Entrepreneurship For Engneering

WOLKITE UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
ENTREPRENEURSHIP FOR ENGINEERS MODULE (CENG 5211)
A COURSE MATERIAL PREPARED FOR SUMMER STUDENTS
Written By: 1. Mr. Samuel Gemechu (MBA)

2. Mr. Alemayehu Takele (MBA)
Edited by: Mr. Mekonnen Mulugeta (MBA)
Wolkite University-Ethiopia
August; 2017
TABLE OF CONTENTS
CHAPTER: ONE
FUNDAMENTALS OF ENTREPRENEURSHIP page
Section: 1. Entrepreneurship and the Entrepreneur…………………………………………………1
Section1.1: Evolution of Entrepreneurship………………………………………………………….1
Section1.2: Entrepreneurship Defined……………………………………………………………….2
Section: 1. 3: Concept of the Entrepreneur…………………………………………………………..3
Section: 1.4.The Relationship between Entrepreneurship and Entrepreneur……………………….5
Section: 1.5: Distinction Between Entrepreneur and Manager……………………………………....6
Section: 1.6: Types of Entrepreneurship……………………………………………………………..7
Section: 1.7: Characteristics of Entrepreneur………………………………………………………..8
Section: 1.8. Functions of an Entrepreneur…………………………………………………………10
Section: 1. 9: Charms of Being an Entrepreneur…………………………………………………...12
Section 1.10: Entrepreneurship, Creativity & Innovation…………………………………………..13
Section 2: The Role of Entrepreneurship in Economic Development…………………………….15
CHAPTER: TWO
MICRO AND SMALL ENTERPRISES
Section 1: Nature of Micro and Small Enterprises ………………………………………...19
Section 1.1: Definitions of Micro and Small Enterprises………………………………….19
Section 1.2: Importance of Micro and Small Enterprises…………………………………21
Section 1.3: Small Business Failure Factors……………………………………………….24
Section 1.4: Characteristics of Micro and Small Enterprises in Ethiopia…………………27
Section 1.5: Problems in the Ethiopian Small Business Industry…………………………28
Section 2: Economic, social and political aspects of small business………………………31
Section 3: Setting a Small Business……………………………………………………….33
Section 3.1: Steps in Setting a Small Business…………………………………………….34
CHAPTER THREE:
PREPARING A BUSINESS PLAN AND DEVELOP BUSINESS IDEA
Section 1: Idea Generation………………………………………………………………………….39
Section 2: Identifying and Assessing Business Opportunities……………………………………44
Section 3: Nature of a Business Plan and its components………………………………………..49
CHAPTER: FOUR
PRODUCT AND SERVICE CONCEPT
Section 1: New Product Development Process……………………………………………………..73

Section 2: Product Life Cycle………………………………………………………………………79
Section 3: Marketing Mix at Different Phase………………………………………………………83
Section 4: Product or Service Protection…………………………………………………………84
CHAPTER: FIVE
MARKETING AND UNIQUE MARKETING ISSUES
Section1: Marketing, market and marketing Information………………………………………….92
Section2: Competition Analyzing ………………………………………………………………...105
Section 3: Selecting a Business Location…………………………………………………………113
Section 4: Major Decisions in International Marketing………………………………………….116
CHAPTER: SIX
ORGANIZING AND FINANCING THE NEW VENTURE
Section1: Entrepreneurial Team and Business Formation………………………………………...122
Section2: Common Source of Financing………………………………………………………….126
Section 2.1: Equity Financing……………………………………………………………………..128
Section2.2: Debt Financing………………………………………………………………………..133
CHAPTER: SEVEN
LEGAL FORMS OF BUSINESS OWNERSHIP
Section1: Consideration for the Choice of the Form of Business Organization ………………….139
Section2: Forms of Business Ownership…………………………………………………………140
Section2.1. Sole Proprietorship…………………………………………………………………..141
Section2.2. Partnership……………………………………………………………………………143
Section2.3. Corporation…………………………………………………………………………..149
Section2.4. Joint Ventures………………………………………………………………………...153
Section3. Other Forms of Organizations………………………………………………………….155
Section3.1. Co-operative…………………………………………………………………………..155
CHAPTER: EIGHT
ENTREPRENUERIAL FIRM GROWTH STRATEGIES
Section: 1. Type of Firm Growth Strategies………………………………………………………162

Section 1.1: Exporting……………………………………………………………………………..162
Section1.2: Licensing……………………………………………………………………………...165
Section1.3: Joint-venture………………………………………………………………………….167
Section 1.4: Franchising…………………………………………………………………………..170
Section1.5: Strategic Alliance…………………………………………………………………….171
Section 1.6: Mergers and Acquisition……………………………………………………………172
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 Course assignments …………………………………………………………***

 Answer key for Self- Assessment Questions at end of Chapters……………………..***
 References ………………………………………………………………..…***
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Course Introduction
Dear students, entrepreneurship and enterprise Development is course intended to introduce you
to the world/concept of entrepreneurship. Entrepreneurship is increasingly being recognized as
an important element in the broader efforts to tackle the global youth employment challenge.
National labor markets absorptive capacities in the majority of developing economies are far
from able to provide decent and productive employment opportunities.
Job creation depends in large part upon the initiation and expansion of small businesses.
Entrepreneurs have the ability to spark new ideas and develop new products and services that
create new businesses, which in turn create the need for new jobs. Most economic development
programmers’ designed to stimulate new job opportunities have been aimed at a relatively few
large corporations. However, it is the thousands of anonymous smaller firms, which employ
fewer than 20 employees, that are the primary job providers in urban areas, and they also provide
a major share of new jobs in rural areas as well.
An important aspect of economic growth in any country is the key individuals who promote
change and initiate development activities. These persons may be called entrepreneurs because
they have the ability to identify needs within their environment, gather appropriate resources and
implement action to satisfy these needs. The activities of most entrepreneurs are oriented toward
the immediate environment in which they live (community) and work (either as employees or
employers). If the entrepreneurs prosper, the communities in which they operate will also
prosper.
The course consists of eight chapters: fundamentals of Entrepreneurship, micro and small
enterprise, , preparing a business plan and Business Idea, Marketing and Unique marketing
issues, forms of business ownership, and source of finance for Entrepreneurial firms and
Entrepreneurial firm growth strategies are the chapters included in course.
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Course objectives
Upon completion of this course, Students be able to:
 Differentiate the concepts of Entrepreneurship and Entrepreneurs
 Understand the role of Entrepreneurship for an economy and society
 Define the concept of micro and small business in Ethiopian context
 Enlist the contribution of micro and small businesses
 Define a business opportunity
 Know the techniques of idea generation
 Know the components of business plan and Write a sound business plan
 Identify the legal forms of business ownership
 Characterize the different source of business financing
 Understand the role of marketing in Entrepreneurship
 Identify the different entrepreneurial firm growth strategies
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CHAPTER: ONE
Fundamentals of Entrepreneurship
Introduction
Dear students, Entrepreneurship is an emerging multi-disciplinary course in the field of
management. It is a way of thinking in the direction of socio – economic development. All
the wonders of this contemporary world in the area of communication, Engineering,
medicine and others that makes life easier are the result of entrepreneurship. Dear students,
Chapter one of this module is organized in the manner that it conveys comprehensive
understanding about entrepreneurship and enterprise development. The chapter organized
into two sections. Section one details the basic nature of entrepreneurship, the entrepreneur,
the function and characteristic of entrepreneur. Finally section two provides information
about the role of entrepreneurship for economic development.
Learning Objectives:
Upon completion of this chapter students are able to:
 Explain the essence of entrepreneurship from different scholars points of view
 Differentiate the concept of entrepreneurship and entrepreneur
 List the characteristics of successful entrepreneur
 Jot down the rewards and penalties of becoming entrepreneur
 Briefly describe the role of entrepreneurship for an economy
Section: 1. Entrepreneurship and the Entrepreneur

Section overview
Dear students, you are well- come to section one of chapter. This section is going discusses
evolution of entrepreneurship, the definition of entrepreneurship and the entrepreneur.
Section1.1: Evolution of Entrepreneurship
? Dear student, when do you thing the idea of entrepreneurship commenced

The word ‘entrepreneurship’ is derived from French word ‘Entreprendre’ which mean
‘undertaking.’ The word designates the process of organizing of musical or other
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entertainments. Later in 16th century, entrepreneurship extended to cover all activities of
civil engineering. Therefore, at that time entrepreneurship was conceptualized as the all
activities civil engineering. Then after in 17th century, Richard Cantillon, an Irishman
living in France first coined term entrepreneurship to economic activities. According to
Cantillon, the economic perspective view of entrepreneurship was the activity of buying a
certain product at certain price with a view to sell it at uncertain price. Keeping on the
evolution of the concept of entrepreneurship in such a manner, Schumpeter opine that
entrepreneurship as the way of thinking that results rewarding change. Since
entrepreneurship is conceptualized as the way of thinking and scholars will have different
view of it, the evolution of entrepreneurship will go on.
Section1.2: Entrepreneurship Defined

Entrepreneurship is an elusive concept. The concept of entrepreneurship has been a subject of
much debate and is defined differently by different authors. Some of the definitions given by
different scholars are presented bellow.
 A.H. Cole has defined entrepreneurship as “The purposeful activity of an individual or

group of associated individuals, undertaken to initiate, maintain or earn profit by production
and distribution of economic goods and services”.
 According to Heggins “Entrepreneurship is meant the function of seeking investment
and production opportunity, organizing an enterprise to undertake a new production process,
raising capital, hiring labor, arranging the supply of raw materials and selecting top managers
of day-to-day operations.
 According to Joseph A Schempeter entrepreneurship is essentially a creative activity
that consists of doing things as are not generally done in ordinary course of business.
 Entrepreurship can also be defined as the attempt to create value through recognition
of business opportunity, the management of risk taking appropriate to the opportunity and
through the communicative and management skills to mobilize human, financial and material
resources necessary to bring a project to fruition.
The various definitions of entrepreneurship carry two basic elements of entrepreneurship
namely innovation and risk-bearing.
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Innovation: Innovation is doing something new or something different. Entrepreneurs
constantly look out to do something different and unique to meet the changing requirements
of the customers. Entrepreneurs need not be necessarily inventors of new products or new
methods of production or service, but may possess the ability of making use of the inventions
for their enterprises. Hence entrepreneurship needs to apply inventions on a continuous basis
to meet customers changing demands for products.
Risk bearing: Giving birth to a new enterprise involves risk. Doing something new and
different is also risky. The enterprise may earn profit or incur loss, which depends on various
factors like changing customer preferences, increased competition, shortage or raw materials
etc. An entrepreneur needs to be bold enough to assume the risk involved and hence an
entrepreneur is a risk-bearer not risk-avoider. This risk-bearing ability keeps one to try on
and on which ultimately makes to succeed. The Japanese proverb “fall seven times, stand
up eight” applied to entrepreneur.
 Self test Activity 1.1

1. Explain the evolution of entrepreneurship
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2. Define entrepreneurship from different scholar’s points of view perspective
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Section: 1. 3: Concept of the Entrepreneur

The above section dealt the essence of entrepreneurship and by now the essence of
entrepreneurship seems clear. The following section describes what is meant Entrepreneur.
So Who is an entrepreneur? The definitions given by various scholars are presented bellow.
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 P.H. Knight: Defined Entrepreneurs are specialized group of persons who bear
uncertainty. Here, uncertainty is defined as risk, which cannot be insured against and is
incalculable.
 According to J Baptis Say: An entrepreneur is the one who combines the land of one,
the labor of another and capital of yet another, and thus produces a product. By selling the
product in the market, he pays interest on capital, rent on land and wages to laborers and
what remains the profit- reward for the entrepreneur. This concept of entrepreneur is
associated with the functions of coordination, organization and supervision.
Joseph A SchumPeter in 1934 Defined: An entrepreneur as a dynamic change agent who
brought Economic development by instituting new combinations of factors of production.
According to SchumPeter the introduction of new combination may occur in any of the
following forms.
 Introduction of new product in the market.
 Use of new method of production, which is not yet tested.
 Opening of new market.
 Discovery of new source of raw materials.
 Bringing out of new form of organization.
Schum Peter also made distinction between inventor and innovator. An inventor is one who
discovers new methods and new materials. An innovator utilizes inventions and discovers in
order to make new combinations. Here the concept of entrepreneur is associated with three
elements risk bearing, organizing and innovating. Hence an entrepreneur can be also defined
as a person who tries to create something new, organizes production and undertakes risks and
handles economic uncertainty involved in enterprise.
Some more important definitions of entrepreneur

 According to F.A.Walker: An Entrepreneur is one who is endowed with more than
average capacities in the task of organizing and coordinating the factors of production, i.e.
land, labour capital and enterprises.
 Marx regarded entrepreneur as social parasite.
 Peter F. Drucker defines an entrepreneur as one who always searches for change,
responds to it and exploits it as an opportunity. According to Peter F. Drucker innovation is
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the basic tool of entrepreneurs, the means by which they exploit change as an opportunity for
a different business.
 According to E.E.Hagen: An entrepreneur is an economic man who tries to maximize
profits by innovation
 According to Mark Casson: An entrepreneur is a person who specializes in taking
judgmental decision about the coordination of scarce resources.
 Frank Young: defined entrepreneur as a change agent.
 According to Max Weber: Entrepreneurs are a product of particular social condition in
which they are brought up and it is the society which shapes individuals as entrepreneurs.
 International Labour Organization (ILO): defines entrepreneurs as those people who
have the ability to see and evaluate business opportunities, together with the necessary
resources to take advantage of them and to initiate appropriate action to ensure success.
 Akhouri describes entrepreneur as a character who combines innovativeness, readiness
to take risk, sensing opportunities, identifying and mobilizing potential resources, concern for
excellence, and who is persistent in achieving the goal.
So again, who is an entrepreneur? By synthesizing the above listed definitions one can define
an entrepreneur is the one who translate an idea into action in the manner that brought
rewarding economic, social and political change. Therefore, the definition is given by Frank
Young entrepreneurs are change agents is a binding Definition of what is meant by an
entrepreneur.
Section: 1.4: The Relationship between Entrepreneurship and Entrepreneur

Based on the above explanation, it is simple to understand the distinction between
Entrepreneurship and Entrepreneur. Simply put, Entrepreneurship is the process of
translating an idea into viable business, whereas an entrepreneur might be an individual,
groups or an organization that can able to translate an idea into a viable business. Hence, an
entrepreneur is the practitioner of entrepreneurship.Table1.1 bellow details the distinction
between Entrepreneurship and Entrepreneur.
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Table 1.1: Relationships between entrepreneur and entrepreneurship
Entrepreneur Entrepreneurship
Person Process
Organizer Organization
Innovator Innovation
Risk-bearer Risk-bearing
Motivator Motivation
Creator Creation
Visualizes Vision
Leader Leading
Imitator Imitation
(Source: Partial adaptation of literature)

1. Define what it mean entrepreneur
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2. Differentiate the concept of entrepreneurship and entrepreneur.
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Section: 1.5: Distinction Between Entrepreneur and Manager

Often the two terms namely entrepreneur and manager are considered as synonym. However the
two give different meaning. The major points of distinction between the two are presented in
table 1.1.
Table 1.2: Distinction between entrepreneur and manager
Points Entrepreneur Manager

1. Motive The main motive of an entrepreneur Main motive of a manager is to render
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is to start a venture for his personal services in an enterprise already set by
gratification someone else.
2. Status Owner Servant
3. Risk Assumes risk and uncertainty Manager does not bear any risk involved
in enterprise.
4. Rewards Profits, which are highly uncertain Salary which is certain and fixed.
and not fixed
5. Innovation Entrepreneur himself thinks over A manager simply executes plans
what and how to produce goods to prepared by the entrepreneur.
meet the changing needs of the
customers. Hence he acts as
innovator / change agent.
6. Qualification An entrepreneur needs to possess A manager needs to possess distinct
qualities and qualifications like high qualifications in terms of sound
achievement. knowledge in management theory and
motive, originality in thinking, practice.
foresight, riskbearing
ability etc.
Section: 1.6: Types of Entrepreneurship

There are different kinds of entrepreneurs based on the criteria used to classify entrepreneurship
1. Types of entrepreneurship based on Source of capital
Entrepreneurship can be classified in to two as private entrepreneurship and collective
entrepreneurship.
a. Private entrepreneurship is carried out by an individual on the basis of her own
property or on the basis of property such as loan that is acquired and used on legal
grounds.
b. Collective entrepreneurship is carried out by two or more individuals on the basis of
collective property or on the basis loan that is acquired and used on legal grounds.
2. Types of entrepreneurship based on Idea generation
According to Lester C. Thurow, there are three types of entrepreneurship based on idea
generation- technological, geographical and sociological.
All three types of entrepreneurship are important. But they require different kinds of people and
different support mechanisms. These three types of entrepreneurship-technological, geographical
and sociological are discussed in broad as below.
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a. A technological entrepreneur invents a new technology to produce new products or
new processes for producing old products. A technological entrepreneur brings a new
technology to market in the form of new products or new processes for producing old
products.
b. A geographical entrepreneur moves technology, the products and processes that go
with it from one place to another, usually from the developed world to the developing
world. A geographical entrepreneur moves technology and the products and processes
that go with it from one place to another. Usually this means moving a technology from
the developed world to the underdeveloped world.
c. A sociological entrepreneur finds a new situation in which to sell an old product. A
sociological entrepreneur finds a new context in which to sell an old product.
Sociological entrepreneurship requires a willingness to experiment with different sociologies and
to see before others that which will later become obvious.
3. Types of entrepreneurship based on Reasons for start-up
Entrepreneurship can be classified into opportunity driven and necessity-driven based on the
drive that led the entrepreneur to start the business.
a. Opportunity-driven entrepreneurs start a company because they see clear market
opportunities to exploit.
b. Necessity-driven entrepreneur goes in to business to create self-employment and her
primary concern is survival.
Generally, opportunity-driven entrepreneurs are more growth-oriented than necessity-driven

entrepreneurs.
Section: 1.7: Characteristics of Entrepreneur

Entrepreneur is a person of telescopic faculty drive and talent who identify and examine
business
Opportunities and promptly seizes for exploitation. Successful Entrepreneurs possess the
following Personal characteristics:
 Initiative: Does things before asked for or forced to by events and acts to extend the
business to new areas, products or services.
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 Perceiving opportunities: Identifies business opportunities and mobilizes necessary
resources to make good an opportunity.
 Persistence: Takes repeated or different actions to overcome obstacles.
 Information gathering: Consults experts for business and technical advice, Seeks
information of client or supplier’s needs. Personally undertakes market research and make
use of personal contacts or information networks to obtain useful information.
 Concern for quality work: States desire to produce or sell a better quality product or
service.
 Commitment: Makes a personal sacrifice or expands extraordinary effort to complete a
job, accepts full responsibility in completing a job contract on schedule, pitches in with
workers or work in their place to get the job done and shows utmost concern to satisfy the
customer.
 Efficiency orientation: Finds ways and means to do things faster, better and
economically.
 Planning: Various inter-related jobs are synchronized according to plan.
 Problem solving: Conceives new ideas and finds innovative solutions.
 Self-confidence: Makes decisions on his/her own and stick to it in spite of initial
setbacks.
 Experience: Possesses technical expertise in areas of business, finance, marketing and
other related disciplines
 Self- awareness: Self-critical aware of personal limitations but tries to improve upon by
learning from his past mistakes or experiences of others and is never complacent with
success.
 Persuasion: Persuades customers and financiers to patronize his business.
 Use of influence strategies. Develops business contacts, retains influential people as
agents and restricts dissemination of information in his possession.
 Assertiveness Instructs, reprimands or disciplines for failing to perform.
 Monitoring: Develops a reporting system to ensure that work is completed and quality
norms.
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 Credibility: Demonstrates honesty in dealing with employees, suppliers and customers
even if it means a loss of business.
 Concern for employee welfare: Expresses concern for employees by responding
promptly to their grievances.
 Impersonal relationship: Places long-term goodwill over short-term gain in a business
relationship.
 Expansion of capital base: Reinvests a greater portion of profits to expand capital of the
firm.
 Building product image: Concerned about the image of his products among consumers
and does everything possible to establish a niche for his products in the market.

List the unique personal characteristics of entrepreneurs
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Section: 1.8. Functions of an Entrepreneur

An Entrepreneur performs a number of functions right from the generation of idea up to the
establishment of an enterprise. An Entrepreneur also perceives business opportunities and
mobilizes resources like man, money, machines, materials and methods while he/she carryout
entrepreneurial functions. Anyway, the following are the main functions of an Entrepreneur.
 Idea generation: The first and the most important function of an Entrepreneur is idea
generation. Idea generation implies product selection and project identification. Idea
generation is possible through vision, insight, keen observation, education, experience and
exposure. This needs scanning of business environment and market survey.
 Determination of business objectives: Entrepreneur has to state and lay down the
business objectives. Objectives should be spelt out in clear terms. The Entrepreneur must be
clear about the nature and type of business.
 Rising of funds: All the activities of the business depend upon the finance and hence
financing is an important function of an Entrepreneur. An Entrepreneur can raise the fund
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from internal source as well as external source. He/she should be aware of different sources
of funds. He should also have complete knowledge of government sponsored schemes in
which he/she can get government assistance in the form of seed capital, fixed and working
capital for his/her business.
 Procurement of machines and materials: Another important function of an
Entrepreneur is to procure raw materials and machines. Entrepreneur has to identify cheap and
regular sources of raw materials which will help him to reduce the cost of production and
face competition boldly. While procuring machineries he should specify the technical details
and the capacity. He should consider the warranty, after sales service facilities etc before
procuring machineries.
 Market research: Market research is the systematic collection of data regarding the
product which the Entrepreneur wants to manufacture. Entrepreneur has to undertake market
research persistently to know the details of the intending product, i.e. the demand for the
product, size of the market/customers, the supply of the product, competition, the price of the
product etc.
 Determining form of enterprise: Entrepreneur has to determine form of enterprise
depending upon the nature of the product, volume of investment etc. The forms of ownership
are sole proprietorship, partnership, Joint Stock Company, co-operative society etc.
Determination of ownership right is essential on the part of the entrepreneur to acquire legal
title to assets.
 Recruitment of manpower: To carry out this function an Entrepreneur has to perform
the following activities.
 Estimating man power requirement for short term and long term.
 Laying down the selection procedure.
 Designing scheme of compensation.
 Laying down the service rules.
 Designing mechanism for training and development.
 Implementation of the project: Entrepreneur has to develop schedule and action plan
for the implementation of the project. The project must be implemented in a time bound
manner. All the activities from the conception stage to the commissioning stage are to be
accomplished by him in accordance with the implementation schedule to avoid cost and time
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overrun. He has to organize various resources and coordinate various activities. This
implementation of the project is an important function of the Entrepreneur.

Describe the functions of an entrepreneur
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Section: 1. 9: Charms of Being an Entrepreneur

The most exciting part of Entrepreneurship is that it make one own master. When you are an
employee, you work for others according to their plans, whims and finances. In an
Entrepreneurship, it is you who set the goal, plan the action and reap the satisfaction and
rewards of having achieved the goal.
Why do people become an Entrepreneur?
 To be own boss and boss to other people and make decisions that are crucial to the
business success or failure.
 To make money for one- self rather than for someone else.
 To participate in every aspect of running a business and learn and gain experience in a
variety of disciplines.
 To have the chance to work directly with customers.
 To have the personal satisfaction of creating and running a successful business.
 To be able to work in a field of area that they really enjoy.
 To have the chance to build retirement value.
Rewards for an Entrepreneur

 Freedom to work.
 Satisfaction of being own boss.
 Power to do things as he likes.
 Rewards of ownership and retirement assurance.
 Respect of family and friends.
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Penalties for an Entrepreneur
 Constraints of financiers, laborers, customers, suppliers, and debtors curtail Freedom.
 Frustration due to availability of limited capital and other resources.
 Social and family life is affected due to hard long hours of working.
 Frustration due to non-achievement of full objectives.
 Risk of failure.

1. Explain why people become an Entrepreneur?
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2. List the Penalties of becoming an Entrepreneur
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Section 1.10: Entrepreneurship, Creativity & Innovation

Entrepreneurship is the result of a disciplined, systematic process of applying creativity and
innovation to needs and opportunities in the marketplace.
Creativity is marked by the ability to create, bring in to existence, to invent into a new form, to
produce through imaginative skill, to make or bring into existence something new. Creativity is
the ability to develop new ideas and discover new ways of looking at problems and
opportunities.
Creativity is not only the ability to create out of nothing but the ability to generate new ideas
combining, changing, or reapplying existing ideas. It is a process introducing an idea or
opportunity that is novel and useful, frequently derived from making connection among distinct
ideas or opportunities.
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Creativity is also an attitude, the ability to accept change and newness, willingness to play with
idea and possibilities, a flexibility of outlook, the habit of enjoying the good, while looking for
ways to improve it. Creativity can be taught. Research indicates that anyone can be creative.
Each person can be taught techniques and behaviors that can help them generate more ideas.
Creativity is at the heart of entrepreneurship, enabling entirely new ways of thinking and
working.
Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an
opportunity for a different business or a different service.
Innovation is the process of bringing the best ideas into reality, which triggers a creative idea,
which generates a series of innovative events. Innovation is the ability to apply creative solutions
to problems and opportunities that enhance or enrich peoples’ lives. One entrepreneur explains,
“Creativity is only useful if it is channeled and directed.” It is implementation of a creative idea or
opportunity leading to profitable and effective outcomes.
Innovation must be a constant process because most ideas don’t work and most innovations fail.
Innovation is “the intersection of invention and insight, leading to the creation of social and
economic value.”
Innovation is one of the underlying dimensions of entrepreneurship. It is a key function in the

entrepreneurial process. Without innovation, an entrepreneur cannot survive in the modern
competitive business world. Entrepreneurship is a creative and innovative response to the
environment and an ability to recognize, initiate and exploit an economic opportunity. An
entrepreneur is an innovator who introduces who introduces something new in an economy.
As per the Schumpeter’s view, a person becomes an entrepreneur only when he or she is engaged
in innovation .further, innovation is equal to competitive advantage. The entrepreneurs today
realize the need for innovation. Innovation adds value to the product. It is only through
innovation, the organizations can survive the increasing competition in the market place.
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Entrepreneurs identify opportunities, large or small, that no one else has noticed. Good
entrepreneurs also have the ability to apply that creativity—they can effectively marshal
resources to a single end. They have drive—a fervent belief in their ability to change the way
things are done, and the force of will and the passion to achieve success. They have a focus on
creating value—they want to do things better, faster, cheaper. And they take risks—breaking
rules, cutting across accepted boundaries, and going against the status quo.
Entrepreneurship drives innovation, competitiveness, job creation and economic growth. It

allows new/innovative ideas to turn into successful ventures in high-tech sectors and/or can
unlock the personal potential of disadvantaged people to create jobs for themselves and find a
better place in society.
Creativity, innovation, and entrepreneurship are related. Creativity has become a core business
skill, and entrepreneurs lead the way in developing and applying that skill. Successful
entrepreneurs come up with creative ideas and then find ways to make them work to solve a
problem or fill a need. In an ever-changing world, creativity and innovation are vital to a
company’s success and survival.
Section 2: The Role of Entrepreneurship in Economic Development
Section overview
Dear students, you are well- come to section two of chapter one. This section is going
discusses the role of entrepreneurship in economic development.
 Understand the role of entrepreneurship in economic development: Economic
development essentially means a process of upward change whereby the real per
capita income of a country increases for a long period of time. The economic history
of the presently developed countries, for example, USA and Japan tends to support
the facts that the economy is an effect for which the entrepreneurship is the cause.
The crucial role played by the entrepreneurs in the western countries has made the
people of underdeveloped countries conscious of the significance of entrepreneurship
15
in economic development. Therefore, entrepreneurship is a necessary dynamic force
for economic development. The important role that an entrepreneurship plays in the
economic development of an economy can be put in a more systematic manner as
follows:
 Entrepreneurship promotes capital formation by mobilizing the idle saving of the
public.
 It provides immediate large-scale employment. Thus it helps to reduce unemployment
in the country.
 It provides balanced regional development.
 It helps reduce the concentration of economic power.
 It stimulates the equitable redistribution of wealth, income and even political power
in the interest of the country.
 It encourages effective resources mobilization of capital and skill which might
otherwise remain unutilized and idle.
 It also induces backward and forward linkages which stimulated the process of
economic development in the country.
 It promotes country’s export trade i.e. an important ingredient for economic
development.

1. State the role of entrepreneurship for economic development.
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2. State the role of entrepreneurship for social development.
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 CHAPTER SUMMARY
 The word ‘entrepreneurship’ is derived from French word ‘Entreprendre’ which mean
‘undertaking.
 The economic perspective view of entrepreneurship was given by Richard Cantillon,
an Irishman in 17th century. According to Cantillon, entrepreneurship was the activity
of buying a certain product at certain price with a view to sell it at uncertain price.
 Now day’s entrepreneurship is defined as the process of translating an idea into a
viable business.
 The Entrepreneurship and Entrepreneur are different concepts. Simply put,
Entrepreneurship is the process of translating an idea into viable business, whereas an
entrepreneur might be an individual, groups or an organization that can able to
translate an idea into a viable business.
 Entrepreneurship results an integrated positive economic, social and political
change.
 Successful Entrepreneurs characteristics are by personal qualities like Imitativeness,
opportunities identification, Persistency, Efficiency orientation, Self-confidence and
many others that results success.
 An Entrepreneur performs a number of functions right from the generation of idea up
to the establishment of an enterprise. Idea generation, Determination of business
objectives, rising of funds, Procurement of machines and materials, Market research,
determining form of enterprise, recruitment of manpower, and Implementation of the
project are the major function of an Entrepreneur.
 Becoming an Entrepreneur does have its own pluses and minuses. Yet, wise
entrepreneur tempts exceeded the pluses from the minuses.
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 SELF – ASSESSMENT QUESTIONS
Instruction: The following subjective questions are raised to examine the overall students
understanding of chapter one- fundamentals of Entrepreneurship. Therefore, students are
expected to answer the questions after carefully studied the chapter.
Q1. Briefly explain the essence of entrepreneurship
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Q2. Discuss the Distinction between entrepreneurship and Enterprenuer
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Q3. Briefly describe the charms being an entrepreneur
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Q4. Enlist some functions performed by a successful Entrepreneur
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CHAPTER: TWO
Micro and Small Enterprises
Introduction
Dear students, we hope that in chapter one you got the fundamentals concepts of
entrepreneurship that stimulates your mind to be an entrepreneur. Now you are well-come to
chapter two of this module. Chapter two provides well organized information regarding
small and micro enterprises which are back bone of an economy and the host of
entrepreneurship. Dear students, In order to make the chapter easier to understand, the
chapter divided into three sections. Section one covers the basic natures of small and micro
enterprises. In this section, definitions of micro and small enterprises, importance of micro
and small enterprises, small business failure factors, characteristics of micro and small
enterprises in Ethiopia, problems in the Ethiopian small business industry are included.
Section two provides insight about the economic, social and political aspects of small and
micro enterprises. Finally, section three conveys regarding about setting a small business and
the procedures how to set small business.
At the end of this chapter, students should be able to:
 State nature of Micro and Small Enterprises
 Describe the economic, social and political aspects of small business
 Describe the steps in setting a small business
Section 1: Nature of Micro and Small Enterprises

Section overview
Dear students, you are well- come to section one of chapter two. This section details about
definition of micro and small scale enterprise, the importance of small business, micro
and small business failure factors , the characteristics of micro and small enterprises in
Ethiopia
Section 1.1: Definitions of Micro and Small Enterprises
19
? Dear student, what do you think in your mind about small and micro enterprises?
Small business is a business that is privately owned and operated, with a small number of
employees and relatively low volume of sales. Small businesses are normally privately
owned corporations, partnerships, or sole proprietorships. The legal definition of "small"
varies by country and by industry, ranging from fewer than 15 employees under the
Australian Fair Work Act 2009, 50 employees in the European Union, and fewer than 500
employees to qualify for many U.S. Small Business Administration programs. Small
businesses are common in many countries, depending on the economic system in operation.
“A 'small business' is a separate and distinct business entity, including cooperative enterprises
and non-governmental organizations, which is managed by one or more owners and which
predominantly carries on business in any sector or subsector of the economy.”
There is no universally accepted definition of MSEs both in Ethiopia and in the rest of the
world. Most of the time even definitions in other countries lack uniformity and usually reflect
the relative development of the respective economies (Beyene, 2000). And in the same way,
the definition employed in Ethiopia is also quite different from others defined. Thus, as it is
shown in the FeMSEDA (2011), the government of Ethiopia defined as:
MSE engaged in manufacturing Micro Enterprises are those business enterprises

engaging up to 5 persons including self-employment and with total assets not
exceeding Birr 200,000 and Small Enterprises are those business enterprises engaging
between 6 and 30 persons and with total assets of above Birr 200,000 and not
exceeding Birr 1.5million and MSE engaged in trade and service sector as Micro
Enterprises are those business enterprises engaging up to 5 persons including self-
employment and with total assets not exceeding Birr 50,000 and Small Enterprises are
those business enterprises engaging between 6 and 30 persons and with total assets of
above Birr 50,000 and not exceeding Birr 500,000.
Table 2:1. MSE Definitions Employed in Ethiopia--- defined both in terms of paid up
capital and number of workers.
20
Enterprise scale Sector Human Resource Total asset
Manufacturing ≤5 ≤ Br. 100,000
Micro enterprise Service ≤5 ≤ Br. 50,000
Manufacturing 6-30 ≤ Br. 1.5 million
Small enterprise Service 6-30 ≤ Br. 500,000
Medium enterprise Manufacturing Over 30 >1.5 million
Service Over 30 > Br. 500,000
Source: Micro and Small Enterprises Development Policy and Strategy of Ethiopia, (2011)
Here, the government of Ethiopia uses total assets and the number of employees and in both
definitions if one of the criteria is not fulfilled the governing criteria will be total asset and
the enterprise will be defined or categorized accordingly.
 Self test activity 2.1

Define different Micro and Small Enterprises scales in terms of paid up capital and number of
workers.
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Section 1.2: Importance of Micro and Small Enterprises
The role of small business is of decisive importance in any economy. Most countries define
small business, as an enterprise in terms of employment levels. The small business sector is
very important in most nations of the world as they offer the major economic advantages.
Therefore entrepreneurship is needed to encourage small business for the following
advantages;
 Source of new goods and services: The small businesses which owned and controlled by
the innovative entrepreneurs offers a wide scope for new product development. The
innovation of entrepreneurs to be competitive results in the improved goods and services
availability for the public.
21
 Self-empowerment: The businessmen who engage themselves in the small businesses
acquire increased status, improved lifestyle and the ability to control their own destiny. This
gives the self empowerment for the entrepreneurs who even sometimes disabled persons,
women, ex-convicts and unemployed etc.
 Employment generation: The small business sector can make significant contribution to
employment generation and also to rural industrialization, because of its low capital intensity
and high labor absorption nature.
 Growth potential: The small business industry is ideally suited to build on the strengths
of our traditional skills and knowledge by infusion of the technologies, capital and innovative
marketing practices. The opportunities for the small businesses are enormous due to various
reasons like extensive promotion and support by the government and its need of low
technical and managerial skills.
 Export contribution: Overall small business production contributes to the growth of

export trade and related business to the country and improves the foreign trade which would
result in foreign currency income.
 Flexibility: Small firms are better able to adapt to changing and sometimes disruptive
economic circumstances. Due to its flexibility, the sector is hovering to attract both
technology and funds to generate rapid growth and sustained process of technology up
gradation and quality improvement.
 Decentralization: Large enterprises are most concentrated in grown and big cities. Since
the small business units are located mostly in the rural belt these firms prevent the
concentration of power in a few hands. In addition, they also help in ensuring equitable
distribution of wealth.
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 Distribution of economic power: the equality argument implies that the income
generated from large number of small enterprises is distributed more widely in the
community as compared to income generated in a few large enterprises. The income benefit
to small enterprises is derived by a large population, while large enterprises encounter more
concentration of economic power.
 Mobilization of resources: The small enterprises are able to tap talent resources. In fact,
the growth of an entrepreneurial class requires a congenial environment. Small enterprises
provide that environment which encourages a growing network of feeder and complementary
relations among plants and firms. It is in this environment that latent talents of individual
entrepreneurs find self expression in localized innovations and cost saving measures.
 Optimal utilization of local resources: The wide spread dispersal of small businesses
also contributes to an effective and optimal utilization of local resources. This is augmented
by the fact that the use of traditional or conservative technologies by the small firms does not
require superior inputs. The servicing of local demands and markets by small business units
enables better utilization of local resources especially raw material which if transported
outside, will lead to drain of material from the country. Independence is another advantage of
owning a small business.

1. Explain how small and micro enterprises serve as optimal utilization of local resources
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2. Discuss how small and micro enterprises can decentralized an economy
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Section 1.3: Small Business Failure Factors
As far as the causes for the failure in small business industry are concerned, it cannot be
attributed to a single factor. In fact, it is an outcome of the cumulative effect of many factors
working simultaneously which may not be closely inter-related. The important courses fo
failure can be listed as given below;
 Mismanagement: Management must be intelligent, brilliantly capable, decisive,

innovative, very efficient and assuring. Comparatively management in small businesses is
inherently more difficult and complex duet to its nature of single management band. As a
result of this all areas of small business are not effectively managed. In most of the failed
small enterprises the management fails to take proper decisions on routine matters. Important
decisions regarding site selection, production process, promotion avenues, marketing
management etc are often ignored.
 Implementation delay: In cases of newly established small business, it often faces a

delay in the implementation of its plans. For example, a delay in the construction of the
building within the scheduled time, would lead to delay in the installation of plant and
machinery and consequently the working capital could not be used in time. Inability to
implement the contingency plan in time would in turn, delay the release of further
installations. Side by side, costs also shoot up and the demand projections become obsolete.
It is obvious that in such cases of sequential delays in implementation of plans, failure is
anticipated from the very initial stage of a project.
 Poor information system: Extremely poor information and reporting system is a normal
feature in small businesses where accounts, flow planning, costing, budget control,
breakdowns, sales revenues, financial statements, statement of chargeable current assets etc,
are not properly reported on a day-to-day basis. It shows the presence of intensely low level
of communication and information system.
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 Energy problem: Shortage and unavailability of power has done irreparable harm to most
of the small businesses. Especially in country like Ethiopia where the power source is depend
solely on the water resources the small business fail to flourish due to lack of enough power.
So a better managed power sector and energy policy is required to encourage small
entrepreneurs and to save the small businesses from falling sick due to this power shortage.
 Improper technology: Obsolete technology has been one of the major causes of failure in
small business units. Frequent breakdowns, inefficiency in machinery performances due to
inadequate maintenance, and delays in renovating or replacing the machinery are a normal
feature in these industries. The situation becomes worse when instead of using the funds for
depreciation or development rebates are diverted towards new and unrelated activities.
 Marketing: Small business generally adopts a traditional way of marketing where ‘more’
is regarded as ‘better’. If marketing places a continuous reliance on the promotion of material
consumption, it would lead to a prosperous stage of industrial growth small enterprises fail
mainly become sick mainly because of their inability to market their products for various
reasons such as poor quality of products, lack of market information, poor advertising,
obsolete technical back-ups, less competitive potentials, lack of professionalism, etc.
 Overtrading: The firms grow at a faster rate than they are able to finance from internally
generated cash flow and bank borrowings. The firm focuses only on sales, regardless of
whether or not, the same is profitable. Profit margins are reduced and unprofitable buyers are
wooed just to increase the unprofitable sales growth. There is also shortage of cash because
the unit’s sale, stock levels and general sales grows faster than their capital allows. A
business which tends to have such way of career is ensured of its failure.
 Competition: In the present liberalized atmosphere, the small units have to face intense
competition in the market. Those having greater price inelasticity of the product suffer more;
they generate fewer profits and have lower borrowing power. With scarce funds and lots of
25
competitors, the firms will not be able to invest much in the development of new products,
innovative marketing techniques, product promotions etc.
 Raw materials and cost of production: Cost of production depends on the availability of
raw material used in production. But, mostly due to shortage or poor quantity of raw
materials, cost acceleration makes the product less competitive. Further, shortage of raw
material leads to waste of productive capacity, which is loss for the production unit.
Entrepreneurs depend on intermediaries for arranging the required materials which further
inflate the cost and also they may provide inferior quality of raw material on the other
hand. These factors adversely affect the final product.
 Human resource: The availability of cheaper labor is abundant but the trained and skilled
personnel are more mandatory for the organizations. The most efficient use of the resources
largely depends upon the quality of the manpower employed. The business units
established in remote and least developed areas are likely to face the problem of skilled
manpower like qualified engineers, senior managers etc, who are at times not interested to
work in such remote locations.
In addition to these factors the other factors which is responsible for failure of the small
business firms are bad environmental conditions, pollutions, unreliable lighting system, etc.
in most of the small units, worker’s participation or consultation is not invited, there is a high
degree of gap of communication, absolutely no reward or recognition system and poor
delegation of authority and responsibility.

1. Identify small business failure factors
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2. Explain how mismanagement can be a cause for small business failure factors
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Section 1.4: Characteristics of Micro and Small Enterprises in Ethiopia

Like other developing countries, in Ethiopia MSE are informal sectors are the main source of
employment and income for vast number of people Solomon (2004). Many authors argued
that the largest private sector constitutes the MSE and the medium industries and created the
largest number of employment in the country Mulu (2007) and Rahael (2010). The
government of Ethiopia also gives greater emphasis for the development of MSE in its
strategy and policy formulation. In developing countries, the informal sector is a large source
of employment and income, particularly for the urban population. The informal employment,
outside of agriculture, is defined as employment that comprises of both self-employment, in
the informal enterprises, and wage employment, in the informal jobs, without secure
contracts, worker benefits, or social protection and represents nearly half or more of the total
non-agricultural employment in all regions of the developing world. In Ethiopia, about half
of the urban workforce is engaged in the informal sector and Addis Ababa nearly accounts
for about 40% of the total operators in micro enterprise activities (Rahael, 2010).
According to the 2003 CSA small scale manufacturing survey, over 89% of the informal
sector operators are concentrated in manufacturing, trade, hotel and restaurant activities. Of
the small scale manufacturing industries 85% are engaged in the manufacture of food,
fabricated metal furniture and old traditional cloths. The survey also revealed that the number
of people earning their livelihood from the informal sector activities and small scale
manufacturing industries is eight times larger than those engaged in the medium and large
scale industrial establishments. According to the FMSEDA (2010) the MSE sector is
characterized by highly diversified activities which can create job opportunities for a
substantial segment of the population. This indicates that the sector is a quick remedy for
unemployment problem. To curb unemployment and facilitate the environment for new job
seekers and self-employment a direct intervention and support of the government is crucial.
27
Hence, in order to channel the support facilities to this diversified sector, a definition is
needed to categorize the sector accordingly.
The MSE sector in Ethiopia appears to be fraught with a number of constraints that stifle its
rapid growth and development as a means of overcoming poverty and unemployment
(Zewde, 2002). According to Zewde, the main constraints that face MSE include inadequate
empirical research on MSEs, limited responses by financial institutions to MSEs, lack of
appropriate technology and related facilities, lack of strong organizations for entrepreneurs,
lack of co-ordination among Business Development Service (BDS) providers, lack of access
to land and premises, and lack of market access and market information. The Ethiopian
government also identifies major constraining factors of the sector (MOTI, 1997). These
include: inadequate marketing and production space; facilities, backward production
technology; lack of innovation; marketing problems; lack of information; poor input quality;
absence of intra and inter enterprises networks; and lack of financial capital. Similarly
Solomon (2004) identified the major constraints faced by small enterprises includes demand
problems, paucity of capital, equipment and technology, human and material inputs, rules
and regulations and institutional bottle necks.
Briefly discuss the characteristics of Ethiopian small business.
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Section 1.5: Problems in the Ethiopian Small Business Industry

Micro and small enterprises are faced with a myriad of constraints and challenges which can
be attributed to: insensitive macroeconomic and development policies, insensitive policies
objectives of government intervention programmes on MSE to enhance the upgrading of
such industries, lack of well-coordinated science and technology policy, limited human
28
resource development policies (HRD), lack of or limited governance policies at both MFI
and micro finance clients (MFC) levels, lack of or inadequate operational policies at both
MFI and MFC levels to enhance the credit facilities and eligibility criteria of MFI clients,
lack of policy or its focus on technology as an essential tool for poverty, ineffective strategic
plans to enhance the growth of micro and small scale enterprises, poor linkage between
stakeholders; micro or small enterprises, research and training, government and MFI, size
and terms of loan do not promote the acquisition of technology, cumbersome legal and
regulatory framework, competition with poor quality and cheap imports.
The small businesses and their revenue are not stable sometime up and sometime down, also
the needs of the Ethiopian people is very limited. Though there are considerable number of
problems exists with the small businesses it depends on the type of business activities,
market study and the feasibility study. Some of the identified problems of small businesses in
Ethiopia are listed here;
 Securing finance: One of the primary problems that could be given priority is the
difficulty in securing funds for the establishment and running of the small business
enterprises. The availability of finance is not quite enough for people with interest on the
small scale business industry. By lacking finance the economically poor people left with only
passion are refrained from making their ideas into profitable businesses. And also the
existing small businesses suffer from the non availability of enough finance to keep the
business running.
 Lack of management competence and exposure: The business activities are to be

guided and lead by competitive personnel to attain the desired financial and non financial
goals. Lack of enough exposure to the technology and complicated situations make the
available owners or managers incompetent for guiding the businesses towards the desired
target.
 Non availability of raw materials: One of the serious problems facing today’s small
entrepreneurs in Ethiopia is the lack of suitable raw materials. Though the foreign investment
29
and technology brings enough for the functioning of small businesses, the non availability of
raw materials in the desired quantity and quality keeps the capital and efficiency of the
workforce unused to the optimum level.
 Markets and distribution networks: Finding markets in the economy is another

obstacle for the development and growth of small business entrepreneurs. Though the
marketing activities are remaining in a vulnerable stage the distribution network is also not
found satisfactory. The infrastructures like roads and related facilities in developing areas
form a considerable hurdle for marketing and distribution activity.
 Limited government support: The amount of support provided to the small

entrepreneurs and women business population is not reached the required level. So the
encouragement for people to engage in small businesses remains to be challenging.
 Absence of technological know-how: One of the serious problems hinders the growth of
small business in Ethiopia is lack of education and especially in the technical knowhow.
Irrespective of the government steps in increasing the education and training in the entire
needed fields like agriculture, information technology, health, etc the problem of poor
knowledge still persists to become a major factor responsible for the wastage of resources.
This costs so much for the small businesses too, which operates with little capital.
 Widespread corruption: When the issue of corruption is raised in Ethiopia almost

always we mean the involvement of a private party that pays, or is ready to pay, money to a
public figure in order to gain advantage. This is generally referred to as private to public
corruption. Because this type of corruption is said to impede the development of markets,
drive away investment, increase the costs of doing business, and undermine the rule of law.
But private to private corruption which is in an undisguised or disguised form also present in
has not attracted the same interest or attention. Private to private corruption is as serious as
the private to public corruption.
30
List Problems facing the Ethiopian small business industry
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Section 2: Economic, social and political aspects of small business
Section overview
Dear students, you are well-come to section two of chapter two. This section provides
information about economic, social and political aspects of small businesses
Economic indicators show that unemployment still continues to rise to its highest level. All
major employment sectors continue to see the downfall in any industry as a result of global
finance crisis. But the one industry which can boost up the economically in a slow and steady
pace is small scale industry. It provides new jobs for the unemployed and educated, which in
turn reflect in the per capita income and the general economic growth. Small businesses
owners who have made it thus far through the economic downturn can rejoice with the
numbers shown in small business economic indicators. Keeping a pulse on these economic
indicators can help on adjusting and adapting the business strategy and make adjustments if
needed. The small business also gets the income distribution equally to all the people and
increases savings and debts. In the way around the credit availability and labor supply for the
small business is determined by the economic situation of the country.
Laws are made by politicians, who enact these laws based on the likelihood they will get re-
elected. The political environment is affected and effected by politicians who in turn are
influenced by and challenges in the economy like currency exchange rates, corporate activity,
and unemployment rates. The small business is often has a direct consequence with the
political parties in power. If the citizens are, are very concerned about safety issues, for
example, then there will be a lot of rules and regulations governing things such as
31
transportation safety, which will make it more expensive for some companies on various
costs. The rules and regulations created by the politicians have significant influence on the
cost of running a business and the way it can market products and services - for example in
Canada there are severe regulations about advertising for alcohol and tobacco.
The social norms vary from one community to other community. Anything that is all right for
one particular society may be is not acceptable for the other society. Decision to invest in a
certain location; community, region or state should consider to what degree the social
environment at a particular location is conducive for business development. Stability in a
community or state is a prerequisite for a good investment. The instability as created by
friction amongst the component of society which lead to violence such as burning and looting
of the assets is something to consider in making decision about investment. Therefore it is a
must for businessman to scrutinize the quality of relationship among groups within a society.
The issue of people’s relationship to nature reflects how people in a society treat the nature
and how they orient themselves. Businessmen who invest in the forestry industry should
consider to what degree people would accept the logging of trees as something acceptable to
their value.
The improvement of level of education and the availability of good job for people have given
the opportunity to people to move to a higher level of social class. Since there is a positive
correlation between the social class and the level of spending, the higher the social class, the
higher the demand for consumer goods, then there will be more opportunity available for
business. People’s lifestyle may be the source of good business, especially if the purchasing
power is high. The success of products in the market depend upon which target groups the
products aims to. Therefore, understanding of the social class and its lifestyle would
definitely help the success of business.

Describe the economic, social and political aspects of small businesses
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Section 3: Setting a Small Business

Section overview
Dear students, you are well-come to section three of chapter two. This section covers the
basic nature of Business idea and the steps of setting small business.
? Dear learners! What do you understand about a business idea?
 The business idea
All new ventures begin with an idea. A business idea is a concept which can be used for
commercial purposes. It typically centers on a commodity or service that can be sold for money,
according to a unique model. There are several methods for developing and testing a business
idea. The ability to come up with a business idea can be transformed into a viable business,
where ideas supported by feasibility and a business plan can then be sold to interested investors,
firms, and interested parties for a lump sum or a management contract, or as agreed. Business
ideas, if introduced at the right time, when demand for such service or a product introduced by
the idea is expected to surge, can lead to a very profitable business. Business ideas are always
available through different sources; however, it is the application applied on these ideas, and
timing makes all the difference in failure or success. There should be an idea to decide what
business to go in with. Some entrepreneurs choose their field because they already have
extensive experience with it. They have worked in a family business or held jobs with other
employers. Other entrepreneurs choose their field by a more formal decision making process.
They identify and weigh their options.
33
1 Define a sound business idea
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2 Identify the sources of a business idea
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Section 3.1: Steps in Setting a Small Business
Starting a business means to share rewards and risks and so it is a serious endeavor and
requires considerable preparation. Starting a small business requires determination,
motivation, and know-how. If an entrepreneur is going to accept the challenge, then he/she
must do everything he/she can to improve the chances for success. Though there is no
standard rule for the process of starting a new business unit, the following steps are most
common;
i. Identify Business Opportunity: Choosing what kind of business to start can be an

immobilizing task when confronted with the multitude of opportunities. It's important to
determine where the entrepreneur’s passion lays and to understand his personality type. Yet,
equally important is what skills he brings to the table for the selected business. Identifying
the opportunity and catch holding is itself a predominant skill of an entrepreneur.
ii. Build a Business Plan: For any start-ups, a business plan allows to gain a better
understanding of the industry structure, competitive landscape, and the capital requirements
of starting a small business. New business success requires a combination of knowing is to be
done and capitalizing on a good opportunity. Writing a business plan just makes good
business sense, which will then serve as a road map. It will give a sense of direction and help
to get on to the destination with a minimum of time, effort, and expense.
34
iii. Funding the business plan: To start a business, financing is more important in the
business. The journey of finding start up funds will be different for each individual. Some
start ups such as consulting, requires a few thousands to get a business card even, whereas a
retail store could need more. Finding the money needed for the business may come from
personal contacts, savings, bank loans, government agencies etc. but formally pooling the
finance resources is quite important to have a physical start for a small business.
iv. Business Structure selection: The structure of a business is not simple activity to make
decision. Whether to choose the partnership, or a sole proprietorship or any form of a
corporation will have an impact on the business liability, fund-ability as well as taxes due.
v. Legalization: The business has to accomplish the legal requirements to have a smooth
startup and for various aids and benefits from the government for the future. Starting a small
business requires a routine, yet necessary, paperwork and regulations. That is like choosing
the right name for the company, registering the business as per the prevailing rules and
regulations etc. The right business name will helps to distinguish the business from a sea of
bland competitors, providing the customers with a reason, and aid in the branding of the
company.
vi. Business Location: One of the multitudes of tasks in starting a business is locating a site
for the preferred business. A lot of variables should be taken into account if one should
decide to do a business in a certain location. There are many steps in office set up including
where to locate the office either in home or to hire a specific office space, buying the
necessary office equipment, designing your work space and getting supplies.
vii. Marketing: One major task in setting a new business is to market the goods or services
which is been produced or manufactured. Marketing the product or service of the business
involves finding the right customers and getting the right way to reach them, obtaining
feedback from the market, facing the available competition etc. Each step, executed in order,
builds a solid foundation for the steps that follow. By progressing in this manner, rather than
using the typical haphazard approach, you begin to gain the needed experience.
35
viii. Manage business to achieve preset goals: The last step in the process involves the
ongoing management of the started business. Getting a company started is only half the
battle. Once business is started, strong management tools and marketing skills are needed in
order to stay in business.
Enlist the steps in setting a small business.
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 CHAPTER SUMMARY
 There is no universally accepted definition of MSE in the world. Likewise definition
employed in Ethiopia is also quite different from others defined.
 According to FeMSEDA (2011), the government of Ethiopia defined as: MSE
engaged in manufacturing Micro Enterprises are those business enterprises engaging
up to 5 persons including self-employment and with total assets not exceeding Birr
200,000 and Small Enterprises are those business enterprises engaging between 6
and 30 persons and with total assets of above Birr 200,000 and not exceeding Birr
1.5million and MSE engaged in trade and service sector as Micro Enterprises are
those business enterprises engaging up to 5 persons including self-employment and
with total assets not exceeding Birr 50,000 and Small Enterprises are those business
enterprises engaging between 6 and 30 persons and with total assets of above Birr
50,000 and not exceeding Birr 500,000.
 The role of small business is of decisive importance in any economy. The following
are summary of the benefit of micro and small business for an economy:
 Source of new goods and services
 Self-empowerment
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 Employment generation
 Growth potential
 Export contribution
 Decentralization
 Distribution of economic power
 Mobilization of resources
 Optimal utilization of local resources
 Mismanagement, Implementation delay, Poor information system, Energy problem,

improper technology, poor Marketing, Overtrading, Competition, poor Raw
materials, cost of production, and unqualified Human resource are identified as the
major causes of micro and small business failure.
Instruction: The following subjective and objective questions are developed in order to
assess student’s internalization of the chapter. Hence students are requested to attempt all the
questions presented bellow.
Part- I: Choose the best answer among the alternatives

1. What is the base for the definition of micro and small enterprises employed in Ethiopia?
A. Total capital and number of employees
B. Total revenue and number of employees
C. Total capital, total revenue and number of employees
D. Total capital and total revenues
E. None of the above
2. Which one of the following is not the constraint of micro and small enterprise growth in
Ethiopia?
A. Lack of adequate infrastructure
B. Lack of working premises
C. Lack of access to capital
D. Lack of know how in the field of management and accounting
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E. All are not the constraints
3. Which one is the role of micro and small enterprises in the economy?
A. Creating an employment for the large part of the society.
B. Support in the GDP contribution of the country
C. Contribute in supporting large enterprises
D. They transform resources into useful goods and services, often creating the circumstances
that lead to industrial growth.
E. All of the above
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CHAPTER THREE
Preparing a Business Plan and Develop Business Idea
Introduction
Dear students, in chapter two you have learnt about small and micro enterprises. From this
chapter we conceive that you simulate essential information about the plus and minus of small
and micro enterprise. At this spot you are competent to learn about business idea and sound
business plan that are very important assets of an entrepreneur. Dear students business ideas are
marketable intellectual products like any asset whereas a business plan is a blue-print that directs
how a certain business is going to be launched and operated due to idea is nothing unless it is
communicated and translated into reality. Therefore, chapter three deals about business idea and
preparation of business plan. The Chapter is organized into three sections. Section one discusses
idea generation and sources of business ideas. Section two narrates about business opportunity
identification and assessment. Section three details the basic natures of business plan and its
components, and provides information about the layouts of a business plan.
At the end of this chapter students enable to:
 Generate a sound and feasible business idea
 Identify and assess business opportunities
 Prepare a sound business plan
 List the components of a sound business plan
 Identify the sources of information for business plan preparation
Section 1: Idea Generation
Section overview
Dear student, you are well -come to section one of chapter three. This section discusses
idea generation and sources of business idea.
39
 What is a Business Idea?
A business idea is the response of a person or an organization to solving an identified problem
or to meeting perceived needs in the local environment (markets, community, etc.). Finding a
good idea is the first step in transforming the entrepreneur’s desire and creativity into a
business opportunity.
Two things should however be noted:
 Although it is a prerequisite, a business idea is only a tool;
 An idea by itself, however good, is not sufficient for success.
In other words, notwithstanding its importance, an idea is only a tool that needs to be
developed and transformed into a viable business opportunity. Out of 30 business ideas, there
may be only one good business opportunity.
 Why Generate Business Ideas?

 You need a great 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
 Sources of Business Ideas

There are millions of entrepreneurs throughout the world and their testimonies suggest that
there are many potential sources of business ideas. Some of the more useful ones are outlined
below.
 Hobbies/Interests:
A hobby is a favorite leisure-time activity or occupation. Many people, in pursuit of their
hobbies or interests, have founded businesses. If, for example, you enjoy playing with
computers, cooking, music, traveling, sport or performing (to name but a few), you may be
able to develop this hobby/interest into a business. To illustrate this, if you enjoy traveling,
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performing and/or hospitality, you may consider going into tourism, which is one of the
biggest industries in the world.
 Personal Skills and Experience:

Over half of the ideas for successful businesses come from experiences in the work place. For
example, a mechanic with experience in working for a large garage who eventually sets up
his/her own car repair or used car business. Thus, the background of potential entrepreneurs
can play a crucial role in the decision to go into business as well as the type of venture to be
created. Your skills and experience are probably your most important resource, not only in
generating ideas but also in capitalizing on them to develop a good business opportunity.
 Franchises:
A franchise is an arrangement whereby the manufacturer or sole distributor of a trademark,
product or service gives exclusive rights for local distribution to independent retailers in
return for their payment of royalties and their willingness to conform to standardized
operating procedures. Franchising may take several forms, but the ones of interest to
potential entrepreneurs are the types that offer a name, image and method of doing business
and operating procedures.
In the 1990s franchising experienced tremendous growth, becoming a much-used method of

going into business for the millions of enterprises that were starting up in the USA and
Europe. In the 1990s, there were over 2,000 types of franchise businesses, accounting for
over US$300 billion in annual sales revenue and about a third of all retail sales in the United
States. There are many directories and handbooks as well as associations, including the
International Franchise Association, which can provide further information.
 Mass Media:
The mass media is a great source of information, ideas and often opportunity. Newspapers,
magazines, television, and the Internet are all examples of mass media. Take a careful look,
for example, at the commercial advertisements in a newspaper or magazine and you may
well find businesses for sale. One way to become an entrepreneur is to buy an existing
business.
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Articles in the printed press or on the Internet or documentaries on television may report on
changes in fashions or specific consumer needs. For example, you may read or hear that
people are now increasingly interested in healthy eating or maintaining their physical fitness.
You may also find advertisements calling for the provision of certain services based on skills,
for example accounting, catering or security. Or you may discover a new business concept,
but investors would be needed.
 Exhibitions:
Another way to find ideas for a business is to attend exhibitions and trade fairs. These are
usually advertised on the radio or in newspapers. By visiting such events regularly, you will
not only discover new products and services, but you will also meet sales representatives,
manufacturers, wholesalers, distributors and franchisers. These are often excellent sources of
business ideas, information and help you in getting your business started. Some of them may
also be looking for someone just like you to be a business partner.
 Surveys:
The focal point for a new business idea should be the customer. The needs and wants of the
customer, which provide the rationale for a new product or service, can be ascertained
through a survey. Such a survey might be conducted informally or formally by talking to
people. Surveys may be conducted using a questionnaire, through interviews or through
observation.
You may start by talking to your family and friends to find out what product or service they
think is needed or wanted but is not available in the market. Or, for example, whether they
are dissatisfied with an existing product or service and what improvements or changes they
would like to see. You can then talk to people who are part of the distribution chain that is
manufacturers, wholesalers, distributors, agents and retailers. It would be useful to prepare a
set of questions which might be put on a questionnaire or used in an interview. Given their
close contact with customers, these people have a good sense of what is required and what
will sell and what will not sell. Finally, you should talk to as many customers as possible
42
(both existing and potential customers). The more information you can get from them, the
better.
Besides talking to people, you could also get information through observation. For example,
in deciding whether to open a shop on a particular street, you can observe and count the
number of people going past on given days and compare these numbers to other sites. Or, if
you are interested in an area frequented by tourists, you might sell products from a craft
business. Or you may have noticed that there is no decent restaurant or hotel on a tourist
route or in a given town.
One way of ensuring that you are not negligent in identifying new business ideas is to be alert
at all times to customer needs. One entrepreneur apparently went round at every cocktail
party asking if anyone was using a product that did not adequately fulfill its intended
purpose. Another monitored the toys of a relative’s children looking for ideas for a market
niche.
 Complaints:
Complaints and frustrations on the part of customers have led to many a new product or
service. Whenever consumers or customers complain bitterly about a product or service, or
when you hear someone say “I wish there was .....” or “If only there were a product/service
that could ....”, you have the potential for a business idea. The idea could be to set up a rival
firm offering a better product or service, or it might be a new product or service which could
be sold to the firm in question and/or to others.
 Change:
The world is constantly changing. Change can be a threat; however, most entrepreneurs
consider change as a challenge and opportunity to trigger new needs for products and
services. An innovative entrepreneur always responds to changes in a positive manner.
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 Brainstorming:
Brainstorming is a technique for creative problem-solving as well as for generating ideas. The
objective is to come up with as many ideas as possible.
 Self- test activity 3.1
1 Explain how Personal Skills and Experience can be source of business idea
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2 Explain how mass media can be source of business idea
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Section 2: Identifying and Assessing Business Opportunities
 Identifying Business Opportunities

Seeing, seeking and acting on opportunities is one of the characteristics of successful
entrepreneurs. It is also the basis for starting and maintaining successful ventures. It involves
not only generating ideas and recognizing opportunities, but also screening and evaluating
them to determine the most viable, attractive propositions to be pursued.
 What is a business opportunity?

A business opportunity may be defined simply as an attractive idea or proposition that
provides the possibility of a return for the investor or the person taking the risk. Such
opportunities are determined by customer requirements and lead to the provision of a product
or service which creates or adds value for its buyers or end-users.
However, a good idea is not necessarily a good business opportunity. For example, you may
have invented a brilliant product from a technical point of view and yet the market may not
be ready for it. Or the idea may be sound, but the level of competition, and the resources
44
required may be such that it is not worth pursuing. Sometimes there may even be a ready
market for the idea, but the return on investment may not be acceptable. To underscore the
point further, consider the fact that over 80% of all new products fail. Surely, to the inventors
(and their backers) the idea seemed a good one, yet clearly it could not withstand the test of
the market.
What turns an idea into a business opportunity? A simplified answer is when income exceeds
costs and generates a profit. In practice, to be comprehensive, you need to examine the
factors listed below.
 Characteristics of a good business opportunity

To be a good business opportunity, it must fulfill, or be capable of meeting, the following
criteria:
 Real demand: responds to unsatisfied needs or requirements of customers who have
the ability to purchase and who are willing to buy
 Return on investment: provides acceptable returns or rewards for the risk and effort
required
 Be competitive: be equal to or better (from the viewpoint of the customer) than other
available products or services
 Meet objectives: meet the goals and aspirations of the person or organization taking
the risk
 Availability of resources and skills: the entrepreneur is able to obtain the necessary
resources.
 Assessing Business Opportunities

Ideas and opportunities need to be screened and assessed for viability once they have been
identified. This is not an easy task, and yet at the same time, the assessment of business
opportunities is extremely important. This assessment can make the difference between
success and failure, between making a fortune and losing everything. While the assessment
exercise does not guarantee success, it certainly helps in minimizing the risks and reduces the
odds for failure. Identifying and assessing business opportunities involves, in essence,
determining risks and rewards/returns reflecting the following factors discussed below.
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 Industry and market:
The key question to be answered is whether there is a market for the idea. A market in this
context consists of customers – potential or actual – who have needs and wants, and who
have the ability to purchase your intended product or service. There is also a need to consider
whether what the customer wants can be provided at the right price, in the right place, and in
a timely manner.
Another important consideration is the size of the market and the growth rate of the market.
The ideal situation is a market that is large and growing, where getting even a small market
share can represent a significant and increasing volume of sales.
For this assessment exercise, the would-be entrepreneur needs to gather information. If some
potential entrepreneurs are tempted to think that it involves too much hard work, they might
take some comfort from the saying that the data available about markets (size, characteristics,
competitors etc.) is often inversely related to the real potential of an opportunity. In other
words, if market data is readily available and if the data clearly shows significant potential,
then it is likely that a large number of competitors will enter the market and the opportunity
will not be as good. There are several sources of published information (also called
secondary information), including libraries, chambers of commerce, investment promotion
centers, government ministries, universities, foreign embassies, the Internet, newspapers, and
so on.
In addition to the above, there is often the need to collect information at the source (also
called primary research) by interviewing key people, such as customers and suppliers. In that
case, you will need to conduct survey research.
 Length of the ‘window of opportunity'

Opportunities are said to have a ‘window of opportunity.’ That is, they do exist, but they do
not remain open forever. Markets grow at different rates over time, and as a market gets
bigger and more well-established, conditions for success are not as favorable. Timing is
therefore important. The issue then is to determine the length of time the window will be
open, and whether the opportunity can be created or seized before the window closes.
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 Personal goals and competencies of the entrepreneur
An important question for anyone venturing into business is whether they want to undertake
that particular venture. Personal motivation is an essential attribute of a successful
entrepreneur. Unless a person really wants to do that kind of business, he or she should not
venture into it.
A related question is whether the potential entrepreneur has the necessary competencies
(including the knowledge, skills and abilities) for the requirements of the business and, if not,
whether other people could be brought in. Many small business owners/managers have
entered into business based on the strengths of their own skills and ability.
When the above aspects are combined, the issue then becomes one of whether there is a good
fit between the requirements of the business and what the entrepreneur wants or desires. This
is important, not only for success, but also for the entrepreneur’s happiness. As the saying
goes, “Success is getting what you want; happiness wants what you get.”
 Management team:
In many ventures, particularly those involving a large amount of capital, high risk,
sophisticated markets and high competition, the management team is usually the most
important dimension in determining the success of a business. The experience and skills that
the team possesses in relation to the same or a similar industry often determine success or
failure of a new business. This explains why venture capitalists, or those people who provide
finance for businesses, put so much emphasis on the management factor. Investors often say
that they would rather have good management with an average idea/product/service than a
brilliant idea/product/service with bad management.
 Competition:
To be attractive, an opportunity must have a unique competitive advantage. For example, a
business may have a competitive advantage by lowering costs in terms of production and
marketing. Or better, a business may offer better quality. In addition, the availability of entry
barriers – which could take the form of high amounts of capital required, protection such as
patents or regulatory requirements, contractual advantage such as exclusive rights to a market
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or with a supplier – can make the crucial difference between a ‘go’ and a ‘no go’ investment
decision. If a business cannot keep most would-be competitors out of its market, or if it faces
existing entry barriers, then the opportunity may not be very attractive.
 Capital, technology and other resource requirements:

The availability and access to capital, technology and other resources such as skills determine
the extent to which certain opportunities can be pursued. As a general rule, the more difficult
the resource requirements are to obtain, the more attractive the proposition, provided of
course that there is a market for the idea/product/ service. To give an example, while
marketing a breakthrough product based on a patented technology is no guarantee of success,
it certainly creates a formidable competitive advantage.
 Business environment:
The environment within which the business will operate has a great influence on the
attractiveness of any opportunity. By business environment, we are referring not only to the
physical environment, which is important and increasingly so, but also the political,
economic, geographical, legal and regulatory contexts. Political instability, for example,
renders business opportunities unattractive in many countries, especially for those ventures
requiring high investment with a long payback period. Similarly, inflation and exchange rate
fluctuations, or a weak judiciary system, are not a good environment to start a business, even
if the potential returns are high. The lack of infrastructure and services (such as roads,
electricity, water supply, telecommunications, transportation, and even schools and hospitals)
also affect the attractiveness of an opportunity in a given environment.
1. What is a Business Opportunity?
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2. What is Distinction between ideas and opportunities?
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Section 3: Nature of a Business Plan and its components

Section overview
Dear students, you are well- come to section one of chapter four. This section covers nature
of a business plan, components of business plan and layout of a business plan.
 Natures of a Business Plan
? Dear students, what do you thing about a business plan?

The business plan is a written document that sets out the basic idea underlying a business and
related start-up considerations. It can be viewed as a entrepreneur’s game plan.
For the starting of a new venture, a business plan has four basic objectives that include:
 It identifies the nature and context of the business opportunity.
 It presents the approach the entrepreneur plans to take to exploit the opportunity.
 It identifies the factors that will most likely determine the success of the venture.
 It serves as a tool to raise financial capital.
A business plan has two primary functions:
 To provide a clearly articulated statement of goals and strategies for internal use and
 To serve as a selling document to be shared with outsiders.
Business Plans contain key elements that function to define the endeavors of a business
enterprise. The preparation of a business plan must be completed by the entrepreneur.
Business plans are the difference between a business that succeeds and one that does not.
While the entrepreneur must develop her own plan, it is essential to have the plan reviewed
by professionals, and modified accordingly. It may also be advisable to employ a
professional proposal writer, accountants, lawyers, and other key individuals in its
preparation. If the entrepreneur is going to need financing, partners, or government approval
of some kind, then the need for a professional business plan writer becomes vital. Often the
49
difference between the well accepted and funded business, and the ones which fail, is in the
presentation of the ideas and the packaging of the proposal.

1. Describe what is a business plan?
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What is the importance of a business plan?
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 Layouts of a Business Plan

A good business plan contains the following sections:
A. Cover page
B. Table of contents
C. Executive summary
D. Information about the owner or promoter of the business
E. Description of the business idea and market
F. Marketing plan
G. Legal form
H. Start-up capital and resources
I. Organization and staff
J. Business operation and costs
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K. Financial plan
L. Expected risk analysis
M. Appendices
I. Introductory Contents
The cover page, executive summary, and table of contents will determine what kind of first
impression one makes on readers. In many cases, the introductory elements, especially the
executive summary, will influence whether readers read the rest of the plan at all. A poorly
prepared or unattractive document may not even get a second look! Investors and venture
capitalists may be presented with several proposals per day. They cannot, and do not, read
them all. Getting your document looked at is a key step in the hunt for investment and
support.
The Cover: The cover of the document is often the "First Impression" of a business for any
interested parties or investors. The purpose of a cover is to tell the reader what the document
is about. Your cover should say the words "Business Plan," and should include:
 Name and business name
 Company logo
 Address
 Telephone number
 Fax number
 E-mail address
 Other contact information

The cover should be attractive and professional looking. Fonts used should be easily read, and
color contrasts should be pleasant to the eye.
Executive Summary: The executive summary is what most readers will read first. Lenders in
particular read executive summaries before looking at the rest of a plan to determine whether
or not they want to learn more about a business. An executive summary may also be used
51
singularly to attract potential curiosity in your company and can be "followed up" with a
complete plan if investors are interested. The executive summary is the first part of your
plan, but it should be written last. It is an abstract of the pertinent essentials of your business
plan. The wording should be chosen very carefully. The executive summary should be short,
attention getting, and understandable.
Table of Contents: All pages of your business plan should be correctly numbered and the
table of contents should include page numbers. Be sure to list headings for the major sections
as well as for important subsections. Thumb tabs for the documents headings are a nice
feature and indicate a professional document.
II. Business Description

The business description is the "Business Vision", and includes: who the company is, what it
will offer, what market needs it will address, and why the idea will work. A business without
vision is a business that will not know what it is doing! The description should include:
1) An overview of the industry the business will be in.
2) A description of the company.
3) The company's positioning.
4) Descriptions of the company's products or services.
5) The company's pricing strategy.
The Industry Overview: Begin the business description with a brief overview of the field the
company will be competing in. This is not a discussion of your competition. One is providing
an overview of the industry where it and other companies like it will vie. Describe trends in
the industry, some history and projections. Do not rely on "best guesses," but use actual
industry data from trade associations, government reports and trade journals to support the
descriptions. Do not just report the positive side of the industry, include the negative too! For
example a discussion of an Internet Services business may include problems anticipated with
the number of telephone lines available, or other infrastructure problems with the phone
companies involved. Show that all conceivable aspects have been considered.
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The Company Description: Begin with your mission statement - a one or two sentence
description of the purpose of the business and to whom the product or service is targeted. It is
vital that an entrepreneur know what business they are in. Not being clear in the mission
statement indicates that one is not clear about the purpose of one's company. It can also
indicate that a business is not prepared for the market. When the railroads failed to recognize
that they where in the transportation industry, and not the "train" business, they lost out to
trucking and airlines for market share. A business person should pay very close attention to
this statement, as all else hinges on it. If during the building of the rest of the plan one
discovers that the plan is not correlating to the mission statement, then the mission statement
or the plan must be modified.
Describe the business. Give a brief history and include information like whether it is a
corporation, a retail, or service business. Be complete as to ownership status, location of
operations and other pertinent information.
When discussing the company's principals, one doesn't need to provide a complete resume.
The resumes are included in another section. You can however point out interesting qualities
of the principals. For example, if one of the owners of a research firm has been recognized
for discoveries in his field and it relates to the business, then one may include a statement
like "Biochemist John Blow, who discovered the X factor in 1994, will head up the research
team."
The company's Products or Services: Describe each of the products or services. Go into as
much detail as necessary for the reader to get an understanding for what the enterprise will
be. Make it interesting. It is important to point out how your particular enterprise is different
from other similar businesses. Just saying "It is better" is not enough. You must tell how it is
better. Every business claims to be "high quality, better service." While a business must have
quality and good service, it is no real selling point, since the consumer is bombarded with
that claim at every turn. One cannot bore a reader into buying their proposal! One must
convince them about their product or service. If it cannot be done here, it won’t be done in
the market place when the business starts.
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Positioning: Position is your place in the marketplace. How the customers and your
competitors perceive your company's product or service refers to its position. This is based
on your customers and competition, not your product or enterprise alone. It is the relationship
to customers and competition that is emphasized. A business does not have to be the leader
or potential leader to be profitable, it does however need to know where it stands or will
stand in the industry. This understanding of positioning will aid in the promoting of the
company. Avis car rental did quit well with "We're number two, we try harder."
Pricing: Describe what the charge for the product or service is, and how one calculated the
price. Once the pricing and rationale are explained, discuss where this pricing strategy places
the company in the spectrum of the other providers of this product or service. Also, explain
how the price will affect getting the product or service accepted. Tell also how price will
affect the company’s market share. It is not necessary to assume that lower pricing increases
market share. Sometimes higher prices, as with prestige items, may have the effect of
increasing the product's market share. Remember that lower prices require higher volume to
achieve the same sales totals. A slightly higher price may not affect the total number of sales
but may greatly influence gross profits.
III. The Market

This section is designed to provide enough facts to convince an investor, or potential partner
that the business has enough customers to garner sales despite the competition. It is one of
the most important parts of the plan, taking into account current market size and trends, and
may require extensive professional level research. Having accurate and factual information
about the market and presenting it in a cohesive and understandable way shows that the
entrepreneur understands the business endeavor. The issues that the marketing section
includes: Customers, Market Size and Trends, Competition and Estimated Sales.
Customers: It is important to be specific when describing the customers who will call for the
product or service. This description defines the characteristics of the people the endeavor
wants to sell to. An existing business should list their current key customers and any sales
trends or patterns. A new business should look at the demographics of the potential
customers.
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Market Size/Trends: This section defines the total market size as well as the slice of the
market the business will target. Use numbers as well as trend information to describe the
current market and it’s potential. Growth, declines, and new markets opening up are key
types information. Recognizing the significance of the statistics and explaining them may
require a professional's assistance.
Competition: Present a short discussion of each of the businesses' primary competitors. If

available, include annual sales and market share statistics. Each assessment should include
the degree to which these companies meet their customers' needs. Explain how one can
capture a share of their business.
Estimated Sales: This should include sales in units and dollars for the next three years, with
the first year broken down by quarters or even months if appropriate to the endeavor. These
numbers will also be used in other financial documents presented later in the plan. Justify the
projections using “best case," "worst case “and” most likely" scenarios. Explain what would
influence the different scenarios and how those influences effect sales.
IV. Development and Production

In this section describe the current state of the company's product or service and the plan for
completing the development. This is also where one familiarizes the reader with how their
product is created or services sold. New processes must be contrasted to the old ways, with
emphasis on effectiveness and efficiency.
 Development Status
 Production Process
 Cost of Development
 Labor Requirements
 Expenses and Capital Requirements
Development Status: Describe the current status of the company's product or service and what
remains to be done to make it ready to be marketed. Include a schedule detailing when this
55
work will be completed. Also, detail the contingencies which must be met before the next
phase is commenced.
Production Process: An investor will only provide money for a business he or she
understands, so explain the stages of production from the inception of the idea to when it can
be sold. With a service company, describe the process of delivering the service.
Manufacturing processes and delivery methods also need to be detailed for those enterprises
involved in making products.
Also discuss physical location for the production of your product or service. Justify this
decision as well, by talking about savings in rent or lease, convenience to suppliers, labor,
materials, or other factors important to your business. An investor wants to know that a
business does not intend to sell "Ice to Eskimos," simply because the ice is cheaper to make
in the Arctic regions!
Cost of Production and Development: Present and explain a design and development budget.
This budget should include the cost of the design of a prototype as well as the expense to take
it into production. Testing and evaluation expenses should also be included. Be sure to
include labor, materials, consulting fees, and the cost of professionals such as patent
attorneys. While the cost of production section may be more readily apparent to product
companies, this section is important for all businesses. Service businesses have expenses
such as consulting services, training for principals, and preparation of documentation
materials, among many other things.
Table 3:1: Estimate of Cost of Production & Profitability
Operating year
I II III IV V
Capacity of the plant
Production in unit
Capacity utilization
A. Material Costs
a. Raw material
b. Components
c. Consumables
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d. Packing
Total material cost
B. Utilities
a. Power
b. Water
c. Fuel
Total utilities cost
C. Labor and Plant Overheads
a. Direct wages
b. Factory supervision
c. Bonus, provident
Total labor cost
D. Factory Overheads
a. Repairs and maintenance
b. Rent and taxes
c. Insurance
d. Miscellaneous factory expense
e. Contingency
Total Factory Overhead Cost
E. Estimate of Cost of Manufacturing = A+B+C+D
F. Administrative Expenses
a. Administrative Salaries
b. Remuneration to Directors
c. Professional fees
d. Postage, Telegrams, Telephone
e. Insurance and Taxes on office Property
Total Administrative Expenses
G. Selling Expenses and Sales Promotion
a. Advertising
b. Packing
c. Selling Expenses
d. Taxes
e. Royalty
Total cost of Selling and Sales Promotion
H. Total Cost of Production = E+F+G
I. Total Sales
J. Gross Profit Before Interest = I-H
K. Financial Expenses
a. Interest on LT loans
b. Int. on working capital
c. Guarantee Commission
Total financial expenses
L. Depreciation
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Labor Requirements: The management team is outlined in the management section. This section
provides details of other labor one will need to start up and run the business. Address how many
people are required and what skills they need to possess. Be sure to cover the important issues
such as labor pool, recruitment, training, cost of labor, and future labor pool. Training and
evaluation of employees, and having enough support personnel to accomplish the mission of the
business must be planned for. While having all the other elements of a business are necessary,
not having the employees to perform duties of the company can be the death of a company. Any
cooperative agreements with colleges, training schools, and state departments of labor should be
included in the plan. For example, a treatment center for emotionally disturbed children, located
some distance from centers of education, would have a difficult time recruiting professional
employees. This may drive salary requirements for recruitment out of range.
Expenses and Capital Requirements: One must also create at least three financial forms that
will build a foundation for the financial section of your plan: operating expenses, capital
requirements, and cost of goods. Generate spreadsheets for the year in which one establishes
the business as well as projections for two years or more after.
Operating Expenses: By creating a financial form called Operating Expenses, you pull
together the expenses incurred in running your business. The attention of a business
consultant and an accountant is most needed in these preparations. All expenses, the obvious
as well as the hidden, must be considered. An experienced consultant can ask the questions
that a new entrepreneur would not think of.
Capital Requirements: This form details the amount of money you will need to procure the
equipment and resources used to start up and continue operations of the enterprise. Capital
Requirements also includes the depreciation details of all purchased equipment. To determine
your capital requirements, think about anything in your business that will require money to
procure.
Cost of Goods: For a manufacturing company, the cost of goods is the cost incurred in the
manufacturing of the product. For a retail or wholesale business, the cost of goods
(sometimes called the cost of sales) is the purchase of inventory. To generate a Cost of
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Goods table, you need to know the total number of units you will sell for a period as well as
what other inventory may be on hand, and at what stage of production these units exist. For a
manufacturing company, the cost of goods table will include materials, labor, and overhead
related specifically to product manufacturing. Cost of waste and byproduct disposal must
also be included. For example a company which makes picture frames would be mistaken to
calculate the costs of the product based on it containing only 9/10ths of a board foot, if it
requires 1 and ½ board feet trimmed down to obtain it.
V. Sales and Marketing

This section of a business plan describes both the strategy and tactics one will use to get
customers to buy their products or services. The three components of the sales and marketing
section include:
1) Sales and Marketing Strategy
2) Method of Sales
3) Advertising and Promotion
Sales and Marketing Strategy: Think of this statement as an action plan for how a business
will get customers to buy their products. It will support the tactics described later on in this
section. How will the customers be targeted for the company's products and services?
Method of Sales: Describe available distribution channels and how one will use them. In this
section the writer demonstrate her ability and knowledge to get the company's products into
the hands of the targeted customers. It also details transaction methods, such as terms for
financing the sale, credit card acceptance, check handling, cash transactions, and method of
product or service delivery.
Advertising and Promotion: This section should include a description of all advertising
vehicles the enterprise plans to use. This includes flyers, newspapers, magazines, radio &
TV, Yellow Pages, Internet, etc. It should also include the public relations program,
sales/promotional materials (such as brochures and product sheets), package design, trade
show efforts, videos, and any other methods.
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VI. Management
A good management team can take even a mediocre idea and make it work. In fact, strong
entrepreneurial teams have been known to move from business idea to business, repeatedly
creating and running thriving companies. These same teams can even turn around a
struggling company. When looking for capital to turn around a company, special attention
should be paid to this area. Often the people make the difference!
 Description
 Ownership
 Board of Directors/Board of Advisors
 Support Services
Management Description: Use this section to describe company management including the
responsibilities and expertise of each person. Many lenders and venture capitalists base their
investment decisions on the strength of the company's principals. Include special skills and
abilities, as well as complementary aspects of the team's relationship.
For positions that have yet to be filled, detailed job descriptions, and who needs to be hired to
achieve success must be described. Describe the talents these persons need to possess and
how the addition of that person will help the company meet its objectives. Methods of
recruitment and hiring should also be detailed.
Ownership: A short section on who owns and controls the company will help readers derive a
better understanding of who will be making decisions. Potential lenders, many of whom will
require a significant stake in the company in exchange for funds, will also be interested in
what portion of the company's equity is available.
Board of Directors/Board of Advisors: A strong board of directors or board of advisors is an

asset to a business. If the board members have industry connections, good reputations, or
potential to raise capital for your business, be sure to include these facts. A good board of
advisors can also open doors for "networking" that would otherwise not be available.
Attention to these details may be the difference between obtaining financial and other
resources needed.
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Support Services: Strong support services, including consultants, attorneys, accountants,
advertising agencies, as well as industry-specific services also help to indicate other's faith in
the business. This also shows the ability to attract needed talent to the company.
VII. Financial Documents

This is the section in which one makes the case in words, and backs up what one says with
financial statements and forms that document the viability of the business and its soundness
as an investment. If one is writing a plan for investors, be sure to include the following
sections:
1) Risks
2) Cash Flow Statement
3) Balance Sheet
4) Income Statement
5) Funding Request and Return
6) Break-even analysis
Risks: No business is without risks. The ability to identify and discuss them demonstrates
skills as a manager and increases a planner’s credibility with potential investors. Be realistic,
not admitting risks is the surest way to failure. Knowing your risks helps one have ready-
made solutions.
Cash Flow Statement: A cash flow statement shows readers of the business plan how much
money will be needed, when it will be needed, and where the money will come from. In
general terms, the cash flow statement looks at cash and sources of revenue minus expenses
and capital requirements to derive a net cash flow figure. This is done with respect to a given
time frame. Initial cash flow statements should reflect the time frames of operation, whether
weekly, monthly, or quarterly. The time frame selected most often corresponds to a natural
period of the businesses cycle.
Table3:1: Cash Flow Statement
No Particulars I II III IV V
A Source of Funds
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1 Operating Balance
2 Net Cash Accruals
3 Increase in owner‟s Equity
4 Increase in Term Loan
5 Soft loan/ Seed Capital
6 Investment Subsidy
7 Bank Borrowing
8 Others
Total of “A”
B Application of Funds
1 Capital Expenditure (Fixed Assets)
2 Misc. Fixed Assets
3 Tech. Transfer Fee
4 Office Equipment
5 Deposits
6 Contingencies
7 Term Loan Repayment
8 Other
9 Owner‟s Drawings
Total of “B”
Closing Balance ( A-B)
Balance Sheet: Unlike other financial statements a balance sheet is created only once a year
to calculate the net worth of a business. If your business plan is for a start-up business, you
will need to include a personal balance sheet summarizing your personal assets and
liabilities. A new business almost always requires the strength of personal financial
commitments. Proving that the entrepreneur can keep commitments is important. If the
business exists already, include several of the past years balance sheets. Analyze the results
of the balance sheet briefly and include this analysis in the business plan. As with all
financial documents, have the balance sheet prepared or at least reviewed by a reputable
accountant. Decisions about assets and whether they should be classified as owner debt
equity or capital investment will greatly influence the perceived strength of the balance sheet.
Income Statement: The income statement is where a planner makes a case for the business
potential to generate cash. This document is where the writer records revenue, expenses,
capital, and cost of goods. The outcome of the combination of these elements demonstrates
how much money a business made or will make, or lost or will lose, during the year. An
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income statement and a cash flow statement differ in that an income statement does not
include details of when revenue was collected or expenses paid. Accrual accounting and cash
basis accounting methods will influence the "bottom line" shown.
An income statement projected for a business plan should be broken out by month the first
year. The second year can be broken down quarterly, and annually for each year after.
Analyze the results of the income statement briefly and include this analysis in the business
plan. If the business already exists, include income statements for up to five previous years.
Funding Request and Return: State the amount of funding and the type (debt or partner
equity) of investment sought. It is important to provide a breakdown of how the money will
be applied. Discuss what effect the capital will have on the business potential to grow and
profit, when the money is needed, and what investment has already been made in the
company.
A common mistake in a business plan is to be unclear in this section, which turns potential
investors away. If the company founders have invested in the company, include this in your
plan. Most investors are encouraged by founders putting their own money on the line. Many
will ask why a company's principals are not also investors.
Finally, create an exit plan that describes how investors will get their money out of your
company. One common investor worry is that even if a business is profitable, it may be
difficult for them to get a good price for their equity. A cash-out option in five years or
assurance that the company will become a strong candidate for a purchase or an Initial Public
Offering are what many venture capitalists and lenders will insist upon. A business owner
also may want to be sure that she can "buy back" any equity put up to insure that an
investment will be made.
Break-Even Analysis (BEA): As a part of the business plan, the activity level of a business, in
other words, quantum of production of goods or services as the case may be, is projected over a
period of time, i.e. 5 to 10 years or even more depending on the nature of the business. However,
when the business plan is implemented, there are several factors that came into play towards
realizations of the targeted activity level. Unforeseen shortages .of raw materials, disruption in
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power supply, inability to penetrate the market etc., may curtail targeted activity level. What
would be the financial implications of such even finalities?
To what extent a business can afford to curtail its activity level due to a variety of compulsions
and yet manage to meet-all its liabilities. These questions need to be answered right at the stage
of preparing a business plan so that the entrepreneur as also financial institutions intending-to
fund the business are in a position to assess, though partially, risks involved: The said questions
could be answered through break-even analysis-an analysis of the relationships amongst costs,
production level and profit. What follows is an outline of the concepts of break-even analysis and
the mechanics involved in calculation of Break-even point.
In order to carry out profit-oriented activity, may be production of goes through setting up of a
factory or provision of services by setting up an automobile workshop or hotel/repairs shop,
certain costs are involved. Various items of costs may be the raw material cost, salaries/wages,
interest charges and the money you have borrowed for setting up the unit etc. All these items of
cost put together form the total cost. The cost components can be divided into two major types
viz. (i) Fixed Cost and (ii) Variable Cost.
Fixed Cost
Fixed cost is that cost which does not vary or change with other factors in the production level.
In other words, there are certain items of cost such as, interest on long-term loan, rent on factory
shed or office if they are rented, depreciation on machinery and building if they are owned, etc.
which are to be incurred whether the factory or service centre is working at full capacity or not.
Variable Costs
Variable cost is variable with the level of production i.e. variable cost is directly related to the
quantity of output.
Calculating Break-Even Point
Whenever an entrepreneur estimates profit for his venture at the time of preparing the project
report or making projections for the coming year (when the unit is already in operation), normal
approach is to deduct total Cost from Total Sales Revenue to arrive at Gross Profit. Suppose, he
goes a step further and calculates profit at two stages by splitting the Total Cost into Fixed Cost
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and Variable Cost for the project, the analysis will throw some light. It is known that Variable
Cost per unit of the output remains the same. Hence, given the same selling price, the difference
between Variable Cost per unit and selling price per unit which we call `Contribution' also
remains the same. Thus, as sales go up, the Contribution (difference between Sales Revenue per
unit and Variable cost per unit x No. of units), also goes up. Given the fact that the Fixed Cost
for the project remains the same, the venture has to at least earn enough money to meet the Fixed
Cost. In other words, if loss is not to be incurred the venture must sell enough number of units of
the output so that the contribution is equal to the Fixed Cost. The profit would be to the extent of
the Contribution which is in excess of Fixed Cost.
Such a two-stage analysis to identify the production level at which the venture makes neither
profit nor loss is called Break-Even Analysis. The said production level is called Break-Even
Point. We can now put it mathematically as below:
1. Total Cost at `X' Production Level = Variable Cost for `X' No. of Units (VC) + Fixed Cost
2. Contribution (CN) = Sales Revenue (SR) - Variable Cost (VC)
3. Profit (P) at `X' level of production = (Sales Revenue for `X' No. of Units) - Total Cost. i.e.
SR-(VC+FC) Or SR-VC-FC
VIII. The Appendix

The Appendix is where related documents and support materials are included. For example if
the companies goods or services are featured in a magazine article or trade journal, a copy of
the article may be provided. Any reports or other information that would make the Business
Plan more complete should also be included here.
 Common Errors in Business Plan Formulation
We have covered the ways in which you should go about working on various facets of a business
plan. If you work accordingly, you are likely to avoid major errors. However, there are some
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errors which are so widely noticed that we, though it amounts to repetition, have chosen to
highlight here:
 Capacity-Utilization Estimates: Gross Unrealism
Over optimistic and simplistic assumption with reference to utilization of installed capacity is a
pervasive feature of business plans. There are so many entrepreneurs who presume 80%
capacity-utilization in the first year, 90% in the second year and 100% in the third year. The
assumption is made in complete disregard of existing enterprise performance, market conditions,
competition-level and possible technical snags. The business plan, in such a case, is reduced to
financial jugglery. It is exciting to make such an assumption and derive satisfaction from
financial performance projection. But then, the projection is based on completely false premises.
Avoid this temptation.
 Capacity Computation: A Miscalculation
The computation of installed capacity is a technical task not always performed competently.
There are several finer points-die-changing time, down time, periodic shut-down, capacity of
other equipments-which tend to lower the overall installed capacity. An exaggerated statement of
overall capacity on account of entrepreneur being unaware of such finer points is rather
commonplace. So, pay attention to capacity-calculation.
 Market Study: A Neglected Task
Market study continues to be a grey area. It is relatively easy to work out technical arrangement
and to make financial performance projection. You are, in these cases, dealing with specific
variables. Market study, in contrast, entails a less structured probe and contending with less
definite variables. So, there are entrepreneurs who pass by this component of business plan
completely. They cite demographic (population, income, etc.) statistics, present sketchy and
inaccurate information on demand-supply position, produce stray opinions and conclude that
market is just there waiting to be tapped. This is an attitudinal block. Make sure you do not
develop such a block.
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 Machinery Selection: Serious Errors
This is a subject on which faulty decisions are common. There are machinery-suppliers who may
never have made a certain kind of machinery, may not have ability to do so and yet undertake to
supply such machinery. The results are sometimes disastrous. There are plastic extruders which
can scarcely extrude. These are being sold and bought by entrepreneurs. A small entrepreneur
does not have the resources to replace or rectify the machinery. So, take care that you choose
sound machines.
 Technology-Oriented Products
There are products which call for sophisticated technology or are not amenable to being
produced in the small-scale sector. The entrepreneur is swayed by reported profit margins. He
relies on a technician who may have worked in comparable enterprise but does not have the
capability, to line-up complete technology. Alternatively, it is not possible to setup enterprise
within stipulated financial resources. In other words, the technical feasibility is not there. The
enterprise is fore-doomed to failure.
 Project Cost: An Underestimate
The promoters of very small enterprises do not consider P & P expenses and working capital
margin. They, consequently, underestimate the project cost and own resource requirement
(margin). The others tend to play down magnitude of working capital margin. This is because if
the working capital margin is large, financial institution will expect the entrepreneur to raise his
own contribution to project cost. Thus working capital underestimates an error you must guard
against.
 Location Selection: Some Temptations
There are two major errors which an entrepreneur makes in respect of location-selection. First,
he is so completely swayed by the offer of financial incentives (subsidy, income-tax concession)
that he does not look into other criteria for location-selection. This sometimes becomes the sole
and overriding concern. He may thus choose a location which from the standpoint of market-
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proximity, raw material availability, manpower position and operating cost-structure, is
eminently suitable. Then, there are instances of an entrepreneur choosing a location merely
because it is his hometown or he owns ancestral land-though it is not an appropriate location. Do
not fall prey to these temptations: If you are selecting a location, take a comprehensive view.
 Cash flow in Initial Years: Poor Detail
The cash flow during implementation period and initial years is not charted out in sufficient
detail. You will be able to do this only, if you ascertain the disbursement modalities of financial
institutions completely and work out a thorough cash-plan with built-in contingencies. They may
expect you to spend from your own resources in the first place. It may make direct payment to
machinery supplier and reduce your flexibility. There are machinery suppliers and others who
may expect advance payments from you. If you have not envisaged such payments under your
cash plan, your implementation will grind to a halt.
Self- test activity 3.4

1. Describe the lay outs of a business plan
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2. Explain the utility of break-even analysis for judging the profitability of small
enterprises, with the help of an example.
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3. Describe the common errors in business plan formulation.
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 CHAPTER SUMMARY
 A business idea is the response of a person or an organization to solving an identified
problem or to meeting perceived needs in the local environment. Finding a good idea is the
first step in transforming the entrepreneur’s desire and creativity into a business opportunity.
 Entrepreneurs throughout the world suggested that Hobbies/Interests, Personal Skills and
Experience, Franchises, Mass Media, Exhibitions, Surveys, Complaints and Brainstorming
are the source of good business idea.
 A business opportunity is an attractive idea or proposition that provides the possibility of a
return for the investor or the person taking the risk. Identification of business opportunities
involves seeing, seeking and acting on opportunities and one of the characteristics of
successful entrepreneurs.
 A good business opportunity is characterized by:
 Real demand:
 Return on investment
 Be competitive
 Meet objectives
 The business plan is a written document that sets out the basic idea underlying a business and
related start-up considerations. A good business plan is prepared for two primary functions:
to provide a clearly articulated statement of goals and strategies for internal use and to serve
as a selling document to be shared with outsiders.
 Introductory section of business plan contains the cover page, executive summary, and table
of contents. It determines what kind of first impression one makes on readers. In many cases,
the introductory elements, especially the executive summary, will influence whether readers
read the rest of the plan.
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 The business description section of includes an overview of the industry the business, a
description of the company, the company's positioning, Descriptions of the company's
products or services and the company's pricing strategy. The business description section of
a business plan address: who the company is, what it will offer, what market needs it will
address, and why the idea will work.
 The Market section of business plan is designed to provide enough facts to convince an
investor, or potential partner that the business has enough customers to garner sales despite
the competition. It is one of the most important parts of the plan, taking into account current
market size and trends, and may require extensive professional level research. Having
accurate and factual information about the market and presenting it in a cohesive and
understandable way shows that the entrepreneur understands the business endeavor.
 Development and Production section of a business plan describe the current state of the
company's product or service and the plan for completing the development. This is also
where one familiarizes the reader with how their product is created or services sold.
Basically, this section addresses Development Status, Production Process, Cost of
development, Labor Requirements Expenses and Capital Requirements of the proposed plan.
 Sales and Marketing section of a business plan describes both the strategy and tactics one
will use to get customers to buy their products or services. The section sales details the
company Sales and Marketing Strategy, Method of Sales Advertising and Promotion
 The Management team section of a business plan details the quality of key employees, forms
of business Ownership and the Board of Directors/Board of Advisors. A good management
team develops mediocre idea and makes it work. In fact, strong entrepreneurial teams have
been known to move from business idea to business, repeatedly creating and running thriving
companies.
 Financial description section of a business plan describes financial Risks, Cash Flow
Statement, Balance Sheet, Income Statement and Funding Request and Return regarding to
the proposed new venture.
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 The Appendix section of a business plan consists related documents and support materials.
Any reports or other information that would make the Business Plan more complete should
also be included here.

1. Which one is a business plan basic objectives for new venture?
A. It identifies the nature and context of the business opportunity.

B. It presents the approach the entrepreneur plans to take to exploit the opportunity.
C. It identifies the factors that will most likely determine the success of the venture.
D. It serves as a tool to raise financial capital.
E. All
2. Which one is not element of The Cover page of a business plan?

A. Name and business name
B. Company logo
C. Address
D. Business description
E. Telephone number
3. The Business description part of a business plan includes the following except:
A. An overview of the industry
B. A description of the company.
C. A detail of marketing strategy
D. The company's positioning.
E. Descriptions of the company's products or services.
4. Which one is not sales and marketing section of a business plan?
A. Sales and Marketing Strategy
B. Method of Sales
C. Advertising and Promotion
D. Method of financing
E. None
5. Which statement is considered as the Characteristics of a good business opportunity?
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A. Responds to unsatisfied needs or requirements of customers who have the ability to
purchase and who are willing to buy
B. Equal to or better than other available products or services
C. Meet the goals and aspirations of the person or organization taking the risk
D. Provides acceptable returns or rewards for the risk and effort required
E. All
6. ________ is attractive idea or proposition that provides the possibility of a return for the
investor or the person taking the risk.
A. Business strategy D. Competitive analysis
B. Business opportunity E. None
C. Market strategy
7. Which one is not a Source of Business Ideas?
A, Hobbies/Interests
B, Personal Skills and Experience
C, Franchises
D, Mass Media
E, None of the above
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CHAPTER FOUR
Product and Service Concept
Learning objectives:
After completing this chapter the students will be able to explain the:
 Concept of product life cycle,
 Stages in the product life cycle, and the different types of marketing mix required at each
stage
 Need for product modifications
 Need for new product development and the process through which a product has to pass
before it is finally launched into the market
 Intellectual property rights to protect products
Introduction
Most products have limited profitable life. This Unit will give you a complete picture of what
happens from the time a new product is introduced till it declines, and will show you how the
decline can, to a certain extent, be postponed. Product development involves careful planning
and implementation. Sometimes organizations revive declining products by modification or else
they follow several steps ranging from identification of market opportunity to launching of new
products to replace the declining products. The greater is the competitiveness of market, the
greater is the need for product development.
Section 1: New Product Development Process
The existence and the course of a business in the form of a company, enterprise or corporation
are directly linked with the course of its products. A business unit exists to sell products and as
far as the product sales go well so is the business unit. Products like everything else in life have a
certain life cycle. Each product goes through this life cycle and eventually dies out. There were
some products that were disappeared from the market as they entered the decline phase of their
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life cycle. So due to this fact the long-term operation of a business depends on the ongoing
development of new products.
The rapid development of new technologies, the shift change in customer needs and
attributes, and the gradual increase of the competition has forced all business to adopt New
Product Development (NPD) as a necessary and unavoidable business practice.
As you must have realized by now, it is very important to have a strategy for developing
new products. Some products of an organization might have failed, but still they remain
leading manufacturers because they have continuously added to their lines and added
product lines to their product mix. However, all the developments of new product may not
always succeed. To avoid development of a new product that will not be a success in a
market and to minimize the costs of such a development, a NPD process must be well
known and followed. Knowledge of such a process can help companies and organizations to
successfully develop new products or upgrade existing ones through a series of logical steps,
starting from idea generation and ending at the launch of the product into a market.
There are six common new product development processes;
 Idea Generation
 Screening of Ideas
 Concept Testing
 Product Designing and Evaluation
 Product Testing
 Product Launching
These will now be discussed in detail;
Stage 1: Idea generation

The first step obviously is to get ideas with regard to possible new products. Think of the sources
from which you can get such product ideas. Your answer shown; have been: Customers,
Company Salesmen, Competitors, Company Executives, and Employees within the organization
including technical people.
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As marketing is aimed at satisfaction of consumer needs, an alert marketer can get some ideas
from the customers for possible new products by keeping his eyes and ear open and more
particularly the mind to perceive even needs which are so far unexpressed. Thus, new ideas can
come from customer needs or problems requiring solution.
Company salesmen are in an excellent position to help. This is because they are in constant
touch with the market, that is, both consumers and costumers. Watching competitors and what
they introduce can also be useful for new ideas. Finally company executives and even the lower
staff can be brought in for discussions.
The Interesting method here is what is known as brain storming. This is basically done to have
a flow of ideas-good and bad. A number of people, say executives of the organization, are called
together and asked a question for new ideas or ideas for new products. They are asked to mention
it without evaluation. None is criticized. The answers are recorded on a tape recorder so that the
flow is not interrupted. Thereafter, the answers generated are evaluated as will be explained in
the next stage.
Stage 2: Idea Screening

So far, from the first stage, we have received a number of ideas-good and bad. We have now to
screen them to reduce their number to what is likely to be useful. This is known as the
`evaluation' or `screening' of ideas stage in this process. Poor ideas must be dropped immediately
because unnecessary cost should not be incurred to process them further. The ideas must be
consistent with the company's philosophy, objectives, and strategies and be in terms of the
resources available in the organization. In general, the ideas are screened in terms of:
 Possible Profitability
 Good Market Potential (Market size)
 Availability of Production Facility
 Availability of Raw Materials for such a product, if selected
 Availability of Finance
 Availability of Managerial Ability
 Uniqueness of Product
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Stage 3: Product Concept Development & Testing
Particularly when the product idea is rather revolutionary, the concept itself must be tested. For
example, people talk about `battery driven cars' to save on petrol. This is a concept which has to
be tested in the environment in which the product is sought to be introduced.
As soon as a single product idea is selected through the process described in levels 1 and 2, a
product concept has to be developed so that a complete product can emerge in later levels of the
NPD steps. Therefore, the problem one is forced to face in this level is the product concept
development and its evaluation. The product concept must be the best from many and this is
accomplished by examining all available concepts for a single product idea.
I. Concept Development
A product concept is a printed or pictorial representation and description of a new product. The
concept provides a device for communicating to both consumers and the development team the
nature of the new product, how it will work, the product’s features and characteristics, benefits,
and what problems it will solve for the user.
Concept statements provide the basis for gaining feedback from consumers to help measure the
strength, viability, and sales potential of a new product.
II. Concept Testing
Concept testing is defined as a marketing research technique that is used to evaluate a concept’s
market potential and provide information useful in strengthening the concept and developing
introductory marketing strategy. Testing a concept involves exposing a product idea to
consumers and getting their reaction to it, using a predetermined series of questions designed to
measure various reactions, feelings and opinions.
 Elements of Concept Tests

 The concept‘s relevance to consumer needs
 Consumer reaction to product attributes and features
 Reasons consumers purchase concepts
 Major strengths and weaknesses of the concept
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 Perceived advantages and disadvantages relative to competitive products
 Uniqueness
 Believability: the extent to which consumers feel that the concept can deliver the benefits
promised
 Perceived price-value: consumers expect good value so they are not necessarily turned
on by concepts which provide a good value, but a poor price-value relationship can
dramatically depress overall appeal
 The expected frequency of purchase
Concept testing can use either qualitative or quantitative techniques. Qualitative techniques, such
as in-depth interviews and focus groups, can provide a great deal of useful knowledge regarding
consumer reaction to the concept, the concept’s strengths and weaknesses, and recommendations
for improvement.
Stage 4: Product Designing and Evaluation

If the product idea or the concept passes the test, we then proceed to the engineering or the
production or the R&D stage. So far, what we had was only a description or an idea. Now this
has to be converted into a product. Prototypes are developed and tested. The test can be done
under laboratory or field conditions. At this stage of product development, the technical
problems, if any, must be solved. This is because the product must not suffer from complaints
regarding quality in use. Even a small defect might shorten the life cycle of the product as well
as spoil the company's image.
Stage 5: Product Testing Stage

Apart from mechanical performance, customer acceptance is essential. In fact, the following can
be stated as requirements for the new product, after it is designed:
1. Satisfactory performance
2. Customer acceptance
3. Economical production
4. Adequate distribution
5. Adequate servicing arrangements where required, and
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6. Effective packaging and branding
A market test should, therefore, be conducted before launching the new product. This will help
us find out whether the product can be launched successfully on a commercial scale or not. If
the product is accepted we can proceed. If it is not we can take corrective action. Hence, we can
say that the introduction of a new product is not an easy decision. It has to be weighed very
carefully in terms of possible markets, the costs involved and the potential profits
Stage 6: Launching the New Product

If a company decides to go ahead with the commercialization of a new product, it will face the
largest costs to date. The company would have already spent much on product idea generation,
product idea selection, product development, prototype development and product prototype
testing and validation, but the amount of money that commercialization requires is far more. The
company will have to built, rent a large full-scale manufacturing facility if it has none or
outsource the manufacturing process, it will have to spend a bundle on promotion and
advertising, it will have to decide upon and rent or contract a large distribution and delivery
system, and it will have to take some very difficult and important decisions about the
commercialization process in general.
The test marketing may show up something as depicted in Figure I
Figure 4:1. Market Test Decision Tree Alternative Decisions
Launching Sales
Product Exce
Sales
llent
Sales Fair
Excellent
Organize
new market
Sales poor
test
Market Modify
Test Sales Fair Market
product Test
Modify
product
Market Test
Sales Drop the
poor product
It may show that the sales are `excellent', in which case, our decision is easy and we can proceed
to launch the product. As against this, if it shows that the sales are `poor', there are generally two
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alternatives available from a practical viewpoint. We can drop the product or modify it and test it
again. If the sales are `fair', we may modify the product or conduct a new market test. The latter
is done when we feel that perhaps there is something wrong with the market test just completed.
An alternative, generally available, is to modify the product in terms of the feedback which has
been received from the market test, and then test again before the final decision is taken to
launch the product commercially or to drop it. One must, however, remember that constant
testing involves further costs. A decision must, therefore, be arrived at as early as practicable.
Hence, we can say that the introduction of a new product is not an easy decision. It has to be
weighed very carefully in terms of possible markets, the costs involved and the potential profits.
The question of timing, sometimes, is also relevant. Should the company be the first one to offer
a new `novel' product in the market? In case of small companies, if they do so, they are at a
distinct advantage. However, large companies can afford to wait. For example, Philips entered
the Stereo Hi-Fi system market relatively later. However, they were able to introduce an
attractively priced product, and quickly gained product acceptance because of their long-standing
reputation in the market.
Section 2: Product Life Cycle
A company which introduces a new product naturally hopes that the product will contribute to
the profits and provide consumer satisfaction for a long period of time. This however, does not
always happen in practice. So, progressive organizations try to remain aware of what is
happening throughout the life of the product in terms of the sales and the resultant profits.
All products and services have certain life cycles. The life cycle refers to the period from the
product's first launch into the market until its final withdrawal and it is split up in phases. During
this period significant changes are made in the way that the product is behaving into the market
i.e. its reflection in respect of sales to the company that introduced it into the market. Since an
increase in profits is the major goal of a company that introduces a product into a market, the
product's life cycle management is very important.
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The product's life cycle - period usually consists of five major steps or phases: Product
development, Product introduction, Product growth, Product maturity and finally Product
decline. These phases exist and are applicable to all products or services.
Figure 4:2. Sales Trend – in product life cycle
 Product Development Phase

Product development phase begins when a company finds and develops a new product idea. This
involves translating various pieces of information and incorporating them into a new product. A
product is usually undergoing several changes involving a lot of money and time during
development, before it is exposed to target customers via test markets. Those products that
survive the test market are then introduced into a real marketplace and the introduction phase of
the product begins. During the product development phase, sales are zero and profit is negative.
It is the time of spending with absolute no return.
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 The Introduction Phase
The introduction phase of a product includes the product launch with its requirements to getting
it launch in such a way so that it will have maximum impact at the moment of sale. Large
expenditure on promotion and advertising is common, well designed distribution efforts and
quick but costly service requirements are introduced.
Activity 4.1
In the introduction stage of a product what is likely to be the profit trend? Tick below what you
think would be the profit picture at this stage:
I. Profits will rise rapidly [ ]
II. Profits will rise gradually [ ]
III. There will be a loss in the beginning [ ]
IV. There will be a loss throughout. [ ]
In the introductory stage, there is likely to be no profits or more likely a loss. This loss may
continue for some time depending on the market factors. Thus, the correct answer could have
been either (III) or (IV). It is because, at this stage, considerable amount of funds are being
devoted to promotional expenses with a view to generate sales while the volume of the sales is
low (as already seen in the Figure II). Thus in the beginning, there is likely to be a loss and later
on, as the sales grow, the profit might accrue.
 The Growth Phase

The growth phase offers the satisfaction of seeing the product take-off in the marketplace. This is
the appropriate timing to focus on increasing the market share. If the product has been introduced
first into the market, (introduction into a "virgin" market) then it is in a position to gain market
share relatively easily. In case the product launched is successful, the sales must start picking up
or rise more rapidly. The next stage is then reached which is known as the `growth stage'. Here
the sales would climb up fast and profit picture will also improve considerably. This is because
the cost of distribution and promotion is now spread over a larger volume of sales. As the
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volume of production is increased, the manufacturing cost per unit tends to decline. Thus, from
the point of view of product strategy, this is a very critical stage.
 The Maturity Phase

When the market becomes saturated with variations of the basic product, and all competitors are
represented in terms of an alternative product, the maturity phase arrives. In this phase market
share growth is at the expense of someone else's business, rather than the growth of the market
itself. This period is the period of the highest returns from the product. At this stage, it is more
likely that the competitors become more active. In case your product is a novel one, by now
competition would have come out with a similar product in the market to compete with yours.
Therefore, the sales are likely to be pushed downwards by the competitors while your
promotional efforts would have to be increased to try and sustain the sales. Thus the sales reach a
plateau. This is called the `maturity stage' or `saturation'. At this point it is difficult to push sales
up. With regard to the `profit' picture, the profits are likely to stabilize or start declining as more
promotional effort has to be made now in order to meet competition. Unless of course, you have
the largest market share with your product and it needs no extra push in the market.
 The Decline or Obsolescence Phase

The decision for withdrawing a product seems to be a complex task and there are a lot of issues
to be resolved before decide to move it out of the market. Dilemmas such as maintenance, spare
part availability, service competitions reaction in filling the market gap are some issues that
increase the complexity of the decision process to withdraw a product from the market. This
decline that generally follows could be due to several reasons such as consumer changes and
tastes, improvement in technology and introduction of better substitutes. This is the stage where
the profits drop rapidly and ultimately the last stage emerges. Retaining such a profit after this
stage may be risky, and certainly not profitable to the organization
Often companies retain a high price policy for the declining products that increase the profit
margin and gradually discourage the "few" loyal remaining customers from buying it.
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Section 3: Marketing Mix at Different Phase
Let us now discuss the 4Ps of marketing strategy in relation to these different phases.
At the introductory stage, we have to increase and thus spend a lot on physical distribution and
promotion. This is because we have to create, an awareness and acceptance of our product. We
must also increase its availability. Very often, it is noticed that a product is advertised but is not
available at the distribution outlets. This is a waste of promotional expenses. We must make
optimum use of the available resources of the organization. Thus distribution should be arranged
before the product is launched. In any case, in these two areas substantial amounts would have to
be spent. We have to also counter the reluctance of customers to change their established patterns
and make them purchase our product, particularly if it is of a novel nature. As against this, if it is
a novel one, people may even buy it out of sheer `curiosity'.
Next in the growth stage when the sales shoot up and we are satisfied with the profit generated
by the product, competitors will now enter the market and perhaps offer new product features.
Therefore, we may have to think of improving our product so that we do not reach the ultimate
`decline' stage too quickly. The promotional expenditure is maintained at the same level or is
raised slightly in order to meet competition.
We now come to the next stage called the maturity stage. This stage generally lasts longer than
the other stages and poses problems for the management in maintaining the sales level. Actually,
there is a slowdown in the growth rate of the sales in case of such matured products. The decline
can be arrested by improvements in the product and promotion. We should, however, at this time
seriously think in terms of a new product, mix, that is, the elimination or redesign of the current
product within the near future.
Finally, the decline stage catches up. The decline' may be slow or rapid. It may be due to better
substitute products, better competition, technological advances with which we have not kept up
and several other reasons. Such a product now proves expensive for the organization. One must,
therefore, be willing to consider the elimination of such marginal or unprofitable products.
Eventually, the last weapon is to reduce the price. This is dangerous because this is a very time
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when extra promotional effort is required to be put in to prop up the product's sales. Reducing
the price may soon land the company in a loss situation.
Activity 4.2
1. Identify at least two products in each stage of product life cycle in Ethiopian
Market.
a. Product Development Phase: ……………………………
b. Introductory phase: .................................................. .............
c. Growth phase: ......................................................................
d. Maturity phase: ..............................................................
e. Decline phase: ......................................................................
2. Explain briefly the `product life cycle concept' in marketing management and
state why you feel it is useful to understand this concept.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………
3. Explain how the marketing mix has to be changed during the different stages of the product
life cycle.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
…………………………………
Section 4: Product or Service Protection
The term intellectual property, or ‘IP’, refers to the various rights which the law accords for the
protection of creative effort – and especially for the protection of economic value of creative
efforts. IP is ‘intangible’ as opposed to ‘physical’ in character.
Intellectual property or ‘IP’ refers to the rights granted by law for the results of innovation and
creativity. IP is the rights given to persons over the creations of their minds. IP rights are rights
to intangible things—to ideas, as expressed (copyrights), or as embodied in a practical
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implementation (patents). All different forms of intellectual property establish property
protection over intangible things such as: inventions, signs, music, knowledge/information etc.
There are three forms of intellectual property rights an entrepreneur should think about as he/she
creates something different and better. These are: Patents, Trademarks, and Copyrights.
1. Patents
A patent is a grant of a property right by the government to an inventor. It is issued through the
Ethiopian Science and Technology Commission. Patents are exclusive property rights that can be
sold, transferred, willed, licensed, or used as collateral much like other valuable assets. In fact,
most independent inventors do not commercialize their inventions or create new products from
their ideas. Instead they sell or license their patents to others who have the sources to develop
products and commercial markets.
Patent law stipulates broad categories of what can and cannot be patented and in the words of the
statue any person who invents or discovers any new and useful improvement thereof may obtain
a patent.
Anything that is patentable must be new, useful, and have unique inventive steps. Many
applications fall one of these two criteria. Patents are filed and later turned down because ideas
behind them have previously been registered or because they have become public knowledge.
What can be patented?

a) Processes: Methods of production, research, testing, analysis and other technologies with
new applications.
b) Machines: Products, instruments, machines and other physical objects that have proved
to be useful and unique.
c) Manufactures: combination of physical matter not found in nature fabricated in unique

and useful applications.
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d) Composition of Matter: chemical compounds, medicine and botanical compositions
that do not exist in nature in an uncultivated state nor those that could evolve in nature,
those are new and useful.
Types of Patent
A patent law may provide three categories of patents as: Utility patents, Design patents, and
Plant patents.
 Utility Patents: Granted for new processes, machines, manufactures, and compositions
not including botanical creations, with a protection for specific period.
 Design Patents: Granted for any original ornamental design for an article of manufacture
with protected specific period.
 Plant Patents: Granted for botanical creations that have been sexually reproduced and do
not exist in nature with a protected for specific period.
Process of Patenting
The process of patenting could take the following sequential activities.
A. Document Disclosure
An important service provided by the Science and Technology Commission is limited protection
through the invention disclosure program. As first step in seeking protection from the
commission, most inventors file a document disclosure statement. This is simply a statement
made by an inventor to register an idea with the commission. It will be retained for certain
period, and then removed unless a reference is made to the disclosure in a patent application.
B. The Patent Search

A patent search is required to determine whether the inventors’ creation already exists and
remains actively protected by the law. Most inventors retain attorney experienced with the search
process. The attorney will do all legal work from search to finalization of the patent.
 Preliminary Search
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The first step is to complete a preliminary search that scans patent summaries for prior claims or
inventions. Inventors or their patent attorney access patent records, try to be diligent to discover
prior patents (or patents with similarities to the invention). Then make a judgment call whether to
proceed with the application.
 Collecting Search Documents

Anyone can obtain hard photocopies of patents, drawings, abstracts, and information maintained
in scientific and technical journals. The patent changes a small fee to these services, but the
convenience is remarkable.
C. Making the Patent Application

An application is made after the preliminary search to the commissioner of patents and
trademarks. There are three main parts to the application. The first is a written document that
comprises a description of the invention, its specifications and claims. A claim is a specific
description of the item and how it works. The second part of the application is a set of drawings.
These drawings can be rather crude, but they must be accurate, drawn on flexible material and
able to be photocopied. The third part of the application is a formal oath or declaration by the
inventor. These items are bundled together and accompanied with an application by the inventor.
2. Trademarks
A trademark is a word, name, symbol or device which is used in trade with goods to indicate the
source of the goods and to distinguish them from the goods of others. A service mark is the
same as a trademark except that it identifies and distinguishes the source of a service rather than
a product. The terms "trademark" and "mark" are commonly used to refer to both trademarks and
service marks. Unlike the patent, a trademark can last indefinitely as long as the mark continuous
to perform its indicated function.
Trademark rights may be used to prevent others from using a confusingly similar mark, but not
to prevent others from making the same goods or from selling the same goods or services under a
clearly different mark. Trademarks which are used in interstate or foreign commerce may be
registered with the Patent and Trademark Office.
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It is important to note that registration with a patent and trademark office establishes legal
documentation that can be used in court. Without registration the privilege of ownership is
subject to contention in a civil action between the parties. Registration is a reasonable course of
action.
Filing to Register a Trademark or Service Mark

There are three major parts to a formal application, but filing is not a difficult procedure.
A. Written Application
By using a patent office standard form, an applicant provides conventional information such as
name, address, citizenship, identification of patents, and corporate name. Also the applicant must
make a declaration clearly stating the individual or company that claims proprietary ownership.
Moreover, the applicant must declare that a mark has been adopted and explain how it is being
used commercially.
B. Drawings
A formal drawing of each trademark must be submitted on plain white paper. The drawing
cannot have erasures or “whiteout” or multiple colors. This procedure does not need engineering
credential or special skills other than to provide an accurate rendering of the mark one wishes to
protect.
C. Specimen
Five specimens of actual trademarks must be submitted with the application. But it is not
necessary to submit specimens of all commercial uses or all intended uses.
3. Copyright
Copyrights are similar to patents in establishing ownership and protection for creative endeavor,
but they pertain to intellectual property. A copyright extends protection to authors, composers
and artists, and it relates to the form of expression rather than the subject matter. This distinction
is important because most intellectual property has proprietary information in terms of subject
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matter, and if that property cannot be patented, the copyright only prevents duplicating or using
the original material. This prohibition does not prevent another person from using the “subject
matter” and then rewrite the material. For example the concept of electronic spreadsheet (subject
matter) is not protected; however, the software program devised to create the spreadsheet (form
of expression) is protected by copyright.
Visual materials under copyright protection can be photographs, paintings, sculptures, poems,
articles stories, books, music, sound recordings, motion pictures, audiovisual works, periodicals,
choreographic works, and so on.
Obtaining a Copyright
Once a copyright declaration has been printed on material, a formal filing process may proceed
as follows.
Figure 4:3. Obtaining a Copyright process
Application
Make application to the
Declaration copyright office, pay
Print copyright Issue
required fees. Obtain verification of
declaration by the
owner on Deposit copyright and
property. Forward concurrently with registration number
application copies of
material excerpts required
for deposit.
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 CHAPTER SUMMARY
Product and service development is not the simple task for entrepreneurs by which keeping the
balance of customer need and firm profit in the long life of the venture. A company which
introduces a new product naturally hopes that the product will contribute to the profits and
provide consumer satisfaction for a long period of time. The rapid development of new
technologies, the shift change in customer needs and attributes, and the gradual increase of the
competition has forced all business to adopt New Product Development (NPD) as a necessary
and unavoidable business practice.
As you must have realized by now, it is very important to have a strategy for developing new
products. Some products of an organization might have failed, but still they remain leading
manufacturers because they have continuously added to their lines and added product lines to
their product mix. However, all the developments of new product may not always succeed. To
avoid development of a new product that will not be a success in a market and to minimize the
costs of such a development, a NPD process must be well known and followed.
All products and services have certain life cycles. The life cycle refers to the period from the
product's first launch into the market until its final withdrawal and it is split up in phases. During
this period significant changes are made in the way that the product is behaving into the market
i.e. its reflection in respect of sales to the company that introduced it into the market. Since an
increase in profits is the major goal of a company that introduces a product into a market, the
product's life cycle management is very important
 SELF-ASSESSMENT QUESTIONS
Please answer the following questions. This is meant for self-evaluation to show you how far you
have understood or remembered what you have learnt. You can always refresh your memory.
1. Which of the following is correct regarding opportunities and ideas?
A. An opportunity and an idea are essentially the same thing
B. An idea almost always meets the criteria of an opportunity
C. An opportunity is a thought, an impression, or a notion
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D. An opportunity is a favorable set of circumstances that creates a need for a new
product, service, or business.
2. Which one of the following is not the phase of product life cycle?
A. Product Development Phase
B. The Introduction Phase
C. The Growth Phase
D. The Maturity Phase
E. All
F. None of the above
3. Which one is unique from others?
A. Utility patents
B. Design patents
C. Plant patents
D. Composition of Matter
4. Which one of the following is true regarding to the Introduction stage of product
lifecycles?
A. Have to increase and thus spend a lot on physical distribution and
promotion.
B. Have to create awareness and increase its availability product at market
place.
C. Change the established patterns and make customer purchase of
product.
D. All of the above
5. Which one of the following is not the criteria of idea are screening?
A. Possible Profitability
B. Good Market Potential (Market size)
C. Availability of Raw Materials for such a product, if selected
D. Availability of Finance
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CHAPTER: FIVE
Marketing and Unique Marketing Issues
Introduction
Dear students, so far in chapter four you have learnt about how to prepare a sound business plan
and how to communicate it to various stakeholders. Developing sound business plan by itself is
nothing unless it is supported by good marketing strategy. As kottler quote it. “Marketing is Soul
of any business”. It is the science and art of how to satisfy customer needs and wants though
production and distribution of products. It is the most critical and dynamic element of business.
Therefore chapter five deals about unique marketing issues in entrepreneurship. It is organized
into four sections. Section one describes Marketing, market and marketing Information. Section
two describes regarding competition analysis in business practice Section three describes details
about a business location election and the elements to be considered in location analysis. Finally,
Section four major deals with major decisions in international marketing.
Upon completion of this chapter, students are able to:
 Define what it meant by marketing
 Identify target markets
 Conduct a sound market survey
 Set Strategic location for a suitable market
 Discuss market intelligence
 Explain about different marketing strategy
Section1: Marketing, market and marketing Information
Dear students, you are well- come to section one of chapter five. This section covers the
concept of marketing and marketing information.
 The concept of marketing
? Dear students! What do you think about marketing and marketing information?
One of the greatest needs of the owners of small businesses is to understand and develop
marketing programs for their products and services. Modern marketing programs are built
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around the “marketing concept” and performance, which directs the owners to focus their
efforts on identifying, satisfying and following up the customer’s needs at a cost that will
bring a profit.
 Marketing strategy
Marketing strategy includes identifying target markets which a small business can serve well
than its large competitors, and tailoring its product offers, prices, distribution, promotional
efforts and services towards that particular market segment. Ideally the strategy should
address customer needs which are not currently being met in the market and which represent
adequate potential size and profitability. A small business cannot be all things to all people,
so it must analyze its market and its own capabilities so as to focus on a specific target
market.
 The most common marketing strategies;
 Expanding Markets: In order to survive in the changed and changing environment, a

business enterprise needs to be strong enough to cope with the challenges before it.
Normally, any company has only two options either—
(a) Withdraw or
(b) Fight
There is no fun in surrendering before a war. Therefore, it is better to plan:
(a) Sharper, focused, competitive strategies to face the new competition.
(b) Tone up the existing strength and leverage the first mover advantage.
(c) Realize the need for growth of business enterprises.
The manner which can help a company achieve, defend, grow, expand, diversify depends on the
kind of strategy it pursues.
 Strategic Alternatives before an Enterprise

As Entrepreneurial Strategy represents the set of decisions, actions and reactions that first
generates and then exploit over time, a new entry in a way that maximizes the benefits of
newness with minimizing its cost. But whether associated with a new product, a new market
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and/or a new organization, "Newness" is like a double-edged sword – to be used carefully and
tactfully. Various strategic alternatives are available to a firm for achieving its growth objectives.
The corporate strategies a firm can adopt, have been classified into four grand categories:
(i) Stability maintain strategies
(ii) Expansion – growth strategies
(iii)Retrenchment/Divestment strategies
(iv) Combination strategies
1. Stability Strategies
Initially, the organization continues to serve its customer with basically the same products and
services "STABILITY" is what the entrepreneur is looking for in the beginning as stability
strategy is:
 Less risky
 Easier and comfortable
 Unconsciously pursued
 Defensive and satisfactory
 Enhances functional efficiencies
But now, starts the quest for growth, for expansion. To do things differently than the rivals and
develop a unique position for them, develop gradually but naturally on the enterprise.
2. Expansion Strategies:
Expansion is one of the forms of internal growth of business. Mostly, it means enlargement or
increase in the same line of activity. Expansion of an enterprise can be both domestic as well as
international. It can be pursued through a number of methods and many options are available,
depending on the degree of growth and momentum of growth which one aspires. Thus, an
expansion strategy is a strategy that a firm pursues when -
(1) It serves the public in additional product or service or adds markets of functions to
its definitions.
(2) The growth is fast in the market in which their products are sold
(3) They tend to have larger than average profit margins.
(4) A stretch rather than a fit strategy is pursued.
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(5) New markets, new products, new processes and new usage for old products are
regularly developed.
(6) Internal expansions, mergers and acquisitions are used to achieve expansion.
(7) Shifting from local to global markets is an expansion sign.
 Desire to Grow and Expand: All the businesses aspire to grow at one point of time or
the other Hence, growth/expansion strategies are the most popular and commonly used
strategies by all organizations because:
(a) A Healthy firm normally has a natural desire for growth.
(b) Growth is essential for survival because if a firm does not grow when competitors
are growing, it might lose its competitiveness.
(c) A company needs growth to increase its market share.
(d) Market leadership is an objective of growth for several companies.
(e) A company needs to diversify its business to minimize risks.
(f) Growth becomes essential for full utilization of the existing resources of the
company.
(g) To increase profits is the most obvious objectives of growth.
(h) People working in the organization will be motivated only if there are challenges,
opportunities and growth.
 Market Expansion Grid

It is also referred as; ‘Ans offs Product Grid’ is very useful framework for detecting new
intensive growth opportunities. It's believed that basically there are three expansion options:
Intensification, Integration and Diversification.
Initially, enterprise pursues internal expansion strategy.

Table 5:1. Market expansion Grid
Current Markets New Markets
Current Products Market Penetration Market Development
New products Product Development Diversification Strategy
(Source: H.I. Ansoff. Corporate strategy, 2009)
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A. Intensive Expansion:
Intensive expansion means the enterprise increase the sales of its existing product by enlarging
the existing markets. A profit market expansion can assume the form of:
I. Penetration Strategies:
A strategy to grow by encouraging existing customers to buy more of the firm's current product
is said to be penetrating strategy. Here, the enterprise strives to increase the sale of the current
products in the current markets by following approaches:
a) Encourage frequency of use:

Encourage customers for more use of the product by increasing the
(ii) Frequency of use: For example, brush twice a day with x toothpaste to prevent
cavities
(iii)Usage per use: For example, every time you shampoo your hair, repeat it two
times for better results.
b) Attract new clientele:

If an enterprise is successful in making non-users of a product the users of the product, it will
provide a potential opportunity for increasing the sales. It could be by using any mode of sales
promotion viz.
(i) Advertising
(ii) Personal selling
(iii)Discounts
(iv) Coupons
(v) Samples
c) Attract Competitors Customers:

Hindustan Lever adopted the strategy of multi-branding with an aim of capturing the market by
winning the customers of their competitors. They introduced many brands in soaps and
detergents markets, so that no segment is left untouched. It has Dove – in the Ultra premium
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segment, Lifebuoy – in the economic segment and Rexona, Liril and Lasancy – in the
intervening segments.
If the company succeeds in making the customer to switch from the competitors' brand to the
company's brands while maintaining its existing customers intact, there will be an increase in the
company's sales. This is expansion at the expense of the competitors.
II. Market Development Strategy:

Market development strategies involve selling the firm's existing products to new groups of
customers. It implies exploring new markets for the existing product – both nationally,
internationally. The new groups of customers can be searched in terms of:
(a) New Demographic Market:

Forhan's toothpaste was steadily losing its market share to Colgate and Closeup which were
coming up with gel variations of their toothpastes, with a much younger positioning. Forhan's
was being viewed as fuddy-duddy, one prescribed by the doctor and meant for the older
generation. Forhan's then came up with a brand extension-‗Forhan's Fluoride‘, with a better,
tangier taste than the original, propagating it as excellent for healthy gums and teeth, for all those
who are above 6 years. Forhan's got a New lease of Life. It beautifully targeted a new age group.
Demographics are used to characterize customers based upon their:
 Income
 Marital status
 Standard of living
 Education
 Age and sex
Thus, herein, the entrepreneur, who is currently selling the existing product to a specific
demographic group, can now offer the same to a different demographic group.
For example: Tata Nano caters to a segment of middle income group.
(b) New Product use:
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An entrepreneur might find out that people use its product in a way that was not intended or
expected. This new knowledge of product use provides insight into how the product may be
valuable to a new group of buyers. Aspirin, a pain killer, has been discovered good for heart too.
(c) New Geographical Market:

This simply suggests selling the existing products in the new locations and new markets. This
has the potential of increasing sales by offering the product to customers who have not
previously had the chance to purchase its products. While opting for this approach an
entrepreneur must be aware of:
 Customers' preferences
 Language
 Legal requirements
 Regional differences etc.
The normal practice is to first explore new markets within the country and then to move to other
countries in search of better markets. Nowadays a common philosophy adopted to expand market
is to go global. Nirma, which was initially confined to local Gujarat market later expanded to
regional and then to national markets.
Expansion is a very useful tool to safely increase a customer‘s profile. Having a large customer
base is always in the interest of the company as it helps to:
(1) Achieve economies of scale;
(2) To reduce its risk;
(3) To reduce its dependence on any one market;
(4) Counter attack a global firm for snatching their customers through better products or
lower prices;
(5) Might discover that some foreign markets present higher profit opportunities than the
domestic market.
Whatever may be the reason, the enterprise can also plan to expand adopting the strategy of
going from local to 'GLOBAL' markets.
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Target market
Owners of small businesses have limited resources to spend on marketing activities.
Concentrating their marketing efforts on one or two key market segments is the basis for
their target marketing.
The marketing mix

The marketing mix is used to describe how entrepreneurs can combine the following four
areas into an overall marketing program.
 Products and services: effective product strategies for a small business may include
concentrating on a narrow product line, developing a highly specialized product or service, or
providing a product/service package containing an unusually high amount of service.
 Promotion: this marketing decision area includes advertising, salesmanship and other
promotional activities. In general, high quality salesmanship is a must for small businesses
because of their limited ability to advertise heavily.
 Place/distribution: manufacturers and wholesalers must decide how to distribute their

products. Working through established distributors or manufacturer’s agents is generally
more feasible for small manufacturers. Small retailers should consider cost and traffic flow as
two major factors in location site selection. In other words, low-cost, low-traffic location
means spending more on advertising to build traffic.
 Price: determining price levels and/or pricing policies (including credit policy) is the
major factor affecting total revenue. Generally, higher prices mean lower volume and vice-
versa; however, small businesses can often command higher prices because of the
personalized service they can offer
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 Evaluating marketing performance
After key marketing program decisions are made, entrepreneurs need to evaluate their
decisions. Standards of performance need to be established so results can be evaluated
against them. Sound data on industry norms and past performance provide a basis for
comparing present performance. Owners should evaluate their marketing performance at
least quarterly.
The key questions are:
a. Is the business doing all it can to be customer-oriented?
b. Do employees make sure customers’ needs are satisfied and leave customers with the
feeling that they would enjoy coming back?
c. Can customers find what they want and at a competitive price?
d. How can the consumer acceptance of a product or service be analyzed?
Consumers buy products or services for their own use, but do not buy products for the purpose
of making a profit from them. Consumers buy to satisfy their own or their family’s wants and
needs. When they buy any product or service, they do so because of what they expect the
product or service to do for them. People are motivated to buy for two basic reasons:
 Emotional reasons: pride in personal appearance, social achievement, ambition,
cleanliness, pleasure, increased leisure time.
 Rational needs: durability, economy in use, economy in purchase, handiness, efficiency
in operation, dependability in use.

Psychologists have determined that consumer buying behavior is primarily directed toward
satisfying certain basic needs. These very basic needs include food, shelter and clothing. An
individual attempting to fulfill the most basic needs is led by rational motives. Persons with
few resources need the best products and services for their money in terms of quantity,
quality and dependability.
Many consumers won’t admit they purchase goods and services to satisfy emotional needs.
However, most psychologists believe that pride in personal appearance is an emotional
buying motive. Certain motives generally seem to be more rational than others. Because
people think of themselves as rational individuals, they tend to express their reasons for
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buying in very logical ways. To market a product or service successfully, entrepreneurs need
to be aware of what motivates consumers to buy a specific product/service.

1. What are the functions of marketing in entrepreneurial strategy?
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2. Outline and briefly discuss different marketing strategies?
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 What is market in marketing?

The market for a business is all the people within a specific geographical area who need a
specific product or service and are willing and able to buy it. Every business sells some type
of product or service to people. Potential customers can be described as:
1. People who need or want the product or service.
2. People who are able to buy the product or service.
3. People who are willing to buy the product or service.
Competition must be considered. If competitors are serving the same market, it must be
decided if the market is large enough to support another business. It should also be
determined how the product or service is unique and different from that of the competitors.
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Important Point entrepreneurs to know about potential customers
 Know the customers: The market can be segmented either by dividing it into
meaningful buyer groups or dividing it according to characteristics such as age, sex,
marital and family status, employment, income and trends regarding any of these
characteristics.
 Know what different customer groups wants: By segmenting the marketing into
groups, it is easier for entrepreneurs to determine what products or services each
group wants or needs.
 Know where the customer buys: Entrepreneurs need to find out where the
customers in their market are presently buying, and determine what factors will cause
them to switch and buy from their new businesses.
 Know when the customer buys: By knowing when customers buy (daily, weekly,
monthly, yearly, and seasonally), entrepreneurs will be able to determine such things
as possible hours of operation, when to advertise and quantity of merchandise to have
on hand at specific times of the year.
 Know how the customer buys: Knowing how the customer pays for products and
services can help the entrepreneur to determine a credit policy as well as a pricing
policy for the business.
 Where can customer information be located?
Customer information can be obtained from trade associations (publications), chambers of

commerce, government agencies (including local government), newspapers and magazines,
and individual research by conducting a market survey in the community.
 Conducting a Market Survey

You may have an excellent product or service to offer to the public. One key to success or
failure in business is determining whether there are enough customers willing to buy your
product or service on a regular basis. The price of the product or service must give you an
adequate profit margin to allow you to survive, make a profit and further develop the
business.
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Before committing your resources to the business, you should measure whether there is a
sufficiently large unsatisfied market. The following questions need to be answered to
determine what your competitors are doing in your proposed area of business.
 Is the market growing at a rate that allows another new business to enter?
 In a declining market, how will you capture business from your competitors?
 How do your products or services differ from those of your competitors?
 Have you identified a market segment that needs servicing?
 Steps in Conducting a Market Survey:

The process of conducting a market survey involves the following steps.
1. Define market survey objectives and specify what information is required.
2. Work out details of the market survey, such as:
 sources for obtaining information,
 time and cost of conducting the study,
 methodology to be used in gathering information,
 Development of a plan of action.
3. Select sample samples and decide what contacts and visits should be made.
4. Prepare questionnaires and plan for survey interviews.
5. Collect and analyze data.
6. Prepare a report of findings.
For new entrepreneurs, a major problem in conducting market surveys does not know specific
sources and contacts for obtaining information.
 Information Sources
The information sources can be divided into:
a. Primary Data Sources: information which originates as a result of contacts with those
who are directly involved in the relevant activity. For a furniture survey, for example,
information obtained from furniture manufacturers or wholesalers would be primary data
sources.
b. Secondary Data Sources: data which already exists and may be used in the
investigation. This information may not have been collected for a specific purpose.
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It may be obtained from trade/manufacturer’s associations or published data.
Tips for Conducting a Market Survey
The following tips can help entrepreneurs to conduct a market survey effectively and
systematically.
 Personal bias can be a negative factor in collecting information from various types of
people.
 Be patient and persistent in gathering information during the survey.
 Keep information confidential. Do not pass information on to others.
 Write down the information immediately after you visit someone. Avoid writing or
referring to your papers when interviewing someone.
 Sequencing of questions, as well as involvement and commitment to get information, are
the key factors in conducting a successful market survey.
 The best way to gain information from your competitors is to go as a potential client. You
might show interest in selling their products.
When the survey is completed, a detailed report on your findings should be prepared in
written form. The market survey report will help you to assess the feasibility of marketing
your product. It may also be an important document to convince financial institutions about
your understanding of the market and your competition.

1. Write the modern definition of marketing
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2. List the Important Point entrepreneurs to know about potential customers.

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Section2: Competition Analyzing
Competition must be expected when initiating a business, but having too much competition is an
unnecessary risk. It would be better to select a different type of business if there is too much
competition. You must know your competitors as well as you know your customers. Business
rewards come from being better than your competition. For any business, the understanding of
the competitive situation is extremely important. In fact, it may be a matter of business life and
death. A typical small enterprise may face competition from other small firms, and from large
companies having established and well known brand names. The exercise of demand analysis
would have already given the entrepreneur a fairly good idea of the nature and extent of
competition prevailing in the market. He would have got a rough assessment of the market share
being enjoyed by each competitor: However, the true nature and extent of competition can hardly
be judged from the market share being enjoyed by each competitor. In order to assess and
understand the competitive situation, an entrepreneur should try to answer the following
questions:
 How many firms are in competition with him?
 What are their market shares?
 What are the strengths and weaknesses of their products?
 What kind of consumer image does each product enjoy?
 What trade practices do the competitors employ?
 Who are the major customers of each brand?
The best way to do that is to know who your competitors are and how they operate.
Unfortunately, many entrepreneurs never bother to find out much about their competition
until it is too late. The following steps should be taken by entrepreneurs to get to know their
competitors.
Step 1: Identify your competitors

i. Direct Competitors: list each by name, address and type of business.
ii. Indirect Competitors: list the name, address and type of business of each firm that provides
products and/or services that, while not the same as yours, can be a substitute for yours.
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Step 2: Analyze businesses that have recently been set up and recently failed
i. List competitive businesses that have started within the past two years.
ii. List competitive businesses that have gone out of business within the past two years.
iii. Analyze the possible reasons for the businesses that have failed in the last two years. What
factor or combination of factors explains the optimism of the new businesses that have
succeeded? What factor or combination of factors was present in the businesses that failed?
Step 3: Analyze existing businesses

i. Estimate the sales and turnover of each of your primary competitors.
ii. Rate your competitors in terms of price, quality of product or services, facilities, advertising,
promotion and sales.
 What prices do they charge? What is the quality of their merchandise? How much do
they advertise
 What extra services do they offer?
 Are their sales terms liberal?
 Is their location expensive, moderate or cheap?
 Are their production processes and equipment modern? Are their employees well-
trained? Are their employees well paid?
iii. Determine if there is a correlation between the firms that have high sales and their methods
of operation. That is, do these firms have similar pricing, selling and/or production methods?
A thorough analysis of the methods of operation based on the firm’s sales should yield
valuable information.
Step 4: Compare your proposed business operations against the competition

A. A. Indicate the advantages your products and/or services will have in terms of price,
performance, quality, durability and visibility over the competition.
B. Be able to explain why your method of operating your business will be more successful
than that of your competitors.
C. If you plan to operate in a manner similar to other businesses, you should be able to
explain why:
1. Either the market is large enough to profitably support you and the other firms, or
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2. The market cannot support all competitors but your business will be more efficient and/or
more effective.
D. If you plan to operate in a manner completely different from the competition, you should
be able to explain why no one else is operating that way. Are other not aware of the
opportunity? Or, do they know something that you don’t?
There are competitive forces beyond direct rivals which shape up the competitive environment
that can be better understood with the five forces framework discussed below.
 Porter’s Five Forces Framework

The five forces framework developed by Michael Porter is the most widely known tool for
analyzing the competitive environment, which helps in explaining how forces in the competitive
environment shape strategies and affect performance. The framework suggests that there are
competitive forces other than direct rivals which shape up the competitive environment. These
competitive forces are as follows:
1) The rivalry among competitors in the industry
2) The potential entrants
3) The substitute products
4) The bargaining power of suppliers
5) The bargaining power of buyers
However, these five forces are not independent of each other. Pressures from one direction can
trigger off changes in another which is capable of shifting sources of competition. In the
following section each of these five forces are discussed in detail as to understand how each of
these forces affect an Industry’s environment so that one can identify the most appropriate
strategic position within the industry.
1) Threat of New Entrants: Entry of a firm in and operating in a market is seen as a threat to
the established firms in that market. The competitive position of the established firms is
affected because the entrants may add new production capacity or it may affect their
market shares. They may also bring additional resources with them which may force the
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existing firms to invest more than what was not required before. Altogether the situation
becomes difficult for the existing firms if not threatening always and therefore they resort
to raising barriers to entry. These barriers are intended to discourage new entrants and this
may be done by organizations, be in any one or more ways, as discussed below:
a) Economies of Scale: Firms which operate on a large scale get benefits of lower cost of
production because of the economies of scale. Since the new firm normally would start
its operation at a smaller scale, it will have a relatively higher cost of production; its
competitive position in the industry gets adversely affected. This barrier created through
large scale of operation is not only applicable for production side but it can be extended
to advertising, marketing, distribution, financing, after sales customer service, raw
materials, purchasing and Research and Development as well.
b) Learning or Experience Effect: The theory explaining the experience curve or the
learning curve suggests that as firms produce they grow more efficient and this brings
them cost benefits. The efficiency levels achieved is an outcome of the experience, which
teaches the organization better ways of doing things. This again keeps any new entrant at
a disadvantage.
c) Cost Disadvantage Independent of Scale: New entrants may face disadvantages which
are independent of the operations. It may be on account of the lack of proprietary product
knowledge such as patents, favorable access to raw material, favorable locations, existing
plants built and equipped years earlier at lower costs, lower borrowing costs etc.
d) Brand benefits: Buyers are often attached to established brands. Differences in physical
or mere perceived value make existing products unique and the new entrants have to tire
out to beat such brands and change the mindset of the customers.
e) Capital Requirements: High investments required for a start up in any business is
another deterrent for new entrants bringing down the possibility of increased competition.
f) Switching Costs: Switching costs, which is nothing but the expenses (financial or
psychological) which a customer incurs in switching from one seller to another. Cases
where such an expense is higher, new entrants find it difficult to establish or survive.
Such costs may be because of a strong brand association or the comfort level a customer
may be enjoying or it may be on account of a particular technology.
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g) Access to Distribution Channel: Any such critical activity like distribution channel in
the business can be a barrier for the entrants when accessibility to them is found to be
difficult. Most existing firms in FMCG industry are found to have a strong favorable
distribution channels which is very difficult to penetrate.
h) Anticipated Growth: Incumbents in a rapidly growing market are less likely to respond
to a new entrant when the market‟s growth offers enough opportunities to share. But a
new entrant position will be opposite in a slowly growing market. In addition to the
above, few general entry barriers exist in each industry‟s case, for example, regulatory
policies, tariffs and international trade restrictions are few such additional factors.
2) Bargaining Power of Suppliers: Business organizations have a large dependency on

suppliers and the latter influence their profit potential significantly. Suppliers‟ decisions on
prices, quality of goods and services and other terms and conditions of delivery and payments
have significant impact on the profit trends of an industry. However, suppliers‟ ability to do
all these depends on the bargaining power over buyers. Suppliers‟ bargaining power would
normally depend on:
a) Importance of the Buyer to the Supplier Group: The size of the supplies taken by a
particular buyer is likely to put the buyers in a relatively advantageous position. The
same may be found true if the supplier tends to get an image advantage by supplying to a
particular firm. Consequently in dealing with such buyers, suppliers‟ bargaining power is
naturally reduced. Just opposite happens when buyer is not so important to the supplier
and the latter then is less likely to offer favorable terms to win or retain the customer.
b) Importance of the Supplier’s Product to Buyers: Here the position may just be
opposite of the above situation where suppliers have a better bargaining power coming
from their sheer size or image.
c) Greater Concentration among Suppliers than among Buyers: An industry, which is
largely dominated by a few large firms, is a highly concentrated industry. Such few firms
hold greater power with them as the proportion of the industry‟s total output is in hands
of such large firms. This gives such firms greater power over those who do business with
them. The converse is true when industry has low concentration in suppliers. A higher
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concentrated supplier position may be possible on account of the sources of raw materials
available, R & D or patent rights available with fewer firms.
d) High Switching Costs for Buyers: In this case buyers suffer because of the suppliers‟
advantageous position or by the nature of supplies itself; the buyers have to face a higher
switching cost.
e) Credible Threat of Forward Integration by Suppliers: Suppliers in a given situation
may see an opportunity in moving up the value chain and may seriously think of getting
into the business of what its buyers have been doing till now. Any indication of that
nature from supplier side puts the buyers at the receiving end as they feel threatened
because of a new player in that market and of losing an assured source of supplies. A
recent example may be of Reliance which has decided to move from exploration and
refining of oil to selling of oil through its own retail petrol pumps.
3) Bargaining Power of Customers: Customers with a stronger bargaining power relative to

their suppliers may force supply prices down or demand better quality for the same price and
may demand more favorable terms of business. For instance, there will always be a difference
in the bargaining power between an individual’s buying different construction material like
cement, steel or bricks and a real estate builder buying them for the number of properties he
may have been building over so many years. Few of the following facts attach greater power
to buyers:
a) Undifferentiated or Standard Supplies: A supplier, given the nature of products it
supplies, may have a very limited choice in providing any differentiated products and this
enables a customer to get the deal at the most favorable terms. In a perfectly competitive
market situation with large number of suppliers, prices automatically are at their lowest.
b) Customer’s Price Sensitivity: Customer’s buying behavior varies with respect to their
sensitivity to prices. Depending on how important the item is for the customer’s usage
and proportion he may be spending on the item concerned, buyers‟ sensitivity to price
varies. Any customer with high price sensitivity gains advantage in its bargaining power.
c) Accurate Information about the Cost Structure of Suppliers: A more informed
customer is capable of negotiating with suppliers. Whenever such customers notice a
decline in the supplier’s costs they would always bargain for a proportional decrease in
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price. This aspect is more relevant in today‟s context of global markets where cost
benefits can come from anywhere in the world at any point in time for various reasons.
There may be a general decline in prices of a product in world market because of a glut
situation or somewhere some new discoveries may have pulled the prices down.
d) Greater Concentration in Buyer’s Industry than in Supplier’s Industry and
e) Relatively large Volume Purchase: This means that buyers are large and more powerful
than suppliers. Government departments like police department when negotiating for
large orders of security weapons or intelligence equipments will necessarily command a
greater hold than its supplier as there will be only few numbers of such institutions
buying them at a given point of time.
f) Credible threat of Backward Integration by Buyers: Different from forward
integration which suppliers tend to attempt at, buyers in order to hold their position
stronger in the market may integrate in backward manner. This will mean that the buyer
extends itself to the previous stage of manufacturing or distribution for which it had been
dependent on suppliers till now. An example could be of an entertainment channel which
airs programs outsourced from organizations producing them outside, get into the
business of producing its programs in house.
4) Threat of Substitutes: Often firms in an industry face competition from outside industry
products, which may be close substitutes of each other. For example, with the new
technologies in place now the electronic publishing are the direct substitutes of the texts
published in print. Similarly, newspapers find their closest substitutes in their online version,
though it may be a smart strategic move to position them as complementary products.
However, the competitive pressure, which any industry may face, depends primarily on three
factors:
a) Whether the substitutes available are attractively priced;
b) Whether buyers view substitutes available as satisfactory in terms of their quality and
performance;
c) How easily buyers can switch to substitutes.
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Generally it is observed that the availability and acceptability of substitutes determine an upper
price limit to a product. When relative prices of the product in question rises above that of the
substitute products, customers tend to switch away from them.
5) Competitive Rivalry: The level of rivalry is lesser in a perfectly competitive market where
there are large number of buyers and sellers and the product is uniform with everyone. Same
is true for a monopoly market where there is only one player and the type of product is also
one. However in case of oligopoly or monopolistic competition, where you will find few
players and the market conditions allow them to differentiate their products and services,
competition if found to be fierce. Few of the following factors explain the level of rivalry:
a) The Stability of Environment: An unstable environment is likely to call for a hyper-
competitive situation and of the several factors that affect stability could be technological
innovation, changes in government regulations, customers‟ profile and their needs. In an
industry which witnesses high movements in terms of entry or exit, the rules of the game
may change too frequently.
b) The Life Expectancy of Competitive Advantage: There are industries for example
consumer electronics or white goods in which the fruits of innovations do not last longer
and hence the companies do not even bother to patent them. This has an adverse implication
for the stability of the competitive environment leading to intense rivalry. Lengths of
innovation cycle, patent protection or switching costs between rivals are few factors, which
may impact the life expectancy of competitive advantage.
c) Characteristics of the strategies pursued by competitors: This also has or may have an
impact on the general approach to rivalry. For example, in a market segmented approach on
part of the competitor leads to lesser rivalry situation. Also the kind of goals, which
competitors pursue, has an impact on the rivalry. Competitors pursuing the goal of increased
market share will lead to increased rivalry again.
In an overall assessment, two critical observations regarding rivalry can be made here. First, a
powerful competitive strategy employed by one rival can greatly intensify the competitive
pressure on other rivals. Second, the frequency and rigor with which rivals use any or all
competitive weapons at their disposal can be a major determinant of whether the competitive
pressures associated with rivalry are cutthroat, fierce, strong, moderate or weak.
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2. Write the modern definition of competition?
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3. Explain Michael porter’s framework of competitive advantages?
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Section 3: Selecting a Business Location

Dear students, you are well- come to section two of chapter five. This section discusses
business location analysis and the elements to be considered in location analysis.
 Locating the Business

Selecting the business location is one of several factors which is vitally important to the
success or failure of a small business. In many instances, the small business owner looks no
further than the nearest vacancy sign for locating the business. To increase the chances of
success, it is important that considerable thought and research be given to selecting a
location. It should be emphasized that although a good location may allow a mediocre
business to survive, a bad location may spell failure for even the best planned business.
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Analysis of the location should be a continuous process throughout the life of the business.
Such factors as changing population, changes in customer buying habits, new methods of
transportation and the direction of community growth can adversely affect the suitability of
the business location. Two basic aspects of selecting a location for a business are:
(1) Deciding on a particular community, and
(2) Selecting a particular site within that community.
 Importance of Business Location

Location is more important for some types of businesses than for others. The right location is
very important for retail stores and service businesses. Clothing stores, dry cleaning
establishments and service stations all depend on a great deal of customer traffic to survive.
These types of businesses must locate near their customers to succeed.
For other types of retail and service businesses and most wholesale businesses, location is not
as important in attracting customers. Retail stores that sell high-cost items such as furniture
and appliances draw customers to them. Services such as accounting and tax firms and
wholesale businesses can be located “off the beaten path” and still have high sales.
Customers will spend time searching for the product or service offered by these businesses.
Manufacturing, construction and some of the other services are not interested in attracting
customers on the basis of the firm’s location. These types of firms find customers through
either personal selling or advertising. The location of these businesses may be selected on the
basis of costs, environmental impact, or supply of raw materials.
Economics, population and competition are important factors to consider when selecting a
business location. These factors will also help in selecting a promising city or town in which
to locate the business.
 General Factors in Selecting a Business Location

Economics
A major concern in choosing a community in which to initiate a small business is the
economic base of the community. Why do people live in the area? What is their standard of
living? Why are other businesses located in the area? A study should be made of the
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industries in the area. Do 80 per cent of the people work in one industry or very few
businesses, or does the community contain a variety of businesses? Is the industry healthy in
the area? Is the business activity in the community seasonal? Are businesses moving in or
moving out of the community? You will need to study the effect the responses to these
questions will have on your business.
How much people in an area earn determines the demand for goods and services.
Entrepreneurs should therefore gather information about income in the area they have
selected. Specific questions include: What is the average family income? What are the
income levels (low, medium, high) in the area? What are the employment/unemployment
trends? Other important economic factors might include good highways and access to
railroads.
Population
Entrepreneurs should identify the groups of people who will be their customers. For example,
if you are interested in opening a music store, it would be important to know where the
greatest population of teenagers and young adults is located because they buy the most music
CDs. Other population factors include: How stable is the area? Do people move in and out
regularly? Is the population growing or declining? If the area is rapidly growing, there will
probably be a large number of young families. All these factors need to be considered when
locating a business.
Competition
You must study your competitors by gathering information on their strengths and weaknesses.
You should know how many competitors you have and where they are located. You should
also find out how many businesses similar to yours have opened or closed in the past two
years. Indirect competition that provides similar kinds of goods and services should also be
studied.
There are three favorable conditions for opening a new firm. First, no competitors are located
in the area. Second, competitors’ businesses are poorly managed. Third, customer demand
for your product is growing.
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Basic site factors to be reviewed for every type of business include: lease-purchase terms,
competition, parking and costs of operating at the location. In addition to these basic
concerns, some specific questions also need to be answered that depend on whether you plan
to open a retail establishment, a manufacturing firm, a wholesale business or a service
business.

1 Why is location important to business success?
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2. What are the elements that entrepreneurs should consider in location decision?
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Section 4: Major Decisions in International Marketing

Before going global, the right approach is to learn how to enter foreign markets. Before making a
decision to go abroad, the company must weigh several risks by deciding:
 Strategically, logically whether to go abroad or not
 Which markets to enter
 How to enter the foreign market
 The marketing program
 Marketing organization.
Though all decisions have significant impacts and implications, the most important is “How to
Enter Foreign Market”. It can be through:
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(a) Indirect Export: The easiest and a normal way of going global is through export.
Occasional exporting is a passive level of involvement where the company exports from
time to time on:
(i) its own initiative,
(ii) work through independent middlemen on being approached by them,
(iii) In response to unsolicited orders from abroad.
When the company makes a commitment to expand through exports, the least change in the
company's product lines, workforce organization, investments or missions are involved and thus
is a convenient mode of expanding.
(b) Direct Export: Companies eventually may decide to handle their own exports. Through
this strategy of entering global market, the enterprise assumes somewhat greater risk and
investment, but so is the potential return. The company can carry on direct exporting in
several ways as:
 Through Domestically based Export Division or Department
 Through Overseas Sales Branch or Subsidiary Establishment.
 Nominations Foreign based agents or distributors to sell the goods on behalf of the
company.
(c) Licensing: Licensing represents a simple way for a manufacturer to become involved in
international marketing. The licensor licenses a foreign company to use a manufacturing
process, trademark, patent, trade secret or other item of value for a fee or royalty. Coca-
Cola carries out its international marketing by licensing bottlers around the world–or
more technically, franchising bottlers and suppliers them with the syrup and the training
needed to produce, distribute and sell the coke.
This way, the licensor safely and easily can gain entry into the foreign market at:
 Little risk
 The licensee gaining production expertise or 'well-known product or name without
having to start from scratch.
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(d) Contract Manufacturing:
Another entry method for a local firm to go global is through contract manufacturing. Here, the
firm engages local manufacturers to produce the product for them. When SEARS opened
departmental stores in Mexico and Spain, they found qualified local manufacturers to produce
many of its products. This not only significantly reduced SEARS cost of production but led the
company to earn envious revenue position. Contract manufacturing offers the company a chance
to start faster and with lesser risk.
(e) Joint Ventures:

Mostly, a joint venture is a restricted or a temporary partnership between two or more firms to
undertake jointly to complete a specific venture. The co-ventures (parties) participate in the
equality and operations of the business, sharing profits or losses in then agreed ratio. To go
global, at times when one wants to take limited, calculated risk, joint ventures might serve the
best interest.
(f) Direct Investment:
The ultimate form of global involvement is through direct ownership of foreign-based
manufacturing facilities. No doubt, here the firm exposes its large investment to risks by buying
partly or full interest in a local company or by building its own enterprise.
III. Product Development Strategies:

It implies developing or modifying the existing product to meet the requirement of the
customers. Product development strategies for growth involve developing and selling new
products to people who are already purchasing the firm's existing products, i.e., management can
consider new product possibilities in the same existing markets by:
(1) Adding new features: - a fairness cream with sunscreen component.
(2) Different Quality Levies: - Surf excel, Surf Ultra, etc.
(3) Alternative Technology: - CDMA and GPRS mobiles.
(B) Integrative Expansion:

It Involves:
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I. Vertical Expansion:
Vertical integration means that, any of the activities/functions, previously performed by the firm
right from sourcing of raw material to supply of finished goods, through external agencies will
now be performed by the firm itself through:
(i) Backward Integration: It refers to taking a step back (up) on the value-added chain
towards the raw materials, which means, that the producer also becomes a raw
materials wholesaler. In essence the firm becomes its own supplier.
(ii) Forward Integration: Forward, is taking a step forward (down) on the value added
chain towards the customers which in this case means that the firm also becomes a
finished goods wholesaler In essence, the firm becomes its own buyer.
The manufacturer of a product who does not do the marketing of it, currently, starts marketing it
directly through own show room;
II. Horizontal Integration:

Horizontal integration occurs at the same level of the value added chain but simply involves a
different, but complementary, value added chain. It may involve acquisition of one on more
competitors at the same level of business.
(C) Diversification strategy:

‘Diversification ‘means adding new lines of business. The new lines of business may be related
to the current business or may be quite unrelated. If the new lines added, make use of the firm's
existing technology, production facilities or distribution channels or it amounts to backward or
forward integration, it may regarded as related diversification. A heightened ability to learn new
knowledge represents an important source of competitive advantage that needs to be fostered by
the entrepreneur. It is particularly advantageous in a continuously changing environment to look
out for all probabilities of growing, expanding and winning edge over competitors Entrepreneurs
need to capitalize on these assets of newness, growth and diversifications, if it wants to excel and
remain as trend setter.
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 CHAPTER SUMMARY
 Marketing is the process identifying, satisfying and following up the customer’s
needs at a cost that will bring a profit. In other expression, marketing is the process of
delivering and capturing value.
 Marketing strategy includes identifying target markets which a small business can
serve well than its large competitors, and tailoring its product offers, prices,
distribution, promotional efforts and services towards that particular market segment.
Ideally the strategy should address customer needs which are not currently being met
in the market and which represent adequate potential size and profitability.
 Target market refers to the potential customers that a marketer identifies as a profitable
target customer with the company limited resource.
 The marketing mix is the set of marketing program or all activities of marketing that
consists of production, pricing, promotion and placement. A well integrated
marketing mix result success.
 SELF-ASSESSMENT QUESTIONS
Instruction: The following subjective questions are formulated to examine students
understanding of chapter-Five – Marketing and Unique marketing issues in entrepreneurship.
Therefore, students should attempt to address all questions after careful study the stated
chapter.
Part I: Choose the Best Answer from the given Alternative

1. Potential customers can be refers:
A. People who need or want the product or service.
B. People who are able to buy the product or service.
C. People who are willing to buy the product or service.
D. All
2. One of the following is not the primary sources of information?
A. Survey
B. Interview
C. Observation
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D. Document analysis
3. Which one of the following is not includes in five forces framework of Porter competitive
environment?
6)
A. The bargaining power of suppliers
B. The substitute products
C. The potential entrants
D. The rivalry among competitors in the industry
Part Two: Discussion Questions

1. Describe the marketing mix elements
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2. List the Steps in Conducting a Market Survey.
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3. Describe how economic condition can affect location decision

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CHAPTER: SIX
Organizing and Financing the New Venture
Introduction
Dear students, raising the money to launch a new business venture have always been a
challenge for entrepreneurs. Choosing the right sources of capital for a business can be just as
important as choosing the right form of ownership or the right location. It is a decision that
will influence a company for a lifetime, so entrepreneurs must weigh their options carefully
before committing to a particular funding source. This chapter emphasis on entrepreneurial
firms sources of financing. Basically the chapter details the sources equity financing and debt
financing.
After studying this chapter, students are able to:
 Describe about entrepreneurial team
 Identify the various source of entrepreneurial firm financing
 Compare the advantages and disadvantages of using various sources of finance to
start-ups
 Explain the major concerns of bankers and how to approach them for a loan.
 Discuss the methods for valuing a new venture
Section1: Entrepreneurial Team and Business Formation

The success of an enterprise is more often determined by the individuals who lead it forward
than by its products or services. The entrepreneurial team transforms creative ideas into
commercial realities through their hard work and determination. Entrepreneur must provide
inspiration and direction, and they must be able to create organizations to sustain growth. For the
independent small business, the owner must wear several hats at once leading, managing, and
administrating the new enterprise. For the corporate venture, a company “champion” must
assemble a team of like-minded people capable of breathing life into an innovation. For the high-
growth new venture, an entrepreneur must have the foresight to find partners or hire people with
complementary skills needed to guide the enterprise toward success.
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 Matching Human Resource Need and Skills
New ventures succeed or fail on the performance of founding entrepreneur. An exceptional new
product positioned in the best possible market has no life of its own without a skilled founder. It
is the capability of a determined entrepreneur or the strength of an entrepreneurial team that
breathes life into an enterprise.
Three important criteria for establishing a successful entrepreneurial team are:
1- The founder must have the personal skill and commitment to head the venture.
2- The founder must either have a team or able to identify who is needed on a team to
launch the venture.
3- The team must be able to share in the success of the new venture.
The last point is crucial. If an entrepreneur intends only to “hire in” nine to fivers, success will
rest solely on the resilience of the founder; employee contribution may be limited to their
willingness to work for wages. What an entrepreneur needs are enthusiastic people who can
share in the vision, complement one another’s skills and emotionally “buy into” the venture
concept.
 The Founder’s Role: Founding entrepreneurs are responsible for defining their
businesses and identify human resource requirements. Consequently, founders must first
understand their own skills and limitations, and then have the ability to attract others to
the venture. The inventor and marketer may form a good team, but they will also need to
demonstrate their conceptual ability to lead an enterprise and to be financial responsible.
Occasionally an individual comes along who has capabilities in all these areas, but more
often, entrepreneurs must face the reality of needing help. Consequently, an
entrepreneurial team is needed, and the lead entrepreneur must have the human resource
skills to organize this team and to focus its efforts on fulfilling the venture’s objective.
In the pre-start up stage, entrepreneur should be able to define in the business plan the
skills needed and the roles of team members. When possible, these team members and
partners should be specially identified. Founding entrepreneur is expected to fulfill
leadership roles, but often they may be more effective in the background. For example,
an inventor dentist might be more valuable in the role of a technical adviser than in a
management position. Instead of trying to start his own venture, the dentist could
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therefore bring in an experience person with marketing and leadership skills (preferably
gained in the dental instrument industry).
When the new venture is entrepreneurial (developed through the innovation of corporate
employees), then the founder’s role is that of a champion who brings together a corporate
team. In this sense, the entrepreneur must provide the motivation to encourage team
efforts that succeed in convincing management that a new product or service deserves
attention. The corporate team often works after hours, uncompensated and in the shadows
of the organization to transforms an idea to commercial reality. If a new product is
involved, then designer, market researcher, design engineers and the other staff will be
essential. When the new venture is an independent small business, the founder may have
to assume responsibility for all roles.
 Team Member Roles: Team members are partners in the emotional sense that have
joined together to pursue a dream; they are adventures bound together by a common
purpose. In most instances, team members have a stake in the venture as partners,
stockholders, or employee who expects to share in success through stock options or
bonuses. In corporate environment, employee teams often gather through casual
friendships, yet they become united through their mutual commitment to see a project
succeed.
All team members embrace their functional specialization, such as being responsible for
marketing, customer service, or product development, but they must also be part of the
“general manager” process of planning and problem solving. They must be able to
contribute to the venture with enthusiasm. They are associates who, together, will create a
business infrastructure and established a sense of “culture” that gives the venture its
unique image. They will also face crises together, and share in the wealth of success or
the agony of failure.
Once an enterprise is established and begins to grow, team member roles change. Their
individuality as founders is less important than their ability to build an organization. As
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founders, all team members have to be entrepreneurs in the sense of accepting risk and
team innovative. As members of an expanding enterprise, they must be manger capable
of building and leading an efficient staff. They must transform themselves from
mavericks that launched the venture to professional managers who can make it grow.
Therefore, roles of entrepreneurs and their team members must be describe in terms of
the stage of venture development as well as their functional skills.
 The Board of Directors: Law for incorporated companies requires a formal board of
directors, but each state regulates corporations and therefore has specific guidelines for
director’s responsibilities. When a corporation is publicly traded, the Securities and
Exchange Commission (SEC) regulates board activities and generally holds a company’s
directors responsible for corporate conduct. Privately held unincorporated companies to
not have to have boards, yet in practice many do.
 Board Composition: Smaller companies with boards usually limit the number of
directors to between five and seven persons. Entrepreneurs are notoriously reluctant to
share decision-making authority and the founder or the founder’s family often dominates
small boards. There is no ideal composition for a board of directors, but there are two
important observations. First, boards comprising mainly insiders (the founder, family
members, friends, and active investors) tend to focus on short –term budgets and
operational problems. Second, board comprising mainly outside directors tend to focus
on external relations that can augment social and professional networks to attract capital,
clientele, and management talent. Consequently, lopsided boards- either too internally or
too externally focused- may be less effective than those with members who can address
operational problems and strengthen external relations.
 Director Roles: Directors are legally responsible for the general conduct of business.
Ultimately board members are accountable for the performance and professional behavior
of board appointed officers. Although legal responsibilities are important, board level
assistance is of greater interest to entrepreneurs. Board members are supposed to assist in
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determining objectives, formulating strategies, unraveling complex problems, arbitrating
executive conflicts, monitoring budgets, and providing expertise in legal, financial, and
ethical decisions. Directors fulfill important roles beyond their decision-making duties.
These include roles as mentors, professional advisers, and members of an expanded
social network. Directors often provide important access to resources, investors,
professionals, and industry groups that are crucial to a venture’s success.

1. What is team work?
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2. List the entrepreneurial roles?

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Section2: Common Source of Financing

The initial financial objective of the entrepreneur is to obtain start-up capital at the lowest
possible cost. Cost is measured in two ways. One is the return that will have to be paid to the
investor. The other is the transaction costs involved in securing, monitoring, and accounting for
the investment. An investor may be satisfied with what appears to be a below-market return on
investment, but if the cost of the transaction is significantly high, the entrepreneur may wish to
consider an alternative source of financing. The long-term sources of cash for the venture are
debt and equity. In most cases, equity financing is more expensive than debt financing: Pure debt
has a fixed return over a period of time, but the potential gains for investors in equity financing
are unlimited.
The types and sources of financing available to the new venture depend primarily on four
factors:
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1. The stage of business development: The more developed the business, the higher the
chances and the better the terms for outside financing.
2. The type of business and its potential for growth and profitability: High-potential
firms can attract financing at better terms.
3. The type of asset being financed: The more stable the market for the asset, the easier it
is to sell and to recover costs for the lender in case of default.
4. The specific condition of the financial environment within the economy: When the
economy is good, lenders and investors are looking to put their cash to work at a profit.
When the economy is poor, investors are conservative and reluctant to invest.
The elements of the overall financial environment that should be considered are:
 Interest rates and their term structure: Under the normal rate structure, short-term
rates are lower than long-term rates, so the borrower generally prefers a series of short-
term loans. When this is reversed, the borrower prefers a long-term, fixed-rate loan.
Lenders are most concerned about payback and collateral and try to match the term of the
loan with the life of the asset.
 The level and trend in the stock market: A high and rising stock market means people
have cash and are willing to accept more risk in investing. A falling market makes
investors more conservative.
 The health of various financial institutions, such as savings and loans, commercial
banks, and international financial institutions: Institutions under pressure are very
conservative and likely to invest only in ventures that are virtually risk free.
 Level of confidence in the economy: High confidence promotes liberal investing.
 Government monetary and fiscal policy: When the government is running large
deficits and basically monetizing the debt, there are inflationary consequences. Inflation
weakens the currency and benefits borrowers. When the central bank (the Federal
Reserve Bank in a country for example, in the United States) targets inflation to
counteract government spending, the deflationary effects benefit lenders (the bond
market).
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The entrepreneur and the top management team need to be sensitive both to threats to the
successful financing of the venture (such as low consumer and producer confidence) and to
special opportunities such as government finance programs and subsidies.
Section 2.1: Equity Financing
? Dear students! What do you think about equity financing and source of equity financing?
The main source of equity financing for most entrepreneurs is their personal savings.
Financial experts say that one-half of the money needed to start a small business should come
from the owner. This means future owners must work and save to have enough money to
start a business.
Another popular source of equity financing is money from other sources such as family,
friends, venture capitalists, or another business that is generating surpluses.
However, there are a few points to consider. For example, will such investors want to get
involved with operating the business? What will happen if the business doesn’t succeed?
Will it ruin your relationship, especially with family and friends?
Equity financing can also be obtained by selling part of the business to one or more partners.
With partners putting in money, it is usually easier to raise the total amount needed.
However, partners must be able to get along and sometimes this is not easy. Since many
people starting their own business want to make their own decisions, the partnership
alternative may not be a good idea.
We begin from the bottom of the balance sheet with equity capital and move up to the less
risky and cheaper types of financing.
 Inside Equity: Financing based on an ownership stake in the new venture is called
equity. All businesses require equity. Initial equity most frequently comes from the
founder, the top management team, and their friends and relatives. Founders traditionally
make personal equity investments commensurate with their financial means. They do this
for a number of reasons: Their own money is easiest to obtain, putting up money shows
future outside investors the entrepreneurs’ level of commitment, and it offers the right
incentives to business owners. It is almost imperative that people put up their own money
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to start their businesses because it proves that they are serious and that they have put
something at risk. This is the basic source of start-up capital for entrepreneurs. How
much of their own money are they prepared to invest in their business?
This is a complicated question. On the one hand, they should be prepared to invest
everything so they don’t send the wrong message to other investors. If the entrepreneurs
hold back, investors might perceive a lack of confidence in the venture’s success. On the
other hand, it is unreasonable to think that starting a business means that an
entrepreneur’s financial future will be “all or nothing.” Founders should keep a
reasonable amount of capital out of the business, safely set aside to protect their families
and themselves. The amount held in reserve depends on the situation, but it is reasonable
and fair to set aside money for the following:
• Children’s education
• Retirement accounts (depending on age)
• Health savings accounts and insurance
• Home equity (depending on the size of the home)
• Amortization of previous personal debts.
In fact, however, it is not unusual for entrepreneurs to put all of their financial assets at risk
in starting a new venture.
Their next step is to approach the people they know best and who know and trust them—family,
friends, and other “true believers” (sometimes referred to as “fools”). These folks may be
relatively unsophisticated investors and are less likely to demand to see a business plan. They
may be willing to invest despite the apparent lack of an exit strategy to get their money back, and
they frequently require less than market-adjusted risk rates of return. A book on investing
strategy would recommend that these investors act more professionally, but they are by
definition not professionals. This is the most popular source of financing in the United States and
probably the most popular in the world, for example.
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At the beginning of the business, the risk is highest, and start-up equity carries with it the highest
risk of total loss. Therefore, it also carries the highest returns if the business is successful. These
initial investments are equity from the point of view of the firm, although the actual sums may
have been borrowed. For example, an investor can borrow against the value of his home (and
incur or increase the mortgage) to make an equity investment in the new venture. Equity from
the owners, the top managers, friends, and relatives is called inside equity because it is generally
believed that these investors will vote their stock in agreement with the company “insiders.”
 Outside Equity: Investors who have no personal relationship with the venture are called
outside equity investors. Outside equity comes from three sources: private investors,
venture capital, and public offerings.
a. Private investors: sometimes called angels, are wealthy individuals interested in the
high-risk/high-reward opportunities offered by new venture creation. Private
investors are, in fact, the largest single source of funds for new firms. Wealthy
investors exist in all communities and all cities in the developed world. The best way
to reach these people is through personal introduction by acquaintances or associates:
lawyers, accountants, consultants, and others in the economic network of a
community.
Wealthy investors will want to see a business plan or offering memorandum.

Obtaining expert legal counsel in this process is crucial. Many securities laws, both
state and federal, regulate the sale and distribution of stock. Failure to comply with
these laws and regulations can enable the investor to sue the entrepreneur for
recovery of his or her investment if the company goes broke.
The main advantages of obtaining early financing from wealthy investors are their
relative accessibility and the size of the investment pool. Also, these individuals may
be in a position to lend their positive reputations to the venture when additional funds
are needed.
There are also disadvantages. Many wealthy people made their money in the
professions or inherited it. They may lack the business expertise to advise the
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entrepreneur wisely. Even when wealthy investors are businesspeople, they may have
made their money in different types of business or long ago under different
conditions.
A second disadvantage is their inability to continue investing in the future—even rich

people have limits. The usual range of investments from wealthy individuals is
$10,000 to $500,000, with an average investment of about $50,000. This may be
enough in the early development stages, but additional money will be needed later if
the firm is successful. These additional sums may be out of reach for the angel or the
angel may not want to put too much money in a single business.
A third problem concerns the relationship between the angel and the top management
team. Private investors tend to be overprotective of their investment. They often call
the entrepreneurs or complain when things are not going well. If the business is
accessible and local, they may even visit in person, creating headaches for the
entrepreneur.
b. Venture capital: is outside equity that comes from professionally managed pools of
investor money. Instead of wealthy individuals making investments one at a time and
on their own, they pool their funds along with those institutional investors and hire
professionals to make the investment and related decisions.
The venture capital industry has long been associated with new venture creation and
has its own entrepreneurial history. As in any industry the factors that affect
profitability are the power of the buyers (investors), the power of the suppliers
(entrepreneurs who supply the deals), the threat of substitutes, the height of entry
barriers, and rivalry between venture capital firms. Also, macro-environmental factors
create both constraints and opportunities for these firms, just as they do for new
ventures. These macro factors depend on the type of industry the venture capitalists
specialize in. Because industry-specific knowledge is required for evaluating new
venture financing proposals, venture capitalists tend to specialize in certain industries.
For example, there are high-tech venture capitalists that look for cutting-edge
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technological investments, distribution-type venture capitalists who invest in ventures
that provide logistical benefits, and restaurant specialists who look to invest in the
next Domino’s or McDonald’s restaurant chain.
Venture capital is risk capital: The investors are aware of the high risk that they will
receive little or no return on their investment. To compensate for this risk, venture
capital looks for deals that can return at least 35 to 50 percent compounded over the
life of the investment (typically a five-year planning horizon). To achieve such lofty
return, the business opportunity must be extremely attractive with a potential for very
strong growth, and the venture capitalist must be able to own a substantial portion of
the firm. However, venture capitalists can often bring additional money to the table
when needed, and provide advice based on experience and on important industry
contacts.
c. Public offerings: are the ultimate source of outside equity and wealth creation. When
you own 100 percent of a company that earns $500,000 per year, you make a very
good living. When you own 50 percent of a company that makes $500,000 per year,
is publicly traded, and is valued at 25 times earnings (25 x $500,000 = $12.5 million
x .50 =$6.25 million), you are a multimillionaire. Often, in order to go from well-off
to rich, the founders of the venture must take their firm public. This type of financing
creates significant wealth because it capitalizes earnings at a multiple (the price-
earnings ratio). “Going public” is done with the aid of an investment banker through
an investment vehicle known as the initial public offering (IPO).
The IPO enables a firm to raise much more equity capital than was previously
possible. It also allows the entrepreneur, the top management team, and the earlier
investors who still own shares of the firm to sell some shares. This event, often
eagerly anticipated by founders and early investors, represents one of the most
lucrative financial opportunities in a businessperson’s career. The value of the firm
increases by an estimated percent at the completion of a public offering.
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2. What is equity financing?
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2. List the sources of equity financing

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Section2.2: Debt Financing
? Dear students! What do you think about debt financing and source of debt financing?
When equity sources are not enough, the entrepreneur has the option of borrowing from other
sources. Lenders will usually lend money for starting a business to people they know and
trust. Lenders are careful not to lend money if the risk is too great. Lenders do not want to
lose money if the business fails. Most lenders will, therefore, review the business plan very
carefully. This plan should describe how the business will be operated, how much money
will be needed and how it will be used, and at what point the business will be profitable.
Debt is borrowed capital. It represents an agreement for repayment under a schedule at an

interest rate. Both the repayment schedule and the interest rate may be fixed or variable or
have both fixed and variable components. In most cases, debt costs the company less than
equity. Interest rates on debt are historically less than rates of return on equity. Why would
entrepreneurs ever-seek anything but debt? Because debt often requires collateral and its
repayment always requires discipline to meet the regular interest and principal payments.
Failure to meet those payments puts the company in default and in jeopardy of forced
bankruptcy. If the loan is collateralized (i.e., has encumbered a specific physical asset as
assurance of repayment of principal), default may cause the loss of that asset. Therefore,
entrepreneurs often seek higher-cost equity because share-owners have no legal right to the
dividends of the company, and the equity holder is the owner of last resort. If the company is
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liquidated or forced into bankruptcy, equity shareholders receive only the residual value of
the firm after all other claims are settled.
Some entrepreneurs finance their businesses with equity instead of debt for another reason:
They often cannot get loans. Banks and other lending institutions are conservators of their
depositors’ money and their shareholders’ investments. In certain economic climates, they
are extremely reluctant to lend money to risky ventures, and they are hardly ever in a position
to lend money to start-ups. Thus, the entrepreneur is forced to raise equity capital in the
initial stages and to continue raising equity even after the early stages. Because it is difficult
for new and small businesses to procure debt financing, various agencies and departments of
the government offer special programs to help.
 Considerations in applying for a business loan

Different lending institutions have different procedures which have to be followed by the loan
applicant. While lending institutions want to help potential borrowers, these institutions have
to be assured that repayment of the loan will take place as agreed by the borrower. It is
necessary to understand the following factors that are taken into consideration when a banker
is appraising a loan application.
 Type of loan: short-term (up to one year) or long-term (longer than one year).
 Purpose of the loan: it is essential to determine that the applicant will not invest the
money in a business venture which is illegal, not favored by government policy, or is viewed
unfavorably by the local community.
 Credit worthiness and integrity of the borrower. Can the borrower be trusted?
 Capability: the business profile of the applicant becomes an indicator of the
entrepreneur’s capability to operate the project with professional expertise and effectiveness.
Capability helps the lender to understand whether the borrower will be able to utilize the loan
for the intended purpose.
 Repayment period: this is a very important requirement for both the borrower and the
lender. The lender needs to know whether the offer of the borrower to repay is realistic. The
lender can ascertain this through statistical and financial projections and advise the applicant
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regarding a realistic repayment period as well as other details such as the amount of monthly
installments.
 Security: security or collateral for the loan must be acceptable to the lender. Even if all
other conditions are fulfilled, the lender may not grant the loan if security conditions and
terms required by the bank are not satisfied. This is especially true when applying for a
business loan for the first time.
 Guarantors: some lenders call for security both in the form of property and tangible
assets and guarantees from friends.
 Business plan: this is the major instrument used by any lending institution to decide
whether a loan applicant deserves a loan. A business plan discloses whether the intended
business is viable or not. A loan applicant may have his own expert prepare a business plan
to prove that the loan he is applying for deserves due consideration by the lending
organization. The lender always appraises the business plan presented by the applicant and
comes to his own conclusions, or prepares his own feasibility study to assess and appraise the
viability of the proposed business. A very significant aspect of the business plan is the cost
involved and the cash flow. Cash flow, as well as financial and statistical projections,
indicates whether the project can generate more money than the costs incurred. These results
will indicate to the lender whether the loan is safe and the borrower can repay according to
the agreed terms.
 Equity and Debt financing comparison

Table 6.1: Equity and Debt financing comparison
TYPE OF FINANCING ADVANTAGES DISADVANTAGES
EQUITY FINANCING
Using personal savings 1. All of the profit kept. 1. Chance of loss.
2. Reduces amount of debt. 2. May force personal
3. Risk of loss provides sacrifices.
motivation to succeed. 3. Loss of return from use
4. Shows good faith to any of savings in other
potential lenders. investments.
Involving friends and 1. Brings in more cash. 1. Part of profits given up.
family 2. May be possible to 2. Part of the ownership
borrow more. given up.
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3. Financial risks shared.
Forming a partnership 1. Easy source of cash. 1. Risk of destroying
2. Less pressure and personal relations
restrictions. 2. May encourage
3. Informal arrangements. unwanted involvement in
business.
Forming a limited 1. Larger amount of cash 1. Part of profits given up.
company raised. 2. Share of control and
2. Financial risks shared. ownership given up.
3. Legal liability reduced.
4. Tax savings.
Forming a cooperative 1. Poor people are able to 1. Profits shared.
combine financial 2. Financial decision-
resources. making shared.
2. Financial risks shared.
Working with financial 1. Set up to help small 1. Favors expanding
institutions businesses. businesses.
2. Provides loans.
DEBT FINANCING
All forms of borrowing 1. Relatively easy to obtain. 1. High interest costs.
2. Control and ownership of 2. Risk that future profits
the business maintained. will not cover repayment.
3. Can be repaid at more 3. Easy to abuse and
advantageous time. overuse.
4. May save money. 4. Financial and
5. Costs may be tax confidential
deductible. information must be
6. Inflation allows 5. Lender may impose
repayment with cheaper Limitations or restrictions
money. on borrower.

1. Describe debt financing?
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2. Identify the sources of debt financing
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 CHAPTER SUMMARY
 The primary sources of financing to establish a business may be the owner’s
equity or/ borrowing from lending institutions.
 Equity financing is the main source of financing for most entrepreneurs.
Financial experts say that one-half of the money needed to start a small business
should come from the owner. Personal saving is primary source of equity
financing. This means future owners must work and save to have enough money
to start a business. Money from other sources such as family, friends, and venture
capitalists are also the popular source of equity financing. Equity financing can
also be obtained by selling part of the business to one or more partners.
 Debt Financing is the second option of financing entrepreneurial firms. When
equity sources are not enough, the entrepreneur has the option of borrowing from
other sources. Lenders or banks will usually lend money for starting a business to
people they know and trust. Lenders are careful not to lend money if the risk is
too great. This plan should describe how the business will be operated, how much
money will be needed and how it will be used, and at what point the business will
be profitable.
 SELF-ASSESSMENT QUESTIONS
1. What are the advantages and disadvantages of equity financing?
___________________________________________________________________________
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___________________________________________________________________________
__________________
2. What are the advantages and disadvantages of debt financing
___________________________________________________________________________
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CHAPTER: SEVEN
Legal Forms of Business Ownership
Introduction
Dear students, we hope you get impressed on the information got from chapter six. By now
you are going to move on an equally important chapter – chapter seven which carries
information about legal forms of business ownership. Dear students, one of the first decisions
a small business owner must make is to determine the legal form of ownership of the
enterprise. We will see different forms of businesses operate around you. Some are very
small, run by a single person without any assistance, others engage few other people. These
businesses can be categorized differently, for example they can be classified as sole
proprietorship, partnership, corporation, joint venture, and franchise. All these various forms
of businesses are what you will learn in this chapter. Further we will some other forms of
organizations which are not primarily established for business purposes. These are public
enterprise and cooperatives.
Hence, students should have a basic knowledge of all the legal forms of ownership available
and be aware of the relative advantages and disadvantages of each form of ownership. In
order to address the above stated issues in detail, chapter seven decomposed into one major
section and five sub- section s of section one.
Up on completion of this Chapter students are able to:
 Identify the types of business owner ship forms
 Know the advantages and disadvantages of the forms of business ownership
Section1: Consideration for the Choice of the Form of Business Organization

You have to appreciate the fact that there are various forms of business organizations that exist in
the environment. Again, business is a profit-seeking enterprise established for the purpose of
creating goods and services that meet the needs of mankind. Business plays a major role in the
lives of every individual as well as a nation. Business activities are undertaken to improve the
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financial and the material welfare of the participants. A major group that plays an active role in
business within a capitalist economy is the entrepreneur, that is, a person who perceives
investment opportunities and takes advantages to exploit them by organizing for the business.
Selecting a form of business ownership is a landmark step in the creation of a venture. Most
entrepreneurs however are not trained in the finer points of business law. Consequently, it is
imperative that an entrepreneur carefully searches for the types of legal ownership and then
consults an attorney (lawyer), and an accountant or both to verify whether the choice addresses
their specific needs. One of the main reasons small businesses fail is that they do not seek legal
and accounting help at the beginning. As some researchers stated that one of the key to success
in starting a new business is to understand how to get the resources you need. To stay in
business, an entrepreneur may need help from someone with more expertise than he/she has in
certain areas, or may help to raise more money to expand. How you for your business can make
tremendous difference in your long-term success as an entrepreneur.
Although an entrepreneur may change the form of ownership later, this change can be expensive,
time consuming, and complicated.
There is no single best form of business ownership. Each form has its own unique set of
advantages and disadvantages. The key to choosing the optimum form of ownership is the ability
to understand the characteristics of each business entity and how they affect an entrepreneur’s
business and personal circumstances.
Section2: Forms of Business Ownership

If you are considering entering into a business or are involved with an existing business, there
are a number of different ways to structure your business. The most common types are sole
proprietorships, partnerships, and corporations. There are also other types of business
organizations and other forms of organizations. A brief description of each type and some of the
advantages and disadvantages are noted below.
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Section2.1. Sole Proprietorship
The sole proprietorship is the simplest and most popular form of ownership. This form of
business ownership is designed for a business owned and managed by one individual. Sole
proprietorship is the easiest kind of business for you to explore in your quest for an interesting
career. The sole proprietor is the only owner and ultimate decision maker for the business. The
sole proprietorship has no legal distinction between the sole proprietor status as an individual and
his or her status as a business owner. The simplicity and ease of formation makes the sole
proprietorship the most popular form of ownership in Nigeria. One approach when naming a
business is to visualize the company’s target customer. What are they like? What are their ages,
gender, lifestyles and location? What makes our company competitive or unique to those
customers? Although sole proprietorships are common in a variety of industries, they are
concentrated primarily among small businesses unit such as repair shops, small retail outlets, and
service providers, for example, such as painters, plumbers, and barbing saloon.
 Features of sole proprietorship

The important features of sole proprietorship are:
 The business is owned and controlled by only one person.
 The risk is borne by a single person and hence he derives the total benefit.
 The liability of the owner of the business is unlimited. It means that his personal assets
are also liable to be attached for the payment of the liabilities of the business.
 The business firm has no separate legal entity apart from that of the proprietor, and so the
business lacks perpetuity.
 To set up sole proprietorship, no legal formalities are necessary, but there may be legal
restrictions on the setting up of particular type of business.
 The proprietor has complete freedom of action and he himself takes decisions relating to
his firm.
 The proprietor may take the help of members of his Family in running the business.
 Advantages of proprietorship
Following are the advantages of proprietorship
i. Ease of formation: As no legal formalities are required to be observed.
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ii. Motivation: As all profits belong to the owner, he will take personal interest in
the business.
iii. Freedom of Action: There is none to interfere with his authority. This freedom
promotes initiative and self‐reliance.
iv. Quick Decision: No need for consultation or discussion with anybody.
v. Flexibility: Can adapt to changing needs with comparative ease.
vi. Personal Touch: comes into close contact with customers as he himself manages
the business. This helps him to earn goodwill.
vii. Business Secrecy: Maintaining business secrets is very important in today’s
competitive world.
viii. Social Utility: Encourages independent living and prevents concentration of
economic power.
 Disadvantages of proprietorship
Following are the disadvantages of proprietorship
a. Limited resources: one man’s ability to gather capital will always be limited.
b. Limited Managerial Ability
c. Unlimited Liability: Will be discouraged to expand his business even when there
are good prospects for earning more than what he has been doing for fear of
losing his personal property.
d. Lack of Continuity: uncertain future is another handicap of this type of business.
If the sole proprietor dies, his business may come to an end.
e. Economies of Large Scale: As the scales of operations are small, the owner
cannot secure the economies and large scale buying and selling. This may raise
the cost of production.
 Suitability of Sole Proprietorship Form

From the discussion of the advantages and disadvantages of sole proprietorship above, it is clear
that this form of business organization is most suited where:
o The amount of capital is small
o The nature of business is simple in character requiring quick decisions to be taken
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o Direct contact with the customer is essential and
o The size of demand is not very large.
These types of conditions are satisfied by various types of small business such as retail shops,
legal or medical or accounting profession, tailoring, and service like dry cleaning or vehicle
repair etc. hence sole proprietor form of organization is mostly suitable for these lines of
businesses. This form of organization also suits those individuals who have a strong drive for
independent thinking and highly venturous some in their attitude.
Section2.2. Partnership
Another option for organizing a business is to form a partnership. Generally when a proprietor
finds it’s difficult to handle the problems of expansion, he thinks of taking a partner. In other
words, once a business grows beyond the capacity of a sole proprietorship it becomes unarguably
necessary to form partnership. It means that partnership grows out of the limitations of one‐man
business in terms of limited financial resources, limited managerial ability and unlimited risk.
Partnership represents the second stage in the evolution of ownership forms. In simple words, a
Partnership is an association of two or more individuals who agree to carry on business together
for the purpose of earning and sharing of profits.
A partnership is a legal form of business with two or more owners. Partners legally share a
business assets, liabilities, and profits according to the terms of a partnership agreement. The law
does not require a written partnership agreement, also known as the articles of partnership, but it
is wise to work with an attorney to develop an agreement that documents the status, rights and
responsibilities of each partner. The partnership agreement is a document that states all of the
terms of operating the partnership for the protection of each partner involved. Banks often want
to review the partnership agreement before lending the business money.
. The standard partnership agreement will likely include the following information:
1. Name of the partnership
2. Purpose of the business
3. Location of the business
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4. Duration of the partnership
5. Names of the partners and their legal addresses
6. Contributions of each partner to the business, at the creation of the partnership and later.
7. Agreement on how the profits or losses will be distributed.
8. Agreement on salaries or drawing rights against people for each partner.
9. Procedure for expansion through the addition of new partners.
10. Distribution of the partnership asset to the partners.
11. Sale of the partnership interest
12. Absence or disability of one of the partners
13. Voting rights
14. Decision making authority
15. Financial authority
16. Handling tax matters
17. Alteration or modifications of the partnership agreement.
18. Termination of partnership
19. Distribution of assets upon dissolution of the partnership
 Types of Partnership
There are four types of partnership, on the basis of liability of partners:
1. General partnership: This is a partnership in which all owners share in operating the
business and in assuming liability for the business’ debts.
2. Limited partnership: This is a partnership with one or more general partners and one or
more limited partners. Limited partnership is one in which certain partners are liable
only for the amount of their investment. The purpose of a limited partnership is to allow
one or more individuals to provide capital on which a return is expected. In case of
liquidation, the limited partners only lose the capital.
3. Master Limited Partnership (MLP): This is a newer form of partnership which looks
much like a corporation in that it acts like a corporation and is traded on the stock
exchanges like a corporation but it is taxed like a partnership and thus avoids the
corporate income tax.
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4. Limited Liability Partnership (LLP): LLP limited partners risk losing their personal
assets to only their own acts and omissions of people under their supervision. This
newer type of partnership was created to limit the disadvantage of unlimited liability.
 Types of partners on the basis of the involvement in partnership

An entrepreneur interested in being involved in partnership form of business should endeavor to
understand the types of partners that he/she can choose to be in this form of business. Partners
may be classified on the basis of liability, degree of management participation in management
share in the profit and so on. The following types of partners are organized:
1. General partner: A general partner is an owner (partner) who has unlimited liability and
is active in managing the firm.
2. Limited partner: A limited partner is an owner who invests money in the business but
does not have any management responsibility or liability for losses beyond the
investment.
3. Silent partners: These are partners who are known by the public as owners of the
business, but they may take no active role in marketing the business.
4. Secret partners: These are partners who take active role in the management of the
company but they are unknown to the outsiders as partners.
5. Sleeping partners: These are also known as dormant partners, they are neither known as
partners by the public nor do they participate in managing the company. They only share
from the profit /loss of the business to the tune of capital contributed.
6. Nominal partners: These kinds of partners are publicly known that they are partners
although they have no investment in the business and therefore have no rights of
management. They merely lend their names to the enterprise and may be liable for
certain debt of the partnership.
 Features of Partnership
1. Simple procedure of formation: the formation of partnership does not involve any
complicated legal formalities. By an oral or written agreement, a Partnership can be
created. Even the registration of the agreement is not compulsory.
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2. Capital: The capital of a partnership is contributed by the partners but it is not necessary
that all the partners should contribute equally. Some may become partners without
contributing any capital. This happens when such partners have special skills, abilities or
experience. The partnership firm can also raise additional funds by borrowing from banks
and others.
3. Control: The control is exercised jointly by all the partners. No major decision can be
taken without consent of all the partners. However, in some firms, there may partners
known as sleeping or dormant partners who do not take an active part in the conduct of the
business.
4. Management: Every partner has a right to take part in the management of the firm. But
generally, the partnership Deed may provide that one or more than one partner will look
after the management of the affairs of the firm. Sometimes the deed may provide for the
division of responsibilities among the different partners depending upon their
specialization.
5. Duration of partnership: The duration of the partnership may be fixed or may not be
fixed by the partners. In case duration is fixed, it is called as “partnership for a fixed term.
When the fixed period is over, the partnership comes to an end.
6. Unlimited Liability: The liability of each partner in respect of the firm is unlimited. It’s
also joints, and several and therefore any one of the partners can be asked to clear the
firm’s debts in case the assets of the firm are inadequate for it.
7. No separate legal entity: the partnership firm has any independent legal existence apart
from that of the persons who constitute it. Partnership is dissolved when any partner dies or
retires. Thus it lacks continuity.
8. Restriction on transfer of share: A partner cannot transfer his share to an outsider
without the consent of all the other partners.
 Advantages of partnership
1. Ease of formation: partnership can be easily formed without expense and legal formalities.
Even the registration of the firm is not compulsory.
2. Large resources: when compared to sole‐proprietorship, the partnership will have larger
resources. Hence, the scale of operations can be increased if conditions warrant it.
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3. Better organization of business: as the talent, experience, managerial ability and power of
judgment of two or more persons are combined in partnership, there is scope for a better
origination of business.
4. Greater interest in business: as the partners are the owners of the business and as profit
from the business depends on the efficiency with which they manage, they take as much
interest as possible in business.
5. Prompt decisions: as partners meet very often, they take decisions regarding business
policies very promptly. This helps the firm in taking advantage of changing business
conditions.
6. Balance judgment: as partners possesses different types of talent necessary for handling
the problems of the firm, the decisions taken jointly by the partners are likely to be
balanced.
7. Flexibility: partnership is free from legal restriction for changing the scope of its business.
The line of business can be changed at any time with the mutual consent of the partners. No
legal formalities are involved in it.
8. Diffusion of risk: the losses of the firm will be shared by all the partners. Hence, the share
of loss in the case of each partner will be less than that sustained in sole proprietorship.
9. Protection to minority interest: important matters like change in the nature of business,
unanimity among partners is necessary hence, the minority interest is protected.
10. Influence of unlimited liability: the principle of unlimited liability helps in two ways.
First, the partners will be careful in their business dealings because of the fear of their
personal properties becoming liable under the principle of unlimited liability. Secondly, it
helps the firm in raising loans for the business as the financers are assured of the realization
of loans advanced by them.
 Disadvantages of partnership
1. Great risk: as the liability is joint and several, any one of the partners can be made to pay
all the debts of the firm. This affects his share capital in the business and his personal
properties.
2. Lack of harmony: some frictions, misunderstanding and lack of harmony among the
partners may arise at any time which may ultimately lead to the dissolution.
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3. Limited resources: because of the legal ceiling on the maximum number of partners,
there is limit to the amount of capital that can be raised.
4. Tendency to play safe: because of the principle of unlimited liability, the partners tend to
play safe and pursue unduly conservative policies.
5. No legal entity: the partnership has no independent existence apart from that of the
persons constituting it, i.e., it is not a legal entity.
6. Instability: the death, retirement or insolvency of a partner leads to the dissolution of the
partnership. Further even any one partner if dissatisfied with the business, can bring about
the dissolution of partnership. Hence partnership lacks continuity
7. Lack of public confidence: no legal regulations are followed at the time of the formation
of partnership and also there is no publicity given to its affairs. Because of these reasons, a
partnership may not enjoy public confidence.
 Dissolution and Termination of a Partnership

Partners expect their business relationships are going to last forever. However, most do not.
There are possibilities that problems may occur when the entrepreneur realizes he or she is not in
charge of his or her own company. Even when partnerships work, there are always fears that the
partners will develop different business goals. Partners may dissolve or terminate the partnership.
Thus dissolution occurs when a general partner ceases to be associated with the business. This
may be as a result of:
 Expiration of a time period or completion of the project undertaken as delineated in the
partnership agreement.
 Expressed wish of any general partner to cease operation.
 Expulsion of a partner under the provisions of the agreement.
 Withdrawal, retirement, insanity, or death of a general partner (except when the
partnership agreement provides a method of continuation).
 Bankruptcy of the partnership or of any general partner.
 Admission of a new partner resulting in the dissolution of the old partnership and
establishment of a new partnership.
 A judicial decree that a general partner is insane or permanently incapacitated, making
performance or responsibility under the partnership agreement impossible.
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 Mounting losses that make it unpractical for the business to continue.
 Impropriety or improper behavior of any general partner that reflects negatively on the
business.
Section2.3. Corporation
A corporation is a separate legal entity. It can sue and be sued in its own name, hold property in
its own name, and enter into contracts in its own name, including contracts with its shareholders.
A corporation can be more expensive to set up and maintain than other forms of business
organizations.
It has several advantages including that it is a separate legal entity and therefore has the ability to
do many of the things that a natural personal can do. It also provides limited liability such that
shareholders are generally only liable to lose the value of their shares and are not personally
liable for the obligations of the corporation or the actions of the directors. Directors may be
liable in certain situations.
There are some tax advantages to being a corporation, such as the small business deduction and
there may be some tax disadvantages, such as if the corporation incurs losses.
The incorporation of companies differs from one country to the other. Each country has a body
of laws that guide the registration and operations of companies.
 Features of Corporation
You are now familiar with the concept of corporation as a form of business organization. Let us
now study its characteristics.
i. Legal formation: No single individual or a group of individuals can start a business and
call it a corporation. A corporation comes into existence only when it has been
registered after completion of all formalities required by a law.
ii. Artificial person: Just like an individual, who takes birth, grows, enters into
relationships and dies, a corporation takes birth, grows, enters into relationships and
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dies. However, it is called an artificial person as its birth, existence and death are
regulated by law and it does not possess physical attributes like that of a normal person.
iii. Separate legal entity: Being an artificial person, a corporation has its own separate
existence independent of its members. It means that a corporation can own property,
enter into contracts and conduct any lawful business in its own name. It can sue and can
be sued by others in the court of law. The shareholders are not the owners of the
property owned by the company. Also, the shareholders cannot be held responsible for
the acts of the company.
iv. Common seal: A corporation has a seal, which is used while dealing with others or
entering into contracts with outsiders. It is called a common seal as it can be used by
any officer at any level of the organization working on behalf of the company. Any
document, on which the company's seal is put and is duly signed by any official of the
company, become binding on the company. For example, a purchase manager may
enter into a contract for buying raw materials from a supplier. Once the contract paper
is sealed and signed by the purchase manager, it becomes valid. The purchase manager
may leave the company thereafter or may be removed from the job or may have taken a
wrong decision, yet for all purposes the contract is valid till a new contract is made or
the existing contract expires.
v. Perpetual existence: A corporation continues to exist as long as it fulfills the
requirements of law. It is not affected by the death, lunacy, insolvency or retirement of
any of its members. For example, in case of a private limited company having four
members, if all of them die in an accident the company will not be closed. It will
continue to exist. The shares of the company will be transferred to the legal heirs of the
deceased members.
vi. Limited liability: In a corporation, the liability of a member is limited to the extent of
the value of shares held by him. While repaying debts, for example, if a person owns
1000 shares of Br.10 each, then he is liable only up to Br. 10,000 towards payment of
debts. That is, even if there is liquidation of the company, the personal property of the
shareholder cannot be attached and he will lose only his shares worth Br. 10,000.
vii. Democratic management: corporations have democratic management and control.
That is, even though the shareholders are owners of the company, all of them cannot
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participate in the management of the company. Normally, the shareholders elect
representatives from among themselves known as ‘Directors’ to manage the affairs of
the company.
 Advantages of Corporation
.The main advantages of corporation are:
i. Large financial resources: A corporation is able to collect a large amount of capital
through small contributions from a large number of people. In public limited company
shares can be offered to the general public to raise capital. They can also accept
deposits from the public and issue debentures to raise funds.
ii. Limited Liability: In case of a company, the liability of its members is limited to the
extent of the value of shares held by them. Private property of members cannot be
attached for debts of the company. This advantage attracts many people to invest their
savings in the company and it encourages the owners to take more risk.
iii. Professional management: Management of a company is vested in the hands of
directors, who are elected democratically by the members or shareholders. These
directors as a group known as Board of Directors ( or simply Board) manage the affairs
of the company and are accountable to all the members. So members elect capable
persons having sound financial, legal and business knowledge to the board so that they
can manage the company efficiently.
iv. Large-scale production: Due to the availability of large financial resources and
technical expertise it is possible for the companies to have large-scale production. It
enables the company to produce more efficiently and at lower cost.
v. Contribution to society: A corporation offers employment to a large number of people.
It facilitates promotion of various ancillary industries, trade and auxiliaries to trade.
Sometimes it also donates money towards education, health and community services.
vi. Research and Development: Only in company form of business it is possible to invest a
lot of money on research and development for improved processes of production, new
design, better quality products, etc. It also takes care of training and development of its
employees.
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 Disadvantages of corporation
In spite of many advantages of the company form of business organization, it also suffers from
some limitations. Let us note the limitations of corporations.
i. Difficult to form: The formation or registration of corporation involves a complicated
procedure. A number of legal documents and formalities have to be completed before a
company can start its business. It requires the services of specialists such as Chartered
Accountants, Company Secretaries, etc. Therefore, cost of formation of a company is
very high.
ii. Excessive government control: corporations are regulated by government through
Companies Act and other economic legislations. Particularly, public limited companies
are required to adhere to various legal formalities as provided in the Companies Act
and other legislations. Non-compliance with these invites heavy penalty. This affects
the smooth functioning of the companies.
iii. Delay in policy decisions: Generally policy decisions are taken at the Board meetings of
the company. Further the company has to fulfill certain procedural formalities. These
procedures are time consuming and therefore, may delay action on the decisions.
iv. Concentration of economic power and wealth in few hands: A corporation is a large-
scale business organization having huge resources. This gives a lot of economic and
other power to the persons who manage the company. Any misuse of such power
creates unhealthy conditions in the society, e.g., having monopoly over a particular
business or industry or product; exploitation of workers, consumers and investors.
 Suitability of Corporation
A corporation form of business organization is found to be suitable where the volume of business
is large and huge financial resources are needed. Since members of a corporation have limited
liability it is possible to raise capital from the public without much difficulty. This form of
organization is also suitable for businesses which involve heavy risks. Again, for business
activities which require public support and confidence, corporation form is preferred as it has a
separate legal status. Certain types of businesses, like production of pharmaceuticals, machine
manufacturing, information technology, iron and steel, aluminum, fertilizers, cement, etc., are
generally organized in the form of corporation.
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Section2.4. Joint Ventures
A joint venture is similar to a partnership but is generally limited to a single project. It involves
two or more parties combining their expertise, services and other resources for a limited purpose
and usually for a limited time. One advantage of a joint venture is the ability to designate, by
contract, differing levels of obligation and commitment between the parties and to separate
business interests both during the joint venture project and after its completion.
A joint venture has as its basis a contractual relationship between parties who intend to associate
losses and each having some degree of management control over the venture. However, the
parties must be careful not to agree to carry on business together or they may find that they have
formed a partnership rather than a joint venture. The parties should contract in a manner that
does not involve the parties being identified as a combined entity, where either party is permitted
to act for or on behalf of the other. Much of the law of partnership is nonetheless applicable to
joint ventures.
Mostly, a joint venture is a restricted or a temporary partnership between two or more firms to
undertake jointly to complete a specific venture. The co-ventures (parties) participate in the
equality and operations of the business, sharing profits or losses in then agreed ratio. To go
global, at times when one wants to take limited, calculated risk, joint ventures might serve the
best interest.
 Advantages & Disadvantage of a Joint Venture

There are many good business and accounting reasons to participate in a Joint Venture (often
shortened JV). Partnering with a business that has complementary abilities and resources, such as
finance, distribution channels, or technology, make good sense. These are just some of the
reasons partnerships formed by joint venture are becoming increasingly popular.
A joint venture is a strategic alliance between two or more individuals or entities to engage in a
specific project or undertaking. Partnerships and joint ventures can be similar but in fact can
have significantly different implications for those involved. A partnership usually involves a
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continuing, long-term business relationship, whereas a joint venture is based on a single business
Project.
Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective.
This may be to develop a product or intellectual property rather than joint or collective profits, as
is the case with a general or limited partnership.
A joint venture, like a general partnership is not a separate legal entity. Revenues, expenses and
asset ownership usually flow through the joint venture to the participants, since the joint venture
itself has no legal status. Once the Joint venture has met its goals the entity ceases to exist.
 What are the Advantages of forming a Joint Venture?

 Provide companies with the opportunity to gain new capacity and expertise
 Allow companies to enter related businesses or new geographic markets or gain new
technological knowledge access to greater resources, including specialized staff and
technology sharing of risks with a venture partner
 Joint ventures can be flexible. For example, a joint venture can have a limited life span
and only cover part of what you do, thus limiting both your commitment and the
business' exposure.
 In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit
from non-core businesses.
 Companies can gradually separate a business from the rest of the organization, and
eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a
sale by one partner to the other.
 The Disadvantages of Joint Ventures

It takes time and effort to build the right relationship and partnering with another business can be
challenging. Problems are likely to arise if:
 The objectives of the venture are not 100 per cent clear and communicated to everyone
involved.
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 There is an imbalance in levels of expertise, investment or assets brought into the venture
by the different partners.
 Different cultures and management styles result in poor integration and co-operation.
 The partners don't provide enough leadership and support in the early stages.

1. Distinguish a sole proprietorship, a partnership, a Joint Ventures and a cooperative?
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2. What are the legal costs and procedures for starting all four types of business ownership?
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Section3. Other Forms of Organizations

Section3.1. Co-operative
A co-operative form of business organization is different from other forms of organization. It is a
voluntary association of persons for mutual benefit and its aims are accomplished through self
help and collective effort. The main principle underlying a cooperative organization is mutual
help, i.e., each for one and all for each.
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A form of business ownership which involves a collective ownership of a production, storage,
transportation or marketing organization is what is referred to as a co-operative. Some
individuals dislike the notions of having owners, managers, workers and buyers as separate
parties with separate goals for business organization. They envision a situation whereby people
will co-operate with one another as an association and share the wealth more evenly. This is
what necessitates the form of business ownership referred to as cooperatives.
A Co-operative society has much in common with partnership, yet there are differences between
the two types of organization. In partnership, mutual benefit is restricted to partners only, but in a
co-operative society it extends to its members as also the public. For example in a consumer co-
operative store or a co-operative credit society, the benefits are available to the members as well
as the general public. Besides, partnership requires the existence of some business activity
whereas a cooperative may be formed whenever individuals have common needs, which are
difficult to fulfill single-handed. Also, registration is optional in the case of partnership but it is
compulsory for a co-operative society.
 Types of Co-operative
1. Consumers’ co-operative societies: Consumer’ cooperatives are organized by
consumers to eliminate middlemen and to establish direct relations with the
manufacturers or wholesalers. These societies are formed by consumers to ensure a
steady supply of goods and services of high quality at reasonable prices. It purchases
goods either from the manufacturers or wholesalers for sale at reasonable prices. The
profit if any is distributed among members as dividend in the ratio of capital contributed
and also bonus in proportion to the purchases made by them.
2. Producers’ co-operative societies: Producers’ cooperative is formed to help the
members in procuring inputs for production of goods or services. These societies
generally provide raw material, tools and equipment and other common facilities to its
members. This helps them to concentrate their attention on production of goods.
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The society provides inputs to the members and takes over their output for sale to
outsiders. The basis for distribution of bonus is the goods delivered for sale by each
member.
3. Co-operative marketing societies: Co-operative marketing societies are voluntary
associations of small producers, who find it difficult to individually sell their products at
a profit. The main purpose of such a society is to ensure a steady and favorable market
for the output of its members. The output is pooled together and sold at the best price.
The sale proceeds are distributed in proportion to the contribution of the members to the
pool. Marketing co-operatives eliminate middlemen and ensure honest trading practices
in weighing, measuring and accounting.
4. Co-operative credit societies: Such societies are formed to provide financial help in the
form of loans to members. The funds of these societies consist of share capital
contributed by the members and the deposits made by them and outsiders. The funds are
used in giving loans to needy members on easy terms. Thus, the members are protected
from the exploitation of moneylenders, who charge very high rates of interest. Another
important purpose of credit co-operatives is to encourage the habit of thrift among their
members.
5. Co-operative farming societies: In co-operative farming societies, small farmers join
together and pool their resources for cultivating their land collectively. Their objective is
to achieve economies of large scale farming and maximizing agricultural output. Such
societies are particularly important in the case of countries like India, where agriculture
suffers from excessive sub-division and fragmentation of land. Co-operative farming
makes it possible for members to use modem tools and equipments, good seeds, fertilizer
and irrigation facilities in order to achieve higher production.
6. Co-operative housing societies: They are formed to provide residential accommodation
to the members. They undertake the purchase and development of land and/or
construction of houses/flats on the land. Some housing co-operatives provide their
members with necessary loans at low rates of interest to build houses. These societies are
gaining popularity in big cities.
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 Characteristics of Co-operative Organization
The following are the main characteristics of cooperative societies:
i. Voluntary association: In co-operatives, the membership is voluntary. Anybody having
a common interest is free to join a co-operative society. The member can also leave the
society anytime after giving proper notice.
ii. Equal voting rights: In a co-operative society, the principle of one-man one vote is
adopted. A member has only one vote irrespective of the number of share(s) held by
him. Thus, a co-operative society is run on democratic principles.
iii. Separate legal entity: A co-operative society is required to be registered under the Co-
operative Societies Act. Registration provides it a separate legal entity. Its existence is
quite different from its members. The death, insolvency or lunacy of a member does not
affect its existence. It can sue and be sued in its own name. It can make agreements as
well as purchase and sell properly in its own name.
iv. Service motive: A co-operative society is based on the service motive of its members.
It’s main objective is to provide service to the members and not to maximize profits.
Earning profit is the most important objective of other forms of business organization. It
is not so in the case of co-operatives.
v. Distribution of surplus: Out of the profits of the cooperative, members are paid
dividend and bonus. The bonus is given according to the volume of business transacted
by each member with the co-operative society. For example, in a consumer co-operative
society, bonus is paid in proportion to the purchases made by members during a year. In
producers’ co-operative the valued goods delivered for sale form the basis of distributing
bonus.
 Merits of Co-operative Organizations

The co-operative form of organization offers the following advantages:
i. Easy to form: A co-operative society is voluntary association and may be formed with a
minimum of ten adult members. Its registration is very simple and can be done without
much legal formalities.
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ii. Open membership: Membership in a Co-operative organization is open to all having a
common interest. A person can become a member at any time he likes and can leave the
society by returning his shares without affecting its continuity.
iii. Democratic management: A co-operative society is managed in a democratic manner. It
is based on principle of one man one vote. All members have equal rights and can have a
voice in its management.
iv. Limited liability: The liability of the members of a cooperative society is limited to the
extent of capital contributed by them. They don’t have to bear personal liability for the
debts of the society.
v. Stability: A co-operative society has a separate legal existence. It is not affected by the
death, insolvency, lunacy or permanent incapacity of any of its members. It has a fairly
stable life and continues to exist for a long period.
vi. Economical operations: The operation of co-operative society is quite economical due
to elimination of middlemen and the voluntarily services provided by its members.
vii. Government patronage: Government gives all kind of help to co-operatives, such as
loans at lower rates of interest and relief in taxation.
viii. Other benefits: Certain non-economic benefits are also derived by members through
cooperatives. Credit cooperatives, for instance, promote habits of thrift and producers’
co-operative encourage joint activity among members.
 Limitations of Co-operative Organizations

As against the above-mentioned advantages of cooperatives the following limitations and
drawbacks of this form of organization must also be noted:
1. Limited capital: Co-operatives are usually at a disadvantage in raising capital because of
the low rate of return on capital invested by members.
2. Inefficient management: The management of a cooperative society is generally
inefficient because the managing committee consists of part-time and inexperienced
people. Qualified managers are not attracted towards a co-operative on account of its
limited capacity to pay adequate remuneration.
3. Absence of motivation: A co-operative society is formed for mutual benefit and the
interest of individual members is not fully satisfied. There is no direct link between effort
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and reward. Hence members are not inclined to put in their best efforts in a co-operative
society.
4. Differences and factionalism among members: Once the initial enthusiasm about the
co-operative ideal is exhausted, differences and group conflicts arise among members.
Then it becomes very difficult to get full cooperation of the members. The selfish motives
of members begin to dominate and service motive is sometimes forgotten. But the society
continues because it functions in the interest of members.
5. Rigid rules and regulations: Excessive government regulation and control over Co-
operatives affect their functioning. For example, a Co-operative society is required to get
its accounts audited by the auditors of the co-operative department and submit its accounts
regularly to the Registrar. These regulations and control may adversely affect the
flexibility of operations and the efficiency of management in a co-operative society.
 CHAPTER SUMMARY
It goes without saying that it is not easy to choose the best form of business organization. Its
evidence is outlined in this study session that an entrepreneur may participate in the business
world in a variety of ways. He or She can start a sole proprietorship, partnership, limited liability
company (private or public), or cooperative, There are advantages and disadvantages to each, but
whichever one is selected there are risks. Before you decide which form is good for you, you
need to:
 Assess the nature, goals and anticipated future of the business.
 Determine the resources, capabilities, and risk level of the owner.
 Review your current and expected tax situation.
 Understand the laws of your state and other jurisdictional regulations relating to forms of
business ownership.
 Involve professional advisers, such as an attorney and an accountant to advise and assist
with the decision process and take the appropriate action.
 SELF- ASSESSMENT QUESTIONS

1. One of the following is not an advantage of sole proprietorship
A. Ownership of all profits B. Minimum legal
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C. Unlimited liability
D. Privacy
2. The Minimum number required to start a sole proprietorship

a. One b. Seven
c. Two d. Twenty
3. All of the followings are the disadvantages of sole proprietorship except
(a) Limited growth
(b) Unlimited liability
(c) Lack of continuity after the
death of promoter
(d) Easy to raise capital
4. Partnership formation requires minimum and maximum number of partners
respectively
(a) 2 and 20
(b) 2 and 50
(c) 2 and 7
(d) 7 and 20
5. The document that states all the terms of partnership is known as
(a) Partnership agreement
(b) Article of partnership
(c) Article of association
(d) a and b
6. One of the major documents of incorporation is
(a) Article of partnership
(b) Partnership agreement
(c) Memorandum association
(d) Memorandum
incorporation
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CHAPTER: EIGHT
Entrepreneurial Firm Growth Strategies
Introduction
Dear students, Globalization has increased the competition amongst firms. There are more and
more companies which are motivated to conquer foreign markets and enlarge their presence
on these markets. Choosing the right and appropriate growth strategy has a growing
importance. Now days, Small, middle-sized and big companies are using different
approaches to reach their target customers, increase profits or ensure the company’s growth.
Different strategies offer these companies various opportunities to adapt modes to enter
foreign markets. Dear student’s chapter eight is organized in that gives accurate knowledge
about entrepreneurial firm growth strategies. In these chapter growth strategies; exporting,
licensing, franchising, joint-venture, strategic alliance and merger and acquisition are
included.
Chapter Objectives:
At the end of this chapter students should be able to:
 Identify entrepreneurial firm growth strategies
 Understand how each entrepreneurial firm growth strategies can be considered as
external and internal growth strategy.
Section: 1. Type of Firm Growth Strategies

 Section overview
Dear students, you are well-come to section one of chapter eight. This section details the
entrepreneurial firm growth strategies. In these section growth strategies: exporting,
licensing, franchising, joint- venture, strategic alliance and merger and acquisition are going
to be discussed.
? Dear students! What do you know about entrepreneurial firm growth strategies?
Section 1.1: Exporting
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Exporting is characterized by the transportation of finished goods from one country to
another. The distribution on site is done by an intermediary or by foreign based distributors
or agents. Exporting represents the least commitment on the part of the firm entering a
foreign market. Exporting to a foreign market is a strategy many companies follow for at
least some of their markets. Since many countries do not offer a large enough opportunity to
justify local production, exporting allows a company to centrally manufacture its products for
several markets and therefore to obtain economies of scale. Furthermore, since exports add
volume to an already existing production operation located elsewhere, the marginal
profitability of such exports tends to be high.
A firm has two basic options for carrying out its export operations. The form of exporting can
be directly under the firm`s control or indirect and outside the firm`s control. It can contact
foreign markets through a domestically located (in the exporters country of operation)
intermediary-an approach called indirect exporting. Alternatively, it can use an intermediary
located in the foreign market-an approach termed direct exporting.
Indirect Exporting: Indirect exporting includes dealing through export management

companies of foreign agents, merchants or distributors. Several types of intermediaries
located in the domestic market are ready to assist a manufacturer in contacting international
markets or buyers. The major advantage for managers using a domestic intermediary lies in
that individual`s knowledge of foreign market conditions. Particularly, for companies with
little or no experience in exporting, the use of a domestic intermediary provides the exporter
with readily available expertise. The most common types of intermediaries are brokers,
combination export and manufacturers` export agents. Group selling activities can also help
individual manufacturers in their export operation.
Direct Exporting: Direct exporting includes setting up an export department within the firm
or having the firm`s sales force sell directly to foreign customers or marketing intermediaries.
A company engages in direct exporting when it exports through intermediaries located in the
foreign markets. Under direct exporting, an exporter must deal with a large number of
foreign contacts, possibly one or more for each country the company plans to enter. Although
a direct exporting operation requires a larger degree of expertise, this method of market entry
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does provide the company with a greater degree of control over its distribution channels than
would indirect exporting. The exporter may select from two major types of intermediaries:
agents and merchants. Also, the exporting company may establish its own sales subsidiary as
an alternative to independent intermediaries. Successful direct exporting depends on the
viability of relationship built up between the exporting firm and the local distributor or
importer. By building the relationship well, the exporter saves considerable investment costs.
Advantageous:
 Avoids the often substantial costs of establishing manufacturing operation the host
country.
 Exporting may help a firm achieve experience curve and location economies.
Disadvantages:
 Exporting from the firm’s home base may not be appropriate if lower-cost locations for
manufacturing the product can be found abroad. Thus, particularly for firms pursuing global
standardization or transnational strategies, it may be preferable to manufacture where is the
mix of factor conditions is most favorable from a value creation perspective and to export to
the rest of the world from that location.
 High transportation costs can make exporting uneconomical, particularly for bulk
products. Managers need to manufacture products regionally. This strategy enables the firm
to realize some economies from large-scale production and at the same time to limit its
transportation costs.
 Tariff barriers can make exporting uneconomical. The threat of tariff barriers by the host-
country government can make it very risky.
 A firm delegates its marketing, sales, and service in each country where it does business
to another company. This is a common approach for manufacturing firms that are jut
beginning to expand internationally. The other company may be local agents often carry the
products of competing firms and so have divided loyalties. In such cases, the local agent may
not do as good a job as the firm would if it managed its marketing itself.

164
1 Describe exporting as growth strategy
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2 Explain the advantage of direct exporting over indirect exporting
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Section1.2: Licensing
Licensing is a business agreement between a licenser and licensee. Licensing may offer the
foreign firm access to brands, trademarks, trade secrets or patents associated with products
manufactured. Under licensing, a company assigns the right to a patent which protects a
product, technology or process or a trademark which protects a product name to another
company for a fee or royalty. Using licensing as a method of market entry, a company can
gain market presence without a capital investment. The foreign company or licensee gains
the right to commercially exploit the patent or trademark on either an exclusive (the
exclusive right to a certain geographic region) or an unrestricted basis. Due to advantages of
low risk and low investment, licensing is a particularly attractive mode for small and
medium-sized firms. Licensing also is an effective mode for testing the future viability of
more active involvement with a foreign partner.
Licenses are signed for a variety of time periods. Depending on the investment needed to
enter the market, the foreign licensee may insist on a longer licensing period to pay off the
initial investment. Typically, the licensee will make all necessary capital investments
(machinery, inventory and so forth) and market the products in the assigned sales territories,
which may consist of one or several countries. Licensing agreements are subject to
negotiation and tend to vary considerably from company to company and from industry to
industry.
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In some countries where the political or economic situation appears uncertain, a licensing
agreement will avoid the potential risk associated with investments in fixed facilities.
Representing an export of technology rather than goods (as in exporting) or capital, licensing
is an attractive mode in markets where political and economic uncertainties make a greater
involvement risky. Both commercial and political risks are absorbed by the licensee. In other
countries governments favor the granting of licenses to independent local manufacturers as a
means of building up an independent local industry. In such cases, a foreign manufacturer
may prefer to team up with capable licensee despite a large market size, because other forms
of entry may not be possible.
Advantages of Licensing
1. Firm does not have to bear the development costs and risks associated with opening a
foreign market. Normally, the licensee puts up most of the capital necessary to get the
overseas operation going. It is attractive for firms lacking the capital to develop operations
overseas. For example: A fir ma use licensing when it wishes to participate in a foreign
market but is prohibited from doing so by barriers to investment. This was one of the original
reasons for the formation of the Fuji-Xerox joint venture in 192. Xerox wanted to
participation the Japanese market but was prohibited setting up a wholly owned subsidiary by
the Japanese government.
2. Licensing is frequently uses when affirm possess some intangible property that might have
business applications, but it does not want to developed those application itself.
For example, Bell Laboratories at AT&T originally invented the transistor circuit in the
1950s, but AT&T decided it did not want to produce transistors, so it licensed the technology
to a number of other companies. Similarly, Coca-Cola has licensed its famous trademark to
clothing manufacturers, which have incorporated the design into clothing.
Disadvantages of Licensing
1. It does not give a firm the tight control over manufacturing, marketing, and strategy
that is required for realizing experience curve and location economies. Licensing
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typically involves each licensee setting up its own production operation. Te
severely limits the firm’s ability to realize experience curve and location economies
by producing its product in a centralized location.
2. Competing in a global market may require firm to coordinate strategic moves across
countries by using profit earned in one country to support competitive attacks in
another. By its very nature, licensing limits a firm’s ability to utilize a coordinated
strategy.
3. Technological know-how constitutes the basis of many multinational firms’
competitive advantage. Most firms wish to maintain control over know-how to
foreign companies. Most firms wish to maintain control over how their know-how
is used, and a firm can quickly lose control over its technology by licensing it.
1 Briefly describe licensing?
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2 Discuss the advantages and disadvantages of licensing?
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Section1.3: Joint-venture
Under a joint venture (JV) arrangement, the foreign company invites an outside partner to
share stock ownership in the new unit. The particular participation of the partners may vary,
with some companies accepting either a minority or majority position. In most cases,
international firms prefer wholly owned subsidiaries for reasons of control; once a joint
venture partner secures part of the operation, the international firm can no longer function
167
independently, which sometimes lead to inefficiencies and disputes over responsibility for
the venture. If an international firm has strictly defined operating procedures, such as for
budgeting, planning and marketing, getting the JV Company to accept the same methods of
operation may be difficult.
Problems may also arise when the JV partner wants to maximize dividend payout instead of
reinvestment or when the capital of the JV has to be increased and one side is unable to raise
the required funds. Experience has shown that JVs can be successful if the partners share the
same goals with one partner accepting primary responsibility for operations matters.
Despite the potential for problems, joint ventures are common because they offer important
advantages to the foreign firm. By bringing in a partner the company can share the risk for a
new venture. Furthermore, the JV partner may have important skills or contacts of value to
the international firm. Sometimes, the partner may be an important customer who is willing
to contract for a portion of the new unit`s output in return for an equity participation. In other
cases, the partner may represent important local business interests with excellent contacts to
the government.
A firm with advanced product technology may also gain market access through the JV route
by teaming up with companies that are prepared to distribute its products. Many international
firms have entered Japan, China and Eastern Europe with JVs. But, not all joint ventures are
successful and fulfill their partners` expectations. Despite the difficulties involved, it is
apparent that the future will bring many more joint ventures. Successful international and
global firms will have to develop the skills and experience to manage JVs successfully often
in different and difficult environmental circumstances. And in many markets, the only viable
access to be gained will be through JVs.
There are five common objectives in a joint venture. These are:

 market entry,
 risk/reward sharing,
 technology sharing and joint product development, and
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 Conforming to government regulations.
Other benefits of this entry strategy include political connections and distribution-channel
access that may depend on relationships. Such alliances often are favorable when the
partner’s strategic objectives converge while the competitive objectives diverge, the partners’
size, market power, and resources are small compared to the industry’s leaders and when
partners are able to learn from one another while limiting access to their own proprietary
skills.
Advantages:
 A firm benefits from a local partner’s knowledge of the host country’s competitive
conditions, culture, language, political systems, and business systems.
 When the development consists or risks of opening a foreign market are high, a firm
might gain by sharing these costs and risks with a local partner.
 Many countries, political consideration make joint ventures the only feasible entry
mode
Disadvantages:
 Lack of control over technology, For example: a proposed joint venture in 2002
between Boeing and Mitsubishi Heavy Industries to build a new wide-body jet raised
fears that Boeing might unwittingly give away its commercial airline technology the
Japanese.
 Inability to engage in Global strategic coordination, it does not give a firm the tight
control over subsidiaries that it might need to realize experience curve or location
economies. Nor does it give a firm the tight control over a foreign subsidiary that it
might need for engaging in coordinated global attacks against its rival
List the common objectives of joint-venture
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Section 1.4: Franchising
Franchising is a special form of licensing in which the franchiser makes a total marketing
program available including the brand name, logo, products and method of operation.
Usually the franchise agreement is more comprehensive than a regular licensing agreement in
as much as the total operation of the franchisee is prescribed. It differs from licensing
principally in the depth and scope of quality controls placed on all phases of the franchisee`s
operation. The franchise concept is expanding rapidly beyond its traditional businesses (such
as service stations, restaurants and real-estate brokers) to include less traditional formats such
as travel agencies, used car dealers, the video industry and professional and health
improvement services. About 80 percent of all McDonald`s restaurants are franchised and as
of 1999 the firm operated about 24,500 stores in 116 countries.
Advantages:
It similar with licensing, the firm is relived of many of the costs and risks of opening a foreign
market on its own. Instead the franchisee typically assumes those costs and risks. This creates
good incentives for the franchisee to build a profitable operation as quickly as possible. Thus,
using a franchising strategy, a service firm can build a global presence quickly and at a
relatively low cost and risk.
Disadvantages:
 Franchising may inhibit the firm’s ability to take profits out of one country to support
competitive attacks in another. Many service companies, such as hotels, sue franchising,
in such instances; the firm has no reason to consider the need for coordination of
manufacturing to achieve experience curve and location economies.
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 The quality control, the foundation of franchising arrangements is that the firm’s brand
name conveys a message to consumers about the quality of the firm’s product.
Differentiate franchising from licensing.
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Section1.5: Strategic Alliance
A more recent phenomenon is the development of a range of strategic alliances. Alliances

are different from traditional joint ventures in which two partners contribute a fixed amount
of resources and the venture develops on its own. In an alliance, two entire firms pool their
resources directly in a collaboration that goes beyond the limits of a joint venture. Although a
new entity may be formed, it is not a requirement. Sometimes, the alliance is supported by
some equity acquisition of one or both of the partners. In an alliance, each partner brings a
particular skill or resource-usually they are complementary-and by joining forces, each
expects to profit from the other`s experience. Typically, alliances involve distribution access,
technology transfers or production technology with each partner contributing a different
element to the venture. Alliances can be in the forms of technology-based alliances,
production-based alliances or distribution-based alliances.
Although many alliances have been forged in a large number of industries, the evidence is not
yet in as to whether these alliances will actually become successful business ventures.
Experience suggests that alliances with two equal partners are more difficult to manage than
those with a dominant partner. In particular, it is important to recognize that the needs and
aspirations of partners may change over the life of an alliance and do so in divergent ways.
Predicting what the goals and incentives of the various parties will be under various
circumstances is a critical part of effective planning? Furthermore, many observers question
the value of entering alliances with technological competitors, such as between western and
171
Japanese firms. The challenge in making an alliance work lies in the creation of multiple
layers of connections or webs that reach across the partner organizations. Eventually such
connections will result in the creation of new organizations out of the cooperating parts of the
partners. In that sense, alliances may very well be just an intermediate stage until a new
company can be formed or until the dominant partner assumes control.
Explain the essence of strategic alliance as a growth strategy
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Section 1.6: Mergers and Acquisition
Merger is the activity of unifying two or more independent firms into one business. Whereas
acquisitions is the act of purchasing an all ready established firm. Although international
firms have always made acquisitions, the need to enter markets more quickly than through
building a base from scratch or entering some type of collaboration has made the acquisition
route extremely attractive. This trend has probably been aided by the opening of many
financial markets, making the acquisition of publicly traded companies much easier. Most
recently even unfriendly takeovers in foreign markets are now possible. Nevertheless,
international mergers and acquisitions are difficult to make work.
What is the difference between merger and acquisition?
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172
 CHAPTER SUMMARY
 Globalization has increased the competition amongst firms and enlarged the
company’s willingness to enter foreign markets. Small, middle-sized and big
companies are using different approaches to reach their target customers, increase
profits or ensure the company’s growth. This approaches/ strategies are Exporting,
licensing, franchising, joint- venture, strategic alliance and mergers and acquisition.
 Exporting is characterized by the transportation of finished goods from one country to
another. The distribution on site is done by an intermediary or by foreign based
distributors or agents Exporting might be direct exporting or Indirect Exporting.
Indirect exporting includes dealing through export management companies of foreign
agents, merchants or distributors whereas direct exporting includes setting up an
export department within the firm or having the firm`s sales force sell directly to
foreign customers or marketing intermediaries. A company engages in direct
exporting when it exports through intermediaries located in the foreign markets.
 Licensing is a business agreement between a licenser and licensee. Licensing may
offer the foreign firm access to brands, trademarks, trade secrets or patents associated
with products manufactured. Under licensing, a company assigns the right to a patent
which protects a product, technology or process or a trademark which protects a
product name to another company for a fee or royalty.
 In a joint venture arrangement a foreign company invites an outside partner to share
stock ownership in the new unit. The five common objectives in a joint venture
arrangement are: market entry, risk/reward sharing, technology sharing and joint
product development, and Conforming to government regulations.
 Franchising is a special form of licensing in which the franchiser makes a total
marketing program available including the brand name, logo, products and method of
operation. Usually the franchise agreement is more comprehensive than a regular
licensing agreement in as much as the total operation of the franchisee is prescribed.
It differs from licensing principally in the depth and scope of quality controls placed
on all phases of the franchisee`s operation.
173
 SELF- ASSESSMENT QUESTIONS
Part one: Multiple choices
1 ---------- is setting up of an export department within the firm or having the firm`s sales
force sell directly to foreign customers or marketing intermediaries.
A. Direct exporting C. Indirect exporting
B. Licensing D. Joint-venture
E. None
2 Which statement is not true about franchising and licensing?
A. Franchising differs from licensing in the depth and scope of quality controls
B. Franchise agreement is more comprehensive than a regular licensing
C. Franchising is always effective growth strategy than licensing
D. A&B
3 Which one is not the advantage of exporting?
A. It Avoid substantial costs of establishing manufacturing operation the host country.
B. It may help a firm achieve experience curve and location economies.
C. High transportation costs particularly for bulk products.
D. None
4 Which one is an objective of a joint venture?
A. Market entry
B. Risk reward sharing,
C. Technology sharing
D. Conforming to government
regulations .
E. All
5 Which statement is true about Strategic alliance?
A. In strategic alliance ,two or more entire firms pool their resources directly in a
collaboration
B. In strategic alliance establishment of an independent is mandatory
C. In strategic alliance establishment of an independent is not mandatory
D. A&C
174
Wolkite University
College of Business and Economics
Department of Management
Individual Assignment
For the Course Entrepreneurship for Engineers (Ceng 5211)
Max value: 30%

Name:-__________________________________ ID. No: __________Section________
Q1. Let assuming that you have been decided to state new business around
your local area. Therefore, after you have been clearly identify the type of
business coming to start, let try to develop the business plan for the business
you have plan to start? (30%)
2
 Answer key for Self- Assessment Questions at end of Chapters
Chapter Two: Multiple Choices

1. A
2. B
3. E
Chapter Three: Multiple Choices

1. E
2. D
3. C
4. D
5. E
6. B
7. E
Chapter Four: Multiple Choices

1. D
2. F
3. D
4. D
5. E
Chapter Five: Multiple Choices

1. D
2. D
3. E
Chapter Seven: Multiple Choices
1. D
2. A
3. D
4. B
5. D
6. D
Chapter Eight: Multiple Choices

1. A
2. C
3. C
4. E
5. D
3
REFERENCE
 Micro and Small Enterprises Development Policy and Strategy of Ethiopia, (2011)
 H.I. Ansoff. Corporate strategy, 2009.
 Hodgetts, RichardM.Kurakto, DonaldF. “Entrepreneurship: A contemporary approach “.
Fourth Edition, the Dryden Press, 1998.
 HirshRobertD. And D. and PetersMichaelP. “Entrepreneurship” Fifth Edition, Tata
McGraw Hill Edition, 2002.
 Holt David H. “Entrepreneurship – New venture Creation “Eastern Economy Edition,
2000.

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WOLKITE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

ENTREPRENEURSHIP FOR ENGINEERS MODULE (CENG 5211)

A COURSE MATERIAL PREPARED FOR SUMMER STUDENTS

Written By: 1. Mr. Samuel Gemechu (MBA)

Edited by: Mr. Mekonnen Mulugeta (MBA)

Section 1: New Product Development Process……………………………………………………..73

Section: 1. Type of Firm Growth Strategies………………………………………………………162

 Course assignments …………………………………………………………***

Section: 1. Entrepreneurship and the Entrepreneur

Section1.1: Evolution of Entrepreneurship

? Dear student, when do you thing the idea of entrepreneurship commenced

Section1.2: Entrepreneurship Defined

 A.H. Cole has defined entrepreneurship as “The purposeful activity of an individual or

 Self test Activity 1.1

Section: 1. 3: Concept of the Entrepreneur

Some more important definitions of entrepreneur

Section: 1.4: The Relationship between Entrepreneurship and Entrepreneur

 Self test Activity 1.2

Section: 1.5: Distinction Between Entrepreneur and Manager

Table 1.2: Distinction between entrepreneur and manager

Points Entrepreneur Manager

Section: 1.6: Types of Entrepreneurship

Generally, opportunity-driven entrepreneurs are more growth-oriented than necessity-driven

Section: 1.7: Characteristics of Entrepreneur

 Self test Activity 1.3

Section: 1.8. Functions of an Entrepreneur

 Self test Activity 1.4

Section: 1. 9: Charms of Being an Entrepreneur

Rewards for an Entrepreneur

 Self test Activity 1.5

Section 1.10: Entrepreneurship, Creativity & Innovation

Innovation is one of the underlying dimensions of entrepreneurship. It is a key function in the

Entrepreneurship drives innovation, competitiveness, job creation and economic growth. It

Section 2: The Role of Entrepreneurship in Economic Development

 Self test Activity 1.6

Section 1: Nature of Micro and Small Enterprises

Section 1.1: Definitions of Micro and Small Enterprises

MSE engaged in manufacturing Micro Enterprises are those business enterprises

 Self test activity 2.1

Section 1.2: Importance of Micro and Small Enterprises

 Export contribution: Overall small business production contributes to the growth of

 Self test activity 2.2

 Mismanagement: Management must be intelligent, brilliantly capable, decisive,

 Implementation delay: In cases of newly established small business, it often faces a

 Self test activity 2.3

Section 1.4: Characteristics of Micro and Small Enterprises in Ethiopia

 Self test activity 2.4

Briefly discuss the characteristics of Ethiopian small business.

Section 1.5: Problems in the Ethiopian Small Business Industry

 Lack of management competence and exposure: The business activities are to be

 Markets and distribution networks: Finding markets in the economy is another

 Limited government support: The amount of support provided to the small

 Widespread corruption: When the issue of corruption is raised in Ethiopia almost

Section 2: Economic, social and political aspects of small business

 Self test activity 2.6

Section 3: Setting a Small Business

? Dear learners! What do you understand about a business idea?

 The business idea

Section 3.1: Steps in Setting a Small Business

i. Identify Business Opportunity: Choosing what kind of business to start can be an

 Self test activity 2.8

Enlist the steps in setting a small business.