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CHAPTER ONE ENTREPRENEURSHIP AND FREE BUSINESS ENTERPRISE
● Unit Objectives ● Introduction ● Contents 1.1 Definition of Entrepreneur, Entrepreneurship and Enterprise 1.2. Difference between entrepreneur and entrepreneurship 1.3. Characteristics of an entrepreneur 1.4. Entrepreneur vs. manager relationship 1.5. Entrepreneurship VS Intrapreneurship 1.6. Levels of Entrepreneurial Development 1.7. Role of entrepreneurship in economic development 1.8. Creativity, Innovation and Entrepreneurship 1.9. The Desire to take up Entrepreneurship as a Career
Dear learner, this chapter is meant to acquaint you with the basic concepts of entrepreneurship. Thus, after going through this lesson you should be able to: Define and know the Meaning of the terms Entrepreneur, Entrepreneurship and Enterprise Discuss the difference among entrepreneur, entrepreneurship and enterprise List the characteristics of entrepreneur Explain the different between entrepreneurship and intrapreneurship Differentiate the roles of an Entrepreneur and a Manager List the levels of Entrepreneurial Development Explain the Role of Entrepreneurship in Economic Development Explain the relationship between Creativity, Innovation and Entrepreneurship 1
Develop the desire to take up Entrepreneurship as a Career Differentiate between Wage employment, Self-employment and Entrepreneurship
Do you know that there are a number of unemployed youth in the country and by the time you graduate, this number may increase substantially? Do you want to be part of that group which keeps knocking from pillar to post, checking with employment exchanges, relatives, friends, and neighbors and still not able to get a job to their liking and then settle for a second or third rate job? These all challenges can be solved by the active involvement of entrepreneurship in the economic development of the nation. Entrepreneurship is a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. It requires essential ingredients of an entrepreneurs such as the willingness to take calculated risks; ability to formulate an effective venture team; the creative skill to marshal needed resources; fundamental skills of building a solid business plan; vision to recognize opportunity where others see chaos. Not all entrepreneurs are created equal degrees. Different degrees/ levels of entrepreneurial intensity and drive depend upon how much independence one exhibits, the level of leadership and innovation they demonstrate, how much responsibility they shoulder, and how creative they become in envisioning and executing their business plans.
Entrepreneurship is basically concerned with creating wealth through production of goods and services. This results in a process of upward change whereby the real per capita income of a country rises overtime or in other words economic development takes place. Thus entrepreneurial development is the key to economic development. In fact it is one of the most critical inputs in the economic development of a region. It speeds up the process of activating factors of production leading to a higher rate of economic growth, dispersal of economic activities and development of backward regions.
Entrepreneurship is characterized by the utilization of a given opportunity through creativity and innovation. Creativity is the ability to develop new ideas and to discover new ways of looking
By selling the product in the market he pays rent of land. new services. an entrepreneur is an economic agent who unites all means of productionland of one.‟
According to Schumpeter entrepreneurs are innovators who use a process of shattering the status quo of the existing products and services.
. and enterprise? What is the difference between entrepreneurship and intrapreneurship? The term entrepreneur stems from the French word „entrependre‟ meaning one who undertakes or one who is a „go-between‟. and it is the systematic analysis of the opportunities such changes might offer for economic and social innovation. It is the ability to create and build something from practically nothing. thereby making decisions about obtaining and using the resources while consequently admitting the risk of enterprise”.B. Say. According to Peter Drucker Entrepreneurship is defined as „a systematic innovation. wages to labor and interest on capital and what remains is his profit. According to Richard Cantillon. David McClleland: An entrepreneur is a person with a high need for achievement. According to J. which consists in the purposeful and organized search for changes.
Entrepreneurship can be described as a process of action an entrepreneur undertakes to establish his/ her enterprise.
1. Entrepreneurship and Enterprise
Dear learner. “an entrepreneur is a person who pays a certain price for a product to resell it at an uncertain price. entrepreneurship. what do you understand by the words entrepreneur. to set up new products. Definition of Entrepreneur.at problems and opportunities.1. He shifts economic resources out of an area of lower productivity into an area of higher productivity and greater yield. He is energetic and a moderate risk taker. Entrepreneurship is a creative activity. Innovation is the ability to apply creative solutions to those problems and opportunities in order to enhance people’s lives or to enrich society. the labor of another and the capital of yet another and thus produces a product.
Entrepreneurship is the most effective way of bridging the gap between knowledge and the market place by creating new enterprises. contributes to national income. It is the ability to create and build something from practically nothing. It is a knack of sensing opportunity where others see chaos. Essential Characteristics of an Entrepreneur In the past. 1. entrepreneurship is the act. Entrepreneurship is the attitude of mind to seek opportunities.2. The entrepreneur is the actor. contradiction. worked hard. creation and running an enterprise. The process involved in creating and starting an enterprise is called entrepreneurship. psychological and other factors. entrepreneurship is a dynamic process of vision.3. The relationship among an entrepreneur. It comprises of numerous activities involved in conception. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. take calculated risks and derive benefits by setting up a venture. The entrepreneur is the key individual central to entrepreneurship who makes things happen. and were creative enough to become a big success. It requires essential ingredients that include: the willingness to take calculated risk. entrepreneurship and enterprise
The term entrepreneur is used to describe men and women who establish and manage their own business. the ability to formulate an effective venture team.Entrepreneurship is a creative activity. an entrepreneur was seen almost as a hero. An 4
. In an integrate. The average worker depended on the entrepreneurial hero to give them opportunities. change. the fundamental skills of building a solid business plan. Entrepreneurship is the outcome of complex socioeconomic. the creative skill to marshal needed resources. contradiction and confusion. exports and overall economic development. creates jobs. An entrepreneur is the catalyst who brings about change. and creation. and the vision to recognize opportunity where others see chaos. and confusion. who had a big idea. Entrepreneurship is a process and an entrepreneur is a person. such as Thomas Edison or Henry Ford.
1. Entrepreneurship is an abstraction whereas entrepreneurs are tangible people.
An enterprise is the business organization that is formed and which provides goods and services.
or non-verbal messages conveyed through body language. In general. and liaison with officials. employees. plan. Many confident women and men gain their sense of self esteem and faith in their ability to greet challenges by experience and formal education. leaving things in better shape than they were before.entrepreneur frequently has to wear many hats. organize resources. The following are characteristics that are found within all successful entrepreneurs and without which most people will fall short of what it takes to succeed in an entrepreneurial enterprise. whether those are written.
. to act like an owner. In that way the clever entrepreneur uses individual accountability in the ultimate pursuit of profitability. marketing. or strategic partners – are what make or break a business.
Confidence is a hallmark of the entrepreneur. he or she will take advantage of all available tools and resources. Rather than viewing a problem as someone else‟s. Able to Communicate Entrepreneurs recognize that the most important part of any business is the human element. the entrepreneur sees it as his or her own and takes pride in finding a solution. and communication is the key to successful relationships with people. and improving upon situations rather than leaving them unattended. Rather than controlling situations in an attempt to possess them. the entrepreneur teaches other people how to take charge. spoken. The entrepreneur works to sharpen communication skills. And to support communication. Feel a Sense of Ownership Taking responsibility for getting things done – and doing them with care and attention – meaning. Most importantly he/she has to innovate and bear risk. and overall success. and oversee production. but that does not mean we are not capable of it. Human resources –whether in the form of clients. teamwork. Not all of us are born with confidence. He has to perceive opportunity. business literature shows several characteristics essential for entrepreneurs that distinguish ordinary entrepreneurs from the extraordinary ones.
to be better students of human nature. train. ego. Because of the passion for education. much less break. Entrepreneurs rely upon systems before they rely upon people. shortcomings. They also are quick to learn from their own mistakes. Team Player Team players know how to succeed by employing the physics of interpersonal synergy and dynamic relationships. and successful entrepreneurs leverage teamwork to get the heavy lifting done without breaking stride. but a bundle of those small twigs becomes stronger than the sum of its individual parts and can be impossible to bend. and impart experience to others the entrepreneur is constantly striving to learn more. In this way they continue to enrich themselves with knowledge while making a concerted effort to grow that knowledge by sharing it with others who are also front row students of life‟s valuable and unlimited lessons. and by personal reading and research. true entrepreneurs surround themselves with people who either know more than they do or know things that are different from what they know. good systems allow us to reproduce great results every time – with less and less exertion of energy or resources. To teach is to learn. or blindness to one‟s own faults. and perfecting systems is one of the most useful and rewarding skills of an entrepreneur. implementing. asking questions. One twig can be easily snapped. To lead. and they look for system based solutions before searching for human resource solutions. If the person gets the job done but falls sick or leaves. which mean they are less prone to keep repeating them due to arrogance. anyone can step in and follow the blueprint to get the desired result.Passionate about Learning Entrepreneurs are often “autodidactic” learners. which mean that much of what they know is learned not in a formal classroom setting. But if a system is created to get the job done. or errors in judgment. for instance. System-Oriented Like mathematical formulas. They entertain the views and perspectives of others that may be unlike their own. and get better educated.
. The same goes for businesses. instead on their own by seeking out information. the job is threatened. Designing.
Gregarious Because business is all about people. and other contacts both within and beyond the business sphere. But women and 7
. They get excited about sharing ideas. One of the biggest reasons that companies fail is because they lose focus. or disappointments are relegated to the past so that they cannot continue to haunt the present or obstruct the future. and the pleasure that comes from one‟s accomplishments and contributions. Past shortcomings. and services. No matter what that might mean in terms of rising to meet a challenge or acting above and beyond the call of duty. entrepreneurs tend to be socially outgoing. That gives them the agility and flexibility to adapt to changes and demands. helping to give impetus and momentum for greater accomplishments and increased hopefulness. They respect it and nurture it. And when things go right and business prospers. clarify the objective. this further fuels the optimism and positive mindset of an entrepreneur. and one reason that is true is because those who are grateful appreciate what they are given. visions. Regardless of what the effort might involve. while it also invests in them a thankfulness that reminds them that riches and wealth are not about “stuff”. Optimistic A positive outlook is essential for the entrepreneur. Target a goal. They do their best to make it grow instead of allowing it to dwindle away due to neglect. clients. and that tenacity of purpose generates electricity throughout the whole organization. the entrepreneur shows steadfast dedication. and dreams. products. refine the brand. and that excitement is contagious to their employees. Entrepreneurs learn to take nothing for granted in this world. but are about fulfillment. satisfaction. failures. Dedicated Entrepreneurs dedicate themselves to the fulfillment of their plans. friends. who learns to see setbacks as bargain priced tuition for the valuable business lessons gained through firsthand experience. Grateful Being grateful for what we have opens us up to receive more. and narrow the margin of error. an entrepreneur brings a single-minded dedication to the task by being committed to a positive outcome and ready and willing to do the needful.
from their own experience.men who work hard as entrepreneurs also enjoy the unique opportunity to have fun doing something that they love as their primary vocation.
1. and reward them accordingly. drudgery. Human resource experts. frustration. boredom. And many people who do take chances and become somewhat successful find the realization of their dreams an overwhelming possibility. and they understand the need to appreciate others. But they prioritize their approach to life so that the fear of failure. but they are also skilled at leading others. Entrepreneurs know that firsthand. Those who cling to what is familiar to them – even if it means the denial of their dreams – lack the perseverance and ambition that the real entrepreneur exhibits. and dissatisfaction far outweighs the persistent fear of success. An entrepreneur is being enterprising as long as he starts something new then the routine day-to-day management of the business is passed on to the manager. True leaders do not become indispensable. Entrepreneur vs. career counselors. support them. and they tend to be a fun-loving group of people both on and off the job. Entrepreneurs are not immune to fear. An entrepreneur starts a venture then a manager takes over to organize and co-ordinate continuous production. Not Afraid of Risk or Success Many people could be successful if they only took chances. so they interrupt their continued success by retreating back into a comfort zone of smallness. and business psychologists all agree that those who do jobs they enjoy and are good at have higher rates of success and broader measures of satisfaction. The main differences between the two are summed up below: 8
Leader by Example
Entrepreneurs not only lead themselves through self-motivation as self-starters who jump into tasks with enthusiasm. manager
Are all small entrepreneurs managers? Are all small business managers entrepreneurs? The terms entrepreneur and manager are many times used interchangeably yet they are different. otherwise things fall apart in their absence and they can never rise to the highest level of entrepreneurial freedom and prosperity. They know the importance of teamwork.
These traits are administrative. A professional manager whose job is running someone else's business is not an entrepreneur. These literatures reveal the following as behaviors seen in administrative organizations:
• measuring success based on the use of existing resources • focusing on quick results • making decisions slowly • showing little willingness to change after a decision to commit resources is made • using well defined structures with a well defined line of authority and responsibility • Concentrating on risk reduction. material and psychological risks An entrepreneur is driven by perception of opportunity An entrepreneur initiates change An entrepreneur is his own boss An entrepreneur gets uncertain reward
Manager A manager runs the business over a long period of time A manager does not have to bear risks A manager manages by the resources he currently possesses A manager follows rules & procedures A manager gets fixed rewards and salary
Some business literature tells us that a business owner who hires a professional manager to run his business and then turns his own interests to other things is not an entrepreneur.
. Although she may be organizing and operating the enterprise. he is not actively involved in organizing and operating it. Although he is assuming the risk of the venture.Entrepreneur An entrepreneur is involved with the start-up process An entrepreneur assumes financial. she is assuming no personal risk for its success or failure.
thus allowing an atmosphere of innovation to prosper. by definition. It indicates visionary employees who think like entrepreneurs. 5 Intrapreneurship: Developing Entrepreneurship in the Corporation
Intrapreneurship is also known as corporate entrepreneurship or corporate venturing.
Reasons for rise of Intrapreneurship
This need has arisen in response to a number of pressing problems. Intrapreneurs. and drive. including: a rapidly growing number of new and sophisticated competitors. downsizing of major corporations. international competition. a sense of distrust in the traditional methods of corporate management. When the organization is not. an exodus of some of the best and brightest people who are leaving corporations to become small-business entrepreneurs. to exploit a new opportunity and create economic value
Intrapreneur is a person who focuses on innovation and creativity and who transforms a dream or an idea into a profitable venture. and an overall desire to improve efficiency and productivity
. An intrapreneur thinks like an entrepreneur seeking out opportunities. the intrapreneur succeeds. which benefit the corporation.
If the company is supportive. passion. It is the practice of developing a new venture within an existing organization. by operating within the organizational environment. in making companies more productive and profitable. embody the same characteristics as the entrepreneur: conviction. It is a new way of thinking. the intrapreneur usually fails or leaves to start a new company. The major thrust of intrapreneuring is to develop the entrepreneurial spirit within organisational boundaries.1.
1. And they usually begin by creating a situation where they do the same type of work they did while being an employee. and belief systems.
Level Two: The Managerial Perspective Those with a managerial outlook are often in a great position to succeed as entrepreneurs. and much more expensive to remedy. a world-renowned business author and founder of his own international franchise with nearly 1. career.000 offices worldwide. Relinquishing the control of a boss every day is not their idea of happiness. expect for two big misconceptions that lead to massive problems. but they figure out how to do it by themselves and for themselves. Once again.6. innovation. Levels of Entrepreneurial Development
Dear learner. magnified. They throw extra bodies at the problem.
Many managers believe that if a business is not working. patterns of thinking. growth but overall structural growth of the enterprise itself. and destiny. They want to do things their own way. Growing larger to fix the problems of a small business only generates a much bigger company with problems that are expanded. what do you understand by the different levels/ degrees of entrepreneurial development? What relationship do you think among creativity. but this only aggravates the situation because it fails to address the underlying cause of the difficulty. identifies five different types or levels of entrepreneurial mindsets. They want more autonomy. the solution lies in hiring more employees. and they believe that they could do their job just as well without an employer– and perhaps without the need for other employees. and
entrepreneurship? Do you think that entrepreneurship can be a career option?
Brad Sugars. Another mistaken belief that is common to this mindset is that the route to success is through growth – not profit. Many
. bigger is not necessarily better unless and until the fundamentals are sound and efficient.
Level One: The Self-Employed Mindset The driving force behind the self-employed person is not security but a desire for greater control over his or her life.
but they never figure out why. the entrepreneur who has succeeded this far can begin to accept another exciting challenge. Investing for maximum returns involves smart leverage of assets. managers themselves are able to delegate aspects of their business to others and set higher goals. By getting the most out of employees. that of managing money so that it works to produce more money. The owner/leader can therefore focus not so much on sales and revenues. and by doing so has created more wealth. but to be a leader – one who knows how to inspire and train others to rise to greater heights – is a rare quality. can rise to the next level and become owner/leaders – one step closer to the real definition of an entrepreneur.
Level Four: The Entrepreneurial Investor With a business that generates profits.
A third misstep common to the managerial attitude is that the entrepreneur wants to be the boss. even if that means sacrificing the talent or potential of employees. Managers who become leaders succeed because they accept the challenge and responsibility of ensuring that others under their wings also succeed and flourish.
Rather than being the only person who could get the job done the best. this leader has passed that torch of responsibility and expertise along to others who now enjoy for themselves a greater level of career achievement.managerial entrepreneurs go into bankruptcy thanks to vigorous growth. and the entrepreneurial 12
. To give orders and be in charge requires no great skill or aptitude. This kind of entrepreneur has created an organization that is more self-sufficient and self-sustaining. While the business continues to run smoothly – and generate more transactions – the owner/leader concentrates on fine tuning it for increased profitability while letting others handle the day-to-day operational details. and free time. personal freedom. but on net profits.
Level Three: The Attitude of Owner/Leader The entrepreneur who attains the level of an owner/leader enjoys remarkable benefits by knowing how to step aside and let the business – and those employees working in it – operate as a profit center not reliant upon the owner‟s constant hands-on participation. They not only manage but also lead.
So rather than remaining at the control of these companies the investor will buy them. the investor can get into the career of not just selling basic products and services.
. and economic cycles. Rather than dealing on the level of isolated actions and reactionary tactics. The true entrepreneur experiences a paradigm shift that involves a four-step process of changed thinking: Idealization – Imagine gigantic. ensure that they have valuable equity or attractive allure and potential. is still to turn a profit. the entrepreneur will typically appoint someone else to take the reins of the company as the president or chief executive officer(CEO). of course. but of selling entire businesses. and then sell them to other entrepreneurs or would-be entrepreneurs. and the rewards – both financial and personal – are abundant. Visualization – Picture the ideal world as a reality and begin to clarify this vision on a daily basis. all-encompassing dreams for creating the ideal world. and to meet this problem with a viable solution. the entrepreneurial investor has risen to the level of broad and comprehensive strategies that work across all sorts of products. services. filling in more details each day. in other words. it is possible to reach the ultimate goal and realize one‟s dreams in a really life-changing way.investor will often leverage the success of the first business to create a second or third company based on the same model or system.
The challenge is to avoid falling back into the role of running a business as an administrator or manager. Working smart replaces working hard. By franchising the original venture or buying other healthy businesses. Then the investor becomes more of a director or silent partner who shares in the profits while enjoying the relief of not having to share the routine responsibilities of running the business from the inside.
Level Five: The True Entrepreneur Having learned new things every step of the way and evolved through various stages of entrepreneurial accomplishment and insight. The goal. This all becomes possible because the entrepreneur has not just created a business but has also designed excellent systems for keeping it going.
Initiating and creating change in the structure of business and society. Increase in the national outputs which in turn lead to greater and stronger economic growth. thus to enable more wealth to be divided among the various participants (stakeholders). Increasing the per capita output and income of the people of the country. Generation of innovation that leads to the creation of new products and services. The following are some of the roles of entrepreneurship in economic development. Role of entrepreneurship in economic development
The industrial health of a society depends on the level of entrepreneurship existing in it. Entrepreneurs historically have altered the direction of national economies. industries or markets. Streamline of the private sector and encourage the inclusion of new technology that is less labor dependent.7. Improvisation and modification on existing product to better suit market and customers‟ needs. Laying the seed bed for creating new entrepreneurs in various new technologies 14
. Further growth and increased output arises.Verbalization – Begin to put words to the dream and talk of it as if it was already happening. Talk about it to others as if it were real and continue to have a personal dialog with the ideal to make it come true.
1. things begin to fall into place and happen in a natural and automatic way. A country might remain backward not because of lack of natural resources or dearth of capital [as it is many times believed] but because of lack of entrepreneurial talents or its inability to tap the entrepreneurial talents existing in that society. Materialization – Because the effort and intention of designing and believing in the ideal and the dream. Creation of self employment and to cut back the dependency of potential employment of new workers in government sectors. The idea becomes a real and tangible fact that materializes in the world and influences others while opening new doors to fresh opportunities and the birth of more dreams.
Through innovation. Innovation is the ability to apply creative solutions to those problems and opportunities in order to enhance people’s lives or to enrich society. Researchers believe that entrepreneurs succeed by thinking and doing new things. social and political variety. Innovation and Entrepreneurship
Creativity is thinking new things. It is applying creativity and innovation to solve problems and to exploit opportunities that people face every day. In doing so. or doing old things in new ways.8. innovation and entrepreneurship
Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities. Creativity. The Relationship between Creativity.
Figure1. and innovation is doing new things.
Acting as a catalyst to nurture intrapreneurs in a business organization. In other words. creativity is thinking new things.1. and innovation is doing new things. Let us define creativity and innovation and show the following relationship. Both innovation and job creation involve the creation of new organizations with interdependent activities carried out by several people to accomplish a goal. cultural.
1. entrepreneurs create new organizations in our economy. What is the entrepreneur‟s secret for creating value in the marketplace? In reality. our political process and our educational process and generate economic. In other words. the secret‟ is no secret at all. they develop organizations that are subsequently in
. they also precede and create the context for management.
need of strategy. It involves applying focused strategies to new ideas and new insights to create a product or a service that satisfies customers’ needs or solves their problems. These blocks can act as logjams to creativity.
The following is a creativity Model that can help in real situations to remove these logjams and enhance creative thinking. entrepreneurship is the result of a
disciplined. obsolete and no longer relevant. having a great new idea is not enough.8. innovation and application of that innovation in the marketplace. something must happen Income Entrepreneurship = creativity + innovation. performance. even though they may be outdated. change. Creativity Entrepreneurs must always be on guard against traditional assumptions and perspectives about how things ought to be.
Modeling creativity Building a creative environment takes time. A lot of people come up with creative ideas for new or different products and services but most of them never do anything with them. In short. structure. Although new ideas may appear to strike suddenly. they are actually the result of the systematic process which involves the following steps:
. In turn. above all. Research shows that to encourage people to be more creative entrepreneurs have to create an environment that values their creativity.1. culture and. Such assumptions are quick killers of creativity. Such self-imposed mental constraints and other paradigms that people tend to build over time damage creative minds. these ideas become so deeply rooted in our minds that they become immovable blocks to creative thinking.
1. but the payoffs can be phenomenal. Entrepreneurs are those who marry their creative ideas with the purposeful action and structure of a business. systematic process of applying creativity and innovation to needs and opportunities in the marketplace. Successful entrepreneurs are associated with a constant process that relies on creativity. A paradigm is a preconceived idea of what the world is? What should Creativity and Innovation look like? And how they should operate? Sometimes.
talking. and knowledge that an entrepreneur brings to the opportunity recognition. 8. Then the creative idea is put into a final form. Phase 2: Incubation process: It is a stage during which a person considers an idea. Searching for the one “right” answer. Phase 4: Evaluation and implementation. however.g. usually this phase slowly but surely formulates the solution. 3. prototypes. Avoiding ambiguity. 17
. details are worked out and idea is transformed into something valuable. but we might like to consider it as an optional reading. Roger Von Oech (1990) identifies ten “mental locks‟ that limit individual creativity: 1. experience. are those that individuals impose on themselves. 6. visit to library. They include time pressures. 7. Viewing play as frivolous. Preparation: It is the background. thinks about a problem. Blindly following the rules. and exercises it Phase 3: idea generation or ‘eureka’ experience. Becoming overly specialized. Constantly being practical. Fearing looking foolish. This is a stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. 4. This is through reading. professional conferences. advice. 5. Perhaps the most difficult hurdles to overcome.
Barriers to Creativity The following discussions of background material about barriers to creativity and developing creativity are not as important as the discussion above about developing creativity. unsupportive environment and overly rigid policies and strategies. e. it is the “mulling/considering things over” phase. This phase requires sleep on the issue‟. 2. Focusing on being logical. The number of potential barriers to creativity is almost limitless.Phase1.
Schumpeter (1934) was first to point out the importance of new value created by entrepreneurs. Extension is said to be the expansion of a product.8.
1. duplication and synthesis. entrepreneurs can develop the skills. defining aspect of entrepreneurship. service or process. saying that entrepreneurs: • • • • • • Introduce new goods Introduce new services Introduce new methods of production Open new markets Open new sources of supply. and Reorganize industry. entrepreneurs can set free their own creativity as well as the creativity of those people around them. Invention has been described as the creation of a new product. these are: invention. By doing so. In some economic theories. constantly ask “what if?” and learn to appreciate ambiguity. Fearing mistakes and failure. Believing that “I am not creative”. More recently. service or process. Innovation Entrepreneurship centers on novelty and the generation of variety in the marketplace and means that the processes of innovation are at work.9. attitudes and motivation that make them much more creative – one of the keys to entrepreneurs is ‟successful performance”. Boulton and Carland (1984) extended and specified Schumpeter‟s idea. Hoy.2. Finally. innovation is a key. extension. service or process.
Four Types of Innovation There are four distinct types of innovation. 10. explore new ideas. the combination of existing concepts and factors into a new formulation has been identified as synthesis.
By avoiding these ten mental locks. Duplication has been defined as replication of an already existing product. Carland. Research shows that successful entrepreneurs are willing to take some risks.
we now turn our attention to the innovation process. To some people innovation refers to an end product or practice perceived as new by the individuals. Innovation is thought to be necessary for change and long-term survival of these organizations. They see the innovation process as one that is recognized as new by the adopting system and/or one that results in a major restructuring of the adopting system. The market is one of the main sources of innovation. organizing and marketing.
The Innovation Sources Sources of innovation in terms of the main areas are where new ideas come from. However.
. process or service simple and understandable is another example of a principle of innovation. To Peter Drucker (1985). Taking the preceding framework into account. it is pertinent to point out that there are a number of principles of innovation. and the like. A few more include: make the product. start small. The main areas are: unexpected occurrences. In a constantly changing market new ideas are always presenting themselves. An important message here is that entrepreneurs must realize that these principles exist and that they can be learned. follow a milestone schedule. process or service customerbased. products. He refers to innovation as a process of bringing inventions into use through engineering. it is significantly important to remember that the last. . One of the principles is to be action-oriented. innovation also implies
commercialization of new ideas and/or the implementation and change of existing systems. innovation is the specific function of entrepreneurship and defines what is entrepreneurial and what is managerial.Peter Drucker (1984) defines entrepreneurship in terms of the generation of new jobs and the production of new flows of income. Other sources include demographic changes and changes in perception. and resources. Other observers and writers focus on innovations embedded in larger organizations. Principles of Innovation While innovation encompasses a large area. principle is work. The entrepreneur must always be looking for new ideas. work and more work. aim high. Making the product. but by no means least important. So far we have talked about what innovation means within the context of entrepreneurship. process needs. and gaps between expectations and reality.
Income generation. ever evolving. The vast majority of human beings direct their activities towards earning a living.
Entrepreneurship is the terminal stage of the entrepreneurial process wherein after setting up a venture one looks for diversification and growth.
Income generation is the initial stage in the entrepreneurial process in which one tries to generate surplus or profit. Entrepreneurship as a career option
After finishing your graduation you will be at the crossroads of life. You will face the dilemma of choosing what you have to do in life.the context of employment generation. Selfemployment and Entrepreneurship are often used interchangeably. An entrepreneur is always in search of new challenges. a man with some surplus money might put his money in a fixed deposit account in a bank or a chit -fund to earn some interest. One can choose to be employed in the Public Sector or the Private sector.g.g. He might not have resources but he will have ideas.If you opt for a job then you will work for others. ever expanding opportunity for personal as well as business growth and development. Some of the main differences between entrepreneurship and wage employment career options are as under. They are often taken on part. generating wealth and improving their standard of living. He/she has to follow instructions and execute plans laid down by his/her superior. or to grow in any other manner[e. He is innovative and creative. In case of wage employment one is engaged in routine work carried on for others for which he receives salary or wages. The three terms.9. soft drinks etc. You can choose your career from two broad categories of options – Wage Employment or Entrepreneurship. e. Self-employment is the second stage in the entrepreneurial process and refers to an individual‟s fulltime involvement in his own occupation.1. An entrepreneur is not a routine businessman. supplying tea/coffee/sandwiches to others in the vicinity]. a person who starts a tea shop and remains happy and satisfied and has no plans to add on any other items like buns. We may define entrepreneurship as a career in your own business [YOB] rather than wage employment [JOB] . In case you opt for entrepreneurship you will be your own boss. He can convert a threat into an opportunity.g. We will learn more about entrepreneurship a little latter in the lesson.time or on casual basis to supplement income e. Small businessman might 20
. The term „career‟ signifies a continuous.
An entrepreneur is being enterprising as long as he starts something new then the routine day-to-day management of the business is passed on to the manager. On the other hand an entrepreneur can leave a perfectly running business to start another venture if he so desires. Income generating experience encourages self-employment.
. the ability to formulate an effective venture team.shut-down or change his business if he anticipates losses but an entrepreneur will try again after analyzing the situation. and not all entrepreneurs are created equal. Entrepreneur is the actor. . how much responsibility they shoulder. contradiction. Entrepreneurship is a dynamic process of vision. which in turn facilitates graduating into
Functionally all entrepreneurs are self-employed and income generating persons but the reverse is not true. Different degrees or levels of entrepreneurial intensity and drive depend upon how much independence one exhibits. The terms entrepreneur and manager are many times used interchangeably yet they are different. self-employment and entrepreneurship can be considered as the initial. and creation. It requires essential ingredients include: the willingness to take calculated risk. If seen on a continuum. the level of leadership and innovation they demonstrate.all self-employed and income generating persons are not entrepreneurs. entrepreneurship is the act. the creative skill to marshal needed resources.
The term entrepreneur stems from the French word „entrependre‟ meaning one who undertakes or one who is a „go-between. and the vision to recognize opportunity where others see chaos. the fundamental skills of building a solid business plan. and how creative they become in envisioning and executing their business plans. Entrepreneur is the key individual central to entrepreneurship who makes things happen. income generation. An entrepreneur starts a venture then a manager takes over to organize and co-ordinate continuous production. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. middle and final stages of the entrepreneurial growth process. and confusion. Not all independent business people are true entrepreneurs. change.
Entrepreneurship is the result of a disciplined, systematic process of applying creativity and innovation to needs and opportunities in the marketplace. It involves applying focused strategies to new ideas and new insights to create a product or a service that satisfies customers‟ needs or solves their problems.
Self Assessment Questions Part I Multiple choice questions
5. Where individual skills are collectively integrated into a group, this is known as:A. Collective entrepreneurship B. Intrapreneurship C. Team entrepreneurship D. Dual innovation E. None of the above 6. Which of the following is not considered a typical characteristics of entrepreneurs? A. Ability to seize opportunities B. Persistent C. Optimistic D. The desire to be a winner E. None of the above 7. Which of the following is NOT a characteristic of a typical entrepreneur? A. B. C. D. E. Confidence in his/her ability to succeed Value of money over achievement Desire for immediate feedback A future orientation None
Part II Discussion Questions
1. How creativity, innovation, and entrepreneurship are are related? 2. What contributions does entrepreneurship have for the economic development of the country? 3. Can entrepreneurship be a career option?
CHAPTER TWO SMALL BUSINESS MANAGEMENT
● Unit Objectives ● Introduction ● Contents 2.1 Concepts and definition of small business 2.2 Economic social & political aspects of small business enterprise 2.2.1. Advantages of Going into Small Business 2.3. Small Business Failure factors. 2.3.1. Problems in Ethiopia small business 2.4. Entrepreneurship and Business Enterprise Creation 2.4.1. Opportunity scouting/ sensing 2.4.2. Environmental scanning 18.104.22.168. Opportunities in contemporary business Environment 2.4.3. Idea Generation 22.214.171.124. Role of Creativity and Innovation in Idea Generation
Dear learner, this chapter is meant to acquaint you with the basic concepts of small business management. Thus, after going through this lesson you should be able to: Understand general concepts of small business write economic, social, and economic contribution of small business enterprise Identify small business failure factors Integrate the knowledge necessary to establish a small business venture Scan the business environment in terms of the entrepreneurial opportunities and threats Identifying important business ideas Tap the sources for idea generation.
Specifying size and standard to define small business is necessarily arbitrary, because people adopt different standards for different purposes. Based on socio- economic conditions, countries define small business differently. But all may use size and economic criteria as a base to define small business. Size criteria include number of employees and the startup capital. Size does not
always reflect the true nature of an enterprise; in addition, qualitative characteristics are used to differentiate small business from other business. The economic/control definition covers market share, independence and personalized management. Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an important role in both developed and developing economies. Ethiopia is no exception and SMEs occupy a prominent position in the development of the Ethiopian economy. While the small entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the vagaries of the market, they have to face many problems like lack of fiancé, poor operations management, lack of experience, poor financial management, etc,. The process of setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a difficult task and involves scanning the environment and the use of creativity and innovation.
2.1. Concepts and definition of Small Business
Specifying size and standard to define small business is necessary, because people adopt different standards for different purposes. For example, legislators may exclude small firms from certain regulations and specify ten employees as the cut-off point. Moreover, a business may be described as “small” when compared to larger firms, but “large” when compared to smaller ones. For example, most people would classify independently owned gasoline stations, neighborhood restaurants, and locally owned retail stores as small business. Similarly, most would agree that the major automobile manufacturers are big businesses. And firms of in-between sizes would be classified as medium on the basis of individual viewpoints. There are two approaches to define small business. They are: 1. Size criteria 2. Economic/control criteria.
Some criteria are applicable to all industrial areas. the business is small.
Even though number of employees-is the most widely used yardstick. the best criterion in any given case depends upon the user‟s purpose. All over the world. and a combination of the stated factors. volume.1. and value of sales turnover. total capital investment. Examples of criteria used to measure size are: number of employees. To provide a clearer image of the small firms. Compared to the biggest firms in the industry. Size Criteria
Even the criteria used to measure the size of businesses vary. volume/value of production. Size refers to the scale of operation. number of employees or capital investment or both have been used as the basis for defining SMEs
. Only in a rare case would the business have more than 15 or 20 owners. Manufacturing services Germany France China SME SME SME <100 employees <20 employees <500 employees 10 -499 employees Depends on product group. Except for its marketing function. Indonesia Malaysia SME SME <100 employees <175 full time workers investment US $1 million
This size criteria based definition of SMEs varies from country to country. the following general criteria for defining a small business are suggested by Small b Business Administration (SBA) Financing of the business is supplied by one individual or a small group. asset size. Usually 100 employees: investment ceiling US $8 million. The number of employees in the business is usually fewer than 100. while others are relevant only to certain types of business. and volume of deposits. the firm‟s operations are geographically localized.
g.000. on capital investment) to a higher level of authority. Small Enterprises are business enterprises with a paid-up capital of less than Birr 20.. but excluding high-tech consultancy firms and other high-tech establishments. Independence: Independence means that the owner has control of the business himself. qualitative characteristics may be used to differentiate small business from other business. The economic/control definition covers: Market share Independence Personalized management
All three of these characteristics must be satisfied if the business is to rank as a small business.000.000 but not more than Birr 500. In addition.The following are size criteria definitions of SMEs in some of the developing and developed countries: Using capital as size criteria. therefore. Ministry of Trade and Industry of Ethiopia adopted official definition of Micro and Small enterprises as follows: Microenterprises are business enterprises found in all sectors of the Ethiopian economy with a paid-up capital (fixed assets) of not more than Birr 20. Market share: The characteristic of a small firm‟s share of the market is that it is not large enough to enable it to influence the prices of national quantities of goods sold to any significant extent. nevertheless have to refer to major decisions (e.
. but excluding high-tech consultancy firms and other high-tech establishments. Economic/Control Criteria
Size does not always reflect the true nature of an enterprise.
2. It. rules out those small subsidiaries which though in many ways fairly autonomous.
Ethiopia is no exception and SMEs occupy a prominent position in the development of the Ethiopian economy. the number of SMEs is growing form time to time.
2. In this way small scale enterprises bring about greater equality of income distribution. occur. There is little delegation of authority. On the other hand. They need a strong support on Scio. Equitable distribution of wealth and decentralization of economic power
Unregulated growth of large-scale industries results in concentration of economic· power in the hands of a few and consequently gross inequalities in the distribution of income and wealth wi.
Personalized Management: It is the most characteristics factor of all. Over the years. It is also argued that most of the small scale units are either proprietary or partnership concerns. Some of the contributions are hereunder. relations between workers and employers are more harmonious in small enterprises than in large enterprises. Small
enterprises also encourage competitive spirit and generate the impetus to self development. Only few are technology intensive. This is due to wide spread ownership and decentralized location of small scale enterprises. It implies that the owner actively participates in all aspects of the management of the business. and in all major decision-making process. with a small number of employees and relatively low volume of sales. income generated in a large number of small enterprises is dispersed more widely and its benefit is derived by the large segments of the society. As a result. Small businesses are normally privately owned companies..
More Employment creation capacity
Economic planners have realized the necessity of encouraging small enterprises because they 27
.economic and political ground.
Technology: Small business is generally labor intensive. or cooperatives. Geographical area of operation: The area of operation of a small firm is often local. One person is involved when anything material is involved. small business is a business that is privately owned and operated.
Generally.2. partnerships. sole proprietorships. Economic social & political contributions of small business enterprise
Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an important role in both developed and developing economies.
2. numerous benefits can be attained personally as well as professionally. The small firms will stand in good position because they are less capital intensive and more labor intensive. people migrate in large numbers to big cities.g. e. As a result semi urban and rural areas remain deprived of the benefits of industrialization. this continual creation of new business is at the heart of free enterprise system.
Removing Regional Imbalance
Another problem is the continuous shifting of people from rural to urban areas which causes overcrowding in cities with slum conditions due to lack of social and medical amenities which require heavy investments. For individuals pursuing a career in business ownership. The small-scale sector has the capacity to generate a much higher degree of employment than the large-scale sector. The next section explains the following common advantages of owning a small business: Independence 28
. Advantages of going into Small Business
The desire for individuals to own and operate their own small business is growing. undue concentration of large industries in urban areas creates several problems.1.
2. etc. shortage of civic facilities. This problem can be solved by inducing people to set up small firms in rural areas. As stated earlier. pollution. This is because small
scale enterprises are labor intensive and thus create more employment with a given level of capital. Due to lack of employment opportunities in the country side. This ancillary function involves specialization in specific areas and results in greater profitability. Moreover.
More production needs more capital in such a situation.require less capital but generate more employment.
Large scale industries have the tendency to concentrate in big cities.. Ancillary Function
Many small-scale enterprises supply parts and accessories to bigger enterprises. Realizing the importance of the small-scale sector in the economy the Ethiopian government has adopted several measures to speed up the growth of small enterprises. Small scale units can be located in rural and semi urban areas to reduce regional disparities. Export Promotion
Small-scale enterprises are opening up fresh avenues in the export market in our world.
First. Introducing Innovation: New products that originate in the research laboratories of big business make a valuable contribution to our standard of living. small business owners can provide employment for family members.
Job Security: When one owns a business. however. The individual can work as long as he or she wants.Most small business owners enjoy being their own boss. They learn from the past failure or success.
Another advantage is the opportunity to provide family members with employment.
Learning from Challenge
Many small business owners are attracted by the challenge that accompanies going in to business for oneself. By contrast. The record shows that many scientific breakthroughs originated with independent inventors and small organizations. This has several benefits. they like the freedom to do things their own way. Catering for small or niche markets: Large firms with high overheads must produce high levels of output to spread costs. in times of severe economic downturn.
Another major reason for going into business for oneself is financial opportunity. no mandatory retirement exists. they are also willing to assume it. as to the relative importance of big business in achieving the truly significant innovations. small firms are able to make a profit on much lower 29
. Third. owner-managers want to perpetuate their business and how better to do it. he or she will start a small company to provide it. There is question.
Community Service Sometimes an individual will realize that a particular good or service is not available. job security is ensured. Although a great deal of responsibility is associated with this independence. higher moral and trust usually occur more in family-run businesses than others. Research reveals that most successful small business owners like to feel they have a chance to succeed (they want to know success is possible) and the chance to fail. Second. then to get children or relatives to take it over. Many small business owners make more money running their own company than they would be working for someone else. If the person has reason to believe the public will pay for such output.
Inappropriate location – Owners who choose a business location without proper analysis. fraud. Poor credit practices – Owners often sell on credit to meet (or beat) the competition and find that they lack the additional working capital required or the ability to collect receivables. the business might find itself bankrupt before too long.
Neglect occurs whenever an owner does not pay sufficient attention to the enterprise.3 Small Business Failure factors
The following are some of the major factors.
Fraud involves intentional misrepresentation or deception. They can therefore sell into much smaller markets that are ignored by larger organization: e. Lack of experience – Many owners start businesses in industries in which they have no experience Poor financial management – Many owners start with too little money and with little or no understanding of financial spreadsheet applications. The owner who has someone else manage the business while he or she goes fishing often finds the business failing because of neglect. investigation. and planning often fail. Failure to plan – The lack of a strategic plan to guide the business in the long run Unplanned and uncontrolled growth – Growth is natural and healthy.
. If one of the people responsible for keeping the business‟s books begins purchasing materials or goods for himself or herself with the company's money. which cause most small business failures. but unplanned growth can be fatal to a business. Over-investing in fixed assets – Owners who over-invest in fixed assets may find themselves with no access to funds for working capital. owners seek “cheap” sites and locate themselves straight into failure.sales figures. and disaster. Poor operations management – The manager lacks the ability to operate a small business. a local window cleaner serving a few hundred houses.
Other common causes of business failure include neglect. a specialist jeweler with personal clients. Too often.g.
or extended strikes.4. The same is true for fires. consequently their productivity suffers. Because of their size and partly because of the limited profit. and SWOT analysis as entrepreneurship process of setting new business venture? What small business opportunities does this country have?
. particularly because of financial. which the enterprises have adopted. Because of their poor financial position they are not able to buy new equipment. Furthermore. Lack of adequate finance and credit has always been a major problem of the Ethiopian small business. These problems are still major handicaps to their development. They do not have easy access to industrial sources of finance partly because of their size and partly because of the fact that their surpluses which can be utilized to repay loans are relatively small. they approach traditional money lenders who charge extra high rate of interest hence small enterprise continue to be financially weak. robberies. Small business owner can avoid some of the common pitfalls that lead to business failure by: Knowing the business in depth Developing a solid business plan Managing financial resources Understanding financial statements Learning to manage people effectively Etc……
2. If a hurricane hits the area and destroys property in the company's yard. environmental scanning. Entrepreneurship and Business Enterprise Creation
Dear learner! What do you understand by terms opportunity scouting.
Small scale enterprises find it difficult to get raw materials of good quality at reasonable prices in the field of production. burglaries. the techniques of production. are usually outdated. Problems in the Ethiopian small business
Small-scale businesses have not been able to contribute substantially to the economic development.1.
Small-scale units do not have easy access to the capital because they mostly organized on proprietary and partnership basis and are of very small size.
2. production. they search for funds for investment purposes. the loss may require the firm to declare bankruptcy.
Disaster refers to some unforeseen happening. and marketing problems.3. Consequently.
Hence. opportunities just do not „occur‟ to the individual. Opportunity scouting/ sensing
The entrepreneurial process begins with identifying an opportunity and evaluating it through an initial screening process. entrepreneurs see opportunities for starting a business. If not it can be discarded.1. He/ she is the one who makes things happen by capturing an opportunity and organizing the resources needed to exploit this opportunity. which will greatly enhance his/ her chances of success. Entrepreneurs look ahead to see what can be done in future rather than concentrating on the past. Several problems are involved in this task.In the first chapter we have learnt that the entrepreneur is at the center of this phenomenon of entrepreneurship. except in rare cases. he/she has to establish an enterprise. It is extremely important to take utmost care in identifying the product or service to be launched by the entrepreneur. Where others see problems and shortcomings. otherwise it might prove to be a costly mistake. Figure 2 shows the entrepreneurial process to set up a business. Clearly. to be a job provider instead of a job seeker. a detailed business plan can be made. After tentatively identifying four to five ideas. However. the startup process for a new venture creation begins with scouting for opportunities. setting up of a small new enterprise is a very challenging as well as a rewarding task. And then the detail of each process is herewith. This will help the entrepreneur to crystallize one idea in an objective and systematic manner. which can provide business opportunities and then carefully scan his/her environment to generate ideas. He creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth. If it appears reasonable. These have to be actively searched/ scouted for. he/ she should go in for detailed assessment and feasibility study.
Once an individual decides to take up entrepreneurship as a career path.
.4. He/ she must develop sensitivity to changes around him/her.
Figure 2 . It is quite possible that many of the promising opportunities might not make commercial sense. An attempt can be made to modify. community.family. and job and build up a case for business from the bottom-up. one may just look around one‟s immediate context. Else. It is not a superficial exercise but rather an attempt to look beyond the immediate opportunities to the emerging trends. Often it is said that necessity is the mother of all inventions. but they also create the new needs as well. starting from the scanning of the international and macroeconomic environment and conducting/using industrial/consumer surveys and identifying appropriate business ideas. the entrepreneurs meet not only the existing needs. Scanning involves close examination of the environmental conditions and their impact upon the business idea.. opportunities besides existing in the environment in the form of needs and problems of people around might have to be „created. Opportunity scanning
Once the entrepreneur perceives opportunities. in the context of entrepreneurship. An entrepreneur can sense and intelligently seize opportunities.Opportunity – Idea .
. one may take a top-down approach.‟ Thus. However.
2. which exist in the environment. that is.Analysis
The process may start from an arm‟s length.4.2. it becomes important for him/ her to scan the environment.
a. All of these are not immediate part of the entrepreneur‟s venture yet they have an impact on his enterprise. Relationship between entrepreneurship and environment is shown in the figure below. Environmental analysis
Entrepreneurship does not exist in a vacuum. combine. infrastructural facilities. It has created an extensive institutional framework for provision of finance. the government is supportive of the small-scale sector. and institutional support gives a stimulus to entrepreneurship. It is affected by and affects the environment. Let us now examine the elements of the macro environment of the entrepreneur one by one. substitute.
Figure 3 – Entrepreneurship Vs Environment As the economies are getting internationally integrated. the short gestation period and the fact that small industries act as a seedbed for nurturing and developing entrepreneurship.
. technological. Government policies which give priority to growth of trade and industry. What to be scanned by an entrepreneur are shown as follows:
I. reverse etc. social. Political Environment
Entrepreneurship can flourish under a stable and conducive political climate. and industry/sector specific factors. technology as well as help in marketing is made available by government institutions.adapt. Macro environment The macro environment of an entrepreneur consists of the political. for an analysis of the environment of entrepreneurship you would be required to develop an understanding of macroeconomic. Considering the employment and export potential. rearrange. legal and economic environments.
The customs. the trends and the rate of change in technology all have a direct impact on enterprise creation. For example. Changes in technology. we sometimes say that the Gurage people are very enterprising. On the other hand if he/she uses certain costly technology chances of others to quickly becoming his competitors are less. Telecommunications. In many traditional communities of our country working of females out of the home environment is frowning upon. In many industries the technological threshold is low and as a result the success of an entrepreneur promotes many others to start similar businesses and he loses the initial competitive advantage. As a result their goods are of poor quality and lack standardization. Many times the choice of occupation is also dictated by the family traditions. Socio-cultural factors are also crucial for the operations of multinational companies. etc. both innovation and invention change industry structures by altering costs. In developing economies there is usually an imitation of the above through greater process innovation. Pharmaceuticals etc. Socio-cultural environment is also concerned with attitudes about work or quality concerns. In the advanced countries of the West more pure inventions have been taking place which createed new
industries for example Automobile. ethics.
. quality requirements and volume capabilities.
It has been observed that many small units use obsolete technologies and do not invest in research and development (R&D). It is very important for a multi-national company to understand the socio-cultural background of its customers in the host country. Computer Hardware.
The level of technology. values. A direct consequence of this is their inability to face competition. norms and traditions of the society also play an important role in either hindering or promoting enterprise. Aeronautical.
foreign tie-ups and joint ventures. The purpose of industry analysis is to determine what makes an industry attractive. trademark infringement. has increased the space for business operations. forecasts made by the government or the industry. which might outweigh some negative general trends. This will help to put the proposed venture in the proper context. new products developed in the industry. The labor laws and legal redressing system also have a bearing on business operations. manpower or raw materials. the future trends.
b. Sectoral Analysis
After having understood the general environment in which the business has to take birth. globalization and opening of the economy of Ethiopia. threat of substitutes and entry barriers. The resultant competition. which are industry specific. Simpler legal procedures can facilitate the process of new venture creation and its smooth functioning including setting up of ancillaries. Patents. which have to be handled by the entrepreneurs. . Copyright. Sometimes there might be bilateral agreements between countries regarding some sectors or government policy that is sector specific or some event that throw up challenges. It is also advisable to study the existing or potential competition.
Liberalization. dumping and unfair competition can create legal problems in the shape of long drawn out court battles. It has also opened channels for foreign investors to start operations. it is important to study the sector or industry conditions in which the entrepreneur proposes to launch a venture. For such analysis one should study the history of the industry. There might be certain constraints regarding availability of technology. rapid and complex changes have generated uncertainties.
The laws of the country can make the process of setting up business very lengthy and difficult or vice-versa. Similarly there might be certain strengths of a particular sector.this is usually indicated either by above normal profits or high growth rates. agreements on trade and tariffs and environmental laws also need to be studied. Currently the cement and steel
conducting a SWOT analysis will help the entrepreneur to clearly identify his/her own strengths and weaknesses as well as the opportunities and threats in the environment. goals and objectives. Weaknesses are negative internal factors that inhibit an individual‟s ability to accomplish his/her mission. An analysis of the above can give the entrepreneur a more realistic perspective of the business. pointing out foundations on which he can build future strengths and remove obstacles. goals and objectives. change in government policy. Strengths are positive internal factors that contribute to an individual‟s ability to accomplish his/her mission. economic recession.
II. technological breakthroughs.
Opportunities are positive external options that an individual could exploit to accomplish his/her mission.sector are on an upward swing with a favorable climate in the housing sector as well as government‟s thrust on the construction sector. change in government policies etc. The hierarchical approach to the development of business idea is given below. He / she might posses certain unique skills or abilities. Threats are negative external forces that hinder an individual from accomplishing his/her mission. technological advances etc. An entrepreneur should try to magnify his strengths and overcome or compensate for his/her weaknesses. which along with his/ her knowledge and experience can provide him/ her cutting edge. SWOT analysis
At this stage. Threats in the environment can arise from competition. These could arise due to competition.
Figure 4 – Hierarchical environmental analysis 37
. goals and objectives. goals and objectives.
technological.1. For example there is an emerging niche in the world food market for health conscious people who want to consume only organically grown foods. convenience and value to the customers the small entrepreneur can successfully compete with the bigger market players. legal and other changes. and they cannot be marketed through wholesalers and retailers . for a specified period.2. skills. These constantly throw up new challenges for entrepreneurs. are given below. Franchising is an arrangement between the buyer who is called a franchiser and the seller who is called the franchisee. which can be intelligently used by a small entrepreneur. Business franchising is a name given to relationship in which the owner of a product. By providing personal service. Production and consumption are simultaneous.The entrepreneur has to use the opportunities provided by the environment. Niche Marketing Niche marketing is a marketing strategy. services are not tangible.if you want a haircut you will have to go the barber or a beauty saloon. process or service allows a local operator to set up a business under that name. The proposed product / service should be compatible with the capability of the entrepreneur. which can be explored by the potential entrepreneur.
. The entrepreneur can try and identify a very specific market segment called a niche. Opportunities in contemporary business Environment
We have observed above that the business environment is constantly evolving as a result of demographic. Franchising
Franchising takes a proven formula for success and expands it. resources available in the environment and the need of the society. The 38
. and then take a decision to launch a particular product or service. they cannot be stocked. Some opportunities. Service Sector Unlike products. experience etc.
2. The standardized goods produced on large scale cannot cater to the special requirements of a small segment of the market. combine these with his/her unique strengths in terms of knowledge.4. Another advantage of setting up a service enterprise is that they require lower investments compared to the manufacturing sector.
Music industry is also flooded with music videos. For example. music and film nights. Hundreds of films are made annually in Ethiopia. Rural-Tourism. Some people have even capitalized on the high cost of Medical Services abroad and have promoted Medical Tourism. It is clear from the above that this sector has untapped potential which can be exploited by potential entrepreneurs. It includes any business connected with the activities of tourists: Travel arrangement (rail. The licensing system gives the franchisee barriers to entry. family dramas.
The entertainment industry is another sector. There is an a shortage of service providers in all these areas. and Religious Tourism. The gap between the demand and supply is likely to increase in the foreseeable future opportunity. which boasts of very high rates of growth. remixes. cartoons. It is the highest foreign exchange earning sector for many countries and offers tremendous opportunity for entrepreneurship and employment. for the franchisee. The franchisee is able to expand his market geographically without having to worry about day-to-day operations.buyer gets the right to sell the trademark product or service to the franchisee. Tourism Tourism is amongst the fastest growing industries the world over. religious etc. sports.
. they hire taxis for local site visit. air or sea) Accommodation (hotels. motels. guest houses) Food Entertainment Apart from the potential in providing these direct services. Eco-Tourism. There are innumerable entertainments ranging from news. road. standardization and incentives for growth. music. However the franchisee is obliged by the franchising agreement to be careful that the standards of quality are adhered to. Heritage Tourism. Adventure Tourism. He is relieved of most of the functions involved in setting up of an enterprise and gets the benefit of visibility and recognition. etc. tourists use many indirect services. Usually the franchiser looks after the training. design and layout. they need guides and interpreters. preparation and launch of CDs and DVDs. The growing segments of tourism include Cultural Tourism.
. It concentrates on new and creative ways to recycle usable materials. This concept also stresses upon the prevention of waste at the source rather than at the end of the process. Green Entrepreneurship signifies concern for the environment. even teachers. dubbing. business magazines. banners. editing to name a few. A reading of the Economic Times.
The starting point for any successful new venture is the basic product / service to be offered.Enterprises can be set up to provide services for pre and post production including script writing. watching special business programs on the television.3.A study of government policies for example tax incentives and holidays for setting up projects in backward area can help an entrepreneur to arrive at some decision . food. posters which provide endless entrepreneurial opportunities. evaluating new products being offered in the market and active engagement in Research and Development can help in generating a number of ideas. use of substitutes or processes that are less polluting as well as adoption of waste minimization strategies.For a new entrepreneur it becomes very difficult to filter information from the business environment. difficulty in obtaining a satisfactory product or service. evaluate them and then crystallize one specific idea. Developing a hobby.
2. Like the tourism sector the entertainment sector too has a host of feeder activities attached to it . discussions with professionals. Green Entrepreneurship Conservation and Environment protection are presently getting a lot of attraction. music. This idea can be either generated internally or externally .supply of jewelry. The sources of idea generation are listed in the figure below. Attending an Entrepreneurial Development Programs can provide him/her with a sound understanding of all the steps one has to take to initiate and run a venture.4. animation. identify opportunities. surfing the internet all help to provide valuable inputs . Such business activity should be chosen which has the least adverse impact on the environment.
1. It is a true statement as the business environment is constantly changing for any number of reasons. demographic changes like nuclear families.
. torches. Changes in tastes and preferences have resulted in mushrooming of restaurants and designer clothes.Once the idea or group of ideas is generated it has to screened or evaluated to determine its apropriativeness for further development. old people‟s homes. Creativity is a prerequisite for innovation. Creativity is the ability to bring something new into existence. It can be developed by any individual who has a concern for excellence and is willing to work hard.4. which has a commercial value.3. working parents. blankets. food etc. A natural disaster can create a demand for tents. which have fueled a demand for day care centers. Innovation is the translation of an idea into application. You will learn about these stages of a venture starter in the next chapter
2. An entrepreneur with his/her vision. creativity and innovation can capitalize on these changes and create customers.
Role of Creativity and Innovation in Idea Generation
It is frequently commented that the only constant thing in business is change. fast food etc. medicines. Ideas showing the most potential are subjected to a feasibility analysis and a Project Appraisal is then made. A creative person develops new alternatives and offers innovative solutions. There can be technological break thorough like the IT revolution.
it is a sector which is highly affected by different factors. However. a number of ideas and solutions are generated depending upon the personal knowledge. Rarely can one hit upon an idea straight away. The process of setting up a venture begins with searching for an opportunity. What crucial roles do you think from the well managed small business? 4. Do you think it is important for an entrepreneur to scan for opportunities in the small scale sectors? Give reasons. That means using both size and economic control criteria. The process involves both market identification as well as product / service identification. If it appears to be promising its viability can be studied through a proper feasibility analysis. and finical. What do you understand by the term business opportunity? What is its relevance for an entrepreneur? 5. 6. experience.It is through their creative thinking that entrepreneurs find solutions to problems. handle adversity and exercise control over business. One has to be very sensitive to the changes in the business environment. In your opinion what precautions should a potential entrepreneur take at the Idea Generation Stage in an ever-changing business environment?
. as part of creativity process. of the potential entrepreneur. Creativity helps not only in doing different things but also in doing the things differently. What are the major causes for failure of most small business? 2. Identifying a good opportunity is a difficult task and involves scanning the environment and the use of creativity and innovation. insight etc. How can the small business owner avoid the common pitfalls that lead to business failure? 3. Idea generation. A careful analysis can help an entrepreneur to crystallize an idea.
Self assessment questions
1. In Ethiopia the Small Scale Industry evokes several socio-economic and political contributions.
In most parts of the world the nomenclature used to define Small and Medium Enterprises (SMEs) and the criteria for defining include the number of employees and /or the turnover. Thus due attention is given in setting the enterprises and good management is required while its operation.
after going through this lesson you should be able to: Conduct a feasibility analysis of the proposed business ideas with regard to marketability.5 Ecological Analysis 3. 43
. funding.4. define what business plan is.CHAPTER THREE
FEASIBILITY ANALYSIS.6 Legal and Administrative Analysis 3.1. Thus. Project Report 3. List users of business plan Understand the pitfalls that may be encountered while preparing business plan and find out their respective remedies.1.2 Financial Analysis 3.1. this chapter is meant to acquaint you with the basic concepts and detailed analysis of a business idea so that the venture becomes profitable. Business Plan
Dear learner. Feasibility Analysis 3.1.1. technical viability. PROJECT REPORT AND BUSINESS PLAN
Introduction Objectives Contents 3.3 Technical Analysis 3.1.1 Market Analysis 3.4 Economic Analysis 3. Point out the different elements of business plan. and legalities Prepare a business plan Recognize basic startup problems.1.2.3 Registration 3.
For any given organization. financial and legal perspectives.
Plans are part of any business operation. you should conduct an in-depth examination of the chosen three to four before settling for the one where you would like to exert your time.Even though they may serve different functions. production plans. Generation of ideas is not enough. Plans also differ in scope depending on the type of business or the anticipated size of the start up operation. to name a few. the business ideas must stand the scrutiny from techno-economic. or they may be strategic or operational. You should prepare a business plan that will serve as the road map for effective venturing. plans can be classified in to three types: strategic plans. Plans may be short term or long term. prepare a sample business plan considering the real world scenario
The process of setting up a business is preceded by the decision to choose entrepreneurship as a career and identification of promising business ideas upon a careful examination of the entrepreneurial opportunities. It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan. Planning is a process that never ends for a business. and sales plans. human resource plans. after the initial screening of the ideas that do not seem promising. it is possible to find financial plans. you are likely to encounter many problems en route. whether you may require institutional funding (in which case it is necessary to do so) or not. It‟s advisable to be aware of these problems as to forewarn means to fore arm. all these plans have one important purpose: to provide guidance and structure to management in a rapidly changing market environment. marketing plans. That is.
. Setting up of new business enterprise is a very challenging task. money and energy. tactical plans. and operational plans. In this regard.
1 Market Analysis
. financial. the whole world cannot be your market. cost structure. technical and legal constraints impinging on the marketing of the product. whether and wherefrom the necessary technical know-how to convert the idea into a tangible product may be available. whether a place or not. attitudes. Moreover.1. past and present supply position. preferences and requirements. a project has to be viable not only in technical terms but also in economic and commercial terms too. feasibility study involves an examination of the operations. By now. demographic and psychological profile of the potential customers.
3. HR and marketing aspects of a business before the venture comes into existence. 45
. market analysis is primarily concerned with the aggregate demand of the proposed product/service in future and the market share expected to be captured. However. for this you require information on: consumption trends. motivations. there always is a possibility that a project that is technically possible may not be economically viable. and so on. It is a study of knowing who are your customers. Success of the proposed idea clearly pivots on the continuing support of the customers. that is. It is necessary to know beforehand whether there exists a sizeable market for the proposed product/service. do you know something about the important facets of business venture feasibility
study? What factors are to be kept in mind while deciding on product/service development?
Feasibility literally means whether some idea will work or not. consumer behavior. intentions. administrative.3. The module presents hereunder a brief outline of the issues impinging upon the various aspects of the feasibility of the proposed business idea. You have to carefully segment the market according to some criteria such as geographic scope. elasticity of demand. you would have understood that feasibility is a multivariate concept. Feasibility Analysis
Dear learner. imports and exports competition. In other words. From seller‟s point of view. it is may be difficult to identify the market for one‟s product/service. production possibilities and constraints. distribution channels and marketing policies in use. After all. what would be the investment requirements and where to get the funding from. is the arena for interaction among buyers and sellers.
weight. This cost-benefit analysis goes into 46
.benefits.color.1. etc. Where to locate the facility. what would be the layout. are the issues that you would learn in greater details in subsequent lessons. projected profitability. as well as standards to be complied with such as industry level standard and country level standard.1. cash flows of the project. length. the inputs received would undergo a process of transformation in several stages of manufacture.even point. break.3. means of financing.4 Economic Analysis
Economic analysis is the study of costs. that is. height.and. chemical material properties. and projected financial position. process and outputs. Output Analysis: this involves product specification in terms of physical features. investment worthiness judged in terms of various criteria of merit. You have to enter into long-term contracts with the potential suppliers. quantification and evaluation of project inputs.1. While conducting a financial appraisal certain aspects has to be looked into like: investment outlay and cost of the project. machinery and materials. functional features. Usually. breadth. what would be the quality control measures.
3.2 Financial Analysis
The objective of financial analysis is to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. what would be the sequence. You have to ensure that the right kind and quality of inputs would be available at the right time and cost throughout the life of the project. Process Analysis: It refers to the production/operations that you would perform on the inputs to add value. Input Analysis: Input analysis is mainly concerned with the identification. In regard to the feasibility of the study the entrepreneur is concerned whether the total cost of the product is justifiable in comparison with the price at which it will sell at the market place. in many cases you have to cultivate your supply sources.3 Technical Analysis
The issues involved in the assessment of technical analysis of the proposed project may be classified into those pertaining to inputs.
Tax implications of the different ownership structures. chemicals and leather processing). registration and clearances and approvals from the diverse authorities.
I. whereas economic feasibility leads one to the unit cost of the product.
Types of Business Ownership in Ethiopia
One of the first decisions that you will have to make as a business owner is how the company should be structured. commercial feasibility informs whether enough units would sell.6. In making a choice.
. we will want to take into account the following:
Your vision regarding the size and nature of your business. At this stage it is also useful to distinguish between the economic and commercial feasibility. The concerns that are usually addressed include the following: What is the likely damage caused by the project to the environment? What is the cost of restoration measures required to ensure that the damage to the environment is contained within acceptable limits?
3. The level of structure you are willing to deal with. choice of the form of business ownership. and for environment polluting industries (like bulk drugs.financial calculations for profitability analysis that we discussed under financial analysis.1.1.
3. Legal and Administrative Analysis
The entrepreneur has to be sure of the administrative and legal issues involved in the business project which is going to be selected. The business‟ vulnerability to lawsuits. These include. The level of control you wish to have..5 Ecological Analysis
In recent years. environmental concerns have assumed a great deal of significance especially for projects. which have significant ecological implications like power plants and irrigation schemes. Expected profit (or loss) of the business.
may make decisions as they see fit. In the eyes of the law and the public. you are one and the same with the business entity. usually the individual who has day-to-day responsibilities for running the business. and within the parameters of the law.
Disadvantages of a Sole Proprietorship:
Sole proprietors have unlimited liability and are legally responsible for all debts against the business. A) Sole proprietorships
The vast majority of small businesses start out as sole proprietorships. Sole proprietors own all the assets of the business and the profits generated by it. These firms are owned by one person.
Whether or not you need to reinvest earnings into the business. They also assume complete responsibility for any of its liabilities. Advantages of a Sole Proprietorship:
Easiest and the least expensive to organize. Profits from the business flow directly to the owner's personal tax return. if desired. The business is easy to dissolve.
May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business. Sole proprietors are in complete control.
Sole proprietors receive all income generated by the business. Their business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from personal savings or bank loans.
Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income. Your need for access to cash out of the business for yourself.
profits will be shared. Profits must be shared. Like proprietorships.
Disadvantages of a Partnership:
Partners are jointly and individually liable for the actions of one or more partners. and what steps will be taken to dissolve the partnership when needed. there will be even greater problems. it may end upon the withdrawal or death of a partner. Advantages of a Partnership:
Partnerships are relatively easy to establish.B). The partnership may have a limited life. how partners can be brought out. two or more people share ownership of a single business. Some employee benefits are not deductible from business income on tax returns.
With more than one owner. but many partnerships split up at crisis times. The partners should have a legal agreement that sets forth how decisions will be made. disputes will be resolved. how future partners will be admitted to the partnership. The profits from the business flow directly to the partners' personal tax returns. Prospective employees may be attracted to the business if given the incentive to become a partner. and unless there is a defined process.
The business usually will benefit from partners who have complementary skills. Yes. however time should be invested in developing the partnership agreement. disagreements can occur. it's hard to think about a breakup when the business is just getting started. Partnerships In a Partnership. the law does not distinguish between the business and its owners. They also must decide up-front how much time and capital each will contribute. Since decisions are shared.
. the ability to raise funds may be increased.
separate and apart from those who own it. Corporations
A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity. but is clearly for a limited period of time of a single project.
C. Equal shares are assumed unless there is a written agreement that states differently. The corporation has a life of its own and does not dissolve when ownership changes. which generally encourages investors for short-term projects or for investing in capital assets. If the partners in a joint venture repeat the activity.Types of partnerships
General-Partnership Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Advantages of a Corporation:
Shareholders have limited liability for the corporation's debts or judgments against the corporations. 50
. The owners of a corporation are its shareholders. Joint Venture Acts like a general partnership. and it can enter into contractual agreements. This form of ownership is not often used for operating retail or service businesses. they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity. A corporation can be taxed. it can be sued. Limited Partnership Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions. The shareholders elect a board of directors to oversee the major policies and decisions. Forming a limited partnership is more complex and formal than that of a general partnership.
state and some local agencies. such as the failure to withhold and pay employment taxes. partnerships.
Corporations are monitored by federal. This particular type of business is called a cooperative (co-op) and is some-what like a corporation. Formation is more complex and formal than that of a general partnership.
E. Limited Liability Company (LLC)
The LLC is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. continuity of life.)
Corporations can raise additional funds through the sale of stock. and free transferability of ownership rights. Cooperatives
Proprietorships. Dividends paid to shareholders are not deductible from business income. thus it can be taxed twice.
Incorporating may result in higher overall taxes. and corporations are by far the most popular forms of business organizations. The time limit can be continued. (Note however.
D. by a vote of the members at the time of expiration. centralization of management. and the duration of the LLC is usually determined when the organization papers are filed. if desired.
. The owners are members. shareholders can only be held accountable for their investment in stock of the company. There is yet another form of organization that is small in number but which serves a very useful purpose. Disadvantages of a Corporation:
The process of incorporation requires more time and money than other forms of organization. that officers can be held personally liable for their actions. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets. A corporation may deduct the cost of benefits it provides to officers and employees. and as a result may have more paperwork to comply with regulations.
It can register and have limited liability for its members. to join together to get better prices for their food products. The idea at first was for farmers. It is often felt that financial institutions tend to overemphasize the financial feasibility of the project and do not pay adequate attention to its commercial and economic viability. Owners. These cooperatives are formed to give members more economic power as a group than they would have as individuals.A Cooperative is a business owned and operated by its user members for the purpose of supplying themselves with goods and services it is an organization owned by members/ customers who pay an annual membership fee and share in any profits (if it is profit making organization). workers.g. but has to adopt the following principles: Members have an equal vote in decisions membership is open to everyone who fulfils specified conditions (e. The best example of such cooperatives is a farm cooperative. number of hours worked) assets controlled. managers. These findings may be vetted by the independent consultants/experts.
. A cooperative is an enterprise owned and controlled by all those who work in it.
3. The idea is that the optimist entrepreneur may have overlooked certain aspects that may have a bearing on the ultimate feasibility of the proposed business idea. Funding agencies have their own set-up for the appraisal of these reports. and usually owned jointly by members profit shared equally between members with limited interest payable on loans made by members Share capital remains at its original value –members benefit from participation.2 Project Report
The findings of the feasibility analysis may be compiled in a project report. and customers are all the same people. not investment.
A notarized copy of registration of the company in the country of origin.3 Registration
The first step for registration is to submit an application to the registrar in a prescribed form. Financial reference from the company's bank.
An authenticated decision of the company's board of directors or a similar authorized
body to undertake business activities in Ethiopia.3.
A copy of the company's entry in the commercial register. the following additional documents are required to be submitted.
A bank statement showing one quarter of the par-value of the shares or the capital
raised by public subscription is deposited. Copy of the memorandum and article of associations. In addition. A notice published in a news paper announcing the establishment of the business organization. the following additional documents are required to be submitted.
A specimen of share certificates for each class of shares. the following additional documents are required to be submitted.
A resolution of the appropriate body of the company agreeing to the company's
participation in the company to be formed. The decision should indicate the amount of capital allocated and the individual appointed by the company to act on its behalf. the following documents should be lodged with the registrar of the business organization.
Where the shareholder is a legal person incorporated in Ethiopia. Where the shareholder is a legal person incorporated abroad.
The memorandum of association or the contract of partnership. An authenticated power of attorney issued by an authorized organ of a company for the permanent representative in Ethiopia.
Where the applicant is a share company.
It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan.2 What Is A Business Plan? It is a written document describing all relevant internal and external elements and strategies for starting a new venture. and human resources expected results
Business plan answers the questions: Where am I now? Where am I going? How will I get there? Potential investors.4. plans can be classified in to three types: strategic plans. Plans also differ in scope depending on the type of business or the anticipated size of the start up operation. Plans may be short term or long term.
3. tactical plans.4 Business Plan 3. and operational plans.1. and sales plans. manufacturing. Planning is a process that never ends for a business. marketing. human resource plans.4. all these plans have one important purpose: to provide guidance and structure to management in a rapidly changing market environment.3. suppliers. For any given organization. In this regard.1 Planning As Part of Business Operation Plans are part of any business operation. employees and customers require a business plan. it is possible to find financial plans. finance. to name a few.
.Even though they may serve different functions.4. lenders. or they may be strategic or operational. production plans.1 The concept of business planning
3. marketing plans. It includes: functional plans such as research and development.
he or she may consult with many other sources in its preparation. Entrepreneurs may also hire or offer equity (partnership) to another person who might provide the appropriate expertise in preparing the business plan as well as become an important member of the management team. and engineers are useful in the preparation of the plan.4 Scope and Value of the Business Plan-Who Reads the Plan?
The following parties may read a business plan and hence prior to its preparation the business plan should consider those parties who determine its scope and value. advisory board relations 6. • suppliers. • advisors and consultants.
.4. and controlling. Financial – managing financial resources. • customers. directing.3 Who Should Write The Plan?
The business plan should be prepared by the entrepreneur. Management – planning. budgeting 4. accountants. risk management. supply chain 3. Legal – organization form. • employees.
• bankers.3. accounting. • venture capitalists. • investors. Higher-order – learning. However. organizing. supervising. marketing consultants. Lawyers. 2. problem-solving
3. Marketing – identifying customers. distribution channels. 1. The following skill assessment criteria are used for deciding in the preparation of business plan for it to be either by the entrepreneur or to make use of other resources depending on the entrepreneur‟s assessment of his/her own strengths and weaknesses. privacy and security 5. Administrative – people relations.4.
effort. research. Specifically for the entrepreneur The time. Since all aspects of the business venture must be addressed in the plan.
3. 1. There are three very essential perspectives that should be considered in preparing the business plan. The business plan quantifies objectives. the depth and detail of the business plan depend on the size and scope of the proposed new venture. the entrepreneur develops and examines operating strategies and expected results for outside evaluators. financial sources and customers. and discipline needed to put together a formal business plan force the entrepreneur to view the venture critically and objectively.Who is going to read the plan often affects the actual content and focus of the business plan. The plan can benefit various parties which will have stake the new venture. providing measurable benchmarks for comparing forecasts with actual results. economic. for the purpose of this course we are going to see the benefits of the plan for the entrepreneur. The competitive.5 Benefits of a Business Plan
The benefit of business plan is unquestionable in that many successful businesses start their operation once they have the necessary and feasible business plan. and financial analysis included in the business plan subject the entrepreneur to close scrutiny (analysis) of his or her assumptions about the venture‟s success. The completed business plan provides the entrepreneur with a 56
. 3. The investor: From an investor‟s perspective.4. Generally. Consider whether there are enough customers to buy the product or use the service.
The entrepreneur: The entrepreneur should thoroughly understand what the venture is all about as well as the technology and creativity involved in the venture. The market: You must also try to view your business through the eyes of the customers. sound financial projections that indicate the feasibility of the venture is better be included in the business plan. However.
2. These are:
communication tool for outside financial sources as well as an operational tool for guiding the venture towards success. Hence. • • • • Details of the market potential and plans for securing a share of that market. A clear. The pitfalls in planning are the following: Pitfall 1: No Realistic Goals Indicators: lack of attainable goals.4. since business plan is important and used for variety of purposes. One of the most relevant documents that can make them approve the ability of a client is the business plan. The venture‟s ability to service debt or provide an adequate return on equity. 2. time frame. it needs careful and well managed preparation since absence of important consideration (pitfalls in business planning) can result in disastrous consequences. Specifically for the financial sources Since different sources of finance like banks want to know the ability of their clients to pay back the money that the borrower is borrowed. no contingency plans Remedy: listing the expected obstacles and solutions
. priorities and action steps Remedy: setting up a time table with specific steps to be accomplished during a specific period. in this regard. Pitfall 2: Failure to Anticipate Roadblocks Indicators: no recognition of future problems. business plans are highly reviewed and evaluated by the financial sources of businesses since they get the following information in the business plan.
3. no admission of possible weaknesses of the plan.6 Pitfalls to Avoid in Planning
Dear learner. concise document that contains the necessary information for a thorough business and financial evaluation of the feasibility of the new venture. Critical risks and crucial events with a discussion of contingency plans.
The following format can be amended to meet the needs of a business. not understanding the industry.4.
Section II: Business Description
This part of the business plan includes the following components. The layout may vary depending on the type of the business. no experience in specific area of the venture. no desire to invest personal money Remedy: acting quickly and follow professional appointments. build effective team. It is important to develop a concise description of your business to capture the interest and support of the readers like investors. show financial commitment. • • General description of business Industry background-trends. Pitfall 5: No Market Segment Indicators: uncertainty regarding who will buy.Pitfall 3: No Commitment or Dedication Indicators: excessive procrastination.1 Complete Outline of a Business Plan Section I: Executive Summary
This is a concise summary of the business opportunity. Pitfall 4: Lack of Demonstrated Experience (Business or Technical) Indicators: no experience in business.4.7. however it covers all important components of the plan. As a future-oriented. Remedy: giving evidence of personal experience and background. the purpose of the plan and the leadership.
3. two page document. analysis of competitors 58
. justify why and how your product will satisfy the need.7 Developing a Well-Conceived Business Plan
There are many different business plan formats. lenders or regulatory agencies. no proof of unsatisfied need Remedy: having a specific target market. missed appointments. it demonstrates your knowledge of the business opportunity and proves that any investment in the future will yield a good return.
the status of their businesssteady. different information about the market concerning the following marketing components will be incorporated. increasing or decreasing. E-mail Advisors: lawyers. It is mentioned in the following sections. Market size and trends 3.• • •
Company history or background Goals and potential of the business and milestones (if any) Uniqueness of product or service
The general description of the business refers • Form of business • • • • • • • Owners Name of the business Business startup date Business operation. 1. full time venture Monday to Friday. fax.supplier of high quality child care products Location. Estimated market share Regarding the Marketing plan. Target market (customers) identified 2. telephone.kebele. the four P‟s will be considered and the result will be presented.
. accountants etc. Competition 4. and the difference of their product from your product are expected to be evaluated and presented. Hence.for instance. Strengths and weaknesses of the competitors. 7:00 AM to 6:00 PM Business type.
Section III: Research and analysis
Under this section of a business plan a thorough analysis of both direct and indirect competitors.
. What are you selling? How your product or service will benefit the customer? Which product or services are in demand? What is different about the product or service your business is offering? 2. In this regard.Distribution Here the following questions should be addressed: What are your location’s needs? Is the area accessible? How and where you plan to sell your product?
It should be noted here in that you must match your location and distribution strategy to the buying pattern preferences of your target market. 3. it is should be bore in mind here in that getting a feel for the pricing strategy of competitors is important to see the relationship of your price with the competitors and the industry average. the following questions might be asked and given reply to be competitive in the market. Here the entrepreneur is expected to know different pricing strategies and try to decide a strategy that suits its objectives.1. Hence. knowing what products and services you produce are important. Product or service Product and/or services outputs and the whole activities of the business and the reasons why customers are coming to your organization from which your business gains revenues. This is due to the fact that price is the only element (among the four P‟s) that is used to generate revenue while all the other elements let a business incur costs. Price This part of the marketing plan is used to improve your overall competitiveness.
Cost structure be
Section V: Manufacturing
The manufacturing section of the business plan comprises of the following components. Research. Research assistance needs D. A new business must create awareness about its products or services with an action plan to generate business. A. Manufacturing cost data
.4. Design. Development and design B.
Section IV. both cash receipt and cash disbursements. and Development
Under this section the following technical and engineering parts of a business plan will considered. a well-defined plan of action includes the timing. Production needs: facilities and equipment C. A. costs and expected return of the chosen promotional methods which have impact on cash flow. Location analysis • Is the area desirable? The building desirable? • Is it easily accessible? Is the public transportation available? Is street lighting adequate? • Are market shifts or demographic shifts occurring? B. Labor supply E. Advertising and promotions These are methods you choose to communicate to your target market to obtain your sales projections. Technical research results C. Suppliers/transportation cost D. Hence.
Legal structure – stock agreements. Board of directors. it is essential to take into account how each person will affect the business' bottom line as well.e. Profit and loss statement
. Alternative courses of action (i.
a. unplanned-for competition.Section VI: Management
The intent of the Management Plan is to explain in detail who will run the business. employment agreements. contingency plans)
Section VIII: Financial
1. ownership C. and longer lead times in material purchases. Financial forecast Under this section different information about financial conditions of the business will be considered using various financial statements. inaccurate sales projections. and how everyone will fit into the organization's structure. and consultants
Section VII: Critical Risks
Critical risks of a business may include: a. since a business plan is supposed to show a business' potential profitability. Potential Problems
Potential problems include: effect of unfavourable trend in the industry. Obstacles and risks d. breaking up of management team. the plan encompasses: A Management team – key personnel B. While writing the Management Plan. advisors. what skills and credentials these people have. What-ifs What-ifs are those conditions which may happen in the future but not yet to be known about their occurrence currently. Some of them might be competitors‟ price cut. design or manufacturing cost overruns. So. c.
• Debt financing
• equity financing Concerning the application of funds. the following financial instruments may also be included. 3.Provides you with an overall profitability summary for a period of time and will determine your tax liability for the year as it is depicted below. Cost controls e. Sources of finance and application of funds There are different of sources financing a new venture and an already running business. the two major sources of finance are. This part will be clearly shown in the sample business plan. Budgeting plans A budget is a powerful tool you can use to help you take control of your money. Balance sheet
2. budget plans and financing stages will be included in the business as part of the financial section of a business plan. Preparing cash flow statement helps to determine whether or not the business is viable and if you will be able to draw funds from the business. Income statement ___________________ Sales Expenses ___________________ ____________________
(Variable or fixed) ____________________ Profit/ loss Tax owed ____________________ ____________________ ____________________ ____________________
b. Additionally. 63
c. Break-even analysis d. Cash flow statement
This takes the predictions and estimates that you have determined in your business pan and transferred to a comprehensive financial statement. Basically. It also Helps to know your monthly sales and expenses that will also help make good decisions such as when to purchase equipment or hire staff and if you need to obtain a line of credit.
while keeping in mind how investors like to fund startups. The truth is. most angel investors and venture capitalists prefer to fund startups in steps. Although a “one-time investment” strategy is theoretically possible. entrepreneurs should articulate their investment requirements. the risk. launch products and break even. 4. it is hard to cite examples of any successful startup that has gone this route. Financing stages It is rarely possible for startups to raise sufficient capital to start their operations. revenue. Therefore.Some people say they can't budget. Venture capitalists and angel investors categorize startups into stages based on a number of startup parameters including who makes up the management team. They say it's too complicated or they don't know where to start. and provide equity finance accordingly. Moreover. Basically. Most startups are categorized into the following stages:
Seed round First round
Second round Third round Bridge loan
Merger & Acquisition round Initial Public Offering (IPO) Leveraged buyouts 64
. customers‟ profiles and engagement. the value proposition. Or they think they've got enough money and don't want to be restricted by a budget because it might mean going without. it helps you understand where your money goes so you can take control. A budget helps you decide what you want and plan how to achieve it. etc. This practice helps investors assess the value of the company and minimize the startup risk. everybody who does a budget can see how it pays off.
human resource or other related data. administrative. Establishing the management team Production and operations scheduling Market planning Incorporation of the business Completion of design and development Hiring of sales representatives Product display at trade shows Signing up distributors and dealers Ordering production quantities of materials Receipt of first orders First sales and first deliveries Payment of first account receivables (cash-in)
Section X: Appendix
This section of the business plan contains documents and other materials which have been used for preparing business plan. Timing and objectives
B.Section IX: Milestone Schedule
This part of the business plan contains topics like:
A. Milestones should be related to such activities as: Product design and development. 65
. This can be financial. Relationship of events Milestone scheduling: this is a step by step approach to illustrate accomplishments in a piecemeal fashion. Deadlines/milestones C.
including all necessary explanations in the context of Ethiopia.. to.. 2........ • Keep the Plan Respectably Short • Organize and Package the Plan Appropriately • Orient the Plan Toward the Future • Avoid Exaggeration • Highlight Critical Risks • Give Evidence of an Effective Entrepreneurial Team • Do Not Over diversify • Identify the Target Market • Keep the Plan Written in the Third Person • Capture the Reader‟s Interest
3..8 Sample Business plan format
The business plan outlined below presents all necessary chapters in detail.......... 4.................2 Guidelines to Remember
The following key points are found to be pertinent that should be given due consideration while preparing a business plan..4.......... Full name of the business operator.......Ethiopian application outline
Business Plan 1....... Year of the plan: From.. Address: Woreda.......................... ................ Kebele...................................... Type of the plan/work/business in which the operator is to be engaged............... 3......................
Business plan for micro-enterprises ....................7.............. House no.........4........
................................... no.. cost cost Total Remark Unit of measure Unit Qua............................ Yearly sales plan: Product/servic e to be sold. no.............................................. Equipment to be purchased by the operator Ser............. Qua Unit pric e Total price Remark Unit of measure Unit Qua......... tax expense etc........................
Source of raw material.......... Type of equipment Total cost of equipment 9................. Other yearly operating expenses (e.......... Type of material Total raw cost raw Unit .. 7...... Specify........... if there is any problem: ......................... cost Total cost Remark
Qua...... Yearly raw material requirement: Ser........................................ ..................................................... 10... no..... Ser.... labor expense.......... ............... depreciation expense...... Types of expense Remark expense in Birr
........) Amount of Ser.. Work premises at the disposal of the operator.......g.......... Equipment currently owned by the operator: Ser............... no... Type of equipment Total cost of equipment 8. marketed / year Total sales Months during which sales are expected to be high............. 6......................................... .................................... sales expense............................ ................................... no......5........
be produced or rendered Total cost 12.
· · · · · · · · · ·
short-term and recurrent expenditure Total 13.Total expense 11. production/service to no. Yearly profit and loss plan See Profit + Loss Statement Format: Accounting
Business plan outline 2 for small and medium enterprises and start ups
Business plan for small and medium enterprises and start ups outline
Executive summary 1. Financial plan: Capital requirements Investment capital: Machinery + equipment Furniture + fixture Business premises Any other initial and significant outlay Working capital: Salary/wage Raw material and/or supplies Rent Maintenance Business promotion Other cash outlay to meet Equity Loan Total
Qua . Yearly production/service plan: Types of Ser. Brief Description of the Project
4 Market Area 1.5 Main Customers 1.2.2 Fixed Capital 2.1 Production Process 2.12 Raw Materials Availability 2.10 Raw Materials Needed 2.2 Competitors' 1. Project's Contributions to the Economy 1.6 Total Demand 1.7 Future Capacity 2.5 Sources of Equipment 2. Organization and Management
.18 Production Cost 3.17 Factory Overhead Expenses 2. Brief Profile of the Entrepreneur 3.9 Factory Location and Layout 2.11 Marketing Strategy 1.3 Location 1.1 Product description 1.8 Terms and Conditions of Purchase of Equipment 2.6 Planned Capacity 2.12 Marketing Budget 2.10 Promotional Measures 1.4 Maintenance and Repairs 2.16 Labor Productivity 2.14 Cost of Labor 2.3 Life of Fixed Capital 2. Sales and Marketing 1. Production 2.7 Market Share 1.11 Cost of Raw Materials 2.15 Labor Availability 2.13 Labor 2.8 Selling Price 1.9 Sales Forecast 1.
What factors are to be kept in mind while deciding on product/service? 3.7 Administrative Expenses 4.3.2 Financing Plan and Loan Requirement 4.10 Financial Analysis Experience and Qualifications
Self assessment questions
1.8 Break-even Point (BEP) 4.5 Pre-Operating Expenses 3.2 Organizational Structure 3. Financial plan 4. What are the important facets of a project feasibility study? 2.3 Security for Loan 4. Take any hypothetical small business which is going to be launched by you and prepare a business plan that helps for effective establishment and running of the venture. List and describe the different elements of a business plan.4 Pre-Operating Activities 3. 8.6 Office Equipment 3. financial sources and customers. Explain legal considerations in the establishment of a small scale enterprise? 5. 6. Discuss the pitfalls to avoid in planning and their respective solutions.4 Profit and Loss Statement 4.7 Loan Repayment Schedule 4. 70
. Describe the various forms of business organization? 4.1 Project Cost 4. 7.1 Form of Business 3.3 Business of the Entrepreneur 3.6 Balance Sheet 4.9 Return on Investment (ROI) 4. What is business plan? Write the importance of business plan for the entrepreneur.5 Cash Flow Statement 4.