Entrepreneurship Module 1

Chapter one
Introduction to Entrepreneurship
1.1The concept of entrepreneurship, definition and historical development
Entrepreneurship is the symbol of business strength and achievement. Entrepreneurs are the
founders of today's business success; their sense of opportunity, their drive to innovate and
their capacity for accomplishment have become the standard by which free enterprise is
measured. Entrepreneurs will continue to become critical contributor to the economic growth
through their innovation, research and development effectiveness, job creation,
competitiveness, productivity, and formation of new industry. The words entrepreneur and
entrepreneurship have acquired special significance in the context of economic growth in
rapidly changing socio-economic and socio-cultural climates both in developed and in
developing countries.
Entrepreneurship is one of the four mainstream economic factors: land, labor, capital and
entrepreneurship. The word which is derived from 17 th century French entreprendre, refers to
individuals who were “undertakers”, meaning those who “undertook” the risk of new
enterprise. They were “contractors” who bore the risk of profit or loss, and many early
entrepreneurs were soldiers of fortune, adventurers, builders, merchants etc. Earlier references
to the entreprendeur in the 14th century spoke about tax contractors- individuals who paid a
fixed sum of money to a government for the license to collect taxes in their region.
The concept of entrepreneurship varies from country to country as well as from period to
period and the level of economic development thoughts and perceptions; a concise and
universally accepted definition has not yet emerged.
Example
 In the earliest period: An entrepreneur was viewed as a go- between, who attempt to
establish trade routes and signed contracts with many persons (forerunners of today's
venture capitalist) to sell goods. While the capitalist was a passive risk bearer, the merchant
adventure took the active role in trading, bearing all the physical and emotional risks.
 In the Middle Ages: The term entrepreneur used to describe a person managing large
production projects. In this case, the person would not take any risks but would merely
manage the project using the resource provided. In the 18 th century, The Irishman named
Richard Cantillon, who was living in France, credited to being the first to use the term
entrepreneur in the business context. He viewed the entrepreneur as a risk taker, seeing the
merchants, farmers, crafts men, and other sole proprietors buy products at certain price –
therefore, operating at a risk condition.
1 Entrepreneurship & Small Business Management

Karl Vesper: has researched entrepreneurship and explained that its nature is a matter of
individual perception.
 To an economist: an entrepreneur is one who brings resources; labor, materials, and
other assets in to combination that makes their value greater than before.
 To a psychologist: such a person is typically driven by behavioral forces like need to
obtain, to experiment, to accomplish something, or perhaps to escape authority of
others.
 To capitalist philosophers: an entrepreneur is the one who creates wealth for others as
well, who finds better ways to utilize resources and reduce waste and who creates job
that others are glad to get.
Fundamentally, entrepreneurship is a human creative act, involved building a team of people
with complementary skills and talents. And there have been hundreds of definitions in dozens
of books. Such definitions include:
 A decision maker whose entire role arises out of his alertness to hitherto unnoticed
opportunities (kirzner-1973).
 Who uses available resources in novel ways (Schumpteter-1934).
 Are action oriented, highly motivated individuals who take risk to achieve goals.
 Are people who have the ability to see and evaluate business opportunities, the ability to
gather resources to take advantage of them; and the ability to initiate action to insure
success?
 Is someone who always searches for change, responds to it, and exploits it as an
opportunity (Peter Drucker).
The concept entrepreneurship has wide rages of meanings. On one extreme, an entrepreneur is
a person of very high aptitude who pioneers change, possessing characteristics found in only a
very small fraction of population. On the other extreme of definition, anyone who wants to
work for is considered an entrepreneur. In almost all of the recent definitions, there is an
agreement that we are talking about a kind of behavior that includes:
 Initiative taking
 The organizing and reorganizing of social/economic mechanisms to turn resources to
practical account, and
 The acceptance of risk or failure, etc.
In this regard Robert Hisrich (1985), for example, defined entrepreneurship in a relatively
comprehensive way as a process of creating something different with value by devoting the

necessary time, and effort assuming the accompanying financial, psychological, and social
risks, and receiving the resulting rewards of monetary and personal satisfaction.
1.2. Personality Traits of Successful Entrepreneurs
A common stereotype of the entrepreneur emphasizes such characteristics as a high need for
achievement, willingness to take moderate risk, and strong self-confidence. Go through the
following listed characteristics and compare them with what you have identified.
A). Need for Achievement:

David C. McClelland, a Harvard psychologist, discovered a positive correlation between the
need for achievement and entrepreneurial activity. According to McClelland, those who
become entrepreneurs have, on the average, a higher need for achievement than do members
of the general population. Entrepreneurs are driven by a need to achieve more and more.
B). Willingness to take risk:
The risks that the entrepreneur takes in starting and or operating their own business are varied.
By investing their own money, they assume a financial risk. If they leave secured jobs, they risk
their careers. The stress and time required in starting and running a business may place their
families at risk. In addition, entrepreneurs who identify closely with particular business
venture assume psychic risk as they face the possibility of business failure.
David C. McClelland discovered in his studies that individuals with a high need for
achievement also have moderate risk taking propensities. Often enough entrepreneurs are
calculated risk takers. They enjoy the excitement of a challenge
C). Self-Confidence:
Studies show that successful entrepreneurs tend to be confident individuals who see the
problem in launching a new venture but believe in their own ability to overcome these
problems. Some studies of entrepreneurs have measured the extent to which they are confident
of their own abilities. According to J.B.Rotter, those who believe that their success depends
upon their own efforts have an internal locus of control. In contrast, those who feel that their
lives are controlled largely by luck or chance or fate have an external locus of control. External
locus of control believing that one’s life is controlled more by luck or chance than one’s own
efforts. Based on research to date, it appears that entrepreneurs have a higher internal locus of
control than is true of the population in general.
D). Innovation and creativity:
Innovative activity is a hallmark of entrepreneurship. The entrepreneurial manager is
constantly looking for innovations, not by waiting for a flash of inspirations, but through an
organized and continuous search for new ideas. Entrepreneurship is not so much an art that

either you have, or you do not, but rather a practice, which you constantly follow or you
choose to ignore. It thus can be developed and learned; its core activity is innovation and a
continuous, purposeful search for new ideas, and their practical applications. Doing things
differently is part of entrepreneur's nature. It is how they create a market opportunity and
differentiate themselves from the multitude. Innovation can be based upon many factors from
marketing to technology.
E). Total commitment:
Hard work, energy, and single mindedness are all essential elements in the entrepreneurial
profile.
F). Effective time management:

Entrepreneurs are well aware that time is something that cannot be saved if every single
minute is not used worthy enough. Establishing goals, determining deadlines, allocating time
for each and every important activity are personality traits entrepreneurs are identified with.
G). An Ability of leadership:

Successful entrepreneurs are successful leaders, whether they lead few employees or hundreds
or thousands. By the very nature of their of their work , entrepreneurs are leaders because they
must seek opportunities ; initiate business enterprises; gather the physical, financial and human
resources to carry out their enterprise; set goals for themselves and for others, and direct and
guide others to accomplish goals. To be aware of better ways to accomplish tasks is to be an
effective leader. You are likely to be successful leader if you believe in continuous growth,
improved efficiency and the continued success of your organization.
H). An ability of decision making:

Successful entrepreneurs are creative decision makers. Looking matters from different angles,
gathering relevant information for decision making and consistency are crucial in
entrepreneurial decision making.
I). Desire for Independency:

They wish for autonomy believing that independency of action is the only sure way to get what
they need. Note that whilst entrepreneurs may share some of these characteristics, no one
single trait can be said to be secret of entrepreneurial success.
1.3. Entrepreneurial motivation: why people consider setting up their own businesses?
Business academics have two classes of theories of how people become entrepreneurs; supply
and demand theories. In the demand theory, anyone could be recruited by circumstance or

opportunity to become entrepreneur. A more general held theory is that entrepreneurs emerge
from the population on demand, from the combination of opportunities and people well-
positioned to take advantages of them. The entrepreneur may perceive that they are among the
few to recognize or be able to solve a problem.
Several research studies have shown that entrepreneurs are convinced that they can command
their own destiny. Behavioral scientists express this view by saying that:
…. “entrepreneurs perceive the" locus of control" to be themselves”. It is this-belief,
which stimulates the entrepreneur, according to the supply-side theorists.
In general the factors for business formation can be divided between "Pull" and" Push"
influences.
1.3.1: "pull' Influence
Some individuals are attracted towards business ownership by positive motives such as:
 Independence: In several research studies, this feature is prominently taken as the key
motivator. Many studies singled out the need to gain and keep independence as a
distinguished feature of small business owner managers. A study of female
entrepreneurs in Britain found that women were motivated particularly by the need for
autonomy, which had been frustrated by the individuals’ prior training and
background.
 Market opportunity: The identification of a perceived gap in the market place through
personal observation or experience is also a common reason for starting a business.
Entrepreneurs may seek to exploit this opportunity through special knowledge, product
development or they may hire the appropriate technology and skills.
 Financial incentives: The promise of long-term financial independence can clearly be a
motive in starting a new firm, although it is usually not quoted as frequently as other
factors.
 Community service: - Sometimes individuals with an entrepreneurial ability may come
across some needs and wants of the community and they may think that they can
provide it with an exchange of value. This community serving motive may provide an
advantage.
1.3.2: "Push" influence
Many people are pushed into founding a new enterprise by variety of factors including;
 Unemployment: job insecurity and unemployment varies in significance by region, and
by prevailing economic climate. The latest researches shows that at least 50% of
entrepreneurs are pushed in this way to the entrepreneurial ventures.

 Disagreement with previous employer: Uncomfortable relation at work has also pushed
new entrants into small business.
 Challenge: - a challenge is most of the time a good motive for success. And only the
toughest entrepreneurs come to be successful in the ever-challenging environment of
the business world. A success advantage is exploited from the motive to challenge.
Overcoming Challenge gives psychological satisfaction.
The dividing line between those “pulled and those pushed” is often blurred. Many people,
considering an opportunity or having a desire for independence, still need some form of push
to help them make their decision. What is clear is that the diversity of motivations for starting a
business will influence the owner manager once they have set up.
1.4. Entrepreneurship versus Intapreneurship
Intrapreneurship: (Entrepreneurship within an existing business structure).

Sharma and Chrisman describe intrapreneurship as “ . . . the process whereby an individual or
a group of individuals, in association with an existing organization, create a new organization,
or instigate renewal or innovation within that organization” (Sharma and Chrisman; 1999:18).
Intrapreneurship can bridge the gap between science and the market place. Existing business
have the financial resources, skills, and the marketing and distribution system to successfully
commercialize innovation.
Entrepreneurship: Another method for bridging the gap between science and market place is
entrepreneurship. Many entrepreneurs have a difficult time bridging this gap and creating
new ventures. They frequently lack managerial skills, Marketing capability, and finances.
Their innovations are frequently unrealistic and thus need significant modification to be
marketable. In addition, entrepreneurs often do not know how to interface with necessary
entities such as banks, suppliers, customers, venture capitalists, distributors, and advertising
agencies.
1.4. The Entrepreneurs versus the Owner manager
Entrepreneur:
Entrepreneurial function is the organization of production; Entrepreneurship is an economic
concept. Economics describes four factors of production, namely, land, labor, capital, and
entrepreneurial ability (organizational skill). The entrepreneur combines various factors of
production, processes the raw material, creates utility in the product, and converts the raw
material in to a finished product, organizes the marketing function and sells the product in the
market in order to earn profit. Thus, the entrepreneur organizes the function of production
that represents the input-output relationship.

Decision-making and calculated risk bearing: While organizing the production function, an
entrepreneur plays a significant role. He/she is decision maker, risk-taker, and goal setter.
He/she is responsible for taking decisions about product selection, size of investment, type of
organization, technology, and price determination. Every decision may result in success or
failure. However, the risk is limited and calculated.
An entrepreneur has an all-round personality: An entrepreneur possesses knowledge and
insight about the quality and type of raw materials, machinery, work force and their behavioral
patter, government machinery, labor laws, taxation, production process and marketing
network.
Owner Manager
They may or may not be entrepreneurs. They usually own and manage a small enterprise;
which fits with their personal motivations. They are concerned more about survival than
seeking innovative changes and growth. They are therefore, characterized by:
 Limited scope for innovativeness, creativity, and imagination
 Managerial jobs are transferable.
 As a manager in the organization, his job is transferable from office to office
from one unit and location to another location.
 Managers do not bear-risk.
1.5. Classification of Entrepreneurs

The entrepreneurs have been broadly classified according to the type of business, use of
personal skills, motivation, growth, and stages of development and gender.
1.5.1: Entrepreneur according to the type of business

According to the type of business, entrepreneurs are classified as follows:
1). Business entrepreneur; are individuals who conceive an idea for a new product or
services and then create a business to materialize their idea in to reality.
2). Trading entrepreneur: is one who undertakes trading activities and is not concerned
with the manufacturing. She or he identify potential markets, stimulate demand for his
product line and create a desire and interest among buyers to go in his product.
3). Industrial entrepreneur: is essentially a manufacturer who identifies the potential needs
of the customers and tailors a product or service to meet the marketing needs. She or he is a
product-oriented man who starts in an industrial unit because of the possibility of making
new product.

4). Corporate entrepreneur: is a person who demonstrates his innovative skill in organizing
and managing corporate undertaking. A corporate undertaking is a form of business
organization, which is registered under some statute or act, and which gives it is a separate
entity.
A corporate entrepreneur is, thus. An individual who plans, develops, and manages a
corporate body.
5). Agricultural entrepreneur: is the entrepreneur who undertakes agricultural activities
such as raising and marketing of crops, fertilizers and other inputs of agriculture through
mechanization, irrigation and application of technologies for dry land agricultural
products.
1.5.2: Entrepreneurs based on technology

The application of new technology in various sectors of the national economy is essential for
the future growth of business. From this perspective, entrepreneurs are classified as follows:
1. Technical entrepreneur- is a "Crafts man" with skill in production techniques.
2. Non-technical entrepreneur- is a person who is concerned with developing alternative
marketing and distribution strategies to promote his business.
3. Professional entrepreneur- is a person who is interested in establishing a business but
does not have interest in managerial or operating it once it is established.
1.5.3: Entrepreneurs based on motivation:
Motivation is the force that influences an entrepreneur to achieve his or her objectives.
1. Pure entrepreneur- is an individual who is motivated by psychological and economic
rewards. She or he undertakes an entrepreneurial activity for his or her personal
satisfaction.
2. Induced entrepreneur- is one who is induced to take up an entrepreneurial task due to
the policy measures of the government that provides assistance, incentives, concessions
and necessary overhead facilities to start a venture (business).
3. Spontaneous entrepreneurs- are persons with initiative, boldness, natural talents and
confidences in their ability, which motivate them to undertake entrepreneurial activity.
1.5.4: Entrepreneurs based on stage of development:

Based on stage of development, entrepreneurs are classified as follows:
1. First-generation entrepreneur- starts an industrial unit by innovative skill. She/he is
essentially an innovator, combining different technologies to produce a marketable
product or service.

2. Modern entrepreneur – is a person who undertakes ventures that go well along with
the changing demand in the market. She or he undertakes those ventures, which suit
the current marketing need.
3. Classical entrepreneur- is a person concerned with customers and marketing needs
through the development of a self-supporting venture. She or he is a stereotype
entrepreneur whose main aim is to maximize her/his economic returns at a level
consistent with the survival of the firm with or without an element of growth.
1.5.5. Entrepreneurs based on Idea generation:
Based on this criterion, there are three types of entrepreneurs.
1. Technological entrepreneur- a one who innovates using a technology to produce new
products or new process for producing old product. Fore instance, a broker who starts
to apply online brokerage job by digitalizing the work..
2. A geographical entrepreneur- is one who moves technology, products, and process that
go with it from one place to another. It is common to introduce new products or
services from more advanced nation to developing nation.
3. A sociological entrepreneur- is one who finds a new situation in which to sell an old
product (existing products) .Simple example, could be in cafeteria to render service
while the customers are being in their car, door to door service etc... This is usually
associated with changing mode of delivering the service or product.
1.5.6: Based on source of capital:
Based on source of capital an entrepreneur is classified as:
1. private entrepreneurs- it is when an individual on the basis of his or her own
property start up a new venture whereas,
2. Collective entrepreneurs- when a venture is created in a grouped based on collective
property or contribution.
1.5.7: entrepreneurs based on the reason to start-up:
Based on the reason to start-up, entrepreneurs are classified as follows:
1. Opportunity-driven entrepreneurs- they start a company because they see clear market
opportunities to exploit. For instance, the Ethiopian millennium was found to be a best
opportunity to start up a lot of business.
2. Necessity-driven entrepreneurs- go in to business to create self-employment and to win a
living. For instance, a multitude of government sponsored cooperatives and associations are
started all across the country to reduce unemployment through growth oriented small and
micro enterprises.
1.6. Success factors of entrepreneurs

The following are success factors:
1. The entrepreneurial team: the term "team" is used because entrepreneurs do not start
business by themselves; they have teams, parents, close associates, or extensive network
of advisors. Thus in as much as the talent and commitment of the leading entrepreneur
matters, the same does to his/her team.
2. Venture product and service: Nearly all successful ventures start from score small and
then grow incrementally; few" gear-up" with substantial organizations for a big-bang
start. Incremental expansion of products and services also tend to stay within the bounds
of positive cash flow.
3. Marketing and timing: successful entrepreneurs tend to have a clear vision of both
existing and potential customers. There are no short cuts; innovation requires market
demand, not simply good ideas.
4. Market potential of the business activity is critically influenced by timing of new
products or services. Timing pertains when product or services are to be introduced,
how they are priced, how they are distributed, and how they are promoted.
5. Business Ideology: From an entrepreneur's perspective, every venture has an ideology, a
philosophy or rationale for existence. A business ideology is defined as a system of beliefs
about how one conducts an enterprise. These beliefs include a commitment for
providing customers with value, the ability to take calculated risks, the determination to
grow and to control the fate of the business, and the perspective of creating wealth
realistically.
1.7. Benefits and Limitations of Entrepreneurship

People start their own business for a Varity of reasons. Some have a bright idea that they think
will make them rich, others find themselves unemployed and start their own business to
survive; some only are happy when they are their own boss; others want to make a particular
contribution to their community and can see no other way of doing it except by setting upon
their own business. Generally, even though people start business for various reasons, the
following are considered as the benefits of entrepreneurship:
1.7.1 Role of entrepreneurship in economic development

This section briefly discusses the economic significance of entrepreneurship. The entrepreneur
is the key to the creation of new enterprises that energies the economy and rejuvenate the
established enterprises that make up the economic structure. Entrepreneurs initiate and sustain
the process of economic development in the following ways:

 Capital formation:
Entrepreneurs mobilize the idle savings of the public through the issues of industrial securities.
Investment of public savings in industry results in productive utilization of national resources.
Rate of capital formation increases which is essential for rapid economic growth. Thus, an
entrepreneur is the creator of wealth.
 Improvement in per capita income:
Entrepreneurs locate and exploit opportunities. They convert the latent and idle resources like
land, labor and capital into national income and wealth in the form of goods and services. They
help to increase Net National Product and per capita income in the country, which are
important yardsticks for measuring economic growth
 Generation of employment:
Entrepreneurs generate employment, both directly and indirectly. Directly, self-employment as
an entrepreneur offers the best way for independent and honorable life. Indirectly, by setting
up large and small-scale business units they offer jobs to millions. Thus, entrepreneurship
helps to reduce the unemployment problem in the country.
 Balanced regional development:
Entrepreneurs in the public and private sectors help to remove regional disparities in economic
development. They set up industries in backward areas to avail of the various concessions and
subsidies offered by the Federal and Provincial Governments.
 Improvement in living standards:
Entrepreneurs set up industries, which remove scarcity of essential commodities and introduce
new products. Production of goods on mass scale and manufacture of handicrafts, etc., in the
small-scale sector help to improve the standard of life of a common man. These offer goods at
lower costs and increase variety in consumption.
 Economic independence:
Entrepreneurship is essential for national self-reliance. Industrialists help to manufacture
indigenous substitutes of hitherto imported products thereby reducing dependence on foreign
countries. Businessmen also export goods and services on a large scale and thereby earn the
scarce foreign exchange for the country. Such import substitution and export promotion help
to ensure the economic independence of the country without which political independence has
little meaning.
 Backward and forward linkages:
An entrepreneur initiates change, which has a chain reaction. Setting up of an enterprise has
several backward and forward linkages. For example, the establishment of a steel plant
generates several ancillary units and expands the demand for iron ore, coal, etc. These are

backward linkages. By increasing the supply of steel, the plant facilitates the growth of
machine building, tube making, utensil manufacturing and such other units. Entrepreneurs
create an atmosphere of enthusiasm and convey a sense of purpose. They give an organization
its momentum. Entrepreneurial behavior is critical to the long-term vitality of every economy.
The practice of entrepreneurship is as important to established firms as it is to new ones.
1.7.2. Benefits of Entrepreneurship for individuals

1. Opportunity to gain control over your destiny: owning a business provides entrepreneurs
with independency and the opportunity to achieve what is important to them.
Entrepreneurs want to "call the shots" in their live, and they used their business to bring this
desire to life. They reap the intrinsic rewards of knowing they are driving forces behind
their business.
2. Opportunity to reach your full potential: Too many people find their work boring,
unchallenging, and unexciting. But to most entrepreneurs there is little difference between
work and play. The two are synonymous. Entrepreneurs business becomes the instrument
for self-expression and self-actualization. That is his/her talent, energy, limits
entrepreneurs growth and that...means entrepreneurial situations.
3. Opportunity to reap unlimited profits: The profits their business can earn are an important
motivating factor in the entrepreneur's decisions to launch companies. One venture
capitalist that has financed many small companies says, "Starting your own company has
always been the best way to create wealth. And even if you do not get rich doing it, you will
still have more fun.
4. Opportunity to contribute to society and recognized for your effort: Often, small business
owners are among the most respected and most trusted members of their communities.
Business deals on trust and mutual respect are the hallmark of many established small
companies. These owners enjoy the trust and recognition they receive from the customer
whom they have served faithfully over the years. Playing a vital role in their local business
systems and knowing that their work has a significant impact on how smoothly the nation's
economy functions is yet another reward for small business managers.
5. Opportunity to do what you enjoy: A common sentiment among small business owners is
that their work is no work. Most successful entrepreneurs choose to enter their particular
business fields because they have an interest in them and enjoy those lines of work. They
have their avocation (hobbies) their vocations (work) and are glad they did "find a job
doing what you love, and you will never have to work a day in your life".

1.7.3 The potential limitations of entrepreneurship
Although owning a business has many benefits and provides many opportunities, anyone
planning to enter the world of entrepreneurship should be aware of its potential drawbacks.
1. Uncertainty of income: Opening and running a business provides no guarantees that an
entrepreneur will earn enough money to survive. Some small business barely earns enough
to provide the owner manager with an adequate income. In businesses early days, the
owner often has trouble meeting financial obligations and may have to live on saving. The
steady income that comes with working for someone else is absent and the owner is always
the last one to be paid.
2. Risk: Starting or buying a new business involves risk, and the higher the rewards, the
greater the risk entrepreneurs usually face. This is why entrepreneurs tend to evaluate risk
carefully. It should be noted, "People who successfully innovate and start businesses come in
all shapes and sizes but they do have a few things others do not. In the deepest sense, they
are willing to accept risk for what they believe in”. They have the ability to cope with a
professional life riddled by ambiguity, a consistent lack of clarity. Most have a drive to put
their imprint on whatever they are creating. And while unbridled ego can be a destructive
thing, try to find an entrepreneur whose ego is not wrapped up in the enterprises.
Entrepreneurs face a number of different types of risk. These can be grouped in to four
basic areas.
A. Financial Risk: In most new ventures, the individual puts a significant portion of his
or her saving or other resources at stake. This money or resources will, in all likelihood, be
lost if the venture fails. The entrepreneur also may be required to sign personally on
company obligations that far exceed his or her personal bankruptcy. Many people are
unwilling to risk their savings, house, property and salary to start a new business.
B. Career Risk: a question frequently raised by would-be entrepreneurs is whether they

will be able to find a job and go back to old job if their ventures fail. This is a major concern
to managers who have a secure organizational job with a high salary and a good benefit
package. To reduce such risk, starting a part time business is popular gateway to
entrepreneurship. Part-time entrepreneurs have the best of best worlds; they can ease in to
business for themselves without scarifying the security of a steady paycheck and benefits. A
major advantage of going in to part-time business is the lower risk in case the venture
flops. Many par timers are "testing the entrepreneurial waters" to see whether their business

ideas will work and whether they enjoy being self-employed. As they grow, many part-time
enterprises absorb more of the entrepreneurs time until they become full-time business.
C. Family and Social Risk: Starting anew venture uses much of the entrepreneur's energy
and time. Consequently, his or her other commitments may suffer. Entrepreneurs, who are
married, and especially those with children, expose their families to risk of an incomplete
family experience and the possibility of permanent emotional scars. In addition, old friends
may vanish slowly because of missed ‘get- togethers’.
D. Psychic Risk: The greatest risk may to the well being of the entrepreneur. Money can
be replaced, a new house can be built, children, and friends can be adapted. However, some
entrepreneurs who have suffered financial catastrophes have been unable to bounce back,
at least immediately. The psychological impact has proven to be too severe for them.
3. Long hours and hard work: Business start-ups often demand that owners keep nightmarish
schedule. In many start-ups, six or seven day workweeks with no paid vacations are that
norm. When the business closes, the revenue stops coming in and the customers go
elsewhere. Even when you own your own business, you still always are working for
someone else ‘your customer and clients’.
4. Lower quality of life until the business gets established: The long hour and handwork
needed to launch a business can take their toll on the rest of the entrepreneurs’ life.
Business owners always find that their roles as husband or wives and fathers and mothers
take a back seat to their roles as a business founders. Part of the problem is that most
entrepreneurs launch their business between the age of 25 and 39, just when they start
their families. It is very tough to give the amount of work that is required to build a
company without slighting your family. As a result, marriages and friendships are too often
casualties of small business ownership.
5. High level of stress: starting and managing a business can be an incredibly rewarding
experience, but it also can be a highly stressful. Entrepreneurs often have made significant
investments in their companies, have left behind the safety and security of a steady
paycheck and have mortgaged everything they own to get in to businesses. Failure may
mean total financial run, and that creates intense level of stress and anxiety.
6. Complete Responsibility: It is great to be the boss, but many entrepreneurs find that they
must make decisions on issues about which they are not knowledgeable. When there is no
one to ask, the pressure can build quickly. The realization that the decisions they make are

the cause of success or failure has a devastating effect on some people. Small business
owners discover quickly that they are the business.
1.8 Entrepreneurship, creativity, and innovation

Creativity and innovation are considered to be overlapping constructs between two stages of
the creative process; both are necessary for successful enterprise. Creativity can be defined as
the production of novel and useful ideas, while innovation refers to the implementation or
transformation of a new idea into a new product or service, or an improvement in
organization or process.
Innovative activity is a hallmark of entrepreneurship but not necessarily of the owner-

manager. Because by definition, creativity and innovation involve the creation of something
new that “... is central to the entrepreneurial process”. The entrepreneurial manger is constantly
looking for innovations, not by waiting for a flash of inspirations, but through an organized
and continuous search for new ideas. Entrepreneurship is not so much an art that you either
have, or you do not, but rather a practice, which you constantly follow or you choose to ignore.
It thus can be developed and learned; its core activity is innovation and a continuous,
purposeful search for new ideas, and their practical applications.
Creativity and innovation are considered to be inseparable from entrepreneurship, which is in

turn manifested in the act of starting up and running an enterprise. Pretorius, Millard and
Kruger (2005) maintain that “creativity is clearly part and parcel of the entrepreneurial skills
required to successfully start a venture”.
Entrepreneurs and their start-ups are considered to be “important agents of innovation”, not
simply in terms of the products and services they provide, but also in terms of the technologies
and processes that they utilize. Entrepreneurs could be argued to be, by their very nature, the
essence of creativity and innovation. Entrepreneurs implement creative ideas to introduce
innovative products or services, or to deliver products or services in a new, more efficient, and
hence innovative way. Innovation in New Product Development could include upgrading an
existing product or developing a totally new concept to create an original and innovative
product. Doing things differently is part of entrepreneurs’ nature. It is how they create a
market opportunity and differentiate themselves from the competition. Innovation can be based
upon many factors from marketing to technology.

There is a great deal of confusion about whether a person is an entrepreneur or an inventor or
if there is any difference between the two.
 An inventor is an individual;
 Who creates something for the first time, and is a highly driven individual
motivated by his or her own work and personal ideas.
 highly creative, well-educated individual with college or often postgraduate
degrees; having family, education, and occupational experiences that contribute
to creative development and free thinking;
 having a very high level of self-confidence; being a problem solver able to
reduce complex problems to simple ones;
 having the ability to tolerate ambiguity and uncertainty being willing to take
risks; and
 A typical inventor places a high premium on being an achiever, measuring
achievement by the number of inventions developed and the number of patents
granted an inventor is not likely to view monetary benefits as a measure of
success.
As indicated in this profile, the inventor differs considerably from an entrepreneur. While an
entrepreneur falls in love with the organization (the new venture) and an inventor falls in love
with the invention and will reluctantly (If at all) modify the invention to make it more
commercially feasible. To establish a new venture with an inventor, an entrepreneur often
must be brought in, thereby using the team approach to new venture creation.
Small Business Chapte

 Do
r Two
you want to know some realities about small
businesses? The following are some realities about these
firms but they are not the only.
 They are the dominant form of business on this planet
 Sometimes they grow and hibernated; and mainly fail because of different factors
 Their contributions to society is not as their name indicate they are small firms
 There is no uniformly acceptable definition for these firms
 They respond to changing opportunities in the market place quickly

 Their number and share in society is now highly increasing
 Service sector is their abundant involvement
 They are important providers of more than 50% job opportunities in all countries.
 Customers increasingly expect these firms to address their particular needs in their
market niches because these firms are nearer to customers and are responsive.
 They are the hallmark, springboard, engine and vehicle of Millennium Development
Goals through their innovation and dynamism
 They are the hope of healthy economy, tomorrow’s business leaders and friends of
economic progression by their mentality of possibility thinking.
 They use idle local resources and substitute imported items in a cheap way.
 They are easy for diversification when it is required
The above points can provide you some highlight about the small enterprises and you can get the
more detail facts in the next sub-topics. We have said Small Business, but how we can define
this name and what it means?
2.1 Definition of Small Business

Defining small business is not an easy as it looks; we can have different definitions depending on
the size of the industry we are talking about, the purpose of the definition, and the country the
definition is applicable to.
In classifying and defining a business organization, the following questions can be raised.
 What yardsticks are applied to determine business size?
 Is independent ownership a critical factor?
 Is either sales volume or number of employees a logical guide in describing smallness?
 Can a business be described accurately as small in both manufacturing and retailing sector
etc.?
The approaches writers use in defining small business include:

1) By size criteria: Taking size in consideration the following could be used relatively to
describe/define small business:
 Number of workers involved in the business
 Sales volume These size variables are not
 Capital of start up uniformly used internationally
and as a result vary from nation to
 Asset size nation.
 Insurance in force

 Volume of deposits
The specific number of employees, sales volume or asset size and the amount of capital varies
from nation to nation. For instance, according to the USA small business administration (SBA),
the number of employees in the business is usually fewer than 100. However, this is not the case
in developing countries and also our country.
2) By economic control criteria: This criterion covers the economic role of the business like
how much asset involves, how much employment chance it provides. Again, this depends
on the law of the nation.
 Market share: The small business by very nature is not large enough to enable it to
influence the price of the national quantities of goods sold to any significant extent. In
other words, any form of small business has very limited market share even that
sometimes could be insignificant. For example, take a given city and imagine about the
market share of a single restaurant.
 Personalized Management: The owner of any small business plays almost all the
business role i.e. from start up to entire management. It implies that the owner actively
participates in all aspects of management of the business, in all major decision-making
process.
 Independence: the owner of any small business enterprise has control of the business by
himself.
Generally, there is no universally accepted definition of small business. For the sake of our
discussion, it is possible to use and adopt the following definition but it cannot guarantee us as
concise definition. Small business is a business, which employs less than 100 employees, owned
by one or few individuals, with the exception of the marketing function has geographically
localized operations, and does not dominate the industry.
Although the boundaries between micro, small, medium and large enterprises are at best
arbitrary, categorizing business enterprises by scale of operation is important for functional
and promotional purposes to achieve the desired goals of development. It is for this reason that
different countries adopt different working definitions for different scale levels of enterprises.
Definition is one of the fundamental issues related to Micro and Small Enterprises (MSEs).
Micro and Small Enterprises (MSEs) has led to diverse definitions and unresolved debates.
Policy makers, researchers, and others involved in the promotion and development of small
business use different terms such as micro enterprises, informal sectors, small business, small
enterprises, small scale industries, small and medium sized enterprises etc. Generally, there is no
universally agreed up on the definition of MSEs.
Due to this, the meaning of MSE is necessary arbitrary because peoples, countries and
organizations adopt different standards for different purposes according to their own working
definition. These individuals and organizations have been defining them in a variety of ways
using different factors according to their country and organization perspectives. In recent times,
there has been some degree of convergence in MSEs definitions particularly in Europe. The

European Commission defines MSEs using a combination of employee numbers, annual
turnover or balance sheet total and ownership.
Although many countries around the globe seemed to be using common factors in their
definitions, the degree of emphasis and measures used differ quite considerably. Their factors
include number of employees, volume of sales, and the capital value of the business. Regardless
of their definition, there are two approaches to define them i.e. quantitative/size criteria and
qualitative/economic criteria/ approaches. In most cases number of employees, volume of sales
turn over and asset size are widely used as yardstick criteria to define.However, the above
convergence does not in any way suggest a common agreement of the specific numbers in terms
of these variables. Different governments and writers considerably differ in defining MSEs
because of the following two factors.
The first factor is population and stage of a country’s economic development. A definition of
MSE in the developed world would differ from how MSEs are defined in developing countries.
For example MSEs in USA and Europe if defined according to the number of employees and
annual turnover of developing countries, it would be a definition adopted for medium or large
enterprise. So, the acceptable figures of number of employees and annual sales turnover differ
from country to country, depending on economic development of the country among other
factors.
The second factor is industry within which the MSE is operating and competing. The definition
of MSEs as perceived above does not take into account the fact that the MSEs sector is diverse,
while the convergence in MSEs definitions is certainly a welcome move for the standardization
of data collection on enterprises (a major reason for defining MSEs), it does little to help us
understand the diversity of the sector. In fact, harmonizing definitions may obscure
characteristics that more varied definitions try to draw-out. A definition of MSE, even using the
abovementioned variables should necessarily take into consideration the industry within which
the firm is participating.
When we come to MSEs definition in Ethiopian context, two types of working definitions for
Micro and Small Enterprises (MSEs) were used in the past, one is by the Ministry of Trade and
Industry (MOTI) and the other is Central Statistics Authority (CSA).
The definition used by MOTI in 1997 has been developed for formulating MSEs.
According to MSE Development Strategy (1997), Micro enterprises are those business
enterprises in the formal and informal sector, with a paid up capital of not exceeding birr
20,000 and excluding high tech. consultancy firms and other high tech. establishments.
And Small enterprises are those business enterprises with a paid up capital of above birr
20,000 and not exceeding birr 500,000 and excluding high tech consultancy firms and
other high tech establishments.

For the purpose of compiling statistical information, Central Statistics Authority (CSA)
categorizes enterprises into different scales of operations on the size of employment and
the nature of equipment. According to Central Statistics Authority (CSA), establishments
employing less than ten persons and using motor operated equipment are considered as
small-scale manufacturing enterprises. Enterprises in the micro enterprise category are
subdivided into informal sector operations and cottage industries: cottage and handicraft
industries are those establishments performing their activities by hand and using non-
power driven machines. The informal sector is defined as household type establishments
or activities, which are non-registered companies or cooperatives operating with less than
10 persons.
This un uniform definition was the issue because there is a need to have agreed national
definition not only for research purposes but also for consistency of legislation and for focusing
discussions of policy makers as well as financial and enterprise promotion agencies to tailor
appropriate measures to particular sectors. In light of the above definitions and taking into
consideration the Ethiopian situation, micro and small scale enterprises (SSEs) were defined in
previous periods in the following ways.
Micro enterprises are business activities that are: independently owned and operated, have a
small share of the market, are managed by the owner and employing five or less employees.
(This has also revised to include employment until 10 workers and capital reaching up to 20,000
birr) and Small business are those enterprises that employ 6-49 employees and they share the
same characteristics with micro-enterprises. In a brief way the ministry of trade and industry of
the FDRE had provided the following definitions in past years even though it was modified
currently.
 Micro enterprises: are business enterprises found in all sectors of Ethiopian
economy with a paid-up capital (fixed assets) of not more than 500,000.
 Small enterprises: are business enterprises with a paid up capital of more than
500,000 but not more than birr 2,000,000.
The above definitions are given in accordance with the provisions of the Federal Small and
Micro Enterprises Agency. The Central Statistics Agency (CSA) has provided the following
definition.
 Micro and small enterprises are establishments staffed with 10 persons using
power driven machinery.
However, since Feb.2011, Ethiopian Ministry of Trade and Industry (MOTI) has adopted official
definition of Micro and a Small Enterprise which is different from previous years. The current
definition of MSEs in Ethiopia focused on the number of employees that the enterprises hire and
size of the capital they own are mainly used as a yardstick to define MSEs and accordingly, each
micro and small enterprise is categorized as industry and service sector. According to this
definition: Micro-enterprise is the business enterprise found in all sectors of the Ethiopian
economy hiring up to five man power and 100,000 birr capital for industry and up to five man

power and capital of 50,000 birr for service sector. In small scale enterprise category, the
industry sector includes 6-30 man power and maximum of 1.5 million birr capital and the service
sector involves 6-30 man power and capital of 500,000 birr. Under the industry sector there are
Manufacturing, Construction, and Mining and under the service includes Retail, Transport, Hotel
and Tourism, Recreation, Information Technology and Maintenance are included.
To provide a clearer image of the MSES, the following general criteria in defining small business
are suggested.
 Financing the business is supplied by an individual/ small group rarely more than 15-
20 owners.
 Except for its marketing function, the firm’s operation is geographically localized.
 Compared to the biggest firms in the industry, the business is small.
 The number of employees in the business is usually fewer than 100.
Though the definition of small, micro and medium enterprises with respect to size criteria varies
from country to country the relatively acceptable divisions are:
 Up to 19 workers – micro or very small enterprises

 20-100 workers – small enterprises
 101-500 workers – medium enterprises
 >500 employees – large corporations
Micro and small business are those that employ relatively less amount of capital, labor, land as
well as entrepreneurial resources than that of the big industries.
Having the above definition in mind, small business can be found in different industries. These
include:
 Retail industry: drugstores, clothing stores, bookstores
 Service industry: such as accounting firms, advertising agencies, managerial
consultants, barber and beauty shops.
 Manufacturing industry: like shoe factories, furniture-manufacturing plants etc.
2.1.1 Characteristics of Small Scale Industries

 Capital investment is small.
 Most have fewer than 10 owners
 Generally engaged in the production of light consumer goods, processing etc.
 Located in rural and semi-urban areas
 All of these firms are privately owned and are organized as sole proprietorship.
 Fixed assets form the largest component of small units.
 Most of the funds come from the entrepreneur’s savings
 Small scale industrial activity has been growing at a faster rate even than large
enterprises.

 Very few of the small scale industries have grown up to medium and large scale
industries.
 Small scale industries activity is beehive of entrepreneurship.
 Exploitation of natural resources is another characteristic of small scale
industries.
 Small scale industries are quality conscious.
2.2 Special Contribution of Small Business:
Although small business pose a number of challenges to the entrepreneur and have certain
limitations, countries’ economy cannot do without them. This is because small businesses have
special features that make them superior over large ones in certain aspects of business activities.
First, let us see the special contribution small businesses make to countries’ economy and we will
try to see why it is advisable for an individual to start small business when embarking on
entrepreneurial venture.
1. Providing Job Opportunities: this is one way in which small businesses contribute to
countries’ economy. In fact, in most countries, the number of new job created by small
business is significantly higher than created by large business. For example, in the US, 50%
of the employment comes from small businesses and each year small business account for
about 80% the new jobs created.
2. Introducing Innovation: new products, which originate in the research laboratories of big
businesses, make a valuable contribution to our standard of living. There is a question,
however, as to the relative importance of big businesses in achieving the truly significant
innovations. Usually the research department of big business tends to emphasize the
improvement of existing products. Records show that many scientific breakthroughs were
originated with independent inventors and small organizations.
3. Stimulating Economic Competition: Small business by definition is one that does not
dominate its industry, and competition will be closer to perfection when the market is full of
small businesses that cannot exert a significant impact on the market price and supply when
operating individually.
4. Aiding big business: the fact that some functions are more expertly performed by small
businesses enables small businesses to contribute to the success of larger ones. Especially
there are two types of business activities, which are performed by small businesses more
economically and effectively.
 Supply function: Most small businesses act as suppliers, and sub-contractor for large
firms.
 The distribution function: Few large manufacturers of in expensive consumer
products find it desirable to own wholesale and retail outlets.
5. Producing Goods and Services: we depend highly on small businesses for the provision of
most goods and services we need in our lives. In fact, if it was not for small business, we

would have not been able to find the goods and services we need at time we need them,
in a convenient place, and at the quantity we prefer.
In addition to the above general advantages small businesses offer to countries’ economy, they
have certain benefits to the individual entrepreneur. These include:
 Small business requires less time, energy, and financial resource to establish.
 They also provide the entrepreneur with greater autonomy, and independency, - because
the money needed to start small businesses is relatively small; the entrepreneur can raise
most of it by him or herself without relinquishing significant ownership interest and control.
 In addition to these, small businesses help the entrepreneur develop his skill in running his
organizations as it has different kinds of activities concerning the business. These include
business planning, investment and finance, customer relation, personnel, and expected to
perform human resources, cash control and bookkeeping, inventory control, purchasing,
marketing and sales, and leadership.
2.3. Risks and Causes of Failure Associated with Small Business

Although many new small businesses are established in most countries, the success rate is
minimal. This can be attributing to many factors, which can generally be classified in to two
categories: external and personal (internal) factors of failure.
The external factors that might bring about small business failures includes economic
business cycles, fluctuating, interest rate, interrupted supplies, labor market, inflation,
government regulations, and unstable financial markets . Although all businesses/small/big
are subject to this risk, their effect on small businesses is far more serious than any other
businesses. This is because the resources a small business owner controls are very limited which
makes it very difficult to deal with these situation. On the other hand, there are certain problems
that can be attributed to personal weakness and limitations of the entrepreneur. These include:
 Inexperience: too often, entrepreneurs launch their enterprises without having sufficient
experiences to succeed. Inexperience can be translated to mean a lack of technical or
management insight.
 Arrogance: many small businesspersons – particularly inventors and innovative
entrepreneurs with new products become egocentrically engrossed in their ventures. They
become consumed with their own brilliance, convinced, beyond reason (often without market
research) that their bright idea will change the world-it has to see! Their arrogance will not
allow them to take advice from others.
 Mismanagement: humble entrepreneurs steeped in experience can still go under simply

mismanagement of resources; they simply make bad decisions in critical situations. These
may include:
 Over Investment on Fixed Assets: when starting and expanding a business, it is
tempting to buy facilities and equipments rather than lease or subcontract. Everyone

likes to own assets, but greater investment on fixed assets means less flexibility to
adjust to adverse conditions.
 Poor Inventory Control: purchasing too much inventory increases the risk of low
turnover and obsolescence. Having too little inventory undermines customer
satisfaction and sales. Buying and holding the wrong inventory, at the wrong time,
evaporates cash. In each scenario, the business ties up high-powered cash in non-
earning assets, and the inventory items can rarely be disposed of more than a fraction
of their costs in an emergency. The result is that a business "purchases" itself in to
insolvency.
 Poor Financial Control: Because of poor control over credit sales, poor
bookkeeping, and advances and regular payment for inventory purchase, loan
payments, lease payments, utility cost, telephone bills, and payroll expenses.
 Poor Business Philosophy: An unfortunate aspect of many business failures is that

too often-individual owner’s priorities get in the way of sound business practices. In
the least obtrusive way, entrepreneurs may not be fully committed to the long hours
required to make a venture successfully.
 Lack of Planning: most entrepreneurs frequently underestimate the importance of

planning in the business success. However, not planning means not anticipating
future problems and challenges and not being prepared for them in advance .
This surely leads the entrepreneur into making mistakes and facing problems, which
could have easily avoided through sound planning.
2.4. Types of Small Business
Small business could take one of the following forms. Mind you, it is worth remembering what
commonly considered, as a small business in Ethiopia may not be used in USA. For instance,
most books on entrepreneurship and small business written by westerners list the following as a
small business.
 Manufacturing: - machine shops, bakeries
 Mining: - coal mines, sand and gravel companies
 Services: - beauty shops , Travel agencies
However, most Authors categorize small business as follows:

 Family Enterprises: They are locally owned and operated, often by one person called
sole proprietors. Proprietors may have started their business in an effort to supplement
or replace family income. Many are service-based forms that rely on an owner skill.
Family owned businesses vary widely and can include retail stores, contracting
businesses, small manufacturing firms, and restaurants among others. In the absence of
successor, the life of a venture is limited to the working life of its founders.
 Personal Service Firms: Such business rely crucially on unique skills of their founder or
key employees in most instance, the business is the person, and succession is unlikely
unless a son or daughter develops comparable skills. Since the early 1980s, the primer

personal service firm has been the computer service enterprise that provides software
development, business consulting office system networking and similar assistance to
other firms.
 Franchises: It is a form of a business created by contract. An individual receives specific

help and advantages in exchange for a franchise fee and, usually a percentage of sales.
The franchisee may receive financial help. Some scholars consider franchise as
distribution system. Through franchise training, guaranteed supplies, a protected market
and technical assistance with maters such as site selection purchasing, accounting and
operations management could insure.
2.5. Merits and Demerits of Small Business

Some firms operate in all industries. Nevertheless, they differ greatly in their nature and
importance from industry to industry. Currently in Ethiopia, one can clearly observe that the
desire for individuals to own and operate their own small business is growing. Small business
engagement may provide numerous benefits. It also helps to develop professional competency
that might lead to larger businesses. The following are more common advantages of owning a
small business.
1) Independency: most small business owners enjoy being their own boss; they like the
freedom to do things their way. Although often a great deal of responsibility is
associated with this independency, they are willing to assume it.
2) Financial Opportunity: The possible financial opportunity obtained from small business
is one of the main reasons that let the owner to endure all possible challenges and
pains. Many small business owners make more money running their own company than
they would be working for someone else.
3) Job Security: When one owns the business, job security is insured. The individual can
work as long as he or she wants. No mandatory retirement exists.
4) Community Service: Sometimes an individual will realize that a particular good or

service is not available. If the person has reason to believe the public will pay for such
output, he or she will start a company to provide it.
5) To Practice Challenge: Starting and properly managing small business has its own
challenges. Research reveals that most successful small business owners like to feel they
have a chance to succeed and a chance to fail but one thing is certain: the final outcome
depends heavily on them; they want to win or lose their own abilities. This challenge
gives them psychological satisfaction.
Although there several advantages associated to small business, it is not without certain
demerits. Thus, it should be recognized that some drawbacks to owning small business exist.
The following could be some of the demerits:

 Competition: Comparatively the level of risk, start-up challenges, and requirement for
small business give a room for competitors to enter into small businesses. Even in your
locality, you can observe the movement one might identify an opportunity to open any
small business, sooner he/she finds some other similar business opens just at their
business sides.
 Sales Fluctuation: sales fluctuations could be a possible challenge associated with small
business. This could occur due to change in the market or increasing numbers of
competitors. This in turn might lead to financial losses.
 Increased Responsibilities: Small business owners face many responsibilities due to the
nature of the business i.e. because owners not only have to make more decisions on
major matters but also have to become knowledgeable in many different areas.
 Risk of Failure: The ultimate risk the small business owner- managers face is failure,
usually with a loss of most, if not all, of the money invested in the enterprise. All
owners face this risk, and despite experience and business knowledge, many fail because
of factors beyond their control. In most instances, however, poor management causes
failure.
 Employee relations: if family members own the business and there are closer, relatives
are working along with many few other non-relative workers, the employee relation
could be sometimes challenging.
2.6. Problems in Ethiopian Small Business
The following factors are some causes affecting the small businesses to fail.
Small –scale industries have not been able to contribute substantially as needed to the economic
development particularly because of financial, production, and marketing problems. However,
according to World Bank report the case has shown improvement over the past years. These
problems are still major handicaps to their development. Lack of adequate finance and credit
has always been a major problem in Ethiopian small businesses. Small-scale units do not have
easy access to the market because they mostly are organized on proprietary partnership basis and
are of very small size. They do not have access to industrial sources of finance partly because
of their size and partly because of the fact that their surpluses that can be utilized to repay loans
are negligible. Because of their size and partly because of their limited profit, they search for
funds for investment purpose. Consequently, they approach moneylenders who charge high rate
of interest and hence small enterprises continue to be financially weak.
Small-scale enterprises find it difficult to get raw materials of good quality and cheaper rates in
the field of production. Very often, they do not get raw material in time. As a result, these
enterprises very often fail to produce goods in requested quantities and of good quality of a low
cost. Furthermore, the techniques of production, which these enterprises have adopted, are
usually out dated. Because of their poor financial position they are not able to buy new
equipment, consequently their productivity suffers. Besides, many small business enterprises are
suffering with the problem of marketing their products.
2.7 Setting Small Businesses

2.7.1 What is a basic business idea?
An entrepreneur should keep in view of future long term goals and this long term thinking is
called basic business idea. An entrepreneur perceives an opportunity for marketing a product or
service. Then she/he establishes a business unit on the basis of her/his perception. Finally, she/he
manages her/his enterprise expanding, growing or diversifying over a period of time. The basic
business idea, which facilitates a choice of the products at different stages of the project,
allows for diversification and expansion. The entrepreneur should monitor and being flexible to
the dynamic business environment and select basic business idea that would:
 Generate quick returns
 Permit changes in the product.
The general business atmosphere guides the choice of basic business idea. A basic business
idea results from the identification of business opportunities in the market. To be successful in
business, the entrepreneur should carry out SWOT analysis, be sensitive to the market changes,
monitor the demand and supply, study consumer behavior and choose the basic business idea.
1.7.2 What project an entrepreneur should have?

What Project Means?
 It is an organized unit dedicated to the attainment of a goal- the successful completion of
development project on time, within budget, in conformance with predetermined program
specifications.
 It is a system involving the co-ordination of a number of separate department entities through the
organization, and which must be completed within prescribed schedules and time constraints.

Project classification
1. Quantifiable and non-quantifiable projects
Little and Mirrelees divide the project into two broad categories: quantifiable and non-
quantifiable projects. Quantifiable projects are those in which a plausible quantitative assessment
of benefits can be made. Non-quantifiable projects are those where such an assessment is not
possible. Projects concerned with industrial development, power generation, and mineral
development are forming part of quantifiable projects. The non-quantifiable projects category
comprises health, education, and defense.
2. Sectoral projects
According to sectoral classification, a project may fall in the following sectors;
a) Agriculture and allied sectors. d) Social services sector.
b) Manufacturing and mining sector. e) Miscellaneous sector.
c) Transport and communication sector.
NB: This sector classification of projects is quite useful for resource allocation at macro levels.
3. Techno-Economic projects
Techno-economic projects classification includes;
a) Factor-intensity oriented
The factor intensity is used as base for classification of projects such as capital intensive
or labor incentive which depends upon the large scale investment in plant and machinery
or human resources.
b) Causation oriented classification
The causation-oriented projects are determined based on its causes namely demand based
projects. The non-availability of certain goods or services and consequent demand for
such goods or services or the availability of certain raw materials, skills or other inputs is
the dominant reason for starting the project.
c) Magnitude oriented classification
The size of investment forms the basis for magnitude-oriented projects. Projects may thus
be classified based on its investment such as large-scale, medium-scale, and small-scale
projects.
4. Financial institutions classification
The projects are classified according to their age and experience and the purpose for which the
project is being taken up. They are as follows;
1. New projects. 3. Modernization projects.
2. Expansion projects. 4. Diversification-projects
The projects listed above are generally profit-oriented and the services oriented projects are
classified as under;
a) Welfare projects.
b) Service projects.

c) Research and development projects.
d) Educational projects.
Definition of Industry and Small Scale Industry
An industry is an institution where raw materials is purchased from suppliers, converted in to a

finished product using machinery and labor and sold to the buyer. Conversion of raw materials
means changing the size shape, chemical properties and assembling different parts, etc. An
industry is able to carry out the function of buying, manufacturing and selling its product with
the use of an organization: an organization being a collection of people with of different skills,
who coordinate the various functions involved. Industry can be classified as manufacturing,
process, conversion and service.
Small scale industries can be defined as industrial unites engaged in

manufacturing/preservation activities or repairing/ servicing operations including such actions as
quarrying.

2.7.3 STEPS IN SETTING UP BUSINESSES
In order to establish an entrepreneurial system, an entrepreneur needs to take the following steps:
1. Search for business ideas.
2. Process the ideas.
3. Select the best idea.
4. Assemble the necessary input resources.
5. Establish the enterprise.
1) Search for Business Idea

The task of promotion begins with the search for a suitable business idea or opportunity. The idea may
be generated from various sources e.g. success story of a friend or relative, demand for certain projects,
chances of producing a substitute for an imported article, visits to trade fairs and exhibitions, study of
project profiles and industrial potential surveys, meeting with government agencies etc. The idea may
relate to the starting of a new business or to take over of an existing enterprise. The idea should be sound
and workable. It should yield a reasonable return on investment. The promoter has to be imaginative and
foresighted to discover a business idea.
Sources of Business ideas

Ideas for businesses may come from diversified sources ranging from personal exposures and experiences
to market conditions. Some of the commonly cited sources of business ideas are briefly stated below.
 Work Experience: a significant number of entrepreneurs have acquired a voracious work
experience through employment. Research suggests that entry into business after certain level of
work experience is a plus to success in business. People working in a particular company will
become familiar with the practices and business opportunities perused by their employer company.
A closer observation of the gaps the company creates, success factors, complementary areas,
supplementary areas, as well as potential markets leads them to think about seizing the
opportunities.
 Hobbies: Most often people consider what they like doing frequently and enjoy, and change such
avocations into business opportunities. Many promotion and advertising tycoons, photography and
film making, sanitation and environmental cleaning, restaurant and hotel runners, gymnasium
owners, bookstore successes, beauty service business owners, agriculturalists, floriculturists, etc are
backed by their hobbies.
 Deliberate Search: Sizeable numbers of people go into business after an extensive market need
assessment to identifying demand and supply gaps and future prospects.
 Observing the Market: observation of the market through personal exposure may give a flash idea
of going into business. This may include; observation of customer complaints, understandings of
what the people like doing most often, a closer examination of the socio-cultural conditions.
 Customers: giving attention for the requirements of the needs and wants of the customers by giving
customers the opportunity to express their opinion.
 Government organizations
 By providing advice and assistance in technical, financial, marketing and other areas of
Chapter: 4
business
 By formulating regulations and policies
30
 Distribution channels
 Trade fair and exhibitions
 Mass medias
2) Idea Processing/Screening
Once business ideas are discovered, screening and testing of these ideas is done. Business
ideas/opportunities need to be screened and assessed for the viability once they have been
identified and generated. The following considerations are significant in the evaluation and
testing of business ideas.
Process of screening business ideas
i. List down all the business ideas you have identified. Here, write down at least ten
business ideas on your observation on what people would like to buy.
ii. Down screening ideas into three. Make selection of three business ideas from the least
of ten business ideas developed in the first step.
Some of criteria to screen business ideas include:
a. Marketability/demand
- You need to offer what people want to buy not what you want to sell
- It is about estimation of the demand of the product.
- Listing to the market place(you need to generate a list of areas people needs are not being
met enough or at all)
- Is there a market for the idea?
- Does a customer have the purchasing power?
- Can you provide what they need and want?
b. Profitability of the idea if implemented

- Potential benefits associated with each idea.
c. Availability of raw materials
- Considering source of raw materials at reasonable cost and effort
- Considering if these resources can be imported or locally available. If is to be imported other
factors like- currency exchange rate, custom duty transportation should be further
considered.
- Availability of national labor supply also affects ideas.
d. Personal goals and competencies of the entrepreneur
- Do you really to venture in to business?
- Do you have what it takes?
- Are you motivated enough?
- Do you have the experience and knowhow, contacts or other desirable attributes required?
Chapter: 4
e. Ease of implementation
31
Do the ideas can be converted in to real business easily? The entrepreneur should consider:
- Procedure for registration
- Legal requirements
- Need for employing quality personnel etc
f. Financial feasibility
- Ideas should be evaluated based on the finance required to implement and manage the business
beautifully.
- Ideas which are expected to generate better profit, may not be selected first (best), rather
financial requirements and financial capacity of the ideas should be considered.
g. Risk exposure
- Ideas which are not exposed to risk easily should be selected.
h. Government support and incentives
- Ideas should be evaluated where the ideas will gain material, financial supports and facilitates
utilities from the government if implemented
i. Technical feasibility
- It refers to the possibility of producing the product. Technical feasibility of an idea is judged
in terms of availability of necessary technology, machinery and equipment, labor skills and
raw materials. The advice and assistance of technical experts may be necessary to judge the
technical feasibility of various business ideas.
j. Commercial viability
- A cost-benefit analysis is required to ascertain the profitability of the ideas. An elaborate study
of market conditions and prevailing situation is made to assess the viability and prospects of
the proposed project. This is known as feasibility study of the project. A number of
calculations have to made about the likely demand, expected sales volume, selling price, cost
of production, breakeven point etc. The services of market analysts and financial experts may
be necessary for this purpose. In order to judge the workability and profitability of the
proposed business, feasibility analysis has to be conducted.
After preliminary evaluation of the idea, the promising idea is subjected to a thorough analysis. Full
investigation is carried out in the technical feasibility and economic viability of the proposed project.
Financial and managerial feasibility of the idea are tested. After the evaluation of a business idea is
completed, the findings are presented in the form of a report known as ‘feasibility report’ or project
report. This report helps in the final selection of the project. It is also useful for procuring licenses,
finance etc from governmental agencies.
3) Idea Selection
The feasibility report is analyzed to finally choose the most promising idea. The following
Chapter: 4
considerations influence the selection of idea for a product or service;

a) Products whose inputs are banned or restricted by the government
32
b) Products which can be exported easily and profitably
c) Products whose demand exceeds their supply so that there exists ready demand.
d) Products on which the entrepreneur has manufacturing and/or marketing experience.
e) Parent ancillary relationship i.e. the product is to be manufactured for a parent company.
f) Products which showed high profitability
g) Products based on the expansion or diversification plans of existing firms
h) Products which ensured specific advantages- scale of the industry or the location of the factory
or technology of manufacture.
i) Products favored by the country’s industrial/licensing policy.
j) Products for which incentives and subsidies are available.
While considering these various factors- market, own experience, policy and incentives:- an entrepreneur
would generally come across a mix of some encouraging and some discouraging factors with reference to
every product.
4) Assemble The Necessary Input Requirements

Once the promoter is convinced of the feasibility and profitability of the project, he assembles the
necessary resources to launch the enterprise. He has to choose partners/collaborators, collect the required
finance and acquire land and buildings, plant and machinery, furniture and fixtures, patents, employees
etc. Decisions have to be made about the size, location, layout etc of the enterprise. The form of
ownership organization has to be selected. The main inputs required for launching an enterprise are as
follows;
a) Information and intelligence
In the turbulent business environment, information and intelligence have become the key input in
entrepreneurial success. An entrepreneur requires relevant data on the following aspects:
1. Size and nature of demand for the product or service
2. Volume and sources of supply
3. Price cost volume relationship
4. Sources of raw materials
5. Type and suppliers of technology, machinery and equipment
6. Number and type of personnel required and their resources
7. Amount and sources of funds required for the enterprise
8. Nature and degree of competition
9. Government policies and regulations concerning the industry
10. Export import conditions for the product/service.
b) Finance
A business enterprise requires finance for fixed assets (fixed capital) as well as for current assets
(working capital). Once the amount of funds required are established, the entrepreneur has to
identify the sources from which the funds are to be raised. He has also to decide the relative
proportion between the funds raised from different sources (e.g. shares, debentures, loans etc).
This decision is known as the capital structure. It is a very crucial decision because it influences
Chapter: 4
the real worth of the enterprise and the return of the owners. After deciding the capital structure,
33
the funds are raised. Systems are created for the efficient management and control of working
capital and earnings.
C) Personnel
People are the most valuable asset of an enterprise and an entrepreneur has to make the
following decisions concerning the personnel:
 Number of personnel required for management, technical and other positions in the
enterprise.
 Qualifications and experience required in the personnel to perform the jobs effectively
 Sources of recruitment
 Procedure and methods of selecting the best candidates
 Methods of orientation and training.
 Criteria for evaluating the performance of employees.
 Policies for the transfer and promotion of staff.
 Policies and methods of remunerating the personnel.
 Facilities to be provided for the safety, health, welfare of the staff.
 Participation of personnel in the management of the enterprise.
5) Establish The Enterprise
The form of ownership is to be decided upon and the company formed and registered. Following
this, action is directed towards obtaining finance, necessary licenses, and necessary
infrastructure is to be taken. This would involve dealing with various government bodies and
other institutions like:
 Financial institutions- for finance
 Sales tax, Income tax authorities- for respective registration
 Licensing authority- for obtaining industrial license and licenses for raw material
procurement.
 Municipal Authorities and Electricity- for requisite utilities.
 Directorate of Industries, Municipal Authorities etc- for land, factory and shed etc
Once all the required authorizations and sanctions have been obtained, action is to be taken for
the following;
 Ordering machineries from suppliers
 Obtaining utilities like power and water connections
 Recruitment of staff
 Arranging supplies of materials
 Arranging for distribution of the product
The plant is ready for commissioning. Trial run may be made at this stage. Promotion efforts may be
made to pave the way for introducing the product. When the first few batches of the product are
introduced in the market, information regarding its acceptance is to be gathered. On the basis of feedback
obtained, the process/product has to be modified until acceptable output is obtained. Then the unit is
ready for commercial production.
Chapter: 4
CHAPTER - THREE
34
BUSINESS PLANNING
3.1 The Concept of Business Planning
Business planning is the process of organizing and presenting the ideas associated with a new business
venture. This can include the starting of a new business or the continued expansion of an existing
business. Business planning is important for businesses, but few take the time to plan using sound
business concepts. Effective business planning requires a focus on the organization's mission, vision and
values, along with careful consideration of the impacts on the organization from both internal and
external forces. Based on data gathered through a thorough situation analysis, a business then
establishes goals and objectives that they will plan to meet through effective strategies and tactics.
A situation analysis is a concept of business planning that involves a thorough review of the internal and
external environment to provide a foundation for businesses to determine their goals and objectives.
Situation analysis encompasses considerations about existing and desired customers, existing and
impending competitors, as well as industry and environmental issues that could impact the business.
The collection of this data is used as an input into a SWOT analysis--the consideration of the strengths,
weaknesses, opportunities and threats that the business faces.
Alignment is a critical concept of business planning. Whether or not a business has a stated mission and
vision, its owners certainly have an idea of why the business exists, what it offers and who it serves.
Values provide an indication of the company's beliefs in terms of how it operates. In business planning,
goals and objectives should be aligned with the mission, vision and values of an organization. Clear goals
and objectives in business planning ensure that everyone involved in implementing the plan know what
they are attempting to achieve. In addition, clear goals and objectives provide an indication of the
resources that will be necessary for success. The resources required to sell $1 million in products will be
significantly more than what would be required to sell $100,000 in products, for instance. Measurable
goals and objectives provide the basis for implementation of the plan and measurement of plan
progress.
Business’s strategies and tactics should be designed to achieve the goals and objectives established.
Strategies are broad and are designed to either capitalize on your strengths and weaknesses or
overcome your weaknesses and threats. For instance, a strategy might be: "Leverage high customer
satisfaction scores to attract new business." Tactics are more specific and indicate specific operational
tasks that must be accomplished to achieve strategies. An example of a tactic might be: "Tweet about
customer service satisfaction scores.
3.2 Feasibility Planning

The go/no-go decision is one of the most critical in business development. It is the point of no return.
Once you have definitely decided to pursue a business scenario, there is usually no turning back. The
feasibility study will be a major information source in making this decision. This indicates the
importance of a properly developed feasibility study.
A feasibility study is designed to provide an overview of the primary issues related to a business idea.
Chapter: 4
The purpose is to identify any “make or break” issues that would prevent your business from being
35
successful in the marketplace. In other words, a feasibility study determines whether the business idea
makes sense. A thorough feasibility analysis provides a lot of information necessary for the business
plan. For example, a good market analysis is necessary in order to determine the project’s feasibility.
This information provides the basis for the market section of the business plan.
An analysis of the ability to complete a project successfully, taking into account legal, economic,
technological, scheduling and other factors. Rather than just diving into a project and hoping for the
best, a feasibility study allows project managers to investigate the possible negative and positive
outcomes of a project before investing too much time and money. A feasibility study is a brief formal
analysis of a prospective business idea. The goal of a feasibility study is to give the entrepreneur a clear
evaluation of the potential for sales and profit for a particular idea. Therefore, feasibility analyses focus
on the market size and shares, competing products or services, the pricing structure and, given the
three of these, the likely sales and profits of the prospective business.
Feasibility study is an analysis of the viability of an idea. It focuses on helping answer the essential
question of “should we proceed with the proposed project idea?” and primarily it focus on proposed
business ventures. A feasible business venture is one where the business will generate adequate cash-
flow and profits, withstand the risks it will encounter, remain viable in the long-term and meet the goals
of the founders. The venture can be either a start-up business, the purchase of an existing business, an
expansion of current business operations or a new enterprise for an existing business. A feasibility study
is only one step in the business idea assessment and business development process
The feasibility study helps to “frame” and “flesh-out” specific business scenarios so they can be studied
in-depth. During this process the number of business alternatives under consideration is usually quickly
reduced. During the feasibility process you may investigate a variety of ways of organizing the business
and positioning your product in the marketplace. It is like an exploratory journey and you may take
several paths before you reach your destination. Just because the initial analysis is negative does not
mean that the proposal does not have merit.
Feasibility Study vs. Business Plan

A feasibility study is not a business plan. The separate roles of the feasibility study and the business plan
are frequently misunderstood. The feasibility study provides an investigating function. It addresses the
question of “Is this a viable business venture?” The business plan provides a planning function. The
business plan outlines the actions needed to take the proposal from “idea” to “reality.”
The feasibility study outlines and analyzes several alternatives or methods of achieving business success.
The feasibility study helps to narrow the scope of the project to identify the best business scenario(s).
The business plan deals with only one alternative or scenario. The feasibility study helps to narrow the
scope of the project to identify and define two or three scenarios or alternatives. The person or business
conducting the feasibility study may work with the group to identify the “best” alternative for their
situation. This becomes the basis for the business plan.
Chapter: 4
36
The feasibility study is conducted before the business plan. A business plan is prepared only after the
business venture has been deemed to be feasible. If a proposed business venture is considered to be
feasible, a business plan is usually constructed next that provides a “roadmap” of how the business will
be created and developed. The business plan provides the “blueprint” for project implementation. If
the venture is deemed not to be feasible, efforts may be made to correct its deficiencies, other
alternatives may be explored, or the idea is dropped.
Conducting a feasibility study is a good business practice. If you examine successful businesses, you will
find that they did not go into a new business venture without first thoroughly examining all of the
issues and assessing the probability of business success. These are reasons to conduct a feasibility study:
it gives focus to the project and outline alternatives, narrows business alternatives, identifies new
opportunities through the investigative process, identifies reasons not to proceed, enhances the
probability of success by addressing and mitigating factors early on that could affect the project,
provides quality information for decision making, provides documentation that the business venture
was thoroughly investigated, helps in securing funding from lending institutions and other monetary
sources, helps to attract equity investment.
3.3 The Business Plan

When a business plan is developed, it serves as the blueprint for advertising, budgeting, marketing,
organizational structure and the goals of the organization. Within the business plan are the
responsibilities of the management teams, and the projected growth of the company or division. Your
business plan is your compass. It will help you map out a new course, and navigate through unchartered
territory. A business plan is an essential roadmap for business success. This living document generally
projects 3-5 years ahead and outlines the route a company intends to take to grow revenues.
Your executive summary is a snapshot of your business plan as a whole and touches on your company
profile and goals. It is a comprehensive set of guidelines for a new venture which also said to be
feasibility plan encompassing the full range of business planning activities. It is an outline of potential
issues to address and a set of guidelines to help an entrepreneur make better decisions. This plan
presents basic business idea and all related operating, marketing, financial and managerial
considerations. It layouts the idea and describes where we are, where we want to go, and how we
propose to go there.
The purpose of the business plan is to minimize the risk associated with a new business and maximize
the chances of success through research and maximize the chances fo success through research and
planning. Whether you’re starting or growing your business, you need a business plan. Your plan will
provide the roadmap to achieve the success you want. The question shouldn’t be IF you write your plan,
but how to write a business plan that will take your company where you want to go.
The Purpose of Business Plan

 It can help the owner/manager to crystallize and focus his ideas.
Chapter: 4
 It can help the owner/manager set objectives and give him a yardstick against which to
monitor performance.
37
 It can act as a vehicle to attract any external finance needed by the business.
 It can convince investors that the owner/manager has identified high growth opportunities,
and that he has the entrepreneurial flair and managerial talent to exploit that opportunity
effectively.
 It entails taking a long term view of the business and its environment.
 It emphasizes the strengths and recognizes the weakness of the proposed venture.
 It offers a sound basis for operation of a business plan that can be used at different times.
When Business Plans Are Produced?
1. At Startup of a New Business: after the initial stage of developing ideas and feasibility
study are over, a new business may start up through a detailed planning stage of which the
main output is the business plan.
2. Business Purchase: buying an existing business does not negate the need for an initial
business plan. A detailed plan tests the sensitivity changes to key business variables. This
helps to understand the level of risk that are accepted and the likelihood of rewards being
available for the buyers.
3. Ongoing Process: ongoing review of progress, against the objectives of either a new
business or a small business purchase is important in a dynamic environment. A periodic
review with the business plan is required in the constantly changing environment. A
business plan should be the live, strategic, and technical planning focusing on how a small
business responds to the inevitable changes around it.
4. Major Decisions: Even if planning is not carried out on a regular basis, it is usually
instigated at a time of major change.
Who Makes The Business Plans?

Three types of people are interested in a business plan:
1. The managers who run the business on a day to day basis
2. The owners, or prospective equity investors
3. The lenders, who are advancing loans for the enterprise
1. Managers: They are involved in small business planning both as producers and recipients of
the plan. The management of a small enterprise is the only people likely to be sufficiently
knowledgeable to produce a business plan. Business plans are also written to aid small
business managers.
2. Owners: The managers of a small enterprise may also be the owners and take a keen interest
in the planning process. A plan may be intended for prospective equity partners, either a
sleeping partner looking for an investment, or an active partner looking to join an existing small
business. Owners may also be lenders, who take an equity stake in return for providing loans.
3. Lenders: Banks are the main recipients of business plan. They encourage the production of
business plans to justify overdrafts and loans offering literature and advice and putting
together business plans. Other lenders of money, from private individuals to venture capital
companies, will also expect to make their investment decision after the presentation of a
formal business plan.
Why Business Plans Are Prepared? The above three groups will have some shared, and some
more separate motives for using a business plan. Managers, owners and lenders will be seeking to
investigate the following issues:
Chapter: 4
 Assessing the Feasibility and Viability of the Business or Project : A project feasibility analysis
includes market analysis, technical analysis, financial analysis and social profitability analysis. A
38
market analysis is a method of screening project ideas as well as means of evaluating a project’s
feasibility in terms of the market. The technical analysis of a project feasibility study establishes
whether the project is technically feasible or not, and whether it offers a basis for the estimation
of costs. In the financial analysis, the emphasis is on the preparation of the financial statements,
so that the project may be evaluated in terms of the different measures of commercial
profitability and the magnitude of financing required may be determined.
 Setting Objectives and Budgets: an objective is an important element in the project planning.
Objectives are concerned with defining in a precise manner what the project is expected to
achieve and to provide a measure of performance for the project as a whole. Objectives are the
foundations on which the entire edifice of the project design is built.
The objectives should be;

 Specific
 Not complex
 Measurable, tangible and verifiable
 Realistic and attainable
 Established within resource bounds
 Consistent with resources available or anticipated
 Consistent with organizational plans, policies or procedures.
Having a clear financial vision with believable budgets is a basic requirement of everyone involved
in the plan.
3.4 Developing a Business Plan- The Format It Includes

What should a business plan look like, and what should be included? Business plan should answer
straight forward questions;
 Where are we now?
 Where do we intend to go?
 How do we get there?
A. Where We Are Now? -An analysis of the current situation of the market place, the business
concept and the people involved is a necessary first step. An evaluation of what we are doing now
helps to proceed to the future.
B. Where Do We Intend To Go? - The direction that is intended for the business need to be clear
and precise. Quantifiable targets and objectives help to clarify and measure progress towards the
intended goals. Identification of likely changes to the business environment will build on the
opportunities outlined, and assess possible threats.
C. How Do We Get There? - Implementation of accepted aims gives the final end result. Plans for
marketing and managing the business, with detailed financial support are the advisable
preliminaries before putting it all into practice.
Your business plan is essentially your answers to a comprehensive list of questions. The first and
most important question is this: where do you want your business to go? Stated differently, what do
you want your business to look like in three, five or even 10 or more years? What level of revenues
and profits do you have at that time? How many employees? How many locations? And so on.
Likewise, your business plan should answer these questions for a shorter time period, particularly
Chapter: 4
one year. That is, what are your business’ goals for the current year, and what must you accomplish
39
to make the year a success. In answering these big business planning questions, you naturally have
to answer questions pertaining to each of the core business plan sections as follows:
1. Company Analysis: what products and/or services do you offer now and/or what will you develop and offer
in the future?
2. Industry Analysis: how big is/are your market(s) and how are they changing? What trends are affecting
them and do these trends bode well for your future success?
3. Competitive Analysis: who are your competitors and what are each of their key strengths and weaknesses?
In what areas will you have or gain competitive advantage? How?
4. Customer Analysis: who are your target customers? What are their demographic and/or psychographic
profiles? What are their needs?
5. Marketing Plan: how will your reach your target customers? What promotional tactics and marketing
channels will you use? How will you price your products and/or services? What brand positioning do you
desire for each?
6. Management Team: who comprises your current team and what key hires must you make in order to execute
on the opportunity in front of you. Will you build a Board of Advisors or Directors, and if so, who will you
seek?
7. Operations Plan: what is your action plan? What are the milestones you must accomplish to go from where
you are now to where you want to be at year’s end? At the end of five years?
8. Financial Plan: how much external funding (if applicable) do you need to build your company? In what
areas will these funds be invested? What are your projected revenues and profits over the next one to five
years? What assets must you acquire?
Answering the questions in these eight key business plan sections helps you formulate specific
business goals. They also help you answer the most important question to include when you write
the Executive Summary of your business plan, which is this: why is your business uniquely qualified
to succeed?
There are many reasons why your business might be uniquely qualified to succeed. For example, it
could be the quality of your management team. Or unique technology and/or partnerships you’ve
created. But importantly, if you have no unique qualifications, it’s too easy for competitors to steal
your customers and market share at any time.
So, if you’re thinking right now about how to write a business plan, sit down and start answering the
questions outlined above. It’s the thinking and strategizing part which is actually more important
than the writing part. Sure, if you want others to read and/or fund your business, your plan has to
read well and be formatted properly. But it’s the content in the business plan, your strategy and
reasons why you’ll succeed, that will prompt others to invest or otherwise join you in your conquest
to build a thriving business!
A business plan is living document that uses as a road map reading and means of
communicating the business idea, the needed resources and activities. A business plan is a
written statement that describes and analyzes your business and gives detailed projections about
its future. A business plan also covers the financial aspects of starting or expanding your
business—how much money you need and how you’ll pay it back. All business plans include
eight common elements that are contained in the feasibility model summarized below. This model
Chapter: 4
is generally adaptable to most types of new ventures.
40
Eight Common Elements in a Feasibility Plan
Executive Summary  Venture defined, products or services identified, market characteristics

summarized, founders introduced, and financial structure profiled
Business Concept  Purpose of the venture and the major objectives of its founders; description of the
distinct competency of the firm
Product or Service  Function and nature of products and services, proprietary interests,
attributes and technical profile
Market Research and Analysis  Customer scenario, markets, venture’s niche, industry structure, expected
competition, and sales forecast
Market Plan  Market strategy to compete, pricing, promotion, distribution, service and
warranties, and sales leadership
Manufacturing or Operations  Facilities, location, inventory and materials needed, human resources,
operational processes, technology, security, insurance, and safety
Entrepreneurial Team  Profile of founders, key personnel, investors and management roles
I. Documentation
Financial Executive Summary:
 FinancialThe statements
opening section, calledand
for income the expenses,
executive cash
summary, is a synopsis
flow; assets of the break-
and liabilities,
proposed enterprise. It addresses five subjects as mentioned below.
even projections, and start-up underwriting needed
 Venture Defined: The Company must be identified to include when it was formed, by whom and for
what purpose. The entrepreneur should briefly extend the definition to explain how the enterprise is
unique.
 Product or Service: The entrepreneur must describe clearly what will be sold. If there is a proprietary
interest (patent, trademark, or copyright), this fact should be stated. The executive summary should
briefly describe how far the entrepreneur has gone to develop the product or service. Products and
services should also be described in terms of quality image, pricing and distinguishing characteristics that
might demonstrate a distinctive competency.
 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. Market
potential should be estimated over a reasonable period of time (i.e. number of sales for the first three to
five years). Summaries on data on growth projections, such as regional trends in specialty merchandising,
may be required.
 Entrepreneurial Team: an entrepreneurial team may include only the founding entrepreneur, but there
are other key personnel essential for the firm’s success. These individuals must be identified, and their
skills and talents must be adequately described. The executive summary emphasizes strengths of team
members and their qualifications.
 Financial Summary: critical financial considerations like start-up estimates of revenue, costs, cash flow
requirements, and profits or losses. These should be extended in annual increments for at least three
years. A good plan will identify the break-even point in sales volume.
II. Business Description: following the executive summary, the plan will provide detailed sections
Chapter: 4
on each major topic. The first section is a thorough description of the business. Essentially, the
41
same points covered in the executive summary are covered here, but they are covered in far
greater detail. An important area to address is the nature of market demand. Is the firm responding
to an established demand, or is it trying to establish a new product or service in untested markets?
The entrepreneur also needs to explain the nature of the business by clearly defining how the firm
will operate and what the founders intend to accomplish.
III. Products or Services: The plan must provide 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 itself, how it works (or is used),
materials, costs, methods of manufacturing, proprietary protection (patents, trademarks, or
copyrights), and potential competing (substitute) products. Most new products also will require
validated testing, and many will require approval by regulatory agencies. A business is staged
during the startup and early growth periods. Staging refers to the manner in which products or
services will be introduced.
IV. Market Research and Analysis: The objective of market research and analysis is to establish
that a market exists for the proposed venture. Entrepreneurs may provide a credible summary of
potential customers, markets, competitors, and assumptions about pricing, promotion and
distribution.
Market Research and Analysis Activities
Identify Potential Evaluate Analyze Competitors Describe

Customers Markets Assumptions
 Existing
 Future competitors with  Market niche for
 Demographic profile of
markets similar products positioning firm
customers
&trends or  Future competitors  Pricing approach
 Characteristics of
changes ease of entry used in plan
customers, age, sex,
 Window of  Industry structure  Distribution or
income etc.
¶ opportunity method of making
 Buying habits and
 Niche position
¶ Potential Customers: A customer profile includes demographic information such as age, sex, family
income, occupation and location of potential customers. Customer profiles can include many
characteristics but entrepreneurs should be guided by reason to provide relevant information that
could affect sales.
¶ Markets: A market exists only when there are qualified buyers, but the entrepreneur must
remember that the feasibility plan is a forecast of future markets. Therefore, market trends are
important to identify, including a window of opportunity for introducing the new business.
¶ Competitors: It is essential to identify competitors and to analyze how competition is likely to
change when the new venture becomes established. The minimum requirement is to identify
existing competition and to explain their strengths and weaknesses.
Chapter: 4
42
¶ Assumptions about the New Venture : A formal marketing plan comprises the next major section of
the feasibility plan. Entrepreneurs must identify the market niche, price system, promotional effort,
and distribution method to justify a basis for market research.
¶ Market Niche: A 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 Systems: Describing the price system is essential for developing a customer profile. Luxury
prices for name-brand products sold through specialty stores indicate customers that quality
merchandise and individualized service are offered. Low prices with frequent sales and discounts
suggest the opposite. Prices will also be defined by credit policies, location, methods of distribution,
and market strategies devised by the founders.
¶ Methods of Distribution: It is the manner in which products or services are brought to market. The
choice of a distribution system often defines the market niche, influences prices, and delineates
promotional activities. A creative method of distribution gives a business its distinct competency.
¶ The Sales Forecast: Marketing research must conclude with solid data on projected sales. Sales
forecast is the culmination of research to indicate the quantity of sales and expected gross sales
revenue during the planning period. A sales forecast includes quantity of sales in numerical terms
where the products or services can be individually identified. A good plan will describe projected
sales in the executive summary, but present well-documented information here on specific market
data and how sales are expected to occur during the first three to five years of business.
V. The Market Plan: the market plan describes an entrepreneur’s intended strategy. It builds on
market research and distinct characteristics of the business to explain how the venture will
succeed. It focuses on specific marketing activities. It describes pricing policies, quality image,
warranty policies, promotional programs, distribution channels, and other issues such as after
sales service and marketing responsibility. These are outlined in the figure below.
Elements of the Marketing Plan

Quality and reliability, use, and how the product or service will be
Product or Service positioned in growth markets
Pricing System Pricing methods, discounts, and quantity and bulk prices, methods
to set price
Promotional Mix Strategy of combining appropriate uses of public relations,

advertising, displays, events, demonstrations, personal sales etc.
Distribution Channels Description of service- after-sales policies, repair services, guarantees,

and product warranties
Services & Warranties Use of market channels including retail, wholesale, catalog,
telemarketing, personal sales representatives, or other approaches
Chapter: 4
Marketing Leadership Define leadership roles, persons responsible for marketing and sales
43
VI. Manufacturing or Operations Plan
Facilities Inventor Human Resources Operation Other issues

y s
Opening inventory Operating personnel Research and Insurance
Purchase or lease
development
Purchasing system Skill requirements Legal
Renovations
Manufacturing protection
Sub contracting Supervision
Equipment and process
Patents,
technology Inventory Service and support Service structure Copyrights
management
Packing and and trade
Unusual
Quality control marks
transport Supplies and requirements
Manufacturing and Operating Elements:

 Facilities: Every business requires physical facilities. Retailers are usually involved in choosing a
location and either securing a lease or purchasing a store. Facilities include fixtures, furniture,
equipment, parking facilities, and renovations necessary to open for business.
 Inventory Management: Retailers will describe beginning inventory required to open for
business and explain how merchandise will be replenished. Manufacturers will describe raw
materials and supplies needed in inventory prior to production, and they will also describe
projected finished goods inventory at opening
 Human Resource Requirements: From a manufacturing view point, human resource
requirements should be summarized with information on the number of personnel and type of
skills needed. If the business depends on unusually talented personnel, then they should be
identified.
 Operational Rationale: If the firm will engage in R&D, the plan should spell out the extent of
this effort. If operations include manufacturing, the plan should describe vendor relations,
supply requirements, maintenance expectations and transport requirements. Manufacturers
will also be expected to describe their quality control policies, safety requirements, and other
specific operations related to the enterprise.
 Legal Issues: Most businesses must consider insurance and legal protection to avoid disasters.
Specifically, entrepreneurs will need business liability insurance, and when the business relies on
a few talented people, the founders may want to purchase personnel life and disability
insurance on key people.
VII. Leadership and the Entrepreneurial Team: Entrepreneurs must take care to profile of the
Chapter: 4
entrepreneurial team honesty but effectively. They should emphasize team member’s strengths,
past successes, and positive characteristics, and they should include brief resumes of the
44
principals. Each person’s role in the new venture should be described briefly, including board
members or investors who may not be involved directly in operations yet be able to influence
decision
VIII. Financial Documentation: Since money is the objective measure used to gauge a firm’s progress,
it follows that financial statements come under close scrutiny. Financial statements for a new
venture are projections based on previously defined operating and marketing assumptions. An
income statement is required to show revenue, cost of goods sold, operating expenses, and net
income. Cash flow budgets reflect information from the profit and loss statement adjusted
properly for credit sales, non-cash expenses and cash obtained and used outside of operational
income. A projected balances sheet will summarize assets and liabilities, and a break even analysis
will reveal when the enterprise begins to turn a profit.
CHAPTER FOUR
PRODUCT AND SERVICE CONCEPT
Introduction
Most organizations now days operate several businesses. They often define their businesses in
terms of products. Whether they are in the copying business or the lighting business but
Theodore Levitt argued that market definition of business is superior to product definitions. As
Drucker pointed out, there are obvious benefits of defining a business in terms of customer’s
needs. Products may come and go but basic needs and customer groups endure forever. So,
every business needs to examine three basic questions initially before defining its nature and
scope of operations: Who the customer is, where is the customer located, how to reach the
customer, how does the customer buy ; what does the customer buy and what does the customer
consider value? So, an organization obviously needs to define its business covering three vital
aspects i.e. the product / service offering, customer segment and value creation.
Because of this, a product or service concept is the way in which a firm likes to position its
products / services in the market, in terms of product features, quality, price service, distribution,
differentiating elements etc. While trying to position its products / services in a distinct manner,
the company should not lose sight of its present and potential rivals competitive environment
changing preferences of customer for whom they do. A firm has to define the factors that offer
value to a customer in terms of low price, high quality, fast delivery, novel features, excellent
after sales service etc. Simply stated, value is the ratio between what the customer gets (both
functional and emotional benefit) and what he gives (in terms of money paid, energy expended
Chapter: 4
time spent and the opportunity scarified) to survive and flourish in a competitive market, a firm
45
should always define its business in terms of how it is going to offer certain benefits to customers
more effectively than its rivals.
Since the modern workplace is complex and makes high demands on flexibility, efficiency and
ergonomics, so that your employees have a sense of well-being, keep healthy and can do good
job that satisfies your customers. If not, the poorly treated employees treat the customer just as
poorly as the satisfied cow yield more milk, the opposite is also correct. In both delivering
products and rendering services, you should shape every interaction you have with your
customers because every time customers do business with you. And business is vanity and
purposeless without customers a location where the overall life and operation of business is
encircled by them.
4.1 Product and Technology
At both the micro and macro level of innovation, few products require exceptionally sophisticated
scientific knowledge. Sensational new products occasionally make headlines, but most are not high
tech in the sense of having significant to humankind. Periodically, major inventions or discoveries
emerge that are vitally important. Majority of the products, however, will evolve at the other end of
the technology spectrum as low-tech or no-tech innovations. For entrepreneurial convenience
product technologies are generally classified into three classes. These are: High-Tech Products;
Mid-Tech Products & Low-Tech Products.
1. High-Tech Product: Such products tend to be more of “state of the art” products reflecting current
levels of technological advancement. They are result of scientific research and experimentation,
whose uses have managed to reach a business application for the market.
Examples include:
 Semiconductors  Computerized materials

 Digital CD players  Satellite systems etc
 Laser instruments
2. Mid-Tech Products: This class contains a majority of the products that we are familiar with. This
technology assumes the use of existing resources or methods of production that results in new
products.
Examples include:
 Cosmetics  Power supplies

 Fertilizers and nutrients  Fax machines etc
 Desktop publishing
3. Low- Tech Products: Such products are ones that generally are understood to be developed as a
result of small changes or improvements in existing products. However, development of low tech
products requires insight by entrepreneurs to see opportunities.
Examples include:
Chapter: 4
 Office furniture  Paper supplies
46
 Plastic toys
 Closing and textiles
 Printer ribbons
 Candy and cookie
 Building supplies etc
Chapter: 4
47
4.2 Product Planning and Development Process
Once ideas emerge from idea sources or creative problem solving, they need further
development and refinement into the final product or service to be offered. This refining
process – the product planning and development process – is divided into five major stages:
idea stage, concept stage, product development stage, test marketing stage, and
commercialization; it results in the start of the product life cycle (see Figure 4.1)
4.2.1 Establishing Evaluation Criteria

At each stage of the product planning and development process, criteria for evaluation need
to be established. These criteria should be broad, yet quantitative enough -to screen the
product carefully in the particular stage of development. Criteria should be developed to
evaluate the new product in terms of- market opportunity, competition, the marketing
system, financial factors, and production factors.
A market opportunity in the form of a new or current need for the product idea must exist.
The determination of market demand is by far the most important criterion of a proposed new
product idea. Assessment of the market opportunity and size needs to include consideration
of the following:
 The characteristics and attitudes of consumers or industries that may buy the product
 The size of this potential market in dollars or units,
 The nature of the market with respect to its stage in the life cycle -growing or
declining)
 The share of the market the product could reasonably capture.
Current competing producers, prices, and marketing policies should also be evaluated,
particularly in terms of their impact on the market share of the proposed product. The new
product should be able to compete successfully with products already on the market by
having features that will meet or overcome current and anticipated competition. The new
product should have some unique differential advantage based on an evaluation of all
competitive products filling the same consumer needs.
48 Marketing and new venture development

The new product should be compatible with existing management capabilities and marketing
strategies. The firm should be able to use its marketing experience and other expertise in
this new product effort. For example, General Electric would have a far less difficult time
adding a new kitchen appliance to its line than Proctor & Gamble.
Several factors should be considered in evaluating the degree of fit: the degree to which the
ability and time of the present sales force can be transferred to the new product; the ability to
sell the new product through the company’s established channels of distribution; and the
ability to “piggyback” the advertising and promotion required to introduce the new product.
The proposed product should be able to be supported by and contribute to the company’s
financial structure. This should be evaluated by estimating manufacturing cost per unit, sales
and advertising expense per unit, and amount of capital and inventory required. The break-
even point and the long-term profit outlook for the product need to be determined.
Along with financial criteria, the compatibility of the new product’s production requirements
with existing plant, machinery, and personnel should be determined. If the new product idea
cannot be integrated into existing manufacturing processes, not only is the new idea less
positive, but new plant and production costs as well as amount of plant space must be
determined if the new product is to be manufactured efficiently. All required materials
needed in the production of the product should be available and accessible in sufficient
quantity.
4.2.2 Idea Stage

New product development starts with idea generation – the systematic search for new
product ideas. The ideas could emerge from idea sources or creative problem solving.
However, they need an in-depth development and refinement into the final product or
service to be offered. A company ought to generate as many ideas as possible in order to find
a few good ones.
4.2.3 Concept Stage

After a new product idea has been identified in the idea stage as viable, it should be further
developed and refined through interaction with consumers. In the concept stage, the refined
product idea is tested to determine consumer acceptance without necessarily incurring the
costs of manufacturing the physical product. Initial reactions to the concept are obtained
from potential customers or members of the distribution channels when appropriate. One
method of measuring consumer acceptance is the conversational interview in which selected
respondents are exposed to statements that reflect the physical characteristics and attributes
of the product idea. Where competing products exist, these statements can also compare the
primary features of existing products. Favorable as well as unfavorable product features can
be discovered by analyzing consumers’ responses, with favorable features then being
incorporated into the product.

Features, price, and promotion should be evaluated for both the concept being studied and
any major competing products. By identifying any major problems in the product concept,
research and development can be directed to develop a more marketable product, or the
concept can be dropped and not receive further attention.
The relative advantage of the new product versus competitive products can be determined
through the following questions.
 How does the new concept compare with competitive products in terms of quality and
reliability?
 Is the concept superior or deficient compared with products currently available in the
market?
 Is this a good market opportunity for the firm?
Similar evaluations should be done for each of the remaining aspects of the product – price,
promotion, and distribution.
4.2.4 Product Development Stage

In the product development stage, consumer reaction to the physical product is determined.
One tool frequently used in this stage is the consumer panel, in which a group of potential
consumers are given product samples.
 Participants keep a record of their use of the product and comment on its virtues and
deficiencies.
The panel of potential customers can also be given a sample of the product and one or more
competitive products simultaneously. One test product may already be on the market,
whereas the other test product is new. Both products may also be new, with some significant
variation between them. Then one of several methods – such as multiple brand
comparisons, risk analysis, level of repeat purchases, or intensity of preference analysis –
can be used to determine consumer preference.
4.2.5 Test Marketing Stage

Although the results of the product development stage provide the basis of the final
marketing plan, a market test can be done to increase the certainty of successful
commercialization. This last step in the evaluation process, the test marketing stage,
provides actual sales results, which indicate the acceptance level of consumers. Positive test
results indicate the degree of probability of a successful product launch and company
formation.
4.2.6 Commercialization Stage

At this stage the product will be offered for the market and hereafter the product may pass
through additional four stages: Introduction, growth, maturity and decline (see the figure
below).
Figure 4.2: Product Life Cycle

1. Introduction Stage
This stage starts when the new product is first launched. It takes time and sales growth is
apt to be slow.
In this stage, as compared to other stages:-
 Profits are negative or low
 Require much money to attract distributors and build their inventories.
 Promotion spending is relatively high to inform customers of the new product and get
them to try it.
Marketing Strategy
 Firms focus their selling on those buyers who are the most ready to buy
 As the pioneer moves through later stages of the LC, it will have to continuously
formulate new pricing, promotion and other marketing strategies
 The firm has the best chance of building and retaining market leadership if it plays its
cards correctly from the start.
2. Growth Stage
If the new product satisfies the market, it will enter a growth stage, in which sales will start
climbing quickly.
 The early adopters will continue to buy and later buyers will start following their
lead, especially, of they hear favorable word of mouth.
 New competitors will enter the market, because of the attractions by opportunities for
profit.
 In this case, firms will introduce new product features, and the market will expand.
 Prices remain where they are or fall only slightly.
 Companies keep their promotion spending at the same or a slightly higher level.
 Profits increase during the growth stage, as promotion costs are spread over a large
volume and as unit manufacturing costs fall.
Marketing Strategy

The firm uses several strategies to sustain rapid market growth through:
 By improving product quality and adds new product features and models.
 By entering new market segments and new distribution channels.
 By shifting some advertising from building product awareness to building product
conviction and purchase
 By lowering prices at the right time to attract more buyers.
 By spending a lot of money on product improvement, promotion and distribution, the
company can capture a dominant position
3. Maturity Stage
At some point, a products sales growth will slow down and the product will enter a maturity
stage. This stage normally lasts longer than the previous stages and it poses strong challenges
to marketing management. Here, the slowdown in sales growth results in:
 Marking down prices

 Increasing their advertising and sales promotion
 Upping their R&D budgets to find better versions of the product.
This step leads to a drop in profit, some of the weak competitors start dropping out, and the
industry eventually contains only well established competitors
To prevent the product going into decline you modify the market, the product and the
marketing mix elements
 To Modify the Market, the company tries to increase the consumption of the product
and looks for new users and market segments.
 To Modify the Product, the company tries to changing characteristics of the product
like quality, features, or styles to attract new users and to inspire more usage.
 To Modify the Marketing Mix, the company try to modify the marketing mix;
 It can cut prices to attract new users and competitor’s customers.
 It can launch a better advertising campaign or use aggressive sales promotion, trade
deals, cents-off, premiums, and contests.
 It can also move in to larger market channels, using mass merchandisers, if these
channels are growing.
 Finally the firm can offer new or improved services to buyers.
4. Decline Stage
Here, the sales of most product forms or brands eventually dip. Sales decline for many
reasons including due to technological advances, shifts in consumer tastes or increased
competition. As sales and profits decline, some firms withdraw from the market. Those
remaining may prune the product offerings. In this case, carrying a weak product can be very
costly to a firm.
 A product failing reputation can cause customer concerns about the company and its
other products.
 Companies need to pay more attention to their aging products.

 The firm’s first task is to identify those products in the decline stage by regularly
reviewing sales, market shares, costs, and profit trends.
 Then management must decide whether to maintain, harvest or drop each of these
declining products.
In general, the PLC concept can be applied by marketers as a useful framework for
describing how products and markets work. The products current PLC position suggests
the best marketing strategies and the resulting marketing strategies affect product
performance in later life cycle stages. Yet, when used carefully, the PLC concept can help
in developing good marketing strategies for different stages of the PLC.
4.3 Product Protection

One of the challenges the novice/beginner entrepreneur will face as he/she goes into
business is understanding the regulatory environment which is made up of numerous laws
and regulations. To operate as a legal businessperson and protect the business from
unnecessary suits and liabilities, the entrepreneur needs to understand the various laws that
govern his/her business. Following are the key legal issues for the entrepreneur.
4.3.1 Intellectual Property

Sometimes as abbreviated as IP, intellectual property is a legal definition of ideas,
inventions, artistic works and other commercially viable products created out of one’s own
mental processes. In the same sense that real estate titles establish ownership of tangible
items, intellectual property is protected by such legal means as patents, copyrights, and
trademark registrations. In order to enjoy the benefits arising from the exclusive ownership
of these properties, the entrepreneur needs to protect these assets by the relevant law.
However, because of lack of understanding, some entrepreneurs seem to ignore important
steps that should be taken to protect their intellectual properties.
Many court cases arise over improper use of intellectual property every day. Unfortunately,
infringement/violation on intellectual property rights can usually be proven only if the owner
of that idea or creation can establish a date of origination. This is the reason why experts
strongly recommend that those in creative fields seek protection through official registration
of their intellectual properties.
4.3.2 Patents
A patent is a grant of a property right by the government to an inventor. All patents have
the distinction of being assets with commercial value because they provide exclusive rights
of ownership to patent holders, their heirs/inheritors and assigns. Patents are exclusive
property rights that can be sold, transferred, willed, licensed, or used as collateral; much
like other valuable assets. Most independent investors do not commercialize their inventions
or create new products from their ideas. Instead, they sell or license their patents to others
who have the resources to develop products and commercial markets.

4.3.3 Copyright
A copyright is that the intellectual property is protected for the life of the originator plus 50
years. This protection affords an extraordinary property right and a substantial estate. Among
the things that need to be protected through copyrights are: music, books, software, scripts,
articles, poems, sculptures, models, maps, and blueprints. A copyright extends protection to
authors, composers, and artists, and it relates to a form of expression rather than the subject
matter. This distinction is important because most intellectual property has proprietary
information in terms of subject matter, and if that property cannot be patented, the copyright
only prevents duplicating or using the original material.
In Ethiopia, the revised copyright law was enacted in July 2004. The law severely punishes
those who infringe others’ copyright, whether intentionally or with negligence, with
imprisonment of up to 10 years and material and moral compensation of Birr 100,000
minimum. Thus, it is very crucial for the entrepreneur to understand the law very clearly
and proceed accordingly.
4.3.4 Trademarks
A trade mark includes any word, name, symbol, or distinguishing device, or any
combination thereof adopted and used by a manufacturer or merchant to identify his goods
and distinguish them from those manufactured or sold by others. A trade mark is granted
through the U.S Patent and Trade Mark office for a period of 20 years. It needs the necessary
renewal.
Examples;
 Coke (name) for Coca-Cola Corporation
 (Symbol) Apple with a bite in the side – Apple Computer Corporation
 Wild Mustang horse- Ford Automobile
 The intricate shield and eagle design- beer cans by Anheuser-Busch
Chapter – Five
Marketing in Small Business
5.1. The Marketing Perspective

Marketing consists of a multitude of activities that include decisions about the
company’s product or services, pricing policies, promotions and methods of distribution.
The ultimate goal is to facilitate exchanges between an enterprise and its customers.
The exchange relationship exists as one party becomes willing to “give

something of value” to “receive something of value” from the other party.
Marketing is a process of conceiving that exchange, and then accomplishing the tasks
necessary to deliver the goods or services in a manner that satisfies customers and meets
business objectives.
The Marketing Mix Elements

Marketing involves four general activities that are important to emphasize
because they capture the essence of marketing. The four activities concern
decisions about the firm’s product, its price, methods of promotion, and how
products are distributed.
 Product: Product includes physical objects or services being sold, together with
packaging, image, brand name and warranty. In addition, a product includes
physical attributes that influence consumer’s perceptions, such as colors, shapes,
sizes and materials.
 Price: Price is the monetary unit required for a purchase, and from an
entrepreneur’s view point, it is the unit of income. Prices communicate information
about value, image and competition, and they influence decisions about distribution,
market segmentation, product characteristics and related services.
 Promotion: The act of communication that provides consumers with information
about a company’s products, its services or the venture itself is promotion. It is
through promotional activities that the venture attracts consumers. They include
advertising, personal selling, direct marketing, public relations.
 Distribution: It is concerned with how products or services are made available to
customers. Distribution can mean the physical channels or transporting products
from manufacturers to end users, warehousing, wholesaling and retailing. It can
also relate to marketing systems such as catalogues, telemarketing, franchising, and
computer-based network markets.
5.2. Market Segmentation
Market segmentation is breaking down a market into groups of customers with similar
characteristics. The key for most small firms is to concentrate their efforts and
resources on one or more closely defined market segments. Research studies
show a relationship between profitability and firms that do this and thereby gain
a high share of that market segment.

The purpose of segmentation is to find a way of describing groups of customers so that
the firm can better communicate with them. This allows the firm to tailor the
marketing mix to the needs of that segment and communicate the offering in an
appropriate way, through an appropriate medium. Thus a market segment is one
distinct customer group on which a business will concentrate its efforts. A market
segment, also called market niche, keenly focuses an entrepreneur’s efforts on product
characteristics, pricing, promotion and channels of distribution related to a specific
customer group.
5.3. Marketing Strategies for Small and Micro Enterprises

5.3.1. Market Research in the Pre-Start-Up Phase
Before entrepreneurs actually commit themselves to opening a business they
have to answer the following:
1. Who Is the Customer? A clear profile of potential customers is a basic element of

market research. Customers may be young or old, married or single, teachers
or students, homeowners or renters, poor or wealthy.
 Sex and Age: These are two essential characteristics to identify in the
customer scenario.
 Income Status: The ability to buy and the amount of money will influence
the product or service concept, price, nature of promotions, and method
of distribution.
 Occupation and Education: Both of these factors can significantly
influence an entrepreneur’s decisions.
 Other Customer Characteristics: These include family profiles, such as
being married, single, or divorced; teenage children away at college, one
of both parents working etc. Customers can also be identified by ethnic
group, religion and domicile.

2. Where Is the Market? Part of the customer scenario will involve locating the
potential customer base-large metropolitan areas, suburban communities, small
cities, and rural towns.
 Market Size and Changes. It is important to determine the potential for
current and future sales.
 Local Market Characteristics: differ significantly because of population
size, economic development, industrial profile, ethnic groups, weather,
legislation and culture.
 Segmenting the Market: A market segment is one distinct customer group
on which a business will concentrate its efforts. It keenly focuses an
entrepreneur’s efforts on product characteristics, pricing, promotions and
channels of distribution related to a specific customer group.
3. Competition: Who are the market players?

Existing competitors should be identified and finding out the products or
substitutes. Distribution: How will customers be reached? A distribution system
is the physical process of getting products to market or providing services.
Sources of Market Intelligence

 Existing competitors: identified through telephone directories, association,
licensing agencies, advertisements, and public documents
 Trade publications: specialized publications, magazines, news letters,
catalogs, and brochures.
 Securities Analyst’s Reports: Securities brokers, investment bankers,
private investment companies, and experienced private investors.
 Government sources: volumes of government reports and document in
the public sector. (e.g. Department of Commerce, Chamber of Commerce
etc)
 Potential customers: informal discussion with the end-users.
5.3.2. Competitive Analysis: Research after Start Up
A competitive analysis is essentially a structured method of examining an organization

or industry in order to provide a clear understanding of the factors that affect a business.

Michael Porter’s (Competitive Strategy) five forces model of competition, is a strategic
management technique for established profit- seeking companies.
1. The Threat of entry

What is the threat of other companies entering the industry? Some points to be
considered are:
 Capital requirements: If the type of business requires a large critical
capital investment, fewer entrepreneurs are likely to enter the industry.
 Economies of scale: Large sales volume offers a product or service at a
competitive price. Due to mass scale production, the cost of production
can be minimized, which benefits the firm.
 Experience: Cost advantages are often enjoyed by those who were first
into a business or who have experience in the technology required.
 Distribution systems: Lacking established distribution systems or access
to them is a major barrier to new entrants.
 Differentiation: extent to which an enterprise can establish a brand image,
service, product innovation, or reputation describes its differentiation or
distinct competency. By being distinct, an enterprise can command its
market niche, discouraging new entrants. If entrepreneurs can establish
unusual niches through differentiation, they may successfully barricade
themselves against new competitors.
Entry Barriers
 Economies of scale  Obsolete cost advantage

 Proprietary product
 Government policy
difference
 Brand identity  Expected relations
 Switching cost
 Capital requirement
 Access to distribution
2. The Power of Buyers

Entrepreneurs may think in terms of retail customers, but often they are in the
position of selling to organizations much larger than their own enterprises. When
buyers are relatively large and command a high percentage of the smaller company’s
sales, the buyers wield/exercise negotiating power; entrepreneurs become price takers and
often rely for their very existence in one or two buyers. Assuming few major obstacles
to entry- competitors can mount significant challenges by outbidding the
entrepreneur for price buyers. In addition, buyers may arbitrarily choose to
create their own capability to supply the entrepreneur’s products or services.
Determinants of Buyer Power
 Bargaining leverage  Ability to backward

 Buyer concentration vs. firm integration
concentration  Substitute products
 Buyer volume  Pull through
 Buyer switching cost relative  Price sensitivity
to firms
 Buyer information
3. The Power of Suppliers

When entrepreneurs are buyers, they must be concerned with the market power of their
suppliers. Most new ventures start small and consequently buy materials and
supplies from larger companies. Therefore, suppliers control prices and terms of
sale. This situation usually results in high costs to the new enterprise, and if the
entrepreneur is in a low-margin business (such as fast food retailing) the market
leverage created by a powerful supplier can dictate success and failure. Supplier
power is taken to be high when there are only a few suppliers giving an
entrepreneur few options to shop for inventory.

Determinants of Supplier Power
 Differentiation of inputs  Cost relative to total purchase

 Switching cost of suppliers in the industry
 Presence of substitute inputs  Impact of input on cost and
 Supplier concentration differentiation
 Importance of volume of
suppliers
4. The Threat of Substitutes

A direct substitute is one that performs the same services or has exchangeable attributes
with respect to the entrepreneur’s business. Indirect substitutes exist as choices between
unlike products or services when buyers make allocation decisions. Entrepreneurs with
special use products, such as medical equipment, have few direct or indirect
substitutes to consider. Those in commodity goods, such as soft drinks, must
consider many direct substitutes but few indirect ones because the consumer
rarely makes a rational choice among dissimilar expenditures. Entrepreneurs in
high priced durable goods such as VCR’s or furniture, have tremendous
competition from direct and indirect substitutes.
5. Competitive Rivalry
The extent to which an enterprise faces competitive rivalry is partially the result of a
combined effort of the other four forces. Rivalry also depends on the nature of the
industry, trends towards new technology, industry growth potential, and intensity of
competition among major market players. If all competitors are roughly the same
size, then the industry will be sensitive to prices and advertising, but relatively
insensitive to outsiders. If an industry has companies of various sizes with
differentiated products, then product attributes, prices, promotions, and
distribution methods will result in market confusion and instability.
Rivalry Determinants

 Industry growth
 Fixed/storage cost
 Intermittent over capacity
 Product difference
 Brand identity
 Switching costs
 Concentration and balance
 Information complexity
 Diversity of competitors
 Corporate stakes
 Exit barriers

5.4. Marketing Strategies
A marketing strategy is a formulated plan that describes how a new venture will
compete. It focuses the enterprise the activities related to competing in its market
niche, subsequently providing guidelines for decisions about strategic objectives,
allocation of resources, and responsibilities required to implement a marketing plan.
Strategic Objectives
Objectives vary- some are simple, others can be quite complex. Entrepreneurs should be able to
establish objectives that can be easily measured. Several types of objectives can be
considered with similar measurable criteria.
 Growth: is measured through sales activities and should be expressed in terms of sales or
units sold. The sales volume should reflect accurate sales forecast.
 Profitability: every commercial enterprise will have profit objectives, but these can be
expressed in several ways. In a business where prices and costs are sensitive, an
entrepreneur will want to track “return on sales” to monitor the gap between
income and expenses, and calculate a targeted “rate of return” on assets, equity and
investments. Most companies can use these criteria to indicate how well they are
utilizing assets to generate sales.
 Customer Service: An essential objective is to define how the enterprise will serve
customers. The definition can be expressed in terms of product quality, diversification,
or innovation.
 Human Resources: Most excellent companies have resource objectives such as

helping employees improve their career opportunities, or improving performance through job
skill training. Entrepreneurs can learn from larger firms that well-articulated
objectives for human resources.
 Other Objectives: All entrepreneurs want something from their enterprises; their
preferences may include autonomy, opportunity to be innovative, or the challenge
of a new life style. Personal objectives will be accounted for a well-articulated
marketing strategy that guides decisions.
General Approaches to Strategy

Most new ventures concentrate on a product or service in a select market, and although
entrepreneurs may think about diversification. They must first establish the
fundamental business endeavor. Once established, a venture may be positioned to
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diversify into new products or markets. These strategies are called product or market
diversification. A vertical integration is a strategy of expanding backward into the vendor
chain to secure resources, or of reaching forward into distribution channels to
consolidate intermediaries. The primary strategies for new ventures are shown below.
Common Start-Up Strategies
 Concentration
Directed to a distinct market
Focal product, service or line
segment or niche
of merchandise
 Concentric diversification of products and services
Focal product, service or line New products or services closely Directed to the same market
of merchandise related to those initially offered. segment or niche as those
initially offered
 Concentric diversification of markets or customers
Focal product, service or line Focus of products, services or New market segments open
of merchandise line of merchandise is through expanded range of
maintained customers, niches
 Concentration: Entrepreneurs will want to consider how to grow, and the pace of
growth. An intense growth can be achieved through “market penetration” tactics that
include low prices, pervasive advertising, and sales promotions. Growth can also be
achieved by concentrating on a specific market with high-priced goods for select clients in
up market locations.
 New market development: Another method of intense growth is to develop several
closely associated markets. This is called concentric diversification in which the
entrepreneur emphasizes finding new customer niches.
 New Product Development: A third alternative is product diversification which means
to develop new products or services that are closely associated with existing product and
services. This is also called concentric diversification, and is some instances, related
diversification. Entrepreneurs consciously choose to add to their product lines, yet
they stick close to their initial products or services, building on their distinct
competencies.
 Other Strategy Considerations: Business plans that are successful in attracting
investors and lenders will have a market strategy that portrays a vision of accelerated
growth. A proposed new product might be acceptable to investors only if the
entrepreneur intends to set up a wholesale distribution system or establish a plant
for manufacturing. These options for “integration” imply an early plan to stage the
enterprise-that is to time the sequence of events to make it successful.
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CHAPTER – SIX
FINANCING SMALL BUSINESS
6.1. Financial Requirements
Finance is a key input of production. It is a pre requisite for accelerating the process of industrial
development. Financial resources are essential for business, but particular requirements change as
an enterprise grows. Obtaining those resources in the amount needed and at the time when they are
needed can be difficult for entrepreneurial ventures because they are generally considered more
risky than established enterprises.
Types of Finance
Depending upon the nature of the activity, the entrepreneurs require three types of finances; i.e. short
term, medium term and long term finances.
1) Short Term Finance: refers to the funds required for a period of less than one year. Short
term finance is usually required to meet variable, seasonal or temporary working capital
requirements. Borrowing from banks is a very important source of short term finance. Other
important sources of short term finance are trade credit, installment credit, and customer
advances.
2) Medium Term Finance: the period of one year to five years may be regarded as a medium
term. Medium term finance is usually required for permanent working capital, small
expansions, replacements, modifications etc. Medium term finance can be raised by:
 Issue of shares  Ploughing back of profits by
 Issue of debentures existing concerns
 Borrowing from banks and other
financial institutions
3) Long Term Finance: period exceeding 5 years are usually regarded as long term. Long term
finance is required for procuring fixed assets, for the establishment of a new business, for
substantial expansion of existing business, modernization etc. The important sources of long
term finance are:
 Issue of shares
 Issue of debentures
 Loans from financial institutions
 Ploughing back of profits by existing
concerns.
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Sources of Finances
1. Equity Financing: Equity is capital invested in a business by its owners, and it is ‘at risk’ on a
permanent basis. Because it is permanent, equity capital creates no obligation by an entrepreneur
to repay investors, but raising equity requires sharing ownership.
2. Venture Capital: Venture capital is an alternative form of equity financing for small businesses.
Venture capitalists focus on high risk entrepreneurial businesses. They provide start-up (seed
money) capital to new ventures, development funds to businesses in their early growth stages,
and expansion funds to rapidly growing ventures that have the potential to “go public” or that
need capital for acquisitions.
3. Personal Sources: Entrepreneurs must look first to individual resources for startup capital.
These include cash and personal assets that can be converted to cash. Family members and close
friends become involved as informal investors.
4. Commercial Banks: Most commercial loans are made to small businesses. Commercial banks
provide unsecured and secured loans. An unsecured loan is a personal or signature loan that
requires no collateral; the entrepreneur is granted the loan on the strength of his reputation.
Secured loans are those with security pledged to the bank as assurance that the loan will be
repaid.
5. Finance Companies: There are three types of finance companies, and although all are asset-
based lenders, each serves a different clientele. These are sales finance companies, consumer
finance companies, and commercial finance companies.
 Sales Finance Companies: focus on loans for specific purchases like automobiles and
farm machinery. Most of the customers are end users such as individuals who have their
new cars financed through finance companies.
 Consumer Finance Companies: focus on short term loans secured by personal assets,
and most consumer loans are for small amounts at high rates of interest. These loans are
typically negotiated directly between finance companies and consumers for purchases
such as furniture, appliances, vacation trips and home repairs.
 Commercial Finance Companies: are focused predominantly on small business and
agricultural lending. Their primary business is making loans on commercial, industrial
and agricultural equipment.
6. Leasing: Leasing allows a small firm to obtain the use of equipment, machinery or vehicles
without owning them. Ownership is retained by the leasing company, although in many cases
there is a purchase option at the end of the lease period.
7. Hire Purchase: Hire purchase provides the immediate use of the asset and also ownership of it,
provided that payments according to the agreement are made.
8. Factoring: Factoring is a specialist form of finance to provide working capital to young,
undercapitalized businesses. A small firm, which grants credit to its customers, can soon have
considerable sums of money tied up in unpaid invoices. Factoring is a method of releasing these
funds; the factoring company takes responsibility for collection of debts and pays a percentage
(Usually 80%) of the value of invoices of the issuing company.
6.2. Control of Financial Resources
Financial problems
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Fast growing small businesses have particular problems in controlling their finances. Growth brings
frequent changes to the internal structures and external environment of a small firm. It is often
difficult to ensure that financial control systems keep pace with the changing circumstances. The
small business is likely to be confronted by a variety of financial problems as it advances through its
life cycle.
Stage Likely sources of Financial issues
finance
Conception Personal investment Under capitalization, because of inability to raise finance.
Introduction Bank loans, overdrafts Control of costs and lack of information.
Development Hire purchase, leasing ‘Over trading’, liquidity crisis.
Growth Venture capital ‘Equity gap’ appropriate information systems.
Maturity All sources Weakening return on investment
Decline Sale of business/ liquidation Finance withdrawn. Tax issues of business are sold.
The Financial Cycle of a Small Firm

Cash Flow-Debtors and Stock
 Financial management in a small firm starts with the management of the cash flow. It is easy
for cash resources of a small business to become ‘locked up’ in unproductive areas such as
debtors, work in progress and finished stocks.
 Debtors can hurt small business in two major ways:-
1) They absorb cash and effectively increase the funding requirement of a small firm
2) The longer a debt is alive, the greater the risk of a bad debt
 Stock represents a poor investment for a small firm’s financial resources. Stock surpluses
earn no money and the risk of deterioration if not used quickly. Stock management is about
balances, and the optimization of resources. Stocks need controlling in three areas- raw
material stock, work-in-progress, finished stock.
Costs and Profits
 Profits and losses are theoretical figures representing the difference between total earnings
and total expenditures, incurred by a small firm in achieving those earnings. Profits or losses
should be translated into cash surpluses or deficits. Profitability can be improved by:-
 Reduction of costs
 Increase of prices
 Increase of sales volume
 Costs are classified as fixed or variable. Fixed costs remain unchanged in the short term.
These costs will not vary with the volume of goods or services sold. They are the overheads
of a business. Fixed costs do vary in the long term. Variable costs are operational expenses
that change according to the volume of production.
6.3. Financial Analysis
Small firms differ greatly in their approach to the provision of accounting information, and the use
of forecasts and budgets for planning and controlling of business.
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The three most widely used financial summaries are:-
 Profit and loss account or income statement
 Cash flow, and
 The balance sheet.
 The Profit and Loss Account: commonly called as income statement shows how a
business is doing in terms of sales and cost- and the difference between them of profit or
losses.
 The Cash Flow Summary: indicates the movement of cash into and out of the business. It
differs in the important respect of reflecting credit given to customers and received from
suppliers, as well as the amount of money invested in a business, or borrowed by it.
 The Balance Sheet: represents a summary of what money has been spent by a business,
and what it has been spent on. It is usually an annual summary of the use and source of
funds in a company.
6.4. Financial Management
 In this subchapter emphasis is given to dealing with on how small and micro enterprises
generate business transaction, record it and prepare different financial statements and
budget.
Financial Record Keeping
Organizations are established to achieve certain objectives. While trying to achieve these objectives,
they perform different activities, which are sources of different transactions. Once small and micro
enterprises are established, they will have:-
A) Different properties such as office chair, automobile
B) Money or goods borrowed from others and
C) Net capital of the business
 To make clear different transactions of a business, let us see the following example. Assume
that SENFU DIGITAL PHOTO PLC has the following transaction as of January 1, 2010.
- Purchased office equipment for 20,000; 10,000 for credit.

- Purchased automobile from MOENCO----for 250,000; 150,000 for credit.
- Purchase a building for ----- 150,000
- Kept cash birr ------------ 20,000
What is owned? What is owed?
Cash --------------------------- 20,000 A.A Trading --------------- br 10,000

Office equipment ----------- 20,000 Dashen bank ------------- br 200,000
Automobile ------------------- 250,000 Moenco-----------------------Br150,000
After identifying the total amount of what SENFU DIGITAL PHOTO owned (possess) and owed
(borrowed) it is possible to determine the total worth (equity) of the business as follows.
- Total owned (possessed) ------------------ br 440,000 (A)
- Total owed (borrowed) --------------------- br 360,000 (B)
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- Equity (A) – (B) ------------------------------ br 80,000
The property owned by the company in accounting term is known as equity. Equities can also be
divided in to owners’ equity and creditor’s equity. The equity of the creditors is debts for the
business organization and is called liabilities and the equities of the owners are called capital.
Expansion of the equation to give recognition to the two types of equities yields the following
accounting equation.
Asset = Liabilities + Capital
An item to be called as asset it:-
 Should be the property of the organization
 Must be measured in terms of money
 The owner should exercise the right to possess, use, enjoy and dispose of the asset
The business transaction of SENFU DIGITAL PHOTO PLC stated above can be rewritten in a
more formal way called beginning balance sheet.
Balance Sheet
January 1, 2010
Asset Liabilities
Cash 20,000 Dashen Bank 200,000 br
Office equipment 20,000 Moenco 150,000 br
Automobile 250,000 A.A trading 10000
House 150,000 Total liabilities 360,000 br
Capital
Senfu capital 80,000 br
Total asset 440,000 Total liabilities & capitals 440,000
Balance sheet is one of the accounting statements that list assets, liabilities and capital of a business
entity at a specific date, usually at the close of the last day of the month.
Preparing Financial Statements

There are so many parties, which are interested about the financial situation of a small business
organization. Financial statements such as income statement, balance sheet, and capital statements
provide information about the financial condition of the organization. Financial statement can be
prepared on monthly, quarterly and yearly basis as per the user’s requirement for decision making.
1) Income Statement: is a summary of the revenue and the expense of a business entity for the specific
period of time such as a month or a year. Income statement has two major parts; the heading and the
body.
 In the heading, the name of the business, name of the statement and the date of preparation are
identified.
 In the body part, the revenue and the expense of the business organization are listed.
There are four steps that we should follow to prepare income statement. These are:-
Step 1. Write the heading of the statement- Write the name of the business and the statement and
date of preparation.
Step 2. Prepare the revenue section- Write the word revenue at the left side and write the income
statement account sales in the second line by moderately indenting.
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Step 3. Prepare the expense section-Like the revenue, the second part of the income statement
i.e. expense is written at the left side below expenses account moderately indented from the left.
The word total expense is written on the line beneath the last expense account title.
Step 4. Calculate the net income /net loss- Net income or loss is calculated by subtracting total
expense from the total revenue. The word net income is written at the left margin.
To make clear the preparation of net income, let us assume that SENFU DIGITAL PHOTO has
recorded the following transactions during January 2010.
 Registered a cash revenue of --------------------50,000 birr
 Paid salary --------------------------------------------6,000 birr
 Paid for utilities ------------------------------------ 3000 birr
 Purchased supplies for cash ----------------------6,000 birr
 Paid for advertising ---------------------------------8,000 birr
 Purchase supplies for credits ------------------- 5, 000 birr
Applying the aforementioned transaction, let us now prepare income statement of SENFU DIGITAL
PHOTO as follows.
SENFU DIGITAL PHOTO PLC

Income statement
For the month ended January 31 2010
Revenue
sales 50000
Operating expenses
Advertising expense 8000
Salary expense 6000
Utilities expense 3000
Total operating expense 17000
Income before tax 33000
Tax 30% 9900
Net income 23100
2) Capital Statements /Statements of Owners’ Equity: It is one of the financial statements that
shows the increase or decrease of the owner’s equity. The owner’s equity might be changed due
to additional investment, income or loss and withdrawal by the owner.
 Some information from income statement helps to prepare capital statement. Therefore,
capital statements should be prepared next to income statements. Capital statement like
income statement has heading and body. In the heading, the name of the statement, the name
of the business organization and the date on which it is prepared is specified.
 For the sake of clarity, let us prepare the capital statement of SENFU PLC, taking the initial
capital of birr 20000 and the above prepared income statement.
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Capital statement
For the month ended January 31 2010
_____________
Capital January, 1 2010 80000
Add: Net income 23100*
Capital January 31, 2010 103100
__
* taken from the above income statement
The information on the capital statement helps to prepare the balance sheet. From the example, the
capital of SENFU DIGITAL PHOTO PLC has increased. If the business was not profitable, its
capital would have been decreased.
3) Balance Sheet: is a list of assets, liabilities and capital of a business entity as of a specific date
usually at the close of the last day of a month. A beginning balance sheet can be prepared during
the establishment of the business organization. Thereafter, it can be prepared at different time
when required, while preparing balance sheet it is customary to begin the asset section with cash
which is followed by receivables, supplies, and other assets such as prepaid expenses that will be
converted into cash or consumed in the near future. The assets of a relatively permanent nature
such as equipment, buildings and land follow in that order.
Steps To Prepare Balance Sheets
Step 1- Write the Heading- Like all other financial statements, write at the center the heading
specifying the name of the business organization, the title of the statement and date it is prepared
Step 2- Prepare the Asset Section- Identify the nature of the assets as current assets those that will be
expected to be changed into cash, or consumed usually within a year and fixed assets: that are of
relatively fixed or permanent in nature. Write the heading current assets at the left hand side and
below it list down current assets and below the last current asset write total assets. The same applies
for fixed assets. After writing all current and fixed assets write total assets indenting moderately.
Step 3- Prepare the Liability Section- Assess the nature of liability accounts and identify current and
long –term liabilities. Current liabilities are liabilities that will be due within a short time (usually one
year) and that are to be paid off out of current assets. Long – term liabilities are those, which will be
due comparatively after a long time (usually more than one year). After identification of liabilities is
finalized, write below total asset at the center of the line the word “Liability and Capital”, at the left
hand side write current liability and below it list all current liabilities. Below the last liability account
write the word total current liability. The same procedure holds true for long – term liabilities.
Step 4- Prepare the Capital Section- Capital is the word applied to the owner’s equity in the
business. It is the residual claim against the assets of the business after the total liabilities are
reduced. If the business is profitable, it increase the capital of the owner, if there is a loss, it will
decrease the capital.
*Following the aforementioned steps, let us prepare the Balance sheet of XY Trading P.L.C
Balance Sheet
For the Month Ended January 31, 2010
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Asset
Current assets
Cash 47000.00
Supplies 11000.00
Total current asset 58000.00
Plant Assets
Automobile 250000.00
Building 150000.00
Office Equipment 20000.00
Total fixed assets 420000.00
Total assets 478000.00
Liabilities
Current liabilities
Account payable 5,000.00
Tax payable 9,900.00
Long term liabilities
Dashen bank 200,000.00
Moenco 150,000.00
A.A trading 10,000.00
Total liabilities 374900.00
XY Trading capital 103100.00*
Total liabilities and capital 478000.00
* Taken from the above capital statement
CHAPTER SEVEN
MANAGING GROWTH AND TRANSACTION
7.1. Preparing For the New Venture Launch: Early Management Decisions
7.1.1 Record Keeping: It is necessary to have good records for effective control and for tax purposes.
The entrepreneur should be comfortable and able to understand what is going on in the business. The
goals of a good record keeping system are to identify key incoming and outgoing revenues that can be
effectively controlled.
A. Sales (Incoming Revenue): It is useful to have knowledge about sales by customer both in
terms of units and dollars. The entrepreneur of a retail store might try to identify the profile
of the type of customer that patronizes the store. Retailers also like to have information on
specific customers. Credit card purchases can be tracked for information on the type and
amount of merchandise purchased. In a service venture, records would need to be
maintained on when a customer paid their monthly fee. As cash flow problems are the most
significant cause of new venture failure, good payment records are necessary.
B. Expenses/Costs (Outgoing Revenue): Records of expenses are easily maintained through
the checking account. It is good business practice for the entrepreneur to use checks as payment for
all expenses in order to maintain records for tax purposes. Canceled checks provide proof of payment.
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In the early stage, it may be desirable to make all payments on time to establish credibility with
suppliers. It may be necessary to maintain records on all assets owned by the business.
C. Other Records: The entrepreneur should maintain information about employees, records on
all assets owned may be needed. With a good record keeping system it is easy to maintain
controls over cash disbursements, inventory, and assets.
7.1.2 Recruiting and Hiring New Employees: The entrepreneur will generally need to establish
procedures and criteria for hiring new employees using internal and external vacancies. For
senior management the most effective strategy is networking with friends and business associates.
Personnel agencies may also be considered if there are no other effective options. Once resumes have been
collected some basis of determining each candidate’s strengths should be made.
Some criteria must be used in the resume evaluation. Factors such as education, prior experience,
entrepreneurial activities, and interests can be used to assess candidates. From the initial screening
of resumes, a few candidates can be invited for an interview. Most firms use an interview form
with critical factors listed for evaluating the interview candidates. The goal should be to hire not
only the best candidate but also someone who will perform well in the entrepreneurial environment and
provide a long-term solution to the available position. Acquiring senior talents can be critical to the
venture’s ability to successfully meet its growth goals.
Recruiting for Upper Management in an Entrepreneurial Firm: Many executives choose to become
part of the entrepreneurial process rather than continue working in structured big business. The
entrepreneur should use all his or her contacts and recognize that every potential candidate is different. If
the entrepreneur has no expertise in financial analysis, marketing research, or promotion, he or she
should hire outside experts.
7.1.3 Motivating and Leading the Team
The entrepreneur will usually be a role model for any other employees. It is important that the
founder assume the role of leader to the management team and employees. Communication with
managers and employees is one of the most important leadership qualities. Good work ethic will go a
long way toward achieving financial and emotional success. Leadership is influencing and
inspiring others in the organization to strive to meet the mission of the venture.
Some behaviors that can exhibit the leadership qualities necessary for the new venture:
 Set an example with an ethical set of values for other managers and employees
 Show respect and concern for the personal well- being of employees
 Don’t try to do everything yourself
 Recognize the diversity of employees and how they should be treated
 Encourage and praise others in the organization when deserved
 Provide incentives and awards for quality work effort and new ideas
 Recognize the importance of employees having fun at their jobs
 Be aware of the need for future strategic planning
7.1.4 Financial Control: The entrepreneur will need some knowledge of how to provide
appropriate controls to ensure that projections and goals are met. Cash flow statement, income
statement, and balance sheet are key areas needing careful management and control.
A. Managing Cash Flow: An up-to-date assessment of cash position, such as a monthly cash
flow statement, is needed. The cash flow statement may show the actual amounts next to the
budgeted amounts. It is useful for adjusting the pro-forma and indicating potential cash
flow problems. A cash flow crisis can occur suddenly and unexpectedly. Cash flow analysis
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can also involve sensitivity analysis: for each monthly expected cash flow the entrepreneur
can use a +/-5% that would provide a pessimistic and optimistic cash estimate. For the very
new venture it may be necessary to prepare a daily cash sheet. Comparison of budgeted or
expected cash flows with actual cash flows can provide an assessment of potential cash
needs and indicate possible problems in the management of assets and control of costs.
B. Managing Assets: In addition to cash management, other items such as accounts receivable
and inventory also need to be controlled. Management of credit may include acceptance of
credit cards or use of internal credit. Using outside credit cards shifts the credit risk to the
outside company but increases costs. Using internal credit makes the firm responsible for
collecting delinquent payments, and payment delays can create negative cash flows. The
entrepreneur will need to be sensitive to major changes in accounts receivable and should
always compare actual with budgeted amounts. Inventory is an expensive asset, and
requires careful balance. If inventory is low and the firm cannot meet demand, sales will be
lost. Carrying excess inventory can be costly. An inventory control system allows the
company to monitor key figures, such as inventory turnover and percentage of customer
complaints. The entrepreneur will need to determine the value of inventory and determine
how it affects the cost of goods sold. Most firms use a FIFO (first-in, first-out) system since it
reflects truer inventory and cost values. There are good arguments for the use of LIFO (last-
in, first-out) in times of inflation. The decision to convert from a FIFO to a LIFO system is
complex and requires careful evaluation. It is necessary to decide if inventory is to be
grouped into categories or to cost each item individually. All inventories must be costed by
searching through historical records. An average inventory cost must be calculated.
Conversion to LIFO can typically be beneficial if the following conditions exist: Rising labor,
materials, and other production costs are anticipated. The business and inventory are
growing. The business has some computer-assisted inventory control method capability.
The business is profitable. The entrepreneur must keep careful records of inventory using
perpetual inventory systems followed by a periodic physical count. Fixed assets have
certain costs related to them, such as depreciation. If the entrepreneur cannot afford to buy
equipment or fixed assets, leasing could be an alternative. Leasing may be a good
alternative to buying depending on the terms of the lease and type of asset. Leases for
automobiles may be more expensive than a purchase. However, lease payments represent
an expense and can be used as a tax deduction. Leases are also valuable for equipment that
becomes obsolete quickly. The entrepreneur should consider all costs associated with a
lease-or-buy decision as well as the impact on cash flows.
C. Long-Term Vs. Short-Term Debt: The entrepreneur may need to borrow funds to finance
assets and meet cash needs. Fixed assets are usually financed by long-term debt borrowed
from a bank. Alternatives include borrowing from family members, having partners
contribute more funds or selling corporate stock. Many of these options require the
entrepreneur to give up some equity.
D. Managing Costs and Profits: An interim income statement helps to compare the actual with
the budgeted amount for that period. The most effective use of the interim income statement
is to establish cost standards and compare the actual with the budgeted amount for that
time period. Costs are budgeted based on percentages of net sales. These percentages can be
compared with actual percentages to see where tighter cost controls may be necessary. This lets the
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entrepreneur manage and control costs before it is too late. In later years, it is also helpful to look back
on the first year of operation and make comparisons month-to-month. When expenses or costs are
much higher than budgeted, the entrepreneur may need to determine the exact cause. Comparison of
actual and budgeted expenses can be misleading for ventures with multiple products or services. For
financial reporting purposes, the income statement summarizes expenses across all products and
services. This does not indicate the marketing cost for each product nor should the most profitable
product. Allocating expenses over product lines be done as effectively as possible to avoid arbitrary
allocation of costs.
E. Taxes: The entrepreneur will be required to withhold federal and state taxes for employees and make
deposits to the appropriate agency. Federal taxes, state taxes, social security, & Medicare are withheld
from employees’ salaries and are deposited later. The entrepreneur should be careful not to use these
funds. The new venture may also be required to pay state and federal unemployment taxes. Federal &
state governments will require the entrepreneur to file end-of-the-year returns of the business.
F. Ratio Analysis: Calculations of financial ratios can also be valuable as an analytical and
control mechanism. These ratios serve as a measure of the financial strengths and
weaknesses of the venture, but should be used with caution.
There are industry rules of thumb that the entrepreneur can use to interpret the financial data.
 Liquidity Ratios: Current ratio is commonly used to measure the short-term solvency of the
venture or its ability to meet its short-term debts. The current liabilities must be covered
from cash or its equivalent.
The formula is: Current ratio = current assets/current liabilities
While a ratio of 2:1 is generally considered favorable the entrepreneur should also compare this
ratio with industry standards. Acid test ratio is a more rigorous test of the short-term liquidity of
the venture. It eliminates inventory, which is the least liquid current asset.
The formula is: Acid test ratio = current assets – inventory/current liabilities
Usually a 1:1 ratio would be considered favorable.
 Activity Ratios: Average collection period indicates the average number of days it takes to
convert accounts receivable into cash. This ratio helps gauge the liquidity of accounts
receivable or the ability of the venture to collect from its customers.
The formula:
Average collection period = accounts receivable/ average daily sales
This result needs to be compared to industry standards.
Inventory turnover measures the efficiency of the venture in managing and selling its inventory.
A high turnover is a favorable sign indicating the venture is able to sell its inventory quickly.
The formula:
Inventory turnover = cost of goods sold/inventory
 Leverage Ratios: Debt ratio helps the entrepreneur assess the firm’s ability to meet all its
obligations. It is also a measure of risk because debt also consists of a fixed commitment.
The calculation:
Debt ratio = total liabilities/ total assets
Debt to equity ratio assesses the firm’s capital structure. It provides a measure of risk by
considering the funds invested by creditors and investors. The higher the percentage of debt,
the greater the degree of risk to any of the creditors.
The calculation:
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Debt to equity ratio = total liabilities/ stockholder’s equity
 Profitability Ratios: Net profit margin represents the venture’s ability to translate sales into
profits. You can also use gross profit as another measure of profitability. It is important to know
what is reasonable in the particular industry as well as to measure these ratios over time.
The calculation:
Net profit margin = net profit/net sales
Return on investment measures the ability of the venture to manage its total investment in assets.
By substituting stockholders’ equity for assets, you can also calculate a return on equity.
The calculation:
Return on investment = net profit/total assets
The result of this calculation will also need to be compared to industry data. As the firm grows
it will be important to use these ratios in conjunction with all other financial statements to
provide an understanding of how the firm is performing.
7.2 Rapid Growth and Management Controls
Rapid growth may result in management problems. Before rapid growth occurs, the new venture is
usually operating with a small staff and limited budget. Rapid growth may also dilute the leadership
abilities of the entrepreneur. The entrepreneur’s unwillingness to delegate responsibility can lead to
delays in decision making. The entrepreneur can avoid these problems through preparation and
sensitivity. It may be necessary to limit the venture’s growth if the future financial well being of the
venture means a more controlled growth rate. The limits to the growth of any venture will depend on the
availability of a market, capital, and management talent. Too rapid growth can stretch these limits and
lead to serious financial problems.
 Creating Awareness of the New Venture: In the early stages, the entrepreneur should focus
on developing awareness of the products offered through: Publicity, Internet Advertising,
Trade Shows, Selecting an Advertising Agency. In the early stages, the entrepreneur should
focus on developing awareness of the products offered.
a. Publicity: It is free advertising provided by a media outlet. Many local media encourage
entrepreneurs to participate in their programs. The entrepreneur can increase the
opportunity for getting exposure by preparing a news release and sending it to as many
media sources as possible. For radio or TV, the entrepreneur should identify programs that
may encourage local entrepreneurs to participate. Free publicity can only introduce the
company. Advertising can be focused on specific customers.
b. Internet Advertising: The Internet is an excellent medium to create awareness and to
effectively support early launch strategies. Creating a website is the most important first
stage. The website should indicate: Background of the company. Its products, officers,
address, telephone and fax numbers. Contact names for potential sales. Direct sales from the
website may also be available. Significant advertising is needed to create interest and
awareness of the existence of the website. It is important to change the content of the
website as necessary. The entrepreneur may also consider using a banner ad, small
rectangular ads similar to billboard ads that appear on browser websites.
c. Trade Shows: Every industry has a trade or professional association that sponsors annual
trade shows. Although creating a booth can be very expensive, trade shows are where
hundreds of thousands of people observe or identify trends in their industry. There is strong
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evidence to indicate that the cost per sale from a trade show is significantly less than the cost
per sale from a personal sales call.
d. Selecting Advertising Agency: Advertising agencies can provide many promotional
services. The advertising agency is an independent business organization composed of
creative and business people who develop, prepare, and place advertising in media for its
customers. The agency can provide assistance in marketing research. It is important to
determine whether the agency can fulfill all of the needs of the new venture. A checklist of
items that the entrepreneur may consider in evaluating an agency is useful. The agency
should support the marketing program and assist the entrepreneur in getting the product
effectively launched.
7.3. Managing Early Growth 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.
Organizational Changes during growth: Many entrepreneurs find that as the venture reaches the
growth stage they need to change the 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.
 Be 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 to 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
It needs different skills and strategies to run the business activities.
Record keeping and financial control: With growing venture it is sometime necessary to
enlist the support and services of an accountant or consultant to support record keeping and
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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.
Inventory control: Efficient electronic data interchange (EDI) among producers, wholesalers, and
retailers can enable these firms to communicate with one another. Linking the needs of a retailer to
the wholesaler and producers allows for the fast order entry and
response. These systems also allow the firm to track shipments
internationally. Transportation mode selection can also be important in inventory
management.
Human resources: Generally, the new venture does not have the luxury of a 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.
Marketing skills: 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 customers’ needs
and competitive strategies.
Strategic planning skills: 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.
In strategic planning, three to five year plan that includes all functions of an organization
outline should be prepared including:
 Business mission
 Situation analysis
 Internal environmental analysis
 External environmental analysis
 Goal formulation
 Strategy formulation
 Formulation of programs to meet goals
 Implementation, feedback and control
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Time management: Time is the entrepreneur’s most precious yet limited resource. It is
unique quantity: an entrepreneur cannot store it, rent it, hire it, or by it. Entrepreneurs can always
make better use of their time, and the more they strive to do so, the more it will enrich their
venture as well as their personal lives. Process of improving individuals’ productivity is possible
through use of time in more efficient way.
Negotiation: Negotiation is the process by which parties attempt to resolve a conflict
by agreement. There are two type of negotiation: Distributive bargaining (competitive
negotiation) and Integrative bargaining (cooperative negotiation)
 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. Rational decision model is method of resolving conflict through
objectives, analysis of alternatives and actions.
 Competitive negotiation (Distributive bargaining) - does not allow the other party to
achieve his or her goals. There is a fixed pie to be divided which means that the larger the
opponent’s share, the smaller the entrepreneur. In this competitive adversarial bargaining
arena, each party tries to discover the others goals, values and perceptions. The methods
use to collect information are indirect methods and direct methods.
 Indirect methods- include discussing the person with anyone who has had previous
contact, such as your own employees, the party employees, or outside individuals.
 Direct methods-Whenever possible, he or she should meet informally with
representatives of the other company, probing them to determine their levels of
preparation. Frequently, insight can be obtained from response to relaxed, almost innocent
questions.
7.4 New Venture Expansion Strategies And Issues

A. Joint Ventures: With the increase in business risks, hyper-competition, and failures, joint
ventures have increased. A joint venture is a separate entity involving two or more
participants as partners. They involve a wide range of partners, including universities,
businesses, and the public sector.
Types of Joint Ventures
The most common type is that between two or more private-sector companies. Some joint
ventures are formed to do cooperative research. Another type of joint research for research
development is the not-for profit research organization. Industry-university agreements for the
purpose of doing research are also increasing. Two problems have kept this type venture from
increasing even faster. A profit corporation wants to obtain tangible results-such as a patent-
from its research investment and universities want to share in the returns. The corporation
usually wants to retain all proprietary data while university researchers want to make the
knowledge available. Joint ventures between universities and corporations take many forms,
depending on the parties involved and the subject of the research. International joint ventures
are increasing rapidly due to their relative advantages. Both companies can share in the
earnings and growth. The joint venture can have a low cash requirement. Also, the joint venture
provides ready access to new international markets.
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Such a venture causes less drain on a company’s managerial and financial resources than
wholly owned subsidiary. There are drawbacks in establishing international joint ventures. The
business objectives of the partners can be quite different. Cultural differences can create
managerial difficulties. Government policies sometimes can have a negative impact on the
venture. The benefits usually outweigh the drawbacks.
Factors in Joint Venture Success
One critical factor for success is the accurate assessment of the parties involved and how best to
manage the new entity. A second factor involves the symmetry between the partners. Another
factor is that the expectations about the results of the joint venture must be reasonable. The final
factor is the timing. A joint venture should be considered as one of many options for
supplementing the resources of the firm.
B. Acquisitions: is the purchase of a company or a part of it in such a way that the acquired
company is completely absorbed and no longer exists. Acquisitions can provide an excellent
way to grow a business and enter new markets. A key issue is agreeing on a price. Often the
structure of the deal can be more important to the parties than the actual price. A prime
concern is to ensure that the acquisition fits into the overall direction of the strategic plan.
Advantages of an Acquisition
 Established business
 The acquired firm has an established image and track record
 The entrepreneur would only need to continue the existing strategy to be successful
 Location is already established
 Established marketing structure
 An important factor that affects value of a firm is its existing marketing channel & sales structure
 The entrepreneur can concentrate on expanding to new target markets
 The total cost of acquiring a business could be lower than trying to buy a franchise
 Existing employees
 The employees of an existing business can be important assets
 They know the business and can help the business continue
 Employees already have established relationships with customers, suppliers, and channel members
 More opportunity to be creative
 More time can be spent assessing opportunities to expand or strengthen the business.
Disadvantages of an Acquisition
 Marginal success record- most ventures for sale have an erratic or even unprofitable record.
It is important to review the records and meet important constituents to assess the future
potential.
 Overconfidence in ability-even though the entrepreneur brings new ideas, the venture may
never be successful for reasons not possible to resolve.
 Key employee loss-often when a business changes hands key employees also leave. In a
service business, it is difficult to separate the actual service from the person who performs it.
Incentives can sometimes be used to assure that key employees will remain with the
business.
 Overvalued-if the entrepreneur has to pay too much for a business; the return on investment
will not be acceptable. The entrepreneur will need to establish a reasonable payback to
justify the investment.

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C. Mergers: is a transaction involving two or more companies in which only one company
survives. Acquisitions are so similar to mergers, that the terms are often used
interchangeably. A key concern in any merger or acquisition is the legality of the purchase.
The Department of Justice frequently issues guidelines for horizontal, vertical, and
conglomerate mergers. Merger motivations range from survival to protection to
diversification to growth. A merger requires sound planning by the entrepreneur. Merger
objectives must be spelled out with the resulting gains for the owners of both companies
delineated.
The entrepreneur must evaluate the other company’s management and resources to ensure that the
weaknesses of one do not compound those of the other. The entrepreneur should establish a climate of
mutual trust. The same methods for valuing the entrepreneur’s company can be used to determine
the value of a merger candidate. The process involves looking at the synergistic product/market
position, the new market position, and undervalued financial strength. A common procedure is to
estimate the present value of discounted cash flows and the expected after-tax earnings attributable to
the merger.
D. Hostile takeover: One form of acquisition, hostile takeover has received increasing attention
recently. Three items make hostile takeover possible.
 A low stock evaluation coupled with a strong performance
 A low debt/equity ratio, allowing the entrepreneur to use the assets of the company to fund the
takeover.
 The percentage of institutional investors holding the company stock.
Since the objective of institutional investors is to make a profit they will frequently vote in favor of
hostile takeover due to the anticipated gain in stock price and firm evaluation.
E. Leverage buyouts (LBO): It occurs because an entrepreneur purchasing the venture believes
that he/she could run the company more efficiently than the current owner. It occurs when
an entrepreneur/employee/group used borrowed funds to purchase an existing venture for cash. The
current owner is frequently an entrepreneur or owner who wants to retire. The owner may also be
large corporation desiring to divest itself in a subsidiary that is too small or that does not fit its long
term strategic plan.
F. Franchising: Franchising also represents an opportunity for entrepreneurs to expand the business.
In the context of franchising, the entrepreneur will be trained and supported in marketing by the
franchisor and will be using a name that has an established image. Franchising is also an alternative
means by which an entrepreneur may expand his/her businesses by having others pay for the use of
the names, process, products, and service and so on.

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Chapter one

1 Entrepreneurship & Small Business Management

2 Entrepreneurship & Small Business Management

A). Need for Achievement:

3 Entrepreneurship & Small Business Management

F). Effective time management:

G). An Ability of leadership:

H). An ability of decision making:

I). Desire for Independency:

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5 Entrepreneurship & Small Business Management

Intrapreneurship: (Entrepreneurship within an existing business structure).

6 Entrepreneurship & Small Business Management

1.5. Classification of Entrepreneurs

1.5.1: Entrepreneur according to the type of business

7 Entrepreneurship & Small Business Management

1.5.2: Entrepreneurs based on technology

1.5.4: Entrepreneurs based on stage of development:

8 Entrepreneurship & Small Business Management

9 Entrepreneurship & Small Business Management

1.7. Benefits and Limitations of Entrepreneurship

1.7.1 Role of entrepreneurship in economic development

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1.7.2. Benefits of Entrepreneurship for individuals

12 Entrepreneurship & Small Business Management

B. Career Risk: a question frequently raised by would-be entrepreneurs is whether they

13 Entrepreneurship & Small Business Management

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1.8 Entrepreneurship, creativity, and innovation

Innovative activity is a hallmark of entrepreneurship but not necessarily of the owner-

Creativity and innovation are considered to be inseparable from entrepreneurship, which is in

15 Entrepreneurship & Small Business Management

Small Business Chapte

16 Entrepreneurship & Small Business Management

2.1 Definition of Small Business

The approaches writers use in defining small business include:

17 Entrepreneurship & Small Business Management

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 Up to 19 workers – micro or very small enterprises

2.1.1 Characteristics of Small Scale Industries

21 Entrepreneurship & Small Business Management

22 Entrepreneurship & Small Business Management

2.3. Risks and Causes of Failure Associated with Small Business

 Mismanagement: humble entrepreneurs steeped in experience can still go under simply

23 Entrepreneurship & Small Business Management

 Poor Business Philosophy: An unfortunate aspect of many business failures is that

 Lack of Planning: most entrepreneurs frequently underestimate the importance of

However, most Authors categorize small business as follows:

24 Entrepreneurship & Small Business Management

 Franchises: It is a form of a business created by contract. An individual receives specific

2.5. Merits and Demerits of Small Business

4) Community Service: Sometimes an individual will realize that a particular good or

25 Entrepreneurship & Small Business Management

2.7 Setting Small Businesses

1.7.2 What project an entrepreneur should have?

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Definition of Industry and Small Scale Industry

An industry is an institution where raw materials is purchased from suppliers, converted in to a

Small scale industries can be defined as industrial unites engaged in

29 Entrepreneurship & Small Business Management