Enterpreneurship and Small Bus.

Table of Content
Content Page
Chapter One: Entrepreneurship and Free Enterprise ------------------------------1
1.1. Definition and philosophy-----------------------------------------------------3
1.2. History--------------------------------------------------------------------------20
1.3. Role within the economy-----------------------------------------------------21
1.4 Entrepreneurship, creativity and Innovation--------------------------------24
Summery--------------------------------------------------------------------------28
Chapter Two - Small Business ---------------------------------------------------------32
2.1 Definition and importance-----------------------------------------------------32
2.2 Economic social & political aspects of small business enterprise-------48
2.3 Small Business Failure factors-----------------------------------------------51
2.4 Problems in Ethiopia small business----------------------------------------52
2.5 Setting Small Business--------------------------------------------------------53
2.5.1 What is Basic Business Idea? -------------------------------------53
2.5.2 What project an Entrepreneur should have? --------------------54
2.5.3 Definition of industry and small scale industry-----------------56
2.5.4 Steps in setting a small scale unit---------------------------------59
Summery----------------------------------------------------------------------------61
Chapter Three: Business Planning ---------------------------------------------------63
3.1 The concept of business planning--------------------------------------------63
3.2 Feasibility planning------------------------------------------------------------65
3.3 The business plan--------------------------------------------------------------65
3.4 Developing a business plan---------------------------------------------------66
Summery--------------------------------------------------------------------------78
Chapter Four: Product and Service Concept ----------------------------------------82
4.1 Product technology-------------------------------------------------------------82
4.2 Product development process-------------------------------------------------83
4.3 Product protection---------------------------------------------------------------84
4.3.1 Patents-----------------------------------------------------------------84
4.3.2 Trademarks------------------------------------------------------------87
4.3.3 Copyrighting----------------------------------------------------------88
Summery-----------------------------------------------------------------------------88
Chapter Five: Marketing and New Venture Development -------------------------90
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5.1 Marketing research--------------------------------------------------------------90
5.2 Marketing intelligence----------------------------------------------------------94
5.3 Competitive analysis------------------------------------------------------------96
5.4 Marketing strategies-------------------------------------------------------------97
5.5 International markets-----------------------------------------------------------106
Summery ---------------------------------------------------------------------------108
Chapter Six: Organizing and Financing the New Venture---------------------- 110
6.1 Entrepreneurial team and business formation-----------------------------110
6.2. Sources of financing---------------------------------------------------------111
6.2.1 Asset management-------------------------------------------------111
6.2.2 Equity Financing---------------------------------------------------111
6.2.3 Venture Capital-----------------------------------------------------112
6.2.4 Debt financing------------------------------------------------------113
6.2.5 Government Programs--------------------------------------------116
Summery----------------------------------------------------------------124
Chapter Seven: Managing Growth and Transaction ----------------------------127
7.1. Preparing for the launch of the venture-----------------------------------127
7.2. Managing early growth of venture----------------------------------------129
7.3. New venture expansion strategies and Issues---------------------------131
Summery--------------------------------------------------------------------------135
Answer key -------------------------------------------------------------------- --137
References-----------------------------------------------------------------------138
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COURSE TITLE: ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT
Dear distance education learner, well come to the course entrepreneurship and small business
management. The course will enable you to investigate the study the impact of entrepreneurship
on the economy, concept for an innovative product, Equipped with the basic knowledge and
skills of starting and operating a business.
So you are expected to read the notes and practice the activities carefully. This course is
composed of seven units. These are:
Chapter One: Entrepreneurship and Free Enterprise
Chapter Two - Small Business
Chapter Three: Business Planning
Chapter Five: Marketing and New Venture Development
Chapter Six: Organizing and Financing the New Venture
Chapter Seven: Managing Growth and Transaction
Dear learner therefore, you are required to cover all units to sit on final exam. And, if you have
points in the module that are not clear with, make them ready to be elaborated during the tutorial
class arranged at your study center.
Course Introduction
This interdisciplinary course is designed to introduce students to the concept of sustainable

entrepreneurship, a manageable process that can be applied across careers and work settings. It
focuses on building entrepreneurial attitudes and behaviors that will lead to creative solution
within community and organizational environments. Course topics include the history of
entrepreneurship, the role of entrepreneurs in the 21st century global economy, and the
identification of entrepreneurial opportunities. The elements of creative problem solving, the
development of a business concept/model, the examination of feasibility studies and the social
/moral/ethical implication of entrepreneurship will be incorporated. Issues related to starting and
financing new ventures are included.
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Course Objectives
At the end of this course student will be able to:
 Define entrepreneurship within the context of society; organizations and individuals.

 Understand more about the specific management issues involved in setting up and
running a small enterprise.
 Demonstrate an understanding of the impact of entrepreneurship on the economy.
 Distinguish between an entrepreneurial and a conventional approach to management.
 Recognize and overcome obstacles to creative problem-solving.
 Describe the element of an effective business model/plan.
 Develop a concept for an innovative product or service in his or her own area of interest.
 Recognize that entrepreneurial success in the 21st century depends on teamwork and
diversity.
 Develop a personal framework for managing the ethical dilemmas and social
 Responsibilities facing entrepreneurs.
 Describe the leadership studies of entrepreneurs who have been successful in different
sectors (e.g., start-ups, corporations. Community, public sector, etc.).
 Equipped with the basic knowledge and skills of starting and operating a business for
they will be the future managers (or even Owner-managers) of these firms.
 Identify traits/characteristics of an entrepreneur/ entrepreneurs as exhibited in behavior.
 Analyze elements of the entrepreneurial mind set and discuss the implications for
functioning as a successful entrepreneur.
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Chapter One: Entrepreneurship and Free Enterprise
Introduction
The aim of the chapter is to familiarize students with entrepreneurship in the context of society;
organizations and individuals. For the purposes of this unit, that is enough to say about the nature
and characteristics Entrepreneurship and Entrepreneurs. In this unit we will explore a number of
issues about entrepreneurship and small business management. The unit is divided into four
sections. Those are: Definition and philosophy, History, innovation and role of entrepreneurship
in economy.
Objectives:
After completing this unit, you will be able to:
 Describe the general nature of entrepreneurship

 Discuss the various philosophy and history of entrepreneurship and small business
management
 Explain the nature and characteristics entrepreneurship and Entrepreneurs
 Explain the types of Entrepreneurship and Entrepreneurs
 Describe the activities or functions and reasons for entrepreneurial Success
1.1. Definition and philosophy
What is entrepreneurship?
______________________________________________________________________________
_________________________________________________________________________
! 1.1.2. Definitions of Entrepreneurs The concept of entrepreneurship has a wide range of

meanings. On the one extreme an entrepreneur is a person of very high aptitude who pioneers
change, possessing characteristics found in only a very small fraction of the population. On the
other extreme of definitions, anyone who wants to work for him or herself is considered to be an
entrepreneur.
The word entrepreneur originates from the French word, entreprendre, which means "to
undertake." In a business context, it means to start a business. The Merriam-Webster Dictionary
presents the definition of an entrepreneur as one who organizes, manages, and assumes the risks
of a business or enterprise.
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1) Entrepreneurship is the process of creating and building something of value from practically
nothing. That is, entrepreneurship is the process of creating or seizing an opportunity and
pursuing it regardless of the resources currently controlled. Entrepreneurship involves the
definition, creation, and distribution of value and benefits to individuals, groups, organizations,
and society.
2) Entrepreneurship is the dynamic process of creating incremental wealth. This wealth is

created by individuals who assume the major risks of equity, time and/or career commitment of
providing value for some product or services. The product or service itself may or may not be
new or unique but value must somehow be infused by the entrepreneur by a group of persons.
3) Entrepreneurship is the capacity and willingness to undertake conception, organization, and

management of a productive venture with all attendant risks, while seeking profit as a reward.
4) Entrepreneurship is defined as “the recognition of an opportunity to create value, and the

process of acting on this opportunity, whether or not it involves the formation of a new entity.
5) Entrepreneurship can also be defined as the process of creating something different and
better with value by devoting the necessary time and effort by assuming the accompanying
financial, psychic, and social risks and receiving the resulting monetary reward and personal
satisfaction.
The term ‘entrepreneur’ first of all appeared in the French Language. The word
‘Entrepreneur’ is derived from the French word ‘Enterprendre’ meaning to undertake.
The ‘entrepreneur’ is very much related to the term ‘entrepreneurship.’ Both these terms are
often used interchangeably. But, they are conceptually different. Entrepreneurs are one of the
most important actors in the economic development of any nation. Defining who entrepreneurs
are has been and will continue to be a favourite topic of researchers. Like entrepreneurship (the
process), entrepreneur (the actor) has no universally accepted definitions.
.
Thus, some of the definitions of entrepreneurs are forwarded as follows:
1) Adam Smith described entrepreneur as a person who only provides capital without taking
active part in the leading role of an enterprise.
2) Joseph Schumpeter recognized entrepreneur as a person who introduces innovative changes.

He treats entrepreneur as an integral part of economic growth and as a fundamental sources of
economic disequilibrium. For him an entrepreneur in an advanced economy is an individual who
introduces something new in the economy. He may introduce a method of production not yet
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tested by experience in a branch of a manufacture concerned, a product with which consumers
are not yet familiar, a new source of raw material or new market and the like.
3) Entrepreneur refers to a person who establishes his/her own business or industrial

undertaking with a view to making profit. An entrepreneur is considered to be an originator of a
business venture. He takes the role of an organizer in the process of production.
4) Entrepreneurs are job creators and/or become self employed rather than seekers of jobs in an
overstretched public services.
5) Entrepreneurs are people who have the ability to see and evaluate business opportunities; the
ability together the necessary resources to take advantage of them, and the ability to initiate
appropriate action to ensure success.
6) Entrepreneurs take the risks necessary in producing goods and services. In this way they act
as the energizers of the business system. They are instruments of change.
7) An entrepreneur is one of the important segments of economic growth. Basically an

entrepreneur is a person who has the initiative, skill for innovation and who looks for high
achievements. He/she is a catalytic agent of change and works for the good of people.
In nut shell, there have been hundreds of definitions in dozens of books. Some of them are given
as: Entrepreneurs are action oriented, highly motivated individuals who take risks to achieve
goals. Entrepreneurs are people who have the ability to see and evaluate business opportunities;
the ability to gather the necessary resources to take advantage of them, and the ability to initiate
The term ‘entrepreneur’ first of all appeared in the French Language. The word
‘Entrepreneur’ is derived from the French word ‘Enterprendre’ meaning to undertake.
.
Thus, some of the definitions of entrepreneurs are forwarded as follows:
1) Adam Smith described entrepreneur as a person who only provides capital without taking
active part in the leading role of an enterprise.
2) Joseph Schumpeter recognized entrepreneur as a person who introduces innovative changes.

He treats entrepreneur as an integral part of economic growth and as a fundamental sources of
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economic disequilibrium. For him an entrepreneur in an advanced economy is an individual who
introduces something new in the economy. He may introduce a method of production not yet
tested by experience in a branch of a manufacture concerned, a product with which consumers
are not yet familiar, a new source of raw material or new market and the like.
3) Entrepreneur refers to a person who establishes his/her own business or industrial

undertaking with a view to making profit. An entrepreneur is considered to be an originator of a
business venture. He takes the role of an organizer in the process of production.
4) Entrepreneurs are job creators and/or become self employed rather than seekers of jobs in an
overstretched public services.
5) Entrepreneurs are people who have the ability to see and evaluate business opportunities; the
ability together the necessary resources to take advantage of them, and the ability to initiate
6) Entrepreneurs take the risks necessary in producing goods and services. In this way they act
as the energizers of the business system. They are instruments of change.
7) An entrepreneur is one of the important segments of economic growth. Basically an

entrepreneur is a person who has the initiative, skill for innovation and who looks for high
achievements. He/she is a catalytic agent of change and works for the good of people.
In nut shell, there have been hundreds of definitions in dozens of books. Some of them are given
as: Entrepreneurs are action oriented, highly motivated individuals who take risks to achieve
goals. Entrepreneurs are people who have the ability to see and evaluate business opportunities;
the ability to gather the necessary resources to take advantage of them, and the ability to initiate
Nature and Characteristics Entrepreneurship and Entrepreneurs
! Entrepreneurship- is a set of activities performed by an entrepreneur. Thus, entrepreneur

precedes entrepreneurship. Their relationships are given in the following table:
Table 1.1 Relationship between entrepreneur and entrepreneurship
Entrepreneur Entrepreneurship
Person Process
Visionary Vision
Organizer Organization
Decision Maker Decision Making
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Innovator Innovation
Risk bearer Risk Taking
Motivator Motivation
Creator Creation
Leader Leadership
Manager Management
Initiator Initiation
Planner Planning
Technician Technology
Communicator Communication
Administrator Administration
Imaginative Imagination
Foresighted Fore sighting
Types of Entrepreneurship and Entrepreneurs
According to Steve Blank, not all entrepreneurship is the same. Steve Blank clearly describes
four different types:
1. Small Business Entrepreneurship

Today, the overwhelming number of entrepreneurs and start ups in the United States are still
small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7% of all
companies and employ 50% of all non-governmental workers.
Small businesses are grocery stores, hairdressers, consultants, travel agents, internet commerce
storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own
business. They hire local employees or family. Most are barely profitable. Their definition of
success is to feed the family and make a profit, not to take over an industry or build a $100
million business. As they can’t provide the scale to attract venture capital, they fund their
businesses via friends/family or small business loans.
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2. Scalable Start up Entrepreneurship
Unlike small businesses, scalable start ups are what Silicon Valley entrepreneurs and their
venture investors do. These entrepreneurs start a company knowing from day one that their
vision could change the world. They attract investment from equally crazy financial investors –
venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and
scalable business model. When they find it, their focus on scale requires even more venture
capital to fuel rapid expansion.
3. Large Company Entrepreneurship
Large companies have finite life cycles. Most grow through sustaining innovation, offering new
products that are variants around their core products. Changes in customer tastes, new
technologies, legislation, new competitors, etc. can create pressure for more disruptive
innovation – requiring large companies to create entirely new products sold into new customers
in new markets. Existing companies do this by either acquiring innovative companies or
attempting to build a disruptive product inside. Ironically, large company size and culture make
disruptive innovation extremely difficult to execute.
4. Social Entrepreneurship
Social entrepreneurship is the recognition of a social problem and the uses of entrepreneurial
principles to organize create and manage a social venture to achieve a desired social change.
While a business entrepreneur typically measures performance in profit and return, a social
entrepreneur also measures positive returns to society. Thus, the main aim of social
entrepreneurship is to further broaden social, cultural, and environmental goals. Social
entrepreneurs are commonly associated with the voluntary and not-for-profit sectors, but this
need not preclude making a profit. Social entrepreneurship practiced with a world view or
international context is called international social entrepreneurship.
Social entrepreneurs are innovators who focus on creating products and services that solve social
needs and problems. But unlike scalable start ups their goal is to make the world a better place,
not to take market share or to create to wealth for the founders. They may be non-profit, for-
profit, or hybrid.
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Type of Entrepreneurs
There are various ways by which entrepreneurs have been classified:
 Types of entrepreneurs based on ownership

 Types of entrepreneurs based on personality traits and business running style
 Types of entrepreneurs based on the type of business
 Types of entrepreneurs based on stages of business development
 Types of entrepreneurs based on motivation levels
 Types of entrepreneurs based on technology used(expertise)
 Other categories of entrepreneurs
Types of entrepreneur(s) based on ownership
! Entrepreneur(s) is classified into four types based on the ownership of the business. These
are: founder (pure) entrepreneur; second-generation operators of family owned business;
franchisees and owner manager. They are discussed as follows.
Founder (pure) entrepreneur(s): Are those individuals who are the founder of the business.
Moreover; they are the ones who conceptualize business plan and then put in efforts to make the
plan a success.
Second-generation operators of family owned business: They are individuals who have
inherited the business from their fathers and forefathers.
Franchisees: it is a method of doing business wherein the parent owner licenses his/her
trademarks and tried and proves method of doing business to a franchisee in exchange for a
recurring payment.
Owner manager: this refers to a person who buys a business from the founder and then invests
his time and resources in it.
Types of entrepreneur(s) based on personality traits and business running style
Based the personality traits and style of running the business, entrepreneur(s) are classified into
five types. These include: the achiever, the induced entrepreneur, the idea generator, the real
manager and the real achievers, respectively.
The achiever: These types of entrepreneurs have personal desires to excel. The only driver that
pushes them is the desire to achieve something in life, the desire to make a mark in society, the
desire to prove their excellence. They do not need any external stimulus but are self-driven.
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The induced entrepreneur: These types of entrepreneur(s) are those induce by some external
factors to start a business. These external factors, among others, include: government policies,
unemployment, family support, facilitating institutional support etc.
The idea generator: These kinds of entrepreneur(s) are highly creative people, who are always
in search of innovative ideas for setting up new business ventures. Accordingly, they enjoy the
first mover’s advantage and are able to skim higher profits from the market.
Types of entrepreneur(s) based on the type of business
Based on the type of business, entrepreneur(s) is classified into five main types. These are:
Business entrepreneur, industrial entrepreneur, trading entrepreneur, corporate entrepreneur and
agricultural entrepreneur, respectively. Their short definition and characteristic are as follows.
Business entrepreneur: are individuals who conceive an idea for a new product or service and
then create a business on materializing their idea in to reality. They tap both productions and
marketing resource in their search to develop a new business opportunity. They may set up a big
establishment or a small business unit such as printing press, textile processing, house,
advertizing agency, readymade armaments, etc.
Industrial entrepreneur(s): Is entrepreneur who is into manufacturing of a product.

Accordingly, he/she identifies the needs and wants of customers and then manufactures products
to satisfy these needs and wants.
Trading entrepreneur(s): Is one who undertakes trading activities and is not concerned with the
manufacturing of products. Rather, identifies potential markets, stimulates demand and generate
interest among buyers to purchase a product.
Corporate entrepreneur: corporate entrepreneur is a person who demonstrates his innovative

skill in organizing and managing a corporate undertaking which is registered under some act that
give it a separate legal entity.
Agricultural entrepreneur(s): Agricultural entrepreneurs are those entrepreneurs who

undertake business related to agricultural activities. These may include, farm equipments,
fertilizers and other agricultural inputs.
Types of entrepreneur(s) based on stages of business development
Based on their stages of business development, entrepreneur(s) are classified into three main
types. These are first generation entrepreneur(s), modern entrepreneur(s) and classical
entrepreneur(s), respectively.
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First generation entrepreneur(s): A first generation entrepreneur refers to the one who starts an
industrial unit by means of an innovative skill. He or she is an innovator combining different
technologies to produce a marketable product or service.
Modern entrepreneur(s): A modern entrepreneur is one who undertakes business to satisfy the
contemporary (up to date/ current) demands of the market. In other words, a modern
entrepreneur undertakes those ventures which suit the current socio-cultural trends.
Classical entrepreneur(s): A classical entrepreneur is one whose aim is to maximize the

economic returns at a level consistent with the survival of the firm, with or without element of
growth.
Types of entrepreneur(s) based on motivation levels
Motivation is the force that influences the effect of the entrepreneur to achieve his or her
objective. Based on this aspect, entrepreneurs are classified into four types. These are: pure
entrepreneur, induced entrepreneur, motivated entrepreneur and Spontaneous Entrepreneur,
respectively.
Pure Entrepreneurs: are those entrepreneurs motivated by psychological and economic

rewards. The entrepreneur undertakes the enterprise for his/her personal satisfaction in work or
status.
Induced Entrepreneur: is the one who is induced to take up entrepreneurial task due to the
policy measures of the government that provides assistance, incentive and necessary overhead
facilities to start a venture.
Motivated Entrepreneur: motivation is the desire for self-fulfillment. They come into being
because of the possibility of making and marketing some new product.
Spontaneous Entrepreneur: is one who is motivated by his/her natural talent to begin a

business. This kind of entrepreneurs is very confident in their natural blessings from God and
wants to undertake business because they believe their natural gifts will enable them to do so.
Types of entrepreneur(s) based on technology used (expertise)
The application of new technology in various sectors of national economy is essential for the
future growth of business. Based on the technology used, entrepreneurs can be classified into
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three groups. These are: technical entrepreneurs, non-technical entrepreneurs and professional
entrepreneurs, respectively.
Technical Entrepreneurs: These are those entrepreneurs that have technical knowledge
regarding innovation of new products and concentrate on manufacturing (technical aspect) rather
than marketing.
Non technical Entrepreneurs: These groups of entrepreneur are not concerned with technical
aspect of a product rather they concentrate on developing alternative marketing, distribution and
promotion aspects of their product rather than manufacturing aspect.
Professional Entrepreneurs: Are those entrepreneurs interested neither in the technical aspect
nor in the non technical aspects of a product. In contrast, they are highly interested in
establishing a business without a desire to manage or operate once a business is established. In
other words, professional entrepreneurs sell their business ideas and look on to creating another
business.
Other categories of entrepreneur(s)
Under this, others, category entrepreneur(s) is classified into five types. These are innovative
entrepreneur(s), imitative entrepreneur(s), Fabian, drone entrepreneur(s) and copreneurs. For
clarity, they are defined as follows.
Innovative entrepreneur(s): are those full of creative ideas and offer innovate products to the
society. It is because of these innovative entrepreneurs that many important changes occur in the
society.
Imitative entrepreneur(s): These types of entrepreneur(s) adapt a successful innovation from

others. The main reason for imitation is the risk-aversive nature of these entrepreneur(s). As a
result of which, they do not try to develop new ideas or products.
Fabian entrepreneur(s): Entrepreneurs of this type are very cautious (careful) and skeptical
(doubtful) while practicing any change. They have neither the will to introduce new changes nor
the desire to adopt new methods innovated by the most enterprising entrepreneurs. Their dealings
are determined or dominated more by customs, religion, tradition, and past practices. They are
not much interested in taking risk and they try to follow the footsteps of their predecessors.
Drone entrepreneur(s): Drone entrepreneur(s) are those not open to creativity and change.
Hence, they do not like to changing the working of the enterprise (organization) with the
changing times and customers preference.
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Functions of Entrepreneurs
 Do you explain the functions of an entrepreneur?
______________________________________________________________________________
____________________________________________________________________________
! The main functions of an entrepreneur are as follows:
1) Innovation: An important function of an entrepreneur is “innovation”. An entrepreneur

introduces new combinations in any branch of economic activity. Innovation implies doing new
things or doing things that are already being done in new ways. It may occur in the following
forms:
a) Introduction of a new product or new quality of an existing product
b) Introduction of new methods of production or distribution
c) Opening of a new market
d) Conquest of a new source of raw materials
e) New form of organization of industry
Entrepreneurship is a creative activity and the entrepreneur introduces something new in any
branch of economic activity.
2) Risk taking: Risk is an inherent and inseparable element of entrepreneurship. Risk taking or
uncertainty bearing implies assuming the responsibility for loss that may occur due to unforeseen
contingencies of the future. An entrepreneur reduces uncertainty in his/her plan of investment,
diversification of production, and expansion of the enterprise. He/she is specially talented and
motivated person who undertakes the risks of business. He/she visualizes opportunities for
introducing new ideas and handles economic uncertainty. He/she is an enterprising individual
willing to assume the risks involved in innovations, new ventures, and expansion of an existing
venture.
3) High achievement: Entrepreneurs are highly oriented to achievement of their need. A need
for achievement and achievement orientation is one of the functions of entrepreneurs.
4) Economic activity: Entrepreneurship is primarily an economic function because it involves

the creation and operation of an enterprise. It is basically concerned with the production and
distribution of goods and services.
5) Purposeful activity/goal oriented activity: Entrepreneurs have goal to be achieved and it is

conducted purposely.
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6) Organization building: Organization building includes; agreement function of an
entrepreneur includes:
a) Planning of an enterprise
b) Coordination, administration, and control
c) Routine type of supervision
7) Gap filling function: The gap between human needs and the available products and services
gives rise to Entrepreneurship. An entrepreneur identifies this gap and takes necessary steps to
fill the gap. The gap between human needs and the available products and services gives rise to
entrepreneurship.
Motivation for Starting a Business and its Reward
! Some of the reasons that enable a given person to create his/her business are either
Pulling/internal intention or Pushing/external forces factors.
i) Pulling Factors of Entrepreneurs
The pull factors encourage entrepreneurial activities by attracting individuals from the labor
force or conventional jobs towards entrepreneurial career.
Some examples are the following:
1) Having a sound business idea that will make money
2) Hope of independence, freedom and autonomy to work for one self in life
3) Having much physical and mental energy to use for personal business
4) The need to create a business to support ones family
5) The desire to work in a really competitive environment
6) To own ones business
7) To use personal savings in good use of one’s business
8) The desire to be a boss and to show one’s leadership quality in business
9) The desire to be creative and innovative in personal business
10) The financial rewards to be obtained from entrepreneurial ventures
11) The sense of achievement to be gained from running one’s own business
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12) The desire to gain social standing (Prestige) achieved by entrepreneurial decision
13) Attractive government policies, land, taxation, investment, etc.
14) The desire to do something new in personal skills, qualifications and occupational
experiences.
The more the pulling factors that forces entrepreneurs to initiate and run their ventures, the more
are the probabilities for success.
ii. Pushing/External Factors of Entrepreneurs
Pushing factors encourage entrepreneurs by making incentive available in the market or

conventional jobs less attractive, and pushes individuals or group of individuals out of the labor
market to substitute with entrepreneurial career.
Some of the examples of push factors are:
1) When one is mostly engaged with routine works
2) When one doesn’t like to have another boss for his/her work
3) When one’s salary or wage is limited for certain periods of time
4) When one doesn’t like the working culture of the organization/business enterprise
5) When one is not satisfied with the image of his/her working place
6) When one is laid off his/her job and is un employee
7) When one’s job is insecure
8) When an organization, where he/she works lacks vision and direction
9) When one is bored with the job that he/she works lacks vision and direction
10) Inability to personal innovation in a conventional job
11) Career limitations
12) Limitation of financial rewards (salary increment, bonus, social privileges) and others
13) Maintenance of large family
14) Government support assistance and others
When a person is more pushed by external factors to start his own business, there is a less
probability for success. Therefore, do not wait until challenges challenge your life. Be
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imaginary and proactive to lead a successful business life because you are definitely born for
success. But you should be ready to pay the right price to get the wisdom of entrepreneurial a
sprit out of your own mind.
Entrepreneurial Rewards
The hardships and risks which face are enormous. So are the rewards and benefits that a
successful entrepreneur can reap.
The rewards of entrepreneurial success include the following;
 Considerable wealth/money
 Prestige and better status in the society
 Economic independence and payer
 Sense of achievement and pride of personal fulfillment
 Satisfaction of providing employment to others
 Providing children with sufficient care
 Flexible and adjustable life style
 Right livelihood
Reasons for Entrepreneurial Success
Several success factors are apparent from research on innovation and entrepreneurship:
1) Hard work, drive, and dedication
2) Market demand for products offered
3) Managerial excellence
4) Luck
5) Strong control systems
6) Sufficient capitalization
! Major qualities /characters of entrepreneurs
To be successful, entrepreneurs are assumed to have the following traits.
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Mental ability: This consists of mainly intelligence and creative thinking. An entrepreneur
should be intelligent and must have an analytical mind. Besides, an entrepreneur is also expected
to have the capacity to analyze problems and able to study the various situations under which
decisions have to be made.
Clear objectives: Entrepreneurs are expected to have a clear business objective. This is because
the fact that without clear objectives, entrepreneurs cannot be successful. So, successful
entrepreneurs need to have clear objective to establish their product in the market, to make profit
and to render social services.
Business secrecy: Entrepreneurs are expected to guard their business secrets to succeed in the
market. This is crucial trait because leakage of business secrets to competitors leads them to lose
business. This highlights the care needed by entrepreneurs while selecting their subordinates
(partners).
Good human relations ability: Entrepreneurs are expected to have good communication with
their customers to earn more profit and win their confidence in the products delivered.
Effective communication: Effective communication ability is considered as the secret of

success for many entrepreneurs. In other words, having good communication enhances
entrepreneurs to put their points effectively and with clarity.
Technical knowledge: With advancement of business, entrepreneurs are dealing with situations
where sophisticated technologies are used. As a result, to be successful entrepreneurs are
expected to have a reasonable level of technical knowledge.
Decision making ability: As it is known, running a given enterprise requires taking various
decisions. Then, entrepreneurs are expected to have the capacity to analyze different aspects of
their business to make decisions.
Risk bearing: Risk is considered as inherent and inseparable element of entrepreneurships. In

other words, entrepreneurs are always confronted with ‘no risk, no business’ or ‘no risk, no gain’
choices. And hence, entrepreneurs are expected to have risk bearing character.
Self-confidence: In the world of competitive business, entrepreneurs are expected to have the
mental capacity to face any situations. They also need to have the ability to inspire others. These
will be achieved if entrepreneurs have the confidence in themselves that lead them to
determination for achieve their goals.
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The Ethiopian Case on Entrepreneurship Development
Ethiopia’s backwardness is an indicator of its low-level of entrepreneurship development. The

economic structure also shows us that entrepreneurship is in its infant stage that requires prior
and immediate actions of all stakeholders to make it more dynamic for the realization of
Ethiopian Renaissance in the new millennium. The dynamics of entrepreneurship development
has been so slow that there is a lot of human resource wastage in Ethiopia in both rural and urban
areas as shown before. Had there been a good awareness on entrepreneurship, the local leaders
would have handled things differently. Brain drain (Ethiopian Professional that left the country),
we realize, how this has affected the national economy. This may not have happened if
entrepreneurship was widely practiced.
The Philosophy of Entrepreneurship
View from the sidelines by Venkatesh Krishnamoorthy
This is not a rant about the philosophical side of entrepreneurship. It’s about a holistic
understanding of entrepreneurship from my viewpoint. I am a copyeditor by profession. I was
lucky to be trained by an academic, who was not by any measure intending to be a copyeditor
anytime in his life. So he applied his academic acumen into principles of editing academic
manuscripts (extended to editing any manuscript) to teach us what one of my friends called the
philosophy of copyediting. It is a holistic outlook bereft of prescriptions. So, this viewpoint is
neither prescriptive nor descriptive. By which I mean I am not trying to define what
entrepreneurship is or try to tell you how you should go about being an entrepreneur. But I will
try to list some common traits that make entrepreneurship a successful undertaking.
Fishes swim, birds fly, startups die. This is a famous statement you often get to hear from Vijay
An and, The Startup Guy. Whether you like it or not, it is stark reality. Starting up is easy but
keeping it going is difficult. For many reasons, the likelihood of your startup going under the
cover is very high. But we humans are wired to think of happiness and success that we often
forget the failures and disasters and lay them on the wayside. If you really looked at your whole
life and put metrics on happiness and sadness, depressed states and exalted states and success
and failure, the probability is you were sad, depressed, failed most number of times. But we
don’t accept that into our mind. We are thrilled at success and happiness. We keep it as a pointer
to keep going in life. The same applies to startups. You need to navigate through your successful
points, keeping failures on the wayside.
Passion and real-time truths. Passion is most often related to startups. Merriam-Webster’s one
definition of passion is “a state of desire or emotion that represents the influence of what is
external and opposes thought and reason as the true activity of the human mind.” You are
absorbed into some influence that is beyond your reason. Passion defies logic. Your success as
18
an entrepreneur depends upon how you combine contrary logic of passion (read defying reason)
and real-time truth of cash flow, scale-up and customers giving you business. You need to be
hardcore business-like when it comes to certain aspects of business and run your imagination
through your product or service. Never get imaginative at accounting, sales numbers or cash
flow. To put it in a nutshell, you need to wear both white and red hats in a balanced measure.
(Six hats of thinking — white, objective reasoning state; red, passionate thinking devoid of
reason state; yellow, positive thinking state; black, negative thinking state; green, creative
thinking state; blue, calm, in control thinking state.)
! Entrepreneurship is just a state of mind. It’s a daring against convention of security, against
constancy of life, against a bright sunshine and smiling faces. It is a curious state of mind that
wants to find out what will happen if I did this, despite many people telling you that you will fail.
Risk is an inborn characteristic of entrepreneurship.
Think of it. We follow successful people and copy them shamelessly. We think we would
succeed like them but often we fall short or overshoot. Entrepreneurship is also an aspiration to
be successful, to make a mark, to leave an indelible imprint, and change the world.
Schumpeter's View of Entrepreneurship
Austrian economist Joseph Schumpeter’s definition of entrepreneurship placed an emphasis on

innovation, such as:
 new products
 new production methods
 new markets
 new forms of organization
Wealth is created when such innovation results in new demand. From this viewpoint, one can
define the function of the entrepreneur as one of combining various input factors in an innovative
manner to generate value to the customer with the hope that this value will exceed the cost of the
input factors, thus generating superior returns that result in the creation of wealth.
Entrepreneurship vs. Small Business
Many people use the terms "entrepreneur" and "small business owner" synonymously. While
they may have much in common, there are significant differences between the entrepreneurial
venture and the small business. Entrepreneurial ventures differ from small businesses in these
ways:
19
1. Amount of wealth creation - rather than simply generating an income stream that
replaces traditional employment, a successful entrepreneurial venture creates substantial
wealth, typically in excess of several million dollars of profit.
2. Speed of wealth creation - while a successful small business can generate several
million dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for
example, within 5 years.
3. Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive
of sure profits many entrepreneurs would be pursuing the idea and the opportunity no
longer would exist.
4. Innovation - entrepreneurship often involves substantial innovation beyond what a small
business might exhibit. This innovation gives the venture the competitive advantage that
results in wealth creation. The innovation may be in the product or service itself, or in the
business processes used to deliver it
1.2. History
 Define history of Entrepreneurship

______________________________________________________________________________
_____________________________________________________________________________
! The term entrepreneurship can be traced back to as early as the Middle Ages, when the
entrepreneur was simply someone who carried out tasks, such as buildings and construction
projects by applying all the resources at his disposal. However, it was during the 16th century
when business was used as a common term, and the entrepreneur came in to focus as a person
who is responsible for undertaking a business venture.
In the 18th century, early economists, for instance one known as Richard Cantillon, added
that an entrepreneur bears risk as part of his work definition. It was during the 17tha and 18th
centuries’ Industrial Revolution that business itself was becoming part of the new lifestyle,
especially in Europe, where most of this development was taking place. The early economists,
such as John Baptist, John Stuart Mill, and Alfred Marshall all included entrepreneurship into the
economic spectrum of the time by defining the various skills and features of an entrepreneur.
These definitions vary from an entrepreneur being responsible for employing resources in high
productivity areas to earn profits, to risk bearing, and finally to an entrepreneur being responsible
for organization and control. However, the most substantial research into entrepreneurial theory
was achieved in the 20th century, under the aegis of Joseph Schumpeter, who claims that the
entrepreneur has a creative destruction innovation by replacing destroying an existing economy
by a better, advance one.
Where some of the entrepreneurships emerged as a result of innovation based on new
products, others were merely an expansion of existing businesses in markets that now showed
areas of growth. For instance, railroads and shipping, cargo, transport; factors that became
intertwined with growth in commerce during the late 18th century and early 19th century. The 20th
20
century saw the evolution of entrepreneurial history developing its most recent form and most of
this research was done at the Center for Entrepreneurial History at Harvard. It was here that the
theorist Arthur H. Cole defined an entrepreneur as an organization builder. Within the last two
decades, the concept of entrepreneurship has evolved from being a single individual to account
for that of an entire organization or a corporation. In some of these modern theories,
entrepreneurs also include the top tier of executives who are running a corporation. Along with
entrepreneurial theory, it is observed that the growing importance of theories regarding
entrepreneurship emerged side by side with historical events which integrated the entrepreneur as
an essential part of a modern, capitalist society.
Historical entrepreneurships, for instance, the creation of Coca Cola in the 19th century,
the emergence of fast food and McDonalds during the 20th century, Henry Ford and the initiation
of the automobile industry, and Heinz, the brand which brought about a revolution in the food
market with pre-packaged food; the signaling of these events on a global level brought to the
attention of society everywhere a new capitalist thought of brand creation by focusing on need
creation in different societies. For example, Estee Lauder who worked hard to change the image
of immigrant sand slaves in the newly formed America by selling and promoting beauty products
under the guise of achieving social stature and dignity for those who were being exploited
against. Since its initiation into society, entrepreneurship has been linked with innovation. Most
economic and financial giants in today’s world began almost a century ago in either a garage or
the work-station of an inventor.
And admittedly, most generally emerged from America where most of the rebel minds
had migrated, trying to find new ways to earn a living. Considering the role of women
entrepreneurs it is observed that as entrepreneurship developed as a concept over the years,
women entrepreneurs were not far behind. For instance, considering the American market, by
1972, 4 percent of all American businesses were owned by women. In 1991, that figure reached
38 percent. It can be noticed how the evolution of business concepts led to a change even in the
business hierarchy of society, where at first women were not allowed to vote, yet only years
down the lane, the same society saw a great proportion of its businesses being run by women.
1.3. Role within the economy
 Dear distance learner what are the roles of entrepreneurship in the economic development?
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Entrepreneurs occupy a central position in a market economy. For it's the entrepreneurs who
serve as the spark plug in the economy's engine, activating and stimulating all economic activity.
The economic success of nations worldwide is the result of encouraging and rewarding the
entrepreneurial instinct.
21
A society is prosperous only to the degree to which it rewards and encourages entrepreneurial
activity because it is the entrepreneurs and their activities that are the critical determinant of the
level of success, prosperity, growth and opportunity in any economy. The most dynamic
societies in the world are the ones that have the most entrepreneurs, plus the economic and legal
structure to encourage and motivate entrepreneurs to greater activities.
Entrepreneurship continues to be important to every nation, industry sector and to the global
economies. There is no single country in the world, which has developed without entrepreneurial
activities. Economic development essentially means a process of up-ward changes where by the
real per capital income and job opportunities of a country increases over a period of time.
Entrepreneurship plays a vital role in economic development, i.e. It increases per capital income
up ward.
! According to Joseph Schumpeter, the rate of economic progress of a nation depends upon
the distribution of entrepreneurial talent in the population (in families and societies).
The diversity of socio-economic and political advancement that characterized USA, Japan,
Germany, and other developed and the newly industrialized developing countries like India,
China, and others is the result of the promotion of entrepreneurship development. The hope of
Ethiopia’s renaissance can be attributed to the supply of its indigenous entrepreneurs. The
entrepreneur is the key to the creation of new jobs and wealth energizes the economy.
Entrepreneurs initiate and sustain the process of economic development and growth in the
following areas:
1) Innovation
2) Employment generation and increased number of new start-ups
3) Capital formation
4) Improvement of per capital income
5) Creation of balanced regional development
6) Improvement of living standards
7) Economic independence and life improvement
8) Backward and forward linkages development
9) Socio-political stability, and
10) Development of intangible factors
22
Entrepreneurs seek disequilibrium a gap between the wants and needs of customers and the
products and services that are currently available. The entrepreneur then brings together the
factors of production necessary to produce, offer and sell desired products and services. They
invest and risk their money--and other people's money--to produce a product or service that can
be sold at a profit.
More than any other member of our society, entrepreneurs are unique because they're capable of
bringing together the money, raw materials, manufacturing facilities, skilled labor and land or
buildings required to produce a product or service. And they're capable of arranging the
marketing, sales and distribution of that product or service.
Entrepreneurs are optimistic and future oriented; they believe that success is possible and are
willing to risk their resources in the pursuit of profit. They're fast moving, willing to try many
different strategies to achieve their goals of profits. And they're flexible, willing to change
quickly when they get new information.
Entrepreneurs are skilled at selling against the competition by creating perceptions of difference
and uniqueness in their products and services. They continually seek out customer needs that the
competition is not satisfying and find ways to offer their products and services in such a way that
what they're offering is more attractive than anything else available.
Entrepreneurs are a national treasure, and should be protected, nourished, encouraged and
rewarded as much as possible. They create all wealth, all jobs, all opportunities, and all
prosperity in the nation. They're the most important people in a market economy--and there are
never enough of them.
As an entrepreneur, you are extremely important to your world. Your success is vital to the
success of the nation. To help you develop a better business, one that contributes to the health of
the economy, I'm going to suggest that you take some time to sit down, answer the following
questions, and implement the following actions:
What opportunities exist today for you to create or bring new products or services to your market
that people want, need and are willing to pay for? What are your three best opportunities?
1. Identify the steps you could take immediately to operate your business more efficiently,
especially regarding internal operating systems.
2. Tell yourself continually "Failure is not an option." Be willing to move out of your
comfort zone, to take risks if necessary to build your business.
3. Use your creativity rather than your money to find new, better, cheaper ways to sell your
products or reduce your costs of operation. What could you do immediately in one or
both of these areas?
23
4. Imagine starting over. Is there anything you're doing today that, knowing what you now
know, you wouldn't get into or start up again?
5. Imagine reinventing your business. If your business burned to the ground today, and you
had to start over, what would you not get into again? What would you do differently?
1.4 Entrepreneurship, creativity and Innovation
 Why you learn Entrepreneurship?
______________________________________________________________________________
_________________________________________________________________________
On one hand, the terms discovery, invention, innovation and creativity are often misused in the
media and even in our own day-to-day conversations. On the other hand, it's becoming widely
accepted that they are among the most important ingredients for successful entrepreneurial
activity, the future competitive advantage of a new venture, and the sustainable growth of
individuals, businesses and even nations.
Many courses on entrepreneurship teach students how to create value by exploiting their firm's
existing competitive advantages, i.e. they teach elements of strategy. This topic sets the stage for
a series of subsequent topics in which you will also learn the skills required to explore for
tomorrow's value (whatever your entrepreneurial initiative or venture might be) through an
understanding of the concepts of innovation and creativity.
Countless authors have written articles on these subjects in the news, on the web, and in journals,
so there's a lot to sink our teeth into. We'll get to those later though. In the meantime, this topic is
designed with three simple goals in mind:
1. Challenging our own understanding of these concepts

2. Providing a common vocabulary so we can have a conversation about their role in the
work of creative and entrepreneurial individuals
3. Starting to think about why they matter
 What's Innovation?
______________________________________________________________________________
______________________________________________________________________________
_____________
The word itself gets used all the time in the news, in press releases made by governments and
universities and in company boardrooms around the world – innovation, innovation, innovation!
Not surprisingly, it can bring to mind a variety of meanings depending on the context. Although
often associated with discoveries carried out by white-haired scientist-types in high tech industry
labs or universities, innovation shouldn't imply only carrying out research and development. Nor
24
is it usually the responsibility of only a small group within of a successful company. Rather,
innovation has a much broader definition and considerably wider functions, and should touch all
of us every day. It's important to understand that definition and how the concept is different from
the concepts of discovery, invention and creativity. Let's start by taking a look at how all of these
fit together.
Discovery, Invention, Innovation and Creativity
By now you'll have been through an in-class exercise about these topics, in which we'll have
considered the following figure. This is referred to as an Innovation Value Chain because it
represents the very general sequence of activities that create value in our society and economy.
Simply put: discoveries result in new ideas in the form of knowledge and concepts, inventions
result in new technologies and business models, and innovation exploits inventions to allow for
the creation of value through commodities, goods, services and experiences.
! Innovation
Using this conceptualization we are able to land on the following definition of innovation:
Innovation: A process of intentional change made to create value

by meeting opportunity and seeking advantage. This short
definition has several key elements that are worth considering:
 Process: Innovation is a process (implying, among other

things, that it can be learned and managed)
 Intentional: That process is carried out on purpose
 Change: It results in some kind of change
 Value: The whole point of the change is to create value in

our economy, society and/or individual lives
 Opportunity: Entrepreneurial individuals enable

tomorrow's value creation by exploring for it today:
having ideas, turning ideas into marketable insights and
seeking ways to meet opportunities
 Advantage: At the same time, they also create value by

exploiting the opportunities they have at hand
25
Innovation involves creating value by bringing together resources that are hard to come by. It
applies to small businesses, existing businesses and a range of other types of entrepreneurial
ventures such as non-profit ventures. It also applies to you as an individual.
Technological vs. venture model innovation
In a later topic we are going to look at ways of distinguishing between different types of
innovations. Understanding what type of innovation you are dealing with is of critical strategic
importance when it comes to you deciding how you will react to an innovation, whether someone
else has introduced it or whether you plan to introduce it to the marketplace.
Let’s just distinguish between two main types:
1. A technological innovation is a change made in response to a new or modified technology.
Classic examples of technological innovation are the internet, the digital camera and cell phones,
to name but just a few. Whether you or someone else in your industry is responsible for a
technological innovation, it can be a game-changer. And under the right circumstances it can
provide remarkable opportunities for growth.
2. A venture model innovation is a change made in response to a new or modified venture

model, or some component of a venture model (such as the value chain, the approach to
distribution, the choice of mainstream customer and other such concepts that we will look at
later).
While technological advances were required to enable the success of these examples, it was the
unique changes to the venture models that made them successful.
For those who wish to dig deeper (than required in this course), this type of innovation is also
known as strategic or value innovation
Creativity
And by looking at creativity as the proverbial grease in the wheels of our Innovation Value
Chain, we can define it as follows:
Creativity: A process of assembling ideas by recombining

elements already known but wrongly assumed to be unrelated to
each other.
This definition has several key elements that are worth
26
considering:
 Process: Creativity is also a process (implying, among

other things, that it is more like a skill than an attitude,
and that you can get better at it with practice)
 Ideas: Creativity results in ideas that have potential value
 Recombining: The creative process is one of putting

things together in unexpected ways
Perspectives on entrepreneurship
There are several commonly accepted perspectives of entrepreneurship.
One useful perspective views entrepreneurship as a combination of the right toolset and mindset.
In other words, with the right tools in hand, the right approach to using them and enough
practice, one can successfully innovate to create value.
It is also useful to view entrepreneurship from the perspective of the new venture life cycle. A
simplified model of the new venture life cycle is shown below to demonstrate this perspective.
This is also handy because it provides an opportunity to show you the design of some of the
course that follows The Entrepreneurial Experience.
 What’s a venture?
______________________________________________________________________________
____________________________________________________________________________
For the sake of completeness, it is worth defining a new venture:
New venture: An organizational vehicle through which the

entrepreneurial team creates value.
In other words, formal value creation is done by teams through new ventures.
For the purposes of this course, new ventures can be:
 new or existing;
 small, medium or large;
 profit or not-for-profit; and
27
 Corporations or other types of organizations (such as product development groups,
professional associations, political parties, clubs, and communities of practice).
And finally, we will consider the following types of ventures defined by their orientation to
growth.
 marginal ventures;
 lifestyle ('mom and pop') ventures;
 successful small ventures; and
 High growth ventures.
There is a very important relationship.
1. Creativity is making something new and different than what you ever did before.
2. Creativity can be something very simple (a line drawing) to very complex (a new drug
formula). Creativity may be inventive and/or innovative ... or neither!
3. Creativity is personal ... it does not require a comparison to anything else that already
exists. That is not true for inventions or innovations.
4. Invention is making something new, useful, not obvious, and different than what already
exists ... however, an invention is not necessarily better, just different!
5. Innovation is making something not only new and different, but also better than what
already exists.
6. Entrepreneurship is applied innovation ... putting something new and better to work!
Creativity: The process of generating ideas - divergent thinking.

Innovation: The sifting, refining and implementation of ideas - convergent thinking -
putting ideas into action.
"Innovation is about people using new knowledge and understanding to experiment with
new possibilities in order to implement new concepts that create new value.
Innovation = Invention + Exploitation
SUMMERY
The term ‘entrepreneur’ first of all appeared in the French Language. The word ‘Entrepreneur’ is
derived from the French word ‘Enterprendre’ meaning to undertake.
28
Small businesses are grocery stores, hairdressers, consultants, travel agents, internet commerce
storefronts, carpenters, plumbers, electricians, etc. In the 18th century, early economists, for
instance one known as Richard Cantillon, added that an entrepreneur bears risk as part of his
work definition. It was during the 17tha and 18th centuries’ Industrial Revolution that business
itself was becoming part of the new lifestyle, especially in Europe, where most of this
development was taking place. The early economists, such as John Baptist, John Stuart Mill, and
Alfred Marshall all included entrepreneurship into the economic spectrum of the time by
defining the various skills and features of an entrepreneur.
The economic structure also shows us that entrepreneurship is in its infant stage that requires
prior and immediate actions of all stakeholders to make it more dynamic for the realization of
Ethiopian Renaissance in the new millennium. The dynamics of entrepreneurship development
has been so slow that there is a lot of human resource wastage in Ethiopia in both rural and urban
areas as shown before. Had there been a good awareness on entrepreneurship, the local leaders
would have handled things differently. Brain drain (Ethiopian Professional that left the country),
we realize, how this has affected the national economy
Activity 1
1. What is meant by the term entrepreneurship?
__________________________________________________
2. The basics of the new venture life cycle
______________________________________________
3. What is a venture and what types of ventures you consider in this chapter?
4. Explain the rewards of entrepreneurial success.
__________________________________________
5. Explain the characters of entrepreneurs.
_______________________________________
29
 Checklist
Before you go to the next section, try to answer the following questions by ticking the “Yes” or
“No” column.
Yes No
Do I have an informed opinion on whether the importance of

creativity and innovation depends on the stage of the new venture life
cycle?
Do I have an informed opinion on whether creativity and innovation
are processes that can be learned
Can I explain why creativity and innovation are important to our
Economy and society?
Can I explain the importance of creativity and innovation to the work

of the entrepreneur?
Given an innovation can I classify it as either a technological or
venture model innovation?
Can I explain whether it is possible to innovate without inventing?

And why this is important?
Can I offer examples of how creativity can be encouraged in the
workplace? On the flip side, can I identify common barriers to
creativity?
With my notes open, can I name and describe the phases of the new
venture life cycle?
The types of ventures?
Can I define and distinguish between the terms discovery, invention,
innovation and creativity?

Can I explain the difference between a technological innovation and a
30
venture model innovation?
If your answer for all of these questions is “Yes”, you can be sure that you understood this unit
very well. However, if you have a “No’ answer for any of the questions, go back to your note
and study the part that particular point is found.
 Self test
1. _________is innovation of process implying, among other things, that it can be learned
and managed.
a) Intentional b) Value c) Change d) Process
2.______________ is that process of carried out on purpose.
a) Intentional b) Value c) Change d) All
3. ___________ Entrepreneurial individuals enable tomorrow's value creation by exploring

for it today. a) Intentional b) Value c) opportunity: d) All
4. How to define and distinguish between the terms discovery, invention, innovation, and
creativity
5. Reasons why creativity and innovation are critical to the work of the
entrepreneurial individual in any field
6. What is the relationship between creativity, invention, innovation, and entrepreneurship?
7. Given the concepts you considered above, what is entrepreneurship?
8. What's the difference between innovation and creativity?
31
Chapter Two - Small Business
Introduction
Dear distance learner! In the previous unit we looked at the general nature and theories of
entrepreneurship. We also examined the difference between innovation and creativity. In this
unit we will explore the different aspects of small business, importance of small business in the
economy, the problems faced, forms of business ownership, economic social & political aspects
of small business enterprise, the Problems of small business in Ethiopia and setting small
business.
Objectives:
 Discuss the significance of small business management

 Identify the forms of business ownership
 Describe the role of small business in the economy
 Explain the economic ,social & political aspects of small business enterprise
 State the Problems of small business in Ethiopia
2.1 Definition and importance
 What is a small business?

______________________________________________________________________________
______________________________________________________________________________
________
A small business is a business that is independently owned and operated, with a small number of
employees and relatively low volume of sales.
Different countries have slightly different description for a small business.
For example, in United States a business have less than 100 employees is considered as a ‘small
business’, whereas it is under 50 employees to qualify as a ‘small business’ in European Union.
In Australia, a small business is defined as 1-19 employees.
32
Small businesses are normally privately owned corporations, partnerships, or sole
proprietorships.
Apart from number of employees other criteria for classifying a business as ‘small’ are:
 Amount of capital employed

 Annual Sales turnover
 Value of assets
 Profits
Importance of small business in the economy
As we all know that small firms are important for the economy.
 Small businesses employees’ majority of the workforce in any country.

 Every business starts small.
 Small businesses are flexible and respond easily to changes in demand.
 Small firms often cater to local demands.
 In difficult economic times, such as a recession, small business can be an important
source of providing employment.
 Small firms provide competition to larger firms through providing customized goods and
services.
 Small firms provide niche products and services which a larger firm might overlook.
Small businesses face the following problems
 Under capitalization
 Poor debt management
 Lack of managerial skills of the owner
 Cannot retain experienced staff
 Usually find it difficult to attract skilled staff
 Poor stock management
 How can small business survive?

______________________________________________________________________________
______________________________________________________________________________
____
! Small firms survive by being different (product differentiation). They can survive by
 Segmenting the market by income. They can target niche market segments of high
income customers, position their product as a ‘premium brand’ at a high ‘premium price’
33
Small firms have the advantage of being able to respond quickly to change - they do not
have the bureaucratic procedures often a feature of large firms where decisions are made
only after endless meetings. This means they can be quick to exploit new market trends.
 The Internet also allows small firms direct access to consumers, by passing
intermediaries. The web gives small firms the opportunity of international marketing.
 Small independent firms can join together to form a buying group to negotiate discounts
on joint orders.
 Small firms can survive by selecting a premium niche and offering an exclusive brand’
that exactly meets the customer requirements of their target segment. They will need to
be totally customer orientated.
! Legal Forms of Business Ownership
The entrepreneur when deciding on what goods and services to provide to consumers should also
decided on an appropriate legal form of business ownership for his business.
The long- term success of a small business depends on how the entrepreneur forms the business
or what form of business ownership is chosen.
Knowing how to get the needed resources for starting a small business is one of the keys to
success of that small business. The entrepreneur or small business person may need to take on
partners or find other ways of obtaining money when he/she himself is not capable of providing
the full investment money. Or otherwise, the entrepreneur may require huge amounts of money
for expansion.
Under one or all of these conditions, the entrepreneur may choose any one form of business
ownership which best meets his/her objectives or best suits for the type of business being
operated.
Importantly, a small business person has four different forms of business ownership to choose
from any; these are:
 Sole proprietorship
 Partnership
 Corporation
 Cooperative
Sole Proprietorship
What is sole proprietorship?
______________________________________________________________________________
__________________________________________________________________
34
A sole proprietorship is a business that is owned, any usually manager, by one individual. Many
sole proprietorship concerns are involved in services businesses rather than on manufacturing
businesses.
This is so because service businesses require less capital when compared to manufacturing
businesses. This form of business ownership has its own advantages and disadvantages when
compared with other forms of business ownership.
Advantages of sole proprietorship
1. Ease to start or terminate the Business

Among all the forms of business ownership, sole proprietorship is the most easy and
inexpensive to from and at the same time it is also easy to dissolve
Because this type of business ownership requires has no or minimal legal formalities.
2. Owners Discretion
The sole proprietorship owners have completed discretion to do what they want. She/he
has complete freedom and need not consult any one in taking decisions because he/ she
totally own the firm. And also there are minimal government regulations.
3. Full Ownership over Profits
The sole proprietor doesn’t have to share the sole proprietorship profits with anyone else.
All Profits of business belong to the owner and so can enjoy them. This is so because in
sole proprietorship there is only one person as owner and there are no joint owners.
4. Business Secrecy
In conducting business operations, secrecy is of much vital importance. The sole
proprietorship form of business ownership permits a high degree of secrecy which is
much important. The sole proprietorship form of business ownership permits a high
degree of secrecy because it is owned and managed by one person and so he/she doesn’t
have to reveal information to any body except to a few government organizations.
5. No Multiple Taxes
The profits of sole proprietorship will be treated as the personal income of the owner and
so as to pay income tax only once and not twice.
6. Being your Own Boss
“Working for others does not have the same excitement as working for their own.” That’s
the way sole proprietorship owners feel.
There are some risks and limitations involved with this form of business ownership.
1. Unlimited Liability
The owner is personally liable for business debts. The creditors can claim the
personal property of sole proprietorship owners when business property is not
sufficient enough to cover the debts.
2. Limited Funds
The sole proprietorship owner has limited- sources for raising funds and may also
find it difficult to borrow. Often the limited sources of funds act as a constraint on
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the business operation. This lack of resources hinders their development into
large- scale operations
3. Difficulty in Operating /Managing the Business
The owner must rely usually upon his/her expertise, as skilled employees are
expensive. The owner must be jack-of all- trade managers to handle various and
different activities.
4. Lack of certainty/ Continuity
The survival of the business is tied mostly to the life of the owner unless and
otherwise the ownership is taken over by heirs or sold to others.
5. Long House
The sole proprietorship owners may have to put in long hours in managing the
business. This is so because he/she has to do most of the work by themselves as
they cannot afford the required employees.
6. Bearer of Entire Losses/ Full Responsibility of Losses
The sole proprietorship owner must bear by himself/ herself all losses arising of
sole proprietorship venture.
Partnership
This form of business ownership has emerged due to the limitations of sole proprietorship of
business ownership.
The limitations of limited funds, management difficulty, and single bearer of losses have
paved the way for partnership form of business ownership. For business expansion and to
strengthen the operations of business the sole proprietorship owner needs more persons.
These more persons could be added to business as owners through the form of partnership
business ownership. Thus partnership is an arrangement by which business is conducted by
two or more persons and profits or losses to be shared by them. Partnership is a business/
organization owned by two or more persons/ individuals. Partnership is less popular than that
of sole proprietorship but many small businesses use this form of business ownership in
organizing themselves.
According to Article 211, Commercial Code of 1960, Ethiopia, ‘a partnership agreement is
a contract where by two or more persons who intend to join together and to cooperate
undertake to bring together contributions for the purpose of carrying out activities of an
economic nature and of participating in the profits and losses arising out there of , if any.”
Characteristics of Partnership
What are the characteristics of Partnership?
________________________________________________________________________
___________________________________________________________________
The important characteristics of partnership are as follows:
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1. Formation
Partnership is based on a contract among two or more persons. The formation doesn’t
involve any complicated legal formalities. Generally, a simple agreement either orally
or in writing is enough to create a partnership. But to prevent misunderstanding in the
future it is desirable to have the partnership agreement in writing and signed. This
agreement is called partnership deed or partnership contact and it lays outs the
rights and duties of partners. As part of the formation procedure, this type of business
ownership is required to be made known to the out side parties or to the public.
2. Contribution to Capital
Partner’s contribution can be in the form of money, property, receivables, or skills. So
some persons can contribute their skills and abilities to partnership instead of money
and become partners.
3. Management
Unless agreed upon, every partner has a right to manage the firm and participate in
the operation of business. So as to avoid problems of managing the partnership firm,
the partnership agreement may include the division of responsibilities among
different partners depending on their skills/ specialization such as purchases,
production, sales etc.
4. Duration
The duration of the partnership may or may not be fixed by the partners when the
duration is fixed; the partnership comes to an end once the fixed term is over.
Partnership is also dissolved on the death, retirement or insolvency of any one partner
of the partnership.
The partners in partnership firm are liable jointly and individually for all debts of the
firm and their liability is unlimited. Personal property of partners can be claimed by
creditors for partnership firm’s debts when partnership firm’s assets are not sufficient
and do not cover the entire business debts.
6. Implied Authority/ Agency
Partnership business is run on the principles of implied authority invested in every
partner of general partnership. This means that every general partner can bind his/her
other general partners by his/her acts in the ordinary course of business.
7. No Separate Legal Entity
The partnership firm has no independent legal entity a part from the persons who
constituted it. In other words, partners are partnership and partnership is partners and
they cannot stands as separate constituents.
8. Share Transfer Restriction
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Generally, the transfer of partnership firm’s shares is restricted to among the partners.
Without the unanimous consent of all the other partners the shares of partnership
could not be transferred to outside persons by any one partner.
9. Change in Nature of Business
Unanimous consent is also required to make any changes in the nature of business. A
partner can act out of the specified way or make major and special decisions without
the consent /agreement of all the other partners.
10. Utmost Good Faith
A partnership is based up on mutual confidence and trust of the partners. They must
disclose all the facts and render true accounts relating to the operations and not make
any secret profits.
Type of Partnership
The most common types of partnership are: General Partnership and Limited
Partnership.
1. General partnership
A general partnership is really a sole proprietorship multiplied by the number of partners.
The most striking feature of the general partnership is its ability to grow by adding talent
and money.
According to Article 280, Commercial code of 1960, Ethiopia, “a general partnership
consists of partners who are personally, jointly, severally and fully liable as between
themselves and to the partnership for the partnership firm’s undertakings.”
In General partnership, every partner has the right to participate in the administration of
the partnership firm.
2. Limited partnership
A limited partnership consists of two types of partners and these are General partners
and limited partners. General partners are fully liable personally, jointly, severally.
Limited partners are only liable to the extent of their contributions. A limited partnership
has at least one general partner, who assumes unlimited liability and at least one limited
partner, whose liability is limited to his /her contribution in the partnership firm.
Limited partner, are barred from participating in the management of the partnership
firm but share in the profits according to the terms of partnership agreement.
If limited partner involves in the management of the partnership firm then he/she
becomes a general partner and assumes unlimited liability.
The death, retirement, bankruptcy of a limited partner does not lead to the dissolution
of the partnership.
A limited partnership should be registered under the law, and made public about it.
Limited partnership exists for risky investment projects where the chance of loss is great.
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Kinds of partners
The individuals who form a partnership are known as partners, or copartners. A partnership
consists of different types of partners and among the different kinds, the important ones are:
1. General partner: - is a partner who is involved in the management of business and have
unlimited liability
2. Limited/Special partner: - is a partner who is not involved in the management of business and
so liability is limited.
3. Secret Partner: - is a partner who is actively involved in the management but not known to
the public.
4. Silent Partner: - is a partner who is known to the public but not involved in the management
of the firm
5. Dormant/ Sleeping Partner: - is a partner who is neither known nor active in the management
of the firm.
6. Nominal partner: - is a person who is not an active partner in any sense but acts like that. This
type of partner is held liable like active/ general partners.
7. Senior partner: - is a partner who plays a major role in the management of the firm because of
senior experience or amount of capital invested, or age. They normally receive a lion share of the
firm’s
8. Junior Partner: - is a partner who plays a minor role in the management of the firm because
of junior experience, age, or amount of capital invested, they receive a smaller share in the firm’s
profits.
Advantages of partnership
There are many advantages of having one or more partners in a business. Often, it is much easier
to own and manage a business with one or more partners. The following are the advantages of
partnership when compared to that of sole proprietorship.
1. Easy Formation
Partnerships are also generally easy to organize like that of sole proprietorship.
Partnership has minimal legal requirements.
2. Additional Financial Resources
More capital is available in partnership form than in sole proprietorship form because of
the multiple sources of money. By having more persons as partners the partnership firm
can raise more capital.
3. Better Credit
Partnership firms have higher credit ratings than that of sole proprietorship firms because
of the partners’ combined wealth. Partnership form of business ownership makes it easier
than that of sole proprietorship form to borrow money. This is so because more owners
means that more security is available than a sole proprietorship.
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4. Wider Expertise/ Larger Talent Pool
Partnership form provides a large pool of talent than that of sole proprietorship form of
business ownership. Partners’ specialization can help in making faster decisions than that
of corporations and at the same time better decisions than of sole proprietorship because
of combined experience. Additional talents help in running the business in a better way as
responsibility of managing the business is shared between partners.
5. Risk Reduction
There is no sole responsibility for losses in partnership like in sole proprietorship.
Business loss would be share among the different partners according to their share in
capital.
6. Tax Benefits
Like in sole proprietorship form of business ownership, partnership firm’s income /
Profits is taxed as the personal income of the partner. Partners pay taxes on their personal
share of earnings, but their businesses are not taxed.
Disadvantages of partnership
Each general partner is liable for the debts of the firm, no matter who was responsible for
causing those debts.
2. Risk of Implied Authority
Any partner can legally commit the entire business without the other partner’s consent.
So the other partners’ are binded by the actions of one partner’s mistakes
3. Interpersonal Conflicts
As many persons are involved in the management of business as partners; it may lead to
interpersonal conflicts. These conflicts may take place over disagreements over money
matters, hiring, and firing employees.
4. Lack of continuity
The partnership legally dies on the withdrawal or death of any one partner in the
partnership. This happens even if the other partners agree to continue in the partnership.
This leads to the situation of uncertainty.
5. Limited Resources
Even though partnership form of business ownership can raise more capital than that of
sole proprietorship, it still faces a problem of limited resources. Because of its form of
business ownership the creditors are not willing to provide much credit to compete in the
market if the market consists of corporations as competitors.
6. Difficulty of Transferring ownership
Any partner in the partnership firm cannot sell his/her shares in the partnership firm to
outsides without the consent of the other partners. Many times getting the consent of the
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other partners is difficult and hence the investment in partnership firm is said to be as
“frozen investment”.
Corporation
Most large organizations, and some smaller organizations, use the corporation as the basis for
business ownership. A corporation is a legal entity created under the law that is independent of
any single individual. Its assets and liabilities are distinct from those of owners of the
corporation. So like an individual, a corporation can borrow money, enter into contracts, own
property, sue and be sued. The owners of the corporation are the stockholders. A corporation
continues to exist despite the retirement or death of any of its owners, and it can often borrow
money easily. Corporations have higher start- up costs; however, they are subject to increased
regulation and double taxation.
Characteristics of a Corporation
What are the characteristics of Corporation?

________________________________________________________________________
___________________________________________________________________
1. Separate Legal Entity

A corporation is a separate legal entity, or body, created by the state. A corporation is a legal
entity separate from the natural persons connected with it either as owners or managers. As a
legal entity, a corporation has many of the rights, duties and powers of a person, including
receiving, owning, and transferring property. Corporations can enter into contracts with
individuals or with other legal entities. They can sue and be sued in court.
2. Limited Liability
The owners of corporation form of business ownership are liable for the firm’s debt only in the
extent to their investment in the firm.
3. Transferability of Shares
The owner of shares in a corporation can sell his ownership over shares to other persons with out
the consent of the other shareholders. The corporation maintains a record of its shareholders and
once ownership over shares has been changed and it has been informed to the corporation, it
would delete the old shareholder name and enter then new shareholder name in its records.
4. Death and withdrawal of stockholders
Corporations usually have a perpetual life and it is not affected by the death or withdrawal of any
of its share holders.
5. Common Seal
A corporation has a common seal with the name of the company engraved (fixed) on it, which is
used as a substitute for its signature though it acts through its agents. As it is an artificial person,
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a corporation cannot sign documents for itself. Corporate seals state the name, date and state of
incorporation
6. Separation of ownership from Management
Mostly owners of a corporation do not manage it. Corporations form governing bodies called as
boards, who hire directors and officers to manage the affairs of the business and the interests of
the corporation
7. Regulation
The corporation performs business functions with out direct involvement of the stockholders.
Therefore, it is subject to more government regulation than a sole proprietorship or a partnership.
8. Written constitution
A corporation has no mind of its own to decide upon what to do. A corporation should have a
written constitution in the form of by laws so that it helps in understanding the rights, duties and
powers of the different groups that comprise the corporate understanding the rights, duties, and
powers of the different groups that comprise the corporate structure. For forming a corporation,
one should file ‘articles of incorporation’. A corporation’s Articles of Incorporation is the main
filing document which begins the corporation’s existence under sate law. Once filed, the
corporation comes into existence. The level of complexity for a corporation’s Articles of
Incorporation can range from very simple to extremely complex.
Generally, Articles of incorporation contain, at minimum information about the corporate name,
the Registered Agent, and the Corporation’s business address.
Corporate by laws have to be created and these are important because they set out the basic rules
that govern the ongoing formalities and decisions of corporate life, such as how and when to
hold regular and special meetings of board of directors and shareholders and the number of votes
that are necessary to approve corporate decisions. Bylaws serve as the internal operating
document for the corporation. Generally, bylaws detail the responsibilities, rights, and duties of
directors, shareholders and officers.
Decision Makers in Corporation/ Structure of Company management

Corporation form of business ownership has three groups that comprise the corporate structure
and these are the stockholders, the board of directors, and the Officers of the corporation. In
considering how businesses operate, knowing who manages them may be even more important.
The various decision makers are not always the same as the owners. The various decision makers
that are important in the actual management of the corporation are:
1. Stockholders
They are the owners of the corporation. A stockholder is any person who owns at least one share
in a corporation. The stockholders are the people who actually own the corporation with limited
liability.
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The liability for the losses of the corporation belongs to the stockholder only to the extent of his/
her individual investment.
Stockholders are not responsible for debits incurred by the corporation might seem logical that
stockholders would also be actively involved in the management of the firm.
Stockholders virtually never take an active role in a company.
They sell stock, and they may vote on major issues at the annual meeting. They also elect the
members of the board of directors, although this is much more of a formality than one might
expect because the existing board nominates new members. In smaller corporations, stockholder
may pay a role in managing the firm, but this is because they are usually key managers or family
members, not because they are stock holders
2. Board of Directors
The Board of Directors is essentially the management body for the corporation. Responsibilities
of the Board of directors include establishing all business policies and approving major contracts
and undertakings. In addition, the Board may also elect the president. Ordinary business
practices of the corporation are carried out by the Officers and employees under the directives
and supervision of these Directors. The board of directors is elected by the stockholders to
oversee the management of the firm. The actual role the board members play depends on the
company, particularly the size of the company. In small corporations, the directors may be the
owners of the firm, and they may be active in day- to- day management. In large, publicly held
companies, the directors perform a strategic role of helping top managers to determine the
overall direction of the company. However, it is the top managers who make most key decisions.
Boards of directors often meet monthly or quarterly.
The members of the board could be inside directors or outside directors. Inside directors are also
employees of the company. Outside directors are not employed by the company and often are
active or retired executives of other large but noncompeting businesses. Regardless of the size of
the company or the size of the board, the decisions it makes are of strategic importance. These
decisions will affect the direction of the firm, its culture, and its goals. These decisions will be
implemented at lower levels in the firm, but their impact is significant. In fact, some critics
believe that boards of directors should take a more active role in the oversight of the companies.
3. Corporate Officers/ Managers/ Executives
Ordinary business practices of the corporation are carried out by the officers and employees
under the directives and supervision of the Directors. Officers are mostly referred to top
management positions and these include CEO, COO, CFO, CIO, VP, etc.
Top management refers to the officers of a corporation who make major decisions for the
company and are responsible for the company’s performance. The number of positions depends
on the size of the firm. For example, a small business may have only one person in top
management- the owner, who is typically the president.
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Advantages of a Corporation
1. Financial Muscle
Corporations can raise additional funds through the sale of stock.
2. Limited Personal Liability
Shareholders have limited liability for the corporation’s debts or judgments against the
corporations. Generally, shareholders can only be held accountable for their
investments in stock of the company.
3. Scope of Expansion
Corporations have better chance of expanding rapidly because of better financial and
human resources.
4. Better Decision Making
Corporations have efficient people to assist in its operations in the role of directors and
managers. It is having a large talent pool because it is able to attract talented people as
it is able to pay higher salaries and also people are attracted by its form of ownership.
5. Easy Transfer of Shares/ Ownership
A stockholder can sell its stock/shares in the corporation at any time to anybody
without taking the consent of the other shareholders or the corporation.
6. Separate legal Entity
A corporation is a legal entity created under the law that is independent of any single
individual. Its assets and liabilities are distinct from those of owners of the corporation.
A corporation continues to exist despite the retirement or death of any of its
stockholders.
Disadvantages of a corporation
1. Difficulty in Formation
The process of incorporation requires more time and money than other forms of
organization.
2. Lack of Owner’s Personal Interest
This may lead to a stage where the corporation may not be able to reach its full
potential as the directors or officers who have been given the task of operation the
business may not show the same interest as that of owners.
3. Slow Decision Making
As there are many decision makers and some of these decisions have to be consented
by the top management board of directors, and ultimately stockholders, and this lead to
slow decision making.
4. Lack of Secrecy
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Corporations have to provide much information about their operations on a regular
basis to different organization. This could lead to a situation where it could not
maintain secrecy on some of its important business matters.
5. Double Taxation
Incorporating may result in higher overall taxes. Dividends paid to shareholders are not
deductible form business income, thus this income can be taxed twice.
6. Much Regulated
Corporations are monitored by federal, regional/ sate and some local agencies, and as a
result may have more paperwork to comply with regulations.
Corporation
Many of the administrative and tax complications of incorporation can be put to rest by
electing to incorporate as an S -Corporation.
The purpose of S- Corporations is to help small businesses attract capital through
incorporation. The important advantage is the avoidance of double taxation problem.
Administration of S -Corporation tends to mirror that of a partnership with the
exception of directors’ reports and stockholders’ meetings.
An S Corporation is limited to 100 stockholders, regardless of the amount of their
individual or capital investment.
This limit can be a serious constraint on attracting capital, but for the small business
enterprise, it is not a major obstacle.
Cooperatives
Proprietorships, partnerships, and corporations are by far the most popular forms of business
organizations. There is yet another form of organization that is small in number but which serves
a very useful purpose. This particular type of business is called a cooperative (co-op) and is some
what like a corporation.
A cooperative (also co-operative; often referred to as a co-op) is a business organization owned
and operated by a group of individuals for their mutual benefit. Cooperatives are defined by the
International Co-operative Alliance's Statement on the Co-operative Identity as autonomous
associations of persons united voluntarily to meet their common economic, social, and cultural
needs and aspirations through jointly owned and democratically controlled enterprises. A
cooperative may also be defined as a business owned and controlled equally by the people who
use its services or by the people who work there. Cooperative enterprises are the focus of study
in the field of cooperative economics.
A cooperative is a business owned and operated by its user members for the purpose of
supplying themselves with goods and services. It is an organization owned by
members/customers who pay an annual membership fee and share in any profits (if it is profit
making organization). Owners, managers, workers, and customers are all the same people.
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These cooperatives are formed to give members more economic power as a group than they
would have as individuals. The best example of such cooperatives is a farm cooperative. The
idea at first was for farmers, joint together to get better prices for their food products.
A cooperative is an enterprise owned and controlled by all those who work in it. It can register
and have limited liability for its members, but has to adopt the following principles: members
have an equal vote in decisions; membership is open to everyone who fulfils specified conditions
(e.g. number of hours worked); assets controlled, and usually owned jointly by members; profit
assets controlled, and usually owned jointly by members, but has to adopt the following
principles: members have an equal vote in decisions; membership is open to everyone who fulfils
specified conditions ( e.g. number of hours worked); assets controlled, and usually owned jointly
by members: profit shared equally between members with limited interest payable on loans made
by members; share capital remains at its original value members benefit from participation, not
investment.
! Cooperatives in Ethiopia play a significant role in poverty reduction and contribute to

the by bringing services closer to their members at highly competitive prices, and increasing
members' income by eliminating middlemen and reducing production costs;
 through improved production methods resulting from education and training

activities offered to members of cooperatives, enabling farmers to improve
incomes, nutrition and food security through higher yields;
 through profits accruing from efficiently managed business and reverted to the
members, again raising their incomes and reducing poverty;
 through education and training activities for members promoting entrepreneurship
and democratic management practices;
 By promoting job creation and stabilizing existing self-employment in urban and
rural areas.
Small Business Administration programs, although in 2006 there were over 18,000 "small
businesses" with over 500 employees that accounted for half of all the employees employed by
all "small business ". Small businesses can also be classified according to other methods such as
sales, assets, or net profits.
Small businesses are common in many countries, depending on the economic system in
operation. Typical examples include: convenience stores, other small shops (such as a bakery or
delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses,
photographers, small-scale manufacturing, and online business, such as web design and
programming, etc
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! Business Size definitions
AUS US EU
Minute/Micro 1-2 1-6 <10
Small <15 <250 <50
Medium <200 <500 <250
Large <500 <1000 <1000
Enterprise >500 >1000 >1000
• Most cells reflect size not defined in relevant legislation • Some definitions are multi-
parameter, e.g., by industry, revenue, market share
Demographics
According to a survey run in the United States among businesses having <500 employees in late
2010, about 50% of minute/micro-businesses are owned by women.
Franchise businesses
Franchising is a way for small business owners to benefit from the economies of scale of the big
corporation (franchiser). McDonald's restaurants, True Value hardware stores, and NAPA Auto
Parts stores are examples of a franchise. The small business owner can leverage a strong brand
name and purchasing power of the larger company while keeping their own investment
affordable. However, some franchisees conclude that they suffer the "worst of both worlds"
feeling they are too restricted by corporate mandates and lack true independence. However, in
some chains, such as the aforementioned True Value and NAPA, franchises may have their own
name alongside the franchise's name.
Advantages of small business
A small business can be started at a very low cost and on a part-time basis. Small business is also
well suited to internet marketing because it can easily serve specialized niches, something that
would have been more difficult prior to the internet revolution which began in the late 1990s.
Adapting to change is crucial in business and particularly small business; not being tied to any
bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business
47
proprietors tend to be intimate with their customers and clients which results in greater
accountability and maturity.
Independence is another advantage of owning a small business. One survey of small business
owners showed that 38% of those who left their jobs at other companies said their main reason
for leaving was that they wanted to be their own bosses. Freedom to operate independently is a
reward for small business owners. In addition, many people desire to make their own decisions,
take their own risks, and reap the rewards of their efforts. Small business owners have the
satisfaction of making their own decisions within the constraints imposed by economic and other
environmental factors. However, entrepreneurs have to work for very long hours and understand
that ultimately their customers are their bosses.
Several organizations, in the United States, also provide help for the small business sector, such
as the Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.
Problems faced by small businesses
Small businesses often face a variety of problems related to their size. A frequent cause of
bankruptcy is undercapitalization. This is often a result of poor planning rather than economic
conditions - it is common rule of thumb that the entrepreneur should have access to a sum of
money at least equal to the projected revenue for the first year of business in addition to his
anticipated expenses.
2.2 Economic social & political aspects of small business enterprise
Economic growth
What understand about economic growth?

______________________________________________________________________________
______________________________________________________________________________
_________
Many theorists and policymakers in predominantly capitalist nations have emphasized

capitalism's ability to promote economic growth, as measured by Gross Domestic Product
(GDP), capacity utilization or standard of living. This argument was central, for example, to
Adam Smith’s advocacy of letting a free market control production and price, and allocates
resources. Many theorists have noted that this increase in global GDP over time coincides with
the emergence of the modern world capitalist system.
In years 1000–1820 world economy grew six fold, 50% per person. In most capitalist economic
regions such as Europe, the United States, Canada, Australia and New Zealand, the economy
grew 19-fold per person even though these countries already had a higher starting level, and in
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Japan, which was poor in 1820, to 31-fold, whereas in the rest of the world the growth was only
5-fold per person.
Proponents argue that increasing GDP (per capita) is empirically shown to bring about improved
standards of living, such as better availability of food, housing, clothing, and health care. The
decrease in the number of hours worked per week and the decreased participation of children and
the elderly in the workforce have been attributed to capitalism.
Proponents also believe that a capitalist economy offers far more opportunities for individuals to
raise their income through new professions or business ventures than do other economic forms.
To their thinking, this potential is much greater than in either traditional feudal or tribal societies
or in socialist societies.
Political freedom
Milton Friedman stated that the economic freedom of capitalism is a requisite of political
freedom which has been continuously echoed by others such as Andrew Brennan and Ronald
Reagan. Friedman stated that centralized operations of economic activity are always
accompanied by political repression. In his view, transactions in a market economy are
voluntary, and the wide diversity that voluntary activity permits is a fundamental threat to
repressive political leaders and greatly diminishes power to coerce. Friedman's view was also
shared by Friedrich Hayek and John Maynard Keynes, both of whom believed that capitalism is
vital for freedom to survive and thrive.
A social enterprise is just as the name explains -- an enterprise, or business, with a social
purpose.
It's run exactly the way a business is run, only the profits made are used towards poverty
alleviation and related causes.
Business is an incredibly powerful force for social change. Social enterprises use business to
tackle social problems, improve communities, improve people’s life chances, or protect the
environment. They create shared wealth and give people a stake in the economy.
Social Enterprises create jobs for people; provide consumers with products they need; pay taxes
that support public services; donate to charities and foundations and often re-invest any surplus
profits into the community or into service developments. This means that social enterprises very
often benefit the whole community as well as the people who use their services
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Sustainable Development
Sustainable development means meeting the needs of the present, without compromising the
ability of future generations to meet their own needs. The solutions too many problems – poverty
and employment, environment and fair trade development – depend on changing the way
markets work. There can be no long-term solutions to many of these problems based entirely on
government grants, subsidy or charitable donations. Long-term solutions have to be self-
sustaining and in a market economy that usually means finding a way to make money from them
so producers can sustain them. The best social enterprises are those that are environmentally,
socially, and economically sustainable.
Self Sufficiency
Unlike traditional Western aid which ties countries to donor desires, social enterprise unlocks
self-sufficiency and creative economic growth within local cultures. One of the benefits of
running a social enterprise can be in providing employment for local people. This may include
people who have traditionally found it hard to enter the labour market. A social enterprise can be
the ideal environment for such people to develop their potential - either as an employee or
heading up their own operation. This type of philanthropic aid is more dignifying to its recipient,
and also more efficient long term solution to poverty. It’s a matter of helping them get started,
whether to grow more food or to fight malaria or to handle recurring droughts. Then, once
they're on the first rung of the ladder of development, they'll start climbing just like the rest of
the world.
Consumer Accountability
Social enterprises are a vital source of new business approaches to fair trade, social inclusion,
community regeneration, creating jobs for those most marginalized in markets and
environmental sustainability. They help creating more ethical buying markets, giving consumers
the power to choose more charitable or environmentally conscious products.
Protecting the Environment
Environmentally sustainable products and services provide consumers with the freedom to take
an active role in protecting the environment and our world’s resources. By directly supporting
the social enterprises that are sensitive to the natural world or even work towards improving the
environment, consumers challenge all other businesses to do the same.
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2.3 Small Business Failure factors.
Every year many small business firms cease operations.Most of the time small business failed
because of failure to pay debts. Some Specific causes of failure
1) Incompetence
The owners simply do not know how to run the enterprise
2) Unbalanced experience
This means owners do not have well-rounded experience in the major activities of the business,
such as finance, purchasing, selling, and production
3) Lack of managerial experience
The owners simply do not know how to manage people.
4) Lack of experience in the line (field)
The owner has entered a business field in which he/she has very little knowledge
5) Others such as neglect, fraud, and disaster
In the study reported by the small Business Administration/SBA, small business failed because
of:
1) Inadequate records
2) Expansion beyond resources
3) Lack of information about customers
4) Failure to diversify market
5) Lack of marketing research
6) Legal problems
7) Nepotism
8) One person management
9) Lack of technical competence
10) Absentee management
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2.4 Problems in Ethiopia small business
Challenges
Most small business faces critical constraints, at both operation and start up level. Some of the
constraints include:
1) Lack of access to finance
2) Lack of access to premise
3) Lack of infrastructure
4) Lack of training in entrepreneurial and management skills
5) Lack of information on business opportunities
6) Social and cultural facts
7) Deficient entrepreneurial culture
8) Excessive corruption
9) Technology
10) Market problem
Opportunities
Some favourable factors for entrepreneurial activities in Ethiopia include:
1) Liberalization of policies
2) Exemption from paying import duties and various taxes
3) Availability of untouched natural resources
4) Availability of labour forces
5) Favourable physical environment
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2.5 Setting small business
2.5.1 What is the basic Business Idea?
 What you know about basic Business Idea?

______________________________________________________________________________
_________________________________________________________________________
Which business? Sky is the limit! "Business link" has an interesting page on sources for ideas
which may help you identify your business. For example, if you have a particular interest in
becoming an Internet start-up, it may be useful to see the pages in the business link site related to
Internet start-up .
Whatever type of business it is, you'll be faced with the decision about whether you should be
starting up as a sole proprietor, partnership or limited company. There may be many factors for
you to consider or the choice may be made for you. There are advantages and disadvantages
associated with each of the three options, depending upon your circumstances and requirements.
Some people may want to start enterprise which is not for their own profit .The resources in
business in Social Enterprises topic area will show details on such business what their goals can
be, how they can be structured, and so on.
Launching the Business
You now have a business plan, and are ready to launch your business. Once you have decided
upon your start date (day one of trading), you will need to inform the relevant public authorities
for sales tax purposes. Be sure that all Health and Safety checks have been made and you have
the appropriate certificates to prove this to your customers and suppliers.
Don't overlook the obvious such as getting a telephone service or utilities like electric, gas and
water connected on time - and make sure your bank, accountant and solicitor are all lined up and
ready to work with you. Most importantly, be sure that your customers and suppliers are lined up
and ready to do business.
Finance and Money
Finance, how costly it is and, is crucial for making profit &surviving. For some businesses, it
may be better to seek share capital funding rather than bank loans. Depending on your
circumstances and geographic area, there may be special soft loans or grants that are available
and suitable for your business needs. Check the pages on Types of Finance for a general
overview
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When running your business, you need to know the basics of accounting and bookkeeping; you
will also need a good financial plan and sound financial management. For the assistance of
small units, these are schemes in idea which you can see in our section of finance.
Types of Finance
Getting the right sort of finance is crucial to your business success. Businesses can be financed in
a number of ways, including venture capital, loans, overdrafts, grants or, more likely, a
combination of these. You need to understand which source may be suitable for your needs. A
good place to start is by reading the guide “What finance is right for my business?” in "Business
Link".
Grants
Grants are generally given by socially committed agencies or government for specific activities.
Whether or not you may qualify for a grant depends on a number of factors, including the kind of
business you have, whether it will create jobs, which section of society it caters to, where it is
located and what you need the money for.
You should bear in mind that a grant may not be the most appropriate form of finance for your
business needs and that there are often costs involved in complying with the conditions of the
grant. But grants can be preferable to other forms of finance since there is no interest or dividend
to be paid and they do not have to be repaid so long as the terms of the grant are met.
Grants are made available to businesses by central and provincial Government, UN agencies,
multilateral agencies, religious charities and certain other bodies.
2.5.2 What project an Entrepreneur should have?
 What project an Entrepreneur?

______________________________________________________________________________
______________________________________________________________________________
If you are considering starting your own business or becoming your own boss, you already have
a different mindset than most of your peers.
Entrepreneurs think differently. We experiment. We push the limits. That is how we succeed and
exceed even our own expectations by bucking the status quo.
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Since most entrepreneurs think differently, what I am about to suggest should be totally outside
the realm of possibility, right?
Once you as an entrepreneur has made a thorough market research, which has led you to find
your Target, or niche market they will head your products services, you must start the technical
study of your business plan. This document is very important because it defines how to produce
what is thought to sell and which already has found a market in market research.
The technical study is nothing more than the statement that as an entrepreneur should do, of the
aspects to consider for making the product or service delivery, as well as the processes involved
there. Understand that if you are chosen a business idea is because it is known or can investigate
how to make a product or service can deliver better.
Basically in the technical aspects is defined as: Where to place the company or project facilities?
Where to get materials or raw materials? What machines and processes used? What is the state of
the art of existing technologies? What staff is needed to carry out this project?
Answering these questions is crucial, as these will be inputs to the organizational and financial
study, to establish investment budgets and expenditures.
This study also analyzes the elements that have to do with the basic engineering of the product
and / or process you want to implement, for it has to do the detailed description thereof in order
to show all the requirements to make it work. For this, is of vital importance to the analysis of
the optimal size of the plant which should justify the production and the number of consumers
who will not to risk the company in creating a structure that is not supported by demand, with
which can generate the installed spare capacity, which in the financial study will be reflected to
be a substantial increase in costs and expenses of the business plan.
So the business plan must show its technical study different alternatives for the development or
production of goods or services, so as to identify the processes and methods needed to achieve
them, hence make it necessary machinery and equipment suitable for the production, identifying
the technologies that have become obsolete, and which exist today tip. Also, you have to take
account of the skilled labor to achieve the objectives of product operation, the space organization
for implementation, identification of suppliers and creditors that will provide the materials and
tools to develop your product optimally, and to establish an analysis of the strategy for managing
the process capability to meet demand over the planning horizon. This will have a basis for
determining production costs, costs of machinery and the manpower.
If market research and has provided the tools necessary to give as entrepreneurial response to the
question who to sell? The technical study will give answer to the question how? For them
initially must identify the inputs and supplies needed by the business project, the matter should
55
identify sufficient supply in quantity and quality of raw materials required for the project. Hence
the importance of identify the supplies, prices, quantities of supplies and consumables. At this
stage it is suggested to have supported through the contributions to establish a commitment to the
future supplier.
For technical baseline can use a box containing items such as supplier, input, presentation of the
input, unit of measure, quantity, unit cost and total cost. The correct filling out this information
will give optimal knowledge for initial drafting more appropriate and meets the needs of the
project.
Component of a market analysis of your business plan
2.5.3 Definition of industry and small Scale Industry
! An Industry: is one in which something is converted into other form(s) with value-
addition using men, material, & equipment. When this involves at least 3-persons (and power is
used) or at least 5-persons (when power is not used), it is an industry, else, it is classified as an
activity.
Service enterprises may also be in the small-scale ambit, and there are many schemes that are
now available for financing them.
Who can start an industry? Do you need to be an existing Entrepreneur?

______________________________________________________________________________
______________________________________________________________________________
Anyone can start a unit, whether
Existing entrepreneur or fresh to business,
With or without a business background in the family,

Educated or Uneducated,
Rural area / backward area persons, Women, Physically Handicapped persons, Minorities,
SC-ST have special incentives available to them.
A strong to set up industry, essential skills, ability of hard work, and ability to take calculated
risk are the key requirements.
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 Where is the Money?
______________________________________________________________________________
____________________________________________________________________________
Entrepreneur, who has skill in their hands, as well as some vision, can start their unit by availing
of the Composite Loan scheme, where they need not contribute any of their own capital. Other
entrepreneurs need to contribute 25 to 30% of the project cost as their own contribution (that is,
Equity capital). The rest can be got as a Loan from a financial institution or bank. The Loan
would have two components. Term Loan for creating fixed assets, and Working capital to run the
industry. These have to be returned over a period of a few years. The Loans generally require
Collateral. However, there is the Credit Guarantee scheme which is Collateral-free. Assistance
under Technology Up gradation scheme is also one, which can be of much advantage. The unit
may be owned either by one Proprietor, or a Partnership, or a Cooperative of some members, or a
limited company.
Where to Locate? :
______________________________________________________________________________
__________________________________________________________________________
An industry can be started by the entrepreneur at either his own place / own shed, or rented place
/ rented shed. It can also be located at an industrial estate.
The Product:
An entrepreneur would usually start with a product that some others are already doing business
with. To identify the right product, one has to keep looking till your right choice becomes clear
to you, almost magically! For every product that you explore, it is essential to look at its possible
market, its price, and competition. One can then try to find ways of catering the same product to
a different market, or offering it at a more competitive price-- these are often the pathways to a
new business.
Some Wise Tips On use of Funds & on Product Selection:

If you possess some funds of your own, be wise about how you use it. Some experienced people
give the thumb-rule, that you should divide it into 3-parts, and use it in the following way
 1/3rd can be utilized for providing your equity contribution to obtain the term loan
 1/3rd can be utilized for your contribution to get the working capital loan, and
 1/3rd can be set apart for uncertainties till the unit generates its own funds from sales.
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Pouring all ones resource into just getting a fat term loan (to finance fixed assets) can be a recipe
for disaster, because, merely fixed assets without working capital cannot make a business work.
From the point of view of product-selection, it would be wise if you“
Pick a set of products rather than a single one to guard against uncertainty in case one product
fails. Try to see if the product can have other alternative markets. Product / Process should be
such that the Technology can be upgraded when such upgrades come into the market.
Financial Management
Your accountant can help you set up a practical and appropriate financial management system.
Keeping your finances on an even keel is a challenge for any business but is essential for its
long-term survival. This can be even more of a challenge for under-capitalized small businesses,
where sporadic income and late payments coupled with committed outgoings can easily lead to
cash flow problems. Good budgeting and sound financial management gives a firm foundation
on which to build your business. Your accounting and bookkeeping system is a major factor to
sound financial management and should allow you to track actual performance against
expectations and provide early warning of any potential financial problem.
These business link pages will be key guidance for proper financial matters
Sources of Advice and Help
Marketing & finance is often the key to success. A mafia source of advice will be your
accountant. If you don't yet have one, the best way to choose an accountant (or any other adviser)
is by recommendation from trusted business friends and contacts.
Sales and Marketing
Whatever your stage of business development - start-up or growing - good ideas and products
alone are insufficient to sustain a business. To be successful, you need a constant flow of new
customers and the means to ensure they become loyal and profitable in the longer-term. This
means understanding your customers, knowing what they want, need and will pay for.
You need to keep abreast of changes in the market and understand how these will affect your
customers. You also need to be aware of what your competitors are doing and find unique ways
to sell your own products and services.
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2.5.4 Steps in setting a small scale unit
Provisional Registration Certificate (PRC):
In order to take steps to set up an industry for a particular product at a particular place, one needs
to Register it with the state Government District or Industries Centre (DIC / TIC etc), which
issues a Provisional Registration certificate (PRC).
To get the PRC, apply to the DIC etc in prescribed format with a Project Report / Project
Profile. A 2 to 3 page project report / profile would suffice if it is a small. It would highlight the
background of the entrepreneur, plant & machinery to be bought & its value, details of where the
product would sell & at what price, and the sources of funds including term loan, working capital
loan, own equity, etc. For large SSI project, details like cash-flow chart will also be needed.
The DIC etc will issue the PRC (normally, across the table) if the investment in plant &
machinery is within. 1 Core, the product is not banned, and such an activity is declared as an
industry (many services like IT, Hotels, Hospitals are included). The PRC is valid for 3-years,
and can be extended if the entrepreneur cites unavoidable circumstances.
The PRC is a prerequisite for getting other permissions permission of local authority to set up
the industry, Trade license, Power, Pollution clearance, clearance of inspector of Boilers,
Registration for commercial Taxes (State & Central sales tax) etc. The PRC is also needed for
obtaining Term Loan & Working Capital.
Permanent Registration Certificate (PMT)
Having set up the unit and achieved Trial production, the entrepreneur is expected to take the
Permanent registration (PMT). This is also issued by the DIC etc. To get PMT, apply in
prescribed format along with copies of PRC, Power sanction, Municipal /, First Sale Invoice,
Lease or rental agreement, Partnership Deed or Memorandum of Association (in case of
limited.), and a required official declaration. The PMT is normally issued either after inspection
or without inspection subject to later verification.
! Venture Capital
For technology based start-up's venture capital is a good option in India .But it is usually
provided to those that can demonstrate growth potential. Venture capital can be provided by:
* Individuals, business angels
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* Specialist finance houses
* Commercial companies/corporate venturing
* Public institutions
Some "business link" pages in this topic area will give you practical tips on:
* Finding, winning and keeping profitable customers

* Developing your business by launching new products, entering new markets and starting to
export
* Planning and using a wide variety of marketing communications, including advertising and
PR , direct mail , and, of course, the Internet
* Making use of information about your competitors
Once you have all necessary information, resolves whatever you ask in the following steps:
1. Definition of objectives. Define the objectives to be achieved with the development of your
project, taking into account social, economic, environmental and others you consider relevant.
2. Rationale and background. Justify the reasons for the development of your project taking into
account social, economic, environmental and other relevant you consider the justification for
your project. It also relates the history of the project.
3. Analysis of the sector. State the study on the technological and industrial development of the
sector performance of the sector in the last three (3) years, its evolution and expected trend in the
short, medium and long term.
4. Market analysis. Develop a diagnosis of the current structure of the domestic market and / or
countries objectives; define target market, target market justification, estimating the potential
market, apparent consumption, per capita consumption, extent of need, estimate segment / niche
market (size and growth), consumer profile and / or client.
5. Competitive Analysis. Identification of key participants and potential competitors, analysis of
competing companies, guilds relationship existing cost analysis of my product / service from the
competition, analysis of substitute products, analysis of sales prices for my product / service and
competition, competition image to customers, which is directed segment competition, position
my product / service over the competition.
Posted in Business Ideas, Entrepreneurship, Small Business | Tags: Business plan, Business Tips
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Â»
How does the market research business plan.
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A business plan is a written document that you must have if you want to start a business . You do
it because often commit the mistake of not having clarity for sure the type of business you want,
do not know your target market, also not know the people or institutions that can help viable
your business idea , do not know who can make up your team work, do not know the machines
or equipment you require for the production process of the business, do not know how the
company is legally registered and also have no clear gains or losses can throw this initiative.
In these times of constant change where the only constant is change, is a mistake to all the
markets, trying initially to get to various niche markets and above all this, have no differentiating
factors of your business versus the competition.
This is where the business plan becomes a management tool that enables you to have complete
clarity of what your business is, will and hope to project to your customers, suppliers,
competitors, substitutes, government and community. Do not see the business plan as a simple
written on many occasions to fulfill a simple requirement, but as a weapon you can use whether
you are talking to investors, partners, prospective employees, suppliers or even with the same
clients.
Then, start your business plan you have to start a research process that take you to successfully
determine the type of business you have, will head the target to which your product or service,
who (individuals or entities) can support you in your entrepreneurship, who will be at your side
as a team and how that equipment will use throughout the production process and its different
cycles, legal business name and will have your new company, which must record and last but
least, that state of profit / loss and balance sheet has to throw this new business.
SUMMERY
A small business is a business that is independently owned and operated, with a small number of
employees and relatively low volume of sales. The entrepreneur when deciding on what goods
and services to provide to consumers should also decided on an appropriate legal form of
business ownership for his business. Proponents also believe that a capitalist economy offers far
more opportunities for individuals to raise their income through new professions or business
ventures than do other economic forms. To their thinking, this potential is much greater than in
either traditional feudal or tribal societies or in socialist societies.
Business plan must show its technical study different alternatives for the development or
production of goods or services, so as to identify the processes and methods needed to achieve
them, hence make it necessary machinery and equipment suitable for the production, identifying
the technologies that have become obsolete, and which exist today tip. Also, you have to take
account of the skilled labor to achieve the objectives of product operation, the space organization
for implementation, identification of suppliers and creditors that will provide the materials and
61
tools to develop your product optimally, and to establish an analysis of the strategy for managing
the process capability to meet demand over the planning horizon.
 Activity 2
1. What business needs you identified in your environment (community, neighborhood, country,
and municipality)?
______________________________________________________________________________
_______________________________________________________________
2. Have you thought why you have business unmet needs?

______________________________________________________________________________
___________________________________________________________________________
3. What have you done research on these business needs?

______________________________________________________________________________
______________________________________________________________________________
4. What do you propose initially to meet those needs?

______________________________________________________________________________
______________________________________________________________________________
5. Why these proposals could respond to these business needs?
___________________________________________________
 Checklist
Before you go to the next section, try to answer the following questions by ticking the ‘Yes” or
“No” column.
Yes No
1. Can you define the small business management?
2. Can you state the difference between sole proprietorship, partnership

and corporation?
3. Can you describe the advantages of sole proprietorship and

Corporation?
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4. Can you identify the business size definitions?
5. Can you distinguish the failure factors of small business?
6. Can you explain Advantages of small business?
7. Can you explain the industry and small scale industry?
If your answer for all of these questions is “Yes”, you can be sure that you understood this unit
very well. However, if you have a “No’ answer for any of the questions, go back to your note
and study the part that particular point is found.
 Self test 2
1. Write why Problems faced on small businesses.
2. Explain the Sources of Advice?
3. Write the failures factors of Small Business
4) Which of the following is/are not characteristics of small business?
A) Relatively small market share in the industry
B) Personalized management
C) There is little delegation of authority
D) None
5. Write the steps in setting a small scale unit.
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CHAPTER-THREE
THE BUSINESS PLAN
Introduction
The business plan is a written document that sets out the basic idea underlying a business and
related start-up considerations. The business plan may present a proposal for launching an
entirely new business. More commonly, perhaps, it may present a plan for a major expansion of
a firm that has already started operation. For example, an entrepreneur may open a small local
business and see the possibility of opening additional branches or extending its success in other
ways.
Objectives:
After studying this unit, you will be able to:
 Explain business plan and its importance

 Discuss the feasibility of plan
 State the principle of developing a business plan
 What is business Plan?
______________________________________________________________________
______________________________________________________________________
Definition of Business Plan
Business plan is a written document prepared by the entrepreneur that describes all the relevant
external and internal elements involved in starting a new venture. Business plan is a
comprehensive set of guidelines for a new venture. It is often an integration of functional plans
such as marketing, finance, manufacturing and human resources. The business plan should be
prepared by the entrepreneur however he or she may consult with many other professional in its
preparation. Lawyers, Accountants, Marketing Consultants and Engineers are useful in the
preparation of the plan.
3.1 The concept of Business planning

 Why is planning is so Important?
______________________________________________________________________________
___________________________________________________________
Due to Globalization, the world has been reduced into a small village. Hence, it is very difficult
to stay in the right truck in today’s world unless we start in the right foot. For this to happen,
planning is an essential tool that paves the way to success. In fact, planning does not ensure
success rather it enhances the chance of succeeding.
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! Business Planning is the process of setting objectives and devising actions to achieve those
objectives. Planning is a process that never ends for a business. It is extremely important in the
early stages of any new venture when the entrepreneur will need to prepare a preliminary
business plan. The plan will be finalized as the entrepreneur has a better sense of the market, the
product or services to be marketed, the management team, and the financial need of the venture.
As the venture evolves from an early start-up to a mature business, planning will continue as
management seeks to meet its short term or long term business goals.
3.2 A feasibility plan is outline of potential issues to address and a set of guidelines to help
entrepreneurs make better decisions. Writing an honest plan with well supported information will
benefit every one. The business plan may be read by employees, investors, bankers, venture
capitalists, suppliers, customers, advisors, and consultants. Well developed plan should be to the
point, clearly identifying products and/or services, markets and the founders. A feasibility plan
doesn’t have to be “slick”, but it does have to be prepared in a quality manner. It should be easy
to read and understand, and complete and accurate.
3.3. The Business Plan
! A business plan is the cornerstone of starting a business as well as a significant tool for
monitoring the progress and growth of your company.
For the entrepreneur starting a new venture, a business plan has four basic objectives:
 It identifies the nature and the context of the business opportunity-why does such an
opportunity exist?
 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 can be viewed as an entrepreneur’s game plan; it crystallizes the dreams and
hopes that motivate the entrepreneur to start the business.
Preparing Business Plan
There are probably three perspectives that should be considered in preparing the business plan.
First is the perspective of entrepreneurs who understand better than anyone else the
creativity and technology involved in the new venture. The entrepreneur must be able to
clearly articulate what the venture is all about
Second is the marketing perspective. Too often an entrepreneur will consider only the
product or technology and not whether someone would buy it. Entrepreneur should try to
view his or her business through the eyes of their customers
Third the entrepreneurs should try to view his or her business through the eyes of the
investors
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Protecting the business
! Wide circulation can be dangerous if plan contains sensitive information (strong statement)
should be written on the cover page that it is impossible to copy or disclose the plan. Making a
plan readable keeping the plan as easy and understandable and short and precise.
Ten key reasons below are why you should need business plan:
1. To attract investors
2. To see if your business ideas will work
3. To outline each area of the business
4. To setup milestones
5. To learn about the market
6. To secure additional funding or loans
7. To demonstrate your financial needs
8. To attract top-level people
9. To monitor your business
10. To device convergence plans
3.2. Developing a business planning
! The business plan should be comprehensive enough to give any potential investors a
complete picture and understanding of the new picture and it should help the entrepreneur clarify
his or her thinking about the business. There is no hard and fast rule regarding the components of
business plan and most of the time the following are recommended to be included while
preparing business plan:
1. Cover page
2. Executive summary
3. Business description
4. Product or service
5. Market research and analysis
6. The market plan
7. Manufacturing or operations plan
8. Leadership / entrepreneurial team.
9. Financial documentation
The cover page
! This is the title or cover page that provides the brief summary of the business plan’s contents.
It should contain the following
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The name and address of the company
The name of the entrepreneur(s), telephone number, fax number, e-mail
address and web site address if available can serve as the title page of your
plan. It consists the following
Month and year your plan was prepared (important)
Copy number of the plan
Copy right of the business
A paragraph describing the company and the nature of the business
A statement of the confidentiality of the report, this is for security
purpose and is important for the entrepreneur
2. Executive summary
What is executive summary?
___________________________________________________________________________
___________________________________________________________________________
! This section of the business is prepared after the total plan is written. About two to three
pages in length, the executive summary should stimulate the interest of the potential
investors. Generally the executive summary should address a number of issues or questions
that any one picking up the written plan for the first time would want to know. For example
 What is the business concept or model?

 How is this business concept or model unique?
 Who are the individuals starting this business?
 How will they make money and how much?
It is the “tickler” that either captures an investor’s interest or skills all incentives to read further.
Under executive summary we will have:
i) Venture defined-the company should be identified to include when it was formed, by whom
and for what purpose. Purpose is very important. Example, it may be manufacturing,
merchandizing, publishing, service providing, and e.t.c.
ii) Market characteristics: existing and potential markets must be briefly described in terms of
size and geographic characteristics. The plan must provide a summary of data to validate
projections.
iii) Entrepreneurial Team: the key personnel that is essential for the firm’s success. These
individuals must be identified, and their skills and talents must be adequately specified.
iv) Financial summary: critical financial considerations must be summarized to include start-
up estimates of revenue, costs, cash flow requirements and profit or loss. These should be
67
extended for at least three years .A good plan will identify the break even point in sales volumes
or dollar.
3. Business Description
The description of venture should be detailed in this section of the business plan. This will
enable the investors to ascertain the size and scope of the business. This section should begin
with the mission statement or company mission of the new venture. This statement basically
describes the nature of the business and what the entrepreneurs hopes to accomplish with that
business. The key elements to be discussed in this section are the products or services , the
location and the size of the business, the personnel and office equipment that will be needed , the
back ground of the entrepreneurs and the history of the venture.
4. Product or service
The plan must provide an accurate description of a product or service before attempting to
explain how it will be marketed. Essential information required to describe a product includes,
distinctive characteristics of the product it self, how it works (or is used), materials, costs,
methods of manufacturing, proprietary protection (patents, trade-mark, copyrights), and potential
competing (substitute) products. Most new products also require validated testing and many will
require approval by regulatory agencies. It also explains how the products will be introduced and
diversification plans and prospects for incremental growth.
5. Market Research and Analysis
 What is market research and analysis?
______________________________________________________________________________
______________________________________________________________________________
! The objective of market research and analysis is to establish that a market exists for the
proposed venture. The most difficult and important part of the plan that entrepreneurs must
provide a credible summary of potential are:
 customers,
 competitors,
 assumption about pricing,
 Promotion and distribution
Potential customers- identifying descriptive and behavioral segments of the customers
Descriptive –demographic and geographic
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Behavioral –psychographic (lifestyle, personal image) benefit segmentation (expected benefit)
and usage rate (heavy users and brand loyalty)
Demographic profile of customers like age, sex, income, education, religion etc…..
Buying habits and relevant information for new venture must be collected.
Evaluate market: future markets and funds or changes window of business opportunity, niche
position information is collected.
Analyze competitors: existing competitors with similar products or services
 Future competitors and ease of entry

 Industry structure.
Assumption about the new venture-It is important to describe in the marketing research section
assumptions that support market projections for the new venture.
Market niche- is a carefully defined segment of a broader market. It defines the positioning of a
product or service to create a distinct marketing focus.
Pricing system- describing the pricing system is essential for developing a customer profile.
High price for luxuries goods, discount for frequent sell, credit policies, etc
Methods of distribution- is a manner in which a product or service will be brought to the

market. The choice of distribution system defines the market niche, influences prices, and
delineates promotional activities. A creative method of distribution gives a business and its
distinctive competency.
The sales forecast -marketing research must conclude with solid data on projected sales. It is a
culmination of research to indicate the quantity of sales and expected sales revenues during the
planning period. Present well documented on specific market data and how sales are expected to
occur during the first three to five years of business.
6. The Market Plan
What is marketing plan?
______________________________________________________________________________
_____________________________________________________________________________
It builds on market research and distinct characteristics of the business to explain how the
venture will succeed. It describes how the products or services will be distributed, priced and
promoted. This section usually focuses on specific marketing activities. It describes pricing
policies, quality image, warranty policies, promotional programs, distribution channels and other
issues such as service after sale and marketing responsibility.
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 Pricing system -discounts, quantity and bulk prices, methods to set prices
 Promotional mix -strategy of combining appropriate uses of public relations,
advertising
displays
demonstrations
personal sales etc
 Distribution channels- use of market channels including retailers, wholesalers, catalog,
telemarketing, personal sales, representatives, or other approaches
7. Manufacturing or Operations Plan
All business manufacturing or non manufacturing should include an operations plan as part of
the business plan. This section goes beyond the manufacturing process (when the new venture
involves manufacturing) and describes the flow of goods and services from production to the
customers. It might include inventory or storage of manufactured products, shipping, inventory
control procedures, and customers support service. A non-manufacturer such as a retailer or
service provider would also need this section in the business plan in order to explain the
chronological steps in completing a business transaction. It is important for ventures that
manufacture, design, or sell products as well as for service firms that require capital equipment.
! The elements of manufacturing or operation plan are:
Facilities - purchase or lease, renovation, equipment and technology parking and transport, legal
and zoning issues
Inventory – opening inventory purchasing system, subcontracting, inventory management

supplies and support
Human resource- operating personnel skill requirements, supervision services and support
unusual requirement
Operations: research and development, manufacturing process, service structure, quality control
safety, and maintenance.
Legal and insurance issues- legal protection such as copyright, patent right and trade mark
 Insurance is also necessary to manage uncertainty of losses or disasters

 Entrepreneurs will need business liability insurance
8. Leadership / Entrepreneurial team
Investors put greater emphasis on the entrepreneurial team than on the business concept.
So, entrepreneurs must take care to profile the entrepreneurial team honestly and effectively.
They should emphasize team member’s strength past success and positive characteristics and
avoid/reduce weaknesses. Each person’s role in the new ventures should be described briefly.
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(Who does what), Personal data like age, address, salaries to be paid etc… (for cost calculation)
should be discussed in detail.
9. Financial plan
Like the marketing, production, and organizational plan the financial plan is an important part of
the business plan. It determines the potential investment commitment needed for the new venture
and indicates whether the business plan is economically feasible or not.
Generally three financial areas are discussed in this section of the business plan
1. The entrepreneurs should summarize the forecasted sales and the appropriate expense for at
least the first three years. It includes the forecasted sale, cost of goods sold and the general and
administrative expenses
2. Important to determine cash on a monthly basis especially in the first year
3. The last financial item needed in this section of the business plan is the projected balance
sheet. It shows the financial conditions of the business at a specific time. It summarizes the asset
of a business, its liability, the investment of the entrepreneurs and any partners and retained
earnings or (cumulative loss).
Operating and capital budget
If the entrepreneur is a sole proprietor then he or she is responsible for the budgeting decisions.
In the case of partnership, where employees to exist, the initial budgeting process may begin
with one of this individuals depending on his or her role in the venture
Example:-a sales budget may be prepared by a states manager, a manufacturing budget is

prepared by the production manager and so on. The final determination of these budgets will
ultimately rest with the owners or entrepreneurs
Capital budgets are intended to provide a basis for evaluating expenditures that will impact the
business for more than one year
Operating cost
! Include list of fixed expense incurred regardless of sales volume such as rent, utilities,
salaries, advertising, depreciation and insurance should be completed.
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A sample operating budget for first three month
Expenses January February March
Salaries $23.2 $23.2 $26.2
Rent $2 $2 $2
Utilities $0.9 $0.9 $0.9
Advertising $13.5 $13.5 $17
Selling expense $1 $3 $1
Insurance $2 $2 $2
Payroll taxes $2.1 $2.1 $2.5
Depreciation $1.2 $1.2 $1.2
Office expenses $1.5 $1.5 $1.5
Total $47.4 $49.4 $53.9
Pro forma income statement
Income statement indicates the analysis of revenue and expense. It only reflects the actual cost of
good sold as a direct expense. In the preparation of pro forma income statement the
entrepreneurs must first develop a sales budget that is an estimate of the expected volume of
sales by month. In preparation of income statement sales by month must be calculated first.
The cost of good sold can be computed in two ways
1. Directly:-
The variable cost of producing a unit multiplying number of units sold
2. By using an industry standard percentage of sales
Example: - for a restaurant, the national restaurant association or food marketing institutions
publishes standard cost of goods percentages of sales. These percentages are determined from
members and studies completed on the restaurant industry.
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Sample pro forma income statement three year summaries.
Percent Year 1 Percent Year 2 Percent Year 3
Sales 100 970 100 1264 100 1596
Less cost of 50 485 50 632 50 789

goods sold
Gross profit 50 485 50 632 50 798
Operating
expense
Salaries 31.8 308.4 24.4 308.4 21.8 348.4
Rent 2.5 24 1.9 24 1.5 24
Utilities 1.1 10.3 0.8 10.3 0.7 10.3
Advertising 19.8 192.0 13.5 170 11.3 180
Sales expense 1.2 12.0 1 12.5 0.8 13.5
Insurance 2.4 24 1.9 24 1.5 24
Payroll&misc.tax 3 29.2 2.3 29.2 2 32
Depreciation 1.5 14.4 1.1 14.4 0.9 14.4
Office expenses 2.3 22.o 1.8 22.5 1.5 23.5
Total operating 65.6 636.3 48.7 615.3 42 670.1

expense
Gross profit(loss) 15.6 151.3 1.3 16.3 8 129.9
Taxes 0 0 0 0 0 0
Net profit 15.6 151.3 1.3 16.3 8 127.9
Pro form cash flow
It is the summary of cash receipts and cash payments .It is not the same as profit. Profit is a result
of subtracting expense from sales, where as cash flow results flow from the difference between
actual receipts and cash payments. Sales may not be regarded as cash because a sale may be
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incurred but payment may not be made. Cash payments to reduce the principal on a loan do not
constitute a business expense but constitute a reduction of cash. Also, depreciation on capital
assets is an expense which reduces profit not a cash outlay.
For straight accounting purpose there are two standard methods used to project cash flow
 Direct method
 Indirect method
Indirect method
The objective is not to repeat what is in the net income statement but to understand there are
some adjustments that need to be made to the net income based on the fact that actual cash may
or may not have actually been received or disbursed
Example a sales transaction of $1000 may be included in net income, but if the amount has not
yet been paid, no cash has been received, thus for cash flow purpose there is no cash available
from the sales transaction.
It is important for entrepreneurs to make monthly projection of cash like the monthly projections
made for profit. The numbers in the cash flow projection are constituted from the pro forma
income statement with modifications made to account for the expected timing of the changes in
cash. If disbursements are greater than receipts any time period, the entrepreneurs must either
borrow funds or have cash in a bank account to cover the higher disbursements.
Statement of cash flow
Cash flow from operating activities
Net income XXX
Adjustment to net income
Non cash non operating items
+Depreciation and amortization XXX
Cash provided by changes in current assets or liabilities
Increase (+) or decrease (-) account receivable XXX
Increase (+) or decrease (-) in inventory XXX
Increase (+) or decrease (-) in prepaid expense XXX
Increase (+) or decrease (-) in account payables XXX
Net cash provided by operating activities XX, XXX
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Cash flow from other activities
Capital expenditure (-) (XXX)
Payments of debt (-) (XXX)
Dividends paid (-) (XXX)
Sales of stock (+) XXX
Net cash provided by other activities (XXX)
Increase or decrease in cash XXX
Pro forma balance sheet
The entrepreneur should prepare a projected balance sheet depicting a condition of the business
at the end of the first year. This balance sheet will require the use of the pro forma income and
cash flow statements to help justify some of the figures.
The pro forma balance sheet reflects the position of the business at the end of the first year. It
summarizes the asset, liabilities and net worth of the entrepreneurs. Every business transactions
affects the balance sheet, but because of the time and expense as well as need , it is common to
prepare balance sheet at periodic interval .Thus, the balance sheet is a picture of the business at a
certain moment in time and does not cover a period of time.
Asset
Represent everything of value that is owned by the business. Value is not necessarily meant to
imply the cost of replacement or what its market value would be but is the actual cost or amount
expended for the asset. Assets are categorized as current asset and fixed asset.
Current asset: - cash and anything else that is expected to be converted into cash or consumed
in the operations of the business during a period of one year or less .These current asset are often
dominated by receivable or money that is owned to the new venture from customers
Fixed asset: - are those tangible and will be used over a long period of time.
Liabilities: - these accounts represent everything owned to creditors. Some amounts may be due
within one year (current liabilities) and other may be long term liabilities (debts).
Owner equity:-the amount owners have invested and/or retained from the venture operations.
This represents the excess of all assets over all liabilities. It represents the net worth of the
business. Revenue increase assets and owner’s equity and expense decrease owner’s equity and
either increase liabilities or decrease assets.
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Sample pro forma balance sheet
Asset
Current asset
Cash $41.5
Account receivable $52.0
Inventory 1.2
Total current asset $94.7
Fixed asset
Equipment 72.0
Less depreciation 14.4
Total fixed asset 57.6
Total asset $152.3
Liabilities and Owner’s equity
Current liabilities
Accounts payable $13.6
Total liabilities $13.6
Owner’s equity
Mr. K 100
Mr. Y 100
Mr. Z 100
Retained earnings (151.3)
Total owner’s equity 148.7
Total liabilities and owner’s equity $152.3
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Pro forma source and applications of funds
It illustrates the deposition of earnings from operations and from other financing. Its purpose is
to show how net income and financing were used to increase assets or to pay off debt. The
source and applications of funds statement emphasize the interrelationship of asset, long term
liabilities, owner equity and dividends to working capital. The statement helps the entrepreneur
as well as investors to better understand the financial well being of the company as well as the
effectiveness of the financial management policies of the company.
Sample pro forma source and application of funds, end of first year
Source of funds
Personal funds of founders $300,000
Net income (loss) from operations (151,300)
Add depreciation 14,400
Total funds provided $163,100
Application of funds
Purchase of equipment $72,000
Inventory $1, 2000
Total funds expended 73,200
Net increase in working capital 89,900
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Summary
Business plan normally starts with an Executive Summary, which should be concise and
interesting. People almost always expect to see sections covering the Company, the Market, the
Product, the Management Team, Strategy, Implementation, and Financial Analysis. The precise
business plan format can vary.
Is the order important? If you have the main components, the order doesn’t matter that much,
but here’s the sequence I suggest for a business plan. I have provided two outlines, one simple
and the other more detailed.
Simple business plan outline
1. Executive Summary: Write this last. It’s just a page or two of highlights.
2. Company Description: Legal establishment, history, start-up plans, etc.
3. Product or Service: Describe what you’re selling. Focus on customer benefits.
4. Market Analysis: You need to know your market, customer needs, where they are, how
to reach them, etc.
5. Strategy and Implementation: Be specific. Include management responsibilities with
dates and budgets. Make sure you can track results.
6. Web Plan Summary: For e-commerce, include discussion of website, development
costs, operations, sales and marketing strategies.
7. Management Team: Describe the organization and the key management team members.
8. Financial Analysis: Make sure to include at the very least your projected Profit and Loss
and Cash Flow tables.
Build your plan, and then organize it. I don’t recommend developing the plan in the same
order you present it as a finished document. For example, although the Executive Summary
obviously comes as the first section of a business plan, I recommend writing it after everything
else is done. It will appear first, but you write it last.
Standard tables and charts
There are also some business tables and charts that are normally expected in a standard business
plan.
Cash flow is the single most important numerical analysis in a plan, and should never be
missing. Most plans will also have Sales Forecast and Profit and Loss statements. I believe
they should also have separate Personnel listings, projected Balance Sheet, projected Business
Ratios, and Market Analysis tables.
I also believe that every plan should include bar charts and pie charts to illustrate the numbers.
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Expanded business plan outline
Here’s an expanded full business plan outline, with details you might want to include in your
own business plan.
1.0 Executive Summary 4.3 Industry Analysis

1.1 Objectives 4.3.1 Industry Participants
1.2 Mission 4.3.2 Distribution Patterns
1.3 Keys to Success 4.3.3 Competition and Buying Patterns
4.3.4 Main Competitors
2.0 Company Summary
2.1 Company Ownership 5.0 Strategy and Implementation
2.2 Company History (for ongoing Summary
companies) or Start-up Plan (for new 5.1 Strategy Pyramids
companies) 5.2 Value Proposition
2.3 Company Locations and Facilities 5.3 Competitive Edge
5.4 Marketing Strategy
3.0 Products and Services 5.4.1 Positioning Statements
3.1 Products and Service Description 5.4.2 Pricing Strategy
3.2 Competitive Comparison 5.4.3 Promotion Strategy
3.3 Sales Literature 5.4.4 Distribution Patterns
3.4 Sourcing and Fulfillment 5.4.5 Marketing Programs
3.5 Technology 5.5 Sales Strategy
3.6 Future Products and Services 5.5.1 Sales Forecast
5.5.2 Sales Programs
4.0 Market Analysis Summary 5.6 Strategic Alliances
4.1 Market Segmentation 5.7 Milestones
4.2 Target Market Segment Strategy
4.2.1 Market Needs 6.0 Web Plan Summary
4.2.2 Market Trends
4.2.3 Market Growth 6.1 Website Marketing Strategy
6.2 Development Requirements
7.0 Management Summary

7.1 Organizational Structure
7.2 Management Team
7.3 Management Team Gaps
7.4 Personnel Plan
8.0 Financial Plan

8.1 Important Assumptions
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8.2 Key Financial Indicators
8.3 Break-even Analysis
8.4 Projected Profit and Loss
8.5 Projected Cash Flow
8.6 Projected Balance Sheet
8.7 Business Ratios
8.8 Long-term Plan
 Activity 3
Assume you are the business man, answer the following question
1. What business am I in?

________________________________________________________
2. What finances do I need?
_________________________________________________________
3. What is my sales strategy?
________________________________________________________
4. Where can I find needed personnel?
_________________________________________________________
5. How much profit can I expect?
____________________________________________________________
6. Explain Operating and capital budget?
________________________________________________________________
 Checklist
Before you pass to the next section, try to answer the following questions by ticking the “Yes” or
“No” column.
Yes No
1. Can you explain the meaning and importance of business plan?

2. Can you describe the three perspectives in preparing the business plan?
3. Can you discuss the nature of organizational power?
4. Can you understand the way of developing a business plan?
5. Can you explain the ten key reasons that needed in business plan?
6. Can you identify the executive summary?
7. Can you explain the Statements of cash flow?
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If you answer for all of the above questions is “Yes”, you can be sure that you understood this
unit very well. However, if you have a “No” answer for any of the questions, go back to your
note and study the part that has contained the point.
Self test 3
SAY TRUE OR FALSE
______1) Planning does not ensure success rather it enhances chance of succeeding.
_____ 2) According to current policy of Ethiopia micro and small enterprises can be formed by
two individuals.
_____3) General economic contribution of small businesses is similar to that of big businesses
Short Answers
4. Explain executive summary
5. Explain Management Team
6. What is web Plan Summary?
7. Explain Market Analysis
8. What is Strategy and Implementation?
9What are the standard elements of a business plan?
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Chapter Four: Product and Service Concept
Introduction
Dear distance learner! In the previous unit we looked at the general nature and theories of the
business plan. We also examined the concept of business plan feasibility and developing a
business plan. In this unit we will explore the different aspects of Product and Service Concept,
Product technology and Product development process. There may be more applications for such
a product in the business / industrial world. Certainly the ability to turn an appliance off at the
mains plug outlet without having to move from the position where one is using the appliance
could be very useful. From the consumer market perspective this kind of products requires the
use to identify useful applications for the product.
Objectives:
 Discuss the different aspects of Product and Service Concept

 Describe the role Feasibility planning
 Explain the nature and features of the business plan and Developing a business plan
4.1 Product technology
Technology advances with amazing rapidity and new innovations soon become standard
applications. One need to look carefully at exactly what this product does and how it actually
works before thinking about how one set about marketing the product.
Is there really a demand for such a product in the home?
______________________________________________________________________________
___________________________________________________________________________
The product is of interest to those with plenty of money but will it appeal to the all important
next groups of people in the innovation adoption curve? The entirely electric car certainly has
many limitations but possibly over time many of these can be removed and the product made
more useful to the bulk of people who will want to use it to replace petrol and diesel fuelled cars.
It is hard to estimate how long this will be since the technology to do so appear to be lacking at
the outset. One has to remember, however, that in the very early days TVs and computers faced
similar kinds of problems. Just as interesting is the use of intermediate technology mentioned in
the case and used by some manufacturers with some degree of usefulness by the consuming
public.
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4.2 Product development process
What is Product Development?
______________________________________________________________________________
____________________________________________________________________________
The development of competitive new products is a prerequisite for many companies' success.
Product development does not necessarily mean discovering revolutionary new inventions, nor
does it just involve re-vamping old solutions. A successful product often results from thinking
along new lines, free from conventional approaches and traditional choices of materials and
designs.
Today, the word product can have many different meanings. Here, we will be using the term in
the sense of a mechanical product. To a car salesman, a car is the product. But a car consists of a
number of components which are often supplied by independent manufacturers. To an engine
supplier, an engine is the product. To take this analogy one step further, an engine is also
comprised of a number of different components, all of which may be viewed as separate
products.
The task of developing a new product and, to an even greater extent, the task of designing a new
product, may rightfully be called "creating" a product. Each individual step of the process has to
be examined and approached as though it were a "development project" in its own right, whether
we look at the car as a whole or at one of the components used to make it.
As a rule, the product development process is divided into several phases, and it may be
The process usually begins with market-oriented activities, such as determining the need for the
product and analyzing the market. The process then moves on to the concept phase (when the
product idea is formulated), a basic drafting phase and a more detailed design phase, when the
product concept actually reaches maturity. The final phases are production and sales.
At this early stage in the process, our decisions are often based on rather sketchy information.
Unfortunately, at the stage where we could influence costs most, our grounds for making
decisions are usually weakest. Thus our aim must be to discover a method that gives us the best
possible grounds for making decisions as early as possible in the product development process.
Design Methodology
Design methodology is a rapidly growing field. It deals with systematic design and the methods
applied in connection with systematic design. There are several different theories on design
methodology. The following is a brief outline of the principal features such a method brings into
play during the concept stage of the product development process.
The first thing the design process has to clarify is which functions the product must
Perform to satisfy our needs and what properties it must have to be a good product
It is important to specify the product's functions in detail, and not to accept the first idea that
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comes along on the assumption that it will solve the problem
Basic Specification
Even if one draws up general descriptions systematically, the work is not easy and does not
result in straightforward, unambiguous answers. This is because the description depends on an
interpretation of the need for the product and business decisions concerning how that need can
best be met and how to compete on the market.
A basic specification is based on insight. However, it is possible to develop new insight during
the course of the development process, meaning that the basic specification has to be revised
often. As one moves from the general system to the sub-systems or components, it may also be
necessary to draw up basic specifications for the sub- systems to ensure that the right decisions
are taken, including the right choice of materials.
A basic specification consists of requirements and properties
The criteria distinguish viable solutions from non-viable solutions and thereby define the
framework available to us. The properties express our understanding of what constitutes a good
solution, and may be considered to be the "contours" within our framework. The basic
specification is usually set up on a printed form that provides spaces for headings (factors) and
questions
Functional Analysis
It may be useful to begin our search for a solution by making a functional analysis Provide light
for a lamp, "store compressed air" for a pressure tank, "indicate temperature" for a thermometer,
etc.). Based on our ideas about the finished product's applications, we can make a list of some of
the functions the product should have. The lists should not favor any particular solutions early in
the process. For example, if we were searching for car door solutions, stating the "allowed
rotation" would limit us to hinged doors. Stating the "allowed opening", on the other hand,
permits a wider range of possibilities.
Functions are expressed as a verb plus a noun. For example:
To regulate temperature
To transmit momentum
To provide heat insulation
To ensure the power supply
Many different solutions should be produced during this process because experience has taught
us that the more potential solutions we have, the better the final solution will be.
Evaluations Based on the Criteria
Product criteria should be formulated so that the answer to whether they are satisfied is a simple
"yes" or "no". On the other hand, it is not possible to use the following type of expressions as
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criteria: Reliable, quiet, user-friendly, etc. This is because such requirements cannot be satisfied
absolutely and they are not measurable or quantifiable values.
The criteria that the product design must meet depend on a set of requirements related to the
various phases of the product life. Ideally, a product should satisfy our expectations during all
phases of its life. Criteria have to fulfill the requirements of the producer, the user and/or of
authorities, e.g. in the form of normative, safety, and environmental standards.
Evaluation Based on Properties
Properties express which aspects of the product we want to optimize. A property should
therefore be expressed in such a way as to indicate the direction of optimization:
 Low price
 Easy to assemble
 Easy to operate
 Highly reliable
 Very safe for users
 Easy to transport
 Easy to dismantle
 Easy to maintain
If we are going to examine several solutions, we must therefore determine how good the
different solutions' properties are. They may be expressed on a relative scale, for example, using
two values - good/bad - or on a more finely divided scale - insufficient/mediocre/
acceptable/good.
It may be possible to measure some properties, e.g. US$ for price, time for simple assembly, etc.,
but others are almost impossible to quantify, e.g. easy to operate, good design.
4.3 Product protection
 Do you explain Product protection?
______________________________________________________________________________
___________________________________________________________________________
4.3.1 Patents
Patents are for inventions. Entrepreneurs can seek patents for a new product or a new process
that can be used in industry. For example, James Dyson obtained a patent for his bag-less
vacuum cleaner. A patent can protect the invention, preventing other businesses from making,
using, importing or selling similar products.
To apply for a patent, a business must submit a patent specification. This is a written description,
often with drawings of the invention. This sets out what the invention does and provides
important technical details. A patent can last up to 20 years; if it is renewed every year.
The essence of a Patent is a de jure monopoly: a total control on all activities related to some
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technique, device, or whatever is subject to the patent: use of a technique, experimentation with
it, enhancement to it, technical support about it, etc. Such monopoly does not reside in a natural
un ability of other people to produce the same services without causing harm to someone. On the
contrary it consists in a state-enforced prohibition for others to carry out activities in which they
could otherwise engage most legitimately, without harming anyone, for the benefit of all
concerned.
Such monopolies are not natural property: they are privileges granted by governments to a first
claimer under the pretense of promoting creation of new techniques. Nobody can deny that
patents are a privilege, rather than natural property. Makes it explicit:. The State grants a time-
limited privilege in as much as it hopes that this privilege will foster innovation.
Even disregarding the authority of the US founding fathers, it is clear that these monopolies are
not legitimate property of patent holders: indeed, even the most extended patent laws
acknowledge that freedom must ultimately (after a number of years) be returned to the public to
freely use the patented technology. Legitimate property would last forever, whereas patents last
for a mostly arbitrary number of years that changes depending on the country, the date, and the
whim of the legislator (and on the growing influence of patent lobbies on governments).
Patents are a privilege, the cost of which is borne by the public. Any economic account of
patents that displays their alleged benefits without even considering their cost is a shameful lie; it
is a disgrace that most people (and most legislators, too) are so easily fooled by the omnipresent
protectionist propaganda of patent lobbies.
Thus we will be analyzing in more detail the benefits and costs of patents, and we will see if they
balance each other, or if one exceeds the other.
Technical Lock-in and Research Avoidance
Once a patented technique is successfully spread, it creates incentives for a whole range of nasty
behavior from the privilege holder, whereas other people are forced into passiveness, or strongly
incited into it.
Successful patent monopolists, deriving lots of (socially destructive) revenues from their patents
(which is the primary economic effect of protection), are incited into finding ways to secure
these revenues. We have already covered part of this phenomenon in our analysis of secondary
and tertiary economic effects of patents; let us now uncover the technical aspect of this rent-
seeking behavior: the monopolist will try to accumulate new patents regularly, so that even when
his original patent expires, he still has a monopoly on the modern form of the technique. At first
glance, it looks like this will foster innovation, but then, the kind of innovation that is incited is
not superior ways to use the technique, for the benefit of the public; it is ways to secure
monopolistic revenues. This means that a large part of the research will be diverted from making
things cheaper, simpler and better, into making them more expensive, more complex to interface
to; the most wicked kind of "innovation" that this leads to is tricks that make customers prone to
paying additional money for derived services that would otherwise be free if there were
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competition. With industrial protection, technology becomes a way to put consumers into
shackles, instead of a way to free them.
Since the monopolist doesn't face technical competition within his technical domain, he will
neglect domain-specific enhancements, and invest into marketing tricks that might extend his
protected domain. This means that he'll have apparently more attractive products, that turn out
not to be satisfying to people who actually use them (especially technically aware people). As
compared to a free market in the same technical domain, this results in decreased quality, higher
costs, and a lot of customers tricked into products that turn out not as good as promised: all in all,
useless dissipation of wealth for the society at large.
Companies that hold patents will tend to fund research that depends on their existing patents, and
to discard research that circumvents their patents. For instance, a cheap mechanism for blocking
the AIDS virus that does not depend on patented molecules will find no funding from patent
holders, because they won't be able to grab as enormous a share of profit with it. In the absence
of patents, there would be no such incentive to avoid research; on the contrary, research
laboratories would compete to find the best and cheapest technique, independently from any
lock-in requirement. The net effect of patents on innovation is thus to divert it from useful
innovation into harmful innovation.
Designs
Registering a design prevents a competitor copying the physical appearance of a product or
component. The appearance of a product includes lines, shape, contours, texture, colors and
materials.
A registered design lasts initially for five years, although it can be renewed for up to 25 years.
For example, registering designer fashions will stop others from using those designs. This helps
to protect designs from being copied and appearing as cheap fakes on the high street.
4.3.2 Trade marks
What is A trade mark?
______________________________________________________________________________
____________________________________________________________________________
A trade mark is a sign that can distinguish goods and services from those of other traders. A sign
can include a combination of words, logos and pictures. To register a trade mark, it must be:
 distinctive for a group of goods and services
 not the same as (or similar to) any earlier marks on the register for the same or similar
goods and services
A trade mark is a marketing tool which helps to develop and distinguish the brand. The trade
mark also provides reassurance for consumers. People will recognize products more easily when
they see them advertised. For example, goods bearing the Nike 'tick' logo demonstrate they are
Nike products and meet Nike quality standards. Trade Marks can last indefinitely provided that
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they are renewed every 10 years.
Entrepreneurs register trademarks, designs and logos to protect and represent their brands.
Branding delivers huge commercial value to a company. Many people recognize brands rather
than individual products or services. The entrepreneurs behind Innocent smoothies use
distinctive logos and trade marks to create a recognizable brand.
4.3.3 Copyright
Copyright is an IP right that relates to the expression of an idea, not the idea itself. For example,
anyone can write a story based on the idea of a superhero, but they cannot copy the name, the
text or illustrations from other books about the same subject.
Copyright protects sound recordings, films, broadcasts, photographs and original artistic,
musical, dramatic and literary works. Unlike patents, designs and trademarks, copyright is an
unregistered right. It applies as soon as something is created. There is no registration process or
fee. It covers both printed and web-based materials.
Summery
The development of competitive new products is a prerequisite for many companies' success.
Product development does not necessarily mean discovering revolutionary new inventions, nor
does it just involve re-vamping old solutions. A successful product often results from thinking
along new lines, free from conventional approaches and traditional choices of materials and
designs. The task of developing a new product and, to an even greater extent, the task of
designing a new product, may rightfully be called "creating" a product. Each individual step of
the process has to be examined and approached as though it were a "development project" in its
own right, whether we look at the car as a whole or at one of the components used to make it.
Patents are for inventions. Entrepreneurs can seek patents for a new product or a new
process that can be used in industry. Companies that hold patents will tend to fund research that
depends on their existing patents, and to discard research that circumvents their patents. A trade
mark is a sign that can distinguish goods and services from those of other traders. A sign can
include a combination of words, logos and pictures.
Activity 4
1. What are the basic things to register a trade mark?
______________________________________________________________________________
__________________________________________________
2. Explain Copyright?
______________________________________________________________________________
______________________________________________________
3. What is product development process?
______________________________________________________________________________
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______________________________________________________
 Checklist
“No” column.
Yes No
1. Can you explain the product technology?

2. Can you describe the different aspects of Product and Service Concept?
3. Can you discuss role feasibility planning?
4. Can you explain the nature and features of the business plan?
5. Can you describe developing a business plan?
6. Can you identify the different theories product protection?
Self test 4
1. What information needs to be in your business plan?
______________________________________________________________________________
___________________________________________________________________________
2. What is the order of information that will make the most sense to lenders and investors?
______________________________________________________________________________
___________________________________________________________________________
3. What is the essence of a Patent is a de jure monopoly?
______________________________________________________________________________
______________________________________________________________________________
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Chapter Five: Marketing and New Venture Development
Introduction
Marketing is the process of planning and executing the conception, pricing, promotion, and
distribution of ideas, goods, and services to create exchanges that satisfy individual and
organizational objectives. In this unit we discuses generations of entrepreneurs and venture
capitalists have been facing this challenge; yet, how to place an economic value on a new
venture. In 1920s production was directed to satisfy demand rather than simply producing. Early
1950s it was realized by business men to made advertising expenditure.
Objectives:
After completing this section, you will be able to:
 Explain the meaning and importance marketing research

 Identify the marketing intelligence
 State the competitive analysis
 Describe the characteristics marketing strategies
 Explain the International markets
5.1 Marketing research
What are the key factors that influence the economic value of an entrepreneurial firm when such
a firm seeks equity financing from a venture capitalist? Generations of entrepreneurs and venture
capitalists have been facing this challenge; yet, how to place an economic value on a new
venture is still one of the more difficult tasks in venture capital decision-making (Mechner,
1989). New venture valuation is also an under-developed area in the research literature (Barry,
1994; Davila, Foster and Gupta, 2003; Sarasvathy, 1999). As one of the few large-sample
empirical studies on this important issue, the current paper attempts to fill this research gap.
Providing the perspective of a well-known venture capitalist in Silicon Valley, Quindlen
maintains that determining the economic valuation of an entrepreneurial firm is a challenging
task, and: “It’s much more art than science” (2000: 169). Also, May and Simmons state that: “the
truth about valuing a start-up is that it’s often a guess” (2001: 129). Scholarly research in this
area is rare and “little work is available on the valuation of venture capital investments” (Wright
and Robbie, 1998: 558). Indeed, both academic researchers and venture capitalists are
increasingly recognizing the importance of contributing both sound theoretical and practical
contributions to this nascent research area (Blaydon and Horvath, 2002).
This research applies an integrative approach to investigate whether the economic valuation of a
new venture by a venture capitalist can be explained by key factors identified in the research
literature as important to explaining and predicting firm performance. According to corporate
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finance theory, the economic value of any investment is determined by the sum of the discounted
value of its future cash flows (Brealey and Myers, 2001).
Innovative Research methods
 What are innovative Research methods?
______________________________________________________________________________
__________________________________________________________________________
We are known for our innovative methods of research but we also offer standard face-to-face,
telephone and internet based research (both qualitative and quantitative). Our focus on
understanding choices means we often design research using trade-off and experimentation
techniques starting with qualitative research. Our innovative methods include telephone group
discussions, mixed mode post and telephone conjoint, web assisted telephone interviewing
(WATI) with tailored respondent prompts and options, executive depth interviews using quality
of service reviews among other areas.
Improving the research process
Market research does not sit in a vacuum. The design and outcomes of a market research project
have to reflect not just the results from the data, but the way in which your organization could
and should use the data.
Our research process is designed so that we take more care to understand your goals and
constraints and use this to deliver better value from the research we carry out. We find that effort
up-front pays great dividends at the end in terms of the quality of the recommendations from the
research.
Increasingly we believe that more companies will want to be involved in carrying out their own
research with their own staff in order to become more customer focused.
Understanding the business and commercial context
The aim of market research should not just be about identifying areas of customer demand, it
also has to identify areas that can be profitably exploited. This means understanding something
of the real business implications and existing business practices. Communication and sharing of
results, understanding production and supply implications and identifying stakeholders and
influencers for the research are all important in making a research project successful. A brief
case study illustrates how the understanding the business context impacts on the research
outcome.
 Firms might address five questions to find out what consumer needs and preferences are;
 What is the need and what is being done to meet it? It can be done through,
Defining the problem:- the first step is defining the problem and setting research
objectivebased on agreement. Problem defined is half solved. it should be neither to
broad nor too narrow.
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 Analyzing the situation: developing research plan:
 What data is available( primary, secondary, or both)
 How does the data be usefully analyzed?
 In what format should results of the study be presented?
 Market research approach to collect primary data
 There are four commonly-used methods of research.
 Observation: merely taking note of consumer buying behavior and trends
in the market place.
 Surveys: assessing consumer preferences/thoughts by asking them directly
(mail, telephone…etc).
 Focus groups: bring in small groups of potential buyers to ask them about
new ideas/improvement.
 Experimental methods: put consumers in the situations that resemble real
markets, observe their actions.
 E.g. how much are buyers willing to pay for certain attributes.
Marketing’s Changing Role
Simple Trade Era Focus:
Sell Surplus
Production Era Focus:
Increase Supply
Sales Era Focus:
Beat Competition
Marketing Department Focus :
Era Coordinate and Control
Marketing Company Focus : Long-Run
Era Customer Satisfaction
Needs wants and demand- human needs, wants and demand are the starting points for the
discipline of marketing. Needs are some basic satisfaction like food, cloth, shelter, safety, etc.
Want is desire for specific satisfiers of this deep need e.g. a person who needs Kitfo, Tibs, etc.
Demand is the willingness and ability to pay.
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Product-(goods, services and Idea) - people satisfy their needs and wants with Product
Value cost and satisfaction-people pay cost to get satisfaction and that satisfaction is directly
related to value
Exchange and transaction- marketing emerges when people decide to satisfy their want
through exchange
Transaction-the process of exchange
R/ship and network- smart marketers make win- win r/ship with their customers and build
their trust
Market –the concept of exchange lead to market. it consists all potential customers who
engage in exchange for the propose of satisfying that need and want.
Marketer and prospects –
Marketer -some potential sellers who has more desire for exchange
Prospects-whom the marketer identifies potentially willing and able to engage in exchange of
value
Implementing the Marketing Concept
The marketing concept has been adopted by many of the most successful business firms. To
implement the marketing concept, a firm must first obtain information about its present and
potential customers. The firm must then use this information to pinpoint the specific needs and
potential customers toward which it will direct its marketing activities and resources. Finally, the
firm must again obtain marketing information-this time regarding the effectiveness of its efforts.
Market Segmentation
What is market Segmentation?
______________________________________________________________________________
________________________________________________________________________
Grouping people according to their similarity in one or more dimensions related to a particular
product category. The process of dividing a market into segments is called market segmentation.
A firm using this approach directs a marketing mix at a segment rather than at the total market.
Marketers use a wide variety of segmentation bases. Those bases most commonly applied to
consumer markets.
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Marketing Mix
To enrich the product to users business firm controls four important elements of marketing mix
that are combined in such a way as to reach the firm’s target market. The marketing mix is a
combination of product, price, promotion and place (distribution) created to reach a particular
target market. A firm can vary its marketing mix by changing any one or more of these
ingredients. (Product, price, promotion, and place) .A firm may use one marketing mix to reach
one target market and a second, different marketing mix to reach another target market. A firm
has to keep an edge (special value) on competitors. Firms try to differentiate their products and
find ways to distinguish products from competitors so consumers choose that firm’s product.
5.2 Market Intelligence

Market Intelligence is about providing a company with a view of a market using existing sources
of information to understand what is happening in a market place, what the issues are and what
the likely market potential is.
Market Intelligence can be divided into two spheres
 Market Intelligence based on external data
 Market Intelligence based on internal data
Often Market Intelligence relies purely on external data such as analysts reports, but there is
often a great deal of untapped information internally that would give you an insight into your
market, from sources such as databases and prospect lists, and an holistic view can prove very
insightful.
Market Intelligence from external data
What is Market intelligence?
______________________________________________________________________________
______________________________________________________________________________
Market intelligence from external data is normally gathered through what is known as desk
research. This means sourcing and analyzing published information to build a picture of a market
and to try and answer some specific commercial questions such as what is the market potential,
what are competitor’s future plans likely to be, what prices customers might be willing to pay,
what's the best means of entering a market.
Central to successful desk research is the ability to track down sources of information and to
provide the right level of analysis. For example identifying who your competitors are and
analyzing their market position against yours to find strengths and weaknesses and indications of
new developments, or identifying potential channel partners or locations to set up new offices.
Consequently, related to desk research in the form of collecting background information, is the
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process of list building. This involves seeking out lists of likely prospects or partners for
relationship or network building and finding out key information about the companies for
marketing purposes. A variety of places provide off-the-shelf lists, but often these lists need to be
enhanced with other forms of information to make them useful - for instance background
information about what the business offers, it's market positioning and details of who to contact.
A specific form of Market Intelligence is competitive intelligence. This is typically undertaken
on an on-going basis and involves the collection of news, materials and other information about
competitors from a wide variety of sources. This may involve collecting information about
market positioning and market messages, core clients or contracts, size and structure of the
business and issues like pricing or typical deal structures. Examples might include collecting
price-check information, or details of promotional and advertising campaigns, or monitoring
news channels for information about new products or new technologies (e.g. patents). Although
competitor intelligence can be carried out as a one off project, in reality, because of its on-going
nature, competitive intelligence is often more about putting structures in place to enable
information about competitor behavior to be fed-back and monitored, than specifically finding
one-off pieces of data. One key point is that for legal and ethical reasons, competitor research
should not be carried out in any underhand way (eg misrepresentation) and so should rely only
on openly available information sources.
Increasingly, Market Intelligence can involve collecting data from posts, tweets and other social
media. This type of 'market intelligence' overlaps with some forms of market research and with
PR monitoring. For some companies, the volume of comment together with the need to manage
and monitor across multiple languages and multiple domains mean that large scale software is
used to capture and then text-analyze the data. This can provide companies with good insights
into the mood of a market about, for instance, a new product that has been launched. But it can
also be part of a communication or PR campaign to allow companies to be alert to negative
comment or problems that are publicized via the social networks.
Market Intelligence from internal data
While much marketing intelligence is associated with collecting information externally, much
marketing intelligence information can come from making better use of existing information
such as customer databases, web-analytics and test-marketing. For instance by carrying out
database analysis on orders taken it may be possible to understand where you have cross-sale and
up-sale opportunities, or to understand what type of customers are your most profitable.
Common database analysis includes tracking regency, frequency and value of purchases.
Looking for pare to segments. Augmenting database lists with external data to identify
purchasing patterns.
Database information is not the only source of market data. Your website may also include a
high degree of valuable information about who is looking for your products and services. Web
site traffic analysis can help you understand what customers are looking for and why, and can be
used in conjunction with test advertising and variations in site and page delivery (eg varying
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landing pages) to provide direct measurement and enhancement of marketing effectiveness.
Finally, don't overlook knowledge about customers, markets and competitors that comes from
your staff. Often this is a poorly tapped source of information. Collecting and disseminating such
information falls into the realms of customer knowledge management and making better use of
this customer knowledge can help businesses focus far more on what the customer wants and
says.
5.3 Competitive analysis
What is Competitive Analysis?
______________________________________________________________________________
_________________________________________________________________________
Competitive Analysis is a process of gathering and analyzing information about your

competitors, their practices, products, strengths and weaknesses and business trends in order to
assess your position in the market and improve your products and marketing strategies.
What is the purpose of Competitive Analysis?
______________________________________________________________________________
__________________________________________________________________________
In today’s market, you must know what your competitors are doing and what to do to stay ahead
of the competition. Many businesses believe they are providing a good product to their
customers, but do not have reliable information showing how customers perceive their product or
how it compares to the competition.
A Competitive Analysis performed by an unbiased third party is an invaluable tool because it can
help you identify ways to attract new customers, as well as keep the ones you have.
Competitive Analysis can help you determine the following:
Strengths and weaknesses: How your product stacks up against the competition and in what areas
they have an edge over your product and in what areas your product is superior.
Identify your competition: Verify who your primary and secondary competitors are.
Improvements: How and in what areas your product, processes, and practices must be improved
to meet market demands or to stay ahead of the competition.
Marketing: What improvements you need to make in your marketing approach, and what
features you want to highlight in a marketing campaign.
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How can Competitive Analysis help establish my product as a market leader?
______________________________________________________________________________
____________________________________________________________________
Competitive Analysis gives you a realistic view of your competition. It also gives you the
opportunity to identify improvement in areas like manufacturing processes, customer services,
and marketing claims. It can help you compare products prior to making your marketing and
promotional decisions, thus saving you both time and money.
Competitive Analysis will help you accomplish the following:
Have a realistic view of your competition.
Foresee market changes and demands.
Identify ways to attract customers away from your competitors.
Discover opportunities for improvement in your business practices.
Identify necessary changes in your processes to meet market demands.
Identify necessary changes in your processes to reduce costs.
The readiness of a new product in the market
A realistic view of customers’ perception of your product against the competition
Data is collected from a variety of online sources, hands-on testing, internal data, and other
sources to provide a detailed view of how your product stacks up to the competition. qVision™
presents this real time data through an easy to use web interface allowing for quick reporting,
data exporting, and other analysis by your internal teams.
5.4 Market strategies

Developing a clear and profitable strategy relies on balancing your company's competencies and
abilities against the market opportunities into the future.
We offer a strategic development process that starts with strategic analysis and takes you through
to implementation. Our marketing effectiveness studies look at how your marketing expenditure
can be optimized to maximize your marketing.
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Strategic analysis
What is strategic analysis?
______________________________________________________________________________
________________________________________________________________________
Many marketing plans happen by hunch, but there is a better way. Strategic analysis forms the
groundwork for the development of market strategies and involves looking at your customers
and markets, your competitors and your competencies to identify the areas of opportunity and
threat, based on what your customers really value and what you can cost effectively deliver.
The nature of marketing strategy and how this should take account of the interests of various
stakeholders when involving such things as, product/service development and delivery,
promotional mix, support services, manufacturing and production processes, R&D, and material
purchasing affect the stakeholders.
Other factors in the business environment that influence marketing strategy: political, economic,
socio-cultural and technological (PEST).
Marketing and competitors: how a firm must be able to position itself competitively in the minds
of its customers so that its products and services stand out very favourably in important respects
in relationship to competitors.
Match the firm’s products / services with opportunities and threats in the market place. The
limited periods during the fit between the key requirements of a market and the particular
competencies of a firm competing in that market are at an optimum. Investment in a product line
or a market area should be timed to coincide with periods during which a strategic window is
open. Correspondingly, withdrawal should be considered where something which was a good fit,
is no longer a good fit. Ways in which a market can evolve and how firms might develop a
competitive strategy to take advantage of Strategic Windows.
Portfolio Analysis
How organizations create their own environments rather than simply adapt to existing ones. How
they select the strategic windows of opportunities and threats through which they want to look
out into the world and develop and market product and services to meet the needs of what they
observe to be required in the face of environmental turbulence.
How well the fit between an organization’s products/services meet the needs presented by the
windows of opportunities and threats is a fitting start for exploring the subject of strategic
marketing. It introduces the many factors that impinge on the firm’s ability to operate in a
strategically successful manner. These factors are both internal and external to the organization
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and form subjects in their own right which will be explored in subsequent lectures.
Central to the success or failure of a business is the health of its product (or service) mix. The
product life cycle concept is a useful conceptual framework within which to study how firms can
vary their marketing strategies. At different stages in the product life cycle certain marketing
strategies seem to be more appropriate than others. The life cycle concept also points to the
different earning patterns of products or services at various points in time. It indicates that it is
necessary to have a balanced portfolio of products services in terms of cash generating
capabilities in order to ensure steady-sales and profits at all times. Since products will generate
different cash flows and profits over their lives it means that the firm has to constantly review its
product mix, prune its product lines and introduce new products from time to time in order to
maintain long-run profits and stay in business.
Analysis of the business

What is business analysis?
______________________________________________________________________________
________________________________________________________________________
Understanding a business in depth is the goal of self analysis and is based on detailed current
information on sales, profits, costs, organizational structure, management style and other factors.
Approaches include: focus on marketing competencies and the resource-based view of the firm
which are central to any thinking about self analysis from a marketing perspective. Next there is
value chain analysis which examines the elements upon which a competitive advantage can be
based. Other useful frameworks include Kay’s distinctive capabilities and the Balanced
Scorecard. Then there is shareholder value analysis which provides a financial evaluation of a
business. These might be briefly discussed and illustrated.
One should also mention sales and profitability analysis along with the need to implement more
qualitative measures of analysis which try to ascertain customer perceptions of the organization
and its products or services.
Creativity in business is an important issue and there is a need be aware of problems associated
with negative mind sets and blocks to creativity. Discuss how such problem can be circumvented
and illustrate some of the creative problem solving techniques mentioned in the chapter in the
book.
Note: this is a lengthy chapter in the book with many techniques and topics that can be
developed substantially. It may be advisable to have more than one lecture on Analysis of the
Business and to spend more time on the various elements involved.
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Industry Analysis
How understanding the nature of the industry and how it changes is thus crucial to understanding
the process of how strategic-windows can be opened and closed by external forces.
The difference between industries and markets and whereas markets can be looked upon as
groups of customers with similar buying needs, industries are collections of organizations with
common products and technologies. How knowledge of markets and industries helps to identify
competition.
Examine how as industries progress through their life cycles, the nature of competition and
consumer demand changes and that this then affects the opening and closure of strategic
windows. The strategies and problems that firms adopt or encounter when operating in different
stages of the industry life cycle or in different types of industrial settings differ. Emphasize that
an understanding the stage of the industry life cycle in which a firm is operating is imperative.
Introduce the notion of strategic groups.
Illustrate SPACE analysis which summarizes a large number of strategic-issues in a few

dimensions. It relates industry strength to competitive advantage and the financial strength of a
firm. The Boston Consultancy Group competitive advantage matrix may also be introduced and
examined. This recognizes that strategic groups within an industry have different levels of
profitability and it helps to classify the competitive environments that coexist within an industry.
Market Analysis
Examine the purposes of market analysis to assess its prospects for participants and understand
the dynamics of the market. One needs to identify emerging key success factors, trends, threats
and opportunities and to develop strategic questions that can guide information gathering and
analysis. Measuring the size of the market, identifying the trends and being able to predict how
the market is going to develop in the future are critical factors in understanding the state of
strategic windows.
Long-term forecasts are most useful for medium- and long-term strategic planning purposes,
whereas short-term forecasts enable organizations to monitor the effectiveness of earlier long-
term forecasts. Illustrate both methods, including qualitative scenario generating approaches for
long term forecasting.
Market size and projected market growth rates are not the only important dimensions of market
analysis. Point to the some of the factors influence the profitability of a market at its various
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stages of development. Understanding the key factors which govern a firm’s success take us
from simply looking at the profitability of a market to the consideration of cost structures,
distribution systems and related trends and developments.
Analysing competition
The nature of competition and the factors which influence should be explored along with how
firms identify competitors and how they use product positioning to obtain a competitive
advantage. Attention should be given to how firms define their marketing strategies and analyse
the competitive positions of rivals. Consideration should also be given to the various sources of
information available to firms that enable them to gauge competitors’ strengths and weaknesses.
Competing successfully depends not only on an ability to identify customer wants and needs but
also upon an ability to be able to satisfy those wants and needs better than competitors are able to
do. This implies that organizations need to look for ways of achieving a differential advantage in
the eyes of the customer. The differential advantage is often achieved through the product or
service itself but sometimes it may be achieved through other elements of the marketing mix.
One might illustrate and discuss Porter’s five forces model to portray the various factors which
influence competition and how this influence is affected.
Attention should be given to how one identifies competition since this may not always be quite
straightforward. It is important to be able to correctly identify different types of competitors so
that suitable reaction to their marketing strategies and tactics can be put into practice as and
when required.
The various bases of competitive advantage might be illustrated and reference is made to Porter’s
strategic thrust typologies. This might then be followed by a discussion of the various typologies
of competitors that can be identified and the kind of strategy each one employs. Various
competitor typologies should be considered—leader, challenger, follower, niche—along with
their implications for approach to marketing strategy
Attention should also be given to ways and methods of obtaining information about competitors’
actual and planned activities. In particular, attention is given to market signalling actions and
their interpretation. How firms might assess competitors’ strengths and weaknesses and the
sources of information that should be consulted to make this possible should be examined.
Analysing the Business Environment
Discuss and illustrate how organizations need to respond and adapt to changing environmental
conditions if they intend to survive and that they can even instigate changes in the environment
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which are in their own interests. Both demand an understanding of those factors and forces
which bring about change in the environment. Ideally, an organization should adapt to changes
as they occur, even anticipate them in advance or systematically instigate changes to its own
advantage. An inability to do so can put organizations in positions where their short- and long-
term survival is jeopardized.
Point out that it is usual to distinguish between the internal and the external environment. The
former usually comprises the various assets and resources possessed by the organization. That is
its workforce, plant and machinery; know how, financial resources, etc. The latter refers to
people, institutions and developments, etc. which exert an external influence on how the
organization performs. Of course, with the emergence of strategic alliances and networks (to be
discussed in a later lecture) such a definition of boundaries does tend to become more blurred.
Firms need to anticipate the changes that are likely to take place in the marketing environment
in the foreseeable future. However, as noted above, it is not simply a matter of adapting to
change. Organizations can also exercise their own influence on the environment. Among the
ways that this can be achieved is the development and commercialization of new technological
ideas. These new technologies then become part of the business environment and in their turn
have an impact upon what other organizations can do. Give some illustrations.
Considerable control can be exercised over its internal environment by a firm, but a firm cannot
exert control in the same way or to the same extent over the external environment. It can only
attempt to influence it. There are various ways of influencing events in the external environment.
These may include activities such as lobbying among legislative groups. The latter is what
organizations often do when trying to influence the formulation of European Community
directives which can have an impact on such things as product design safety standards, etc.
Analysing the customer in the market place
In studying buyer behavior, a distinction should be made between complex decision-making

situations and those in which little consideration is given to the purchase being made. Where a
product is relatively expensive and possibly technologically complex, prospective purchasers
often go through a complex search and evaluation process prior to making a purchase.
Various models of consumer behavior have been developed over the years. The models reflect
the different buying situations in which consumers find themselves. Examples of these are shown
in the text and can be accessed on the PowerPoint slides. Factors influencing consumer behavior
must be considered as well as similar factors influencing the buying decisions in business to
business transactions. The chapter provides an overview of the principle behavioral factors
influencing customer’s in the purchasing and these might be explored or summarized in the
lecture.
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Firms undertake marketing research to help identify why people buy or do not buy products and
services. It also provides information for making marketing mix decisions (pricing, product,
distribution and promotion). Research can be undertaken both in-house and by specialist
marketing research companies. Research can be tailor-made to a client’s requirements or bought
‘off the peg’ if a suitable omnibus research report is available.
The research process involves: problem definition, consulting company records and published
data sources, deciding whether field work is required and if so, what is the best research method,
specifying the location and size/ type of sample, collecting the data, analyzing the data,
evaluating the results and setting down recommendations for action.
Various methods are used in marketing research including surveys, experiments and
observational methods. Since virtually all research involves working with sample data, a key
aspect of research concerns how the sample is taken from the population. Quota sampling and
simple random sampling methods are widely used in practice.
 A marketing strategy is a plan that will enable an organization to make the best use of its
resources and advantages to meet its objectives.
 A marketing strategy consists of;
 The selection and analysis of a target market.
 The creation and maintenance of an appropriate marketing mix.
 Marketing Strategy and the Marketing Environment. The marketing mix consists
of elements that the firm controls and uses to reach its target market.
 The firm’s marketing activities are also affected by a number of external—and
generally uncontrollable forces. Some of these force are;
 Economic forces—the effects of economic conditions on customers’ ability and
willingness to buy.
 Socio cultural forces—influences in a society and its culture that result in changes in
attitudes, beliefs, norms, customs, and lifestyles.
 Political forces—influences that arise through the actions of elected and appointed
officials.
 Competitive forces— the actions of competitors, who are in the process of implementing
their own marketing plans.
 Legal and regulatory forces-laws that protect consumers and competition through
government regulations and policies that affect marketing
 Technological forces—technological changes that can create new marketing
opportunities and can cause products to become out of date (old-fashioned) almost
overnight.
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Target Market
Price
Product Promotion Place
Product Brand Package Warranty
Idea Assurance
Physical Manufacturer or Protection, None, full, or

dealer (seller,
Good/service Promotion, Limited
Merchant)
Features (or both)
Quality level
Accessories
Instructions
Brand
Product line
What is the Importance of brand is?
______________________________________________________________________________
_____________________________________________________________________________
Brand is a term, sign, symbol or design or a combination of them intended to differentiate the
goods and services of one seller or group of sellers from those of competitors.
Importance of brand is
1. Getting legal protection for your product

2. Attracting loyal set of costumers
3. Building corporate image, once the brand is known it is easy to sell other products
4. Consumers can identify the product difference through brand.
The Strategic Importance of Packaging Convenient packages are easier to use, making purchase
decisions easier for the customer as well. It
Warranty
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A warranty says the company stands behind the product. Consumers often feel more
comfortable with products they know come with assurances.
Pricing decision
The price of a product is the amount of money that the seller is willing to accept in exchange for
the product, at a given time and under given circumstances. Depending on the product or service
firms can have a lot of options for setting price. Factors to consider when choosing price.
I.e. is the elasticity of demand for our product elastic or inelastic?
Strategic Planning for Price
Target
Market
Product Place Promotion Price
Pricing
objectives
Price Price levels Discounts and Geographic
flexibility over product allowances— terms—
life cycle to whom and who pays
when transportation
Price Level Policies
and how
1. “Skim the cream” pricing involves selling at a high price to those who are willing to pay
before aiming at more price-sensitive consumers.
2. Penetration pricing involves selling the whole market at one low price.
3. Discount pricing- quantity, seasonal,
4. Geographic pricing policies – who pays transportation cost. whether there is shipment or not
5. Value pricing - Focus on Customer Requirements, Target Market and Competition, is very
important for entrepreneurs
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Value Pricing says that customer cost should be proportional to customer value. A rational
customer should be willing to pay X in order to receive a value greater than X
c) Promotion decision
Firms have several options available for promoting their products. Choice of promotional tools
depends up on the firm’s product/services, target market, and positions.
Promotional tool the firm may choose includes:
 Advertising: print, television, radio

 Promotions: tickets, special….
 Personal selling
 Public relations

d) Place (Distribution) decisions
What is the most efficient or effective way to get products to customers? Costs and timeliness of
distribution options are two of the main considerations. Choice of distribution channel depends
on the nature of the business in question.
A distribution channel, or marketing channel, is sequence of marketing organizations that directs

a product from the producer to the ultimate user
 Agents – commission men and brokers

 Don’t take title to the product.
 Get commission and fee respectively for the service provided.
 Commission men- commission (as the %age of profit)
 Brokers- fee (payment for professional advice or service)
. Marketing information system
 Every firm should organize the follow up of marketing information to its marketing
manager.
 Marketing information system consists people, equipment, and procedure to gather, sort,
analyze, evaluate, and distribute needed, timely and accurate information to marketing
decision makers.
5.5 International marketing
What is International marketing?
______________________________________________________________________________
__________________________________________________________________________
International marketing is marketing carried out by firms overseas or across national borderlines.
This strategy is an extension of the marketing techniques applied in the domestic market to meet
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the different demands, buying patterns, demographics and market segments of overseas
customers.
International marketing is the multinational process of planning and executing the conception,
pricing, promotion and distribution of ideas, goods, and services to create exchanges that satisfy
individual and organizational objectives
International marketing and global marketing are often used interchangeably, although there is a
significant difference. Global marketing is employing a uniform approach to the marketing of
goods in overseas markets rather than adapting marketing to the local conditions. For example,
global brands such as McDonalds and Adidas try to keep a consistent product, message and offer
around the world.
Increasing globalization is a facet of most firms, markets and brands, because selling into
overseas markets has distinct advantages:
 Increased profitability - larger markets result in increases in sales and profitability as well
as greater economies of scale. Overseas markets may be more lucrative and as the costs
of sourcing from abroad can be considerably lower. In some markets it might be possible
to sell at higher prices than can be charged in the domestic markets.
 Diversification and spreading of risk - economic problems in one country can be avoided
if the company sells in more than one country. A fall in economic activity in one market
may be mitigated by shifting production and sales promotion to other markets that are not
undergoing an economic downturn.
 Increased brand exposure and recognition - brands are a valuable intangible asset. Global
recognition of a brand will increase this value substantially as well as making it easier for
the firm to introduce new products and services into new and existing markets.
 Legal differences - not all countries apply the same standards of health, safety etc and so
it might be easier, or less costly to produce and or sell in one country than in another.
 Market saturation - in competitive market situations a firm might be able to both boost
sales and prolong the life of a product of the range by selling overseas. In some cases,
such as tobacco products, this has enabled companies to continue production when the
economic, political and social circumstances have changed in their domestic markets.
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Summery
Research applies an integrative approach to investigate whether the economic valuation of a new
venture by a venture capitalist can be explained by key factors identified in the research literature
as important to explaining and predicting firm performance. Market research does not sit in a
vacuum. The design and outcomes of a market research project have to reflect not just the results
from the data, but the way in which your organization could and should use the data. Market
Intelligence is about providing a company with a view of a market using existing sources of
information to understand what is happening in a market place, what the issues are and what the
likely market potential is. International marketing is the multinational process of planning and
executing the conception, pricing, promotion and distribution of ideas, goods, and services to
create exchanges that satisfy individual and organizational objectives
Activity
1. What will Competitive Analysis reveal about my products?
______________________________________________________________________________
________________________________________________________________
2. What products compete with yours?
________________________________________________________________________
3. How will demand for our products change if we raise or lower prices?
______________________________________________________________________________
__________________________________________________________________
 Checklist
“No” column.
Yes No
1. Can you explain the meaning and importance marketing and new
venture development?
2. Can you describe the main approaches of marketing strategies?
3. Can you discuss the nature of marketing research?

4. Can you identify the marketing intelligence?
5. Can you describe the Competitive analysis?
6. Can you explain the International markets?
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 Self test
1, what will Competitive Analysis reveal about my products?
________________________________________________________________________
________________________________________________________________________
2. What advantages your products have over the competition
________________________________________________________________________
_______________________________________________________________________
3. What disadvantages your products have when compared to the competition
______________________________________________________________________________
_____________________________________________________________________________
4. What is approach to Competitive Analysis?
________________________________________________________________________
__________________________________________________________________
5. Which of the following is a reason why international marketing is different from domestic?
a) The amount of paperwork needed to send exports
b) The differences in legislation
c) The need to build joint ventures
d) The pressures on a business to merge with others
6. What does the product cost to make? (Cost- based pricing)
8. How many competitors are there in the market place? (Competitor-based pricing)
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CHAPTER-SIX
Organizing and Financing the New Venture
Introduction
Whether one is starting a new business or buying an existing business, there is almost always the
problem of having enough capital to operate the business. Even a profitable business that does
not have enough funds can get into trouble. Starting a new business is tough; and it may even
demand that you change your lifestyle. Here are the biggest financial concerns that you need to
consider when planning to start a business: In this unit we will explore a number of issues about
Organizing and Financing the New Venture. The unit is divided into two sections. In the first
section we will study about the general nature of Entrepreneurial team and business formation.
In the second section we will examine the various theories of finance Sources.
Objectives:
 Describe the general nature of organizing and financing the new venture
 Discuss the various theories of finance sources
 Explain the Entrepreneurial team and business formation
6.1. Entrepreneurial team and business formation
In economics, the term capital is used to refer to money invested in equipment and merchandise
as well as actual cash available for operating the business. In financing a business, capital means
the money and the credit needed to run a business. Fixed capital is the term applied to money
invested in fixtures, equipment and real estate which are called fixed assets. Working capital is
the term applied to money invested in merchandise, money that is due to from customers, and
actual cash on hand is referred to as liquid capital.
One of the most difficult problems in the new venture creation process is obtaining finance,
available financing needs to be considered from the perspective of debt versus equity and using
internal versus external funds as the funding source. Experienced executives need to be brought
into to accomplish the first set of milestones whether they are product research, product
development, marketing introduction, early sales or manufacturing operations. Therefore,
management team selection is not a one-time event. It has to be done throughout the life of the
company. This is a difficult task for founders, and should be facilitated by experienced business
executives. The keys to making the right selections are:
• Accurately and honestly assessing the skills and abilities of the current team; thereby
determining what additional executive skills that are needed
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• Openly admitting where help is needed by leaving no problem without thorough consideration
• Crisply defining the roles and responsibilities for the new members of the team
• Rigorously and intelligently selecting the people to fill the positions
6.2 Sources of finance
What are the different sources of money?
______________________________________________________________________________
____________________________________________________________________________
The use of money is all the advantages there in having money. There are different sources of
money waiting for entrepreneurs.
6.2.1 Asset Management
Financing is available from both internal and external funds. The funds most frequently
employed are internally generated funds.
Internally generated funds can come from several sources with in the company such as from
Profit, Sales of asset, Reduction in working capital, Account receivable. The needed funds can
sometimes obtained by selling little used assets.
The other general source of funds is external to the venture. Alternative source of external
financing need to be evaluated on three bases:-
 The length of time the funds are available

 The cost involved
 The amount of company control lost
The main sources of money are as Equity capital and debt capital
6.2.2 Equity Finance
It does not require collateral and offers the investor some form of owner ship position in the
venture .the investors shares in the profit of the venture , as well as any disposition of its assets
on a pro rata basis based on the percentage of the business owned .Obtaining funds for the
company in exchange for owner ship. The amount of equity involved will vary by the nature and
size of the venture.
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6.2.3Venture capital
Dear distance learner, do you know the kinds of venture capital firms?
______________________________________________________________________________
_________________________________________________________________________
Venture capital firms focuses on high risk entrepreneurial business. It typically receives more
than 1000 requests for money each year and after a final detailed study only 2% will be
successful, because of lack of business plan.
Among principal kinds of venture capital firms are;
Traditional partnership – established by wealthy family.

Personally managed pools – which are formed by such institutions as passion and funds
and foundations
Investment banking firms – are which occasionally form investor associations for venture
capital.
Insurance companies – are which tend to be more conservative and often, require a
portion of equity capital as protection against inflation.
Investment banking firms – are which occasionally form investor associations for venture
capital.
Insurance companies – are which tend to be more conservative and often, require a
portion of equity capital as protection against inflation.
Small business investment companies (SBICs) – are another source of equity capital and
started in USA in 1958 with main purpose of encouraging private investors to finance
entrepreneurs which run as private for profit motivated business but investors would
invest under small business. The small business administration would oversee SBICs
Other sources of funds
Personal funds:-These are the least expensive funds in terms of cost and control
They are also absolutely essential in attracting outside funding, particularly from banks, private
investors and venture capitalists. The typical sources of personal funds include saving, life
insurance or mortgage on house or car. These outside providers of capital feel that the
entrepreneur may not be sufficiently committed to the venture if she or he does not have money
invested.
Family and friends:-after the entrepreneur family and friends are common sources of capital for a
new venture. They are most likely to invest due to their relation ship with the entrepreneur. This
helps over come one portion of uncertainty felt by impersonal investors – knowledge of the
entrepreneur. Family and friends provide a small amount of equity funding for new ventures
reflecting in part the small amount of capital needed for most new ventures.
Although it is relatively easy to obtain money from family and friends, like all sources of capital
there are positive and negative aspects. Although the amount of money provided may be small, if
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it is in the form of equity financing, the family members or friends then have an owner ship
position in the venture and all rights and privileges of that position. This may make them feel
they have a direct input in the operation of the venture, which may have a negative effect on
employees, facilities, or sales and profits. In order to avoid problems in the future, the
entrepreneur must present the positive and negative aspects and the nature of the risks of the
investment opportunity to try to minimize the negative impact on the relationship with family
and friends should problems occur.
6.2.4 Debt Financing
What is Debt Finance?
______________________________________________________________________________
_____________________________________________________________________________
It is a financing method involving an interest-bearing instrument, usually a loan, the payment of

which is only indirectly related to the sales and profit of the venture .typically, debt financing
also called asset requires some assets such as car, house, plant, machine or land to be used as
collateral
Debt financing requires the entrepreneur to pay back the amount funds borrowed as well as fee
expressed in terms of interest rate. There can also be an additional fee, sometimes referred to as
points, for using or being able to borrow the money.
If the financing is a short term financing (less than one year) the money is usually used to
provide working capital to finance inventory, account receivable or the operation of the business.
The funds are typically repaid from the resulting sales and profits during the year.
Long term debts ( lasting more than one year) is frequently used to purchase some assets such as
a piece of machinery, land or a building ,with part of the value of the asset (usually from 50 to 80
%of the total value ) being used as collateral for the long term loan. Particularly when interest
rates are low, debt as opposed to equity financing allows the entrepreneurs to retain a larger
owner ship portion in the venture and have a greater return on the equity.
Commercial Banks
Commercial Banks are source of short-term funds most frequently used by the entrepreneur
when collateral is available. The funds provided are in the form of debt financing and requires
some tangible guaranty or collateral- some asset with value. This collateral may be in the form of
business assets (land, equipment, or the building of the venture), personal assets (the
entrepreneur’s house, car, land, stock or bonds).
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Type of bank loan
There are several bank loans available. To ensure repayment, these loans are based on the assets
or the cash flow of the venture. The asset base for loans is usually accounts receivable,
inventory, equipment or real estate
Account receivable loan: - Provides a good base for loan, especially if the customer base is well
known and creditworthy. For those creditworthy customers, a bank may finance up to 80% of the
value their accounts receivable. When customers such as the government are involved, an
entrepreneur can develop a factoring arrangement whereby the factors (the bank) actually “buys"
the account receivables at a value below face value of the sale and collect money directly from
the accounts. In this case, if any of the receivables is not collectible, the factor (the bank) sustains
the loss, not the business. The bank has more risk when factoring. The cost of factoring involve
the interest charge on the amount of money advanced until the time the accounts receivable are
collected, the commission covering the actual collection and protection against possible
uncollectible accounts .The cost of factoring the account receivable is higher than the cost of
securing a loan against a the account receivable with out factoring being involved, since the bank
has more risk when factoring
Inventory loans
Inventory is a firm asset that is often a basis for loan, particularly when the inventory is liquid
and can be easily sold. Usually the finished goods inventory can be financed for up to 50 percent
of its value. Trust receipts are a unique type of inventory loan used to finance floor plans of
retailers, such as automobile and appliance dealers. In trust receipts, the bank advances a large
percentage of the invoice price of the goods and is paid on a pro rata basis as the inventory is
sold
Equipment loan
Equipment can be used to secure long-term financing, usually on a 3 to 10 years basis.

Equipment financing can be fall into any of several categories: financing the purchase of new
equipment, financing used equipment already owned by the company, sale leaseback financing
or lease financing. When new equipment is being purchased or presently owned equipment is
used as collateral, usually 50-80% of the value of the equipment can be financed depending on
its salability. Given the entrepreneur’s tendency to rent rather than own, sale leaseback or lease
financing of equipment is widely used. In sale leaseback arrangement, the entrepreneur “sells”
the equipment to a lender and then leases it back for the life of the equipment to ensure its
continued use. In lease financing, the company acquires the use of the equipment through a small
down payment and a guarantee to make a specified number of payments over a period of time.
The total amount paid is the selling price plus the finance charges.
Real Estate Loan
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It is also frequently used in asset based financing. This mortgage financing is usually easily
obtained to finance a company’s land, plant or another building, often up to 75 percent of its
value
Cash Flow Financing
What is cash flow financing?
______________________________________________________________________________
___________________________________________________________________________
The other type of debt financing frequently provided by commercial banks and other financial
institutions is cash flow financing. This conventional bank loan includes lines of credit,
installment of loans, straight commercial loans, long-term loans, and character loans.
Line of Credit Financing
Form of cash flow financing most frequently used by entrepreneurs. In arranging for a line of
credit to be used as needed the company pays a “commitment fees” to ensure that the
commercial bank will make the loan when requested and then pay interest on any outstanding
funds borrowed from the bank. Frequently the loan must be repaid or reduced to a certain agreed
–upon level on a periodic basis.
Installment Loan
Obtained venture with a track record of sales and profit. These short –term funds are frequently
used to cover working capital needs for a period of time such as when seasonal financing is
needed .these loans are usually for 30 to 40 days.
Straight commercial loans
It is a hybrid of the installment loan by which funds are advanced to the company for 30 to 90
days. These Self liquidating loans are frequently used for seasonal financing and for building up
inventories
Long- term loans
When the longer time period is required for the use of money is required, long term loans are
used .these loans (usually available for only strong and matured companies) can make funds
available for up to 10 years. The debt incurred is usually repaid according to a fixed interest and
principal scheduled. The principal can sometimes start being repaid in the second or third year of
the loan , with only interest paid the first year
Character loan
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When the business it self does not have the assets to support a loan, the entrepreneur may need a
character (personal) loan. These loans frequently must have the assets of the entrepreneur or
other individual pledged as collateral or the loan consigned by another individual. Assets that are
frequently pledged include cars, home, lands, and securities.
Other types of lenders
Private lenders – range from banks to store front finance companies, from insurance companies
to family. Of these banks offer entrepreneurs the most help like, professional advice, financial
advice, credit information… etc..
6.2.5 Government Programs
What are the roles of Government on sources of finance?
______________________________________________________________________________
_________________________________________________________________________
At the federal level, local level and state level. At federal level it includes SBA (small business
administration).
Hand- capped assistance loans – help entrepreneurs who are physically disable.
Small loan guarantees- this program’s purpose is to help entrepreneurs who need loans of
$50,000 or less.
Loan guarantees on conventional loans- SBA guarantees to pay the part of lost loan borrowed
from the bank by entrepreneurs.
It may reach up to 90% of the loan.
Energy loan guarantees- enable entrepreneurs conserve energy by producing from different
sources or using other alternatives like windmill.
Supplier Credit – this is a source of debt capital in which suppliers finance the business of
entrepreneurs. Suppliers give supplies on the base of credit and entrepreneurs use the cash
released for other purposes. Example; An entrepreneur who owns a tire supply store buys tires
monthly. But the supplier offer credit terms of 30 days. i.e. payment is expected 30 days after the
entrepreneur receives a tire.
Investor’s money is better for entrepreneurs than creditor’s money.
Because:-
1. Creditor’s money involves a definite promise to repay a lender.

2. It has double obligation- repaying the loan and paying the interest on the loan.
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3. If entrepreneurs can’t meet this obligation, it results in failure. But;
4. Investor’s money doesn’t involve a definite promise to repay.
5. Investors buy shares at their own risk.
6. If they want to sell their share, entrepreneurs are not enforced to buy, investors them
selves search for buyer to sell their share.
Financial and Material control
Valuing the company
Valuation is at the core of determining how much owner ship an investor is entitled to for
funding the venture. This is determined by considering the factors in valuation.
Factors in valuation
Nonmonetary aspects that affect the fund valuation of a company. There are eight factors that the
entrepreneur should consider when valuing the venture .
1. The first factor and the starting point in any valuation is the nature and history of the
business.
2. The second factor involves an examination of the financial data of the venture compared
with that of other companies in the industry.
3. The third factor is book value (net value) of the stock of the company and the over all
financial condition of the business. The book value often called owners equity is the
acquisition cost (less accumulated depreciation) minus liabilities.
4. The forth factor is valuing the future earning capacity of the company
5. The fifth valuation factor is the dividend –paying capacity of the venture
6. An assessment of goodwill and other intangibles of the venture is the sixth valuation
factor
7. The seventh factor in valuation involves assessing any previous sale of stock
8. The final valuation factor is the market price of the stock of companies engaged in the
same or similar lines of business.
Financial ratios
Ratio analysis
Calculation of financial ratio can also be extremely valuable as an analytical and control
mechanism to test the financial well being of a new venture during its early stage. this ratio
serves as a measure of financial strength and weakness of the venture. Ratio analysis is a
typically used on actual financial results but can also provide the entrepreneur with some sense
of where problem exist in the pro forma statement as well
Liquidity ratios
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Current ratios
Used to measure the short term solvency of the venture or its ability to meet it’s short term debt.
The current liability must be covered from cash or its equivalent; other wise the entrepreneur will
need to borrow money to meet this obligation. The formula used to obtain current ratio is
CR=CA
CL
Where CR=current ratio
CA= current asset
CL= current liability
Example: - the RVUC main campus has current asset = 108,050 birr and current liability of
=40,500 birr calculate the current ratio for the company.
Solution
CR= CA
CL
CR= 108,050 birr
40,500 birr
CR= 2.67
While a ratio 2:1 is generally considered favorable, one interpretation for this result is that for
every birr of current debt, the campus has 2.67 birr of current asset to cover it. This ratio
indicates that RVUC main campus is liquid and can likely meet any of its obligations.
This is a more rigorous test of the short term liquidity of the venture because it eliminates
inventory, which is the least liquid current asset. The formula is given by
ATR= CA-I
CL
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Where ATR= acid test ratio
CA= current asset
I=inventory
CL= current liability
Example: - the MPP plastics .inc. has current asset = $108,050 and current liability of =$40,500
and inventory of $10,450 calculate the Acid test ratio for the company.
Solution
ATR= CA-I
CL
ATR= $108,050 - $10,450
$40,500
ATR= 2.40 times
The result from this ratio suggests that the venture is very liquid since it has assets convertible to
cash of $2.40 for every dollar of short term obligation. Usually a 1:1 ratio would be considered
favorable in most industries.
Activity ratios
Average Collection Period:-this ratio indicates the average number of days it takes to convert
accounts receivable into cash. The ratio helps the entrepreneur to gauge the liquidity of accounts
receivable or the ability of the venture to collect from its customers
ACP= AR
ADS
Where ACP is average collection period
AR is account receivable
ADS is average daily sales
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Using the formula with account receivable of $46,400and sales of $ 995,000 calculate average
collection period
Solution
ACP= AR
ADS
ACP= $46,000
$995,000/360
ACP= 17 days
If the invoice indicates a 20- day payment required, then one could conclude that most customers
pay on time
Inventory turnover: - measures the efficiency of the venture in managing and selling its
inventory. A high turnover is favorable sign indicating that the venture is able to sell its
inventory quickly .There could be a danger with a very high turnover that the venture is under
stocked , which could result in lost orders. Managing inventory is very important to the cash flow
and profitability if new venture
IT= CGS
Where:-IT is inventory turn over
CGS is cost of goods sold
I is inventory
Example: - the MPP plastics .inc. has the Cost of goods sold = $645,000 and Inventory=$10,450
calculate inventory turn over
Solution
IT= CGS
IT= 645,000
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10450
IT= 61.7 times
This would be an excellent turnover as long as the entrepreneur feels that he or she is not losing
sales because of under stocking inventory.
Leverage Ratios
Debt ratio: - many new ventures will incur debt as a means of financing the start –up. The debt
ratios help the entrepreneur to assess the firm’s ability to meet all its obligations (short and long
term). It is also a measure of risk because debt also consists of a fixed commitment in the form of
interest and principal repayment
DR= TL
TA
Where DR is debt ratio
TL is total liability
TA is total asset
With total liability of $249,700 and total assets of $308, 450, the debt ratio is calculated
DR= TL
TA
DR= $249,700
$308,450
DR=81%
The result indicates that the venture has financed about 81% of its asset with debt
Debt to equity
These ratio asses the firm’s capital structure .It provides the measure of risk to creditors by
considering the funds invested by creditors (debt) and investors (equity). The higher the
percentage of debt, the greater the degree of risk to any of the creditors
DE=TL
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SE
Where DE is debt equity
TL is total liability
SE is stockholder’s equity
The calculation of this ratio using total liability of $249,700 and total assets of $308, 450
with stock holder’s equity being $58,750 is
DE= TL
SE
DE= $249,700
$58,750
DE= 4.25 Times
The result indicates that this venture has been financed mostly from debt. The actual investment
of the entrepreneurs or the equity base is about one fourth of what is owned.
Profitability ratio
Net profit margin: - represent the ventures ability to translate sales in to profits
NPM= NP
NS
Where NPM is net profit margin
NP is net profit
NS is net sales
Return on investment
Measures the ability of the venture to manage its total investment in assets
RI= NP
TA
Where RI is return on investment
NP is net profit
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TA is total asset
Solution
Example 2:- an MPP plastic has a net profit of $8, 750 and net sales of $995,000 with a total
asset of $200,400. Calculate NPM and RI
Solution
NPM= NP
NS
NPM= 8,750
995,000
NPM=0.88%
In this case we have a favorable profit situation
RI= NP
TA
RI= 8,750
200,400
RI= 4.4 %
It indicates the firm has earned a profit in its first year and has returned 4.4 percent in its
asset investment.
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Summery
The owner of a small business performs analysis of financial statements in order to see where the
firm is, where it has been, and where it should go. There are several types of financial analysis
the owner or manager can use to keep or handle on the firm including financial ratio analysis.
These tools are used to forecast the firm's financial needs in the future.
Financial analysis is an aspect of the overall business finance function that involves examining
historical data to gain information about the current and future financial health of a company.
Financial analysis can be applied in a wide variety of situations to give business managers the
information they need to make critical decisions. Goals are set and performance is measured in
financial terms. Plants are built, equipment ordered, and new projects undertaken based on clear
investment return criteria. Financial analysis is required in every such case."
The finance function in business organizations involves evaluating economic trends, setting
financial policy, and creating long-range plans for business activities. It also involves applying a
system of internal controls for the handling of cash, the recognition of sales, the disbursement of
expenses, the valuation of inventory, and the approval of capital expenditures. In addition, the
finance function reports on these internal control systems through the preparation of financial
statements, such as income statements, balance sheets, and cash flow statements.
Financial analysis can be an important tool for small business owners and managers to measure
their progress toward reaching company goals, as well as toward competing with larger
companies within an industry. When performed regularly over time, financial analysis can also
help small businesses recognize and adapt to trends affecting their operations. It is also important
for small business owners to understand and use financial analysis because it provides one of the
main measures of a company's success from the perspective of bankers, investors, and outside
analysts.
6.3. Control of Financial Resources

Maintaining tight financial controls is a must for small businesses. Especially in the start up
phase of a business, cash is a precious resource that must be controlled. After your start up or
existing business gets going, you have to develop your financial controls. You establish your
budget and your accounting system. You will probably want to set up a computerized accounting
system and it's important to choose the right one. You have to understand accounting basics in
order to use it. You want to establish a realistic budget since you will be operating with limited
funds, especially at first. Financial control will be your mantra as get your business underway.
Starts up businesses are especially vulnerable to financial fraud and financial planning blunders.
A typical scenario is that a start up raises venture capital and immediately starts to work towards
its business goals. But here's what can happen along the way:
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 Spending too quickly:-Without good financial controls, a start up can quickly consume its
funding faster than anticipated.
 Financial fraud: - Funded start ups are easy targets for ill-intentioned employees.
Whether it's submitting duplicitous expense reports or something as egregious as creating
false invoices to be paid to a friend's business account, a start up can easily be victimized.
Activities
1. What sorts of financial controls are appropriate?
______________________________________________________________________________
_____________________________________________________________________________
2. Discuses the different sources of money and explain it?

______________________________________________________________________________
____________________________________________________________________________
3. Explain the general nature of organizing and financing the new venture
______________________________________________________________________________
______________________________________________________________________________
 Checklist
Before you go to the next section, try to answer the following questions by ticking the “Yes” or
“No” column.
Yes No
1. Can you explain entrepreneurial team and business formation?

2. Can you define the terms of finance sources?
3. Can you identify the asset management?
4. Can you discuss the major components of equity finance?
5. Can you describe the venture capital?
6. Can you describe debt financing?
If your answer for all of these question is “Yes”, you can be sure that you understood this unit
very well. However, if you have a “No” answer for any of the questions, go back to your note
and study that part again.
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Self test
1. Write and explain the eight factors that the entrepreneur should consider when valuing the
venture.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
________________________________________________________________________-
2.Why Investor’s money is better for entrepreneurs than creditor’s money? Explain?
______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________________________-
3. From several bank loans available, explain at least five of them.
______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________________________-
4. Write and discuses at least three principals of venture capital.
______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________________________
5. Explain Asset Management
______________________________________________________________________________
______________________________________________________________________________
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Chapter Seven: Managing Growth and Transaction
Introduction
Dear distance learner! Launching a new venture and becoming an entrepreneur is an exciting
and challenging task. Some have argued that great entrepreneurs like Anita Roddick and
Mohammed Yunis are simply born with different qualities to the rest of us – and it is these
qualities that explain their success as entrepreneurs. But we know that a key human quality is the
ability to change and develop over time. This is good news for anyone who wants to become an
entrepreneur because it will require you to adapt and change with the enterprise you are founding
as it develops and faces challenges. Becoming an entrepreneur is a never ending lesson as new
challenges arise that offer experiences in how to do and not to do things.
Entrepreneurs learn mainly from experience, so the only real way to become an entrepreneur is
to get out there and do it. You can start from scratch and learn it all by yourself or you can look
at what others have already done and hope to profit from their experiences. The process outlined
here is taken from what we know about what others have done and the advice that existing
entrepreneurs offer to those that wish to follow their path.
Objectives:
 Discuss the significance of Preparing for the launch of the venture

 Identify the factors affecting new venture
 Describe the role of managing early growth of venture
 Explain the new venture expansion strategies and issues
7.1Preparing for the launch of the venture
Can you learn how to be an entrepreneur or are some people just born that way?
______________________________________________________________________________
_________________________________________________________________________
The first thing we learn from other entrepreneurs is that there are many steps to be taken to start
a new venture and attempts to make short cuts and avoid some of these steps can be disastrous.
You don’t have to take these steps in the same order as we suggest below but you will need to
take them during the development of your enterprise.
You can divide your entrepreneurial journey into a number of stages and steps as shown below.
In practice everyone’s journey is different so we do not expect yours to exactly mirror this
pattern. But a good way to start is at the beginning! The process of launching a new venture can
127
be divided into three key stages of: Discovery; Evaluation; and Implementation. These can be
further sub-divided into seven steps as shown below:
This stage can be divided into two steps:
Step 1. Discovering your entrepreneurial potential - the first step is to know more
about your personal resources and attributes through some self-evaluation. – what will
you bring to the venture? What are your strengths and challenges? These will affect the
type of venture you choose.
Step 2. Identifying a problem and potential solution – a new venture has to solve a
problem and meet a genuine need. Evaluation by the end of first stage of Discovery, you
should have selected an idea worthy of further detailed investigation. The next stage
evaluates if this all adds up to a feasible business in two further steps:
Step 3. Evaluating the idea as a business opportunity – find out information about the
market need. Is the solution to this problem really wanted by enough customers?
Investigate the feasibility of the proposed solution (technically, economically, socially,
legally).
Step 4. Investigating and gathering the resources – How will the product/service get to
market? How will it make money? What resources are required? Exploitation by the end
of the second stage of Evaluation, you should have identified an opportunity that has
reasonable prospects of success, and analyzed what is required to launch it. The next
stage is to make the final preparations and launch it into the market. It can be developed
in three further steps:
Step 5. Forming the enterprise to create value – set up a business entity and protect
any intellectual property. Get ready to launch the venture in a way that minimizes risk
and maximizes returns
Step 6. Implementing the entrepreneurial strategy – activate the marketing, operating,
and financial plans.
Step 7. Planning the future – look ahead and visualize where you want to go
What is an entrepreneurial venture?
______________________________________________________________________________
_________________________________________________________________________
Entrepreneurship is increasingly important in the environmental field. Entrepreneurship is also
very important for the continued development of new technology and associated product and
process innovations.
Over the seven steps that make up this programme, we talk about your particular enterprise or
entrepreneurial venture as the focus for your thinking, learning, and development. This will often
refer to your idea for a specific new business. However, the term enterprise, as we have just seen,
can be applied in a wider context. You might be looking to work in a particular industry context,
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or aiming to launch a social enterprise. This step by step approach is valid in these contexts too.
This programme provides a wide range of advice and guidance to anyone interested in getting a
new venture off the ground in whatever context. It aims to assist you in preparing to launch an
enterprise, with signposts to other help and support that is available.
The materials presented here are intended to guide you through the process of enterprise
creation, and provide you with a range of development and management tools for this purpose.
Setting up your own new enterprise or small business is all about ‘learning by doing’. This can
feel particularly pressurized, as you will need to learn ‘how’ to do a wide range of new things in
a short space of time, under what is often a situation of radical uncertainty.
The approach taken to these learning support materials mirrors this reality in a number of
important respects. Most importantly, you are encouraged to take responsibility for your own
learning as you work your way through these materials. Each of the stages and steps include a
number of exercises and an ‘activity which is designed to pull together your learning over the
programme.
7.2 Managing early growth of venture
To grow or not to grow should be an important part of the entrepreneur’s strategic plan. For
those who choose to grow their venture, it is necessary to be prepared for growth and to
understand its implications. In many cases the growth may not be entirely voluntary. Customer
may demand more goods, better services and even better prices.
Hitting the growth wall
Researchers and authors in entrepreneurship often refer to a phase in the new venture’s life as
"hitting the growth wall” where operations reach out of control proportions such as cash runs out
and key employees leave for more stable jobs. The tragedy of this type of scenario is that when
it happens usually ends in disaster. The only way to survive it is to probably avoid it altogether
by being prepared to manage growth up front with effective management skills and controls.
When and if it occurs, the result does not have to be fatal. A clear statement of the situation can
go a long way to ensuring survival.
The entrepreneur will need to determine how much cash will be needed to accommodate the
rapid sales growth.
Organizational changes during growth many entrepreneurs finds that as the venture reaches the
growth stage they need to change the organizational culture.
Organizational culture internal venture atmosphere based on employees attitudes. Some of the
important guidelines to cultural change during growth involve the following:
Communicate all matters to key employees. Trust and understanding by employees are important
so that their roles and responsibilities during this stage of business are clear.
129
Organizational changes during growth are a good listener. Learn what’s on the mind of your
employees and what they would do if they ran the company.
Be willing to delegate responsibility. The entrepreneur cannot always be available to assess
every management decision. Give key employees the flexibility to make decision without the
fear of failure. Provide feedback consistently and regularly. Provide continuous training to key
employees. They in turn will be able to train others in the organization.
Emphasize results to key managers with incentives built into encourage them to train and
delegate within the roles.
Organizational changes during growth Provide continuous training to key employees. They in
turn will be able to train others in the organization.
Emphasize results to key managers with incentives built into encourage them to train and
delegate within the roles. Maintain a focus by establishing a mission with goals and using
consensus in management decision making. Establish a “we” spirit not a “me” spirit in meetings
and memoranda to employees.
Entrepreneurial skills and strategies
What are Entrepreneurial skills and strategies?
______________________________________________________________________________
______________________________________________________________________________
With growing venture it is sometime necessary to enlist the support and services of an
accountant or consultant to support record keeping and financial control. These external services
firms can also help train employees using the latest and more appropriate technology that can
meet the needs of the venture. Generally the new venture does not have the luxury of human
resource department that can interview, hire and evaluate employees. Most of these decisions
will be the responsibility of the entrepreneur and perhaps one or two key employees. Some
entrepreneurs are managing this issue by hiring professional employer organization.
As the company grows, it will need to develop new products and services to maintain its
distinctiveness in a competitive market. This should be an ongoing process based on information
regarding changing customer’s needs and competitive strategies.
Planning is continual process, particularly in a rapidly changing environment. It is unlikely that a
plan that worked yesterday will be effective in today’s marketplace.
Time management
What is time management for entrepreneur?
______________________________________________________________________________
____________________________________________________________________________-
Time is the entrepreneur’s most precious yet limited recourse. It is unique quantity: an
entrepreneur cannot store it, rent it, hire it, or by it. Entrepreneurs can always make better use of
130
their time, and the more they strive to do so, the more it will enrich their venture as well as their
personal lives.
Integrative bargaining (cooperative negotiation)
In this situation the entrepreneur is willing to let the other side achieve its desired outcome while
maintaining a commitment to his or her own goals.
7.3 New venture expansion
The entrepreneur is that endless challenge seeker. Once their small business is humming along,
growth is the next exciting challenge.
Exciting, yes - but at the same time growth can make good business sense - better brand
recognition, building value in the business for employees and customers, offering a wider range
of products and services to a larger geographical market, and creating "economies of scale."
You will also need to carefully weigh the risks and rewards for growth. Some of the steps in your
analysis are outlined in this section. Your lawyer and accountant will need to be consulted.
Perhaps you don't have to figure everything out from scratch. Look to a business in your industry
for best practices and draw on knowledge of others that have gone before you.
The Case for Growth: Gaining a Business Advantage from Expansion
1. Build a Family Dynasty and Grow Community Self-Sufficiency.
Family pride, job relevance for family members, and building a business dynasty for not just
your family, but for other families in your community as well, are a great reason for growth.
Growth of a business, especially in a small community, can be seen as community economic
development.
2. Build business value by dominating a market niche.
Business growth may garner your business the advantage it needs to be a leader in a market
niche. You can move into new geographic markets, acquire more customers or provide the next
level of service to your present customers - perhaps, a service they have been asking you for.
Growing your brand brings value to your business and quality to your customers. Both are
important in creating goodwill in the marketplace.
3. Attract and Retain Good Employees.
Employees are the new "green" in business, and the excitement of growth offers the potential for
career challenge that inspire skilled employees. Growing businesses offer change and the need to
acquire new knowledge - both something that younger employees seek and the global economy
demands.
4. Land the major clients that in turn lead to more financial support from lenders.
Landing a major client or contract can give your business the cachet that it needs to get others to
follow. As you build your resume financiers will take you more seriously, though they may
consider you more risk too. Your larger size will increase your marketplace presence and
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strength.
5. Achieve economies of scale.
The age old concept in business is economies of scale. This means that bigger businesses achieve
lower costs per unit and stretch administration dollars over a larger product line: marketing,
professional fees, insurance and banking charges, to name a few. This economy of scale
contributes to having more money for R&D, sponsorships, employee training and education,
investment in new technology and creating more productivity out of employees.
This is not an exhaustive list - your analysis will uncover many other rewards associated with
your particular business expansion. The next section will discuss the various expansion risks.
Do you have the following building blocks of growth in place, and can you manage them?
___________________________________________________________________________
____________________________________________________________________
 Understanding your core competencies

 Planning the growth
 Controlling costs
 Consolidating growth and working to fill in the down cycles
 Keeping control of the debt
 Building your team and creating an enviable corporate culture
 Taking time for yourself to guard against burnout
Core Competencies - Now that you have a growing business you need to measure the aspects of
your business that drive your profits and those that increase your expenses. Common non-core
functions in a small business are:
 Computer support and maintenance
 Customer help lines
 Legal and accounting support
 Equipment maintenance
 Payroll and debt collection
 Human resources administration
While it makes good sense to outsource bookkeeping services, you will want to maintain control
of your cash and contacts with your clients by keeping invoicing in-house. Functions in your
business that are core include those that create a unique competitive advantage, contribute
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directly to growth, and are a service that others come to you for.
Planning the Growth & Controlling Costs - The tools for planning your growth and
maintaining your costs are cash flow projections and multiple scenario budgets planned on a
shorter term than one year. While it may be pessimistic to plan for failure, do the math and figure
out what things might look like if more money is going out the door than coming in.
Work on Improving Sales in the Slow Times - Huge peaks and valleys in the business cycle
make it difficult to grow a substantial business. Look for complementary business services and
products that provide a steadying influence. Market intensively, perhaps offering price breaks,
during the down cycle so that you can offset your fixed costs. Build relationships with suppliers
that build goodwill for the down cycles, as this may give you some leeway in bill payments.
Manage the Cash Beast - Cash flow is king in all businesses, but especially small businesses. A
poor business plan, operational budget and cash flow plan make you a financial risk. Get in the
habit of doing a mini-business plan for every project, complete with a cash flow projection and
best-middle-worst case scenario. Start some cash flow kick starts today:
 Ask for deposits
 Increase your hourly rate
 Shorten your billing cycle
 Stop work for customers that don't pay
Employees and Employers, Together, Create a Corporate Culture - Cultivating a winning
corporate culture is the "buzz" of top employers. The leader's most important function in creating
an exciting, stimulating, growing business is communication. Employees need to feel
empowered and that they have contributed directly to the success of the organization. People,
including customers, have to believe that the plan will work and that it is not going to be
abandoned for the next "hot thing." Both of the previous two points require commitment of the
leader to be a coach and team builder. By focusing on outcomes, working through natural leaders
in your organization and listening, your job as a leader just got easier.
Take Time for You - Business success depends on the health, creativity, and physical and
mental stamina of its leader. Business owners report stress and burnout lead to illness,
relationship break-downs and more. Take the time for yourself that you need to stay healthy
(read the delegation section one more time!) so that you can steer your ship, through growth, to
success.
Seven Ways to Expand: From Local to Global
1. Increase your sales and products in existing markets. This is obviously the easiest and
most risk-free way to expand. This tactic may require a bigger location, different pricing
strategies, new/improved marketing techniques - but it will be in a customer group with whom
you already have a relationship. If you get off track, your present customers will let you know!
133
2. Introduce a New Product. You have a successful product/service that you have been offering
for some time and have been collecting data, customer feedback and doing the tinkering on your
newest product. This is a normal evolution in business, not just an expansion tactic. When
positioned as adding value and being responsive to customer needs, this can be a relatively risk-
free way to expand.
3. Develop a New Market Segment or Move into New Geography. Both of these areas require
cost outlays and uncertainty. Moving your products into new categories or demographic
segments requires market research, beta testing and new marketing strategies, i.e. a message for a
16-year old will differ that one for a 60-year old. Management of new remote locations may
absorb significant time and attention. While the risks are more, the payoffs are large - and for
most businesses looking to expand, these two methods of expansion are inevitable.
4. Start a Chain. A restaurant, retail or service business that's easily reproduced and can be run
from a distance is all you need to launch a chain. But, you must be cognizant of what made the
first location a success - was it location, your staff or you? If it is just you, then duplication is
only possible through detailed operations plans and sharing staff between locations. You will
need to duplicate the plan of your first location while meeting increased customer demands.
Starting a chain gives your current staff a crack at "management" duties, training opportunities
and an opportunity to expand their horizons.
5. Franchise or License. While it's a quick way to grow, a franchise agreement can cost
(minimally) $100,000 to prepare. You will need to be a good teacher, be able to prepare the
training manuals (preferably in more than one language), be very organized and willing to travel.
Licensing can carry less risk, but demands giving up a certain amount of control. Licensing a
patent, trademark or industrial design means that you sell manufacturing, distribution or
production rights.
6. Join Forces / Strategic Alliance. A merger or acquisition combines the best of two
companies, expands your customer base, increases intellectual capital and delivers operational
efficiencies. The trick is finding the right partner. These partners may be new distributors, but be
forewarned large retailers exact heavy performance expectations. Can you perform to the letter
of your promise? Can you meet high standards of quality (ISO, or the like) and adapt your
procedures to meet just-in-time delivery? Due diligence and strong contractual arrangements are
essential here.
7. Go Global. You can decide to go global in a number of ways. Growing markets, rising
consumer spending, improved business climate--sometimes the only place to find these things is
overseas. Doing business internationally can take the form of exporting, licensing, a joint venture
or manufacturing, but whatever forms you choose, the basic business rules apply: assess
customer demand, gain legal and accounting assistance, protect intellectual property and obey
regulations.
More difficult to understand than the regular business affairs may be the cultural nuances -
ignore them at your peril. In some countries, particularly those in Asia, a local partner is virtually
134
a requirement. Your first stop should be your target country's economic development agency,
which can help marshal local resources to get you on your way, possibly with a small financial
boost. Be patient. Growing your business globally can take more than one "sightseeing trip" to
the region. Here are some steps in going global, from easiest to hardest.
Four Ways to Go Global:
1. You can fill orders from Canadian buyers who then export your product. This is the
lowest risk of all, but does not put you in the driver's seat. You will have to rely on others to spot
the opportunities and take a passive role in the research and negotiations.
2. You can find foreign buyers operating in Canada. Multinational corporations, foreign
government and international retailers can buy goods from you in Canada to export to their
particular market. There are many on-line websites on which you can list your product or
service, and increase the chances of your selection as a company of choice.
3. You can work through agents and distributors. By working through export management,
sales agents or trading houses you can access foreign markets while still being involved in
control of the sales and terms. These intermediaries will build your export expertise and be able
to provide information about new trends or market shifts.
4. Marketing and delivering your product directly. This option calls for a large commitment
in resources, resolve and business savvy. The best way to begin is to join forces with non-
competitor businesses and "package" your offerings. Together you can share advice from
government trade representatives, financial institutions, freight forwarders, distribution networks,
agents and even shipping space. Perhaps also, look for the cultural bridge in your partnership -
do they speak the language or have they lived in the country? Whether you go it alone, or
partner, going global has risks - and the ultimate reward. Bonne chance!
Summery
Entrepreneurs learn mainly from experience, so the only real way to become an entrepreneur is
to get out there and do it. You can start from scratch and learn it all by yourself or you can look
at what others have already done and hope to profit from their experiences. In practice
everyone’s journey is different so we do not expect yours to exactly mirror this pattern. But a
good way to start is at the beginning! The process of launching a new venture can be divided into
three key stages of: Discovery; Evaluation; and Implementation.
Generally the new venture does not have the luxury of human resource department that can
interview, hire and evaluate employees. Most of these decisions will be the responsibility of the
entrepreneur and perhaps one or two key employees. Some entrepreneurs are managing this issue
by hiring professional employer organization
135
Activities
1. How would you characterize an entrepreneur's approach to risk?
______________________________________________________________________________
____________________________________________________________________________
2. How unusual do you think this is - for example, compared with the average small business
founder?
______________________________________________________________________________
_____________________________________________________________________________
 Checklist
“No” column.
Yes No
1. Can you explain the significance of Preparing to launch the venture?

2. Can you describe managing early growth of venture?
3. Can you discuss factors affecting new venture?
4. Can you identify new venture expansion strategies and issues?
Self test
1. The launching of a new venture can be divided into three key stages, explain them.
______________________________________________________________________________
___________________________________________________________________________
2. Discuses the seven ways of expand from Local to Global venture
______________________________________________________________________________
_____________________________________________________________________________
3. What are the Four Ways to Go Global Venture?
______________________________________________________________________________
136
_________________________________________________________________________
4. What are the main strategies to develop a New Market Segment or Move into New Geography
in expansion of venture?
______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________________________-
 Answer key
Self test 1
1 2 3 4 5
Self test 2
1 A 2 B 3 C
Self test 3
4 B
Self test 4
1 True 2 False 3 False
Self test 5
1 2 3 4 5
Self test 6
1 2 3 4 5
Self test 7
1 2 3 4 5
137
References
Text Book: Entrepreneurship and Small Business Management Module
Other References
 Bhatia B.S. and Batra G.S (2003), Entrepreneurship and Small Business Management,
Deep and Deep publications pvt.LTD, New Delhi, India
 Bolton Bill and John Thompson (2004), Entrepreneurs-Talent, Temperament,

Technique, 2nd ed. McGraw-Hill
 Coulter Mary (2003), Entrepreneurship in Action, 2nd ed., prentice-hall, New Delhi,
India
 Dawit Arega and Dawit Ayalem (2005), Entrepreneurship- A challenging Expedition
to success, Addis Ababa, Ethiopia.
 David H. Holt, Asoke K. Ghost (2000), Entrepreneurship, new ventures creation,
prentice-Hall of India pvt. Ltd, New Delhi, India.
 Hailay Gebretinsae (2003), Entrepreneurship and small Business Management, Ethio
central printing press, Mekelle, Ethiopia.
 Histrich D.Robert and Michael P. Peters (2002), Entrepreneurship, 5th ed., McGraw-
Hill, New Delhi, India.
 Lambing Peggy and Charles R. Kuehl (2000), Entrepreneurship, 2nd ed., prentice Hall,
USA.
 Urlacher S. Lawern (1999), Small Business-Entrepreneurship: An Ethics and Human
Relations Perspective, Prentice Hall, USA
 Zimmerer W. Thomas and Norman M. Scarborugh (1998), Essentials of
Entrepreneurship and small Business management, 2nd ed., prentice hall, USA
138
ADAMA UNIVERSITY
ASELLA SCHOOL OF AGRICULTURE
DEPARTMENT OF AGRIBUSINESS MANAGEMENT AND MARKETING
ENTREPRENEURSHIP-MID EXAMINATION
Name Course Name Entrepreneurship and

Business Development
ID.NO
Course Code ABMM 371/ 411
Department
Exam Date April,3/2012
Time Allowed 1:45 hrs
Maximum 30%
Mark
Set by Messele K.
Dida Jilo
General Instruction
 Attempt all questions

 Clear and precise work has a special credit
 Make sure that your Examination contains –III parts in 6 pages
 Respect the rules and regulations of the University
 Switch off your mobile while you are on the exam
Part-I: Say “TRUE” for the correct statement and “FALSE” for incorrect statement
(0.5- mark each).
_______1) Entrepreneurship is a key driver of our economy. Wealth and a high majority of
jobs are created by micro and small businesses started by entrepreneurially minded
individuals, many of whom go on to create big businesses.
______2) Entrepreneurship can only create job opportunities.
______3) Types of entrepreneur who struggle to exist not to grow are called Drone
Entrepreneurs.
______4) Number of employees is the best criteria to define Small Business.
______5) All operation of Micro and Small Enterprise industries are local/domestic.
______6) Innovative entrepreneur are adoptive while imitative entrepreneur are creative.
_____7) Empirical entrepreneur is a type of entrepreneur who introduce many thing

revolutionary
_____8) Planning does not ensure success rather it enhances chance of succeeding.
_____ 9) According to current policy of Ethiopia micro and small enterprises can be formed
by two individuals.
_____10) General economic contribution of small businesses is similar to that of big
businesses
Part-II: Choose the best Answer Among the following Alternatives and Encircle the
letter of your Choice (1-mark each).
1) Micro and small enterprise can stimulate economic development by “activating competition”.
How this can be done?
A) Adding value on their product and initiate existing firm to do so
B) Reducing price of their product in order to shift demand from competitor
C) Producing substitute product
D) All
E) All except ‘C’
2) Which of the following is/are Correct?

A) Entrepreneur is inborn
B) Any salaried employee is considered as an Intrapreneur.
C) Entrepreneurship is the propensity of mind to avert calculated risks with confidence to
achieve a pre-determined goal.
D) Lack of Entrepreneurship inhibits the process of business development, creativity,

innovation, and industrialization.
E) Challenge is the disadvantage of going in to Small Business.
3) Which of the following is/are not characteristics of small business?
A) Relatively small market share in the industry
B) Personalized management
C) There is little delegation of authority
D) All
E) None of the above
4) The word Entrepreneur is derived from: _____
A) French D) Latin
B) Greek E) None
C) Spanish
5) Which of the following is/are incorrect about Entrepreneurs?

A) Entrepreneurs are risk focused
B) Entrepreneurs are opportunity focused
C) Entrepreneurs search for changes, respond to it and exploit it as an opportunity
D) Entrepreneurs are economic agent who units all means of production
E) None
6) Which of the following is/are not significance of Micro and Small Enterprises to the
economy?
A) Job creation D) Quality Performance
B) Innovation E) None
C) Stimulate competition
7) All are not true about Entrepreneur, except?
A) Entrepreneur does live with status-quo
B) Entrepreneurs are gambler
C) The gain of entrepreneur is certain and regular
D) An entrepreneur sets us a new enterprise for only his/her personal satisfaction
E) None
8) Intra-preneurs are:
A) Entrepreneurs who create new ideas and turn them into successful project within an
existing business.
B) Individuals who start a business for which a widely known product image has already
been established.
C) Entrepreneurs who start business and expand as fast as possible in order to be able to
hire other employees
D) Entrepreneurs who look for an idea someone else has already had so that they can then
create their own business based on this model.
9) Which of the following is/are not true about Micro and Small Enterprises/MSEs?
A) MSEs work with minimum, simple, and inexpensive equipments and inputs
B) MSEs Produces basic tools for Agriculture, Manufacturing, and Construction

C) MSEs usually use indigenous resources
D) MSEs can be formed by two individuals according to current policy of Ethiopia
E) None
10) When does a business fail?
A) When the business no longer satisfies a number of the population, sufficient to support it
B) When it is led by persons who did not study economics
C) When it is not the biggest player in the market
D) When it is not able to compete successfully
E) A and D
11) “All activities of micro and small enterprises are usually carried out by owner.” Which
characteristic of micro and small enterprise indicate this?
A) Closely held C) Limited scale of operation
B) Personal character D) Simple organization structure

12) All the following terms indicate entrepreneur except.
A) Organizer C) Energizer
B) Instrument of change D) None
13) Entrepreneurship is primarily an economic function because
A) It is achievement oriented
B) It involve organization building
C) It involve creation and operation of an enterprise
D) It reduce uncertainty for plan of investment
14) Which one is correct about Fabian entrepreneur?
A) They have the will to introduce new change and desire to adopt ne w method
B) Their dealing are dominated by customs and religion
C) They are interested in taking risk during loss and hardship
D) All of the above
15) One of the following is the influential variable that encourage entrepreneurial activities
by attracting individuals from labor market
A) Freedom for one self in life D) Government support assistance
B) Unemployment E)’C’ and ‘D’
C) Maintenance of large family
Part-III: Give Short Answer Accordingly
1) As study reported by small business administration discovered one of small business

failure factors is ‘Nepotism.’ How? Explain it.
2) Jot down Challenges and Opportunities of Ethiopian MSEs
3) Write at least four distinctive features of Entrepreneur
4) Write one paragraph about any successful entrepreneur’s profile you know shortly and
precisely

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Table of Content

Answer key -------------------------------------------------------------------- --137

Chapter One: Entrepreneurship and Free Enterprise

Chapter Two - Small Business

Chapter Three: Business Planning

Chapter Five: Marketing and New Venture Development

Chapter Six: Organizing and Financing the New Venture

Chapter Seven: Managing Growth and Transaction

This interdisciplinary course is designed to introduce students to the concept of sustainable

At the end of this course student will be able to:

 Define entrepreneurship within the context of society; organizations and individuals.

After completing this unit, you will be able to:

 Describe the general nature of entrepreneurship

1.1. Definition and philosophy

! 1.1.2. Definitions of Entrepreneurs The concept of entrepreneurship has a wide range of

2) Entrepreneurship is the dynamic process of creating incremental wealth. This wealth is

3) Entrepreneurship is the capacity and willingness to undertake conception, organization, and

4) Entrepreneurship is defined as “the recognition of an opportunity to create value, and the

2) Joseph Schumpeter recognized entrepreneur as a person who introduces innovative changes.

3) Entrepreneur refers to a person who establishes his/her own business or industrial

7) An entrepreneur is one of the important segments of economic growth. Basically an

2) Joseph Schumpeter recognized entrepreneur as a person who introduces innovative changes.

3) Entrepreneur refers to a person who establishes his/her own business or industrial

7) An entrepreneur is one of the important segments of economic growth. Basically an

Nature and Characteristics Entrepreneurship and Entrepreneurs

! Entrepreneurship- is a set of activities performed by an entrepreneur. Thus, entrepreneur

Table 1.1 Relationship between entrepreneur and entrepreneurship

Decision Maker Decision Making

Risk bearer Risk Taking

Foresighted Fore sighting

Types of Entrepreneurship and Entrepreneurs

1. Small Business Entrepreneurship

3. Large Company Entrepreneurship

There are various ways by which entrepreneurs have been classified:

 Types of entrepreneurs based on ownership

Types of entrepreneur(s) based on ownership

Types of entrepreneur(s) based on personality traits and business running style

Industrial entrepreneur(s): Is entrepreneur who is into manufacturing of a product.

Corporate entrepreneur: corporate entrepreneur is a person who demonstrates his innovative

Agricultural entrepreneur(s): Agricultural entrepreneurs are those entrepreneurs who

Types of entrepreneur(s) based on stages of business development

Classical entrepreneur(s): A classical entrepreneur is one whose aim is to maximize the

Types of entrepreneur(s) based on motivation levels

Pure Entrepreneurs: are those entrepreneurs motivated by psychological and economic

Spontaneous Entrepreneur: is one who is motivated by his/her natural talent to begin a

Types of entrepreneur(s) based on technology used (expertise)

Other categories of entrepreneur(s)

Imitative entrepreneur(s): These types of entrepreneur(s) adapt a successful innovation from

 Do you explain the functions of an entrepreneur?

! The main functions of an entrepreneur are as follows:

1) Innovation: An important function of an entrepreneur is “innovation”. An entrepreneur

a) Introduction of a new product or new quality of an existing product

b) Introduction of new methods of production or distribution

c) Opening of a new market

d) Conquest of a new source of raw materials

e) New form of organization of industry

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

5) Purposeful activity/goal oriented activity: Entrepreneurs have goal to be achieved and it is

b) Coordination, administration, and control

c) Routine type of supervision

Motivation for Starting a Business and its Reward

i) Pulling Factors of Entrepreneurs

Some examples are the following: