Entrepreneurship (1 6)

1 [HARAMAYA INSTITUTE OF TECHNOLOGY] [2021]
CHAPTER ONE
THE ENTREPRENEUR AND THE ENTREPRENEURIAL VENTURE
Main objectives of the chapter
 To define what entrepreneur and its characteristics.
 To define entrepreneurship and its main features.
 To distinguish between entrepreneur and entrepreneurship.
 To identify the conceptual framework/model of entrepreneurship and its contribution to the

economy.
1.1 INTRODUCTION:
The term ‘entrepreneur’ is derived from the French word ‘Entrepredre’ meaning ‘to undertake’ or
“go-between”. In the 16th century, the Frenchmen who undertook military expeditions were referred
to as ‘Entrepreneurs.’ It was extended to cover construction and other civil engineering activities in
17th century. But the 21th century scholars define entrepreneurs as follows:
Richard Cantillon defines the term ‘Entrepreneur’ as risk taking function of establishing a new
venture. The term ‘entrepreneur’ is very much related to the term ‘entrepreneurship.’ Both these
terms are often used interchangeably. But, they are conceptually different.
1.2 Entrepreneurs and entrepreneurship
Entrepreneur:
Definitions:
 Entrepreneur refers to a person who establishes his own business or industrial undertaking
with a view to making profit. An entrepreneur is considered to be an originator of a business
venture. He takes the role of an organizer in the process of production.
 An entrepreneur is one of the important segments of economic growth. Basically an
entrepreneur is a person who has the initiative, skill for innovation and who looks for high
achievements. He/she is a catalytic agent of change and works for the good of people.
 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.
Mechanical Engineering Department By-Yared W.

 Entrepreneurs are action-oriented, highly motivated individuals who take risks to achieve
goals.
 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.
 Peter 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. 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. The entrepreneur also does something about what is seen. The
entrepreneur seeks to have an impact on the system with his/her idea, product, or service.
It is this thinking doing combination that gives entrepreneurial efforts their special appears.
 Entrepreneurs take the risks necessary in producing goods & services. In this way, they act
as the energizers of the business system.
 Entrepreneurs are instruments of change.
Kinds of Entrepreneurs:
There are various ways by which entrepreneurs have been classified. According Clarence Danhof’s
classification, there are four kinds of entrepreneurs.
1.3 Innovative Vs Adaptive Entrepreneur

Innovating entrepreneurs
 Characterized by aggressive assemblage of information and the analysis of results derived
from sound combination of factors.
 An innovating entrepreneur is one who introduces new goods, inaugurates new method of
production, discovers new market and reorganizes the enterprise.
 It is important to note that such entrepreneurs can work only when a certain level of
development is already achieved, and people look forward to change and improvement.
Generally, they are typical of developed countries.
Imitative entrepreneurs
 These are characterized by readiness to adopt successful innovations inaugurated by
successful innovating entrepreneurs. They lap up innovations originated by innovating
entrepreneurs.

 Imitative entrepreneurs do not innovate the changes themselves, they only imitate
techniques and technology innovated by others.
 Such type of entrepreneurs are practically suitable for the developing countries for bringing
a mushroom drive of imitation of new combinations of factors of production already
available in developed regions.
 Imitative entrepreneurs face lesser risks and uncertainty than innovative entrepreneurs.
Characteristics of Entrepreneurs:
A common stereotype of the entrepreneur emphasizes such characteristics:
1. Need for achievement:
 Harvard psychologist McClelland discovered a positive correlation between the

need for achievement and entrepreneurial activity. According to him, those who
become entrepreneurs have, on average, a higher need for achievement than do
members of the general population.
 Entrepreneurs are driven by a need to achieve. What they need to achieve varies, but
it is often recognition rather than money.
 They set themselves goals and targets, are self motivated and take pleasure in
achieving these goals.
2. Willingness to Take risks
 The risks that entrepreneurs take in starting and/or operating their own business are
varied. By investing their own money, they assume a financial risk. If they leave
secured jobs, they risk their careers.
 The stress and time required in starting and running a business may also place their
families at risk. And entrepreneurs who identify closely with particular business
venture assume psychic risk as they face the possibility of business failure.
 Running your own firm is risky. All too many may go out of business quickly. To
succeed you need to take measured risks. Often the successful entrepreneur exhibits
an incremental approach to risk taking, at each stage exposing himself to only a
limited, measured amount of personal risk moving from one stage to another as each
decision is proved.

3. Self Confidence:
 Individuals who posses self-confidence feel they can meet the challenges that
confront them. They have a sense of mastery over the types of problems they might
encounter.
 Studies shows that successful entrepreneurs tend to be self-reliant individuals who
see the problem in launching a new venture but believe in their own ability to
overcome these problems.
4. Innovation:
 Innovation activity is a hallmark of entrepreneurship, but not necessarily of the

owner manager. According to many commentators innovative behavior is key to
the entrepreneurial personality.
5. Total commitment:
 hard work, energy, and single mindedness are all essential elements in the
entrepreneurial profile, such as running your own business in a 24 hours a day, 7
days a week commitment.
6. All rounder's:
 At least in the early stages of the business, entrepreneurs need to be able to ‘make the
product, market it and count money’.
The entrepreneurs initiate and sustain the process of economic development in the following ways:
1. Capital formation:
2. Improvement in per capital income:
3. Generation of employment:
4. Balanced regional development:
5. Improvement in living standards:
6. Economic independency:
7. Backward and forward linkage:
8. Agent role:
9. Role of innovation:
10. Imitating role

Success Factors of Entrepreneurs
Several success factors are apparent from research on innovation and entrepreneurship.
1. The Entrepreneurial Team: more often entrepreneurs do not start business by themselves;
they have teams, partners, close associates, or intensive networks of advisors.
2. Venture product or service: nearly all successful ventures start small and grow
incrementally; few “gear up” with substantial organizations for a big bang start. Incremental
expansion of products and services also tend to say with the bounds of positive cash flow.
Products tend to have strong profit potential with high initial margins rather than small
margins that require a substantial volume of sales to meet profit objectives.
3. Market and Timing: successful entrepreneurs tend to have a clear vision of both existing
and potential customers. A crucial aspect of planning is to have a well-documented forecast
of sales based on sensible projection at each stage of incremental growth.
4. Business Ideology: from an entrepreneur’s perspective, every venture has an ideology or

rationale for existing. Business ideology is defined as a system of beliefs about how one
conducts an enterprise. These beliefs include a commitment to providing customers with
value, the ability to take calculated risks, the determination to grow and to control the fate
of the business, and the propensity to elicit cooperation among team members, and
perspective of creating wealth realistically.
The Concept of Entrepreneurship:
 The term ‘entrepreneur’ and ‘entrepreneurship’ the two sides of the same coin, conceptually
they are different. While ‘entrepreneur’ refers to a person, ‘entrepreneurship’ refers to the
function. Basically entrepreneur is a business leader and the functions performed by him in
relation to that business is entrepreneurship.
 “Entrepreneurship is the process of creating something new with value by devoting the
necessary time and effort, assuming the accompanying financial, psychic, and social risks,
and receiving the resulting rewards of monetary and personal satisfaction of
independence.”… Robert Hisrich
 Entrepreneurship is the process of creating and building something of value from practically
nothing. This is, entrepreneurship is the process of creating or seizing an opportunity and
pursuing it regardless of the resources currently controlled.

 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.
 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 is the process of identifying opportunities in the market place, marshalling
the resources required to pursue there opportunities and investing the resources to exploit
the opportunities for long term gains. It involves creating wealth by bringing together
resources in new ways to start and operate an enterprise.
 Entrepreneurship is the set of activities performed by an entrepreneur.
Nature and Characteristics of entrepreneurship:
The distinctive features of entrepreneurship are summarized as below:
1. Innovative functions: Entrepreneurship is an innovative function as it involves doing things

in a new and better way.
2. Function of risk bearing: Risk is an inherent and inseparable element of entrepreneurship.

An entrepreneur guarantees rent to the landlord, wages to employees, and interest to
investors in the hope of earning more than the expenses. He assumes the uncertainty of
future. In the pursuit of profit there is every possible of loss.
3. A function of high achievement
4. Economic activity: Entrepreneurship is primarily an economic function because it involves

the creation and operation of an enterprise. It is basically concerned with the production of
goods and services.
5. Purposeful activity: The entrepreneur who creates and operates an enterprise seeks to earn
profit through satisfaction and of needs of customers. Therefore, entrepreneurship is a goal
oriented activity.

6. An organizing function: An entrepreneur brings together various factors of production. He

coordinates and controls the efforts of all the persons engaged in his enterprise. He harnesses
land, labor, capital and other resources for the benefit of mankind. Therefore, an
entrepreneur is an organization builder.
7. Gap filling function: The gap between human needs and the available products and services
gives rise to entrepreneurship. An entrepreneur identifies this gap and takes necessary steps
to fill the gap. He introduces new products and services, new methods of production or
distribution, new resource of inputs and new markets for this purpose.
8. Dynamic process: Entrepreneurship is a dynamic function. Entrepreneurs thrive on changes
in the environment, which bring useful opportunities for business. Flexibility is the hallmark
of a successful entrepreneur.
Role of Entrepreneurship in Society and Economic Development:
 Every country is very keen in promoting its economic development. Economic development
essentially means the process of upward change whereby the real per capital income of a
country increases over a period of time.
 Entrepreneurship plays a vital role in economic development. Entrepreneurs serve as the

catalysts in the process of industrialization and economic growth. According to Joseph
Schumpeter, the rate of economic progress of a nation depends upon its rate of innovation,
which return depends upon the distribution of entrepreneurial talent in the population.
 The entrepreneur is the key to the creation of new enterprises that recognize the economy
and rejuvenate the established enterprises that makeup the economic structure.
 Entrepreneurs play a key role in business and the private sector where in Most of the wealth
in a society or nation is created.
 Products and Services- Business entrepreneurs fulfill the role both to discover consumer
demands and to do whatever is required to satisfy them
 Employment- Business ventures are the major providers of “real” jobs – i.e. decent work for
people who need and want to work.
 Investment in Productive Assets- A business needs capital investments to create productive

capacity: innovative technology, modernization, and the expansion of its productive assets.

 National Well-being- Most of the capital goods, commercial and social services as well as
technological know-how required to satisfy our needs come from business activity and
economic development of privately owned resources.
 Environmental Sustainability- All business activity uses natural resources and impacts their
present and future availability. Sustainable enterprises do not only maximize their personal
profit in the short term but ensure the long term availability of natural goods and services
Deadly Mistakes of Entrepreneurship:
1. Management mistakes
2. Lack of experience
3. Poor financial control
4. Weak marketing efforts
5. Failure to develop a strategic plan
6. Poor location
7. Improper inventory control
8. Incorrect pricing
9. Inability to make the “entrepreneurial transition”
1.2 The entrepreneur as an Individual, Creativity and Innovation
“An invention is an idea, a sketch or a model for a new or improved device, product, process or
system (...). An innovation in the economic sense is accomplished only with the first commercial
transaction” (Freeman, 1974: 22).
Innovation = Invention + Commercialization
The innovation process
“Management of the process is crucial “

ENTREPRENEURIAL COMPETENCIES
 taking the initiative
 being highly competitive
 exploiting change
 dealing with uncertainties
 seeking opportunities
The surrounding environment will affect how the entrepreneurial competencies are combined to
implement a social or business enterprise. The following are also main factors for entrepreneur
competency:
 Knowledge consists of a set or body of information stored, which may be recalled at an

appropriate time.
Consists of knowledge about a business opportunity, the market, customers, competitors,
production process, technical matters, business management, sources of assistance
 Skill is the ability to apply knowledge. Technical and managerial skills (leadership,
planning, organizing etc.)
 Traits are the total of peculiar characteristics that constitutes personal individuality.
- Hard Working - Goal-Oriented
- Self-Confident - Persistent
- Builds for the Future - Copes with Failure
- Profit-Oriented - Responds to Feedback

Inventor Vs Entrepreneur
 An inventor creates something new.
 An entrepreneur puts together all the resources needed—the money, the people,
the strategy, and the risk-bearing ability to transform the invention into a viable
business.
Costs and rewards being an entrepreneur
Rewards for Being an Entrepreneur:
 Create your own destiny
 Make a difference
 Reap impressive profits
 Self-actualization/personal fulfilment
 Feeling of freedom and independence
 Providing jobs and benefits to others (investors, suppliers, bankers,

subcontractors, work force, customers)
 Creating economic value (product/service, incomes for workers, profits for
shareholders/partners) Costs of Being an Entrepreneur:
 Works long Class Sessions
 Always concerned about the business
 Needs high energy
 Sacrifices other important aspects of life
 Limited social life
 Not much time with family and friends
 Risk of losing your entire investment
 Lower quality of life until the business gets established

CHAPTER 2 CREATION OF
NEW VENTURES
2.1 Developing the Entrepreneurial Plan:
Entrepreneurs discover an entrepreneurial opportunity when they find a compelling solution to

an unsolved problem or unsatisfied need. The first step in an entrepreneurial venture is to
identify a real opportunity. Second step is to create a plan to address that opportunity. Third step
is to execute that plan.
Business Planning:
Business planning is the process of setting goals, explaining the objectives and then mapping
out a document to achieve these goals and objectives. Effective business planning is critical to
long-term success and the ability to raise capital and grow successfully. Effective business
planning requires a considerable amount of time.
Types of Business Planning:
Effective entrepreneurial planning consists of:
Strategic Business planning
Strategy is the determination of the basic long term objectives and goals of an enterprise and of
the formulation of plans and the acquisitions, allocation and utilization of resources necessary to
accomplish these goals. Strategic planning is the road map of strategies on “what” the business
intends to do to meet the goals and objectives. Strategic planning defines, or outlines, the desired
goals and why you should go about achieving them. It involves business thinkers (namely– the
small business owner) determining why, and in a global sense what, you will achieve in your
stated goals. When doing strategic planning, you need to determine, specifically, what outcome
you want to achieve (These are your Objectives) and how you will measure the results.

Tactical Business planning
Tactical planning contains the details of executing the strategies. Describe “how” you plan to
meet the objectives. Tactical planning requires the understanding and deciphering of the strategic
goals; then identifying the courses of action needed to achieve those strategic objectives. It is
developed by those who deal with getting the work done, day by day. The main question for
them is: “How can the strategic goals be accomplished within the designated limits of resources
and authority?” Tactical planning is actions taken day-to-day, whose results will move the
company forward to achieve the objectives in the strategic plan.
Business Plan:
A business is a proposal that describes a new business. It is presented to potential investors and
lenders. A well-written Business Plan lays out the best growth path & strategy, as well as the
rationale for the selection of the strategy over other alternatives.
A Business Plan is the explanation of:
The services/products that the enterprise needs to provide with their respective uniqueness. It
also describes the qualification of the entrepreneurs. States what resources it will need to
implement the vision and who the team will be that will have the skills and leadership to execute
the vision, and what path they will follow to get there. It is also expected the financial position
and the funds needed with their source The components of a business plan:
• Executive summary • Organizational plan
• Product/service plan • Marketing plan
• Management team plan • Financial plan
• Industry/market analysis • Growth plan

• Operational plan
Executive Summary:
Brief recounting (summarizing) of the key points contained in a business plan. Investors & lenders
rely on this to decide if the concept interests them. Mostly it is not longer than two pages.
Include the most important information from each section of the plan. It is Written at last.

Product/Service Plan:
Presentation of the product or service you’re offering, nature of your business, unique features
of your product/service and any possible spin-offs; Additional products or services that might be
offered once the business is established.
Management Team Plan:
Present entrepreneur’s qualifications & those of any partners involved in the business venture.
Analyze expertise you’re missing & how you will solve that problem. Describe any advisory
board members/Board of Directors that will assist in getting the business started.
Industry/Market Analysis:
Convince the reader that an explosive market opportunity exists; Presents research into the
industry & market. Analyze customers, competition, & industry. It provides information about
the prospective geographic location, economic & demographic data.
Operational Plan:
Includes all processes involved in producing and/or delivering the product or service to the
customer.
• Status of product development
• Equipment, inventory, production
• Time & money needed

Organizational Plan:
• People aspects of the business. Includes:
• Management philosophy
• Legal form of the company

• Key management personnel
• Key employment policies
Marketing Plan:
How your company makes its customers aware of its products or services
• Market segment • Marketing strategies
• Pricing policy • Promotional plan
• Company image • Marketing budget
Financial Plan:
It presents the forecasts for the future of the business. Includes assumptions made when
calculating your forecast figures; usually in the form of financial statements.

Growth Plan:
Looks at how the business will expand in the future. Investors & lenders look to see if the business
has the potential & the plans to grow over its life.
2.2. Ideas versus Opportunities
A business idea is the response of a person or persons, or an organization to solving an identified

problem or to meeting perceived needs in the environment (markets, community, etc.). Finding
a good idea is the first step in transforming the entrepreneur’s desire and creativity into a business
opportunity.
Business Idea:
A business idea is a concept that can be used to make money. Usually it centers on a product or
service that can be offered for money. An idea is the first milestone in the process of founding
a business. Every successful business started as someone’s idea.
Although a business idea has the potential to make money, it has no commercial value initially.
In fact, most business ideas exist in abstract form; usually in the mind of its creator or investor
and not all business ideas, no matter how brilliant they may seem, would end up being
profitable. To find out about an idea’s chances in the market and check its innovative content
and feasibility, you need to conduct a plausibility check. A promising business idea must have
the following characteristics:
 Relevant (must fulfill customers’ needs or solve their problems)
 Innovative
 Unique
 Clear focus
 Profitable in the long run
The acceptability and profitability of a business idea hinges largely on how innovative the idea
is. Being innovative means using conventional production or distribution methods that have
rarely been adopted before. In fact, the entire business system could be innovated.
A successful business idea must meet the following three conditions:

 It must offer benefit to the customer by solving a problem or fulfilling a need. Customers
buy products and services for just one reason; to satisfy a need. So, if your business idea
cannot satisfy customers, it won’t be successful. Every successful business idea must have
a unique selling proposition.
 It must have a market that is willing to accept it. A promising business idea must offer a
product or service that would be accepted by a large market. It must also have feasible
arrangements for catering to that large market as well as unique values that differentiates
it from the competition.
 It must have a mechanism for making revenue. A successful business idea must show how
much money can be earned from it and how the money will be earned..”
Why Generate Business Ideas?
 You need an idea to start a new business
 Business ideas need to respond to market needs

 Business ideas need to respond to changing consumer wants and needs
 Business ideas help entrepreneurs to stay ahead of the competition
 Business ideas use technology to do things better
 Business ideas are needed because the life cycles of products are limited
 Business ideas help to ensure that businesses operate effectively and efficiently
 Business ideas can help specific groups of people (elderly, disadvantaged, those with
disabilities)
 Business ideas help to solve natural resource scarcity, pollution and depletion.
Sources of Business Ideas
Good business ideas are a prerequisite for initiating a new business venture. However, good
business ideas do not usually just occur to an entrepreneur. Sources:
 Hobbies/Personal Interests
 Personal Skills and Experience
 Media (newspapers, magazines, TV, Internet)
 Business Exhibitions
 Surveys

 Customer Complaints
 Natural scarcities and pollution
 Changes in Society
 Brainstorming
 Being Creative
 Ideas from overseas (Global) Potential Imports
Evaluating a Business Idea:
Once you're satisfied that you have a good potential idea that will address your opportunity, you
need to evaluate it thoroughly to ensure that it is realistic, doable, and the right idea for you. If
you answer all the questions below that apply to your idea, you'll be better able to make a
decision about basing a new venture on it.
1. What do others think of your idea? If it's a product, have you shown the idea to a product
designer for evaluation? What did he or she tell you about the product's chances for
success? If it's a service, do people tell you it sounds feasible or not?
2. Is the idea directly related to the opportunity? Explain how the idea will specifically
address the opportunity.
3. Has the idea been tried before? If not, do you know why it hasn't? If it has, do you know
if it succeeded or failed and the reasons? If it has been tried before and failed, how will
you improve it to ensure it doesn't fail this time?
4. Did you base this idea on accurate, reliable, information? For example, did you read just
one article or book and then decide on the idea, or did you do a thorough review of the
literature?
5. What risks are associated with this idea? Do you know how to reduce and manage these
risks? Are you prepared to assume the necessary risks?
6. Will there be resistance to this idea? (There almost always is.) Where will this resistance
come from, and why? Will you be able to overcome this resistance?
7. Do you know how much it will cost to turn your idea into an actual business? Can you
access the resources—money and people—that you will need to make this idea work?
8. How do you feel about the idea? Are you excited? Worried? Skeptical? You'll need to be
really excited and confident if you're going to make a success of it.

Each business idea should be evaluated in terms of:
 Present market. The size of the presently available market must provide prospects of
immediate sales volume to support operations
 Market growth. There should be prospects for rapid growth and high return on invested
capital
 Costs. Some of the costs of production will include:
 Start up costs  Service, warranty, customer
 Costs of raw material inputs complaints and
 Labor costs  Patents and licenses.
 Selling costs
 Efficiency of production processes,

 Business risks. In assessing business risk consider the following factors:
 Market stability in economic cycles
 Technological risks
 Import competition Size and power of competitors
 Legislation and controls
 Time required generating profit

Business Opportunities:
A business opportunity on the other hand is a proven concept that generates on-going income. In
other words, a business opportunity is a business idea that has been researched upon, refined and
packaged into a promising venture that is ready to launch.
While multiple business ideas may strike you on a daily basis, only few of them will be profitable
in the long run based on market research and feasibility study conducted. These few are the real
business opportunities. An opportunity is regarded as one after it has been found to meet the
following criteria:
 It must have high gross margins.
 It must have the potential to reach break-even cash flow within 12 months – 36 months.

 The startup capital investments must be realistic and within the range of what you can
provide.
 You must have the strength and ability needed to drive the business to success.
 Your level of enthusiasm for the business must be very high.
 It must have the potential for residual income.
 It must have the potential to keep on improving with time.
 It must have a low level of liability risk.
After you have refined and packaged your business opportunity in your mind, you can have it
documented by writing a business plan. You can then either implement on your own or sell it to
someone else for profit (probably because you cannot afford the capital required to flag off the
business).
In conclusion, the world is filled with brilliant ideas but the world lacks entrepreneurs who have
the capacity to turn such ideas to profitable business opportunities. It is one thing to develop an
idea, but it is an entirely different ball game to turn an idea into a business opportunity.
So, a major difference between an idea and an opportunity is that you can sell a business
opportunity, but you cannot sell an idea (it is not entirely impossible but it’s difficult). It is
obvious that investors invest in business opportunities and ventures, not business ideas.
Now how do you turn a business idea into an opportunity? Well, you can turn a business idea
into a business opportunity by conducting market research and feasibility study on your idea,
writing a business plan and assembling a business team that will work with you on your idea.
Only then will such idea become an opportunity that will attract investors and probably get the
needed financing.
2.3. Commercialization of technology-based innovation
Technology Commercialization is the process of making the new technology for public use through
different business strategies. It is the spread new technology to the mass society. Universities and
other research institutions mostly play in research and development; not on commercialization of
technology. Governments and other responsible parts should lead the line of commercialization of
technology by encouraging private sectors which are mostly involved and SMS enterprises.

Developed technology must be commercialized and lead to products and industries, and eventually
this will be the natural consequence of a rise in efficiency through innovative R&D systems.
 You must have the strength and ability needed to drive the business to success.
 Your level of enthusiasm for the business must be very high.
 It must have the potential for residual income.
 It must have the potential to keep on improving with time.
 It must have a low level of liability risk.
After you have refined and packaged your business opportunity in your mind, you can have it
documented by writing a business plan. You can then either implement on your own or sell it to
someone else for profit (probably because you cannot afford the capital required to flag off the
business).
In conclusion, the world is filled with brilliant ideas but the world lacks entrepreneurs who have
the capacity to turn such ideas to profitable business opportunities. It is one thing to develop an
idea, but it is an entirely different ball game to turn an idea into a business opportunity.
So, a major difference between an idea and an opportunity is that you can sell a business
opportunity, but you cannot sell an idea (it is not entirely impossible but it’s difficult). It is
obvious that investors invest in business opportunities and ventures, not business ideas.
Now how do you turn a business idea into an opportunity? Well, you can turn a business idea
into a business opportunity by conducting market research and feasibility study on your idea,
writing a business plan and assembling a business team that will work with you on your idea.
Only then will such idea become an opportunity that will attract investors and probably get the
needed financing.
2.3. Commercialization of technology-based innovation
Technology Commercialization is the process of making the new technology for public use through
different business strategies. It is the spread new technology to the mass society. Universities and
other research institutions mostly play in research and development; not on commercialization of
technology. Governments and other responsible parts should lead the line of commercialization of
technology by encouraging private sectors which are mostly involved and SMS enterprises.

Developed technology must be commercialized and lead to products and industries, and eventually
this will be the natural consequence of a rise in efficiency through innovative R&D systems.
Technology commercialization can:
a. Oneself technology Commercialization
Oneself technology Commercialization is where the technology developer directly conducts

the additional sale, marketing etc. for the whole public use.
b. Technology-out Commercialization:
Technology-out Commercialization is where the results developed from specific stages are
commercialized by licensing them out.
Technology commercialization has to be thought of in relation to technology transfer, and
appropriate technology transfer activities can increase the success rate of technology
commercialization.
Importance of Technology Commercialization:
In a society based on knowledge, technology innovation is being appraised as the important factor
that sways national competitiveness and corporate competitiveness. As a result, governments of
various countries around the world are becoming involved in technology innovation with a keen
interest and active involvement in technology commercialization. At present the recognition that
developed technology itself is not the result but that technology must create additional value through
proliferation & commercialization has set in, and technology commercialization policy has taken the
core position of industrial technology policies of every country.
Obstacles in the Technology Commercialization:
 Insufficient funds for commercialization
 lack of government support
 lack of active participation of SMEs

 marketing & sales
 Imitation industry
 Technical & research personnel
 Burdensome evaluation standards

As a result, increasing the commercialization rate and the commercialization success rate is
definitely necessary in strengthening national science & technology competitiveness, and in terms
of finding solutions for the above obstacles, support policies must be created. Also, with the
emergence of the participatory government, discovery and cultivation of new generation growth
dynamic business areas are being actively conducted as a new platform.
Consequently, there needs to be a transformation of policy aims from the policy of increasing
technology development investment scale to a commercialization policy. Government has to
recognize the importance of technology commercialization and they must increase the budget figures
for technology commercialization related funds. Technology which has not been commercialized
does not have any economic value. In other words, investments in technology developments that are
not feasible in terms of business must change their direction and reconsider the concept of
commercialization in their mind set.

CHAPTER 3
INTERNATIONAL TECHNOLOGY TRANSFER AND MULTINATIONAL
ENTERPRISES
3.1. What is Technology transfer?
Technology is a Systematic knowledge (conceptual, empirical, “Scientific”) embodied into tools,

to perform human tasks. It is mixture of physical artifact, social content and context, and procedures.
Knowledge, BY ITSELF, is not technology unless it is embodied into some tools and techniques
that can enhance human performance. Import of technology also known as technology transfer
which involves sharing of skills , knowledge and facilities among government and business so that
these technological developments are accessible to a wide range of users for commercial and
welfare purposes.
 It can be in form of business agreement between two businesses or MNC’s 
It can be as trade agreement b/w two nations.
Technology transfer [and commercialization] is defined as the transfer of results of basic and
applied research to the design, development, production, and commercialization of new and
improved products, services or processes. That which is transferred is often not really technology
but rather a particular kind of knowledge that is a precursor of technology. The transfer process
emphasizes the value and pro; Gary Matkin, Technology Transfer and the University, 1991.
Technology transfer and commercialization requires a dedicated effort to be successful. The skills
necessary for successful technology transfer and commercialization are different than the skills
necessary to do good science. At this time research organization of developing countries must watch
out carefully and heavily involved in technology transfer.
Technology Transfer is a Process:
It has stages, phases, and typical behaviors. It operates and can be understood at different levels
(e.g., technology policy, individual scientists) with different “stakeholder” and perspectives. It is
therefore a “communication process.”
So... Where to enter the catalytic process of technology transfer?
1. Universities and Research Institutes: Mainly on the level of basic and applied research, and
early stage development.
2. Entrepreneurial companies: Any stage from research and development to the market.

Classification of Technology
New Technology: A newly introduced technology that has an impact on how company produces
products example computer software. Any technology is new whenever it is introduced for time in
a place.
Emerging Technology: it is a technology that is not yet fully commercialized but will become so
within a period of years.
High Technology: It refers to advanced and highly sophisticated technology. It is used by variety
of industries having certain characteristics such as:
 It employs a highly educated people, most of them are scientist and engineers.
 It competes with technological innovation.
 It has high level of research and development expenditure.
Forms of Technology Transfer: Internalized form: In this form control resides with the technology
transferor (the owner) holding the majority or full equity ownership. (It can influence the sales, it
is integral part of global strategy, control on investment decisions).
 Externalized form: it refers to joint ventures with local control, licensing strategic alliances
and international subcontracting.
LEVELS OF TECHNOLOGY TRANSFER
 Operational Level: Processes form of technology which involves manufacturing process,

quality controls and maintenance.
 Adaptive Level: Imported technologies are adapted and advanced skills for more complex
engineering methods are learned.
 Innovative Level: it is based on formal Research and development that is useful in constant
improvement in technology and to generate new technologies.
 Duplicative level: At this level investment capacity is expanded in order to import
technology and integrate the foreign technology with existing ones
3.2 Multinational enterprises/corporations:

Multinational corporation is an enterprise which own or control production or service facilities

outside the countries in which they are based. Or Multinational corporations are companies that
manufacture and market the products or services in several countries.
Features of MNCs:
a. Single managerial control: MNC is ultimately controlled by a single managerial authority which
makes the key managerial decisions relating to the operations of the parent firm and all its
affiliates.
b. Global perspective:
The managers of MNCs are presumed to possess a global perspective. It implies the absence of
any preferential emphasis upon the current country’s home market on the part of those
managers.
c. Integrated worldwide business systems
d. Offers new markets for products or services
Role of MNCs for Developing Countries:
The growth and efficiency of developing countries have opened their doors to the MNCs.
a. Capital: capital, the means of production is the basic need for developing countries. It allows
for improvement in the structure of the economic system. Through foreign Direct
Investment (FDI), MNCs are able to diffuse the much needed resource into developing
countries.
b. Transfers of Technology: it is also brought in to the country with MNCs; the movement of
technology to produce goods as well as for communication purposes. This is not only
important for production and distribution by the foreign firms, but also for the development
of similar, local companies.
c. Increases level of integration with different countries
d. Modern work practices are introduces
e. Improved infrastructure
f. Better access to world-wide market
g. Better access to capital investment
h. Local suppliers development
i. Gaining new products or services

Demerits of MNCs
a. Drain of resources for profit maximization
b. Insignificant in employment potential
c. Influence in culture
3.3 Technology usage and adoption by SMEs
Technology Absorption:
Technology Absorption refers to the acquisition, development, assimilation & utilization of

technological knowledge and capability by a firm or some macro entity from an external source. It
occurs between transferring & receiving entities. The technology absorption is wider in scope than
technology acquisition.
• Technology absorbed without changing parameters of acquired technology is called

Technology Adoption.
• Technology absorbed by changing certain parameters of acquired technology is called

Technology Adaptation.
Technology Adaptation may arise due to following reasons:
• Non availability of supporting infrastructure
• For meeting location
• cation / market specific needs
• To make it compatible with existing plant & machinery
• Non availability of ancillary units for components
• To meet legal requirements

Pressure from NGOs, environmentalist, human rights group viz.example: Government

insistence to not to use BVO in soft drinks, forced cola companies to change their
formulations.
Organizations take following steps to manage technology absorption:
• Developing good understanding and mutual trust between technology transferor and
technology recipient organizations
• Proper, clearcut and well-defined agreement between technology transferor and technology
recipient organizations
• Developing time-bound and target-oriented schedule for technology absorption
• Top management support to the technology absportion
• Use of multifunctional teams by the technology acquiring organization
• Regular review of the absorption progress by the highest level.
• Installation of effective communication system by the technology acquiring organization.

Seeking workers’ particicpation, involving one and all in the absorption process;
overcoming the resistance to change through education and motivation through rewards etc.
• Hiring of requisite skilled workforce; if same is not available, seeking early training of own
current employees by technologists / technicians from the transferor enterprise.
• By actively complying with various government directives and requirements on technology
upgradation and technology absorption. Technology Diffusion:
Diffusion is the process by which a new product is accepted by the market. It is the spread of
applications / usage of a new technology and its related products, services or processes from one
nation to another; from one entity to another; from one industry to another; from the owner entity
to user or supplier; and from current user to the prospective user. It is the study of how, why, and at
what rate new ideas and technology spread across the economy.
Patterns of Technology Transfer:
• During the intial stage i.e. innovation stage, technology and innovation gets diffused within
the innovative organizations. Such organizations usually follow technology leadership
strategy.

• During next stage i.e. consolidation stage, diffusion takes place amongst major competitors.
During the last stage, i.e. mature technology stage, diffusion spreads to laggards. These
laggards are, usually, risk-averse and small organizations or small market players.
• The rate of learnings / spread amongst various entities is influenced by profitability and
investment required.
Characteristics of Technology Diffusion:
• Diffusion is not one-way traffic. The innovator can also learn from imitator.
• Diffusion is not once- for-all occurance. It is cyclical in nature.
• Diffusion can take place in varying degrees: IntraFirm - diffusion of lowest degree ;
InterFirm- diffusion of medium degree; Economy wide- diffusion of highest degree.
• Diffusion can take place in variety of forms … viz product , service or a process: use &
production; stock of technological knowledge
3.4. Promotion of technological development
What are Global Trends in Technology Management?
Prior to 1990, rate of technological change has been slow due to cold war between USA & USSR,
restriction on MNCs, existence of high trade barriers across countries. Since 1990s rate of
technological change has become faster.
This increased rate of technological change is noticeable in following areas:
• Most of nations have adopted formal technology development policy and aim at gaining
technological progress / advancement.
• Innovations (new product / process developments) are no more confined to developed world.
They can take place anywhere, anytime.
Globalisation of technology is taking place at a faster pace due to variety of factors
• Technological development is becoming highly customer-oriented. As the customer needs
& tastes are increasing and changing, technological changes are increasing.
• Decreasing payback period – to derive benefits of technology development

• Time compression – decrease in time available in various activities / phases of technology

development
• There is faster movement of products and services from Research & Development center to
markets (reduction in lead times).
• There is increasing focus on simplification of products viz journey from earlier big
computers to modern portable computers; emerging nano-technology.
There is more focus on ergonomics (human convenience to use)
• Technology life cycle is getting shorter due to fast technological changes or technological
discontinuties.
• Product life cycles are decreasing due to fast changes in consumer needs, increasing
awareness about new or improved technologies.
• Technological change may occur not only due to development of improved / hybrid / new
technology but it can occur even due to some development in unrelated technology.
3.5 Public regulation of technology transfers
Protection of Intellectual Property: The Process by which the private value of the creative outputs
of research are protected.
What of Value is protected?
 Intellectual Property:
o The results of research or other creative work that can be protected by law
 Realizing private value from intellectual property: Using a legal mechanism which
permits selected par
 ties to utilize a particular invention, work, or similar creative product; and precludes
others from doing so.
 Value: Private (commercial) value is not the same as public value. It is usually not
possible to achieve private value from creative work which is in the public domain.
First Step in a Protection Strategy is the Invention Disclosure:
 Filed with institutional intellectual property office
 Evidence for date of invention or creation and names of inventors or creators (for
primary)

 Identifies funding source
 Provides information for choosing a protection approach (or whether to protect)
 A disclosure assumes that intellectual property exists, and has value (in fact, these
assumptions are often unwarranted)
Patents:
 Specific criteria defined by law
 Novelty, non-obviousness, utility
 Burden of proof on the applicant
 Applicant must prove in the examination that the invention meets the
criteria
 Careful examination
 Technically qualified examiners
 Review of the “prior art”
 Every country has a different system
Patents are granted by national offices and one invention may differ in coverage from country to
country. Criteria for Patentability
NEW:
 No “prior art” - a novel invention
 Has not been publicly disclosed
 Has not been made or sold in commerce NOT OBVIOUS:

 Not obvious to a person “skilled in the art
 No “prior art” which would suggest the invention

USEFUL:
 has a purpose
What is Patentable?
May include anything “under the sun” made by man...
 Process—a method of doing something (e.g., manufacturing steel, surgical or

medical procedures)
 Machine—combination of mechanical elements
 Article of manufacture—anything which has been manufactured
 Composition of matter—a new chemical, a new formulation of elements, a genetic

construct o Ideas and “principles of nature” are not patentable. Copyrights:
It is the exclusive right granted by the government to the owner of an original work of authorship
to reproduce, distribute, perform, prepare derivative works, and/or display the copyright work.
Trademarks:
A name or logo which is affixed to goods or services placed in commerce and indicates the source
and quality of the goods or services
 Term is indefinite (while still in use)
 Easily protected via registration, and easily obtained indefinitely
 May be worth more than the invention or creation
 Trademarks can be registered within a state, or nationally.
“8 Golden Rules” for Patenting:
 Avoid early public disclosure. File first, then disclose.
 Do not publish interim results or speculate on broader applications of a discovery.

 Do research on the commercial market and technical novelty of an invention before

filing a patent application.
 Consider the possibilities to license or develop an invention before filing.
 If you cannot protect the patent from infringement, don’t file.
 File locally first. Drop international applications if there is no interest in

development in a reasonable time.
 If you cannot prove the concept of a new invention in a reasonable time, drop the
application.
 Periodically clean out your patent portfolio if you are a research institute. Do not
pay for non-productive patents.
3.6 Diffusion and Mechanisms of Technology Transfer

Techniques in Technology Transfer
 Foreign Direct Investment: Through this technique organization transfer its technology to
target nation through its subsidiary i.e. by investing themselves for example Toyota Motors
brought in its technology of invisible mirror through its subsidiaries in various countries.
 Licensing: License is provided for the use of technology to the user Under which only a
license holder can use the technology for example software like operating systems of
Windows or Linux etc. comes with specific code and identity of the system through which
they can be used on authorized system only by the authorized user of that system.
 Franchising: It is quite similar to licensing where organization set up there franchises and
transfer their technology to the franchisee. The franchisee operates on behalf of the
organization under this the company have direct control, the franchisee only carry the name
and trademark for example KFC, McDonalds, Peter England, Monginis, Nescafe etc
 Management Contracts: Here technology is transferred under certain terms and conditions
or by establishing projects for host and training there personnel to operate it and transfer the
control to hosts.
 Contract Manufacturing: It refers to transfer of technology to the user and get the product
manufactured from user themselves.

 Joint Venture: Technology is transferred to joint venture partner and technology is

provided to host nation through a partner from host nation.
3.7 Intellectual Property Rights and the Appropriateness of Technology
Appropriate Technology:
Appropriate technology is the appropriate selection of a device or solution to a problem based on

the individual needs of an area, or a population; which generally utilizes simple and user friendly
products and or systems.
 Simple: technology that is simple in using and effectively achieves the desired results.
 Environment friendly: Technology that support the environment by avoiding all possible
activities that could cause harm to nature.
 Non-Violent / sustainable (no damage to the environment)
 Renewable Sources of Energy

 Create Job opportunities
 Created locally
 Use Local skills
 Use local materials
 Low Cost
Problems in Technology Transfer:
 Costly: Investment in technology higher than the level of attained profits. Cast paid for
royalty and interest is higher than that of inflow.
 Appropriateness: Technology in many cases is not suitable with the socio economic
priorities and conditions
 Dependence: Technological dependence has to increase in import of modern sophisticated
technology that has displaced indigenous technology. The new product and processes
introduced by multinational into developing countries discouraged the self dependence on
technology

 Obsolescence: Import of outdated technology thus the importing action lag behind, the
owners of modern technology view developing nations as a mean to salvage technology that
is obsolescent in advanced country if when they posses advanced technology.

CHAPTER FOUR
ASSESSING THE FEASIBILITY OF A NEW VENTURE
1.1 Assessment and Evaluation of Entrepreneurial Opportunities:
Once entrepreneurs have developed the idea(s) for the new ventures, they must begin the process of
assessing whether or not the idea is in fact a viable business opportunity. Many new ventures have
been launched around bad business ideas. An idea can seem sound in theory but in reality it may
have poor marketplace potential. It is important to assess feasibility as early as possible to avoid the
much costlier effects of failed implementation.
So how do entrepreneurs determine if an idea is an appropriate investment for their
resources?
Assessing an idea’s potential to become a good business opportunity is absolutely necessary to avoid
the unnecessary allocation of scarce resources, including the entrepreneur’s time and effort.
Opportunity identification process begins by determining the unique needs of the industry and
market place, including what customers expect and demand that the new venture can provide. Many
ideas and opportunities exist; however, resources are scarce, and this means that you must be very
careful in your evaluation of business opportunities to be sure they can be supported by the
knowledge and information you possess or can obtain fairly easily. Figure 4.1 illustrates the
movement from opportunity identification to opportunity evaluation. The evaluation process begins
with some fundamental questions to help entrepreneurs assess the potential for the new venture to
succeed. Evaluation of business opportunities should be conducted not only just by the entrepreneur
but also by as many stakeholders in the new venture as possible: potential customers or clients,
employees, advisers, investors, and suppliers.
Four Primary Areas for Assessment:
There are many questions to ask during opportunity evaluation, and they can be classified according
to four primary areas for exploration:
1. The people behind the idea: the background, talents, and experience of the entrepreneur and
the management team, employees, and advisers. Even a great idea with high market potential
requires an entrepreneur or team behind it that can effectively (and passionately) support and
grow the idea. It is then much more likely to be successful. An entrepreneur’s skills and talents
might have led to the discovery of the idea, but does the entrepreneur have the resources
available the competence to turn the idea into a business?

Opportunity Evaluation
Opportunity
Recognition
Industry & Market

Needs,
Expectations, Opportunity
And Demands Surplus
Fig. 4.1 Opportunity Recognition to Opportunity Evaluation: The Assessment Process
2. entrepreneur and the management team, including the equity and debt sources of capital that
are available and accessible, additional assistance from people with expertise needed by the
firm, and the technology required to support the idea. What relationships can the entrepreneur
or teams rely on to acquire the necessary resources?
3. The knowledge and information possessed by the entrepreneur, including knowledge of the
new venture concept, the industry, and market research. Moreover, what is not known that needs
to be known for the new venture to be successful? Information about competitors? About
customers’ preferences? How will this information be obtained?
4. The idea’s ability to generate revenue. How great the potential to sell something that will
generate actual revenues? One of the mistakes would-be entrepreneurs make is to assume that
everyone will love the idea and that people will be standing in line to buy it, once the business
opens. To what degree can the entrepreneur manage and contain the costs while maximizing
returns? These questions form the basis for the opportunity evaluation, and their answers will
help the entrepreneur move forward to create strategies that ultimately support the viable
business model.
Do you think entrepreneurs should proceed with an idea that has inherent weaknesses in any
of these areas?
The Business Evaluation Scoring Technique (BEST):
The Business Evaluation Scoring Technique (BEST) was developed to help entrepreneurs evaluate
a group of ideas before deciding which ones to pursue. The tool considers the various
“windows of opportunity” related to new ventures.

Answer the following questions by scoring them on a 1–5 scale: 1 = low and 5 = high.
1. Is the business really differentiated from other similar businesses?
2. Does the business have growth potential?
3. Will the business require capital? (Note: A low finance requirement receives a higher score, while
a high finance requirement should receive a low score)
4. Can financing be secured?
5. Does the business suit the individual’s entrepreneurial profile (e.g., mind-set, experience)?
The total score indicates the sum of the answers for the questions 1 to 5
Total Score Description Action
20–25 Excellent prospects Must try
15–19 Very good prospects Should try
11–14 Reasonable prospects Try if nothing else is available
10 and under Poor prospects Avoid this loser
Assessing the Feasibility of the New Venture Idea:
Evaluating a new venture idea involves testing its feasibility, the extent to which the idea is a viable
and realistic business opportunity. One of the first steps required in assessing the feasibility of an
idea is to become aware of forces and factors in the internal and external environment that directly
influence the new venture opportunity. Factors internal to the venture include:
 The knowledge, skills, and abilities of the entrepreneur, the management team members,
employees, and advisers
 The resources available to the entrepreneur, including people, financial resources, and
technologies that can be acquired for the launch and growth of the opportunity Factors
external to the new venture include:
 The industry: competitors, structure of the industry, barriers to entry, and trends that affect
businesses in the sector in which the new venture intends to locate.
 The market: knowledge of the preferences, values, and buying behavior of the target
market, including demographic and psychographic information necessary to appropriately
position, promote, and price the products and services.

 Social norms, values, and trends surrounding the new venture idea. Is there an increasing
need for or awareness of the product or service? Are there ethical concerns about the product,
service, or its effects? Realize that a product or service (and any of its components) may be
legal but unethical. The social environment of a new venture often involves the
perceptions—not necessarily the reality—of the opportunity in the minds of customers and
citizens.
 Legal and regulatory forces that could affect the business operations, including laws,
policies, procedures, and regulations pertinent to the industry or municipality in which the
new venture is located Conducting an environmental feasibility analysis will help the
entrepreneur prepare a strategic plan.
Fourteen Questions to Ask Every Time:
To evaluate opportunities, Allis (2003) has developed a set of questions for entrepreneurs. The
answers are helpful as entrepreneurs prepare to conduct a comprehensive feasibility analysis and
to develop subsequent strategies for the emerging venture.
1. What is the need you fill or problem you solve? (value proposition)
2. To whom are you selling? (Target market)
3. How could you make money? (revenue model)
4. How will you differentiate your company from what is already out there? (unique selling
proposition)
5. What are the barriers to entry?
6. How many competitors do you have and of what quality are they? (competitive analysis)
7. How big is your market in birr? (Market size)
8. How fast is the market growing or shrinking? (Market growth)
9. What percent of the market do you believe you could gain? (market share)
10. What type of company would this be? (lifestyle or high growth potential, sole proprietorship
or corporation)
11. How much would it cost to get started? (start-up costs)
12. Do you plan to use debt capital or raise investment? If so, how much and what type?
(investment needs)
13. Do you plan to sell your company or go public (list the company on the stock markets) one
day? (exit strategy)

14. If you take on investment, how much money do you think your investors will get back in
return? (Return on investment) The Feasibility Analysis:
Beginning the Evaluation Process:
A complete industrial analysis usually includes a review of an industry’s recent performance, its
current status, and the outlook for the future. Many analyses include a combination of text and
statistical data. Some of the points entrepreneurs consider in this analysis are given below.
Current Industry Analysis:
 Describe the industry as specifically as possible. Some business ideas fall into more than
one industrial classification.
 What are the current trends in the industry?
 What is the current size of the industry? Is it dominated by large players? Are there a
significant number of small to medium-size enterprises in the industry?
 Where is the industry located? Is it local, regional, national, or global?
 What is the average sales and profitability for this industry? Competitor Analysis
 Obtain basic information on the competitors you have identified. Who are the direct
competitors of the new venture?
 Where are the competitors located?
 What are the advantages and disadvantages of the competitors?
 What features of their products or services are similar to yours?
 How are your products or services distinctive from those of your competitors? This is a key
part of the competitive analysis.
Sources of Information for the Industry and Competitor Analysis There
are many sources of industry analysis:
 Investment firms, business and trade periodicals
 Trade associations, and  Government agencies.

To conduct a thorough industry analysis, include a variety of sources. As you conduct
your research, don’t neglect to record your own personal observations: Visit competitors
in a non-disruptive manner.
 What do you notice?
 What could be improved?

 How is the product or service used? Create the experience of being a customer of this
business and industry.
1.2 Legal Structures and Issues of a new venture:
LEGAL ISSUES:
Entrepreneurs, after they identify their business ideas and developing a business plan, are expected
to think about certain legal issues. They have to legalize their business and they have to be registered
for it. They have to determine the legal forms of business ownership that he/she will establish.
Besides she/he should get legal protection to their inventions or creations. Hence, they have to get
a legal property right from the concerned body.
Legal Forms of Business Ownership
The four most popular are: The sole proprietorship, partnership, Limited Liability Company and
Share Company.
A. Sole proprietorship:
This is the business owned by one individual. The individual is the business, and the business is the
individual. The two are inseparable. A sole trader is the simplest form of business to start – all that
is needed is the first customer. It faces fewer regulations than a limited company and there are no
major requirements about accounts and audits, although the individual will pay personal taxes which
will be calculated based upon the profits made by the business.
There are two important limitations, however. The first is that a sole trader will find it more difficult
to borrow large amounts of money than a limited company because lending institutions prefer the
assets of the business to be placed within the legal framework of a company, because of the
restrictions then placed upon the business. It is, however, quite common for a business to start life
as a sole trader and incorporate later in life as more capital is needed.
The second disadvantage is that the sole trader is personally liable for all the debts of the business,
no matter how large. That means creditors may look both to the business assets and the proprietor’s
assets to satisfy their debts. However, this disadvantage should not be over emphasized because of
the widely adopted practice of placing some family assets in the name of the spouse or another
relative and because, even as a limited company, a bank is likely to ask for a personal guarantee
from the proprietor before giving a loan.

B. Partnerships:
Some professions such as doctors and accountants are required by law to conduct business as
partnerships. Partnerships are just groups of sole traders who come together, formally or informally,
to do business. As such it allows them to pool their resources, some to contribute capital, other their
skills. Partnerships, therefore, face all the advantages of sole traders plus some additional
disadvantages.
The first of these disadvantages is that each partner has unlimited liability for the debts of the
partnership, whether they incurred them personally or not. Clearly partnerships require a lot of trust.
The second disadvantage is that the partnership is held to cease every time one partner leaves or a
new one joins, which means dividing up the assets and liabilities in some way.
Generally, if you are considering a partnership you would be well-advised to draw up a formal
partnership agreement. It is very easy to get into an informal partnership with a friend, but if you
cannot work together, or times get hard, you may regret it. Partnership agreements cover such issues
as capital contributions, division of profit and interest on capital, power to draw money or take
remuneration from the business, preparation of accounts and procedures when the partnership is
held to cease. Solicitors can provide a model agreement which can be adapted to suit particular
circumstances.
C. Limited Companies (Private limited and Share Company)
A company registered in accordance with the provisions of the Companies Acts is a separate legal
entity distinct from its owners or shareholders, and its directors or managers. It can enter into
contracts and sue or be sued in its own right. It is taxed separately through Corporation Tax. There
is a divorce between management and ownership, with a board of directors elected by the
shareholders to control the day-to-day running of the business. There need be only two shareholders
and one director, and shareholders can also be directors.
The advantage of this form of business is that the liability of the shareholders is limited by the
amount of capital they put into the business. What is more, a company has unlimited life and can be
sold on to other shareholders. Indeed, there is no limit to the number of shareholders. Therefore, a
limited company can attract additional risk capital from backers who may not wish to be involved
in the day-to-day running of the business. Also, because of the regulation they face, bankers prefer
to lead to companies rather than sole traders, although they may still require personal guarantees.
Clearly this is the best form for a growth business that will require capital and will face risks as it
grows. Nevertheless, there are some disadvantages to this form of business. Under the companies’
acts, a company must keep certain books of account and appoint an auditor. It must file an annual
return with companies’ house which includes accounts and details of directors and shareholders.
This takes time and money and means that competitors might have access to information that they
would not otherwise.
Advantages and disadvantages of different forms of business
Sole trade Partnership Limited company
Easy to form Easy to form Limited liability
Minimum of Minimum of Easier to borrow

regulation regulation money
Can raise risk capital
advantage through additional

shareholders
Unlimited personal Unlimited personal Pay corporation tax

liability liability for debits of
whole partnership
More difficult to More difficult to borrow Greater regulation
disadvantage borrow money money
Pay personal tax Pay personal tax
1.3 Sources and Types of Capital
Capital – It is any form of wealth employed to produce more wealth for the firm. It is commonly
categorized into three groups: They are:
i. Fixed capital
It is needed to purchase the business’s permanent or fixed assets such as building equipments,
machinery etc. ii. Working capital
It represents the business’s temporary funds; it is the capital used to support the business’s
normal short-term operation. It is current assets less current liabilities. It is used to buy inventory,
pay bills, finance credit sales, pay wages and salaries and take care of any unexpected
emergencies. It is used to offset the uneven flow cash into and out of the business due to normal
seasonal fluctuations.
iii. Growth capital
It is required when an existing business is expanding or changing its primary direction. In order
to expand an existing business, additional capital is needed to buy additional facilities.
Sources of Capital
Generally, there are two types of financing available: external and internal funds.
External sources: They are funds generated from external to the firm. Alternative sources of
external financing needs to be evaluated in terms of length of time the funds are available, the costs
involved, and the amount of company control lost. Each type of external financing falls into one of
two categories – debt financing or equity financing.
Debt financing is a financing method involving an interest bearing loan instrument, the payment
for which is only indirectly related to the sales and profits of the new venture. Typically, debt
financing requires that some asset be available (such as a car, house, machine, or land) as collateral.
Equating financing, on the other hand, typically 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 on a pro rate basis. Key factors in the use of one type of financing
over another are the availability of funds and the prevailing interest rates. Frequently, an
entrepreneur’s financial needs are met by employing a combination of debt and equity financing.
Internal funds: - These are the type of financing most frequently and easily employed. They can
come from several sources: profits (in a form of retained earnings), sales of assets, reduction in
working capital, credit from suppliers and accounts receivable. Another short-term internal source
of funds is obtained by reducing short-term assets inventory cash and other working capital items.
Sometimes, an entrepreneur can generate the needed cash through credit from suppliers. While care
must be taken to ensure good supplier relations and continuous sources of supply, taking a few more
days before paying the bills can also generate needed short-term funds. A final method for internally
generating funds is by collecting bills more quickly, allowing little aging in accounts receivable.

The debt financing and equity financing can also be presented as follows:
Sources of equity capital/financing
Equity financing represents the personal investment of the owner (owners) in business. It is
sometimes called risk capital because these investors assume the primary risk of losing their funds
if the business fails.
The advantages of equity capital are:
- It does not have to be repaid like a loan does.
- It guarantees the investor a voice in the operation of the business and a percentage of any
future earnings.
Some common sources are
1. Personal Savings – This is money that the entrepreneur saves.

It is the most common source of equity funds/capital. It gives absolute control over the
business operation. It offers the least ability to accumulate capital. As a general rule, the
entrepreneur should expect to provide at least half of the start-up funds in a form of equity
capital
2. Friends, Relatives and Angles
The entrepreneur should treat all loans and investments in a businesslike manner, no matter
how close the friendship or family relationship. It can avoid many problems down the line.
Angels are outsiders in search of tax shelters who are willing to invest money in
potentially profitable ventures.
3. Partners
Are those who contribute capital together and share profits or losses. There can be general
partners and limited partners
Advantages
a. Ability to raise large amounts of capital
b. Improved access for future financing
c. Improved corporate image

d. Attracting and retaining key employees
The disadvantages include
a. Dilution of founders ownership
b. Loss of privacy
Debt capital/Financing
Debt financing involves the funds that the entrepreneur has borrowed and must repay with interest.
Sources of Debt capital
Not all of the sources of debt capital are equally favorable to the entrepreneur. Therefore, the
entrepreneur should understand the various sources and their characteristics in order to increase the
chance of obtaining a loan.
1. Commercial Banks
They are the very heart of the financial market, providing the greatest number and variety of
loans. They are second only to entrepreneurs personal savings as a source of capital for launching
business.
Types of loans granted a.
Short-term Loans
They are used to replenish the working capital amount to finance the purchase of more
inventories, boost output, finance credit sales to customers or take advantage of cash
discounts.
b. Intermediate and Long-term Loans
They are used to increase fixed and growth capital balances. It is granted for starting a
business, constructing a plant, purchasing real estate and equipment, and other long-term
investments. Loan repayments are normally made monthly or quarterly.
c. Installment Loans
Loans repayable on periodical payments of equal amount until the loan are fully covered.

2. Commercial Finance Companies:
They are institutions which finance consumers through companies. They lend to companies so
that they can sell on credit to consumers. But they do not directly finance consumers.
3. Savings and loan associations:
Are depository institutions established to encourage thrift among the public and create loanable
money to small businesspersons.
4. Insurance companies
They take the risks associated with doing business. Besides, they give a financial guarantee to
business persons to undertake a business.
1.4 Buying versus Starting a Business
A firm can obtain new products in two ways. One is through acquisition buying a whole company,
a patent, or a license to produce someone else’s product. The other is through new product
development. By new products, we mean original products, product improvements, products
modifications or new brands that the firm develops through its own R&D endeavors. Three most
common reasons why entrepreneurs buy an existing business instead of over creating a new one:
a. Buying an existing business reduces the uncertainties involves in launching and entirely new
venture.
b. The buyer of an existing business typically acquires their personnel, inventories physical
facilities, established banking connections and ongoing relationship with trade suppliers.
c. Ongoing business may become available at what seems to be a low price.

CHAPTER FIVE
GROWING THE NEW VENTURE
1.1 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.
1.2 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

1.3 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
1.1. 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.

1. 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.
2. Evaluating and determining the frequency of occurrence and severity or magnitude of
possible losses due to anticipated risks.
3. 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 Risk financing techniques (paying for the loss if
through risk presentation or avoidances) risk happens)
Risk Prevention (control) Risk avoidance Risk Retention Insurance/transfer

(selfinsurance)

- Abandoning activities - Allocate money and Buy insurance

which have high risk pay for or recover the policy and transfer
frequency and loss if risk happens. the risk to
severity. Eg. Avoiding specialized
construction in rift insurance
- This technique is
valley or flood area companies. This
appropriate when loss
method is
is predictable,
appropriate when
- Thus technique is frequency and severity
severity is high and
appropriate when or risks are low.
frequency is low.
frequency and severity
are high.
4. 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.
5. 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.
1.2. 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 to losses or any other bad consequences such as bodily or property
damage to the party (someone 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:
a. 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.
b. 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.
1.3. 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:
1. 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.
2. Definition of key words and phrases in the policy document
3. 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.
4. 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.
5. Conditions or provisions that quality or place limitation on the insurer’s promise
6. 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.
1. 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.
2. 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.

3. The loss need to be accidental and un international. I.e., insurers do not pay for the losses
intentionally caused by the insured.
4. Calculable chance of loss: i.e. the insurer must be able to calculate the average frequency
and severity of anticipated future losses.
5. The expected loss must be financially serious and the premium needs to be economically
feasible to the insured.
6. 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:
1. 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
2. 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.
3. 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.
4. 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.
5. 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.

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1 [HARAMAYA INSTITUTE OF TECHNOLOGY] [2021]

THE ENTREPRENEUR AND THE ENTREPRENEURIAL VENTURE

Main objectives of the chapter

 To define what entrepreneur and its characteristics.

 To define entrepreneurship and its main features.

 To distinguish between entrepreneur and entrepreneurship.

 To identify the conceptual framework/model of entrepreneurship and its contribution to the

1.2 Entrepreneurs and entrepreneurship

Mechanical Engineering Department By-Yared W.

1.3 Innovative Vs Adaptive Entrepreneur

Mechanical Engineering Department By-Yared W.

A common stereotype of the entrepreneur emphasizes such characteristics:

1. Need for achievement:

 Harvard psychologist McClelland discovered a positive correlation between the

Mechanical Engineering Department By-Yared W.

 Innovation activity is a hallmark of entrepreneurship, but not necessarily of the

2. Improvement in per capital income:

4. Balanced regional development:

5. Improvement in living standards:

7. Backward and forward linkage:

10. Imitating role

Mechanical Engineering Department By-Yared W.

Success Factors of Entrepreneurs

4. Business Ideology: from an entrepreneur’s perspective, every venture has an ideology or

The Concept of Entrepreneurship:

Mechanical Engineering Department By-Yared W.

 Fundamentally, entrepreneurship is a human creative act. It involves finding personal energy

Nature and Characteristics of entrepreneurship:

The distinctive features of entrepreneurship are summarized as below:

1. Innovative functions: Entrepreneurship is an innovative function as it involves doing things

2. Function of risk bearing: Risk is an inherent and inseparable element of entrepreneurship.

3. A function of high achievement

4. Economic activity: Entrepreneurship is primarily an economic function because it involves

Mechanical Engineering Department By-Yared W.

6. An organizing function: An entrepreneur brings together various factors of production. He

Role of Entrepreneurship in Society and Economic Development:

 Entrepreneurship plays a vital role in economic development. Entrepreneurs serve as the

 Investment in Productive Assets- A business needs capital investments to create productive

Mechanical Engineering Department By-Yared W.

Deadly Mistakes of Entrepreneurship:

1.2 The entrepreneur as an Individual, Creativity and Innovation

Innovation = Invention + Commercialization

The innovation process

“Management of the process is crucial “

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 taking the initiative

 being highly competitive

 Knowledge consists of a set or body of information stored, which may be recalled at an

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 An inventor creates something new.

 Reap impressive profits

 Feeling of freedom and independence

 Providing jobs and benefits to others (investors, suppliers, bankers,

 Always concerned about the business

 Needs high energy

 Sacrifices other important aspects of life

 Limited social life

 Not much time with family and friends

 Risk of losing your entire investment

 Lower quality of life until the business gets established

Mechanical Engineering Department By-Yared W.

Entrepreneurs discover an entrepreneurial opportunity when they find a compelling solution to

Types of Business Planning:

Effective entrepreneurial planning consists of: