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CHAPTER ONE ENTREPRENEURSHIP AND FREE BUSINESS ENTERPRISE
● Unit Objectives ● Introduction ● Contents 1.1 Definition of Entrepreneur, Entrepreneurship and Enterprise 1.2. Difference between entrepreneur and entrepreneurship 1.3. Characteristics of an entrepreneur 1.4. Entrepreneur vs. manager relationship 1.5. Entrepreneurship VS Intrapreneurship 1.6. Levels of Entrepreneurial Development 1.7. Role of entrepreneurship in economic development 1.8. Creativity, Innovation and Entrepreneurship 1.9. The Desire to take up Entrepreneurship as a Career
Dear learner, this chapter is meant to acquaint you with the basic concepts of entrepreneurship. Thus, after going through this lesson you should be able to: Define and know the Meaning of the terms Entrepreneur, Entrepreneurship and Enterprise Discuss the difference among entrepreneur, entrepreneurship and enterprise List the characteristics of entrepreneur Explain the different between entrepreneurship and intrapreneurship Differentiate the roles of an Entrepreneur and a Manager List the levels of Entrepreneurial Development Explain the Role of Entrepreneurship in Economic Development Explain the relationship between Creativity, Innovation and Entrepreneurship 1
Develop the desire to take up Entrepreneurship as a Career Differentiate between Wage employment, Self-employment and Entrepreneurship
Do you know that there are a number of unemployed youth in the country and by the time you graduate, this number may increase substantially? Do you want to be part of that group which keeps knocking from pillar to post, checking with employment exchanges, relatives, friends, and neighbors and still not able to get a job to their liking and then settle for a second or third rate job? These all challenges can be solved by the active involvement of entrepreneurship in the economic development of the nation. Entrepreneurship is a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. It requires essential ingredients of an entrepreneurs such as the willingness to take calculated risks; ability to formulate an effective venture team; the creative skill to marshal needed resources; fundamental skills of building a solid business plan; vision to recognize opportunity where others see chaos. Not all entrepreneurs are created equal degrees. Different degrees/ levels of entrepreneurial intensity and drive depend upon how much independence one exhibits, the level of leadership and innovation they demonstrate, how much responsibility they shoulder, and how creative they become in envisioning and executing their business plans.
Entrepreneurship is basically concerned with creating wealth through production of goods and services. This results in a process of upward change whereby the real per capita income of a country rises overtime or in other words economic development takes place. Thus entrepreneurial development is the key to economic development. In fact it is one of the most critical inputs in the economic development of a region. It speeds up the process of activating factors of production leading to a higher rate of economic growth, dispersal of economic activities and development of backward regions.
Entrepreneurship is characterized by the utilization of a given opportunity through creativity and innovation. Creativity is the ability to develop new ideas and to discover new ways of looking
Entrepreneurship and Enterprise
Dear learner. According to Peter Drucker Entrepreneurship is defined as „a systematic innovation. an entrepreneur is an economic agent who unites all means of productionland of one. He shifts economic resources out of an area of lower productivity into an area of higher productivity and greater yield. to set up new products.1. Entrepreneurship is a creative activity. and enterprise? What is the difference between entrepreneurship and intrapreneurship? The term entrepreneur stems from the French word „entrependre‟ meaning one who undertakes or one who is a „go-between‟.‟
According to Schumpeter entrepreneurs are innovators who use a process of shattering the status quo of the existing products and services. the labor of another and the capital of yet another and thus produces a product. According to Richard Cantillon. which consists in the purposeful and organized search for changes. and it is the systematic analysis of the opportunities such changes might offer for economic and social innovation. He is energetic and a moderate risk taker.
Entrepreneurship can be described as a process of action an entrepreneur undertakes to establish his/ her enterprise.B. “an entrepreneur is a person who pays a certain price for a product to resell it at an uncertain price. new services. entrepreneurship. wages to labor and interest on capital and what remains is his profit.at problems and opportunities. It is the ability to create and build something from practically nothing. thereby making decisions about obtaining and using the resources while consequently admitting the risk of enterprise”. According to J. what do you understand by the words entrepreneur. Innovation is the ability to apply creative solutions to those problems and opportunities in order to enhance people’s lives or to enrich society.
. By selling the product in the market he pays rent of land. Say. David McClleland: An entrepreneur is a person with a high need for achievement.
1. Definition of Entrepreneur.
It requires essential ingredients that include: the willingness to take calculated risk. It is the ability to create and build something from practically nothing. Entrepreneurship is an abstraction whereas entrepreneurs are tangible people. the fundamental skills of building a solid business plan. An entrepreneur is the catalyst who brings about change. Entrepreneurship is the most effective way of bridging the gap between knowledge and the market place by creating new enterprises.
An enterprise is the business organization that is formed and which provides goods and services. and the vision to recognize opportunity where others see chaos. entrepreneurship is a dynamic process of vision. and were creative enough to become a big success. Essential Characteristics of an Entrepreneur In the past. change. In an integrate. the creative skill to marshal needed resources. and confusion. The process involved in creating and starting an enterprise is called entrepreneurship. entrepreneurship and enterprise
The term entrepreneur is used to describe men and women who establish and manage their own business. It comprises of numerous activities involved in conception.
1. psychological and other factors. take calculated risks and derive benefits by setting up a venture. Entrepreneurship is the outcome of complex socioeconomic. contradiction. The entrepreneur is the key individual central to entrepreneurship who makes things happen. 1. contradiction and confusion. The relationship among an entrepreneur. exports and overall economic development. It is a knack of sensing opportunity where others see chaos. worked hard.3. such as Thomas Edison or Henry Ford. creation and running an enterprise. An 4
. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions.2. the ability to formulate an effective venture team. and creation. who had a big idea. creates jobs. contributes to national income. The average worker depended on the entrepreneurial hero to give them opportunities. Entrepreneurship is the attitude of mind to seek opportunities. entrepreneurship is the act.Entrepreneurship is a creative activity. The entrepreneur is the actor. Entrepreneurship is a process and an entrepreneur is a person. an entrepreneur was seen almost as a hero.
but that does not mean we are not capable of it. Rather than controlling situations in an attempt to possess them. In that way the clever entrepreneur uses individual accountability in the ultimate pursuit of profitability.
Confidence is a hallmark of the entrepreneur. he or she will take advantage of all available tools and resources. teamwork. and oversee production. marketing. the entrepreneur teaches other people how to take charge. and overall success. and communication is the key to successful relationships with people. to act like an owner. And to support communication. Not all of us are born with confidence. Many confident women and men gain their sense of self esteem and faith in their ability to greet challenges by experience and formal education. leaving things in better shape than they were before. spoken. Human resources –whether in the form of clients.entrepreneur frequently has to wear many hats. and liaison with officials. or non-verbal messages conveyed through body language. whether those are written. Able to Communicate Entrepreneurs recognize that the most important part of any business is the human element. plan. He has to perceive opportunity. the entrepreneur sees it as his or her own and takes pride in finding a solution. business literature shows several characteristics essential for entrepreneurs that distinguish ordinary entrepreneurs from the extraordinary ones. The following are characteristics that are found within all successful entrepreneurs and without which most people will fall short of what it takes to succeed in an entrepreneurial enterprise. Feel a Sense of Ownership Taking responsibility for getting things done – and doing them with care and attention – meaning. and improving upon situations rather than leaving them unattended. Most importantly he/she has to innovate and bear risk. In general. organize resources.
. or strategic partners – are what make or break a business. employees. The entrepreneur works to sharpen communication skills. Rather than viewing a problem as someone else‟s.
They entertain the views and perspectives of others that may be unlike their own. or blindness to one‟s own faults. ego. and impart experience to others the entrepreneur is constantly striving to learn more. Team Player Team players know how to succeed by employing the physics of interpersonal synergy and dynamic relationships. anyone can step in and follow the blueprint to get the desired result. implementing. The same goes for businesses. Because of the passion for education. System-Oriented Like mathematical formulas. much less break. But if a system is created to get the job done. and perfecting systems is one of the most useful and rewarding skills of an entrepreneur. train.
. good systems allow us to reproduce great results every time – with less and less exertion of energy or resources. to be better students of human nature. Entrepreneurs rely upon systems before they rely upon people. shortcomings. true entrepreneurs surround themselves with people who either know more than they do or know things that are different from what they know. for instance.Passionate about Learning Entrepreneurs are often “autodidactic” learners. To teach is to learn. asking questions. and they look for system based solutions before searching for human resource solutions. which mean that much of what they know is learned not in a formal classroom setting. In this way they continue to enrich themselves with knowledge while making a concerted effort to grow that knowledge by sharing it with others who are also front row students of life‟s valuable and unlimited lessons. and by personal reading and research. They also are quick to learn from their own mistakes. One twig can be easily snapped. To lead. or errors in judgment. and successful entrepreneurs leverage teamwork to get the heavy lifting done without breaking stride. and get better educated. but a bundle of those small twigs becomes stronger than the sum of its individual parts and can be impossible to bend. Designing. the job is threatened. If the person gets the job done but falls sick or leaves. instead on their own by seeking out information. which mean they are less prone to keep repeating them due to arrogance.
and that excitement is contagious to their employees. refine the brand. and services. and that tenacity of purpose generates electricity throughout the whole organization. and one reason that is true is because those who are grateful appreciate what they are given. They do their best to make it grow instead of allowing it to dwindle away due to neglect. But women and 7
. Gregarious Because business is all about people. visions. One of the biggest reasons that companies fail is because they lose focus. Optimistic A positive outlook is essential for the entrepreneur. satisfaction. products. or disappointments are relegated to the past so that they cannot continue to haunt the present or obstruct the future. and the pleasure that comes from one‟s accomplishments and contributions. Grateful Being grateful for what we have opens us up to receive more. and narrow the margin of error. Dedicated Entrepreneurs dedicate themselves to the fulfillment of their plans. clarify the objective. clients. And when things go right and business prospers. Target a goal. entrepreneurs tend to be socially outgoing. Past shortcomings. They respect it and nurture it. while it also invests in them a thankfulness that reminds them that riches and wealth are not about “stuff”. No matter what that might mean in terms of rising to meet a challenge or acting above and beyond the call of duty. who learns to see setbacks as bargain priced tuition for the valuable business lessons gained through firsthand experience. failures. They get excited about sharing ideas. and other contacts both within and beyond the business sphere. Entrepreneurs learn to take nothing for granted in this world. but are about fulfillment. and dreams. That gives them the agility and flexibility to adapt to changes and demands. helping to give impetus and momentum for greater accomplishments and increased hopefulness. an entrepreneur brings a single-minded dedication to the task by being committed to a positive outcome and ready and willing to do the needful. Regardless of what the effort might involve. friends. this further fuels the optimism and positive mindset of an entrepreneur. the entrepreneur shows steadfast dedication.
and reward them accordingly. Entrepreneurs know that firsthand. But they prioritize their approach to life so that the fear of failure. frustration. Those who cling to what is familiar to them – even if it means the denial of their dreams – lack the perseverance and ambition that the real entrepreneur exhibits. but they are also skilled at leading others. An entrepreneur starts a venture then a manager takes over to organize and co-ordinate continuous production. and they understand the need to appreciate others. Human resource experts. and business psychologists all agree that those who do jobs they enjoy and are good at have higher rates of success and broader measures of satisfaction. An entrepreneur is being enterprising as long as he starts something new then the routine day-to-day management of the business is passed on to the manager.men who work hard as entrepreneurs also enjoy the unique opportunity to have fun doing something that they love as their primary vocation. Entrepreneurs are not immune to fear. Entrepreneur vs. otherwise things fall apart in their absence and they can never rise to the highest level of entrepreneurial freedom and prosperity.4. True leaders do not become indispensable. boredom. And many people who do take chances and become somewhat successful find the realization of their dreams an overwhelming possibility. from their own experience.
1. They know the importance of teamwork. The main differences between the two are summed up below: 8
. support them. manager
Are all small entrepreneurs managers? Are all small business managers entrepreneurs? The terms entrepreneur and manager are many times used interchangeably yet they are different. so they interrupt their continued success by retreating back into a comfort zone of smallness. career counselors. drudgery. and they tend to be a fun-loving group of people both on and off the job. Not Afraid of Risk or Success Many people could be successful if they only took chances.
Leader by Example
Entrepreneurs not only lead themselves through self-motivation as self-starters who jump into tasks with enthusiasm. and dissatisfaction far outweighs the persistent fear of success.
These literatures reveal the following as behaviors seen in administrative organizations:
• measuring success based on the use of existing resources • focusing on quick results • making decisions slowly • showing little willingness to change after a decision to commit resources is made • using well defined structures with a well defined line of authority and responsibility • Concentrating on risk reduction. he is not actively involved in organizing and operating it. A professional manager whose job is running someone else's business is not an entrepreneur. Although he is assuming the risk of the venture. she is assuming no personal risk for its success or failure.Entrepreneur An entrepreneur is involved with the start-up process An entrepreneur assumes financial. material and psychological risks An entrepreneur is driven by perception of opportunity An entrepreneur initiates change An entrepreneur is his own boss An entrepreneur gets uncertain reward
Manager A manager runs the business over a long period of time A manager does not have to bear risks A manager manages by the resources he currently possesses A manager follows rules & procedures A manager gets fixed rewards and salary
Some business literature tells us that a business owner who hires a professional manager to run his business and then turns his own interests to other things is not an entrepreneur.
. Although she may be organizing and operating the enterprise. These traits are administrative.
international competition. thus allowing an atmosphere of innovation to prosper. It is a new way of thinking. including: a rapidly growing number of new and sophisticated competitors. 5 Intrapreneurship: Developing Entrepreneurship in the Corporation
Intrapreneurship is also known as corporate entrepreneurship or corporate venturing. to exploit a new opportunity and create economic value
Intrapreneur is a person who focuses on innovation and creativity and who transforms a dream or an idea into a profitable venture.
Reasons for rise of Intrapreneurship
This need has arisen in response to a number of pressing problems. and drive. an exodus of some of the best and brightest people who are leaving corporations to become small-business entrepreneurs. passion. An intrapreneur thinks like an entrepreneur seeking out opportunities. the intrapreneur usually fails or leaves to start a new company. The major thrust of intrapreneuring is to develop the entrepreneurial spirit within organisational boundaries. embody the same characteristics as the entrepreneur: conviction.1. the intrapreneur succeeds. and an overall desire to improve efficiency and productivity
. When the organization is not. by operating within the organizational environment.
If the company is supportive. downsizing of major corporations. It indicates visionary employees who think like entrepreneurs. in making companies more productive and profitable. It is the practice of developing a new venture within an existing organization. a sense of distrust in the traditional methods of corporate management. which benefit the corporation. Intrapreneurs. by definition.
Level One: The Self-Employed Mindset The driving force behind the self-employed person is not security but a desire for greater control over his or her life.
Many managers believe that if a business is not working. career. the solution lies in hiring more employees. They want more autonomy. magnified. Another mistaken belief that is common to this mindset is that the route to success is through growth – not profit. identifies five different types or levels of entrepreneurial mindsets. but they figure out how to do it by themselves and for themselves. And they usually begin by creating a situation where they do the same type of work they did while being an employee.6. expect for two big misconceptions that lead to massive problems. a world-renowned business author and founder of his own international franchise with nearly 1. Many
. what do you understand by the different levels/ degrees of entrepreneurial development? What relationship do you think among creativity. but this only aggravates the situation because it fails to address the underlying cause of the difficulty. Relinquishing the control of a boss every day is not their idea of happiness. Once again. and
entrepreneurship? Do you think that entrepreneurship can be a career option?
Brad Sugars. Levels of Entrepreneurial Development
Dear learner. patterns of thinking. growth but overall structural growth of the enterprise itself. innovation. and they believe that they could do their job just as well without an employer– and perhaps without the need for other employees. They want to do things their own way. Growing larger to fix the problems of a small business only generates a much bigger company with problems that are expanded. and belief systems.000 offices worldwide. They throw extra bodies at the problem.
Level Two: The Managerial Perspective Those with a managerial outlook are often in a great position to succeed as entrepreneurs.1. and much more expensive to remedy. and destiny. bigger is not necessarily better unless and until the fundamentals are sound and efficient.
Level Four: The Entrepreneurial Investor With a business that generates profits. even if that means sacrificing the talent or potential of employees. can rise to the next level and become owner/leaders – one step closer to the real definition of an entrepreneur. Investing for maximum returns involves smart leverage of assets. but they never figure out why. By getting the most out of employees. The owner/leader can therefore focus not so much on sales and revenues. While the business continues to run smoothly – and generate more transactions – the owner/leader concentrates on fine tuning it for increased profitability while letting others handle the day-to-day operational details.
Level Three: The Attitude of Owner/Leader The entrepreneur who attains the level of an owner/leader enjoys remarkable benefits by knowing how to step aside and let the business – and those employees working in it – operate as a profit center not reliant upon the owner‟s constant hands-on participation. and the entrepreneurial 12
. They not only manage but also lead. the entrepreneur who has succeeded this far can begin to accept another exciting challenge. managers themselves are able to delegate aspects of their business to others and set higher goals.
A third misstep common to the managerial attitude is that the entrepreneur wants to be the boss. and free time. this leader has passed that torch of responsibility and expertise along to others who now enjoy for themselves a greater level of career achievement. but on net profits. personal freedom. and by doing so has created more wealth.
Rather than being the only person who could get the job done the best. that of managing money so that it works to produce more money. To give orders and be in charge requires no great skill or aptitude. This kind of entrepreneur has created an organization that is more self-sufficient and self-sustaining.managerial entrepreneurs go into bankruptcy thanks to vigorous growth. but to be a leader – one who knows how to inspire and train others to rise to greater heights – is a rare quality. Managers who become leaders succeed because they accept the challenge and responsibility of ensuring that others under their wings also succeed and flourish.
The challenge is to avoid falling back into the role of running a business as an administrator or manager. filling in more details each day. in other words.investor will often leverage the success of the first business to create a second or third company based on the same model or system. The goal. and the rewards – both financial and personal – are abundant. Rather than dealing on the level of isolated actions and reactionary tactics.
. So rather than remaining at the control of these companies the investor will buy them. ensure that they have valuable equity or attractive allure and potential. and economic cycles. and to meet this problem with a viable solution. of course. services. and then sell them to other entrepreneurs or would-be entrepreneurs. Visualization – Picture the ideal world as a reality and begin to clarify this vision on a daily basis. the entrepreneur will typically appoint someone else to take the reins of the company as the president or chief executive officer(CEO). the investor can get into the career of not just selling basic products and services. This all becomes possible because the entrepreneur has not just created a business but has also designed excellent systems for keeping it going. is still to turn a profit. Then the investor becomes more of a director or silent partner who shares in the profits while enjoying the relief of not having to share the routine responsibilities of running the business from the inside. all-encompassing dreams for creating the ideal world. By franchising the original venture or buying other healthy businesses. the entrepreneurial investor has risen to the level of broad and comprehensive strategies that work across all sorts of products.
Level Five: The True Entrepreneur Having learned new things every step of the way and evolved through various stages of entrepreneurial accomplishment and insight. but of selling entire businesses. it is possible to reach the ultimate goal and realize one‟s dreams in a really life-changing way. Working smart replaces working hard. The true entrepreneur experiences a paradigm shift that involves a four-step process of changed thinking: Idealization – Imagine gigantic.
7. The following are some of the roles of entrepreneurship in economic development. Talk about it to others as if it were real and continue to have a personal dialog with the ideal to make it come true. The idea becomes a real and tangible fact that materializes in the world and influences others while opening new doors to fresh opportunities and the birth of more dreams.
1. Streamline of the private sector and encourage the inclusion of new technology that is less labor dependent. Increase in the national outputs which in turn lead to greater and stronger economic growth. things begin to fall into place and happen in a natural and automatic way. Role of entrepreneurship in economic development
The industrial health of a society depends on the level of entrepreneurship existing in it. Increasing the per capita output and income of the people of the country. Further growth and increased output arises. Entrepreneurs historically have altered the direction of national economies. thus to enable more wealth to be divided among the various participants (stakeholders). A country might remain backward not because of lack of natural resources or dearth of capital [as it is many times believed] but because of lack of entrepreneurial talents or its inability to tap the entrepreneurial talents existing in that society. Laying the seed bed for creating new entrepreneurs in various new technologies 14
. industries or markets. Improvisation and modification on existing product to better suit market and customers‟ needs. Creation of self employment and to cut back the dependency of potential employment of new workers in government sectors. Generation of innovation that leads to the creation of new products and services.Verbalization – Begin to put words to the dream and talk of it as if it was already happening. Materialization – Because the effort and intention of designing and believing in the ideal and the dream. Initiating and creating change in the structure of business and society.
our political process and our educational process and generate economic. In other words.8. Creativity. or doing old things in new ways. Innovation is the ability to apply creative solutions to those problems and opportunities in order to enhance people’s lives or to enrich society. It is applying creativity and innovation to solve problems and to exploit opportunities that people face every day.
Acting as a catalyst to nurture intrapreneurs in a business organization. Through innovation. cultural. and innovation is doing new things. the secret‟ is no secret at all. Researchers believe that entrepreneurs succeed by thinking and doing new things. social and political variety.1. they also precede and create the context for management. In other words. Innovation and Entrepreneurship
Creativity is thinking new things. and innovation is doing new things. innovation and entrepreneurship
Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities. The Relationship between Creativity.
1. creativity is thinking new things. In doing so. Let us define creativity and innovation and show the following relationship. they develop organizations that are subsequently in
. entrepreneurs create new organizations in our economy. Both innovation and job creation involve the creation of new organizations with interdependent activities carried out by several people to accomplish a goal.
Figure1. What is the entrepreneur‟s secret for creating value in the marketplace? In reality.
The following is a creativity Model that can help in real situations to remove these logjams and enhance creative thinking. It involves applying focused strategies to new ideas and new insights to create a product or a service that satisfies customers’ needs or solves their problems.need of strategy. Successful entrepreneurs are associated with a constant process that relies on creativity.8. Such self-imposed mental constraints and other paradigms that people tend to build over time damage creative minds. performance. above all.
1. A paradigm is a preconceived idea of what the world is? What should Creativity and Innovation look like? And how they should operate? Sometimes. innovation and application of that innovation in the marketplace. even though they may be outdated. something must happen Income Entrepreneurship = creativity + innovation.1. Research shows that to encourage people to be more creative entrepreneurs have to create an environment that values their creativity. Such assumptions are quick killers of creativity. Creativity Entrepreneurs must always be on guard against traditional assumptions and perspectives about how things ought to be. These blocks can act as logjams to creativity. they are actually the result of the systematic process which involves the following steps:
. entrepreneurship is the result of a
disciplined. these ideas become so deeply rooted in our minds that they become immovable blocks to creative thinking. change. but the payoffs can be phenomenal. In turn. Although new ideas may appear to strike suddenly.
Modeling creativity Building a creative environment takes time. structure. Entrepreneurs are those who marry their creative ideas with the purposeful action and structure of a business. A lot of people come up with creative ideas for new or different products and services but most of them never do anything with them. obsolete and no longer relevant. systematic process of applying creativity and innovation to needs and opportunities in the marketplace. having a great new idea is not enough. culture and. In short.
thinks about a problem. it is the “mulling/considering things over” phase. prototypes. and knowledge that an entrepreneur brings to the opportunity recognition. Perhaps the most difficult hurdles to overcome. visit to library. talking. Then the creative idea is put into a final form. 2. Constantly being practical. however. usually this phase slowly but surely formulates the solution. Roger Von Oech (1990) identifies ten “mental locks‟ that limit individual creativity: 1. Phase 2: Incubation process: It is a stage during which a person considers an idea. and exercises it Phase 3: idea generation or ‘eureka’ experience. unsupportive environment and overly rigid policies and strategies. 7. are those that individuals impose on themselves. professional conferences. but we might like to consider it as an optional reading. 3. 17
. Becoming overly specialized. The number of potential barriers to creativity is almost limitless. experience. Avoiding ambiguity.Phase1. advice.
Barriers to Creativity The following discussions of background material about barriers to creativity and developing creativity are not as important as the discussion above about developing creativity. Viewing play as frivolous.g. This is a stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. This phase requires sleep on the issue‟. Preparation: It is the background. Blindly following the rules. 6. Searching for the one “right” answer. 5. Phase 4: Evaluation and implementation. 8. details are worked out and idea is transformed into something valuable. They include time pressures. e. 4. This is through reading. Fearing looking foolish. Focusing on being logical.
attitudes and motivation that make them much more creative – one of the keys to entrepreneurs is ‟successful performance”. entrepreneurs can develop the skills. and Reorganize industry.9. entrepreneurs can set free their own creativity as well as the creativity of those people around them. Invention has been described as the creation of a new product. Finally.8.
1. duplication and synthesis. Research shows that successful entrepreneurs are willing to take some risks. innovation is a key. Boulton and Carland (1984) extended and specified Schumpeter‟s idea. Schumpeter (1934) was first to point out the importance of new value created by entrepreneurs. Fearing mistakes and failure. service or process. service or process. Carland. extension.
. In some economic theories.2. Extension is said to be the expansion of a product. Duplication has been defined as replication of an already existing product. Believing that “I am not creative”. More recently. Innovation Entrepreneurship centers on novelty and the generation of variety in the marketplace and means that the processes of innovation are at work.
Four Types of Innovation There are four distinct types of innovation. saying that entrepreneurs: • • • • • • Introduce new goods Introduce new services Introduce new methods of production Open new markets Open new sources of supply. Hoy. defining aspect of entrepreneurship. 10. constantly ask “what if?” and learn to appreciate ambiguity.
By avoiding these ten mental locks. explore new ideas. these are: invention. the combination of existing concepts and factors into a new formulation has been identified as synthesis. By doing so. service or process.
Innovation is thought to be necessary for change and long-term survival of these organizations. A few more include: make the product. The entrepreneur must always be looking for new ideas. and resources. but by no means least important. Making the product. we now turn our attention to the innovation process.
The Innovation Sources Sources of innovation in terms of the main areas are where new ideas come from. An important message here is that entrepreneurs must realize that these principles exist and that they can be learned.
. Principles of Innovation While innovation encompasses a large area. One of the principles is to be action-oriented. work and more work. . process needs. it is pertinent to point out that there are a number of principles of innovation. and gaps between expectations and reality. Other observers and writers focus on innovations embedded in larger organizations. innovation also implies
commercialization of new ideas and/or the implementation and change of existing systems. process or service customerbased. and the like. In a constantly changing market new ideas are always presenting themselves. process or service simple and understandable is another example of a principle of innovation. So far we have talked about what innovation means within the context of entrepreneurship. However. aim high. Other sources include demographic changes and changes in perception. He refers to innovation as a process of bringing inventions into use through engineering. Taking the preceding framework into account. it is significantly important to remember that the last. start small. They see the innovation process as one that is recognized as new by the adopting system and/or one that results in a major restructuring of the adopting system. organizing and marketing. follow a milestone schedule. innovation is the specific function of entrepreneurship and defines what is entrepreneurial and what is managerial. principle is work. products.Peter Drucker (1984) defines entrepreneurship in terms of the generation of new jobs and the production of new flows of income. The market is one of the main sources of innovation. The main areas are: unexpected occurrences. To Peter Drucker (1985). To some people innovation refers to an end product or practice perceived as new by the individuals.
The term „career‟ signifies a continuous. The vast majority of human beings direct their activities towards earning a living. In case of wage employment one is engaged in routine work carried on for others for which he receives salary or wages. Entrepreneurship as a career option
After finishing your graduation you will be at the crossroads of life. Some of the main differences between entrepreneurship and wage employment career options are as under. An entrepreneur is not a routine businessman.
Entrepreneurship is the terminal stage of the entrepreneurial process wherein after setting up a venture one looks for diversification and growth. Self-employment is the second stage in the entrepreneurial process and refers to an individual‟s fulltime involvement in his own occupation. They are often taken on part. He can convert a threat into an opportunity. Small businessman might 20
.g. ever expanding opportunity for personal as well as business growth and development. e. He/she has to follow instructions and execute plans laid down by his/her superior. Selfemployment and Entrepreneurship are often used interchangeably. We will learn more about entrepreneurship a little latter in the lesson. In case you opt for entrepreneurship you will be your own boss.1. One can choose to be employed in the Public Sector or the Private sector.time or on casual basis to supplement income e. generating wealth and improving their standard of living. soft drinks etc. The three terms. We may define entrepreneurship as a career in your own business [YOB] rather than wage employment [JOB] .9. He might not have resources but he will have ideas. a man with some surplus money might put his money in a fixed deposit account in a bank or a chit -fund to earn some interest. You will face the dilemma of choosing what you have to do in life. An entrepreneur is always in search of new challenges. a person who starts a tea shop and remains happy and satisfied and has no plans to add on any other items like buns.the context of employment generation. ever evolving.If you opt for a job then you will work for others.
Income generation is the initial stage in the entrepreneurial process in which one tries to generate surplus or profit. or to grow in any other manner[e. supplying tea/coffee/sandwiches to others in the vicinity]. You can choose your career from two broad categories of options – Wage Employment or Entrepreneurship. He is innovative and creative.Income generation.g.g.
Different degrees or levels of entrepreneurial intensity and drive depend upon how much independence one exhibits. Entrepreneurship is a dynamic process of vision. middle and final stages of the entrepreneurial growth process. income generation. the ability to formulate an effective venture team. Entrepreneur is the key individual central to entrepreneurship who makes things happen. how much responsibility they shoulder. the creative skill to marshal needed resources. Not all independent business people are true entrepreneurs. change. the level of leadership and innovation they demonstrate. . It requires essential ingredients include: the willingness to take calculated risk. and how creative they become in envisioning and executing their business plans. The terms entrepreneur and manager are many times used interchangeably yet they are different. the fundamental skills of building a solid business plan.shut-down or change his business if he anticipates losses but an entrepreneur will try again after analyzing the situation. An entrepreneur starts a venture then a manager takes over to organize and co-ordinate continuous production. and the vision to recognize opportunity where others see chaos. An entrepreneur is being enterprising as long as he starts something new then the routine day-to-day management of the business is passed on to the manager. On the other hand an entrepreneur can leave a perfectly running business to start another venture if he so desires. and confusion. entrepreneurship is the act.
Functionally all entrepreneurs are self-employed and income generating persons but the reverse is not true.
The term entrepreneur stems from the French word „entrependre‟ meaning one who undertakes or one who is a „go-between. self-employment and entrepreneurship can be considered as the initial. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. Income generating experience encourages self-employment.all self-employed and income generating persons are not entrepreneurs. contradiction. and creation. which in turn facilitates graduating into
entrepreneurship. Entrepreneur is the actor. and not all entrepreneurs are created equal. If seen on a continuum.
Entrepreneurship is the result of a disciplined, systematic process of applying creativity and innovation to needs and opportunities in the marketplace. It involves applying focused strategies to new ideas and new insights to create a product or a service that satisfies customers‟ needs or solves their problems.
Self Assessment Questions Part I Multiple choice questions
5. Where individual skills are collectively integrated into a group, this is known as:A. Collective entrepreneurship B. Intrapreneurship C. Team entrepreneurship D. Dual innovation E. None of the above 6. Which of the following is not considered a typical characteristics of entrepreneurs? A. Ability to seize opportunities B. Persistent C. Optimistic D. The desire to be a winner E. None of the above 7. Which of the following is NOT a characteristic of a typical entrepreneur? A. B. C. D. E. Confidence in his/her ability to succeed Value of money over achievement Desire for immediate feedback A future orientation None
Part II Discussion Questions
1. How creativity, innovation, and entrepreneurship are are related? 2. What contributions does entrepreneurship have for the economic development of the country? 3. Can entrepreneurship be a career option?
CHAPTER TWO SMALL BUSINESS MANAGEMENT
● Unit Objectives ● Introduction ● Contents 2.1 Concepts and definition of small business 2.2 Economic social & political aspects of small business enterprise 2.2.1. Advantages of Going into Small Business 2.3. Small Business Failure factors. 2.3.1. Problems in Ethiopia small business 2.4. Entrepreneurship and Business Enterprise Creation 2.4.1. Opportunity scouting/ sensing 2.4.2. Environmental scanning 184.108.40.206. Opportunities in contemporary business Environment 2.4.3. Idea Generation 220.127.116.11. Role of Creativity and Innovation in Idea Generation
Dear learner, this chapter is meant to acquaint you with the basic concepts of small business management. Thus, after going through this lesson you should be able to: Understand general concepts of small business write economic, social, and economic contribution of small business enterprise Identify small business failure factors Integrate the knowledge necessary to establish a small business venture Scan the business environment in terms of the entrepreneurial opportunities and threats Identifying important business ideas Tap the sources for idea generation.
Specifying size and standard to define small business is necessarily arbitrary, because people adopt different standards for different purposes. Based on socio- economic conditions, countries define small business differently. But all may use size and economic criteria as a base to define small business. Size criteria include number of employees and the startup capital. Size does not
always reflect the true nature of an enterprise; in addition, qualitative characteristics are used to differentiate small business from other business. The economic/control definition covers market share, independence and personalized management. Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an important role in both developed and developing economies. Ethiopia is no exception and SMEs occupy a prominent position in the development of the Ethiopian economy. While the small entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the vagaries of the market, they have to face many problems like lack of fiancé, poor operations management, lack of experience, poor financial management, etc,. The process of setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a difficult task and involves scanning the environment and the use of creativity and innovation.
2.1. Concepts and definition of Small Business
Specifying size and standard to define small business is necessary, because people adopt different standards for different purposes. For example, legislators may exclude small firms from certain regulations and specify ten employees as the cut-off point. Moreover, a business may be described as “small” when compared to larger firms, but “large” when compared to smaller ones. For example, most people would classify independently owned gasoline stations, neighborhood restaurants, and locally owned retail stores as small business. Similarly, most would agree that the major automobile manufacturers are big businesses. And firms of in-between sizes would be classified as medium on the basis of individual viewpoints. There are two approaches to define small business. They are: 1. Size criteria 2. Economic/control criteria.
Manufacturing services Germany France China SME SME SME <100 employees <20 employees <500 employees 10 -499 employees Depends on product group. the business is small. All over the world. total capital investment. number of employees or capital investment or both have been used as the basis for defining SMEs
. Only in a rare case would the business have more than 15 or 20 owners. Examples of criteria used to measure size are: number of employees. Some criteria are applicable to all industrial areas. the best criterion in any given case depends upon the user‟s purpose. Indonesia Malaysia SME SME <100 employees <175 full time workers investment US $1 million
This size criteria based definition of SMEs varies from country to country.1. and volume of deposits. while others are relevant only to certain types of business. volume/value of production. The number of employees in the business is usually fewer than 100. the firm‟s operations are geographically localized. Except for its marketing function. the following general criteria for defining a small business are suggested by Small b Business Administration (SBA) Financing of the business is supplied by one individual or a small group. asset size. Size Criteria
Even the criteria used to measure the size of businesses vary. To provide a clearer image of the small firms. Size refers to the scale of operation. and value of sales turnover. volume. Usually 100 employees: investment ceiling US $8 million.
Even though number of employees-is the most widely used yardstick. and a combination of the stated factors. Compared to the biggest firms in the industry.
on capital investment) to a higher level of authority. nevertheless have to refer to major decisions (e.000. qualitative characteristics may be used to differentiate small business from other business. therefore. but excluding high-tech consultancy firms and other high-tech establishments. In addition. rules out those small subsidiaries which though in many ways fairly autonomous. Market share: The characteristic of a small firm‟s share of the market is that it is not large enough to enable it to influence the prices of national quantities of goods sold to any significant extent.000 but not more than Birr 500. Economic/Control Criteria
Size does not always reflect the true nature of an enterprise. Ministry of Trade and Industry of Ethiopia adopted official definition of Micro and Small enterprises as follows: Microenterprises are business enterprises found in all sectors of the Ethiopian economy with a paid-up capital (fixed assets) of not more than Birr 20. The economic/control definition covers: Market share Independence Personalized management
All three of these characteristics must be satisfied if the business is to rank as a small business.g.. but excluding high-tech consultancy firms and other high-tech establishments.
. Small Enterprises are business enterprises with a paid-up capital of less than Birr 20. Independence: Independence means that the owner has control of the business himself.
2.The following are size criteria definitions of SMEs in some of the developing and developed countries: Using capital as size criteria. It.000.
Equitable distribution of wealth and decentralization of economic power
Unregulated growth of large-scale industries results in concentration of economic· power in the hands of a few and consequently gross inequalities in the distribution of income and wealth wi. Economic social & political contributions of small business enterprise
Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an important role in both developed and developing economies. occur.. partnerships. This is due to wide spread ownership and decentralized location of small scale enterprises. It implies that the owner actively participates in all aspects of the management of the business. relations between workers and employers are more harmonious in small enterprises than in large enterprises.
More Employment creation capacity
Economic planners have realized the necessity of encouraging small enterprises because they 27
. As a result. small business is a business that is privately owned and operated. sole proprietorships. There is little delegation of authority. Small
enterprises also encourage competitive spirit and generate the impetus to self development.2.
Personalized Management: It is the most characteristics factor of all. They need a strong support on Scio.
2. Only few are technology intensive.economic and political ground. with a small number of employees and relatively low volume of sales. It is also argued that most of the small scale units are either proprietary or partnership concerns. Small businesses are normally privately owned companies. On the other hand. Ethiopia is no exception and SMEs occupy a prominent position in the development of the Ethiopian economy.
Generally. income generated in a large number of small enterprises is dispersed more widely and its benefit is derived by the large segments of the society. Over the years.
Technology: Small business is generally labor intensive. Some of the contributions are hereunder. or cooperatives. One person is involved when anything material is involved. and in all major decision-making process. the number of SMEs is growing form time to time. In this way small scale enterprises bring about greater equality of income distribution. Geographical area of operation: The area of operation of a small firm is often local.
1. Advantages of going into Small Business
The desire for individuals to own and operate their own small business is growing.
2. Small scale units can be located in rural and semi urban areas to reduce regional disparities. Ancillary Function
Many small-scale enterprises supply parts and accessories to bigger enterprises. This is because small
scale enterprises are labor intensive and thus create more employment with a given level of capital. As stated earlier. Moreover. undue concentration of large industries in urban areas creates several problems.require less capital but generate more employment. people migrate in large numbers to big cities.
Large scale industries have the tendency to concentrate in big cities. etc. this continual creation of new business is at the heart of free enterprise system. The next section explains the following common advantages of owning a small business: Independence 28
. The small-scale sector has the capacity to generate a much higher degree of employment than the large-scale sector.g.. Due to lack of employment opportunities in the country side. This ancillary function involves specialization in specific areas and results in greater profitability. e.
More production needs more capital in such a situation. Export Promotion
Small-scale enterprises are opening up fresh avenues in the export market in our world. This problem can be solved by inducing people to set up small firms in rural areas. For individuals pursuing a career in business ownership. shortage of civic facilities. numerous benefits can be attained personally as well as professionally. The small firms will stand in good position because they are less capital intensive and more labor intensive. As a result semi urban and rural areas remain deprived of the benefits of industrialization. pollution. Realizing the importance of the small-scale sector in the economy the Ethiopian government has adopted several measures to speed up the growth of small enterprises.
Removing Regional Imbalance
Another problem is the continuous shifting of people from rural to urban areas which causes overcrowding in cities with slum conditions due to lack of social and medical amenities which require heavy investments.2.
owner-managers want to perpetuate their business and how better to do it. Third. higher moral and trust usually occur more in family-run businesses than others. By contrast. then to get children or relatives to take it over. If the person has reason to believe the public will pay for such output. he or she will start a small company to provide it.
Learning from Challenge
Many small business owners are attracted by the challenge that accompanies going in to business for oneself. Although a great deal of responsibility is associated with this independence. job security is ensured. they like the freedom to do things their own way. no mandatory retirement exists. Many small business owners make more money running their own company than they would be working for someone else. small firms are able to make a profit on much lower 29
. First. They learn from the past failure or success. Second.
Job Security: When one owns a business.Most small business owners enjoy being their own boss.
Another major reason for going into business for oneself is financial opportunity.
Community Service Sometimes an individual will realize that a particular good or service is not available. they are also willing to assume it. in times of severe economic downturn. however. Introducing Innovation: New products that originate in the research laboratories of big business make a valuable contribution to our standard of living. The individual can work as long as he or she wants. Catering for small or niche markets: Large firms with high overheads must produce high levels of output to spread costs. as to the relative importance of big business in achieving the truly significant innovations. small business owners can provide employment for family members. This has several benefits.
Another advantage is the opportunity to provide family members with employment. Research reveals that most successful small business owners like to feel they have a chance to succeed (they want to know success is possible) and the chance to fail. There is question. The record shows that many scientific breakthroughs originated with independent inventors and small organizations.
3 Small Business Failure factors
The following are some of the major factors. a local window cleaner serving a few hundred houses. The owner who has someone else manage the business while he or she goes fishing often finds the business failing because of neglect. investigation. Poor operations management – The manager lacks the ability to operate a small business. Poor credit practices – Owners often sell on credit to meet (or beat) the competition and find that they lack the additional working capital required or the ability to collect receivables. Too often.
2. a specialist jeweler with personal clients. Failure to plan – The lack of a strategic plan to guide the business in the long run Unplanned and uncontrolled growth – Growth is natural and healthy. which cause most small business failures.
. and disaster. Lack of experience – Many owners start businesses in industries in which they have no experience Poor financial management – Many owners start with too little money and with little or no understanding of financial spreadsheet applications. Inappropriate location – Owners who choose a business location without proper analysis. and planning often fail.
Neglect occurs whenever an owner does not pay sufficient attention to the enterprise. They can therefore sell into much smaller markets that are ignored by larger organization: e. the business might find itself bankrupt before too long. If one of the people responsible for keeping the business‟s books begins purchasing materials or goods for himself or herself with the company's money.
Other common causes of business failure include neglect. fraud. Over-investing in fixed assets – Owners who over-invest in fixed assets may find themselves with no access to funds for working capital. owners seek “cheap” sites and locate themselves straight into failure. but unplanned growth can be fatal to a business.
Fraud involves intentional misrepresentation or deception.sales figures.g.
environmental scanning. Entrepreneurship and Business Enterprise Creation
Dear learner! What do you understand by terms opportunity scouting. If a hurricane hits the area and destroys property in the company's yard. Lack of adequate finance and credit has always been a major problem of the Ethiopian small business. burglaries. Problems in the Ethiopian small business
Small-scale businesses have not been able to contribute substantially to the economic development.
Small scale enterprises find it difficult to get raw materials of good quality at reasonable prices in the field of production. consequently their productivity suffers. The same is true for fires.1. and marketing problems. robberies. Furthermore.
Small-scale units do not have easy access to the capital because they mostly organized on proprietary and partnership basis and are of very small size. These problems are still major handicaps to their development. Small business owner can avoid some of the common pitfalls that lead to business failure by: Knowing the business in depth Developing a solid business plan Managing financial resources Understanding financial statements Learning to manage people effectively Etc……
2. They do not have easy access to industrial sources of finance partly because of their size and partly because of the fact that their surpluses which can be utilized to repay loans are relatively small. and SWOT analysis as entrepreneurship process of setting new business venture? What small business opportunities does this country have?
. which the enterprises have adopted.
Disaster refers to some unforeseen happening. the techniques of production. production. Because of their poor financial position they are not able to buy new equipment. or extended strikes. they approach traditional money lenders who charge extra high rate of interest hence small enterprise continue to be financially weak. Consequently. they search for funds for investment purposes. Because of their size and partly because of the limited profit.4. are usually outdated. the loss may require the firm to declare bankruptcy.
2.3. particularly because of financial.
the startup process for a new venture creation begins with scouting for opportunities. He/ she is the one who makes things happen by capturing an opportunity and organizing the resources needed to exploit this opportunity. This will help the entrepreneur to crystallize one idea in an objective and systematic manner. He/ she must develop sensitivity to changes around him/her.In the first chapter we have learnt that the entrepreneur is at the center of this phenomenon of entrepreneurship. which can provide business opportunities and then carefully scan his/her environment to generate ideas. And then the detail of each process is herewith.
2. he/she has to establish an enterprise. Hence. except in rare cases. However. opportunities just do not „occur‟ to the individual. entrepreneurs see opportunities for starting a business. Clearly. These have to be actively searched/ scouted for. Opportunity scouting/ sensing
The entrepreneurial process begins with identifying an opportunity and evaluating it through an initial screening process. setting up of a small new enterprise is a very challenging as well as a rewarding task.
Once an individual decides to take up entrepreneurship as a career path. If it appears reasonable. otherwise it might prove to be a costly mistake.1. Where others see problems and shortcomings. It is extremely important to take utmost care in identifying the product or service to be launched by the entrepreneur. Entrepreneurs look ahead to see what can be done in future rather than concentrating on the past. Figure 2 shows the entrepreneurial process to set up a business. which will greatly enhance his/ her chances of success. He creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth.
.4. a detailed business plan can be made. Several problems are involved in this task. he/ she should go in for detailed assessment and feasibility study. If not it can be discarded. After tentatively identifying four to five ideas. to be a job provider instead of a job seeker.
Figure 2 . opportunities besides existing in the environment in the form of needs and problems of people around might have to be „created. in the context of entrepreneurship. it becomes important for him/ her to scan the environment. An entrepreneur can sense and intelligently seize opportunities. one may just look around one‟s immediate context..
. It is not a superficial exercise but rather an attempt to look beyond the immediate opportunities to the emerging trends.family.‟ Thus. but they also create the new needs as well. Else. which exist in the environment. and job and build up a case for business from the bottom-up. However. An attempt can be made to modify.2. starting from the scanning of the international and macroeconomic environment and conducting/using industrial/consumer surveys and identifying appropriate business ideas.
2. Scanning involves close examination of the environmental conditions and their impact upon the business idea. the entrepreneurs meet not only the existing needs.Opportunity – Idea . It is quite possible that many of the promising opportunities might not make commercial sense. community. Opportunity scanning
Once the entrepreneur perceives opportunities. one may take a top-down approach.Analysis
The process may start from an arm‟s length. that is.4. Often it is said that necessity is the mother of all inventions.
social. It has created an extensive institutional framework for provision of finance. for an analysis of the environment of entrepreneurship you would be required to develop an understanding of macroeconomic. infrastructural facilities. All of these are not immediate part of the entrepreneur‟s venture yet they have an impact on his enterprise. What to be scanned by an entrepreneur are shown as follows:
I. combine. Environmental analysis
Entrepreneurship does not exist in a vacuum. reverse etc.
. technology as well as help in marketing is made available by government institutions. a. Political Environment
Entrepreneurship can flourish under a stable and conducive political climate. the government is supportive of the small-scale sector. and industry/sector specific factors. legal and economic environments. technological. substitute. It is affected by and affects the environment.adapt. rearrange. Considering the employment and export potential. Government policies which give priority to growth of trade and industry. Let us now examine the elements of the macro environment of the entrepreneur one by one. and institutional support gives a stimulus to entrepreneurship. Macro environment The macro environment of an entrepreneur consists of the political. the short gestation period and the fact that small industries act as a seedbed for nurturing and developing entrepreneurship.
Figure 3 – Entrepreneurship Vs Environment As the economies are getting internationally integrated. Relationship between entrepreneurship and environment is shown in the figure below.
we sometimes say that the Gurage people are very enterprising. Socio-cultural environment is also concerned with attitudes about work or quality concerns. As a result their goods are of poor quality and lack standardization. For example. the trends and the rate of change in technology all have a direct impact on enterprise creation.
The level of technology. Computer Hardware. Pharmaceuticals etc. norms and traditions of the society also play an important role in either hindering or promoting enterprise. In many traditional communities of our country working of females out of the home environment is frowning upon. etc. both innovation and invention change industry structures by altering costs.
The customs. Many times the choice of occupation is also dictated by the family traditions. In the advanced countries of the West more pure inventions have been taking place which createed new
industries for example Automobile. Telecommunications. It is very important for a multi-national company to understand the socio-cultural background of its customers in the host country. In developing economies there is usually an imitation of the above through greater process innovation. On the other hand if he/she uses certain costly technology chances of others to quickly becoming his competitors are less. Socio-cultural factors are also crucial for the operations of multinational companies. Aeronautical. A direct consequence of this is their inability to face competition.
It has been observed that many small units use obsolete technologies and do not invest in research and development (R&D). Changes in technology. ethics. quality requirements and volume capabilities. In many industries the technological threshold is low and as a result the success of an entrepreneur promotes many others to start similar businesses and he loses the initial competitive advantage. values.
The resultant competition.this is usually indicated either by above normal profits or high growth rates. threat of substitutes and entry barriers. forecasts made by the government or the industry. the future trends. trademark infringement.
b. Similarly there might be certain strengths of a particular sector. globalization and opening of the economy of Ethiopia. The purpose of industry analysis is to determine what makes an industry attractive. Copyright. which are industry specific. It is also advisable to study the existing or potential competition. it is important to study the sector or industry conditions in which the entrepreneur proposes to launch a venture. Patents. There might be certain constraints regarding availability of technology. For such analysis one should study the history of the industry. Sometimes there might be bilateral agreements between countries regarding some sectors or government policy that is sector specific or some event that throw up challenges. agreements on trade and tariffs and environmental laws also need to be studied. It has also opened channels for foreign investors to start operations. Simpler legal procedures can facilitate the process of new venture creation and its smooth functioning including setting up of ancillaries. foreign tie-ups and joint ventures. This will help to put the proposed venture in the proper context. manpower or raw materials.
The laws of the country can make the process of setting up business very lengthy and difficult or vice-versa. has increased the space for business operations. which might outweigh some negative general trends.
Liberalization. which have to be handled by the entrepreneurs. Currently the cement and steel
. The labor laws and legal redressing system also have a bearing on business operations. rapid and complex changes have generated uncertainties. . new products developed in the industry. Sectoral Analysis
After having understood the general environment in which the business has to take birth. dumping and unfair competition can create legal problems in the shape of long drawn out court battles.
Figure 4 – Hierarchical environmental analysis 37
. technological breakthroughs. goals and objectives. goals and objectives. change in government policy. conducting a SWOT analysis will help the entrepreneur to clearly identify his/her own strengths and weaknesses as well as the opportunities and threats in the environment. Threats in the environment can arise from competition. An entrepreneur should try to magnify his strengths and overcome or compensate for his/her weaknesses. goals and objectives. Threats are negative external forces that hinder an individual from accomplishing his/her mission. The hierarchical approach to the development of business idea is given below.
Opportunities are positive external options that an individual could exploit to accomplish his/her mission. economic recession. goals and objectives. Weaknesses are negative internal factors that inhibit an individual‟s ability to accomplish his/her mission. change in government policies etc. These could arise due to competition. technological advances etc. which along with his/ her knowledge and experience can provide him/ her cutting edge. An analysis of the above can give the entrepreneur a more realistic perspective of the business. pointing out foundations on which he can build future strengths and remove obstacles. SWOT analysis
At this stage.sector are on an upward swing with a favorable climate in the housing sector as well as government‟s thrust on the construction sector. He / she might posses certain unique skills or abilities. Strengths are positive internal factors that contribute to an individual‟s ability to accomplish his/her mission.
. Some opportunities. legal and other changes. skills. services are not tangible. and then take a decision to launch a particular product or service. By providing personal service. The entrepreneur can try and identify a very specific market segment called a niche. Niche Marketing Niche marketing is a marketing strategy.4. technological. Service Sector Unlike products. which can be explored by the potential entrepreneur. are given below. Opportunities in contemporary business Environment
We have observed above that the business environment is constantly evolving as a result of demographic. Another advantage of setting up a service enterprise is that they require lower investments compared to the manufacturing sector. The standardized goods produced on large scale cannot cater to the special requirements of a small segment of the market. The proposed product / service should be compatible with the capability of the entrepreneur. Production and consumption are simultaneous. Franchising
Franchising takes a proven formula for success and expands it. they cannot be stocked. process or service allows a local operator to set up a business under that name. For example there is an emerging niche in the world food market for health conscious people who want to consume only organically grown foods. Business franchising is a name given to relationship in which the owner of a product. and they cannot be marketed through wholesalers and retailers .if you want a haircut you will have to go the barber or a beauty saloon. which can be intelligently used by a small entrepreneur.2. for a specified period. resources available in the environment and the need of the society. experience etc.The entrepreneur has to use the opportunities provided by the environment. These constantly throw up new challenges for entrepreneurs.
. Franchising is an arrangement between the buyer who is called a franchiser and the seller who is called the franchisee.1. combine these with his/her unique strengths in terms of knowledge.
2. convenience and value to the customers the small entrepreneur can successfully compete with the bigger market players.
There is an a shortage of service providers in all these areas. family dramas. The franchisee is able to expand his market geographically without having to worry about day-to-day operations. they need guides and interpreters. cartoons. tourists use many indirect services. preparation and launch of CDs and DVDs. remixes. Tourism Tourism is amongst the fastest growing industries the world over. It includes any business connected with the activities of tourists: Travel arrangement (rail. The growing segments of tourism include Cultural Tourism. motels. The gap between the demand and supply is likely to increase in the foreseeable future opportunity.buyer gets the right to sell the trademark product or service to the franchisee.
. for the franchisee. music and film nights. It is the highest foreign exchange earning sector for many countries and offers tremendous opportunity for entrepreneurship and employment. It is clear from the above that this sector has untapped potential which can be exploited by potential entrepreneurs. which boasts of very high rates of growth. There are innumerable entertainments ranging from news. Eco-Tourism. standardization and incentives for growth. He is relieved of most of the functions involved in setting up of an enterprise and gets the benefit of visibility and recognition. sports.
The entertainment industry is another sector. Music industry is also flooded with music videos. Adventure Tourism. etc. The licensing system gives the franchisee barriers to entry. Some people have even capitalized on the high cost of Medical Services abroad and have promoted Medical Tourism. Usually the franchiser looks after the training. Hundreds of films are made annually in Ethiopia. Heritage Tourism. design and layout. they hire taxis for local site visit. music. religious etc. For example. road. and Religious Tourism. However the franchisee is obliged by the franchising agreement to be careful that the standards of quality are adhered to. air or sea) Accommodation (hotels. guest houses) Food Entertainment Apart from the potential in providing these direct services. Rural-Tourism.
For a new entrepreneur it becomes very difficult to filter information from the business environment. Developing a hobby. surfing the internet all help to provide valuable inputs . Like the tourism sector the entertainment sector too has a host of feeder activities attached to it . This idea can be either generated internally or externally . evaluating new products being offered in the market and active engagement in Research and Development can help in generating a number of ideas. business magazines. Attending an Entrepreneurial Development Programs can provide him/her with a sound understanding of all the steps one has to take to initiate and run a venture.4. Such business activity should be chosen which has the least adverse impact on the environment.
The starting point for any successful new venture is the basic product / service to be offered.
2. identify opportunities. A reading of the Economic Times.supply of jewelry. posters which provide endless entrepreneurial opportunities. It concentrates on new and creative ways to recycle usable materials. watching special business programs on the television. difficulty in obtaining a satisfactory product or service. editing to name a few. use of substitutes or processes that are less polluting as well as adoption of waste minimization strategies.A study of government policies for example tax incentives and holidays for setting up projects in backward area can help an entrepreneur to arrive at some decision . dubbing.Enterprises can be set up to provide services for pre and post production including script writing. music. even teachers. Green Entrepreneurship Conservation and Environment protection are presently getting a lot of attraction. The sources of idea generation are listed in the figure below. discussions with professionals. This concept also stresses upon the prevention of waste at the source rather than at the end of the process. food. friends.
. banners. Green Entrepreneurship signifies concern for the environment. evaluate them and then crystallize one specific idea. animation.3.
A creative person develops new alternatives and offers innovative solutions. Creativity is the ability to bring something new into existence. food etc. demographic changes like nuclear families. torches. which has a commercial value. Changes in tastes and preferences have resulted in mushrooming of restaurants and designer clothes.3.4. medicines. It can be developed by any individual who has a concern for excellence and is willing to work hard. There can be technological break thorough like the IT revolution.
Role of Creativity and Innovation in Idea Generation
It is frequently commented that the only constant thing in business is change. creativity and innovation can capitalize on these changes and create customers. fast food etc. It is a true statement as the business environment is constantly changing for any number of reasons. You will learn about these stages of a venture starter in the next chapter
2. old people‟s homes. blankets. working parents.
. An entrepreneur with his/her vision.1. Ideas showing the most potential are subjected to a feasibility analysis and a Project Appraisal is then made. which have fueled a demand for day care centers.Once the idea or group of ideas is generated it has to screened or evaluated to determine its apropriativeness for further development. Creativity is a prerequisite for innovation. A natural disaster can create a demand for tents. Innovation is the translation of an idea into application.
Self assessment questions
1. it is a sector which is highly affected by different factors. What are the major causes for failure of most small business? 2. What do you understand by the term business opportunity? What is its relevance for an entrepreneur? 5. 6. A careful analysis can help an entrepreneur to crystallize an idea. If it appears to be promising its viability can be studied through a proper feasibility analysis. as part of creativity process. Identifying a good opportunity is a difficult task and involves scanning the environment and the use of creativity and innovation.
In most parts of the world the nomenclature used to define Small and Medium Enterprises (SMEs) and the criteria for defining include the number of employees and /or the turnover. One has to be very sensitive to the changes in the business environment. However. experience. What crucial roles do you think from the well managed small business? 4. In your opinion what precautions should a potential entrepreneur take at the Idea Generation Stage in an ever-changing business environment?
. Do you think it is important for an entrepreneur to scan for opportunities in the small scale sectors? Give reasons. Rarely can one hit upon an idea straight away. Thus due attention is given in setting the enterprises and good management is required while its operation. That means using both size and economic control criteria. Idea generation. The process of setting up a venture begins with searching for an opportunity. Creativity helps not only in doing different things but also in doing the things differently. The process involves both market identification as well as product / service identification. insight etc. and finical.It is through their creative thinking that entrepreneurs find solutions to problems. How can the small business owner avoid the common pitfalls that lead to business failure? 3. In Ethiopia the Small Scale Industry evokes several socio-economic and political contributions. of the potential entrepreneur. handle adversity and exercise control over business. a number of ideas and solutions are generated depending upon the personal knowledge.
1 Market Analysis 3.CHAPTER THREE
FEASIBILITY ANALYSIS. after going through this lesson you should be able to: Conduct a feasibility analysis of the proposed business ideas with regard to marketability. this chapter is meant to acquaint you with the basic concepts and detailed analysis of a business idea so that the venture becomes profitable.3 Technical Analysis 3. Business Plan
Dear learner.5 Ecological Analysis 3.1.4. List users of business plan Understand the pitfalls that may be encountered while preparing business plan and find out their respective remedies.2 Financial Analysis 3. Project Report 3. Feasibility Analysis 3.2. Point out the different elements of business plan.3 Registration 3.1. and legalities Prepare a business plan Recognize basic startup problems.6 Legal and Administrative Analysis 3. PROJECT REPORT AND BUSINESS PLAN
Introduction Objectives Contents 18.104.22.168.4 Economic Analysis 3.1. Thus. funding.1. technical viability. define what business plan is. 43
it is possible to find financial plans. Setting up of new business enterprise is a very challenging task.Even though they may serve different functions. you should conduct an in-depth examination of the chosen three to four before settling for the one where you would like to exert your time. Plans may be short term or long term. For any given organization.
Plans are part of any business operation. Plans also differ in scope depending on the type of business or the anticipated size of the start up operation. Generation of ideas is not enough. Planning is a process that never ends for a business. You should prepare a business plan that will serve as the road map for effective venturing. to name a few. It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan. all these plans have one important purpose: to provide guidance and structure to management in a rapidly changing market environment. and sales plans. and operational plans. It‟s advisable to be aware of these problems as to forewarn means to fore arm.
. after the initial screening of the ideas that do not seem promising. prepare a sample business plan considering the real world scenario
The process of setting up a business is preceded by the decision to choose entrepreneurship as a career and identification of promising business ideas upon a careful examination of the entrepreneurial opportunities. financial and legal perspectives. money and energy. In this regard. or they may be strategic or operational. marketing plans. tactical plans. human resource plans. whether you may require institutional funding (in which case it is necessary to do so) or not. plans can be classified in to three types: strategic plans. you are likely to encounter many problems en route. That is. production plans. the business ideas must stand the scrutiny from techno-economic.
1 Market Analysis
A market. what would be the investment requirements and where to get the funding from. demographic and psychological profile of the potential customers. past and present supply position. You have to carefully segment the market according to some criteria such as geographic scope. Success of the proposed idea clearly pivots on the continuing support of the customers. do you know something about the important facets of business venture feasibility
study? What factors are to be kept in mind while deciding on product/service development?
Feasibility literally means whether some idea will work or not. consumer behavior. distribution channels and marketing policies in use. and so on. is the arena for interaction among buyers and sellers. The module presents hereunder a brief outline of the issues impinging upon the various aspects of the feasibility of the proposed business idea. elasticity of demand. It is a study of knowing who are your customers. technical and legal constraints impinging on the marketing of the product. Feasibility Analysis
Dear learner. attitudes. From seller‟s point of view. motivations. that is. In other words. After all. intentions. feasibility study involves an examination of the operations.1. whether a place or not. it is may be difficult to identify the market for one‟s product/service. preferences and requirements. whether and wherefrom the necessary technical know-how to convert the idea into a tangible product may be available. production possibilities and constraints. market analysis is primarily concerned with the aggregate demand of the proposed product/service in future and the market share expected to be captured. there always is a possibility that a project that is technically possible may not be economically viable.1. 45
.3. imports and exports competition. financial. By now. However. you would have understood that feasibility is a multivariate concept. It is necessary to know beforehand whether there exists a sizeable market for the proposed product/service. cost structure.
3. HR and marketing aspects of a business before the venture comes into existence.
. Moreover. for this you require information on: consumption trends. the whole world cannot be your market. a project has to be viable not only in technical terms but also in economic and commercial terms too. administrative.
height.and.3. means of financing. This cost-benefit analysis goes into 46
. the inputs received would undergo a process of transformation in several stages of manufacture. length. and projected financial position.1. projected profitability.3 Technical Analysis
The issues involved in the assessment of technical analysis of the proposed project may be classified into those pertaining to inputs.2 Financial Analysis
The objective of financial analysis is to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. Where to locate the facility. weight. In regard to the feasibility of the study the entrepreneur is concerned whether the total cost of the product is justifiable in comparison with the price at which it will sell at the market place. You have to ensure that the right kind and quality of inputs would be available at the right time and cost throughout the life of the project.
3. machinery and materials. While conducting a financial appraisal certain aspects has to be looked into like: investment outlay and cost of the project. Usually. Output Analysis: this involves product specification in terms of physical features. chemical material properties. that is. investment worthiness judged in terms of various criteria of merit. as well as standards to be complied with such as industry level standard and country level standard. functional features. in many cases you have to cultivate your supply sources. what would be the quality control measures. process and outputs. Input Analysis: Input analysis is mainly concerned with the identification.4 Economic Analysis
Economic analysis is the study of costs.1.1. break. what would be the layout.
3. what would be the sequence. etc.color.benefits. quantification and evaluation of project inputs. You have to enter into long-term contracts with the potential suppliers. are the issues that you would learn in greater details in subsequent lessons. cash flows of the project. breadth.even point. Process Analysis: It refers to the production/operations that you would perform on the inputs to add value.
which have significant ecological implications like power plants and irrigation schemes. registration and clearances and approvals from the diverse authorities. Legal and Administrative Analysis
The entrepreneur has to be sure of the administrative and legal issues involved in the business project which is going to be selected. Expected profit (or loss) of the business. whereas economic feasibility leads one to the unit cost of the product.1. The level of control you wish to have.
.. chemicals and leather processing).6. At this stage it is also useful to distinguish between the economic and commercial feasibility. The business‟ vulnerability to lawsuits. we will want to take into account the following:
Your vision regarding the size and nature of your business. The level of structure you are willing to deal with. In making a choice. Tax implications of the different ownership structures.
3. The concerns that are usually addressed include the following: What is the likely damage caused by the project to the environment? What is the cost of restoration measures required to ensure that the damage to the environment is contained within acceptable limits?
I. choice of the form of business ownership.financial calculations for profitability analysis that we discussed under financial analysis.1. commercial feasibility informs whether enough units would sell. environmental concerns have assumed a great deal of significance especially for projects.5 Ecological Analysis
In recent years.
Types of Business Ownership in Ethiopia
One of the first decisions that you will have to make as a business owner is how the company should be structured. and for environment polluting industries (like bulk drugs. These include.
Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities. A) Sole proprietorships
The vast majority of small businesses start out as sole proprietorships. Their business and personal assets are at risk. and within the parameters of the law. Profits from the business flow directly to the owner's personal tax return.
Whether or not you need to reinvest earnings into the business. you are one and the same with the business entity.
Disadvantages of a Sole Proprietorship:
Sole proprietors have unlimited liability and are legally responsible for all debts against the business.
May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business.
Sole proprietors receive all income generated by the business.
May be at a disadvantage in raising funds and are often limited to using funds from personal savings or bank loans. Your need for access to cash out of the business for yourself. if desired. usually the individual who has day-to-day responsibilities for running the business. may make decisions as they see fit. Advantages of a Sole Proprietorship:
Easiest and the least expensive to organize. The business is easy to dissolve. Sole proprietors are in complete control. These firms are owned by one person.
Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income. In the eyes of the law and the public.
however time should be invested in developing the partnership agreement. Prospective employees may be attracted to the business if given the incentive to become a partner. and what steps will be taken to dissolve the partnership when needed. Advantages of a Partnership:
Partnerships are relatively easy to establish. Profits must be shared. The partners should have a legal agreement that sets forth how decisions will be made.B). the ability to raise funds may be increased. and unless there is a defined process.
With more than one owner. Like proprietorships. the law does not distinguish between the business and its owners. disputes will be resolved. disagreements can occur. but many partnerships split up at crisis times. They also must decide up-front how much time and capital each will contribute. two or more people share ownership of a single business.
The business usually will benefit from partners who have complementary skills. profits will be shared. it's hard to think about a breakup when the business is just getting started. there will be even greater problems. Some employee benefits are not deductible from business income on tax returns. Yes. The profits from the business flow directly to the partners' personal tax returns. it may end upon the withdrawal or death of a partner. Partnerships In a Partnership. how partners can be brought out. Since decisions are shared. The partnership may have a limited life.
Disadvantages of a Partnership:
Partners are jointly and individually liable for the actions of one or more partners. how future partners will be admitted to the partnership.
Joint Venture Acts like a general partnership.Types of partnerships
General-Partnership Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. The owners of a corporation are its shareholders. Forming a limited partnership is more complex and formal than that of a general partnership. 50
. which generally encourages investors for short-term projects or for investing in capital assets. The corporation has a life of its own and does not dissolve when ownership changes. Corporations
A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity. A corporation can be taxed. they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity. Limited Partnership Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions.
C. Equal shares are assumed unless there is a written agreement that states differently. This form of ownership is not often used for operating retail or service businesses. Advantages of a Corporation:
Shareholders have limited liability for the corporation's debts or judgments against the corporations. If the partners in a joint venture repeat the activity. and it can enter into contractual agreements. The shareholders elect a board of directors to oversee the major policies and decisions. separate and apart from those who own it. it can be sued. but is clearly for a limited period of time of a single project.
Corporations are monitored by federal.
Incorporating may result in higher overall taxes. shareholders can only be held accountable for their investment in stock of the company. Limited Liability Company (LLC)
The LLC is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
E. if desired. and as a result may have more paperwork to comply with regulations.
D. such as the failure to withhold and pay employment taxes. Dividends paid to shareholders are not deductible from business income. centralization of management.
Generally. that officers can be held personally liable for their actions.)
Corporations can raise additional funds through the sale of stock. continuity of life. thus it can be taxed twice. This particular type of business is called a cooperative (co-op) and is some-what like a corporation. and the duration of the LLC is usually determined when the organization papers are filed. and free transferability of ownership rights. by a vote of the members at the time of expiration. Formation is more complex and formal than that of a general partnership. (Note however. The owners are members. A corporation may deduct the cost of benefits it provides to officers and employees. state and some local agencies. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets. The time limit can be continued. Cooperatives
Proprietorships. Disadvantages of a Corporation:
The process of incorporation requires more time and money than other forms of organization. There is yet another form of organization that is small in number but which serves a very useful purpose. partnerships. and corporations are by far the most popular forms of business organizations.
workers. to join together to get better prices for their food products. number of hours worked) assets controlled.
. not investment. managers. and usually owned jointly by members profit shared equally between members with limited interest payable on loans made by members Share capital remains at its original value –members benefit from participation. These findings may be vetted by the independent consultants/experts. The best example of such cooperatives is a farm cooperative. It can register and have limited liability for its members. but has to adopt the following principles: Members have an equal vote in decisions membership is open to everyone who fulfils specified conditions (e. and customers are all the same people. The idea is that the optimist entrepreneur may have overlooked certain aspects that may have a bearing on the ultimate feasibility of the proposed business idea.g. Owners. These cooperatives are formed to give members more economic power as a group than they would have as individuals. The idea at first was for farmers. A cooperative is an enterprise owned and controlled by all those who work in it.2 Project Report
The findings of the feasibility analysis may be compiled in a project report. It is often felt that financial institutions tend to overemphasize the financial feasibility of the project and do not pay adequate attention to its commercial and economic viability.A Cooperative is a business owned and operated by its user members for the purpose of supplying themselves with goods and services it is an organization owned by members/ customers who pay an annual membership fee and share in any profits (if it is profit making organization). Funding agencies have their own set-up for the appraisal of these reports.
the following documents should be lodged with the registrar of the business organization.
A copy of the company's entry in the commercial register.
Where the shareholder is a legal person incorporated in Ethiopia.
A bank statement showing one quarter of the par-value of the shares or the capital
raised by public subscription is deposited. An authenticated power of attorney issued by an authorized organ of a company for the permanent representative in Ethiopia. the following additional documents are required to be submitted. Financial reference from the company's bank. A notarized copy of registration of the company in the country of origin. Copy of the memorandum and article of associations.
. The decision should indicate the amount of capital allocated and the individual appointed by the company to act on its behalf. the following additional documents are required to be submitted.
The memorandum of association or the contract of partnership. A notice published in a news paper announcing the establishment of the business organization. Where the shareholder is a legal person incorporated abroad.3.
An authenticated decision of the company's board of directors or a similar authorized
body to undertake business activities in Ethiopia.
A specimen of share certificates for each class of shares.
A resolution of the appropriate body of the company agreeing to the company's
participation in the company to be formed.
Where the applicant is a share company. the following additional documents are required to be submitted.3 Registration
The first step for registration is to submit an application to the registrar in a prescribed form. In addition.
marketing plans. human resource plans. Planning is a process that never ends for a business.4. lenders. all these plans have one important purpose: to provide guidance and structure to management in a rapidly changing market environment.2 What Is A Business Plan? It is a written document describing all relevant internal and external elements and strategies for starting a new venture. plans can be classified in to three types: strategic plans.1 Planning As Part of Business Operation Plans are part of any business operation. manufacturing.
3. and sales plans. production plans. and human resources expected results
Business plan answers the questions: Where am I now? Where am I going? How will I get there? Potential investors. Plans also differ in scope depending on the type of business or the anticipated size of the start up operation.
. finance. tactical plans. Plans may be short term or long term. suppliers. It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan.4 Business Plan 3. For any given organization. employees and customers require a business plan. marketing.3. it is possible to find financial plans.Even though they may serve different functions. It includes: functional plans such as research and development. or they may be strategic or operational.4. to name a few.4. and operational plans.1 The concept of business planning
3. In this regard.1.
The following skill assessment criteria are used for deciding in the preparation of business plan for it to be either by the entrepreneur or to make use of other resources depending on the entrepreneur‟s assessment of his/her own strengths and weaknesses. • investors. directing. Management – planning.3 Who Should Write The Plan?
The business plan should be prepared by the entrepreneur.
.3. • advisors and consultants. • customers. and controlling. 1. marketing consultants. 2. supervising. Financial – managing financial resources. Lawyers. budgeting 4. • venture capitalists. Higher-order – learning. However. advisory board relations 6. he or she may consult with many other sources in its preparation. risk management.4 Scope and Value of the Business Plan-Who Reads the Plan?
The following parties may read a business plan and hence prior to its preparation the business plan should consider those parties who determine its scope and value. accounting. supply chain 3. problem-solving
3. Administrative – people relations.
• bankers.4. distribution channels. Legal – organization form. organizing. accountants. Marketing – identifying customers. • suppliers. privacy and security 5. • employees. and engineers are useful in the preparation of the plan. Entrepreneurs may also hire or offer equity (partnership) to another person who might provide the appropriate expertise in preparing the business plan as well as become an important member of the management team.4.
The entrepreneur: The entrepreneur should thoroughly understand what the venture is all about as well as the technology and creativity involved in the venture. effort. the entrepreneur develops and examines operating strategies and expected results for outside evaluators. These are:
1. The completed business plan provides the entrepreneur with a 56
2.5 Benefits of a Business Plan
The benefit of business plan is unquestionable in that many successful businesses start their operation once they have the necessary and feasible business plan. sound financial projections that indicate the feasibility of the venture is better be included in the business plan. and discipline needed to put together a formal business plan force the entrepreneur to view the venture critically and objectively. for the purpose of this course we are going to see the benefits of the plan for the entrepreneur. The plan can benefit various parties which will have stake the new venture. 3.Who is going to read the plan often affects the actual content and focus of the business plan.4. Specifically for the entrepreneur The time. However. Since all aspects of the business venture must be addressed in the plan.
3. 1. The investor: From an investor‟s perspective. economic. and financial analysis included in the business plan subject the entrepreneur to close scrutiny (analysis) of his or her assumptions about the venture‟s success. the depth and detail of the business plan depend on the size and scope of the proposed new venture. The competitive. Consider whether there are enough customers to buy the product or use the service. providing measurable benchmarks for comparing forecasts with actual results. financial sources and customers. research. There are three very essential perspectives that should be considered in preparing the business plan. The market: You must also try to view your business through the eyes of the customers. The business plan quantifies objectives.
The pitfalls in planning are the following: Pitfall 1: No Realistic Goals Indicators: lack of attainable goals. Specifically for the financial sources Since different sources of finance like banks want to know the ability of their clients to pay back the money that the borrower is borrowed. • • • • Details of the market potential and plans for securing a share of that market. in this regard. The venture‟s ability to service debt or provide an adequate return on equity. no contingency plans Remedy: listing the expected obstacles and solutions
. 2. Critical risks and crucial events with a discussion of contingency plans.communication tool for outside financial sources as well as an operational tool for guiding the venture towards success. Pitfall 2: Failure to Anticipate Roadblocks Indicators: no recognition of future problems. concise document that contains the necessary information for a thorough business and financial evaluation of the feasibility of the new venture. A clear.4. time frame. priorities and action steps Remedy: setting up a time table with specific steps to be accomplished during a specific period. Hence. it needs careful and well managed preparation since absence of important consideration (pitfalls in business planning) can result in disastrous consequences. no admission of possible weaknesses of the plan.
3.6 Pitfalls to Avoid in Planning
Dear learner. One of the most relevant documents that can make them approve the ability of a client is the business plan. business plans are highly reviewed and evaluated by the financial sources of businesses since they get the following information in the business plan. since business plan is important and used for variety of purposes.
7. the purpose of the plan and the leadership. two page document. • • General description of business Industry background-trends.Pitfall 3: No Commitment or Dedication Indicators: excessive procrastination. justify why and how your product will satisfy the need. it demonstrates your knowledge of the business opportunity and proves that any investment in the future will yield a good return. As a future-oriented.4.7 Developing a Well-Conceived Business Plan
There are many different business plan formats. no proof of unsatisfied need Remedy: having a specific target market. It is important to develop a concise description of your business to capture the interest and support of the readers like investors. however it covers all important components of the plan.
3. Pitfall 4: Lack of Demonstrated Experience (Business or Technical) Indicators: no experience in business. show financial commitment. The following format can be amended to meet the needs of a business. no desire to invest personal money Remedy: acting quickly and follow professional appointments. The layout may vary depending on the type of the business. lenders or regulatory agencies. partners.4.1 Complete Outline of a Business Plan Section I: Executive Summary
This is a concise summary of the business opportunity. Remedy: giving evidence of personal experience and background. Pitfall 5: No Market Segment Indicators: uncertainty regarding who will buy. analysis of competitors 58
Section II: Business Description
This part of the business plan includes the following components. build effective team. not understanding the industry. no experience in specific area of the venture. missed appointments.
7:00 AM to 6:00 PM Business type. 1. full time venture Monday to Friday. fax.
Section III: Research and analysis
Under this section of a business plan a thorough analysis of both direct and indirect competitors.• • •
Company history or background Goals and potential of the business and milestones (if any) Uniqueness of product or service
The general description of the business refers • Form of business • • • • • • • Owners Name of the business Business startup date Business operation. Competition 4. the status of their businesssteady. E-mail Advisors: lawyers.supplier of high quality child care products Location. Hence. Market size and trends 3. increasing or decreasing. and the difference of their product from your product are expected to be evaluated and presented. Estimated market share Regarding the Marketing plan.
.kebele. It is mentioned in the following sections. Target market (customers) identified 2. accountants etc. the four P‟s will be considered and the result will be presented. different information about the market concerning the following marketing components will be incorporated. Strengths and weaknesses of the competitors. telephone.for instance.
What are you selling? How your product or service will benefit the customer? Which product or services are in demand? What is different about the product or service your business is offering? 2.1. This is due to the fact that price is the only element (among the four P‟s) that is used to generate revenue while all the other elements let a business incur costs. it is should be bore in mind here in that getting a feel for the pricing strategy of competitors is important to see the relationship of your price with the competitors and the industry average. In this regard. Price This part of the marketing plan is used to improve your overall competitiveness. 3.
. Hence. knowing what products and services you produce are important.Distribution Here the following questions should be addressed: What are your location’s needs? Is the area accessible? How and where you plan to sell your product?
It should be noted here in that you must match your location and distribution strategy to the buying pattern preferences of your target market. Product or service Product and/or services outputs and the whole activities of the business and the reasons why customers are coming to your organization from which your business gains revenues. Here the entrepreneur is expected to know different pricing strategies and try to decide a strategy that suits its objectives. the following questions might be asked and given reply to be competitive in the market.
Research assistance needs D. Advertising and promotions These are methods you choose to communicate to your target market to obtain your sales projections.
Section IV. Design. Hence. costs and expected return of the chosen promotional methods which have impact on cash flow. a well-defined plan of action includes the timing. Technical research results C. A. Cost structure be
Section V: Manufacturing
The manufacturing section of the business plan comprises of the following components. A new business must create awareness about its products or services with an action plan to generate business. Development and design B. Suppliers/transportation cost D. Research. Production needs: facilities and equipment C.4. Labor supply E. both cash receipt and cash disbursements. and Development
Under this section the following technical and engineering parts of a business plan will considered. A. Location analysis • Is the area desirable? The building desirable? • Is it easily accessible? Is the public transportation available? Is street lighting adequate? • Are market shifts or demographic shifts occurring? B. Manufacturing cost data
Section VIII: Financial
1. what skills and credentials these people have. What-ifs What-ifs are those conditions which may happen in the future but not yet to be known about their occurrence currently. While writing the Management Plan. Potential Problems
Potential problems include: effect of unfavourable trend in the industry.e.Section VI: Management
The intent of the Management Plan is to explain in detail who will run the business. Board of directors. Financial forecast Under this section different information about financial conditions of the business will be considered using various financial statements. breaking up of management team. Profit and loss statement
. Legal structure – stock agreements. employment agreements. Alternative courses of action (i. unplanned-for competition. and longer lead times in material purchases. and how everyone will fit into the organization's structure. it is essential to take into account how each person will affect the business' bottom line as well.
Section VII: Critical Risks
Critical risks of a business may include: a. inaccurate sales projections. ownership C. advisors. c. Some of them might be competitors‟ price cut. the plan encompasses: A Management team – key personnel B. Obstacles and risks d. design or manufacturing cost overruns. b. since a business plan is supposed to show a business' potential profitability. So. and consultants
Sources of finance and application of funds There are different of sources financing a new venture and an already running business. the two major sources of finance are. 3. Break-even analysis d.Provides you with an overall profitability summary for a period of time and will determine your tax liability for the year as it is depicted below. This part will be clearly shown in the sample business plan. Cash flow statement
This takes the predictions and estimates that you have determined in your business pan and transferred to a comprehensive financial statement. the following financial instruments may also be included. Basically. It also Helps to know your monthly sales and expenses that will also help make good decisions such as when to purchase equipment or hire staff and if you need to obtain a line of credit. Additionally. budget plans and financing stages will be included in the business as part of the financial section of a business plan. • Debt financing
• equity financing Concerning the application of funds. Cost controls e. Preparing cash flow statement helps to determine whether or not the business is viable and if you will be able to draw funds from the business. 63
. Balance sheet
2. Income statement ___________________ Sales Expenses ___________________ ____________________
(Variable or fixed) ____________________ Profit/ loss Tax owed ____________________ ____________________ ____________________ ____________________
b. Budgeting plans A budget is a powerful tool you can use to help you take control of your money.
Therefore. customers‟ profiles and engagement. Financing stages It is rarely possible for startups to raise sufficient capital to start their operations. most angel investors and venture capitalists prefer to fund startups in steps. entrepreneurs should articulate their investment requirements. A budget helps you decide what you want and plan how to achieve it. The truth is. while keeping in mind how investors like to fund startups. it is hard to cite examples of any successful startup that has gone this route. it helps you understand where your money goes so you can take control. and provide equity finance accordingly.Some people say they can't budget. This practice helps investors assess the value of the company and minimize the startup risk. Venture capitalists and angel investors categorize startups into stages based on a number of startup parameters including who makes up the management team. launch products and break even. Moreover. etc. Or they think they've got enough money and don't want to be restricted by a budget because it might mean going without. Although a “one-time investment” strategy is theoretically possible. They say it's too complicated or they don't know where to start. everybody who does a budget can see how it pays off. Basically. 4. revenue. the value proposition. Most startups are categorized into the following stages:
Seed round First round
Second round Third round Bridge loan
Merger & Acquisition round Initial Public Offering (IPO) Leveraged buyouts 64
. the risk.
Deadlines/milestones C. Milestones should be related to such activities as: Product design and development.Section IX: Milestone Schedule
This part of the business plan contains topics like:
A. Relationship of events Milestone scheduling: this is a step by step approach to illustrate accomplishments in a piecemeal fashion. Timing and objectives
B. This can be financial. human resource or other related data. 65
. Establishing the management team Production and operations scheduling Market planning Incorporation of the business Completion of design and development Hiring of sales representatives Product display at trade shows Signing up distributors and dealers Ordering production quantities of materials Receipt of first orders First sales and first deliveries Payment of first account receivables (cash-in)
Section X: Appendix
This section of the business plan contains documents and other materials which have been used for preparing business plan. administrative.
Business plan for micro-enterprises ........... Type of the plan/work/business in which the operator is to be engaged..........
.8 Sample Business plan format
The business plan outlined below presents all necessary chapters in detail.... Kebele.... Year of the plan: From..... • Keep the Plan Respectably Short • Organize and Package the Plan Appropriately • Orient the Plan Toward the Future • Avoid Exaggeration • Highlight Critical Risks • Give Evidence of an Effective Entrepreneurial Team • Do Not Over diversify • Identify the Target Market • Keep the Plan Written in the Third Person • Capture the Reader‟s Interest
3................ Town..... 3....................... 2...4................2 Guidelines to Remember
The following key points are found to be pertinent that should be given due consideration while preparing a business plan.........................4..........7................ Address: Woreda............................ 4.......... Full name of the business operator... House no......... to..............................................Ethiopian application outline
Business Plan 1...........3.... including all necessary explanations in the context of Ethiopia..
....... Specify...................... Type of equipment Total cost of equipment 9.... labor expense.. depreciation expense.5.............................
Source of raw material.................... cost cost Total Remark Unit of measure Unit Qua.................................. Yearly raw material requirement: Ser................... Ser................................ 6. Type of material Total raw cost raw Unit ........ Equipment currently owned by the operator: Ser......... ....................... no........................... sales expense............................................... ............. tax expense etc.......... Qua Unit pric e Total price Remark Unit of measure Unit Qua. ..............g................................................ cost Total cost Remark
Qua........................ no..... no................. Other yearly operating expenses (e..................................... no..... 10. if there is any problem: ........... no........ Yearly sales plan: Product/servic e to be sold.......................... ............... 7..) Amount of Ser........ Equipment to be purchased by the operator Ser............... Type of equipment Total cost of equipment 8...... Work premises at the disposal of the operator....... marketed / year Total sales Months during which sales are expected to be high................................ Types of expense Remark expense in Birr
be produced or rendered Total cost 12.
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short-term and recurrent expenditure Total 13. Financial plan: Capital requirements Investment capital: Machinery + equipment Furniture + fixture Business premises Any other initial and significant outlay Working capital: Salary/wage Raw material and/or supplies Rent Maintenance Business promotion Other cash outlay to meet Equity Loan Total
Qua . Yearly profit and loss plan See Profit + Loss Statement Format: Accounting
Business plan outline 2 for small and medium enterprises and start ups
Business plan for small and medium enterprises and start ups outline
Executive summary 1. production/service to no. Yearly production/service plan: Types of Ser. Brief Description of the Project
.Total expense 11.
10 Raw Materials Needed 2.18 Production Cost 3.3 Life of Fixed Capital 2.6 Planned Capacity 2.1 Product description 1.7 Market Share 1.7 Future Capacity 2.16 Labor Productivity 2.6 Total Demand 1.10 Promotional Measures 1.8 Terms and Conditions of Purchase of Equipment 2. Organization and Management
.17 Factory Overhead Expenses 2.9 Factory Location and Layout 2.2 Competitors' 1.14 Cost of Labor 2.4 Market Area 1.15 Labor Availability 2. Sales and Marketing 1.11 Cost of Raw Materials 2.13 Labor 2. Production 2.8 Selling Price 1. Brief Profile of the Entrepreneur 3.4 Maintenance and Repairs 2.11 Marketing Strategy 1.12 Marketing Budget 2.2.5 Main Customers 1.9 Sales Forecast 1.12 Raw Materials Availability 2.1 Production Process 2.3 Location 1. Project's Contributions to the Economy 1.5 Sources of Equipment 2.2 Fixed Capital 2.
List and describe the different elements of a business plan.6 Office Equipment 3. Take any hypothetical small business which is going to be launched by you and prepare a business plan that helps for effective establishment and running of the venture. 8.3 Security for Loan 4.3 Business of the Entrepreneur 3. Financial plan 4.2 Financing Plan and Loan Requirement 4. 70
.5 Cash Flow Statement 4. 7.7 Administrative Expenses 4.9 Return on Investment (ROI) 4.3.4 Pre-Operating Activities 3. Discuss the pitfalls to avoid in planning and their respective solutions.2 Organizational Structure 3.1 Form of Business 3.6 Balance Sheet 4.5 Pre-Operating Expenses 3. What factors are to be kept in mind while deciding on product/service? 3. 6.1 Project Cost 4.4 Profit and Loss Statement 4. financial sources and customers. What are the important facets of a project feasibility study? 2. Explain legal considerations in the establishment of a small scale enterprise? 5.8 Break-even Point (BEP) 4.7 Loan Repayment Schedule 4. Describe the various forms of business organization? 4. What is business plan? Write the importance of business plan for the entrepreneur.10 Financial Analysis Experience and Qualifications
Self assessment questions