CHAPTER ONE - Entrepreneurship and Free Enterprise: Prepared By: Enanu Tesfaw 1

CHAPTER ONE - Entrepreneurship and Free Enterprise
1.1. Meaning of the Terms Entrepreneur, and Entrepreneurship

1.1.1 What is Entrepreneur?
There have been hundreds of definitions in dozens of books. Some of them are given as follows:
Entrepreneurs are action-oriented, highly motivated individuals who take risks to achieve goals.
Entrepreneurs are people who have the ability to see and evaluate business opportunities; the ability
to gather the necessary resources to take advantage of them; and the ability to initiate appropriate
action to ensure success. Economists may view entrepreneurs as those who bring resources
together in unusual combinations to generate profits. Psychologists tend to view entrepreneurs in
behavioral terms as those achievement-oriented individuals driven to seek challenges and new
accomplishments. Corporate managers too often view entrepreneurs as small business persons
lacking the potential needed for corporate management. Drucker states as "Entrepreneur is
someone who always searches for change, responds to it, and exploits it as an opportunity. The
entrepreneur is a combination of the thinker and the doer/achiever. The entrepreneur sees an
opportunity for a new product or service, a new approach, a new policy, or a new way of solving a
historic problem.
Entrepreneurs take the risks necessary in producing goods and services. In this way they act as the
energizers of the business system. Entrepreneurs are instruments of change.
 Different authors have defined the term entrepreneur in different ways. Some of the most
important definitions are;
1. According to F.A.Walker: ―Entrepreneur is one who is endowed with more than average
capacities in the task of organizing and coordinating the factors of production, i.e. land, labor,
capital and enterprises.
2. According to Gilbraith: ―An entrepreneur must accept the challenge and should be willing
hard to achieve something.
3. Frank Young defined entrepreneur as a change agent.
4. International Labor Organization (ILO) defines entrepreneurs as those people who have the
ability to see and evaluate business opportunities, together with the necessary resources to take
advantage of them and to initiate appropriate action to ensure success.
As said above entrepreneur is used in various ways and various views. These views are broadly
classified into three groups, namely risk bearer, organizer and innovator.
Prepared by : Enanu Tesfaw 1

Entrepreneur as risk bearer: P.H. Knight described entrepreneur to be a specialized group of
persons who bear uncertainty. Uncertainty is defined as risk, which cannot be insured against and is
incalculable.
He made distinction between certainty and risk. A risk can be reduced through the insurance
principle, where the distribution of outcome in a group of instance is known, whereas uncertainty
cannot be calculated.
Entrepreneur as an organizer: According to J.B Say “an entrepreneur is one who combines the
land of one, the labor of another and capital of yet another, and thus produces a product. By selling
the product in the market, he pays interest on capital, rent on land and wages to laborers and what
remains is his/her profit”. Say made distinction between the role of capitalist as a financer and the
entrepreneur as an organizer. This concept of entrepreneur is associated with the functions of
coordination, organization and supervision.
Entrepreneur as an innovator: Joseph A Schumpeter in 1934 assigned a crucial role of innovation
‘to the entrepreneur. He considered economic development as a dynamic change brought by
entrepreneur by instituting new combinations of factors of production, i.e. innovations. The
introduction of new combination according to him may occur in any of the following forms.
(a) Introduction of new product in the market.
(b) Use of new method of production, which is not yet tested.
(c) Opening of new market.
(d) Discovery of new source of raw materials.
(e) Bringing out of new form of organization.
Schumpeter also made distinction between inventor and innovator. An inventor is one who
discovers new methods and new materials. An innovator utilizes inventions and discovers in order
to make new combinations. Hence the concept of entrepreneur is associated with three elements risk
bearing, organizing and innovating. Hence an entrepreneur can be defined as a person who tries to
create something new, organizes production and undertakes risks and handles economic uncertainty
involved in enterprise
1.1.2 What is Entrepreneurship?
“Entrepreneurship is the dynamic process of creating incremental wealth. This wealth is created by
individuals who assume the major risks in terms of equity, time and/or career commitments of
providing value for some product or service. The product or service itself may or may not be new

or unique but value must somehow be infused by the entrepreneur by securing and allocating the
necessary skills and resources.” Robert Ronstadt.
Entrepreneurship is the process of creating and building something of value from practically
nothing. That is, entrepreneurship is the process of creating an opportunity and pursuing it
regardless of the resources currently controlled. Entrepreneurship involves the definition, creation,
and distribution of value and benefits to individuals, groups, organizations, and society.
Entrepreneurship is very rarely a get-rich-quick proposition; rather, it is one of building long–term
value and durable cash flow streams.
Fundamentally, entrepreneurship is a human creative act. It involves finding personal energy by
initiating and building an enterprise or organization, rather than by just watching, analyzing, or
describing one. Entrepreneurship usually requires a vision and the passion, commitment, and
motivation to transmit this vision to other stakeholders, such as partners, customers, suppliers,
employees and financial backers. It also requires a willingness to take calculated risks-both
personal and financial and then doing everything possible to influence the odds.
Entrepreneurship involves building a team of people with complementary skills and talents; of
sensing an opportunity where others see chaos, contradiction, and confusion; and of finding,
marshaling, and controlling resources (often owned by others) to pursue the opportunity.
Entrepreneurship involves making sure the venture doesn’t run out of money when it needs money
most.
1.2.1 History of Entrepreneur
 The earliest usage of the term "entrepreneur" is recorded in 17th Century French military
history. It referred to persons who undertook to lead military expeditions.
 In 18th Century Irishman named Richard Cantillon who was living in France at the time, is
credited with being the first to use the term "entrepreneur" in a business context, as someone
who buys goods and services at certain prices with a view to selling them at uncertain prices
in the future, in other words bearing and not-insured risk.
 Jean Baptiste Say, writing in 1803, described the entrepreneurial function in broader terms
laying emphasis on "the bringing together of the factors of production with the provision of
management and the bearing of the risks associated with the venture".
 While Say and Cantillon created some casual interest in entrepreneurs and their role in
society, it was not until the early 20th century when the Morovian, Joseph Schumpeter, cast
the entrepreneur as being the central actor in the change process, that anyone really took

note. He contended that the single most important function of the entrepreneur was
innovation.
1.3 Role/Function of Entrepreneur
An Entrepreneur has to perform a number of functions right from the generation of idea up to the
establishment of an enterprise. They play a big role for the national economy as well as for the
privet ventures. He also has to perform functions for successful running of his enterprise.
Entrepreneur has to perceive business opportunities and mobilize resources like man, money,
machines, materials and methods. The following are the main functions of an Entrepreneur.
1. Idea generation: The first and the most important function of an Entrepreneur is idea generation.
Idea generation implies product selection and project identification. Idea generation is possible
through vision, insight, keen observation, education, experience and exposure. This needs scanning
of business environment and market survey.
2. Determination of business objectives: Entrepreneur has to state and lay down the business
objectives. Objectives should be spelt out in clear terms. The Entrepreneur must be clear about the
nature and type of business, i.e. whether manufacturing concern or service oriented unit or a trading
business so that he can very well carry on the venture in accordance with the objectives determined
by him.
3. Rising of funds: All the activities of the business depend upon the finance and hence fund
raising is an important function of an Entrepreneur. An Entrepreneur can raise the fund from
internal source as well as external source. He should be aware of different sources of funds. He
should also have complete knowledge of government sponsored schemes in which he can get
government assistance in the form of seed/start capital, fixed and working capital for his business.
4. Procurement of machines and materials: Another important function of an Entrepreneur is to
procure raw materials and machines. Entrepreneur has to identify cheap and regular sources of raw
materials which will help him to reduce the cost of production and face competition boldly. While
procuring machineries he should specify the technical details and the capacity. He should consider
the warranty, after sales service facilities etc before procuring machineries.
5. Market research: Market research is the systematic collection of data regarding the product
which the Entrepreneur wants to manufacture. Entrepreneur has to undertake market research
persistently to know the details of the intending product, i.e. the demand for the product, size of the
market/customers, the supply of the product, competition, the price of the product etc.

6. Determining form of enterprise: Entrepreneur has to determine form of enterprise depending
upon the nature of the product, volume of investment etc. The forms of ownership are sole
proprietorship, partnership, Joint Stock Company, co-operative society etc. Determination of
ownership right is essential on the part of the entrepreneur to acquire legal title to assets.
7. Recruitment of manpower: To carry out this function an Entrepreneur has to perform the
following activities.
(a) Estimating man power requirement for short term and long term.
(b) Laying down the selection procedure.
(c) Designing scheme of compensation.
(d) Laying down the service rules.
(e) Designing mechanism for training and development.
8. Implementation of the plan: Entrepreneur has to develop schedule and action plan for the
implementation of the project. The project must be implemented in a time bound manner. All the
activities from the conception stage to the commissioning stage are to be accomplished by him in
accordance with the implementation schedule to avoid cost and time overrun. He has to organize
various resources and coordinate various activities. This implementation of the project is an
important function of the Entrepreneur.

CHAPTER TWO - SMALL BUSINESS
2.1 Definitions of Micro and Small enterprise/Small Business/
The terms Micro-enterprise and small-enterprise refer in the first place to the size of the business.
For a long time, the concept of ‘informality’ has also used to characterize micro and small
enterprise, informality here refers to the informal nature of the employment process (no contract of
employment and low wages) and to the fact that most of such business are not registered. However
for a meaningful classification of firms into categories, the size of firm or the degree of informality
does not provide usable yardsticks. A number of other characteristics of enterprises and of the
entrepreneurs who set up and run them must also be taken into account. At present in most
countries, a combination of the number of workers and invested capital are used as a yardstick.
Worldwide, individual countries apply their own definitions and criteria in defining categories of
small-scale enterprise. For instance definition applied to micro-enterprise in Ethiopia is different
from the developed countries such as the USA and UK – Attempt is therefore made in this section
to cite some of the definitions given to such categories of enterprise by different countries including
Ethiopia.
Micro and Small business enterprise is a specific form of small enterprise. It almost involves
businesses with informal characteristics. Such enterprises usually include small service businesses,
bakeries, metal working business, small furniture maker’s repair and maintenance business, copying
business, small scale food production business, etc… The lower limit in the microenterprise
category is the one-person business. The upper limit is often fairly arbitrarily, drawn at business

with a maximum of 10 employees and/or maximum capital of about US Dollar 50,000. This
definition usually refers to the category set by most developed countries. Moreover, studies indicate
that this group (micro-enterprise) provides most jobs in the industrial sector of many developing
countries varying from 40% to 90%.
Generally, there are two approaches to define a small business enterprise. These are:
A. Size criteria and
B. Economic/control criteria
A. Size Criteria
Though the criteria used to measure the size of business may vary, the following criteria are
commonly used to measure the size of businesses.
i. Sales volume
ii. Number of employees
iii. Insurance in force
iv. Volume of deposits
B. Economic/Control Criteria
The definition of a small business referring to economic/control criteria cover the following:
i. Market share
ii. Independence and
iii. Personalized management
All of these three characteristics should be satisfied in order for the business firm to be categorized
as a small business. These characteristics are briefly discussed here under.
i. Market share: - The market share of a small firm is not large enough to enable to influence
the prices of national goods sold to any significant extent.
ii. Independence: - The owner of a small business is independent in that he/she has full
control over the business.
iii. Personalized Management: - It is the owner who actively participates in all aspects of the
firms’ management and in all major decision making processes. Thus, there is little or no
devolution of delegation of authority.
When we refer to the Ethiopia context, a standard definition to both micro and small enterprise has
been set by the ministry of Trade and Industry study on ‘MSEs development strategy’ which took
place on August 1997.

Accordingly, micro enterprises in Ethiopia are defined as those firms with less than ten workforces
and with a paid up capital of not exceeding birr twenty thousand. While the small enterprises are
defined as those ventures with less than ten workforces and with paid up capital of not exceeding
birr fifty thousand. The study notes that, over 89 percent of the informal sector operators are
concentrated in manufacturing and trade of hotels and restaurants activities and 85 percent of the
small scale enterprise and engaged in manufacturing food fabricated metal furniture and weaving
apparels.
2.2 Economic, Social, and Political aspects of Small Business Enterprise.

Industrialization is of crucial importance to sustainable development. Only very few countries with
a small population and a great wealth of natural resources have succeeded in achieving a high
degree of prospects. The success of a number of newly industrialized countries, especially in East
Asia, has emphasized the importance of the relationship and interaction between agriculture,
industry and the service sector. Within each of these sectors strategic changes are taken place, with
employment in agriculture almost always going into sharp decline while employment in services
and the industrial sector grows. Growth in the industrial sector is less rapid than in the service
sector however. In any case the changes referred to highlight the increasing importance of
development in the micro and small enterprise sector.
Developing countries are devoting attention to the development of small scale enterprises in a
variety of ways. The following are the major vital roles that micro and small enterprise can play in
the socio-economic development of a nation.
i. Micro and small enterprises are considered to be greatest value in building up a local
production structure and in promoting economic growth.
ii. Micro and small enterprise are also considered as a means of creating employment
opportunity and achieving a fair distribution of national resource income, knowledge
and power.
iii. Small scale enterprises are also seen as a seedbed for the development of local
entrepreneurship.
iv. Small enterprises are also important in that can help to promote rural industrialization.
v. Small scale enterprises are also termed or seen as forms enterprises in which more
appropriate technology is applied. They require less capital and more labor. They have
the capacity to generate a much higher degree of employment with less capital as

compared to the large-scale sector. Thus, they are less capital intensive and more
employment oriented.
vi. Small-scale enterprises are also important in that can serve as suppliers of parts and
accessories to bigger industries. This ancillary function involves specialization in
specific areas and results in greater profitability.
vii. Small-scale enterprises or industries can also play a prominent role in promoting the
export market.
When seen from the individual point of view, going into small business has certain advantages. As
a result, the desire for individuals to own and operate their own small business firm is growing.
The following are four benefits those individuals/owners can get

(a) Opportunity to gain control over own destiny: Owning a business provides the
entrepreneur the independence and the opportunity to achieve what is personally important.
(b) Opportunity to reach your full potential: Too often, people find their work boring and
unchallenging. The small business therefore, becomes instrument for self-expression and
self-actualization. In your own business, all of your skills and abilities will likely be
challenged. The only barriers to success are those that your creativity and determination
cannot overcome limits artificiality created by the organization that employs you.
(c) Opportunity to rap unlimited profits: Although money is not the primary force driving
most enterprises their ability to keep the money their business earn, certainly is a critical
factor in their decisions to launch companies. Without question, men and women who apply
their knowledge to produce valuable goods and services and to solve problems of the society
often are rewarded bountifully.
(d) Opportunity to contribute to society and be recognized for your efforts: We no longer
can depend solely on our own skills to provide for all our needs. Entrepreneurs provide the
rest of us with goods and services we need. Small business owners/managers enjoy the
recognition from customers when they have served faithfully over the years.
Being a part of the business system, and knowing that their work has a direct bearing on
how the economy function is another reward for small business owners.
2.3 Small Business Failure factors.
Failure can be thrust upon an entrepreneur through external conditions or fabricated by the
entrepreneur through personal short comings.
External factors of failure
Every business is affected by externalities; economic business cycles, fluctuating interest rates
interrupted supplies, labor market trends, inflation.
Personal factors of failure
The following can be cited as personal factors attributable to small business failures:
 Inexperience: lack of technical skills and or management acumen. Each of these short
comings can be lead to disaster, but they also can be overcome by individual willing to
make the commitment of time and energy to learn about business.
 Arrogance: Many small business persons become consumed with their own brilliance,
convinced beyond reason (often without market research) that their bright ideas will change
the world-it has got to sell. Their arrogance will not allow them to advice from others.
 Mismanagement: inexperience entrepreneurs simply make bad decisions in critical
situations. Several categories of mismanagement take critical for small business to avoid.
 Over investment in fixed asset in common: When starting or expanding a business, it is
tempting to buy facilities and equipment rather than lease or subcontract.
 Poor inventory control: This threatens the success of nearly all retail enterprises.
Purchasing too much inventory undermines customer selection and sales. Buying the wrong
inventory, or buying at wrong time, evaporates cash.
 Poor financial control: Many entrepreneurs fail to realize that ”ncome”does not “cash
flow.”
 Lack of planning: research shows less than half of small business owners had formal plans
prior to going in to business. Many engaged in formal planning soon after starting their
businesses, but one third could not recall ever having a formal business plan. It is nearly
impossible to acquire capital, obtains loans or solidifies vendor contracts without document
sales forecasts, financial statements, market analysis and a clear statement the business
purpose. Plans are guide lines for action.

2.4 Problems of small business in Ethiopia
Small scale industries have not been able to contribute substantially as needed to the economic
development particularly because of financial, production, and marketing problems. These
problems are still major handicaps to their development lack of adequate finance and credit has
always been a major problem of Ethiopian small business. Small-scale units do not have easy
access to the capital market because they mostly organized on proprietary partnership basis and are
of very small size. They do not have 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
negligible. Because of their size and partly because of the fat limited profit, they search for funds
for investment purposes. Consequently, the approach moneylenders who charge high rate of interest
hence small enterprises continue to be financially weak.
Small-scale enterprises find it difficult to get raw materials of good quality and at cheaper rates in
the field of production. Very often they do not get raw materials in time. As a result, these
enterprises very often fail to produce goods in requisite quantities and of good quality of a low cost.
Furthermore, the techniques of production, which these enterprises have adopted, are usually
outdated. Because of their poor financial position they are not able to buy new equipment
consequently their productivity suffers. Besides, many small business enterprises are suffering with
the problem of marketing their products. It is only by overcoming all these constraints that small
enterprises can hope to make their enterprises successful.
2.5 Setting Small Business

2.5.1 What is Basic Business Idea?
All business begins with a business idea. There are many ideas around, but they are not all are
business idea. A business idea has two defining characteristics, it meets an unmet need and it
drives transaction.
In the first, the product or service that we offer must satisfy a customer’s unmet need. This may
mean a brand-new product or service or it may mean finding a way to provide a product or service
at a lower price than currently available.
Second a good business idea drive transaction. Whatever the product we offer to customers they
must be willing to exchange their money for our product or service. A key point keep in mind is

that people do not buy products or services they buy the benefits they get from the product or
service. So what benefits are we providing that meet their needs and solve their problem.
The test of a good business atmosphere guides the choice of basic business idea. A basic business
idea results from the identification of business opportunities in market.
To be success in business consistently watches the opportunities to spot where the entrepreneur has
to be sensitive to the market changes. Watch demand and supply study consumer behavior and
grasp the business ideas.
Person is logical to think of a goal for the unit in long run rather than to look for the immediate
tomorrow. This long-term thinking is called basic business idea. The basic business idea and the
product through hierarchy can be represented as follows.
Basic business idea

Product line
Product range
Product
Business persons should think of long-term goal and the profit when they start a business. The basic
business idea, which is at the top of the hierarchy, is to meet the broadest needs of the customers,
and has the long life perhaps from 5-50 years. The basic business idea facilitates choice of product
under an overall plan. Thus, entrepreneur may think of being in the entertainment firm, in
automobiles, in medicines, in services, in industries, etc.
The product line is relatively narrow and has a shorter life. The product line consists of different
families of product. A unit with a basic business idea for example packaging can metal packages,
aluminum packages, paper or wood packages.
The product range includes different size of the product with in the product line in the examples
given above different size of glass bottles can be manufactured for varied applications.
The product is one item of the product range having different specifications like size, material used
and weight, etc.

The basic business idea, which facilitates a choice of the product at different stages of the product,
allows for diversification and expansion. But the basic idea is not always the same. In a dynamic
business scheme, one has to carefully watch is one of the basic idea degenerating as regards.
A. Its ability to generate quick returns
B. Its ability to permit quick changes in the products
The general business atmosphere guides the choice of basic business idea. A basic business idea
results from the identification of business opportunities in the market.
To be successful in business, consistently watch the opportunities to spot where the entrepreneur
has to be sensitive to the market changes, watch demand and supply, study consumer behavior, and
grasp the business idea.
A. Sources of New Ideas
Some of the more frequently used sources of ideas for new entrepreneurs include consumers,
existing companies, distribution channels, the federal government, and research and development.
1. Consumers: Potential entrepreneurs should pay close attention to the final focal point of the
idea for a new product or service the potential consumer. This attention can take the form of
informally monitoring potential ideas and needs or formally arranging for consumers to
have an opportunity to express their opinions. Care needs to be taken to ensure that the idea
or need represents a large enough market to support a new venture.
2. Existing Companies: Potential entrepreneurs and intrapreneur should also establish a
formal method for monitoring and evaluating competitive products and services on the
market. Frequently, this analysis uncovers ways to improve on these offerings that may
result in a new product that has more market appeal.
3. Distribution Channels: Members of the distribution channels are also excellent sources for
new ideas because of their familiarly with the needs of the market. Not only do channel
members frequently have suggestions for completely new product, but they can also help in
marketing the entrepreneur’s newly developed products. One entrepreneur found out
salesclerks that the reason his history was not selling was due to its color. By heeding the
suggestion and making the appropriate color changes, his company became the leading
supplier of non-brand hosiery in that region.
4. Federal Government: The federal government can be a source of new product ideas in two
ways. First, the files of the Patent Office contain numerous new product possibilities.

Although the patents themselves may not be feasible new product introductions, they can
frequently suggest other more marketable product ideas. Several government agencies and
publications are helpful in monitoring patent applications. Second, new product ideas can
come in response to government regulations. For example, the Occupational Safety and
Health Act (OSHA), aimed at eliminating unsafe working conditions in industry, mandated
that three people. The kit has to contain specific items that varied according to the company
and the industry. The weather proofed first-aid kit needed for a construction company had to
be different from the one needed by a company manufacturing facial cream or a company in
retail trade. In response to OSHA, both established and newly formed ventures marketed a
wide variety of first-aid kits. One newly formed company, R & H Safety Sales Company,
was successful in developing and selling first-aid kits that allowed companies to comply
with the act.
5. Research and Development: The largest source of new ideas is the entrepreneur’s own
“research and development,” efforts that may endeavor connected with one’s current
employment or an informal lab in the basement or garage. A more formal research and
development department is often better equipped and enables the entrepreneur to
conceptualize and develop successful new product ideas.
B. Method of Generating Ideas
Even with a wide variety of sources available, coming up with an idea to serve as the basis for a
new venture can still be a difficult problem. The entrepreneur can use several methods to help
generate and test new ideas, including focus groups, brain storming, and problem inventory
analysis.
I. Focus Groups: Focus groups have been used for a variety of purposes since the 1950s. A
moderator leads a group of people through an open, in-depth discussion rather than simply
asking questions to solicit participant response. For a new product area, the moderator focuses
the discussion of the group in either a directive or a nondirective manner.
The group of 8 to 14 participants is stimulated by comments from other group members in
creatively conceptualizing and developing a new product idea to fulfill a market need. One
company interested in the women’s slipper market received its new product concept for: a
“warm and comfortable slipper that fits like an old shoe” from a focus group of 12 women from
various socioeconomic backgrounds. The concept was developed into a new product that was a

market success. In addition to generating new ideas, the focus group is an excellent method for
initially screening ideas and concepts. Using one of several procedures available, the focus
group a useful method for generating new product ideas. Focus group is groups of individuals
providing information in a structured format.
II. Brainstorming: The brainstorming method for generating new product ideas is based on the
fact that people can be stimulated to greater creativity by meeting with others and participating
in organized group experiences. Although most of the ideas generated from the group have no
basis for further development, often a good idea emerges. This has a greater frequency of
occurrence when the brainstorming effort focuses on a specific product or market area. When
using this method, the following four rules should be followed:
1. No criticism is allowed by anyone in the group-no negative comments.
2. Freewheeling is encouraged-the wilder the idea the better
3. Quality of ideas is desired-the greater the number of ideas, the greater the likelihood
of the emergence of useful ideas.
4. Combinations and improvements of ideas are encouraged; ideas of others can be
used to produce still another new idea.
The brainstorming session should be fun, with no one dominating or inhibiting the discussion.
III.Problem Inventory Analysis: Problem inventory analysis uses individuals in a manner that is
analogous to focus groups to generate new product ideas. However, instead of generating new
ideas themselves, consumers are provided with a list of problems in a general product category.
They are then asked to identify and discuss products in this category that have the particular
problem. This method is often effective since it is easier to relate known products to suggested
problems and arrive at a new product idea than to generate an entirely new product idea by itself
problem inventory analysis can also be used to test a new product idea. Results from product
inventory analysis must be carefully evaluated as they may not actually reflect a new business
opportunity. Problem inventory analysis is a method for obtaining new ideas and solutions by
focusing on problems.

CHAPTER THREE - BUSINESS PLANNING
3.1 The Concept of Business Planning
Why is planning?
Before we go into the details part of business plan, it is important that every individual understand
the importance of planning for the success of any venture. Planning is the process of setting
objectives and devising actions to achieve those objectives, answers the questions such as:
 What business am I in?
 What finances do I need?
 What is my sales strategy?
 Where can I find needed personnel?
 How much profit can I expect?
Planning is a process that never ends for a business. It is extremely important in the early stages of
any new venture when the entrepreneur will need to prepare a preliminary business plan. The plan
will be finalized as the entrepreneur has a better sense of the market, the product or services to be
marketed, the management team, and the financial needs of the venture. As the venture evolves
from an early start-up to a mature business, planning will continue as management seeks to meet its
short term or long-term business goals.
For any given organization, it is possible to find financial plans, marketing plans, human resource
plans, production plans, and sales plans. Plans may be short-term or long-term, or they may be
strategic or operational. Plans will also differ in scope depending on the type of business or the
anticipated size of the startup operation.
What is the Business Plan?

The business plan is the formal written expression of the entrepreneurial vision, describing the
strategy and operation of the proposed venture. It is also a loan proposal, venture plan, or
investment prospectus.

The business plan is a written document that sets out the basic idea underlying a business and
related start-up considerations. However, not all business plans are the same because businesses are
different, products are different, they are prepared for different reasons and they vary in importance.
For the entrepreneur starting a new venture, a business plan has four basic objectives:
A. It identifies the nature and the context of the business opportunity why does such an
opportunity exist.
B. It presents the approach the entrepreneur plans to take to exploit the opportunity.
C. It identifies the factors that will most likely determine the success of the venture.
D. It serves as a tool to raise financial capital.
A business plan can be viewed as an entrepreneur's game plan; it crystallizes the dreams and hopes
that motivates the entrepreneur to start the business. The business plan will represent your vision
and goals for the firm and it will reflect what actually happens.
The business plan should:
 layout basic idea of the venture,
 describe where you are now,
 indicate where you want to go,
 outline how you propose to get there
 explain the key variables of success or failure,
The business plan is a bridge between an idea and reality. Without first mentally visualizing the
desired end result, the entrepreneur is not likely to see the venture become a reality. The role of the
business plan is to provide a clear visualization of what the Entrepreneur intends to do. A business
plan may also address major expansion of an existing firm. A business plan can be a response to
some changes in the external environment that presents new opportunities. Therefore, writing a
business plan should be thought of as ongoing process and as the means to an end product.
3.2 Feasibility planning
3.2.1 Conducting feasibility study
Definition of Feasibility Studies:
A feasibility study looks at the viability of an idea with an emphasis on identifying potential
problems and attempts to answer one main question: Will the idea work and should you proceed
with it?

Before you begin writing your business plan you need to identify how, where, and to whom you
intend to sell a service or product. You also need to assess your competition and figure out how
much money you need to start your business and keep it running until it is established.
Feasibility studies address things like where and how the business will operate.
They provide in-depth details about the business to determine if and how it can succeed, and serve
as a valuable tool for developing a winning business plan.
Why Are Feasibility Studies so Important?
The information you gather and present in your feasibility study will help you:
 List in detail all the things you need to make the business work;
 Identify logistical and other business-related problems and solutions;
 Develop marketing strategies to convince a bank or investor that your business is worth
considering as an investment; and
 Serve as a solid foundation for developing your business plan.
Even if you have a great business idea you still have to find a cost-effective way to market and sell
your products and services. This is especially important for store-front retail businesses where
location could make or break your business.
For example, most commercial space leases place restrictions on businesses that can have a
dramatic impact on income. A lease may limit business hours/days, parking spaces, restrict the
product or service you can offer, and in some cases, even limit the number of customers a business
can receive each day.
The Components of a Feasibility Study
 Description of the Business: The product or services to be offered and how they will be
delivered.
 Market Feasibility: Includes a description of the industry, current market, anticipated
future market potential, competition, sales projections, potential buyers, etc.
 Technical Feasibility: Details how you will deliver a product or service (i.e., materials,
labor, transportation, where your business will be located, technology needed, etc.).
 Financial Feasibility: Projects how much start-up capital is needed, sources of capital,
returns on investment, etc.
 Organizational Feasibility: Defines the legal and corporate structure of the business (may
also include professional background information about the founders and what skills they
can contribute to the business).
 Conclusions: Discusses how the business can succeed. Be honest in your assessment
because investors won’t just look at your conclusions they will also look at the data and will
question your conclusions if they are unrealistic.
In general, feasibility studies contain comprehensive, detailed information about your business
structure, your products and services, the market, logistics of how you will actually deliver a
product or service, the resources you need to make the business run efficiently, as well as other
information about the business.
SWOT Analysis
It is a simple but very powerful tool which enables individuals to do a comparison of the last three
projects idea. This analysis has four quadrants (strength, weakness, opportunity and threats). The
upper two of the four quadrants representing strength and weakness and the lower quadrants
standing for opportunities and threats which is build in the environment.
The basic objectives of SWOT analysis helps to analyze those project ideas found viable after the
micro screening process while utilizing the SWOT parameters. It helps to apply those forms of
analysis for any project expansion or diversification at a later stage of the business enterprise. In
general it is important for proper-identification of projects.
The SWOT Analysis framework/Components of SWOT Analysis/
1. STRENGTH: These are positive initial factors that occur at present (not potential). Strengths are
within the control of the entrepreneur and they occur at present. Strengths should be capitalized and
harnessed to make weaknesses redundant. It includes:-
 Technical expertise
 Good network with customers
 Managerial expertise
 Distribution system
 Comparatively cheap price
 New improvement of products
 Packaging
 Superior technology
 Product features (utility durability)
2. WEAKNESS: this are also within the control of the entrepreneur that occur at present. They are
lack of--- missing ---- or weak points. As far as possible weakness should be eliminated.

These may include:
o No control over raw materials - Lack of promotion experience
o Limited product life - Technological obsolescence
o Poor design of product - Inexperienced management or owner
o Weak selling effort - Lack of working capital
o Comparatively high price
o No technical exercise of owners
3. OPPORTUNITIES: are positive or favorable factors in the environment which the entrepreneur
should make use of or which make his project idea potentially viable. They are however, mostly
beyond the control of the entrepreneur. They are different from strength in the sense that strengths
are positive internal of the business. Some of these opportunities are:-
o Few and weak competitors - No such product in the market
o Rising income of target market - Scarcity of products in the locality
o Growing demand - Favorable government policy
o Similar products making profit - Low interest in loans
o Technical assistance available - Adequate training opportunities
o Access to cheap raw material
4. THREATS : These are negative or unfavorable external factors in the environment and normally
beyond the control of the entrepreneur. They adversely affect the business if not eliminated or
overcome. Threats differ from weakness in as much as they are beyond the control of the
entrepreneur. Both have negative impact on the business. The purpose of analyzing threats is to
avoid them or make a counter balance action.
Some of these threats are:
o Rising raw material cost - Piracy of skilled labor
o Government chain bureaucracy - raw material shortage
o Bribe and corruption
o Changing government regulation - insufficient power
o Too much employee competition - poor infrastructure
o Restrictive labor force – smuggling

3.3. Preparing the Business Plan
In preparing the business plan the entrepreneur, he must sit still long enough to do it. Hiring
someone to write the business plan is not acceptable substitute; entrepreneurs should undertake the
task personally. Although outsider consultants, accountants and lawyers should be tapped for their
advice and expertise, the founder or the initial management team should be responsible for the
preparation of the business plan.
Developing and writing the business plan take money, time, and energy. The business plan could
take many hours to prepare, depending on the experience and knowledge of the entrepreneur as well
as the purpose it is intended to serve. It should be comprehensive enough to give any potential
investor a complete understanding of the new venture. Many entrepreneurs incorrectly estimate the
length of time that an effective plan will take to prepare. Once the process has begun, however, the
entrepreneur will realize that it is invaluable in sorting out the business functions of a new venture.
Although all business plans contains certain key elements, the content and the organization (format)
varies greatly on the nature of the business, the goal of the plan and the business plan preparation
norms in different countries.
Components of business plan
I. Introductory Page
This is the title or cover page that provides a brief summary of the business plan's contents. The
introductory page should contain the following:
• The name and address of the company.
• The name of the entrepreneur(s) and a telephone number.
• A paragraph describing the company and the nature of the business.
• The amount' of financing needed: The entrepreneur may offer a package that is stock, debt, and so
on.
However, many venture capitalists prefer to structure this package in their own way.
• A statement of the confidentiality of the report: This is for security purposes and is important for
the entrepreneur.
This title page sets out the basic concept that the entrepreneur is attempting to develop. Investors
consider it important because they can determine the amount of investment needed without having
to read the entire plan.
II. Executive Summary

This section of the business plan is prepared after the total plan is written. About three to four pages
in length, the executive summary should stimulate the interest of the potential investor. The investor
uses the summary to determine if the business plan is worth reading in total. Thus, it would
highlight concisely and convincingly the key points in the business plan, that is, the nature of the
venture, financing needed, market potential, and support as to why it will succeed.
III. Industry Analysis
It is important to put the new venture in a proper context. In particular, the potential investor, while
assessing the venture on a number of criteria, needs to do an industry analysis in order to know
which industry the entrepreneur will be competing in. Discussion of the industry outlook, including
future trends and historical achievements, should be included. The entrepreneur should also provide
insight on new product developments in this industry. Competitive analysis is also an important part
of this section. Each major competitor should be identified, with appropriate strengths and
weaknesses described particularly as to how they might affect the new venture's potential success in
the market.
Who is the customer? The market should be segmented and the target market for the entrepreneur
identified. Most new ventures are likely to compete effectively in only one or a few of the market
segments. This strategy may be a function of the competition. Any forecasts made by the industry
or by the government should be noted. The potential investor may view a high growth market more
favorably.
Some key questions the entrepreneur should consider include:
 What are total industry sales over the past few years?
 What is the anticipated growth in the industry?
 How many new firms have entered this industry in the past few years?
 What new products have been recently introduced in this industry?
 Who are the nearest competitors?
 How will your business operation be better than this?
 Is each of your major competitor’s sales growing, declining, or steady?
 What are the strengths and weaknesses of each of your competitors?
 What is the profile of your customers?
 How does your customer profile differ from that of your competitors?
IV. Description of the Venture

The description of the venture should be detailed in this section of the business plan. This will
enable the investor to ascertain the size and scope of the business. Key elements are the product(s),
the location and size of the business, the personnel and office equipment that will be needed, the
background of the entrepreneur(s), and the history of the venture. Some of the important questions
the entrepreneur needs to answer when preparing this section of the business plan includes:
 What are the product(s)?
 Describe the product(s), including patent, Copyright or trademark status
 Where will the business be located?
 Is the building new or old? In need of renovations (If renovation needed, state costs)
 Is the building leased or owned? (State the term)
 Why are these building and location right for your business?
 What additional skills or personnel will be needed to operate the business?
 What office equipment is needed?
 Will equipment be purchased or leased?
 What is your business background?
 What management experience do you have?
 Describe personal data such as education, age, special abilities and interests
 What are your reasons for going into business?
 Why will you be successful in this venture?
 What development work has been completed to date?
V. Production Plan
If the new venture is a manufacturing operation, a production plan is necessary. This plan should
describe the complete manufacturing process. If some or all of the manufacturing process is to be
subcontracted, the plan should describe the subcontractor(s), including location, reasons for
selection, costs, and any contracts that have been completed. If the manufacturing is to be carried
out in whole or in part by the entrepreneur, he/she will need to describe the physical plant layout;
the machinery and equipment needed to perform the manufacturing operations; raw materials and
suppliers' names, addresses, and terms; costs of manufacturing; and any further capital equipment
-needs. In a manufacturing operation, the discussion of these items will be important to any
potential investor in assessing financial needs.

If the venture is not a manufacturing - operation but a retail store or service, this section would be
titled "merchandising plan" and purchase of merchandise, inventory control system, and storage
needs should be described. Some of the key questions for this section of the business plan are the
following:
 Will you be responsible for all or part of the manufacturing operation?
 If some manufacturing is subcontracted, who will be the subcontractor(s)? Give name and
addresses.
 Why were these subcontractors selected?
 What are the costs of the subcontracted manufacturing? Include copies of any written
contracts.
 What will be the layout of the production process? Illustrate the steps if possible.
 What equipment will be needed immediately for manufacturing?
 What raw materials will be needed for manufacturing?
 Who are the suppliers of new materials and appropriate costs?
 What are the costs of manufacturing the product?
 What are the future capital equipment needs of the venture?
If a retail operation or service:
 From whom will merchandise be purchased?
 How will the inventory control system operate?
 What are storage needs of the venture - and how will they be promoted?
VI. Marketing Plan
The marketing plan is an important part of the business plan since it describes how the product(s)
will be priced, promoted and distributed. Specific forecasts for product(s) are indicated in order to
project profitability of the venture. The budget and appropriate controls needed for marketing
strategy decision should be discussed.
Potential investors regard the marketing plan as critical to the success of the new venture. Thus, the
entrepreneur should make every effort to prepare as comprehensive and detailed plan as possible so
that investors can be clear as to the goals and strategies of the venture. Marketing planning will be
an annual requirement (with careful monitoring and changes made on a weekly or monthly basis)
for the entrepreneur and should be regarded as the road map for short-term decision-making.
VII. Organizational Plan

The organizational plan describes the venture's form of ownership - that is, proprietorship,
partnership, or corporation. For instance, if the venture is a partnership, the terms of the partnership
should be included. If the venture is a corporation, it is important to detail the shares of stock
authorized, share options, names and addresses and resumes of the directors and officers of the
corporation. It is also helpful to provide an organization chart indicating the line of authority and
the responsibilities of the members of the organization.
Some of the key questions the entrepreneur needs to answer in preparing this section of the business
plan are summarized below. This information provides the potential investor with a clear
understanding of who controls the organization and how other members will interact in performing
their management functions.
 What is the form of ownership of the organization?
 If a partnership, who are the partners and what the terms of agreement?
 If a corporate, who are the principal shareholders and how much stock do they own?
 What type and how many shares of voting or non-voting stock have been issued?
 Who are the members of board of directors?
 Who has check-signing authority or control?
 What are the roles and responsibilities of each member of the management team?
 What are the salaries, bonuses, or other forms of payment for each member of the
management team?
VIII. Assessment of Risk
Every new venture will be faced with some potential hazards, given the particular industry and
competitive environment.
It is important that the entrepreneur makes an assessment of risk and prepares an effective strategy
to deal with them.
Major risks for a new venture could result from a competitor's reaction; weaknesses in the
marketing or production, and new advances in technology that might render the new product
obsolete. Even if these factors present no risks to the new venture, the business plan should discuss
why that is the case. It is also useful for the entrepreneur to provide alternative strategies should any
of the above risk factors occur. These contingency plans and strategies illustrate to the potential
investor that the entrepreneur is sensitive to important risks and is prepared should any occur.
IX. Financial Plan:

Determines the potential investment commitment needed for the new venture and indicates whether
the business plan is commercially feasible. Three financial areas are covered in this section of the
business plan. First, the entrepreneur should summarize the forecasted sales and appropriate
expenses for some years. It includes the forecasted sales, cost of goods sold, and the general and
administrative expenses. Second, cash flow figures must be presented for some years. Third, the
projected balance sheet should be presented. It shows the financial condition of the business at a
specific time. It also summarizes the assets of the business, its liabilities, the investment of the
entrepreneur and any partners, and retained earnings or cumulative loses.
X. Appendix:
This part generally contains any back up material that is not necessary in the text of the document.
Letters from customers, distributors, or subcontractors are examples of the information that should
be included in the appendix.

CHAPTER FOUR - PRODUCT AND SERVICE CONCEPT
4.1 Product technology
Before you will be produced or service provided in-house, specific technology decisions can be
made. Alternatives include using, replacing, or upgrading existing equipment, adding additional
capacity, or purchasing new equipment. Any alternative that involves an outlay of funds is
considered a capital investment. Capital investments involve the commitment of funds in the
present with an expectation of returns over some future time period. The expenditures are usually
large and can have a significant effect on the future profitability of a firm. These decisions are
analyzed carefully and typically require top management approval.
The most effective quantitative techniques for capital investment consider the time value of money
as well as the risks associated with benefits that will not accrue until the future. These techniques,
known collectively as capital budgeting techniques, include payback period, net present value, and
internal rate of return.
 Although capital budgeting techniques are beyond the scope of this text, we do need to
comment on several factors that are often overlooked in the financial analysis of technology.
But some of are
Purchase Cost The initial investment in equipment consists of more than its basic purchase price.
The cost of special tools and fixtures, installation, training, maintenance, and engineering or
programming adjustments can represent a significant additional investment.
Operating Costs To assess more accurately the requirements of the new technology, it is useful to
consider, step-by-step, how the equipment will be operated, started, stopped, loaded, unloaded,
changed over, upgraded, networked, maintained, repaired, cleaned up, speeded up, and slowed
down.
Annual Savings Most new technology is justified based on direct labor savings. However, other
savings can actually be more important. For example, a more efficient process may be able to use
less material and require less machine time or fewer repairs, so that downtime is reduced. A process

that produces a better-quality product can result in fewer inspections and less scrap and rework.
New processes (especially those that are automated) may significantly reduce safety costs, in terms
of compliance with required regulations, as well as fines or compensation for safety violations.
Revenue Enhancement Increases in revenue due to technology upgrades or new-equipment
purchases are often ignored in financial analysis because they are difficult to predict. Improvements
in product quality, price reductions due to decreased costs, and more rapid or dependable delivery
can increase market share and, thus, revenue. Flexibility of equipment can also be important in
adapting to the changing needs of the customer.
Replacement Analysis As existing equipment ages, it may become slower, less reliable, and
obsolete. The decision to replace old equipment with state-of-the-art equipment depends in large
measure on the competitive environment. If a major competitor upgrades to a newer technology that
improves quality, cost, or flexibility and you do not, your ability to compete will be severely
damaged.
In some industries, technology changes so rapidly that a replacement decision also involves
determining whether this generation of equipment should be purchased or if it would be better to
wait for the next generation. Replacement analysis maps out different schedules for equipment
purchases over a two to five year period and selects a replacement cycle that will minimize cost.
Risk and Uncertainty Investment in new technology can be risky. Estimates of equipment
capabilities, length of life, and operating cost may be uncertain. Because of the risk involved,
financial analysts tend to assign higher hurdle rates (i.e., required rates of return) to technology
investments, making it difficult to gain approval for them.
4.2 Product development process
4.2.1 Production system
The production system is ‘that part of an organization, which produces products of an
organization.
It is that activity whereby resources, flowing within a defined system, are combined and
transformed in a controlled manner to add value in accordance with the policies communicated by
management’.
A simplified production system is shown below:

Schematic production system
The production system has the following characteristics:
1. Production is an organized activity, so every production system has an objective.
2. The system transforms the various inputs to useful outputs.
3. It does not operate in isolation from the other organization system.
4. There exists a feedback about the activities, which is essential to control and improve system
performance.
4.3 Product protection
4.3.1 Patents ,Trademarks ,Copyrighting and labeling
Some people confuse patents, copyrights, trademarks, and Labeling. Although there may be some
similarities among these kinds of intellectual property protection, they are different and serve
different purposes.
A patent is a right granted to the owner of an invention that prevents others from making, using,
importing or selling the invention without his permission.
A patentable invention can be a product or a process that gives a new technical solution to a
problem. It can also be a new method of doing things, the composition of a new product, or a
technical improvement on how certain objects work.
Once it is granted, its term of a patent is 20 years from the Date of Filing, subject to the payment of
annual renewal fees.
The benefits of registering a patent
Once you register a patent, apart from using the patent to prevent others from exploiting your
invention, you can employ it to raise funds for your business, license it to third parties for
commercial returns or sell the patented invention.
What Is a Copyright?
Copyright is a form of protection provided to the authors of "original works of authorship"

including literary, dramatic, musical, artistic, and certain other intellectual works, both published
and unpublished. The 1976 Copyright Act generally gives the owner of copyright the exclusive
right to reproduce the copyrighted work, to prepare derivative works, to distribute copies or records
of the copyrighted work, to perform the copyrighted work publicly, or to display the copyrighted
work publicly.
The copyright protects the form of expression rather than the subject matter of the writing.
For example, a description of a machine could be copyrighted, but this would only prevent others
from copying the description; it would not prevent others from writing a description of their own or
from making and using the machine. Copyrights are registered by the Copyright Office of the
Library of Congress.
What Is a Trademark or Service mark?
A trademark is a word, name, symbol or device which is used in trade with goods to indicate the
source of the goods and to distinguish them from the goods of others. A service mark is the same as
a trademark except that it identifies and distinguishes the source of a service rather than a product.
The terms "trademark" and "mark" are commonly used to refer to both trademarks and service
marks.
Trademark rights may be used to prevent others from using a confusingly similar mark, but not to
prevent others from making the same goods or from selling the same goods or services under a
clearly different mark. Trademarks which are used in interstate or foreign commerce may be
registered with the Patent and Trademark Office. The registration procedure for trademarks and
general information concerning trademarks is described in a separate pamphlet entitled "Basic Facts
about Trademarks".
A modern example of a brand is Coca Cola which belongs to the Coca-Cola Company.
Some additional differences between a copyright and a trademark are as follows:

1. the purpose of a copyright is to protect works of authorship as fixed in a tangible form of
expression. Thus, copyright covers: works of art, photos, pictures, graphic designs, drawings and
other forms of images; songs, music and sound recordings of all kinds; books, manuscripts,
publications and other written works; and plays, movies, shows, and other performance arts.
2. The purpose of a trademark is to protect words, phrases and logos used in federally regulated
commerce to identify the source of goods and/or services.
3. There may be occasions when both copyright and trademark protections are desired with respect to
the same business endeavor. For example, a marketing campaign for a new product may
introduce a new slogan for use with the product, which also appears in advertisements for
the product. However, copyright and trademark protection will cover different things. The
advertisement's text and graphics, as published in a particular vehicle, will be covered by
copyright - but this will not protect the slogan as such. The slogan may be protected by
trademark law, but this will not cover the rest of the advertisement. If you want both forms
of protection, you will have to perform both types of registration.
4. If you are interested in protecting a title, slogan, or other short word phrase, generally you
want a trademark. Copyright law does not protect a bare phrase, slogan, or trade name.
5. Whether an image should be protected by trademark or copyright law depends on whether
its use is intended to identify the source of goods or services. If an image is used temporarily
in an ad campaign, it generally is not the type of thing intended to be protected as a logo.
6. The registration processes of copyright and trademark are entirely different.
 For copyright, the filing fee is small, the time to obtain registration is relatively
short, and examination by the Copyright Office is limited to ensuring that the
registration application is properly completed and suitable copies are attached.
 For trademark, the filing fee is more substantial, the time to obtain registration is
much longer, and examination by the Trademark Office includes a substantive
review of potentially conflicting marks which are found to be confusingly similar.
7. Copyright law provides for compulsory licensing and royalty payments - there is no
equivalent concept in trademark law. Plus, the tests and definition of infringement are
considerably different under copyright law and trademark law.
What is labeling?
Label is a concise explanation of any product given for purpose of identification. The word
labeling is used more as a symbol, than a real idea. The general functions of labels are extensive
predictable and familiar as a method of distinction that helps people recognize one product from
another. It is any written, electronic, or graphic communications on the packaging or on a separate
but associated label.

CHAPTER FIVE - MARKETING AND NEW VENTURE DEVELOPMENT
5.1. Definition of Marketing and Marketing Concept
Marketing is the process of matching the needs of the consumer to the capabilities and resources of
the firm. According to John Egan:
Marketing is about making money from satisfied customers – without satisfied
customers there can be no future for any commercial organization.
Many think of marketing as promotion, advertising or sales. Why they see television advertisements
or newspaper advertisements, they view this as marketing. Others use the term in place of the word
“sales.” How often have you heard a company or individual say they are “selling” a product or
service? But using the term in this way is only partially correct. Marketing is much more than
simply promotion or selling.
A marketing approach to business begins with understanding your customers and their needs. It
involves designing the entire company around fulfilling those needs, beginning with the product or
service. Decisions that involve pricing, services, advertising and even sales are developed with the
customer’s needs and desires. Simplified, marketing starts with the customer. You work
backwards from there.
Determining your Target Market?
A target market is a group of customers who have a similar need for a product or service, money to
purchase the product or service, and willingness and ability to buy it. Typically markets are divided
into two broad categories:
A. Consumers: Individuals who buy or acquire products or services for personal use or
consumption.
B. Businesses: Products and services purchased for use in the development of other products
or services, or for the purpose of reselling or renting them to others at a profit.
5.2. Marketing Research

It is a systematic approach to collect data regarding the market and analyses the collected data.
Research provides the information to meet the needs of your customers and determine your
companies, Target market. The market research also help you to answer the following questions:
i. Where do we find Information?

For business people to make knowledgeable marketing decisions, they need accurate and up-to-date
information. Market research is defined as the systematic gathering, recording and analyzing of data
to determine the best marketing strategies for your goods and services.
Its purpose is to help entrepreneurs make better decisions and avoid committing costly mistakes.
The time and dollars spent on marketing research, regarded by many small businesses as frivolous,
can be extremely valuable. This information may highlight unknown opportunities or expose
possible risky situations. The research process of assessing the market should provide useful
information which will help focus your marketing efforts, providing insight into:
• Present and future potential markets (what consumers are buying or prefer and possible future
trends);
• Strengths and weaknesses of your competition;
• Economic forecasts; and,
• Your own business (by becoming an expert).
ii. How to conduct market research

The goal of market research is to reduce the risks associated with making business decision. It can
replace misinformation and assumptions with facts successful market research consists of four
steps; define the objectives, collect the data, analyze and interpret the data and draw conclusions
and act.
Step 1 –Defines the objectives: - the first and most crucial step in market research is defining the
research objective clearly and concisely. The most effective way to began is for the entrepreneur to
sit down and make a list of the information that will be needed to prepare the market plan.
Some objectives for marketing research may be:
 How much potential customers would be willing to pay for the product or service.
 Where potential customers would prefer to purchase the product or service.
 Where the customer would expect to here or learn about such a product or service.
Step 2 – Collects the data

i. Gathering data from secondary source: - the most obvious source of information for the
entrepreneur is data that already exists, or secondary data. This is usually found in trade
magazines, libraries, government agencies, universities, and the internet. A search in library will
often reveal published information on the industry, competitors, trends in consumer tests and
preferences, innovations in the market.
Before considering either primary source or commercial source of information, the entrepreneur
should exhaust all free sources i.e. Secondary sources.
ii. Gathering data from primary source: - information that is new is primary data. Gathering
primary data involves a data collection proceduresuch as observation, networking,
interviewing, focus groups or experimentationand usually a data collection instrument, such
as a questionnaire.
Step 3 –analyzing and interpreting the result

Depending on the size of the sample, the entrepreneur can hand-tabulate the results or entering them
on a computer. The results should be evaluated and interpreted in response to the research objective
that was specified in the first step of the research process.
Step 4 – draw conclusion and acts
This is the final step in marketing research. The entrepreneur should conclude the research based on
what the data collected and analyzed. And shows what actions are appropriate for the finding by
adding his personal judgment.
5.3. Marketing intelligence

Market Intelligence describes the set of activities that provide a company with a view of a market
using existing sources of information to understand
 What is happening in a market place,
 What the issues are?
 What competitors are doing?
 What customers or consumers are doing (eg social media) and
 What the likely market potential is for new products or services based on previous activities
and responses.
 Broadly speaking Market Intelligence can be divided into two areas depending on the source
of the data:
1. Market Intelligence based on external data (Social media monitoring)
2. Market Intelligence based on internal data
These last two categories are increasingly being redefined as Big Data. However, Market
Intelligence is also used to refer to the collection and monitoring of external data such as analysts
reports, competitor financial data, press monitoring or social media monitoring.
Increasing attention is on Market Intelligence from internal information that provides an insight into
markets and customer behavior, from sources such as databases, prospect lists, website activities,
transaction histories, loyalty cards and so on.
Marketing intelligence (MI) is the everyday information relevant to a company’s markets,

gathered and analyzed specifically for the purpose of accurate and confident decision-making in
determining market opportunity, market penetration strategy, and market development metrics.
Marketing intelligence determines the intelligence needed, collects it by searching environment and
delivers it to marketing managers who need it.
Marketing intelligence software can be deployed using an on-premises or software as a

service (SaaS, or cloud-based) model. These systems take data from disparate data sources,
like web analytics, business intelligence, call center and sales data, which often come separate
reports, and put them into a single environment. In order to collect marketing intelligence,
marketing managers must be in constant touch with relevant books, newspapers and trade
publications. They must talk to various stakeholders like customers, distributors and suppliers. In
addition to this they must also monitor social media and carry out online discussions. Marketing
managers can design reports that correlate and visualize data coming from a variety of departments
and sources (even, in some cases, external data.) This allows them to see current key performance
indicators in real time (or as quickly as sources provide data) and analyze trends, rather than wait
for analysts to deliver periodic reports.
 Steps to be taken by a Company to improve its Marketing Intelligence
(1) Train and Motivate Sales Force: A company's sales force can be an excellent source of
information about the current trends in the market. They are the "intelligence gatherers" for the
company. The acquired facts can be regarding the company's market offerings, whether any
improvements are required or not or is there any opportunity for new products, etc. It can also
provide credible source to know about competitor activities, consumers, distributors and retailers.

(2) Motivate Distributors, retailers, and other intermediaries to pass along important
intelligence: Specialists are hired by companies to gather marketing intelligence. In order to
measure the quality of production, the way the employees are behaving with customers, quality of
facilities being provided; retailers and service providers send mystery shoppers. Firms can also
assess the quality of customer experience with the shops with the use of mystery shoppers.
(3) Network Externally: Every firm must keep a tab on its competitors. Competitive
intelligence describes the broader discipline of researching, analyzing and formulating data and
information from the entire competitive environment of any organization. This can be done by
purchasing the competitor's products, checking the advertising campaigns, the press media
coverage, reading their published reports, etc. Competitive intelligence must be legal and ethical.
(4) Set up a customer advisory panel: Companies can set up panels consisting of customers. They
can be the company's largest customers or representatives of customers or the most outspoken
customers. Many business schools set up panels consisting of alumni who provide their knowledge
and expertise and help in constituting the course curriculum.
(5) Optimal usage of Government data resources: Governments of almost all countries publish
reports regarding the population trends, demographic characteristics, agricultural production and a
lot of other such data. All this data must be or can be referred to as base data. It can help in planning
and formulating policies for the companies.
(6) Information bought from external suppliers: Certain agencies sell data that can be useful to
other companies. For example, television channels will require information on the number of
viewership, ratings of TV programs, etc. An agency which calculates this information and generates
this data will provide it to companies that need it.
(7) Collect Competitive Intelligence through online customer feedback: Customer's view about
a product is most essential for any company. Ultimately it's the customer who's buying the product.
Hence customer feedback must be taken. It becomes easier for companies to apply a structured
system to do so as it can then scan out the relevant messages without much of a trouble.
With the above steps being applied, a company's marketing intelligence system will prove to
beneficial to its effective functioning
5.4. Competitive analysis

Competitor analysis in marketing and strategic management is an assessment of the strengths and
weaknesses of current and potential competitors. This analysis provides both an offensive and
defensive strategic context to identify opportunities and threats. Profiling coalesces all of the
relevant sources of competitor analysis into one framework in the support of efficient and effective
strategy formulation, implementation, monitoring and adjustment.
Competitive analysis is an essential component of corporate strategy. It is argued that most firms do
not conduct this type of analysis systematically enough. Instead, many enterprises operate on what
is called “informal impressions, conjectures, and intuition gained through the tidbits of information
about competitors every manager continually receives.” As a result, traditional environmental
scanning places many firms at risk of dangerous competitive blind spots due to a lack of robust
competitor analysis
A common technique is to create detailed profiles on each of your major competitors. These

profiles give an in-depth description of the competitor's background, finances, products, markets,
facilities, personnel, and strategies. This involves:
 Background
o location of offices, plants, and online presences

o history - key personalities, dates, events, and trends
o ownership, corporate governance, and organizational structure
 Financials
o Dividend policy, and profitability

o various financial ratios, liquidity, and cash flow
o profit growth profile; method of growth
 Products
o products offered, depth and breadth of product line, and product portfolio balance
o new products developed, new product success rate, and R&D strengths
o brands, strength of brand portfolio, brand loyalty and brand awareness
o patents and licenses
o quality control conformance
 Marketing
o segments served, market shares, customer base, growth rate, and customer loyalty
o promotional mix, promotional budgets, advertising themes, ad agency used, sales
force success rate, online promotional strategy
o distribution channels used (direct & indirect), exclusivity agreements, alliances, and
geographical coverage
o pricing, discounts, and allowances
 Facilities
o plant capacity, capacity utilization rate, age of plant, plant efficiency, capital
investment
o location, shipping logistics, and product mix by plant
 Personnel
 number of employees, key employees, and skill sets
 strength of management, and management style
 compensation, benefits, and employee morale & retention rates
 Corporate and marketing strategies
 objectives, mission statement, growth plans, acquisitions, and divestitures
 marketing strategies

5.5. Marketing strategy
It is an organization's strategy that combines all of its marketing goals into
one comprehensive plan. A good marketing strategy should be drawn from market research and
focus on the right product mix in order to achieve the maximum profit potential and sustain
the business.
5.5.1. The Marketing Mix

There are four important components of marketing. They are called the 4 Ps – product, price, place
and promotion. Marketing decisions are centered on these variables, which are known as the
marketing mix. Poor decisions regarding even one of the 4 Ps can lead to business failure. A more
thorough discussion of the Marketing Mix follows.
1. Product Strategy
Looking to the customer for guidance is particularly important when deciding upon the specific
product/service to be provided. The product or service offered by the company must be one that
meets the needs of the customers, not one that satisfies only the producer.
Be aware of the “total product concept” or the idea that you are selling more than just a physical
product or service. Successful firms sell bundles of benefits, not just products or services.
The product or service includes offering a wide array of options to meet varying tastes, and often
includes after-sales service. An entrepreneur’s approach to offering a “total” product to his/her
customers should provide and advantage over the competitors.
Types of Consumer Products
There are differing classification schemes that companies may use to help develop a product
strategy. Non-durable goods are goods normally consumed fairly quickly such as soap, toothpaste
and juice. Durable goods normally survive many uses, such as clothing, automobiles and camping
equipment. Services are intangibles and include haircuts, tours and automobile repair shops.
The classification of a particular product varies from person to person. What may be a convenience
good to a wealthy person could easily be a shopping good to someone with less expendable income.

Understanding what type of product or service you have will assist in making decisions on how to
market. For example, if you are selling a specialty good or service, your location may not be as
important as other factors in your marketing mix. Why? Because, people will invest the time to
obtain the good. However, you will need to let them know about you and where you are!
Product Life Cycle
Similar to people, products and services have life cycles. They move from birth, through a period of
growth, to maturity, and then level off somewhat before declining toward their demise. The
decision on whether or not to produce or provide a particular product or service should depend, in
part, on what stage of the life cycle the product or service is in. Some products or services have a
short life cycle (pet rocks), while others enjoy more prolonged lives (picture frames).
It is important to understand the life cycle concept, so the proper form of advertising and promotion
can be used. Knowing the life cycle of your product or service can also help you determine if you
need to redesign or drop a product line. There are four stages in the product or service life cycle:
Introduction, growth, Maturity, Decline
Introduction – researching, developing and then launching the product
Growth – when sales are increasing at their fastest rate
Maturity – sales are near their highest, but the rate of growth is slowing down,
e.g. new competitors in market or saturation
Decline – final stage of the cycle, when sales begin to fall
This can be illustrated by looking at the sales during the time period of the product.
A branded good can enjoy continuous growth, such as Microsoft, because the product is being
constantly improved and advertised, and maintains a strong brand loyalty.
Some key features of each stage in the product life cycle can be summarized as follows:
Introduction
 New product launched on the market
 Low level of sales and capacity utilization
 High unit costs
 Usually negative cash flow
 Distributors may be reluctant to take an unproven product
 Heavy promotion to make consumers aware of the product
 Relevant strategies at the introduction stage might include:
 Aim – to encourage customer adoption
 High promotional spending to create awareness and inform people
 Limited, focused distribution
 Demand initially from “early adopters”
Growth
 Expanding market but arrival of competitors
 Fast growing sales
 Rise in capacity utilization
 Product gains market acceptance
 Cash flow may become positive
 Unit costs fall with economies of scale
 The market grows, profits rise but attracts the entry of new competitors
 Relevant strategies at the growth stage might include:
 Advertising to promote brand awareness
 Increase in distribution outlets - intensive distribution
 Go for market penetration and (if possible) price leadership
 Target the early majority of potential buyers
 Continuing high promotional spending
 Improve the product - new features, improved styling, more options
Maturity
 Slower sales growth as rivals enter the market = intense competition + fight for market share
 High level of capacity utilization
 High profits for those with high market share
 Cash flow should be strongly positive
 Weaker competitors start to leave the market
 Prices and profits fall
 There is a wide variety of possible options for a product that has reached the maturity
stage:
 Product differentiation & product improvements
 Rationalization of capacity
 Competitor based pricing
 Promotion focuses on differentiation
 Persuasive advertising
 Intensive distribution
 Enter new segments
 Attract new users
 Repositioning
 Develop new uses
Decline Stage
Common features at this stage include:

 Falling sales
 Market saturation and/or competition
 Decline in profits & weaker cash flows
 More competitors leave the market
 Decline in capacity utilization –switch capacity to alternative products
 Potential strategies are:
 Harvest by spending little on marketing the product

 Rationalize by weeding out product variations
 Price cutting to maintain competitiveness
 Promotion to retain loyal customers
 Distribution narrowed
Extension strategies
These extend the life of the product before it goes into decline. Again businesses use marketing
techniques to improve sales. Examples of the techniques are:
 Advertising – try to gain a new audience or remind the current audience

 Price reduction – more attractive to customers
 Adding value – add new features to the current product, e.g. video messaging on mobile
phones
 Explore new markets – try selling abroad
 New packaging – brightening up old packaging, or subtle changes such as putting crisps in
foil packets or Seventies music compilations
Some criticisms of the product life cycle

 The shape and duration of the cycle varies
 Strategic decisions can change the life cycle
 It is difficult to recognize exactly where a product is in its life cycle
 Length cannot be reliably predicted
 Decline is not inevitable?
 Assumes no reversion to earlier consumer preferences
 It can become a self fulfilling prophecy
2. Pricing Strategy
Price is a very important factor in the marketing mix. It affects sales volume, profits, the actions of
competitors, and the image of the product/service or store. Proper pricing is a prerequisite of
success.

Pricing has two basic functions: (1) to enable a business to cover costs and make a profit, and (2) to
motivate customers to purchase products or services. The marketing function with regard to pricing
is to use a marketing mix so the product or service can command the best possible price.
The business must be able to prosper and customers must perceive they have received value for
their money.
Key Pricing Factors

The importance of pricing cannot be underestimated as incorrect pricing can often result in the
failure of a business. New businesses often make the mistake of either charging too little or too
much for their product or service. To help you avoid making a pricing mistake, the following
section outlines some of the guiding principles for determining price.
1. Perceived value
The customer’s ability and willingness to buy strongly influences the price charged for your product
or service. Ability to pay is determined by the customer’s income level and where your
product/service ranks on each customer’s level of importance. A customer’s willingness to buy is
determined by taste, need and perceived value.
The customer may also have a perception of your product or service that may largely be attributed
to its price. Test yourself: What is your perception of a diamond ring that sells for $100 versus one
that sells for $1000? What is your perception of a meal that is $50 versus one that is $10?
You can determine the perceived value of your product or service by asking your customer how
much they would be willing to pay for the same service in different surroundings. Or if you are
contemplating adding a benefit to your product or service, ask them how much they would be
willing to pay with the improvement. Restaurants can charge higher prices if they provide an
atmosphere of elegance versus a fast food outlet. In any business, it is perceived value that decides
the price customers are willing to pay.
2. Competition
Some business owners use the competition’s prices as starting points for their own. If your product
or service is an improvement, you can sometimes price it above the competition, as long as you
communicate to your customers the reasons for the higher price (improved service, choice of
colour). For example, some convenience stores generally charge higher prices than do large grocery
store or retailers. They can do so because the benefit of convenience is valuable to their customers.

Caution must be exercised when attempting to price below the competition. This strategy could lead
to a “price war,” which could be hazardous if the competition has more financial resources to
withstand a “price war” than you have.
If you do not have direct competition, you may be able to charge higher prices than you could
otherwise. However, if the prices you charge are too high and your profits are exorbitant,
competitors may be attracted to enter the market. Instead, keeping profits and prices at a reasonable
level may discourage the entry of other businesses.
3. Costs
Your price must cover all costs of goods/services sold, including production costs of supplies,
materials, fixed overhead, time/labor, and generate a profit.
Use this simple formula in setting a price (per unit):
Total Cost of Production per Unit + Desired Dollar Profit per Unit = Price per Unit
3. Place Strategy
Moving a food from manufacturers to consumer is sometimes a costly task. It is critical that the
proper channels are utilized and that the small business owner is able to manage the various
middlemen appropriately. Selling a food product to the consumer with the use of a food broker,
warehouse and retail chain is much different than selling the services of a financial planner where
the product is direct. The following section reviews the place strategy with particular emphasis on
the retailer.
5. Retailers
Location for the retailer is a critical factor. It should preferably be in an easily accessible, high
traffic area. For a retailer, the first decision is the choice of the town/city. Certain businesses (golf
courses, service stations, motels) can be located along highways, but generally retail outlets are
located within concentrated population areas. Most people starting a small business are probably
more concerned with choosing a site within a certain town or city. There are a number of location
choices that may be available to the prospective retailer. Obviously, larger centers have more
choices in terms of location than do smaller communities.
6. Promotion Strategy
Promotion is the activity of informing, persuading and influencing the consumers’ purchase
decisions.
The type and scope of promotional activities that you need to undertake will depend on what the
promotion is intended to do. There are a number of reasons for promotional activities.

• Introduce a new product or service.
• Enter a new market.
• Obtain a new dealer outlet (for manufacturers or distributors)
• Increase or maintain sales.
• Build or maintain the image of the business and/or product.
• Support other selling efforts.
• Reach customers inaccessible by salespeople.
• Educate the public.
The choice of promotion activities used will be determined by a number of factors, including:
•Product type
• Market segment
• Stage in the life cycle
•Competitive activity
• Objectives
• Distribution channels utilized
There are four general types of promotion activities: (1) advertising, (2) sales promotion, (3)
publicity and (4) personal selling.
A. Advertising
There are three general purposes for advertising:
Information:- If you are opening a new store or introducing a new product, you must build
consumer awareness of your existence. Promotion of a new store(s) or products, which are early in
their product life cycle, should be geared toward providing information.
Persuasion: - Businesses attempt to persuade potential customers that they have a better product or
service than the competition (for example, the Pepsi Challenge).
Reminder:- Businesses simply remind consumers that the product or service is still available, and
where they can purchase it.
Advertising mediums
The success of any advertising will depend to a large extent on the ability to identify the target
group properly and to outline objectives clearly. In selecting an advertising medium, consideration
must be given to exposure to your target market. In advertising, rarely, does the advertiser want to
pay for the message to reach everyone. The message would reach only a small percentage of the
store’s target market. It would be more logical, less expensive and more effective, in terms of

reaching that market, to advertise in the neighborhood newspaper. This assumes, of course, that the
target market reads the newspaper!
Radio and television advertising can be more costly than newspaper. Both mediums are monitored
closely by the Bureau of Broadcast Measurement, so statistics are available on the audiences that
are tuned into various programs. It is important to broadcast during times when it is most likely that
members of your target market will be tuning in.
Direct mail advertising is costly on a per unit basis; but, it can be directed specifically toward your
target market. Flyers can be distributed in neighborhoods around the store, or brochures can be sent
to potential retail outlets. It is a selective means of advertising, one that reaches the target market
effectively.
Outdoor advertising (billboards, signs) is usually low cost per viewer and highly flexible. It is most
suitable to those types of businesses which otherwise would have difficulty reaching potential
customers and require large number of customers. Service stations, motels, hotels, which cater to
highway traffic can benefit through outdoor ads.
You should consider more than one form of advertising, as research shows that combining different
forms of advertising greatly increases it effectiveness.
B. Sales Promotions
Sales promotions are short-term incentives to encourage sales of a product or service. Consumer
promotions include samples, coupons, rebates, contests and demonstrations. Trade promotions
include buying allowances, free goods, and cooperative advertising and dealer sales contests. Sales
force promotions include bonuses, contests and sales rallies.
Trade shows are also a sales promotion tool. Trade shows are an excellent means to show your
product, meet new buyers, learn more about the competition, and monitor changes in your industry.
C. Publicity/Public Relations
Publicity is gleaned through news releases, feature stories and editorial comments. To obtain this
exposure for your business, it can be helpful to research effective campaigns/events of others in a
related industry.
Public Relations involve promotion of your corporate image and identity. This may include hosting
events to promote your product/service. Good work or service provided by an organization goes a
long way to increase one’s reputation. Remember, word-of-mouth from a satisfied customer is one
of the most persuasive forms of promotion.
D. Personal Selling

This type of promotion involves a direct, face-to-face relationship with the customer. It includes
explaining the product or service, in an attempt to persuade the customer to buy. The degree of
personal selling required varies from product to product, but is particularly applicable when the
product or service:
 Requires demonstration or is new and unfamiliar to the buyer (a new line of herbal remedies);
 Involves a major expenditure and is purchased infrequently (windows, cars, furniture); and has a
high unit price that requires security (jewelery).
Personal selling can be business to consumer or business to business. Customer service is a function
of personal selling. Customers who have unpleasant experiences with sales staff, products or
services are not only likely to stop patronizing the store; they are also likely to give the
store/supplier adverse publicity. Customers are more likely to tell other people about a bad
experience than about a good one.
5.6. International markets
Markets can be defined in different ways, including by geography, customer, product or even the
behavioral characteristics of consumers.
An international market is defined geographically as a market outside the international borders of
a company's country of citizenship. A company, to the extent that it is a legally distinct entity from
its owners like a corporation, is usually a citizen of the country where it is organized. For example
IBM(International Business Machines) is a well known American computer manufacturer, founded
by Thomas J. Watson (born 1874-02-17). The conceptual opposite of an international market is the
company's domestic market, which is the geographic region within the national boundaries of
company's home country.
International marketing is simply the application of marketing principles to more than one
country. This can be achieved by exporting a company's product into another location, entry
through a joint venture with another firm in the target country, or foreign direct investment into the
target country. The development of the marketing mix for that country is then required -
international marketing. Internationalization and international marketing meets the needs of selected
foreign countries where a company's value can be exported and there is inter-firm and firm learning,
optimization and efficiency in economies of scale and scope. The firm does not need to export or
enter all world markets to be considered an international marketer.

CHAPTER SIX - Financing New Venture
6.1 Determining the amount of fund needed

Two general sources of funds can be used to finance a small business. Many entrepreneurial firms
use both forms of financing to get established.
6.1.1 Equity/ownership financing:

Equity financing does not require collateral and offers the investor some form of ownership position
in the venture. The investor shares in the profits of the venture, as well as any disposition of assets.
Sources of equity financing
The initial financing of a small business is often patterned after a typical personal financing plan. A
prospective entrepreneur will first use personal saving and then attempt to gain access to the savings
of family and friends. Only if these sources are inadequate will the entrepreneur turn to more formal
channels of financing, such as banks and outside investors. Major sources of equity financing
include personal savings, private investors 'in the community, venture capitalists, sale of stock in
public equity markets (going public), friends, relative and large corporations.
a. Individual investors
The search for financial support usually begins close to home. As mentioned earlier, the aspiring
entrepreneur frequently has three sources of early financing; (1) personal savings, (2) friends and
relatives, and (3) other individual investors.
i. Personal Savings: It is imperative that the entrepreneur have some personal assets in the
business, and these typically come from personal savings. Indeed, personal saving is the source of
equity financing most frequently used in starting a business. With few exceptions, the entrepreneur
must provide an equity base. A new business needs equity to allow for a margin of error. In its first
few years, a firm can ill afford large fixed outlays for debt repayment. In addition, money lenders
are unlikely to provide loans if the entrepreneur does not have her own money at risk.
A problem for many people who want to start a business is lack of sufficient personal savings for
this purpose. It can be very discouraging when the banker asks "How much will you be investing in

the business?" or "what do you have for collateral to secure the bank loan you want?" There is no
easy solution to this problem. Nonetheless, many individuals who lacked personal savings for a
start-up have found a way to accomplish their goals of owning their own companies. In most cases,
it requires creativity and risk taking as well as finding a partner who could provide the financing or
friends and relatives who are willing to help.
ii. Friends and Relatives: At times, loans from friends or relatives may be the only available
source of new financing. Such loans can often be obtained quickly, as this type of financing is
based more on personal relationships than on financial analysis. However, friends and relatives who
provide business loans sometimes feel that they have the right to offer suggestions concerning the
management of the business. Also, hard business times may strain the bonds of friendship.
However, if relatives and friends are the only available source of financing, the entrepreneur has no
alternative. To minimize the chance of damaging important personal relationships, however, the
entrepreneur should plan for repayment of such loans as soon as possible. In addition, any
agreements made should be put in writing, as memories tend to become unclear over time. It is best
to clarify expectations up front rather than be disappointed or angry later.
iii. Private investors: they referred as “Angels”. A large number of private individuals invest in
others' entrepreneurial ventures. They are primarily people with moderate to significant business
experience but may also be affluent professionals, such as lawyers and physicians. This type of
financing has come to be known as informal capital because no established market place exists in
which these individuals regularly invest. Somewhat appropriately, these investors acquired the label
business angels-private investors who finance new, risky, small ventures. Paul Allen, cofounder of
Microsoft Corporation is a better-recognized business angel.
In addition to providing needed money, private investors frequently contribute expertise to a
business. They also results in dramatic increase in productivity. Many of these individuals invest in
the type of business in which they have had experience. The investors’ involvement can vary
greatly. Some investors expect only reasonable return, while others expect to be full operating
partner in the business in addition to receiving a return on the capital. Although angel financing is
easier to acquire than some of the more formal types of financing, informal investors can be very
demanding. Thus, the entrepreneur must be careful in structuring the terms of the investors'
involvement and would do the following differently:
♦ Try to raise more equity that is external earlier.
♦ Work to present their case for funding more effectively.

♦ Try to find more investors and to develop a broader mix of investors, with each one investing
smaller amounts.
♦ Be more careful in defining their relationships with individual investors before finalizing the
terms of the agreement.
b. Corporate Investors
Many companies are interested in investing in a small business in the hope that the value of their
investment will increase. Often they then sell their ownership interest back to the original owners
when the owners are in a better position to finance the business independent. Companies whose
major activity is investing in small and medium-sized businesses are called venture capital
companies (VCC’s). Venture capital companies typically look for a business with in a growth
industry, with sound management and the potential (ROI). An entrepreneur seeking venture capital
assistance should be aware of the areas of the business to which investors will pay specific
attention. Normally such factors as the abilities and experience of management team, the level of
development of the product, & industry trends are key elements in this evaluation.
c. Government
Traditionally the government has hesitated to provide equity funding to entrepreneurial firms.
However, programs have been developed in recent years that permit government funding and
licentious for venture capital firms or allow for direct equity investment by the government in
business.
Advantage & Disadvantage of equity financing
Equity financing offers the following advantages.
I. There is no obligation to pay dividends or interest. This flexibility allow the firm to invest
earnings back in to the business in its early years, when these funds are usually needed most.
ii. The origins owner benefits from the expertise of the investor in addition to the financial
assistance.
iii. Equity financing expands the borrowing power of the business. The more equity a business has,
the greater its ability to obtain debt financing.
iv. Equity financing spreads the risk of failure of the business to others.
Disadvantage of Equity financing includes the following
I. Equity financing dilutes the ownership interest of the original owner and leads to decreased
independence. Because of this drawback, many entrepreneurs are hesitant to follow this route in
obtaining debt financing.

ii. Which others sharing the ownership interest, the possibility of disagreement and lack of
coordination in the operation of the business increases.
iii. A legal cost may be associated which issuance of the ownership interest.
6.1.2 Debt/asset based financing:

It is obtained from borrowing. Debt financing is a financing method involving an interest-bearing
instrument, usually a loan, the payment of which is only indirectly related to the sales and profits of
the venture. Typically, debt financing (also called asset-based financing) requires that some asset
(such as a car, house, plant, machine, or land) be used as collateral.
Debt financing requires the entrepreneurs to pay back the amount of funds borrowed, plus a fee
expressed in terms of the interest rate and sometimes points for using or being able to use the
money.
If the financing is short term (less than one year), the money is usually used to provide working
capital to finance inventory, accounts receivable, or the operation of the business. The funds are
typically repaid from the resulting sales and profits during the year. Long-term debt, which
normally lasts more than one year, is frequently used to purchase some asset such as a piece of
machinery, land or a building with part of the value of the asset usually (50 to 80 percent of the
total value) being used as collateral for the loan.
Particularly when interest rates are low, debt (as opposed to equity) financing allows the
entrepreneur to retain a larger ownership portion of the venture and have a greater return on equity.
The entrepreneur needs to be careful that the debt is not so large that regular interest payments
become difficult to pay, and growth and development are inhibited or bankruptcy results.
Sources of debt financing:
The major sources of debt financing are private lenders, corporate lenders, regular private lending
institutions, government sponsored programs, business suppliers, commercial banks and community
based financial institutions (micro finance institutions and informal institutions such as Iqub, Idir).
A. Corporate Lenders
Often this is larger firms that have established some often this are larger firms that have established
some connection or working relationship with the entrepreneurial firms.
Equipment loans and leases: Some small businesses such as restaurants use equipment that is
purchased on an installment basis through an equipment loan. A down payment of 25 to 35 percent
is usually required, and the contract period normally runs from three to five years. The equipment
manufacturer or supplier typically extends credit on the basis of a conditional sales contract (or
mortgage) on the equipment. During the loan period, the equipment cannot serve as collateral for
anther loan. Instead of borrowing money from suppliers to purchase equipment, an increasing
number of small businesses are beginning to lease equipment especially computers, photocopiers,
and fax machines.
Asset-Based Lending: As its name implies, an asset-based loan is a line of credit secured primarily
by assets such as receivables, inventory, or both (working-capital assets). Assets such as equipment
(if not eased) and real estate can also be used for similar purpose. Asset-based lending is available
option for young, growing business caught in a cash flow bind.
B . Regular Private Leading companies
This category includes companies whose major purposes is the lending of funds. The most common
of these firms are the following:
Trust companies: are companies geared primarily for mortgages on long term capital assets such
as land, buildings, and equipment.
Credit unions: are usually locally owned. They tend to be concerned primarily with personal loans,
but in some communities they also provide significant financing to entrepreneurial firms.
Commercial Banks: Commercial banks are by far the most frequently used sources of short- term
funds by the entrepreneur when collateral is available. The funds provided are in the form of
debt financing, and such require some tangible guaranty or collateral-some asset with value.
This collateral can be in the form of business assets (land, equipment, or the, bulldog of the
venture), personal assets (the entrepreneurs house, car, land, stock or bonds), or the assets of
the consigner of the note.
Financing companies: These high-risk lenders charge a higher rate of interest than the other
agencies. The majority of their loans are personal loans.
C. Government Lenders
Government agencies at both federal & regional levels lend money, provide grants, and give
counseling assistance to small business. Government lenders may be more willing to rewrite loan
terms and conditions if the business gets in to trouble, provide lower interest rate than commercial
banks and provide management counseling a long with funding to assist the business. But the
government leaders requires more into for exiled a loan application, long period to approve the loan
and exert more monitoring & control over the business.

CHAPTER SEVEN - Managing Growth and Transaction
7.1. Preparing for the launch of the venture
Recruiting and hiring new employees
 Recruiting and hiring new employees may occur at both the entry and senior management
level.
 Strategy and procedures may differ depending on the level for which the individual is being
hired.
 The entrepreneur will generally need to establish procedures for hiring any new employees.
Motivating and leading the team
The entrepreneur or founder of the new venture will usually be a role model for other employees. A
good work ethic, being organized, being prepared for meetings, being on time, giving praise to
employees, and good communication within the venture- will go a long way toward achieving
financial and emotional success.
A number of behaviors listed below that can exhibit the leadership qualities necessary for the new
venture.
 Set an example with an ethical set of values for other managers and employees.
 Show respect and concern for the personal well-being of employees.
 Don't try to do everything yourself. Give managers and employees the autonomy and
flexibility to make decisions on their own.
 Encourage and praise others in the organization when deserved.
 Provide incentives and awards for quality work effort and new ideas.
 Recognize the importance of employees having fun at their jobs.
7.2 Managing Early Growth of the New Venture
Some of the important guidelines to cultural change during growth involve the following:
 Communicate all matters to key employees.
 Be a good listener.
 Be willing to delegate responsibility.
 Provide continuous training of key employees.
 Emphasize results to key managers with incentives built in to encourage them to train and
delegate within their roles.

 Maintain a focus by establishing a mission with goals and using consensus in management
decision making.
 Establish a “we” sprit-not a “me” sprit-in meetings and memoranda to employees.
7.3 New Venture Expansion Strategies and Issues
Growth along with it brings options for expansion and other forms of business management and
ownership.
Some of these include:
 Joint Venture
 Acquisitions
 Mergers
 Hostile Takeovers
 Leveraged buyouts
 Franchises
Joint ventures
 Joint ventures are not a new concept, but rather have been used as a means of expansion by
entrepreneurial firm for a long time.
 What is a joint venture? A joint venture is a separate entity that involves a partnership
between two or more active participants. Sometimes called strategic alliances, joint ventures
involve a wide variety of partners.
Acquisitions
 Another way the entrepreneur can expand the venture is by acquiring an existing business.
 Acquisitions provide an excellent means of expanding a business by entering new markets
or new product areas.
 An acquisition is the purchase of an entire organization or part of a company, by definition,
the company is completely absorbed and no longer exists independently
Mergers
 A merger -or a transaction involving two, or possibly more, companies in which only one
company comes out - is another method of expanding a venture.
 A key concern in any merger is the legality of the purchase
Franchising
In the context of franchising, the entrepreneur will be trained and supported in the marketing by the
franchisor and will be using a name that has an established image.

 Franchising is also an alternative means by which an entrepreneur may expand his or her
business by having others pay for the use of the name, process, product, service, and so
on.


CHAPTER ONE - Entrepreneurship and Free Enterprise: Prepared By: Enanu Tesfaw 1

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CHAPTER ONE - Entrepreneurship and Free Enterprise: Prepared By: Enanu Tesfaw 1

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CHAPTER ONE - Entrepreneurship and Free Enterprise

1.1. Meaning of the Terms Entrepreneur, and Entrepreneurship

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2.2 Economic, Social, and Political aspects of Small Business Enterprise.

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The following are four benefits those individuals/owners can get

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2.5 Setting Small Business

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Basic business idea

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B. Method of Generating Ideas

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What is the Business Plan?

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Some additional differences between a copyright and a trademark are as follows:

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5.2. Marketing Research

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i. Where do we find Information?

ii. How to conduct market research

 Where potential customers would prefer to purchase the product or service.

Step 2 – Collects the data

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Step 3 –analyzing and interpreting the result

5.3. Marketing intelligence

Marketing intelligence (MI) is the everyday information relevant to a company’s markets,

Marketing intelligence software can be deployed using an on-premises or software as a

 Steps to be taken by a Company to improve its Marketing Intelligence

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5.4. Competitive analysis

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A common technique is to create detailed profiles on each of your major competitors. These

o location of offices, plants, and online presences

o Dividend policy, and profitability

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5.5.1. The Marketing Mix

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Common features at this stage include:

 Potential strategies are:

 Harvest by spending little on marketing the product

 Advertising – try to gain a new audience or remind the current audience

Some criticisms of the product life cycle