CHAPTER 5

GROWING THE NEW VENTURE

• The Management Team

How to build a management team?
Develop your management team
All businesses need a range of skills to be able to survive and grow. As the owner
of a small business it is likely that you will be called upon to perform several roles
out of necessity. You will probably find that you are better at some roles than
others.
If you want your business to grow it will reach a stage when these necessary skills
need to be improved and extended. Getting the right mix of people to complement
and reinforce your business is essential. Having an effective management team
helps you to create a more efficient and capable business.
The role of the management team

A single director or manager rarely has the combination of skills that a

management team might have. Each member of a management team can
concentrate on their own area of expertise. In addition, the business benefits from
having its overall direction and goals viewed from different perspectives.
The rapport within a team is very important and can add further value beyond the
individual talents and skills of each employee. Teams whose members relate well
to one another contribute significantly to the overall success of their businesses. A
disjointed management team could well put off anyone involved with your
business, e.g. employees, customers, clients or suppliers. This could ultimately lead
to corporate failure.
A strong management team is particularly significant if you want the business as a
whole to grow and develop. As a business grows a management team is also
important in spreading leadership responsibility. It is crucial if:
• your business operates in more than one location
• you are in more than one type of business/industry
• your business has different cultures, for example after a merger
or acquisition
It is worth remembering that management teams can also operate at different
levels. Consider establishing teams to help run particular locations or divisions.
This provides additional opportunities for staff development and involvement and
will benefit your business. It may be helpful to find a training course that covers
the ways a management team can support your business.
Management team skill sets
The skills required to run a business successfully include:
• sales and marketing
• production
• finance
• administration
• procurement and buying
Not every business needs these competencies to the same degree or in the same
combination. While all businesses need sales and administration skills, for some
production will be critical, while in others buying ability will be more important. A
review of your business should identify skills that are important to it and those
skills that your current staff, including yourself, already possesses.
Some types of expertise might only be needed from time to time and it may be
better to outsource as required, e.g. using a financial consultant on a short-term
basis during a capital expansion phase.
Another option might be to use outside directors or non-executive directors, who
can bring substantial commercial knowledge and experience on board.
One of your key tasks is to ensure that all roles and responsibilities are clear and
that good communications structures are in place in both formal (management
meetings, briefings, progress reports) and informal (team building sessions, general
feedback) areas.
Building the team

You might like to consider the following stages in developing your management
team:
• Review your business' progress to date and decide what
direction you want it to go in.
• Measure your performance in the market against your
competitors. Analyze any strengths, weaknesses, opportunities or threats -
commonly known as a SWOT analysis - to identify what gaps there are
between where the business is and where you would like it to go.
• Analyze what skills the business requires and consider what
strengths and weaknesses you offer personally.
• Learn the skills, potential and ambitions of your existing staff
and consider less-defined skills such as leadership qualities.
• Analyze the fit of existing skills to business requirements and
establish priorities for the acquisition of missing skills.
• Establish where staff development could fill skills needs and
consider reallocation of responsibilities to create a genuine team, rather than
a group of individual managers.
• Re-examine any skills gaps.
 • Consider other options such as consultants, outsourcing,
contract workers, with a cost/benefit analysis.
• Look to permanent staff recruitment - where possible it is best
to plan ahead by recruiting for future positions and anticipating any
prospective skills gaps.

Training and development of managers

In developing a management team it is important to recognize that most people
will need some help and training to be able to fulfill the new roles required of them
- especially if they are being promoted from within an organization.
Formal training may be appropriate to increase their specialist knowledge, but the
main support will probably be to help them grow into their new management role
with confidence.
There is a wide range of training options now available, including formal courses
run externally or in-house. Internal, less formal training sessions can also prove
useful, and individuals might benefit from on-the-job training, distance learning, or
part-time college courses.
In addition to defined skills training, some thought should be given to developing
team spirit and training managers in diversity and flexibility. Team-building
exercises can play an important part in helping the management team to better
understand and communicate with each other.
Professional performance measurement

Development of a management team is an ongoing process. Performance feedback

should identify skill gaps, leading to training and future improvement.
As you delegate management responsibility and become more removed from the
day-to-day feel of the organization, you will need to have in place good systems to
be able to monitor performance. A suitable balance has to be achieved. You need
sufficient feedback from managers to appreciate the overall position of the
business, but you also have to allow them the freedom to be able to manage their
designated areas.

• Strategic Planning and Managing Growth

One of the responsibilities of business coaches working with High Growth

Companies is to help them to plan ahead and to put in place appropriate systems
and controls to support the management of growth. Whether a High Growth
Company or not, all companies experiencing growth need to pay particular
attention to the Big Five Factors: finance, people, processes, market and
customers.
Monitoring and control procedures are important because information can be used
to:
• Assess resource allocation choices
• Monitor progress in implementation of plans
• Evaluate performance of both overall and specific parts of the
business
• Monitor the environment for significant changes since the
original planning assumptions were made
• Provide a feedback mechanism to enable managers to fine-tune
strategies and plans
The important point about monitoring and control systems is that they are able to
provide information in sufficient time to enable action to be taken as early as
practically possible. 

THE BIG 5 FACTORS

• Developing a Team of Advisors

Working with professionals who have had the experience of supporting other
businesses through succession planning and business transition will provide you
with relevant insights and proper advice. You may decide to coordinate most of
the transition yourself, or you might feel more comfortable appointing a trusted
advisor to spearhead the planning and represent your best interests. Whatever you
decide, your team members can work with you – and with each other – to enable
the successful transition of your business.
Companies that organize their workers in teams can improve their productivity and
identify new approaches to achieving company goals. One of the many ways for a
business to organize employees is in teams. A team is made up of two or more
people who work together to achieve a common goal. Teams offer an alternative to
a vertical chain-of-command and are a much more inclusive approach to business
organization. Teams are becoming more common in the business world today.
Effective teams can lead to increased employee motivation and business
productivity. You may wonder how a team is different from an ordinary work
group. Work groups are mainly for members to share information and make
decisions so that each member can achieve his or her individual work goals. In a
team, the members not only share information, but also share responsibility for the
team's work. The idea behind teams is that members can accomplish more together
than they could on their own. This is known as synergy.

Characteristics of Effective Teams

Not all teams are successful at what they do. Perhaps you have worked on a team
that spent too much time debating decisions or included members who did not take
on a fair share of the work. Such teams will be ineffective. Here are some of the
key characteristics of effective teams:

Teamwork in action

• Ideal size and membership: The team should be the minimum

size needed to achieve the team's goals and include members with the right
mix of skills and talents to get the job done.
• Clear purpose: Everyone needs to understand and accept the
team's goal and their role on the team.
• Open communication: The team should value diverse points of
view and encourage open and honest discussion. All members should feel
that their ideas are welcome.
• Fairness in decision making: Ideally, teams will make decisions
by consensus. When consensus is not feasible, teams will use fair decision-
making procedures that everyone agrees on.
• Creativity: Effective teams value original thinking and will
produce new and unique approaches to organizational problems.
• Accountability: Members must be accountable to each other for
getting their work done on schedule and following the group's rules and
procedures.

Chapter 6
Risk and insurance of Business enterprises

• What is risk?
Definition of Risk: As many scholars agreed, so for, no single and comprehensive
definition of risk exists. Economists, behavioral scientists, statisticians, etc have
their own perception and definition of risk. Some scholars defined it as uncertainty
concerning the occurrence of a loss (Rejda, 1995). Others defined it as a condition
in which there is a possibility of an adverse deviation from what is expected (Unity
University College, 1998). However, for the sake of common understanding, it
could be important to give operational definition for our discussion. That is, Risk is
the probability of exposure to bad/adverse consequences (such as loss, loss of
property, etc) due to unexpected changes in the future.

The process of Risk management

Risk management is defined as “a systematic process for the identification and
evaluation of pure loss exposure faced by an organization or individual and for the
selection and implementation of the most appropriate techniques for treating such
exposures” (G. Rejda, 1995: 38) As clearly indicated in the definition, risk
management requires the performance of sequential activities known as the
process/steps of risk management. These steps are briefly discussed below.

• Analyzing the situation and identifying potential risks. The

first step in the process of or risk management is conducting environmental
scanning i.e. retrospective or past, current or present and prospective future
situation analysis with special reference to the probabilities of exposures to
adverse or undesirable consequences; in short, risk exposures and based on
this analysis, anticipating and identifying the type(s) of risk(s) that
businessmen may face in the future and also its/their possible causes.
• Evaluating and determining the frequency of occurrence and
severity or magnitude of possible losses due to anticipated risks.
• Based on step 2, selecting the appropriate risk handling
strategy for handling anticipated risk(s).

Based on the frequency and severity of loss exposure(s) or anticipated risks, the
risk manager need to select the most appropriate strategy or combination of
strategies for handling anticipated risk(s). The chosen strategy will be risk
management strategy of the entrepreneur.

The most common risk handling strategies, which are further divided into two
specific techniques (risk control and risk financing tools) and appropriate
situation(s) for each technique are indicated in the table below.
Risk control techniques (minimizing or avoiding losses through risk presentation
or avoidances)
Risk financing techniques (paying for the loss if risk happens)
Risk Prevention (control)
Risk avoidance
Risk Retention (self-insurance)
Insurance/transfer
• Taking risk preventive measures to reduce the frequency and
severity of loss eg. Quality control

• Installing fire extinguisher, burglary alarm

• Driver exam

• Strict adherence to safety rules

• This technique is appropriate when risk frequency is high and

severity is low.
• Abandoning activities which have high risk frequency and
severity. Eg. Avoiding construction in rift valley or flood area

• Thus technique is appropriate when frequency and severity are

high.
• Allocate money and pay for or recover the loss if risk happens.

• This technique is appropriate when loss is predictable,

frequency and severity or risks are low.
Buy insurance policy and transfer the risk to specialized insurance companies. This
method is appropriate when severity is high and frequency is low.

• Implementing the chosen/selected risk handling strategy:

based on the situation, an entrepreneur may choose either one or
combination of the above mentioned technique(s). The chosen technique(s)
need to be implemented or put into action.
• Monitoring and evaluating the implementation of the chosen
risk management strategy. The last step in the process of risk management
is monitoring the implementation process to make sure that the selected
strategy is implemented as planned. Monitoring requires periodic review of
the implementation process, comparing actual with planned performance and
taking corrective action if there is any deviation between actual and planned
performances. Finally, conducting impact assessment or evaluating,
unusually at the end of the planning period, is essential in order to identify
the efficiency and effectiveness of the chosen strategy.
 • Risks classification
The probabilities of exposure to adverse/bad consequences are multi facet. The
various types of business risks that an entrepreneur may face can be classified into
four major groups as indicated below.

Property Cantered Risks: Entrepreneur’s, big or small, own properties or assets

of different kinds such as buildings, machinery, materials, etc. These assets may be
fully or partially damaged, destroyed, lost or theft due to fire, earth quake,
lightening tornado, windstorm, etc. Such risks which lead to physical damage,
destruction or theft of property are termed as property-centered risks. Property
centered risk cause direct financial loss which is equal to the value of the property
destroyed and/or indirect/consequential loss which refers to extra expenses or loss
of income in the future as a result of such risks.

Employee Centered Risks: These risks are directly or indirectly related to

employee circumstances of the entrepreneur such as:
• Work-place accidents and professional hazards which may lead
to employee injury, partial or total disabilities.
• Employee strike which may cause considerable trouble and loss
of income
• Employee frauds such as forgery, over-stating or under-stating
checks and other illegal acts of an employee(s).
• Loss of key employees/executive who have valuable specialized
skill and experience which cannot be easily replaced. An entrepreneur may
loss his/her key employees who are vital for the success of his/her business
due to sickness, death, resignation, etc.

Market-Centered Risk: An entrepreneur is not an island. He/she interacts with

different elements of the external environment such as customers, suppliers, the
labor market, competitors, etc. The actions and reactions between the entrepreneur
and the external environment coupled with other environmental changes may
sometimes lead to undesirable consequences /risks/ to the entrepreneur. These risks
are termed as market centered risks. Such types of risks include:
• Business recession or economic decline in general.
• Undesirable price fluctuation
• Production process and/or product obsolescence i.e. an
entrepreneur’s production process and/or products may become obsolete if
competitors introduce improved production technology and/or product.
• Bad debt or risk or risk of uncollectible accounts receivable if a
customer who bought on accounts dies or disappears.
 • Liability risk which refers t losses or any other bad
consequences such as bodily or property damage to the party (some one
else) due to the action or the product of an entrepreneur. For example,
product liability suit may be filed if a customer is injured, sick or sustained
property damage as a result of using an entrepreneur’s product.
Personal/Individual Centered Risks: These are risks which directly affect
personal circumstances of the entrepreneur and lead to complete loss or reduction
of earned income, depletion of financial assets, and/or extra expenses.

Examples of such risks are:

• Risk of premature death
• Risk of old age
• Risk of poor health
• Risk of unemployment, etc.
Based on their ultimate effect, the above mentioned types of business risks are
grouped into two broad categories are:
• Pure Risks which refer to the risks which produce the
possibilities of adverse consequences (loss) or natural (no loss) situation. In
this. In this case, the possible ultimate effects are loss if risk occurs or no
loss if risk doesn’t occur. The above mentioned property-centered and
personal risks fall under this category.
• Speculative Risks which refer to risks which produce the
possibilities of adverse consequences (loss) or favorable situation (profit). In
this case, the ultimate effects are either profit or loss. Market centered risks
are good examples of this category.
• Risk, Peril and Hazard: An entrepreneur need to clearly
distinguish between what is called the peril which is the main cause of a
particular risk and a hazard which refers to a condition which creates and/or
increases the probability of occurrence and severity of a particular risk. For
example, while fire is a peril/ (the cause) for property damage, defective
electric wiring is the hazard or the condition that aggravates the probability
and severity of fire risk.

The three major types of hazard are:

Physical Hazard which refer to a physical condition which increases the chance or
risk such as:
• Icy road which aggravates auto accident
• Defective wiring which aggravates fire risk
• Defective door-lock which aggravates theft.
Moral Hazard refers to dishonesty, fraudulent claims or deliberate character
defects of an individual which increase the frequency and severity of risk such as:
• Intentionally burning unsold merchandize
• Intentionally inflating insurance claims, etc.
Morale Hazard which refers to inadvertent carelessness, negligence or
indifference to risk/loss because of the existence of insurance such as:
• Leaving ignition ken in the car and increasing the chance of loss
• Leaving doors unlocked and increasing the chance of burglary.
Therefore, an entrepreneur is required to know the various types as well as causes
of risk and critically analyze the frequency and severity of possible risks that
he/she may encounter in the future. Based on this analysis, risk-handling
strategy/strategies need to be designed. In the following section, the process /steps/
of risk management will be briefly discussed.

• Insurance
Insurance: Basic Concepts and its Management

Though so many people confuse the concepts of risk or risk management and
insurance or insurance management, there is vivid distinction between these
concepts. Insurance is only one of the four alternative strategies of handling risk.

A. Definition of Insurance:
Insurance is defined as a legal contract whereby one party, called the insurer or
insurance company agrees to reimburse, recover or indemnify another party, called
the insured (an individual, a group, organization, etc) if the latter (the insured)
suffers a specified monetary loss. As it is clearly indicated in the definition,
insurance is a contract between the insurer and the insured whereby the insured
transfer his/her potential risk(s) to the insurance company. However, in order for a
particular insurance contract to be legal document, it should be written and
supported by appropriate insurance policy-document. The insurance policy-
document among other things, need to contain the following elements:
• Declarations: Statements which provide information about:
• the name, address, sex, age, etc for a person
• Identification and location of the property, period of protection,
amount of premium and other relevant information’s.
• Definition of key words and phrases in the policy document
• Insurance agreements which summarize the major promises of
the insurer and the insured as well as the conditions under which assets are
to be paid.
• Exclusive such as:
 • Excluded periods such as unclear radiation
• Excluded losses such as losses due to negligence
• Excluded property such as animals and birds in case of home
insurance.
• Conditions or provisions that quality or place limitation on the
insurer’s promise
• Other miscellaneous provisions such as, for example, the
manner of relationships between the insurer and insured, the insured/insurer
and the third party, etc.

B. Insurable and Uninsurable Risks

Not all risks are insurable. Depending upon the nature of the property, type of risk,
perils and hazards; while some risks are insurable, others are uninsurable.
Generally, insurable risks need to meet the following requirements.
• There must be a large number of exposure units: As insurance
companies operate under the low of large numbers, ideally, they need a large
number of exposure units subject to similar peril.
• The expected loss need to be calculable, determinable and
measurable: which means, the loss must be de definite to a particular peril,
time, place and amount.
• The loss need to be accidental and un international. I.e., insurers
do not pay for the losses intentionally caused by the insured.
• Calculable chance of loss: i.e. the insurer must be able to
calculate the average frequency and severity of anticipated future losses.
• The expected loss must be financially serious and the premium
needs to be economically feasible to the insured.
• The loss need not be catastrophic in a sense that a larger portion
of exposure units (insured) should not incur losses at the same time. The
peril must not be likely to affect all insured simultaneously.

Therefore, insurability of a particular risk depends upon whether it meets the above
mentioned requirements or not.

Fundamental Legal Principles of Insurance

The two parties to the insurance contract (the insurer and the insured) are governed
by the following legal principles:
• The Principles of Indemnity: This principles states that the
insured should not collect more than the actual loss in the event of risk/
damage. That is, the insured should not profit from a covered loss; but
 restored (indemnified) to the same financial position that existed prior to the
occurrence of the loss. However, there are some exceptions to this principle.
Some of these are:
• Valued policy
• Replacement cost insurance
• Life insurance – the word indemnity is not applicable for
life insurance
• The Principle of Insurable Interest: This principle refers to the
financial interest of the insured towards the subject insured. That is, the
insured must lose financially or must suffer some other kind of harm if loss
occurs in the event of risk. The insured is said to have financial interest if
he/she benefits from the existence and suffer from the destruction/loss of the
subject insured.
• The Principle of Subrogation: The principle states that the
insurer who indemnified/compensated/ the insured’s loss is entitled to be
recovered from any liable third party/ parties responsible for the loss. In
insurance, the principle of subrogation substitutes the insurer in place of the
insured for the purposes of claiming compensation /indemnity/ for a loss
covered by the insurer from a liable third person. The aim is to prevent the
insured from collecting money from the third party (the one who made the
loss) and his/her insurer.
• The Principle of Utmost Good Faith: This principle states that
high degree of honesty is imposed on both parties to the insurance contract.
That is, both parties to the contract must make full and fair disclosure of all
material facts related to the contract. Neither party shall try to take
advantage of the other party’s lack of information. Which means:
• There should be no misrepresentation and/or cancellation of
material fact either deliberately or innocently.
• Both parties to the contract need to live up to their
promises/warranty indicate in the contract.
• The Principle of Contributions
This one supports the principle of indemnity. It is applied to a situation where
a person or firm, for some reason, purchase insurance from two or more
insurers to cover the same subject matter against loss or damage. Under such
circumstance, the insured cannot collect compensation from each insurer. If
this happen, insurance becomes a profit making mechanism. So, the insured is
paid only to the extent of the loss suffered. But, each insurer will make
contribution to settle the claim.

Therefore, an entrepreneur is required to clearly know, understand and act is

accordance with the above mentioned fundamental legal principles of risk and
insurance.