Entrepreneurship and Small Business Management 2017

ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT

CHAPTER ONE
ENTREPRENEURSHIP AND FREE ENTERPRISES
1.1. A Brief History and Philosophy of Entrepreneurship

The earliest usage of the term "entrepreneur" is recorded in 17th Century French military history.
It referred to persons who undertook to lead military expeditions. In 18th Century, Irishman
named Richard Cantillon who was living in France at the time, is credited with being the first to
use the term "entrepreneur" in a business context, as someone who buys goods and services at
certain prices with a view to selling them at uncertain prices in the future, in other words bearing
a not-insured risk. This definition seemed to satisfy people until a decade or so later Jean
Baptiste Say, writing in 1803, described the entrepreneurial function in broader terms laying
emphasis on "the bringing together of the factors of production with the provision of
management and the bearing of the risks associated with the venture".

While Say and Cantillon created some casual interest in entrepreneurs and their role in society, it
was not until the early 20th century when the Morovian, Joseph Schumpeter, cast the
entrepreneur as being the central actor in the change process, that anyone really took note. He
contended that the single most important function of the entrepreneur was innovation. But some
have suggested that Max Weber's earlier writings of 1904 had a critical influence on Schumpeter.
In Weber's paper the entrepreneur is depicted as an energized individual painted against the
clumsy and sluggish background of the traditional economy. As the hero, the entrepreneur sets in
motion the revolutionary processes associated with change. For Weber the main motivating
factor for the entrepreneur was religious belief or the Protestant work ethic which established
social norms that discouraged extravagance, conspicuous consumption and indolence. The result
was higher productivity, increased savings, and investment, all factors which are vital to
economic growth.

Schumpeter, on the other hand maintained that it was the entrepreneurs who used Protestantism
to legitimize what they were already doing. He attributed the motivation of the entrepreneur to
the need "to found a private kingdom... the will to conquer, the impulse to fight, to prove oneself
superior to others, to succeed for the sake of it, and not for the fruits of success itself... finally

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there is the joy of creating, of getting things done or simply exercising one's energy and
ingenuity". For Weber the entrepreneur was the product of society but for Schumpeter these
individuals occurred randomly in any ethnically homogenous population and were gifted with a
special intuition to see things in a way which afterwards proved to be correct, they possessed the
energy and force of will to overcome traditional norms and withstand social opposition. These
two theories still command a great deal of respect even today and are constantly referred to in
most of the literature on Entrepreneurship.

1.2. The Evolution of Definitions of Entrepreneurship

Since that time the definition of an entrepreneur has not dramatically changed, but a few are
worth noting; the well-known economist, Marshall in 1920 described the entrepreneur as
someone who " combines through vigorous activity the factors of production, labor and capital
so as to produce an increased output of goods and services thereby increasing the total wealth or
material welfare of society." David McClelland the behaviorist who inspired the introduction of
achievement motivation training for entrepreneurs defined the entrepreneur as "a person who
organizes and maintains a business undertaking assuming the risks for the sake of profit". Our
final definition is from William Bygrave and although short on description and detail it is
perhaps the simplest and most elegant, "an entrepreneur is someone who perceives an
opportunity and creates an organization to pursue it." Although these definitions are helpful in
telling us what an entrepreneur does, they do not give us many clues as to the relevance of
Entrepreneurship or how to promote it. This investigation only began in the second half of the
20th Century.

People who own, operate, and take the risk of a business venture are called entrepreneurs. They
are engaged in entrepreneurship, the process of running a business of one’s own. Entrepreneurs
come from all types of backgrounds and create all kinds of businesses. People of all ages can
become entrepreneurs. Some own tiny craft shops while others own huge construction
companies. Entrepreneurs try to identify unmet needs in the marketplace. Then they provide a
service or product to meet those needs. When they succeed, their businesses flourish and profits
are earned. But if their business idea is unsuccessful, they may lose the money they invested.

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An entrepreneur is someone who is engaged in entrepreneurship. Entrepreneurs are people who

can organize, manage, and take the risk of owning and operating a business.
An entrepreneur is a person who creates a business or product, manages his or her resources, and
takes risks to gain a profit. To be an entrepreneur is to initiate and build an organization, rather
than being only a passive part of it.
Here we will see at least three definition of entrepreneurship because a single definition is likely
to result, in some cases at least, in a mismatch with out expectations. Intuitively, we know that
entrepreneurship is the process and entrepreneur is the person undertaking entrepreneurial
activity. Finally we will see the common attributes of the definitions of entrepreneurship.

1. Entrepreneurship is the process of creating incremental wealth. The wealth is created by

those individuals who assume the major risk in terms of equity and time or providing value
for others.
2. Entrepreneurship can also be defined as the process of creating something different and
better with value by devoting the necessary time and effort by assuming the accompanying
financial, psychic and social risks and receiving the resulting monetary reward and personal
satisfaction. In this case an individual should come up with something different and better
in order to the named as entrepreneur.
3. Our third definition views the term from three perspectives; i.e. from the economist,
psychologist and capitalist philosophers point of view.
To an economist an entrepreneur is one who brings resource, labor, materials, and other assets
into combination that makes their value greater than before and also one who introduces changes
innovations.

To a psychologist an entrepreneur is a person typically driven by certain forces need to obtain or

attain something, to experiment, to accomplish or perhaps to escape the authority of others.

For the capitalist philosopher an entrepreneur is one who creates wealth for others as well, who
finds better way to utilize resources and reduce waste and who produce job others are glad to get.

In general, the process of entrepreneurship includes five critical elements. They are:

1. The ability to perceive an opportunity.

2. The ability to commercialize the perceived opportunity i.e. innovation

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3. The ability to pursue it on a sustainable basis.

4. The ability to pursue it through systematic means.
5. The acceptance of risk or failure.
Based on the above concepts of entrepreneurship, an entrepreneur can be defined as follows:

An entrepreneur is someone who perceives an opportunity and creates an organization to pursue

it with the intention of being profitable.

An entrepreneur:
 Observes the environment
 Identifies opportunities in the business or non-business environment
 Gathers the necessary resources
 Implements the activity, and
 Receives financial or social rewards
Entrepreneurs are the prime movers in the business or social sectors. Without entrepreneurs,
there would be no business or social development.

Entrepreneurship is the process of creating and managing a business to achieve desired

objectives. Entrepreneurship occurs when an enterprising individual pursues a lucrative
opportunity and it is the process of starting and managing your own business. It involves creating
new systems, resources, or processes to produce new goods or services and/or serve new
markets.
Characteristics of Successful Entrepreneurs

Many people dream of running their own businesses. They would like to become entrepreneurs.
Entrepreneurship can be exciting, but many go into it not realizing how difficult it is to run their
own business. In fact, statistics show that most new businesses will fail within a few years.
Startup businesses fail because of the owner’s poor planning, lack of business knowledge, lack of
entrepreneurial characteristics, inability to work with others, or failure to choose the right
business. Researchers have identified several characteristics that distinguish successful
entrepreneurs from those that fail.

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1. Successful entrepreneurs are independent.

They want to make their own decisions and do something they enjoy.
2. Successful entrepreneurs are self-confident. Entrepreneurs make all the decisions. They
must have the confidence to make choices alone and bounce back from a poorly made
decision.
3. Successful entrepreneurs have determination and perseverance. Entrepreneurs persist
through hard times until goals are met.
4. Successful entrepreneurs are goal-oriented. They know what they want, and they are able to
focus on achieving it.
5. Successful entrepreneurs have a need to achieve and to set high standards for
themselves. They are motivated by setting and achieving challenging goals.
6. Successful entrepreneurs are creative. They think of new ways to market their businesses
and always look for new solutions to problems.
7. Successful entrepreneurs are able to act quickly. They are not afraid to make quick
decisions when necessary, which helps them, beat their competitors.
8. Successful entrepreneurs keep up to date with technology. New technologies emerge that
can help with many business activities. In order to run their business efficiently, entrepreneurs
should always be on the lookout for new technology they can apply to their business.
In general, the most important entrepreneurial traits are listed below. A successful entrepreneur
is:
 Hardworking  Demonstrates initiative
 Self-confident  Willing to listen
 Builds for the future  Sets own standards
 Profit oriented  Copes with uncertainty
 Goal-oriented  Committed
 Persistent  Builds on strengths
 Copes with failure  Reliable and has integrity
 Responds to feedback  Risk taker

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Advantages of Entrepreneurship

Many people see significant advantages in owning their own businesses. Some of the biggest
advantages include the following.
1. Entrepreneurs are their own bosses. Nobody tells an entrepreneur what to do.
Entrepreneurs control their own destinies.
2. Entrepreneurs can choose a business that interests them. Entrepreneurs work in
fields that interest them. Many combine hobbies and interests with business.
3. Entrepreneurs can be creative. Entrepreneurs are always implementing creative ideas
they think of themselves.
4. Entrepreneurs can make large sums of money. Entrepreneurship involves risk, but if
the business is successful, the business owner will reap the profits.

1.1. Role of Entrepreneurship in the Economy

There are many benefits of entrepreneurship in the process of developing nation’s economy
in every corner of the world. Among these roles, some of them are presented as follows.
1) Employment Creation: entrepreneurs create employment for themselves and other
people. They are employers and assist in solving the unemployment problem.
2) Local Resources: when entrepreneurs utilize local resources, the value of these resources
increases, which has sum of benefits to the society.
3) Decentralization and Diversification of Business: entrepreneurs are able to identify
business opportunities, and locate these businesses in suitable areas, including rural areas.
4) Promotion of Technology: by being creative, entrepreneurs are able to contribute to the
utilization and development of appropriate technology.
5) Capital formation: entrepreneurship increases capital formation and investment in new
and expanding businesses.
6) Promotion of an Entrepreneurial Culture: by projecting successful images,
entrepreneurs become role models for other people

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1.3. Entrepreneurship, Creativity and Innovation

The Entrepreneurial Process

Allan Gibb, an Entrepreneurship practitioner working out of Durham University Business School
in the UK, challenged the validity of the assumption that only those with certain entrepreneurial
characteristics can successfully be self-employed or run independent owner managed businesses.
He questioned the relevance of many of the common Entrepreneurship tests as a means for
selection on the grounds that the traits which are sought after by the selectors are traits learned in
business. For Gibb running achievement motivation training as a separate module for
entrepreneurs was artificial because, in his view, the whole training program should be oriented
to learning and developing the skills needed to succeed in business. Also instead of having one
program to cover all target groups he advocated the design of many training interventions suited
to the different stages of the business start-up, survival and growth process. Gibb also laid out the
start-up process into 6 stages: From idea and motivation acquisition to raw idea; from raw idea to
valid idea; from valid idea to scale of operation and resource identification; from "scale" to
business plan and negotiations; from negotiations to birth; and from birth to survival.

Carol Moore developed a similar linear model of the start-up process in 4 stages:
Innovation-Trigger Event-Implementation-Growth
She suggests that what gives life to the process are a series of factors working on the would-be
entrepreneur. These actors are: personal, such as achievement orientation, locus of control,
tolerance forum certainty, risk taking, personal values, education and experience; sociological
factors, like networks, teams, parents, family, and culture; and environmental factors such as
opportunities, role models, competition, resource availability, government policy, and markets or
customers .Reducing the key components of success down to the minimum, Jeffrey Timmons
identifies: the opportunity; the entrepreneur (and the management team); and there sources
needed to start the business. Out of these three components the lead entrepreneur is considered
the most important, and Timmons refers to venture capitalists, or entrepreneurs who make their
living from picking winners, as giving 80%of their selection points to the quality of the
entrepreneur, the other 20 % goes to the market potential. Timmons second component is the

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opportunity. Opportunities exist because of changing circumstances, inconsistencies, chaos, lags

or leads, information gaps, and a variety of other vacuums in the market. Opportunities are
situational; they are like constantly moving targets they are seen by many but their potential is
recognized by a few. It takes great skill and experience to recognize when the window of
opportunity is open and when it is closed, when to shoot and when to hold fire. As Mark Twain
once said “I was seldom able to see an opportunity until it had ceased to be one". Timmons third
component is resources. He says that "entrepreneurs are frugal with their resources", they try as
much as possible to keep their overheads low, their productivity high and have minimum
ownership of their capital assets. Knowing when these three components fit together and when
they do not is for Timmons the key to entrepreneurial success. He sums it up by saying,
experienced entrepreneurs exhibit an ability to quickly recognize a pattern- an opportunity- while
it is still taking shape. Thus, the process of sorting through ideas and recognizing a pattern can
also be compared to the process of fitting pieces into a three dimensional jigsaw puzzle. It is
impossible to assemble such a puzzle by looking at it as a whole unit. Rather one needs to see the
relationship between seemingly unrelated pieces and be able to fit them together before the
whole is visible. The ability to recognize ideas that can become entrepreneurial opportunities
stems from a capacity to see what others do not- that one plus one equals three or more. ... Nobel
Prize-winner Herbert Simon of the Department of Psychology at Carnegie-Mellon University
described the recognition of patterns as a creative process that is not simply logical, linear, and
additive; he says, rather that the process is often intuitive, involving the creative linking, or cross
association, of two or more in-depth "chunks" of experience, know-how and contact"

Creativity and Innovation

Innovation is an important function of an entrepreneur and it the act of introducing new
combinations in any branch of economic activity. Innovation implies doing new things or doing
things that are already being done in new ways. It may occur in the following forms:
 Introduction of a new product or new quality of an existing product
 Introduction of new methods of production or distribution
 Opening of a new market
 Conquest of a new source of raw materials
 New form of industry

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Entrepreneurship is a creative activity and the entrepreneur introduces something new in any
branch of economic activity.

What is Creativity?
Creativity is the ability to design, form, make or do something in a new or different way. The
ability to come up with creative solutions to needs/problems and to market them often marks the
difference between success and failure in business. It also distinguishes high-growth or dynamic
businesses from ordinary, average firms. Real, successful entrepreneurs are creative in
identifying a new product, service or business idea and turning it into a business opportunity. To
be creative, you need to keep your mind and eyes open as you work through the sources of
business ideas explained below, and apply the techniques.

Most people can think of several occupations which require creativity – artist, musician, dancer,
designer and scientist. However, the need for creativity is not limited to these occupations.
Creative ideas are needed anywhere there are problems with unknown solutions. In the business
world, entrepreneurs use creativity to solve everyday problems, promote products and services,
update products and services, and make use of limited resources.
Some people believe that they are not creative. They may overlook situations in which they have
good ideas, or they may avoid sharing their ideas with others. By recognizing and sharing their
ideas, people can begin to develop their creative ability.
Because people become accustomed to thinking in certain ways, they may have difficulty
thinking of original ideas. People can develop their creative potential through learning and
practice. Several techniques can be used to develop more creative thinking habits. Some of these
techniques are: increasing awareness of one’s environment, brainstorming and changing existing
ideas.
Increasing awareness of one’s environment means learning to pay attention to sights and
sounds we ordinarily ignore. Most people are in the habit of blocking out certain sights and
sounds in order to concentrate on one thing at a time. By paying attention to what we usually
ignore, we can open our minds to new ways of thinking.
Brainstorming is a technique in which persons generate a large number of ideas.
Unusual ideas are encouraged. Ideas are never judged or criticized during brainstorming.
Participants may combine and improve ideas during brainstorming.

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New and original ideas can be developed by using existing ideas as a starting point.
Parts of existing ideas can be changed in many ways. They can be: made bigger, made smaller,
modified in color, taste or style, rearranged, reversed, substituted or combined. Products and
services are often changed to make them more attractive by using this simple technique. This
method could also be used to help entrepreneurs make their working situations more pleasant and
efficient.
By developing and using their creativity, entrepreneurs can increase their potential for success.
The appreciation of creativity has been more important for entrepreneurs in the past several
years. It is increasingly accepted that intellect and credentials take a backseat to the ability to
respond creatively to challenging situations. Here are seven steps to expanding your creative
potential:
1. Examine how you perceive creativity and creative people. Our results-oriented culture has
tended to look at those whose creativity produces a product — a book, painting or cake — as
officially creative. We have been less able to recognize people who identify new ways of
thinking and behaving, especially in every day and business life, as just as creative.
2. Spend time with creative people. Observe how they act, think, relax and respond. Ask them
to talk about what events in their lives influenced their creativity.
3. Learn your own warm-up process. This warm-up process increases your ability to ready
yourself to develop a creative idea and take positive risks in making changes, even small
ones. What events and settings seem to encourage your creative actions?
4. Move, dance, exercise, bicycle, walk and stretch. These physical activities get us out of our
thinking brain and allow us to truly inhabit all of our body. As the body moves, the right and
left parts of the brain; both the imaginative side and the cognitive side are able to work
together more efficiently.
5. Listen to music and experiment with improvisational exercises. Notice how different
types of music promote various levels of energy within you. Theater and drama exercises
will help you practice different ways of responding, apart from your habitual roles.
6. Keep a notebook of interesting or creative ideas and observations. Paste a few pictures
from magazines that interest or intrigue you, even if you don’t know why. Scribble and
doodle. Whatever you do, don’t censor yourself. See what happens.
7. Find a mentor or coach who can help you develop your creativity to a higher level.

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Check Your Progress Questions

1. Give at least two definitions of entrepreneurship

…………………………………………………………………………………………………

………………………………………………………………………………………

2. How the entrepreneurs environment differs from the environment of the individual
entrepreneur?
…………………………………………………………………………………………………
………………………………………………………………………………………

3. Discus any four possible areas for innovation

…………………………………………………………………………………………………
………………………………………………………………………………………

4. Who are the potential candidates for entrepreneurship?

…………………………………………………………………………………………………
………………………………………………………………………………………

5. Identify any five characteristics of a successful entrepreneur

…………………………………………………………………………………………………
………………………………………………………………………………………

6. Some people argue that “the only beneficiary of the entrepreneurial wealth is the
entrepreneur him/herself” Do you agree? Why or why not?
…………………………………………………………………………………………………
………………………………………………………………………………………

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Chapter- Two
Small Business
2.1 Definition and Importance
Specifying any size standard to define small business is necessarily arbitrary, because people
adopt different standards for different purposes.

Even if there are different approaches and criteria to define small businesses, the most common
size criteria are listed below:

1. Number of employees
2. Volume/value of sales turnover
3. Asset size
4. Insurance in force
5. Volume of deposits
6. Total capital investment
7. Total investment in plant and machinery
8. Volume/value of production
9. A combination of the above

Although the first criterion listed above-number of employees-is the most widely used yardstick,
the best criterion in any given case depends upon the user’s purpose.

Micro and small enterprises are enterprises which are independently owned and operated; and
not dominant in their field of operation.

In Ethiopia, the Ministry of Trade and Industry (1997) adopted official definition of Micro and
Small enterprises as follows:

Micro enterprises are business enterprises found in all sectors of the Ethiopian economy
with total fixed assets of birr 20,000 and lesser, except high-tech consultancy firms and
other high-tech establishments. And, Small enterprises are business enterprises with a
paid-up capital of more than birr 20,000 but not more than birr 500,000 excluding high-
tech consultancy firms and other high-tech establishments (MoTI, 1997 pp31).

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The Ethiopian Central Statistics Agency (2007) has also tried to define micro and small
enterprises by only considering the type of sector involved and the manpower requirement.

And currently, The Ethiopian Federal Development Agency for Micro and Small Enterprises
(FeMSEDA) (2010), to give more relevant working meanings of the MSEs, has modified the
previous definitions as shown in the table 3.1 by considering the combination of manpower and
total asset bases together.

Table3.1: Definition of MSEs

Type (level of Sector Manpower Total assets (in birr)

business involvement)
Micro enterprises Industrial ≤5 ≤ 100,000
Service ≤5 ≤ 50,000
Small enterprises Industrial 6-30 >100,000 but
≤ 1,500,000
Service 6-30 >50,000 but
≤ 500,000
Source: FeMSEDA, 2010

Micro and Small businesses do provide a number of importance’s that are described in the
following paragraphs.

In developing countries that are scoring success, MSEs by their features like size, location,
capital investment and their capacity to generate greater employment, have demonstrated their
strong propellant effect for rapid economic growth (FeMSEDA, 1997). The MSE sector has also
been instrumental in bringing about economic transition by providing goods and services that are
of adequate quality and are reasonably priced to a large number of people (Reddy, 2007), Fedearl
Micro and Small Enterprises Development Agency (FeMSEDA) (1997) and Zewde & associates
(2002) separately wrote that the Micro and Small Enterprise sector has the potential to provide
the ideal environment for enabling entrepreneurs to optimally exercise their talents and to attain
their personal and professional goals.

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Chibwe (2008) also put that Micro and Small Enterprises is the major feature of the economic
landscape in all developing countries today. According to him, the contribution of these
enterprises to the creation of jobs and to the alleviation of poverty has been recognized by many
3rd world governments and has been given prominence in many development plans as well as in
the strategies of many donors.

In the case of Ethiopia, by quoting Federal Democratic Republic of Ethiopia (FDRE), Ministry
of Trade and Industry 2007 and Hirity (2009) stated that small businesses have been recognized
to create job opportunities for a significant segment of the population and employ large numbers
next to the agricultural sector in Ethiopia. The author added, the contribution of MSEs to
employment expands as a result of new enterprises start up in business and expansion of existing
enterprises. While we cannot deny the importance of large industrial and other enterprises for the
growth of the Ethiopian economy, there is also ample evidence to suggest that the labor
absorptive capacity of the micro and small business sector is high, the average cost per job
created is commonly lower than in big business, and its role in technical activities is vital for
many of the economic challenges facing Ethiopia (FeMSEDA, 1997). Having recognized the
importance of the MSE sector to the economy, has issued an MSE development strategy was
issued by the Federal Government of Ethiopia in 1997 followed by the proclamation for the
establishment of the Federal Agency for Micro and Small Enterprises Development in 1998.

2.2 Economic, social & political aspects of small business enterprise

Small businesses as part of our total economic system, contribute to the development of the
economy that we should clearly understand to pursue pivotal economic activities in our locality.

Small firms operate in all industries, but they differ greatly in their nature and importance from
industry to industry. Although both large and small firms exist in each industrial area, growth
appears relatively favorable to small business. Reasons for the more rapid growth of small firms
in most of the developed countries:
 New technologies, such as numerically controlled machines, tools, may permit efficient
production on a smaller scale than formerly.

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 Greater flexibility is required as a result of increased global competition, a requirement

that favors small firms. Small firms may be more flexible in employing the increasing
numbers of working mothers/hubs in the labor force.
 Consumers may be coming to prefer personalized products over mass-production goods,
and this opens a door of opportunity for smaller businesses.

To see from some social and economic aspects, people are always involved in enterprising.

Reasons for Interest in Small Business

 Small business operators constitute a large political pressure group whose voice and
concerns cannot be ignored.
 There are large numbers of people involved in small enterprise.
 Employees and sometimes owners of small enterprises tend to be underprivileged.
 Small enterprises offer many job opportunities, especially for women.
 Small enterprises alleviate poverty and contribute to development.
People in a community have many interests and different needs and wants. Enterprising men and
women are able to identify these needs and wants and establish specific enterprises to satisfy
them. Enterprises can provide satisfying rewards for those who successfully establish them.

Terms used to classify enterprises include private, public, formal, informal, individual,
community, local, foreign, small, large, business, social, manufacturing, and service, consumer
goods or industrial goods. Enterprises that succeed, irrespective of their nature, come up with
valued approaches to providing solutions to problems, and satisfying the desired needs and
wants. The key difference between all types of enterprise lies in the rewards they provide.
Business ventures provide profits as rewards, while non-business ventures provide other types of
rewards that could be either physical or psychological. Entrepreneurs engage in enterprises
depending on what kind of rewards they expect from them.

Enterprises in a community have the potential to benefit from each other. Output from one
enterprise normally becomes input for other enterprises, and this helps in money circulation
among the enterprises within the community. The more money circulates in the community, the
more prosperous the community becomes. The synergistic nature of all enterprises in a
community creates an environment where there are lots of opportunities to be exploited by

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enterprising men and women. It is up to these men and women to identify the opportunities
available and exploit them. Almost all communities have lots of unexploited opportunities that
can create more advantages for everyone.

Men and women acquire different skills that lead to different careers. They are applied in trade,
services, manufacturing, food processing, recreation, information and communication, and other
forms of enterprises. The existence of many types of enterprise in your community offers you
opportunities to apply the skills you have acquired. All types of skill learnt have a chance to be
applied if opportunities are sought in all types of enterprise. It is normal for men and women to
consider the compatibility of personal values, interests and expectations with the type of
enterprise they desire.

The first step is to evaluate the various enterprises in your community and note their potential.
The next step is to identify how your skills match the various possible enterprises. You can,
therefore, do what you can, with what you have, where you are, and still succeed.

2.3. Small Business Failure factors

Small enterprise weaknesses
Financial limitations:
Balancing “cash in” and “cash out” is a struggle, especially when trying to expand.
Instead of receiving the red carpet treatment by financiers when asking for a loan, the small
businessperson is often made to feel like a second-class citizen. Small enterprises can’t use credit
as a selling tool as readily as companies with large financial reserves. Additionally, many small
enterprises have trouble staying afloat while waiting for their products to win acceptance in the
marketplace.
Staffing problems: Small companies cannot pay top salaries and provide the opportunities and
status normally associated with a big company job. Small enterprise owners must also
concentrate on the day-to-day problems of running the business and generally have little time left
to think about objectives.
Higher direct costs: A small enterprise cannot buy raw materials, machinery or supplies as
cheaply as a large company, or obtain a large producer’s economies of scale. So per unit
production costs are usually higher for a small enterprise, but overhead costs are generally
somewhat lower.

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Too many eggs in one basket: A large diversified company can take a licking in one sector of
its business and still remain strong. This is not so for the small business with only a few product
lines. A small company is vulnerable if a new product doesn’t catch on, if one of its markets is
hit by a sharp recession, or if an old product suddenly becomes obsolete.

Lack of credibility: The public accepts a large company’s products because its name is well
known and usually respected. A small enterprise must struggle to prove itself each time it offers
a new product or enters a new market. Its reputation and past successes in the marketplace
seldom carry weight.

Key Success Factors in Setting up a Small Business

How do I become an entrepreneur? How can I set up a successful business? These are questions
that people often ask. Unfortunately, however, no foolproof answer or formula has been
identified as yet. Notwithstanding this, success – according to the literature, observations and
experience – depends on that peculiar ability to spot opportunities in the market and act on them
by organizing the necessary resources to offer something attractive to customers and take on the
attendant risks. This is the essence of entrepreneurship in a business context.
The crucial ingredient in the whole process is the entrepreneur. He/she takes the initiative and
also bears the risk in creating and/or organizing an attractive offer of value to potential
customers. The entrepreneur’s ability to do this successfully depends on 4 factors, namely:
Motivation, Ability, Idea and Resources. The acronym –MAIR – may help you remember these
factors more easily. These are explained in turn.
Idea and Market
The important issue to be determined here is the viability of the idea, project, product or service
to be offered. In other words, does the idea, product or service meet a need or want for which
there are customers who can afford it and are willing to use/purchase it in sufficient quantities to
make the whole project worthwhile (i.e. return a profit, in a business context)? How the
proposition to be offered is more desirable or better than what is currently available and how will
competitors react?

Motivation and Determination

It is widely acknowledged that, to be successful, the individual or group needs to be highly
motivated and determined to set up the business to make it succeed. This will be reflected, for

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example, in how persistent they are in overcoming obstacles that might get in the way, how they
go about seeking information and how they act on opportunities. Additional indicators might be
their commitment and attitude to work (quality, efficiency, and long hours), previous attempts to
set up a business and the support of family or partners.
Ability
Another important question is whether the individual or others involved have particular abilities
– these may be knowledge, technical or managerial skills of relevance to the business or project.
One way of making up for any lack in this area could be to team up with people who have the
necessary expertise, or buy it in.
Resources
Finally, the extent to which the person(s) involved can acquire or organize resources in adequate
measure will not only influence performance but also, in some cases, whether they start at all.
Examples here include capital, cash, premises, materials, equipment and labor. The availability
of infrastructure (e.g. utilities like electricity, telephone, roads) and support services might also
be important.
Business plan
In order to turn the above 4 components into reality, a plan would be required. In business, this is
normally referred to as a Business Plan. On the whole a business plan should show four main
things, namely:
 where you are currently with your idea, project or business;
 what you wish to do;
 how you propose to go about it;
 And that the project is worthwhile.
Organization and Management
The business then needs to actually start operating and, once this is done, it would need to be
managed. In setting up the business or before starting to operate, there may be legal or other
statutory requirements to be met. There may be a need to consult professionals such as lawyers,
accountants and/or staff from small business support agencies for advice. The whole business
and the process need to be managed, and how well this is done – in particular, finding and
dealing with customers, management of cash and finances, marketing, handling employees,
dealing with suppliers, control systems – will all affect performance.

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2.4 Problems in Ethiopia small business

Small-scale industries have not been able to contribute substantially as needed to the economic
development particularly because of-financial, production, and marketing problems. These
problems are still major handicaps to their development. Lack of adequate finance and credit has
always been a major problem of Ethiopian small business. Small-scale units do not have easy
access to the capital market because they mostly organized on proprietary partnership basis and
of very small business. They do not have access to industrial source of finance partly because of
the fact that their surpluses which can be utilized to repay loans are negligible. Because of their
size and partly because of the fact limited profit, they search for funds for investment purposes.
Consequently, the approach moneylenders who charge high rate of interest hence small
enterprises continue to be financially weak.

Small scale enterprises find it difficult to get raw materials of good quality and at cheaper rates
in the field of production. Very often they don’t get raw material in time. As a result, these
enterprises very often fail to produce goods in requisite quantities and of good quality of a low
cost. Furthermore, the techniques of production, which these enterprises have adopted, are
usually outdated. Because of their poor financial position they are not able to buy new equipment
consequently their productivity suffers. Besides, many small business enterprises are suffering
with the problem of marketing their products.

It is only by overcoming all these constraints that small entrepreneurs can hope to make their
enterprises successful.

2.5 Setting Small Business

2.5.1 What is Basic Business Idea?

Why should you Generate Business Ideas?

There are many reasons why entrepreneurs or would-be entrepreneurs need to generate business
ideas. Here are just a few:
o You need an idea – and a good one at that – for business. As indicated earlier, in looking
at the rationale for this topic, a good idea is essential for a successful business venture –
both when starting a business and to stay competitive afterwards.

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o To respond to market needs. Markets are made up essentially of customers who have
needs and wants waiting to be satisfied. Those people or firms that are able to satisfy
these requirements are rewarded.
o Changing fashions and requirements provide opportunities for entrepreneurs to
respond to demand with new ideas, products and services.
o To stay ahead of the competition. Remember, if you do not come up with new ideas,
products and services, a competitor will bit you. The challenge is to be different or better
than others.
o To exploit technology – do things better Technology has become a major competitive
tool in today’s markets, with the rate of change forcing many firms to innovate. There are
several companies in the world, operating in the electronics and home appliances
industries, which come up with dozens of new products every month. For these and many
others in today’s global markets, generation of business ideas is crucial.
o Because of product life cycle. All products have a finite life. As the product lifecycle
chart shows, even new products eventually become obsolete or outmoded. Thus, there is
a need to plan for new products and the growth of these. The firm’s prosperity and
growth depends on its ability to introduce new products and to manage their growth.
 To spread risk. Linked to the product life cycle concept is the fact that over 80 percent
of new products fail. It is therefore necessary for firms to try to spread their risk and
allow minimizing for failures that may occur from time to time by constantly generating
new ideas.

Generating a Business Idea

A good business idea is essential, or even a prerequisite, for a successful business venture.
However, good business ideas do not usually just occur to an entrepreneur.
Rather, they are the result of hard work and effort on the part of the entrepreneur ingenerating,
identifying and evaluating business ideas that can be developed in to a business opportunity.
What is a Business Idea?
A business idea is the response of a person or an organization to solving an identified problem or
to meeting perceived needs in the local environment (markets ,community, etc.). Finding a good

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idea is the first step in transforming the entrepreneur’s desire and creativity into a business
opportunity.
Two things should however be noted:
(a) Although it is a prerequisite, a business idea is only a tool;
(b) An idea by itself, however good, is not sufficient for success.
In other words, notwithstanding its importance, an idea is only a tool that needs to be developed
and transformed into a viable business opportunity. Out of 30 business ideas, there may be only
one good business opportunity.
What is Creativity?
Creativity is the ability to design, form, make or do something in a new or different way. The
ability to come up with creative solutions to needs/problems and to market them often marks the
difference between success and failure in business. It also distinguishes high-growth or dynamic
businesses from ordinary, average firms. Real, successful entrepreneurs are creative in
identifying a new product, service or business idea and turning it into a business opportunity. To
be creative, you need to keep your mind and eyes open as you work through the sources of
business ideas explained below, and apply the techniques.
Sources of Business Ideas
There are millions of entrepreneurs throughout the world and their testimonies suggest that there
are many potential sources of business ideas. Some of the more useful ones are outlined below.
Hobbies/Interests
A hobby is a favorite leisure-time activity or occupation. Many people, in pursuit of their
hobbies or interests, have founded businesses. If, for example, you enjoy playing with
computers, cooking, music, traveling, sport or performing (to name but a few), you may be able
to develop this hobby/interest into a business. To illustrate this, if you enjoy traveling,
performing and/or hospitality, you may consider going in to tourism, which is one of the biggest
industries in the world.
Personal Skills and Experience
Over half of the ideas for successful businesses come from experiences in the workplace. For
example, a mechanic with experience in working for a large garage who eventually sets up
his/her own car repair or used car business. Thus, the background of potential entrepreneurs can
play a crucial role in the decision to go into business as well as the type of venture to be created.

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Your skills and experience are probably your most important resource, not only in generating
ideas but also in capitalizing on them to develop a good business opportunity.
Franchises
A franchise is an arrangement whereby the manufacturer or sole distributor of trademark,
product or service gives exclusive rights for local distribution to independent retailers in return
for their payment of royalties and their willingness to conform to standardized operating
procedures. Franchising may take several forms, but the ones of interest to potential
entrepreneurs are the types that offer a name, image and method of doing business and operating
procedures.
In the 1990s franchising experienced tremendous growth, becoming a much-used method of
going into business for the millions of enterprises that were starting up in the USA and Europe.
In the 1990s, there were over 2,000 types of franchise businesses, accounting for over US$300
billion in annual sales revenue and about a third of all retail sales in the United States. There are
many directories and hand books as well as associations, including the International Franchise
Association, which can provide further information.
Mass Media
The mass media is a great source of information, ideas and often opportunity.
Newspapers, magazines, television, and the Internet are all examples of mass media.
Take a careful look, for example, at the commercial advertisements in a newspaper or magazine
and you may well find businesses for sale. One way to become an entrepreneur is to buy an
existing business.
Articles in the printed press or on the Internet or documentaries on television may report on
changes in fashions or specific consumer needs. For example, you may read or hear that people
are now increasingly interested in healthy eating or maintaining their physical fitness.
You may also find advertisements calling for the provision of certain services based on skills, for
example accounting, catering or security. Or you may discover a new business concept, but
investors would be needed.
Exhibitions
Another way to find ideas for a business is to attend exhibitions and trade fairs. These are usually
advertised on the radio or in newspapers. By visiting such events regularly, you will not only
discover new products and services, but you will also meet sales representatives, manufacturers,

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wholesalers, distributors and franchisers. These are often excellent sources of business ideas,
information and help you in getting your business started. Some of them may also be looking for
someone just like you to be a business partner.
Surveys
The focal point for a new business idea should be the customer. The needs and wants of the
customer, which provide the rationale for a new product or service, can be ascertained through a
survey. Such a survey might be conducted informally or formally by talking to people. Surveys
may be conducted using a questionnaire ,through interviews or through observation.

You may start by talking to your family and friends to find out what product or service they think
is needed or wanted but is not available in the market. Or, for example, whether they are
dissatisfied with an existing product or service and what improvements or changes they would
like to see. You can then talk to people who are part of the distribution chain that is
manufacturers, wholesalers, distributors, agents and retailers. It would be useful to prepare a set
of questions which might be put on aquestionnaire or used in an interview. Given their close
contact with customers, these people have a good sense of what is required and what will sell and
what will not sell.
Finally, you should talk to as many customers as possible (both existing and potential
customers). The more information you can get from them, the better.
Besides talking to people, you could also get information through observation. For example, in
deciding whether to open a shop on a particular street, you can observe and count the number of
people going past on given days and compare these numbers to other sites. Or, if you are
interested in an area frequented by tourists, you might sell products from a craft business. Or you
may have noticed that there is no decent restaurant or hotel on a tourist route or in a given town.
One way of ensuring that you are not negligent in identifying new business ideas is to be alert at
all times to customer needs. One entrepreneur apparently went round at every cocktail party
asking if anyone was using a product that did not adequately fulfill its intended purpose. Another
monitored the toys of a relative’s children looking for ideas for a market niche.

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Complaints
Complaints and frustrations on the part of customers have led to many a new product or service.
Whenever consumers or customers complain bitterly about a product or service, or when you
hear someone say “I wish there was .....” or “If only there were a product/service that could ....”,
you have the potential for a business idea. The idea could be to set up a rival firm offering a
better product or service, or it might be a new product or service which could be sold to the firm
in question and/or to others.
Change
The world is constantly changing. Change can be a threat; however, most entrepreneurs consider
change as a challenge and opportunity to trigger new needs for products and services. An
innovative entrepreneur always responds to changes ina positive manner.
Brainstorming
Brainstorming is a technique for creative problem-solving as well as for generating ideas. The
objective is to come up with as many ideas as possible.
Identifying Business Opportunities
Seeing, seeking and acting on opportunities is one of the characteristics of successful
entrepreneurs. It is also the basis for starting and maintaining successful ventures. It involves not
only generating ideas and recognizing opportunities, but also screening and evaluating them to
determine the most viable, attractive propositions to be pursued.
What is a business opportunity?
A business opportunity may be defined simply as an attractive idea or proposition that provides
the possibility of a return for the investor or the person taking the risk. Such opportunities are
determined by customer requirements and lead to the provision of a product or service which
creates or adds value for its buyers or end-users. However, a good idea is not necessarily a good
business opportunity. For example, you may have invented a brilliant product from a technical
point of view and yet the market may not be ready for it. Or the idea may be sound, but the level
of competition, and the resources required may be such that it is not worth pursuing. Sometimes
there may even be a ready market for the idea, but the return on investment may not be
acceptable. To underscore the point further, consider the fact that over 80% of all new products

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fail. Surely, to the inventors (and their backers) the idea seemed a good one, yet clearly it could
not withstand the test of the market.
What turns an idea into a business opportunity? A simplified answer is when income exceeds
costs and generates a profit. In practice, to be comprehensive, you need to examine the factors
listed below.
Characteristics of a good business opportunity
To be a good business opportunity, it must fulfill, or be capable of meeting, the following
criteria:
 Real demand: responds to unsatisfied needs or requirements of customers who have the
ability to purchase and who are willing to buy
 Return on investment, provides acceptable returns or rewards for the risk and effort
required
 Be competitive: be equal to or better (from the viewpoint of the customer) than other
available products or services
 Meet objectives: meet the goals and aspirations of the person or organization taking the
risk
 Availability of resources and skills: the entrepreneur is able to obtain the necessary
resources.
Assessing Business Opportunities
Ideas and opportunities need to be screened and assessed for viability once they have been
identified. This is not an easy task, and yet at the same time, the assessment of business
opportunities is extremely important. This assessment can make the difference between success
and failure, between making a fortune and losing everything. While the assessment exercise does
not guarantee success, it certainly helps in minimizing the risks and reduces the odds for failure.
Identifying and assessing business opportunities involves, in essence, determining risks and
rewards/returns reflecting the following factors discussed below.
Industry and market
The key question to be answered is whether there is a market for the idea. A market in this
context consists of customers – potential or actual – who have needs and wants, and who have
the ability to purchase your intended product or service. There is also a need to consider whether

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what the customer wants can be provided at the right price, in the right place, and in a timely
manner.
Another important consideration is the size of the market and the growth rate of the market. The
ideal situation is a market that is large and growing, where getting evena small market share can
represent a significant and increasing volume of sales.
For this assessment exercise, the would-be entrepreneur needs to gather information.
If some potential entrepreneurs are tempted to think that it involves too much hard work, they
might take some comfort from the saying that the data available about markets (size,
characteristics, competitors etc.) is often inversely related to the real potential of an opportunity.
In other words, if market data is readily available and if the data clearly shows significant
potential, then it is likely that a large number of competitors will enter the market and the
opportunity will not be as good. There are several sources of published information (also called
secondary information), including libraries, chambers of commerce, investment promotion
centers, government ministries, universities, foreign embassies, the Internet, newspapers, and so
on.
In addition to the above, there is often the need to collect information at the source(also
called primary research) by interviewing key people, such as customers and suppliers. In that
case, you will need to conduct survey research.
Length of the ‘window of opportunity'
Opportunities are said to have a ‘window of opportunity.’ That is, they do exist, but they
do not remain open forever. Markets grow at different rates over time, and as a market gets
bigger and more well-established, conditions for success are not as favorable. Timing is therefore
important. The issue then is to determine the length of time the window will be open, and
whether the opportunity can be created or seized before the window closes.

Personal goals and competencies of the entrepreneur

An important question for anyone venturing into business is whether they want to undertake that
particular venture. Personal motivation is an essential attribute of a successful entrepreneur.
Unless a person really wants to do that kind of business, he or she should not venture into it.
A related question is whether the potential entrepreneur has the necessary competencies
(including the knowledge, skills and abilities) for the requirements of the business and, if not,

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whether other people could be brought in. Many small business owners/managers have entered
into business based on the strengths of their own skills and ability.
When the above aspects are combined, the issue then becomes one of whether there is a
good fit between the requirements of the business and what the entrepreneur wants or desires.
This is important, not only for success, but also for the entrepreneur’s happiness. As the saying
goes, “Success is getting what you want; happiness wants what you get.”

Management team
In many ventures, particularly those involving a large amount of capital, high risk, sophisticated
markets and high competition, the management team is usually the most important dimension in
determining the success of a business. The experience and skills that the team possesses in
relation to the same or a similar industry often determine success or failure of a new business.
This explains why venture capitalists, or those people who provide finance for businesses, put so
much emphasis on the management factor. Investors often say that they would rather have good
management with an average idea/product/service than a brilliant idea/product/service with bad
management.
Competition
To be attractive, an opportunity must have a unique competitive advantage. For example, a
business may have a competitive advantage by lowering costs in terms of production and
marketing. Or better, a business may offer better quality. In addition, the availability of entry
barriers – which could take the form of high amounts of capital required, protection such as
patents or regulatory requirements, contractual advantage such as exclusive rights to a market or
with a supplier – can make the crucial difference between a ‘go’ and a ‘no go’ investment
decision. If a business cannot keep most would-be competitors out of its market, or if it faces
existing entry barriers, then the opportunity may not be very attractive.
Capital, technology and other resource requirements
The availability and access to capital, technology and other resources such as skills
determine the extent to which certain opportunities can be pursued. As a general rule, the more
difficult the resource requirements are to obtain, the more attractive the proposition, provided of
course that there is a market for the idea/product/ service. To give an example, while marketing a

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breakthrough product based on a patented technology is no guarantee of success, it certainly

creates a formidable competitive advantage.
Business environment
The environment within which the business will operate has a great influence on the
attractiveness of any opportunity. By business environment, we are referring not only to the
physical environment, which is important and increasingly so, but also the political, economic,
geographical, legal and regulatory contexts. Political instability, for example, renders business
opportunities unattractive in many countries, especially for those ventures requiring high
investment with a long payback period. Similarly, inflation and exchange rate fluctuations, or a
weak judiciary system, are not a good environment to start a business, even if the potential
returns are high. The lack of infrastructure and services (such as roads, electricity, water
supply ,telecommunications, transportation, and even schools and hospitals) also affect the
attractiveness of an opportunity in a given environment.
Business Plan
The process of examining the factors discussed above is often the initial step in developing a
business plan. Investors and lenders may require these issues to be considered and set out in the
form of a business plan.
2.5.2 Definition of industry and small scale industry

What is industry?

An industry is an institution where raw material is purchased from suppliers, converted into a
finished product, using machinery and labor, and sold to buyers. Conversion of raw material
means changing the size, shape, chemical properties, and assembling different parts etc.

An industry is able to carry out the functions of buying, manufacturing and selling its product
with the use of an organization; an organization being a collection of people with of different
skills, who coordinate the various functions involved.

Industries are not all the same. Some are big (like a steel plant) and some are small (like unit
manufacturing wooden furniture). Some industries make cycle tubes and tyres while some others
make radios and transistors. Thus industries differ widely and can be classified in different ways.

Basis of classification and description

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1. on the basis of size (depending on the amount of money invested)

Heavy, medium and light
2. on the basis of what it makes
Industries on the basis of the products are classified as electronic industry, machine tools
industry, shipping industry etc.
3. on the basis of market

Certain industries make consumer products, i.e., the products are directly used by the consumer,
e.g., foot wear, ready-made garments, etc. there are other industries, which meet the needs of
another industry, e.g., automobile ancillary units like those making headlights for supply to car
manufacturers and truck manufacturers.

4. On the basis of type

A) Manufacturing industry- where the raw material used undergoes changes in its
physical properties of metallurgical properties, etc., the process involves a change in
size, shape, form, hardness, etc.
B) Process industry- where the raw materials undergo change in size through a chemical
process, e.g., fertilizers, and pharmaceutical products.
C) Conversion industry- where the raw materials undergo change in size, and shape by
simple work like cutting, assembling, etc., for example cartons, boxes, envelops
making, shoes etc.
D) Service industry- which offers different services like laying steam pipes and legging,
tool room facilities, maintenance shop, etc.

Small scale industries

Small scale industries have been defined as industrial units engaged in

manufacturing/preservation activities or repairing/servicing operations including such operations
as quarrying, with original investment in plant and machinery is low.

Small scale industries can be classified into 5 main groups,,

1) Manufacturing industries- i.e., industries producing complete articles for direct

consumption: and also processing industries.

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2) Feeder industries-specializing in certain types of products and services e.g., casting,

electro-plating, welding etc.
3) Service industries- covering light repair shops necessary to maintain mechanical
equipment
4) Ancillaries to large scale industries, - producing parts and components and rendering
services
5) Mining or quarrying

Characteristics of Small Scale Industries

The following are some of the important characteristics of small scale industrial sector/unit:
1) Closely held: the unit is generally a one-man show
2) Personal character- there is close personal contact/supervision of all activities, say
purchase, production, labor, and sale of products. The owner himself is generally the
manager.
3) Limited scale of operation- a small scale industrial unit has a lesser gestation period. The
size of the firm in the industry is small.
4) Indigenous resources: small scale industries can be easily located anywhere subject to
availability of raw materials, labor, finance, etc. small scale units use local resources.
5) Labor intensive: they are generally more labor oriented with comparatively smaller
capital investment than the larger units.
6) Local area of operation: The operations of a small scale unit are generally localized.
7) Simple organization: a small business unit has few or no layers of management. Division
of labor or specialization is low and the resources are limited.

2.5.4. Steps in setting a small scale unit

1) The first key to success in any manufacturing activity is to select the right product. In the
beginning, information of possible lines of activity must be obtained, by talking to
knowledgeable people, from industrial publications, or from various organizations.
These must be examined with a view to assess:
a) The marketing aspect
b) Technical aspects
c) +Financial aspects

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2) Having selected a product, a detailed project report needs to be prepared. This will cover the
following aspects.
 A detailed estimate of demand is to be made
 Technical specifications of the process should be carefully studied.
 The equipment required and the resources are to be specified
 Requirements of space- land, shed etc. and other utilities like power and water are to be
assessed.
 Manpower requirements of direct and indirect personnel are to be determined and their
availability ensured
 The total cost of the project to be worked out and the means for financing it identified;
quotations for equipment, material etc., have to be obtained: information of financing
policies of banks, and other financial institutions has to be gathered
 Like the above information, the economics of the entire scheme at projected operating
levels is to be assessed. The break-even point must be well below the envisaged levels of
operation for adequate profits.
3) After the detailed project report has been prepared and availability of the enterprise
established, the action phase begins. The form of ownership is to be decided upon and the
company formed and registered.
4) Once all the required authorizations and sanctions have been obtained, simultaneous action is
to be taken for the following:
– Ordering machinery from suppliers
– Obtaining utilities like power and water connections after construction of shed, if
necessary
– Recruitment of staff
– Arranging supplies of materials
– Arranging for distribution of the product
5. Once these are complete, the plant is ready for commissioning. Trial run may be made
and at this stage promotional work like efforts may be made to pave the way for
introducing the product.
6. The unit is then ready for commercial production.

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Chapter Three
Business Planning
3.1. The concept of business planning
Purpose of a Business Plan
Once you have worked out the details of your business, you need to put everything down on
paper. Writing out these details will help you visualize all the aspects of your business. It will
also help you convince banks and other people to invest in your business idea. A business plan
is a written document that describes all the steps necessary to open and operate a successful
business.
Writing a business plan is one of the most difficult and important things you will do as an
entrepreneur. Writing a solid business plan is critical because the plan can make or break your
business.
The business plan:
 Describes what your business will produce, how you will produce it, and who will buy
your product or service.
 Explains who will run your business and who will supply it with goods.
 States how your business will win over customers from competitors and what your
business will do to keep customers.
 Provides detailed financial information that shows how your business will succeed in
earning a profit.
The business plan serves three important purposes.
1. A business plan explains the idea behind your business and spells out how your
product or service will be produced or sold. To convince investors that your business
idea is solid, you will need a completely new product or service or one that is better or
less expensive than products or services that already exist. You will need to identify who
your target customer is and show how your company will be able to obtain and keep
customers.
2. A business plan sets specific objectives and describes how your business expects to
achieve them. A good business plan includes sales projections for the short term (the
first year), the medium term (two to five years after startup), and the long term (five

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years in the future). It describes what products and services will be introduced over the
next five years and sets forth future business plans, such as expansion of the business.
3. A business plan describes the backgrounds and experience of the people who will be
running the business. Banks and other lenders make financing decisions based on how
well they think a company can meet its objectives. If you provide information on the
background and experience of the people who will be running your company, the bank
or investor will be more likely to invest money in your business.

The Structure of a Business Plan

When developing any business plan it is necessary to be convinced that planning is a key aspect
in the business development process. Planning assists businessmen or women to articulate both
their long-term and short-term goals for the proposed new business. Specifically a business plan
does the following:
 Increases the probabilities of business success.
 Clearly defines the activities for the successful operation of the business.
 Identifies all the resources available to the business and how they will be combined to
obtain maximum benefits.
 Identifies standards of performance for each segment of business operations which can be
compared with actual performances. This serves as a control mechanism to keep the
business operations on course.

Personal background: The first item in a plan should be a written description of the applicant’s
personal background, including name, address, e-mail, phone number, education, family status,
sex, age and physical status.

Business experience: The entrepreneur’s ability to produce the product and capture the market
needs to be stated. With this in mind, personal background motivations and experience are in the
end most important criteria for judging the viability of a business.

Business structure and description: For a business in the formative phase a statement of the
adequacy of its ownership, legal form and capitalization structure and a description of the
production process are necessary.

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The market competition: In this section the following should be provided: the size of the
market, its growth potential and the estimated share of the business in the market; current and
potential new competition; opportunities for expanding too ther locations.
Production or selling process for products or services: Providing detailed technical
specifications may be unnecessary. A description of the products and/or services of the business
should provide a reasonable idea of what the company sells. The most important item in this
section is a description of why the applicant’s product or service is better than that of its
competitors.

Financial status: The capital required to start the business needs to be indicated, together with
assets and liabilities, showing the proportion contributed by the owner. Anyone starting a
business must have some amount of cash equity. The higher the proportion of personal cash and
assets committed to the business, the less likely the borrower will be ready and willing to give up
the task. If you have to borrow money or get credit from a financing source, there are three types
of documents that could substantiate your financial status or reputation: a personal bank
statement and banker’s reference letter, personal tax returns and business reference letters.

A personal statement of financial status lists all personal assets at their current market value and
obligations owed to family and non-family creditors. Tax returns for previous years may not be
available, but if you have them they can be used to show how much income you have been
earning.

Reference letters from professionals, suppliers, practicing business entrepreneurs, etc. are used
by a potential entrepreneur as proof of good reputation and reliability. The financial part of the
plan describes how the loan will be used in the business and how it will be repaid. It also
becomes a commitment that the business will be operated with a view to attaining certain
results. Lastly, it serves as a documented promise to repay the loan on schedule.
How to Interpret the Findings of the Business Plan
Before starting a business, the potential business starter should be able to answer the following
questions.
Will the business generate enough cash to always allow liabilities to be paid?

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How many goods or services must the business sell to cover the costs and to start making
benefits?
What will happen when turnover decreases or costs go up?
Will the business generate enough money?
To answer the first question, we have to know that a business starter will need to earn money for
his/her own living expenses, that income tax has to be paid and that if credit is used, the credit
plus interest has to be paid back in regular installments.
A look at the cash flow plan will provide information about the cash situation.
The operational costs include staff costs and, if the entrepreneur works in his own enterprise,
she/he will include her/his own salary in this cost category. But maybe this salary is not
sufficient and the entrepreneur needs more money. This money can be taken from the net profit
(if there is any) and the amount has to be recorded as “Any other cash out” in the cash flow plan.
The business has to pay taxes on the profits, and this is generally paid at the end of the fiscal
year. The amount of tax is calculated in the chart “Monthly estimation ofthe net profit”. This
amount has to be included in the cash flow plan as “Any other cash out”.
Repayment of a loan is always done in regular installments; these can be monthly, or every three,
six or twelve months. Interest payments are due at the same time. Interest and loan repayments
are also recorded in the cash flow plan.
If during the whole planning period the “Cash at the end of the month” is always positive, the
business stands a good chance of running smoothly.
How many goods or services must the business sell to cover the costs and to start making a
profit?
The answer to this question comes from break-even analysis.
At the break-even point the revenues from sales equal total costs. Each additional sale will
generate profits. In order to calculate the break-even point we have to know the total amount of
indirect costs (also called overheads), plus the total of direct costs and also the sales turnover.
The difference between the unit sales price and the direct costs per unit sold is called
contribution margin.
Break-even = indirect costs / contribution margin
What will happen when turnover decreases or costs go up?

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The break-even analysis can show what effect a price rise or price decrease will have on the
break-even point. If the market allows it, the price could be increased and the zone of profit will
be reached earlier. However, the market does not often allow a price increase. If the market price
is such that the sales only equal the cost when 80% or 90% of the turnover is reached, the
business will probably not generate enough cash to pay all its obligations.
To know the exact effect of changing prices and or costs on the cash and profit situation, a
sensitivity analysis has to be made.
A sensitivity analysis measures the impact on project outcomes of changing one or more key
input values about which there is uncertainty. For example, a pessimistic, expected, and
optimistic value might be chosen for an uncertain variable. Then an analysis could be performed
to see how the outcome changes as each of the three chosen values are considered in turn, with
other things remaining the same. A sensitivity analysis reveals how profitable or unprofitable the
project might be if input values to the analysis turn out to be different from what is assumed in a
single-answer approach to measuring project worth.
The analysis is easy to realize as it needs only simple calculations.
1. Changing sales: The planned sales turnover of a cash flow plan will be increased by 5% or
10%. All other figures remain unchanged. The cash at the end of them on th will increase
accordingly.
Second step: The planned sales turnover will be decreased by 5% or 10%. The cash will decrease
accordingly and we will see immediately if the business runs out of cash. If this is not the case
the business has a good margin.
2. Changing costs: Now we look on the costs and do the same operation by increasing the costs
by 5% and 10% while keeping the other figure sun changed. The cash flow plan will show if the
business runs out of cash or not.
3. Changing sales and costs: The worst case scenario would be when prices go down and costs
go up.
The recalculation of the cash flow plan will give the answer concerning under which scenario the
business will fail.
This analysis shows how sensitive the business reacts to changes. If a price or sales decrease of
10% would already lead to cash problems, the business starter should reconsider the planned set-
up of the business and think about measures to improve profitability.

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Minimizing Problems of Starting a Business

The following questions will help to determine whether you are in a position to start a business.
A. Personal Qualifications
1. Why do you think you are the type of person who can start and operate a business
successfully?
2. Will your family support your plans to start a business?
3. Have you worked in a business similar to the one you want to start?
4. Do you have supervisory or managerial experience necessary to be self-employed?
5. Have you had business training in the type of business you want to start?
B. Customers and Market
1. Have you prepared a marketing plan?
2. How will customers distinguish your business from that of your competitors?
3. Will you have a credit policy for customers?
4. What advertising techniques will be used to attract customers?
5. How will you determine what the customer wants?
C. Business Operators
1. How will you identify, select and train employees for the business?
2. How will you determine employee salary and benefits?
3. Is your business location accessible for customers (bus stops, parking, etc.)?
4. Does the business location have space for expansion?
5. Have you considered the positive and negative aspects of being a proprietor or forming a
partnership, limited company or cooperative?
6. Do you know what equipment, supplies and materials you will need and how much they will
cost?
D. Keeping Records
1. Do you have a record keeping system to keep track of income, expenses, credit sales and
credit purchases?
2. Are you able to prepare and analyze financial statements?
3. Do you know how good inventory control can lower business expenses?
4. Do you know how to keep payroll records and make tax reports and payments?

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5. Will you need assistance in keeping the financial records for your business?
E. Using Outside Assistance
1. Have you discussed the bookkeeping and other financial procedures with an accountant?
2. Have you discussed the legal requirements and regulations of your business with a lawyer?
3. Have you discussed the financial aspects of your business with a banker?
4. Has a consultant helped you to develop your business plan?
5. Have you discussed the challenges and opportunities of your business with other business
owners in the community?
F. Finances
1. Do you have enough money to start and operate the business for at least the first six
months?
2. Over the next four years, could you make more money working for someone else rather
than starting your own business?
3. Do you know which suppliers will give the best service, lowest prices and best credit
arrangements?
4. Based on accurate financial data, have you compared the cost of buying an existing
business with the cost of starting a new business?
5. Have you explored all possible sources of funding?
G. Choosing the Right Legal Form
1. What are the legal costs involved in starting a business?
2. How does the owner’s liability depend on the legal form?
3. How does the legal form influence the acquisition of capital?
4. What implications does the legal form have on taxation?
5. How does the continuation of the business depend on the legal form?

3.2. Preparing the Business Plan

The investment size required by a business determines the amount of time and effortneeded to
complete the business plan. A large investment calls for a detailed investigation of the project
idea and, inversely, a small investment requires only a general consideration of the critical
aspects of the proposed business.
Preparing the scheme may be facilitated using some guidelines or formats. These are rather
broad guidelines and must be adjusted to accommodate the special conditions of the proposed

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projects. While it may look similar to a hundred others, all things considering, a business plan is
actually unique in itself.
A good plan, which is also known as the project feasibility study, involves:
(b) The collection of data (through research work) which are relevant to all aspectsof the
proposed business,
(c) The analysis of the collected data, and
(d) The application of the results to minimize business risks. Presented in its logical
sequence, it consists of the following components:
Marketing Aspects: The marketing study inquires about the future demand of a product,
determines the competitive situation within the industry, establishes the annual quantity which it
may sell, estimates the future selling prices, and designs them arketing program for the product.
Production Aspects: The production study selects the manufacturing process, rated capacity,
machinery and equipment, plant location and layout, structures specifications, and operating
(including materials, utilities, manpower, etc.) requirements.
Organization and Management Aspects: This component examines the appropriate form of
business organization, background and capabilities of the entrepreneur and the staffing pattern of
the proposed business. All of these should be geared to wards efficient operations.

Financial Aspects: The financial study calculates the total capital required to start the business,
weighs the entrepreneur's exposure and those of the banking community and selects the most
appropriate financing source. It also projects the profitability and financial performance of the
proposed business.

Before undertaking the plan, one should consider some social, political, economic and other
conditions that may threaten the successful implementation of the proposed business. Being
aware of these conditions can save precious time and effort.
The following paragraphs detail some of the so-called project "killers":
(a) Market. Local markets are too small to absorb the production of a factory operating at a
minimum plant size. Or that the proposed business is positioned in a highly competitive market
posing unnecessary barriers to new entries.
(b) Expertise - Expensive technical expertise or absence of adequate local skills.

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(c) Foreign currency restrictions. Foreign currencies for the importation of

materials ,machines and even technology are regulated by the government. This adds
uncertainties in currency control, customs regulations, etc., hence affecting costs and timing of
materials and product delivery.
(d) Environmental factors (Physical, economic, social, institutional, industrial infrastructure).
Poor infrastructure, bad roads, lack of communications and electricity, etc. prohibit the
establishment of industries in certain areas. So will inflation which prevents reliable price
calculations. So is a banking system which is not sensitive to industry's needs. So are
burdensome tax regulations ,trade practices which require that distribution channels and trade
customs should be known in advance in order to arrive at realistic cost estimate. A ndso are high
minimum wages.

BUSINESS PLANFORMAT
EXECUTIVE SUMMARY Section 2
1. Brief Description of the Project PRODUCTION PLAN
2. Brief Profile of the Entrepreneur 2.1 Production Process
3. Project's Contributions to the Economy 2.2 Fixed Capital
Section 1 2.3 Life of Fixed Capital
MARKETING PLAN 2.4 Maintenance and Repairs
1.1 Description of the Product 2.5 Sources of Equipment
1.2 Comparison of the Product with Its 2.6 Planned Capacity
Competitors' 2.7 Future Capacity
1.3 Location 2.8 Terms and Conditions of Purchase of
1.4 Market Area Equipment
1.5 Main Customers 2.9 Factory Location and Layout
1.6 Total Demand 2.10 Raw Materials Needed
1.7 Market Share 2.11 Cost of Raw Materials
1.8 Selling Price 2.12 Raw Materials Availability
1.9 Sales Forecast 2.13 Labor
1.10 Promotional Measures 2.14 Cost of Labor
1.11 Marketing Strategy 2.15 Labor Availability
1.12 Marketing Budget 2.16 Labor Productivity

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2.17 Factory Overhead Expenses Section 4

2.18 Production Cost FINANCIAL PLAN
Section 3 4.1 Project Cost
ORGANISATION & MANAGEMENT 4.2 Loan Requirement
PLAN 4.3 Security for Loan
3.1 Form of Business 4.4 Profit and Loss Statement
3.2 Organizational Structure 4.5 Cash Flow Statement
3.3 Business Experience and Qualifications 4.6 Balance Sheet
of the Entrepreneur 4.7 Loan Repayment Schedule
3.4 Pre-Operating Activities 4.8 Break-even Point (BEP)
3.5 Pre-Operating Expenses 4.9 Return on Investment (ROI)
3.6 Office Equipment 4.10 Financial Analysis
3.7 Administrative Expenses

Mistakes in Business Planning

Many entrepreneurs will not take the necessary time to carefully plan their business and prepare
their business plan. This can contribute to difficulties in getting their business started as well as
business failure.
To create an effective business plan, avoid making the following common mistakes.
1. Unrealistic Financial Projections- Many investors will go straight to the financial
section of the business plan, so it is very important for the projections in this section to be
realistic. Projections should be based on solid evidence for the potential growth of the
company.
2. An Undefined Target Market You must clearly define your market and give a clear
picture of your potential customers. Clearly explain why these customers will buy your
product. Be realistic about your market and do not assume that everyone will want to buy
your product or service.
3. Poor Research Many potential business owners are anxious to get their business
operating and do not spend the time necessary to do good research. Use up-to-date
research information and verify the facts and figures in your business plan.
4. Ignoring Competition- Do not overlook the competition and do not focus only on what
the competition has done wrong. Investors want to see whoyour competition is and how

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you plan to compete in the market. Outlinehow you will differentiate yourself from the
competition.
5. Inconsistencies in the Business Plan:It is important to review your finalbusiness plan
and be sure that your plan is well written and formatted in anattractive style. Be sure that
information provided is consistent from sectionto section. It is a good idea to have an
objective person who reviews your finalbusiness plan before you show it to investors.

Chapter Four
Product and Service Concept
4.1. Product Technology

Product is anything that can be offered to a market for attention, acquisition, use or consumption
and that might satisfy a need or want. It can be physical good, persons, places, ideas or
organization. More often, however, a company’s offer to the market place includes physical
(tangible product) and intangible attributes (services) with varied consequences for a consumer. For
e.g. when Sony offers its television with repair and maintenance services it is not only delivering
the physical aspect of the television to customers as a product but the accompanying service as well.

Product Classifications

Based on the purpose that products are acquired (the types of consumers that use them), products
have traditionally been classified into two broad categories: consumer products and industrial
products.

Consumer products are products bought by the final consumers for personal consumption while
industrial products are products bought by individuals and organizations for further processing or
for use in conducting business. Each of these broad categories is further classified into different
groups.

Consumer products: based on the shopping habit consumer products are classified into four groups.

1. Convenience products: are products that consumers usually buy frequently, immediately with a
minimum of comparison and buying effort. E.g. soap, tobacco, fast foods etc. generally, these are a
kind of products with low price and hence are available in many locations by companies to sell
when customers need them.

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2. Shopping products: are less frequently purchased products. Hence, when they purchase them,
customers compare them carefully on suitability, quality, price, style etc. To this end, when buying
such kind of products, customers spend much time and effort in gathering information and making
comparisons e.g. furniture, clothing, hotel services etc.

3. Specialty products: are products with unique characteristic or brand identification for which a
significant group of buyers is willing to make a special purchase effort. Here, buyers do not
normally compare specialty products but simply they are willing to invest their time and resources
to reach dealers carrying the wanted products.

4. Unsought products: are products that the consumer either does not know or does know but
normally do not think of buying E.g. new innovations can be considered as unsought goods until the
consumer becomes aware of them through advertisings.

Industrial products: these are also further divided in to three groups.

1. Materials and parts: refers to those products that make up the final product of the company
(component part of the final product). E.g. raw materials, manufactured materials, parts etc.

2. Capital items: are products that aids in the buyers production or operation. They neither make up
the final product of the company nor are consumed but are used to produce the final product of the
company for e.g. installations (buildings, offices, main machineries etc.), accessories such as
portable tools and equipment etc.

3. Supplies and services: supplies refer to those products that are consumed in the production process
or operation of buyers. E.g. lubricants, oil, paper, pencil, repair and maintenance items etc. Services
refer to maintenance and repair services that the firm purchases from outsiders or services supplied
by outsiders such as legal, management counseling, advertising etc.

Individual product decisions:

In planning its market offerings (product), the marketer’s task is the difficult one of deciding how
many attributes to build in to a product, how much quality to include in each of the attributes and
how to put the attributes together to gain a competitive advantage. Fortunately, due largely to
implicit coping strategies employed by consumers in every day decision making, only a few product
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attributes are important in any actual choice process. As products become more complex and
consumers become more sophisticated, however, marketers must build more attributes into the
product. Note, too, that the key attributes vary by market segment and therefore, the marketing
effort must change accordingly. In this regard, product planners need to think through the three
levels of product i.e. the basic product aspect, the actual product aspect and the augmented product
aspect.

1. The basic product aspect: - The most fundamental level is the core benefit, the fundamental
benefit that the customer is really buying. It refers to problem solving benefits that customers seek
when they buy a product or a service. This may take different form and concerns in different
markets for the same product for e.g. in the low income group customers most importantly focus on
the capability of the shoe that they buy in protecting their leg for a long period of time but in the
higher income group protection may not be the main focus but safety or style or some other attribute
may be the central focus of their attention. Hence, in determining the basic aspect of the product for
these markets, the marketer should be able to understand the core benefit difference in these two
markets and hence turn the core benefit into a basic product accordingly.

2. The actual product aspect: - At the second level, the marketer should prepare an expected product,
a set of attributes that buyers normally expect and agree to when they buy a product. This includes
the product’s quality aspect, features, design, brand name, packaging and labeling. All this things
should be combined and integrated to deliver the core benefit.

3. Augmented product: At the third level, the marketer should prepare an augmented product, one
that includes additional services and benefits that distinguish the company’s offers from that of
competitors around the core and actual product e.g. product warranties, maintenance and repair
services, customers counseling services, customer training etc.

Generally, if managers focus only on the product’s physical attributes, as intuitive it may seem,
they may entirely miss the subtleties that make people want to buy their product instead of
competing product. Market place success requires that managers come to see their offerings not so
much as a physical entity, but rather as means for customers to fulfill their utilitarian or experiential
needs. Aside from the physical aspect, products have rational, moral and emotional meanings for
customers Therefore, managers should think about their product in terms of what it takes to satisfy

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customer needs and wants so that they can control attributes, which consumers mentally process and
interpret in terms of their personal goals, efficiently. This goals represent the value that customer
anticipate. In turn, customers use perceived value to estimate their likely satisfaction arising from
purchase. After purchase and use, customers’ actual satisfaction or dissatisfaction feedback and
either confirm or negate the value assessment. This leads to decisions to repurchase or not, good or
bad word of mouth communication and other actions in relation to a product or a company.

1. Product quality: - is the most important aspect of product decision. It has two dimensions: quality
level and quality consistency. Quality level refers to performance quality, the ability of the product
to perform its functions. Hence, first the product planner (marketer) should determine the quality
level that is desirable to the target market. The second dimension is consistency. It refers to
conformance quality, consistency in producing products with the desired quality level (the
capability to make production lots free from defects).

2. Product features: a product can be offered with varying features to different markets. Feature
refers to additional functions or benefits of a product that supplements the product’s basic function.
Hence, they are competitive tool for differentiating a company’s product from competitors’
products. To this end, the company should periodically survey customers of a product to find out
what additional benefits they want to be accommodated with the basic function of the product and
then the company should dig to find out ways as to how it can deliver these features in economical
way to customers.

3. Product design: - refers to the structural organization of the product that determines as to how the
product delivers the desired function including the physical appearance of the product. Design is a
wider concept than style. Style refers to the appearance of a product (eye catching aspect of the
product). But, design is more than skin deep; it goes to the very heart of the product. Usually, a
company can have different design options that provide the product with varying capacity to deliver
the core benefit. Hence, a company should select a design that boosts the capability of the product
in delivering the core benefit.

4. Branding: - refers to a name, term, sign or symbol or a combination of all these that identifies the
maker of a product or seller. In today’s competitive market, branding is one of competitive forces
that give edges for companies to compete. In this regard you can imagine to what extent the

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difference will be if Sony sells its television without brand and with brand. In addition, it provides a
legal protection for unique product features that might otherwise be copied by competitors. Apart
from this, it enables the company to segment its market in profitable way. Branding is not only
beneficiary for producer but also for customers. It enables customers to easily identify products that
might benefit them. In addition, it will give them a guarantee that they will get the same features
and benefits and quality each time they buy a given product.

Branding is not an easy task for a marketer. In giving brand name there are some considerations
that good brand name should possess.

1. The name should suggest something about the product’s benefit and its qualities.
2. It should be easy to pronounce recognize and remember the name.
3. It should be distinctive from other brand names.
4. It should be easily translatable to other languages.

Apart from all this, a manufacturer may have three options to launch branding of a product
(sponsor). The product may be launched as manufacturers brand (national brand) or the
manufacturer sell to resellers who will in turn give it a private brand (store or distributor brand) the
company may use licensed brand.

5. Packaging: refers to designing and producing the container or wrapper for a product. It may take
different forms. It may be primary container: a container to be used throughout the life of the
product or secondary container: a container to be thrown away when the product is about to be used
or the shipping package: container necessary to ship or store the product. Traditionally, the primary
function of package was to contain and protect the product. No matter how, in today’s competitive
market environment, packaging concern extended to include issues such as attracting customers,
describing the product, convincing buyers to make sale etc. Developing a good packaging for a
product requires making many decisions. First, the company must establish the packaging concept,
which states what the package should be or do for the product. Should it mainly offer product
protection, introduce a new dispensing method; suggest certain qualities about the product or
something else? Decision then must be made on specific elements of the package such as size,
shape, materials, color, text etc. All these elements must work together to support the product’s

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position and marketing strategy. Additionally, growing environmental concerns in connection to

packaging should also be taken in to consideration.

6. Labeling: refers to printed information appearing on or with the package. It ranges from the simple
tags attached to products to complex graphics on the package or with the package. The label may
include brand name, who made it, where it was made, its contents, how it is to be used, and how to
use it safely.

7. Product support services: customer service is another element of product category. In today’s
competitive market place, a company cannot hinge on only the tangible product or the ultimate
service of the product to succeed rather it should accompany the physical product by the necessary
services that augment the actual product (additional services that customers expect along with the
major offer of the company) for e.g. Sony offers its television along with maintenance and repair
service.

Product line: refers to a group of products that are closely related to each other because they
function in a similar manner, are sold to the same customer groups, are marketed through the same
out lets or fall within given price ranges.

Product mix: consists of all product lines and items that a particular seller offers for sale.

4.2. Product development process

New product development

A company has to be good at developing and managing new products. Every product seems to go
through a life cycle: it is born, goes through several phases, and eventually dies as newer products
come along that better serve customer needs. This pattern presents two major challenges to a firm.
First, because all products eventually decline, a firm must be good at developing new products to
replace aging ones (the problem of new product). Second, the firm must be good at adapting its
marketing strategies in the face of changing tastes, technologies, and competition as products passes
through life cycle stages (the problem of product life cycle).

A firm can obtain new products in two ways: by acquisition- by buying the whole company, patent
or license etc. and the other is through new product development. Here by new products we mean

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original products, product improvements, product modifications and new brands the firm develops
through its research and development efforts.

There are some sequential steps that companies need to pass through in developing new product.

1. Idea generation: refers to the systematic search for new product ideas. The company should
develop a framework (clearly defining new product development strategy) through which new
product ideas that correlates with its operation can be generated in order to make the search for
ideas systematic. Ideas for new products can come from interacting with various sources and from
using creativity generating sources. It may emanate from customers, scientists, competitors,
employees, suppliers and distributors etc.

2. Idea screening: the purpose of idea generation is to create a large number of ideas. The purpose of
this stage is to reduce that number by accommodating good ideas and dropping poor ones so that the
company can go ahead with the product ideas that will hopefully turn into profitable products. In
screening ideas, the benchmark may be different from company to company but it is at this stage
that companies should make sure the idea is compatible with the firm’s objective, strategies and
resources. Hence, it is desirable to drop those ideas that do not match with the aforementioned
aspects of a company.

3. Concept development and testing: attractive ideas must be developed into a product concept. A
product idea is an idea for a possible product that the company can see itself offering to the market.
A product concept is a detailed version of the idea stated in a meaningful consumer terms. Then the
developed concept should be tested with a group of target consumers to find out if the concepts
have strong consumer appeal.

4. Developing marketing strategy: Following a successful concept test, a company should develop a
preliminary marketing strategy plan for introducing the new product into the market. The plan
consists of three parts. The first part describes the target market’s size, structure and behavior; the
second about product positioning; the third about the sales, market share and profit goals sought in
the first few years.

5. Business analysis: Once management has decided on its product concept and marketing strategy, it
can evaluate the business attractiveness of the proposal. Business analysis involves reviewing of

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sales, costs, and profit projections for a new product to find out whether they satisfy the company’s
objectives or not.

6. Product development: It refers to developing the product concept into a physical product in order
to ensure that the product idea can be turned into a workable product. In this regard, the company
should first produce one or more physical versions of a product as a prototype that have the required
functional features and also capable enough to convey the intended psychological characteristics.

7. Test marketing:After the product is developed, it is better to test the product along with its
marketing program into more realistic market settings in order to examine how well it will perform.
This eventually enable the company to visualize/asses its all-marketing program of the product i.e.
positioning strategy, advertising, distribution, pricing, branding, packaging and budget levels.

8. Commercialization: Based on the market test, the management then makes a decision about
whether to launch the new product or to make amendment up on the tested product and its
marketing plans. If the company goes ahead, it will enter into commercialization stage, in which it
faces high costs due to production, advertising, sales promotion and other marketing efforts. In
launching a new product, a firm should first decide when to introduce the product (timing) and
where to launch the new product introduction: in a single location, a region, the national market or
the international market.

4.3. Product Protection

COPYRIGHT vs. TRADEMARK vs. PATENT

Some people confuse patents, copyrights, and trademarks. Although there may be some
similarities among these kinds of intellectual property protection, they are different and serve
different purposes.

What Is a Copyright?
Copyright is a form of protection provided to the authors of "original works of authorship"
including literary, dramatic, musical, artistic, and certain other intellectual works, both published
and unpublished. The 1976 Copyright Act generally gives the owner of copyright the exclusive
right to reproduce the copyrighted work, to prepare derivative works, to distribute copies or

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phone-records of the copyrighted work, to perform the copyrighted work publicly, or to display
the copyrighted work publicly.

The copyright protects the form of expression rather than the subject matter of the writing. For
example, a description of a machine could be copyrighted, but this would only prevent others
from copying the description; it would not prevent others from writing a description of their own
or from making and using the machine. Copyrights are registered by the Copyright Office of the
Library of Congress.

What Is a Trademark or Service mark?

A trademark is a word, name, symbol or device which is used in trade with goods to indicate the
source of the goods and to distinguish them from the goods of others. A service mark is the same
as a trademark except that it identifies and distinguishes the source of a service rather than a
product. The terms "trademark" and "mark" are commonly used to refer to both trademarks and
service marks.

Trademark rights may be used to prevent others from using a confusingly similar mark, but not
to prevent others from making the same goods or from selling the same goods or services under a
clearly different mark. Trademarks which are used in interstate or foreign commerce may be
registered with the Patent and Trademark Office.

What Is a Patent?

A patent for an invention is the grant of a property right to the inventor, issued by the Patent and
Trademark Office. The term of a new patent is 20 years from the date on which the application
for the patent was filed in the United States or, in special cases, from the date an earlier related
application was filed, subject to the payment of maintenance fees. US patent grants are effective
only within the US, US territories, and US possessions.
The right conferred by the patent grant is, in the language of the statute and of the grant itself,
"the right to exclude others from making, using, offering for sale, or selling" the invention in the
United States or "importing" the invention into the United States. What is granted is not the right

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to make, use, offer for sale, sell or import, but the right to exclude others from making, using,
offering for sale, selling or importing the invention.

Some additional differences between a copyright and a trademark are as follows:

1. The purpose of a copyright is to protect works of authorship as fixed in a tangible form of

expression. Thus, copyright covers: a) works of art (2 or 3 dimensional), b) photos,
pictures, graphic designs, drawings and other forms of images; c) songs, music and sound
recordings of all kinds; d) books, manuscripts, publications and other written works; and
e) plays, movies, shows, and other performance arts.
2. The purpose of a trademark is to protect words, phrases and logos used in federally
regulated commerce to identify the source of goods and/or services.
3. There may be occasions when both copyright and trademark protections are desired with
respect to the same business endeavor. For example, a marketing campaign for a new
product may introduce a new slogan for use with the product, which also appears in
advertisements for the product. However, copyright and trademark protection will cover
different things. The advertisement's text and graphics, as published in a particular
vehicle, will be covered by copyright - but this will not protect the slogan as such. The
slogan may be protected by trademark law, but this will not cover the rest of the
advertisement. If you want both forms of protection, you will have to perform both types
of registration.
4. If you are interested in protecting a title, slogan, or other short word phrase, generally you
want a trademark. Copyright law does not protect a bare phrase, slogan, or trade name.
5. Whether an image should be protected by trademark or copyright law depends on
whether its use is intended to identify the source of goods or services. If an image is used
temporarily in an ad campaign, it generally is not the type of thing intended to be
protected as a logo.
6. The registration processes of copyright and trademark are entirely different. For
copyright, the filing fee is small, the time to obtain registration is relatively short, and
examination by the Copyright Office is limited to ensuring that the registration
application is properly completed and suitable copies are attached. For trademark, the
filing fee is more substantial, the time to obtain registration is much longer, and

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examination by the Trademark Office includes a substantive review of potentially

conflicting marks which are found to be confusingly similar. While copyright registration
is primarily an administrative process, trademark registration is very much an adversarial
process.
7. Copyright law provides for compulsory licensing and royalty payments - there is no
analogous concept in trademark law. Plus, the tests and definition of infringement are
considerably different under copyright law and trademark law.

CLOTHING ITEMS

When it comes to copyright v. trademark, we get more questions about clothing than anything
else. Here are a few guidelines:

1. Anything you silk screen or otherwise display prominently on the front or back of a shirt,
top, cap or hat is generally considered artwork, and therefore covered by copyright. In
fact, if you send a photo of a clothing item to the U.S. Trademark Office showing your
design, logo or slogan prominently displayed on the front or back, they will refuse to
register it as a trademark.
2. To qualify as a trademark, your logo or slogan must be used as the brand of the clothing
item itself. In other words, your logo or slogan must be used the way clothing brands are
typically used and displayed on clothing, namely, sewn into a waistband, collar, hem or
pocket, or applied to a label, sticker or tag, and NOT in a way that dominates the
appearance of the clothing item.
3. The caveat, of course, is that when your design, logo or slogan is regarded as artwork -
even though it can be protected by copyright - the protection only extends to the artistic
configuration used. To put it more bluntly, if you have a slogan or name, copyright law
can protect the artistic way you display it, but the text itself is NOT protected. Copyright
law does not cover names, words or short phrases.
4. The only way to protect a name, word, short phrase or other text, is to register it as a
trademark. But this means that you have to change the way you use the mark from an
artistic display to a brand name usage.
5. Yes, it is possible to register a design, logo, name or phrase under both copyright law and
trademark law, so long as you use it in two different ways and you do it consistently.

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Keeping the two usages of the same design or text at the same time is not an easy task,
and you can end up compromising your rights under copyright or trademark, or both,
very easily if you aren't careful.

Chapter Five
Marketing and new venture development
1) What is a market?
The market for a business is all the people within a specific geographical area who need a
specific product or service and are willing and able to buy it. Every business sells some type of
product or service to people. Potential customers can be described as:
1. People who need or want the product or service.
2. People who are able to buy the product or service.
3. People who are willing to buy the product or service.
Competition must be considered. If competitors are serving the same market, it must be decided
if the market is large enough to support another business.It should also be determined how the
product or service is unique and different from that of the competitors.

2) What should entrepreneurs know about potential customers?

a. Know the customers: The market can be segmented either by dividing it into
meaningful buyer groups or dividing it according to characteristics such as age, sex,
marital and family status, employment, income and trends regarding any of these
characteristics.

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b. Know what different customer groups wants: By segmenting the marketing into
groups, it is easier for entrepreneurs to determine what products or services each group
wants or needs.
c. Know where the customer buys: Entrepreneurs need to find out where the customers
in their market are presently buying, and determine what factors will cause them to
switch and buy from their new businesses.
d. Know when the customer buys: By knowing when customers buy (daily, weekly,
monthly, yearly, and seasonally), entrepreneurs will be able to determine such things as
possible hours of operation, when to advertise and quantity of merchandise to have on
hand at specific times of the year.
e. Know how the customer buys: Knowing how the customer pays for products and
services can help the entrepreneur to determine a credit policy as well as a pricing
policy for the business.

3) Where can customer information be located?

Customer information can be obtained from trade associations (publications),chambers of
commerce, government agencies (including local government),newspapers and magazines, and
individual research by conducting a marketsurvey in the community.

4) What is the marketing concept?

One of the greatest needs of the owners of small businesses is to understandand
developmarketing programs for their products and services. Modern marketing programs are
built around the “marketing concept” andperformance, which directs the owners to focus their
efforts on identifying,satisfying and following up the customer’s needs, but at a cost that will
bring aprofit. Marketing is based on the fact that: (a) business policies and activitiesshould be
focused on satisfying customer needs, and (b) profitable salesvolume is a primary goal.
When applying the marketing concept, a small business should:
a. Determine the needs of their customers (market research);
b. Analyze their competitive advantages (marketing strategy);
c. Select specific markets to serve (target marketing); and
d. Determine how to best satisfy those needs (marketing mix).

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5) What is market research?

A small market research program, based on a questionnaire given to presentcustomers and/or
prospective customers, can disclose problems and areas ofdissatisfaction that can be easily
remedied, or new products or services thatcould be offered successfully.
Market research should also identify trends that may affect sales andprofitability levels.
Population shifts, legal developments and the localeconomic situation should be monitored to
enable early identification ofproblems and opportunities. Competitor activity also should be
monitored;competitors may be entering or leaving the market. For example, it is veryuseful to
know what your competitors’ strategies are (i.e. how do theycompete?).

6) What is a marketing strategy?

Marketing strategy includes identifying customer groups (target markets) whicha small business
can serve better than its large competitors, and tailoring itsproduct offers, prices, distribution,
promotional efforts and services towardsthat particular market segment (managing the marketing
mix). Ideally thestrategy should address customer needs which are not currently being met inthe
market and which represent adequate potential size and profitability. Asmall business cannot be
all things to all people, so it must analyse its marketand its own capabilities so as to focus on a
specific target market.

7) What is target marketing?

Owners of small businesses have limited resources to spend on marketingactivities.
Concentrating their marketing efforts on one or two key marketsegments is the basis for their
target marketing. The major ways for abusiness to segment its market are:
a. Geographical segmentation: serving the needs of customers in aparticular geographical
area (for example, a neighborhood shop maysend advertisements only to people living
within one and a half miles ofthe shop).
b. Customer segmentation: identifying groups of people who are mostlikely to buy the
product. Remember, it is easier and less costly to keepcurrent customers than it is to attract
new customers.

8) What is the marketing mix?

The marketing mix is used to describe how entrepreneurs can combine thefollowing four areas
into an overall marketing program.

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a. Products and services: effective product strategies for a small businessmay include
concentrating on a narrow product line, developing a highlyspecialized product or
service, or providing a product/service packagecontaining an unusually high amount of
service.
b. Promotion: this marketing decision area includes advertising,salesmanship and other
promotional activities. In general, high qualitysalesmanship is a must for small
businesses because of their limited abilityto advertise heavily.
c. Place/distribution: manufacturers and wholesalers must decide how todistribute their
products. Working through established distributors ormanufacturer’s agents is generally
more feasible for small manufacturers.Small retailers should consider cost and traffic
flow as two major factors inlocation site selection. In other words, low-cost, low-traffic
location meansspending more on advertising to build traffic.
d. Price: determining price levels and/or pricing policies (including creditpolicy) is the
major factor affecting total revenue. Generally, higher pricesmean lower volume and
vice-versa; however, small businesses can oftencommand higher prices because of the
personalized service they can offer.
The nature of the product/service is also important in locational decisions. Ifpurchases are made
largely on impulse (e.g., soda or candy) then high trafficand visibility are critical. On the other
hand, location is less important forproducts/services that customers are willing to go out of their
way to find (E.g. hotel supplies).

9) How marketing performance can be evaluated?

After key marketing program decisions are made, entrepreneurs need toevaluate their decisions.
Standards of performance need to be established soresults can be evaluated against them. Sound
data on industry norms andpast performance provide a basis for comparing present performance.
Ownersshould evaluate their business performance at least quarterly.
The key questions are:
a. Is the business doing all it can to be customer-oriented?
b. Do employees make sure customers’ needs are satisfied and leavecustomers with the
feeling that they would enjoy coming back?
c. Can customers find what they want and at a competitive price?

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10) How can the consumer acceptance of a product or servicebe analysed?

Consumers buy products or services for their own use, but do not buyproducts for the purpose of
making a profit from them. Consumers buy tosatisfy their own or their family’s wants and needs.
When they buy anyproduct or service, they do so because of what they expect the product
orservice to do for them. People are motivated to buy for two basic reasons:
 Emotional reasons: pride in personal appearance, social achievement,ambition,
cleanliness, pleasure, increased leisure time.
 Rational needs: durability, economy in use, economy in purchase,handiness, efficiency
in operation, dependability in use.
Psychologists have determined that consumer buying behavior is primarilydirected toward
satisfying certain basic needs. These very basic needs includefood, shelter and clothing. An
individual attempting to fulfill the most basicneeds is led by rational motives. Persons with few
resources need the bestproducts and services for their money in terms of quantity, quality
anddependability.
Many consumers won’t admit they purchase goods and services to satisfyemotional needs.
However, most psychologists believe that pride in personalappearance is an emotional buying
motive. Certain motives generally seem tobe more rational than others. Because people think of
themselves as rationalindividuals, they tend to express their reasons for buying in very logical
ways.
To market a product or service successfully, entrepreneurs need to be awareof what motivates
consumers to buy a specific product/service.

11) What factors affect the consumer market?

The consumer market is constantly changing. Many of the following factorshave contributed to
consumer changes in the last few years.
Population changes, such as shift in age, distribution of income, includingincreases in
total purchasing power and the amount spent for “luxuries”.
Changes in life-style and attitudes.
A greater percentage of women in the workforce.
More leisure time.
More credit purchases.
An increase in the number of white-collar and skilled workers.

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Higher overall educational level of the population.

High rate of inflation.
Changes in technology (mobile phones).
Entrepreneurs need to monitor and be ready for changes in consumerbehavior. Entrepreneurs
may need to modify or refine their marketing policiesand procedures. Predicting changes in the
market is an important but difficulttask. Market information must be collected and analyzed
continually.

Know Your Competitors

Analyzing Competition
Competition must be expected when initiating a business, but having too muchcompetition is an
unnecessary risk. It would be better to select a different type ofbusiness if there is too much
competition. You must know your competitors as well asyou know your customers. Business
rewards come from being better than yourcompetition. The best way to do that is to know who
your competitors are and howthey operate. Unfortunately, many entrepreneurs never bother to
find out much abouttheir competition until it is too late. The following steps should be taken
byentrepreneurs to get to know their competitors.
Step 1: Identify your competitors
A. Direct Competitors: list each by name, address and type of business.
B. Indirect Competitors: list the name, address and type of business of each firmthat
provides products and/or services that, while not the same as yours, can be asubstitute for
yours.
Step 2: Analyse businesses that have recently been set up andrecently failed
A. List competitive businesses that have started within the past two years.
B. List competitive businesses that have gone out of business within the past twoyears.
C. Analyze the possible reasons for the businesses that have failed in the last twoyears.
What factor or combination of factors explains the optimism of the newbusinesses that
have succeeded? What factor or combination of factors was present in the businesses that
failed?
Step 3: Analyse existing businesses
A. Estimate the sales and turnover of each of your primary competitors.

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B. Rate your competitors in terms of price, quality of product or services,

facilities,advertising, promotion and sales.
What prices do they charge? What is the quality of their merchandise? Howmuch do
they advertise
What extra services do they offer?
Are their sales terms liberal?
Is their location expensive, moderate or cheap?
Are their production processes and equipment modern? Are their employeeswell-
trained? Are their employees well paid?
C. Determine if there is a correlation between the firms that have high sales andtheir
methods of operation. That is, do these firms have similar pricing, sellingand/or
production methods? A thorough analysis of the methods of operationbased on the firm’s
sales should yield valuable information.
Step 4: Compare your proposed business operations against thecompetition
A. Indicate the advantages your products and/or services will have in terms of
price,performance, quality, durability and visibility over the competition.
B. Be able to explain why your method of operating your business will be moresuccessful
than that of your competitors.
C. If you plan to operate in a manner similar to other businesses, you should be ableto
explain why:
 Either the market is large enough to profitably support you and the otherfirms,
or
 The market cannot support all competitors but your business will be
moreefficient and/or more effective.
D. If you plan to operate in a manner completely different from the competition, youshould
be able to explain why no one else is operating that way. Are otherbusinesses not aware
of the opportunity? Or, do they know something that youdon’t?
Conducting a Market Survey/Market Research
You may have an excellent product or service to offer to the public. One key tosuccess or failure
in business is determining whether there are enough customerswilling to buy your product or

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service on a regular basis. The price of the product orservice must give you an adequate profit
margin to allow you to survive, make a profitand further develop the business.
Before committing your resources to the business, you should measure whether thereis a
sufficiently large unsatisfied market. The following questions need to be answeredto determine
what your competitors are doing in your proposed area of business.
• Is the market growing at a rate that allows another new business to enter?
• In a declining market, how will you capture business from your competitors?
• How do your products or services differ from those of your competitors?
• Have you identified a market segment that needs servicing?
Steps in Conducting a Market Survey
The process of conducting a market survey involves the following steps.
1. Define market survey objectives and specify what information is required.
2. Work out details of the market survey, such as:
• sources for obtaining information,
• time and cost of conducting the study,
• methodology to be used in gathering information,
• Development of a plan of action.
3. Select sample samples and decide what contacts and visits should be made.
4. Prepare questionnaires and plan for survey interviews.
5. Collect and analyze data.
6. Prepare a report of findings.
For new entrepreneurs, a major problem in conducting market surveys does not know specific
sources and contacts for obtaining information.

Information Sources
The information sources can be divided into:
1. Primary Data Sources: information which originates as a result of contacts withthose
who are directly involved in the relevant activity. For a furniture survey, forexample,
information obtained from furniture manufacturers or wholesalers wouldbe primary data
sources.
2. Secondary Data Sources: data which already exists and may be used in theinvestigation.
This information may not have been collected for a specific purpose.

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It may be obtained from trade/manufacturer’s associations or published data.

Tips for Conducting a Market Survey
The following tips can help entrepreneurs to conduct a market survey effectively
andsystematically.
 Personal bias can be a negative factor in collecting information from various typesof
people.
 Be patient and persistent in gathering information during the survey.
 Keep information confidential. Do not pass information on to others.
 Write down the information immediately after you visit someone. Avoid writing
orreferring to your papers when interviewing someone.
 Sequencing of questions, as well as involvement and commitment to getinformation, are
the key factors in conducting a successful market survey.
 The best way to gain information from your competitors is to go as a potentialclient. You
might show interest in selling their products.
When the survey is completed, a detailed report on your findings should be preparedin written
form. The market survey report will help you to assess the feasibility ofmarketing your product.
It may also be an important document to convince financialinstitutions about your understanding
of the market and your competition.
International Markets
International Marketing - is concerned with planning and conducting transactions across
international borders to satisfy the objectives of individuals and organizations.
Why International Marketing?
A: There is a trend toward a global economy.
§ No longer enough to look at domestic market
§ Markets across the world being sought after by more competitors
§ Explosion of international trade
§ Global linkages become important
“If we only distributed pictures in the U.S., we’d lose money. It takes the whole world now to
make the economics of movie-making work”
- William Mechanic
President, 20th Century Fox

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“Half the people in the world have yet to take their first picture. The opportunity is huge, and it’s
nothing fancy. We just have to sell yellow boxes of film.”
- George M.C. Fisher
CEO, Eastman Kodak Company
Comparing Domestic and International Marketing
§ Similarity:
- Both carry out transactions that meet the needs of individuals and organizations
§ Differences:
- International markets have greater growth potential
- Some tasks associated with international marketing not included (or less intense) than in
domestic marketing (e.g., cultural research, political factors, exchange rates, trade laws, long
distance distribution.)

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Chapter Six
Organizing and financing the new venture
6.1. Entrepreneurial team and business formation
Teambuilding is a toughsubject to address because there are so many different definitions of the
subject.
1) A team consists of a diverse group of individuals having complementary skills and styles.
2) A team shares a common company culture
3) A team works together productively
4) A team focuses on worthwhile goals.
5) A team is based on a foundation of integrity.

6.2. Sources of financing

Why businesses need money
Businesses need extra money at times because:
They are just starting and need to buy premises and equipment.
They have an opportunity to introduce a new product or service.
A major item of equipment or building needs to be brought up to date.
The sources of funds
Owner’s funds – savings of the owner – or an additional mortgage taken out on their
house.
Profits – profits which have been retained and not paid out as dividends.
Loans – from a bank or other financial institution.
Government grants – available for specific reasons, eg expanding in a deprived area.
Hiring and leasing – this saves having to buy expensive items outright as payments are
made in regular instalments.
Issuing shares – only applies to public limited companies whose shares are bought and
sold on the Stock Exchange.
Selling assets – such as unwanted buildings or spare land.
Venture capital – finance from a company which specialises in lending to successful
small businesses – often in exchange for shares.

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6.2.1 Asset management

Asset management is “an ongoing process of maintaining, upgrading, and operating physical
assets cost effectively, based on, a continuous physical inventory and condition assessment”.

In addition to cash management, other items such as accounts receivable and inventory also need
to be controlled. Management of credit may include acceptance of credit cards or use of internal
credit. Using outside credit cards shifts the credit risk to the outside company but increases costs.
Using internal credit makes the firm responsible for collecting delinquent payments, and
payment delays can create negative cash flows. The entrepreneur will need to be sensitive to
major changes in accounts receivable and should always compare actual with budgeted amounts.
Inventory is an expensive asset, and requires careful balance. If inventory is low and the firm
cannot meet demand, sales will be lost. Carrying excess inventory can be costly. An inventory
control system allows the company to monitor key figures, such as inventory turnover and
percentage of customer complaints.

For example, if you want to manage a new car, you need to perform the following activities.

 Regular oil change

 Flush radiator
 Wash/wax regularly
 Repair paint chips
 Change belts,
 Change transmission fluid etc.

Features of an Asset Management “system’

 Inventory
 Condition measure
 Prediction of future condition
 Tools/metrics for managing network

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6.2.2 Equity Financing

Finance Your Business with Equity Capital
Another way to finance your business is through equity capital. Equity capitalis money invested
in return for a share of the business’s profits. Entrepreneurs may seek equity capital when they
do not qualify for bank or other loans and are not able to finance their business out of their own
savings.
Friends and Family:Some entrepreneurs ask friends and family for thecapital to start their
business. If you decide to borrow money from friendsor family members, clearly warn them of
the risks involved in lending moneyto a startup business. Be sure both you and they understand
exactly howmuch interest and principal you will pay each month. Also, specify what
yourobligations are to pay back the loan if your business goes bankrupt.
Sources of Personal Financing
• Personal Funds
– The vast majority of founders contribute personal funds, along with sweat equity,
to their ventures.
• Sweat equity represents the value of the time and effort that a founder puts
into a new venture.
• Friends and Family
– Friends and family are the second source of funds for many new ventures.
• Bootstrapping
– A third source of seed money for a new venture is referred to as bootstrapping.
– Bootstrapping is finding ways to avoid the need for external financing or funding
through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary.
– Many entrepreneurs bootstrap out of necessity.
Examples of Bootstrapping Methods
 Buying used instead of new equipment.
 Obtaining payments in advance from customers.
 Buying items cheaply but prudently via options such as eBay.
 Coordinate purchases with other businesses.
 Minimizing personal expenses.
 Sharing office space or employees with other Businesses.

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 Leasing equipment instead of buying.

 Avoiding unnecessary Expenses.
 Hiring interns.

Preparing to Raise Debt or Equity Financing

Sources of Equity Funding

 Venture Capital
 Initial Public Offerings
 Business Angels
Business Angels
– Are individuals who invest their personal capital directly in start-ups.
– The prototypical business angel is about 50 years old, has high income and
wealth, is well educated, has succeeded as an entrepreneur, and is interested in the
startup process.
– The number of angel investors in the U.S. has increased dramatically over the past
decade.
– Business angels are valuable because of their willingness to make relatively small
investments.

• These investors generally invest between $10,000 and $500,000 in a single

company.
• Are looking for companies that have the potential to grow between 30% -
40% per year.
– Business angels are difficult to find.
Initial Public Offering
– An initial public offering (IPO) is a company’s first sale of stock to the public.
When a company goes public, its stock is traded on one of the major stock

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exchanges.
– Most entrepreneurial firms that go public trade on the National Association
ofSecurities Dealers Automatic Quotations (NASDAQ), which is weighted
heavily toward technology, biotech, and small-company stocks.

– An IPO is an important milestone for a firm. Typically, a firm is not able to go

public until it has demonstrated that it is viable and has a bright future.

6.2.3 Venture Capital

Some privately owned companies sell stock through venture capitalists. Venture capitalists are
individuals or companies that make a living investing in startup companies. They are usually
interested in companies that have the potential of earning hundreds of millions of dollars within a
few years. Because of this, many small businesses would have trouble getting venture capitalists
to invest in their company.Fills the cash gap between cash needs to finance high growth and cash
available from earnings and conventional financing and this is giving up a piece of the pie to
grow a bigger pie.
Venture Capital is money that is invested by venture-capital firms in start-ups and small
businesses with exceptional growth potential.For example, there are about 650 venture-capital
firms in the U.S. that provide funding to about 2,600 firms per year.Venture-capital firms are
limited partnerships of money managers who raise money in “funds” to invest in start-ups and
growing firms. The funds, or pool of money, are raised from wealthy individuals, pension plans,
university endowments, foreign investors, and similar sources. A typical fund is $75 million to
$200 million and invests in 20 to 30 companies over a three- to five-year period.
Venture capital firms fund very few entrepreneurial firms in comparison to business angels.
Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital
funding, even though they may have an excellent business plan. Venture capitalists are looking
for the “home run” and so reject the majority of the proposals they consider. Still, for the firms
that qualify, venture capital is a viable alternative for equity funding.An important part of
obtaining venture-capital funding is going through the due diligence process:
– Venture capitalists invest money in start-ups in “stages,” meaning that not all the
money that is invested is disbursed at the same time.
– Some venture capitalists also specialize in certain “stages” of funding.
Overview of Venture Capital Industry

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• Angel investors
• Private equity funds
• Labor sponsored funds
• Institutional investors
• Diversified versus focused
• Venture Capital Trends
Capital Markets Playing Field

The VC Life Cycle

1st: Submit business plan
2nd: Preliminary assessment
3rd: Meet the people
4th: Light due diligence
5th: Term sheet
6th: Heavy due diligence

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7th: Investment memorandum

8th: Commitment letter
9th: Shareholder’s agreement
10th: Grow the company, and finally
11th: Exit

The Business Life Cycle

VC Investment Criteria
• Exponential growth potential
• Attractive industry
• Sustainable advantage platform
• Excellent team “execution”
• Owners receptive to involvement of outsiders
• Owners willing to share the wealth creation
• Credible exit alternatives (4-7 years out)

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6.2.4 Debt financing

Short-term Debt

Expected to be paid within one year

Most often used to finance short-term expenditures such as inventory, supplies, payroll,
etc.

Trade debt

Not a given - need to establish a relationship

Communication critical if cash flow is tight

Build a relationship with long-term vendors

Banks

Some banks specialize in working with entrepreneurs

Smaller local community banks often more willing to work with local small businesses

Asset-based lenders

Lend money against assets

Cheaper than factors, but more expensive than banks

Factors

Advance money on accounts receivable through “purchase” of A/R

Good for businesses that are not “bankable” at current time

Expensive money: 4-7% per month (annual 50-85% equivalent financing rate)

Use for short term only whenever possible

Plan for transition to bank or other lower cost financing

Long-term Debt

Beyond one year

Most often used to fund fixed asset purchases

Banks: term loans

Leasing companies
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Real estate lenders

Overlooked Forms of Debt

Property leases

Long-term employment agreements

SBA or other government backed lending programs

Working with Bankers

Initial contact

“There’s a bank on every corner.”

Get to know your banker’s boss

Make sure they get to know you and your business before you give them financial
statements or plans

Criteria for Lending by Bankers

1. Ability of the business to generate enough cash flow to easily make interest and principal
payments

2. Entrepreneur’s ability to personally pay back the loan if the business fails

3. Assets to serve as collateral

Key Loan Documents

1. Loan proposal

2. Loan document

 Terms

 Restrictions

 Performance requirements

3. Personal guarantees

 Major shareholders

 Joint and several liability

 Eventually becomes negotiable

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On-going Communication

Bankers hate surprises

Give them a little more than they want, a little more often than they want it

Verbal and written

Downside of Debt

Increased risk during economic slowdown

Impact on proceeds from business sale

Restrictive covenants

Personal guarantees

Factors affecting the choice of funding

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6.2.5. Government Programs

(Reading assignment)

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Chapter Seven
Managing Growth and transaction
7.1. Preparing for the launch of the venture

Entrepreneurship and the actual entrepreneurial decisions have resulted in several million new
businesses being started throughout the world. Indeed, millions of ventures are formed despite
recession, inflation, high interest rates, and lack of infrastructure, economic uncertainty and the
high probability of failure.

The entrepreneurial decision process entails a movement from something to something— a

movement from a present life style to forming a new enterprise.To leave a present live-style to
create something new comes from a negative force--disruption. Many companies are formed by
people who have retired, moved, or been fired. Another cause of disruption is completing an
educational degree.The decision to start a new company occurs when an individual perceives that
forming a new enterprise is both desirable and possible.

Although the desire of new venture formation derived from the individual’s culture, subculture,
family, teachers and peers needs to be present before any action is taken, the second feature
necessary centers around this question “What makes it possible to form a new company?”

Formal education and previous business experience give a potential entrepreneur the skills
needed to form and manage a new enterprise. Although educational systems are important in
providing the needed business knowledge, individual will tend to be more successful in forming
in fields in which they have worked. The government also contributes by providing the
infrastructure to help a new venture.

The market must be large enough and the entrepreneur must have the marketing know-how to
put together the entire package.

Finally, financial resources must be readily available. Although most start-up money comes from
personal savings, credit, and friends, but there is often a need for additional capital. Risk-capital
availability plays an essential role in the development and growth of entrepreneurial activity.

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7.2. Managing early growth of venture

I. Record keeping
It is necessary to have good records for effective control and for tax purposes. The entrepreneur
should be comfortable and able to understand what is going on in the business. With software
packages, much of the record keeping can be maintained on a personal computer. The goals of a
good record keeping system are to identify key incoming and outgoing revenues that can be
effectively controlled.

Sales (Incoming Revenue)

It is useful to have knowledge about sales by customer both in terms of units and dollars. The
entrepreneur of a retail store might try to identify the profile of the type of customer that
patronizes the store. Retailers also like to have information on specific customers. Credit card
purchases can be tracked for information on the type and amount of merchandise purchased. An
Internet venture can maintain purchase history data on the types of produces purchased.
Customers’ e-mail addresses can be requested so the customer can be notified of sales. Some
Internet firms have established a free membership as a means of following up. In a service
venture, records would need to be maintained on when a customer paid their monthly fee. As
cash flow problems are the most significant cause of new venture failure, good payment records
are necessary.

Record keeping of payments can either be handled by a computer software package or a simple
card file system. If payments are late beyond a reasonable time, it may be necessary to hire a
collection agency, but only as a last resort.

Expenses/Costs (Outgoing Revenue

Records of expenses are easily maintained through the checking account. It is good business
practice for the entrepreneur to use checks as payment for all expenses in order to maintain
records for tax purposes.

Canceled checks provide proof of payment. In the early stage, it may be desirable to make all
payments on time to establish credibility with suppliers. The entrepreneur should maintain

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information about employee either in a software program or in a card file. It may be necessary to
maintain records on all assets owned by the business.

Other Records
The entrepreneur should maintain information about employees either in a software program or
in a card file. Records on all assets owned may be needed. With a good record keeping system it
is easy to maintain controls over cash disbursements, inventory, and assets.

II. Recruiting and Hiring New Employees

The entrepreneur will generally need to establish procedures and criteria for hiring new
employees. Advertising in local newspapers and referrals from friends and associates is most
effective for entry-level positions. For senior management the most effective strategy is
networking with friends and business associates. Personnel agencies may also be considered if
there are no other effective options.

Once resumes have been collected some basis of determining each candidate’s strengths
should be made.

Some criteria must be used in the resume evaluation. Factors such as education, prior experience,
entrepreneurial activities, and interests can be used to assess candidates. From the initial
screening of resumes, a few candidates can be invited in for an interview. Most firms use an
interview form with critical factors listed for evaluating the interview candidates. The goal
should be to hire not only the best candidate but also someone who will perform well in the
entrepreneurial environment and provide a long-term solution to the available position.

The interview

The interviewer should ask all of his or her questions at the beginning of the interview. It allows
the interviewer to evaluate the candidate’s behavior. It avoids talking too much and not listening.
Upon completion of the interview, the firm should be sure to check all of the candidate’s
references.

Acquiring senior talents can be critical to the venture’s ability to successfully meet its
growth goals.

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Recruiting for upper management in an entrepreneurial firm

Many executives choose to become part of the entrepreneurial process rather than continue
working in structured big business. The entrepreneur should use all his or her contacts and
recognize that every potential candidate is different.

III. Motivating and Leading the Team

1. The entrepreneur will usually be a role model for any other employees.
2. It is important that the founder assume the role of leader to the management team and
employees.
3. Communication with managers and employees is one of the most important leadership
qualities
The entrepreneur will usually be a role model for any other employees.

Good work ethic will go a long way toward achieving financial and emotional success. During
the early stages employees need incentives to remain committed and loyal to the long run
success of the new venture.

It is important that the founder assume the role of leader to the management team and
employees.

Leadership is also influencing and inspiring others in the organization to strive to meet the
mission of the venture. Below are some behaviors that can exhibit the leadership qualities
necessary for the new venture. Set an example with an ethical set of values for other managers
and employees. Show respect and concern for the personal well-being of employees. Don’t try to
do everything yourself. Recognize the diversity of employees and how they should be treated.
Encourage and praise others in the organization when deserved. Provide incentives and awards
for quality work effort and new ideas. Recognize the importance of employees having fun at
their jobs. Be aware of the need for future strategic planning.Communication with managers and
employees is one of the most important leadership qualities.

IV. Financial Control

The entrepreneur will need some knowledge of how to provide appropriate controls to ensure
that projections and goals are met. Financial skills are needed for the entrepreneur to manage

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during early years. The cash flow statement, income statement, and balance sheet are key areas
needing careful managementand control. Some financial skills are necessary for the entrepreneur
to manage the venture during the early years.

Managing Cash Flow

An up-to-date assessment of cash position, such as a monthly cash flow statement, is needed.
The cash flow statement may show the actual amounts next to the budgeted amounts. It is useful
for adjusting the pro forma and indicating potential cash flow problems. A cash flow crisis can
occur suddenly and unexpectedly. Cash flow analysis can also involve sensitivity analysis: for
each monthly expected cash flow the entrepreneur can use a +/-5% that would provide a
pessimistic and optimistic cash estimate. For the very new venture it may be necessary to prepare
a daily cash sheet. Comparison of budgeted or expected cash flows with actual cash flows can
provide an assessment of potential cash needs and indicate possible problems in the management
of assets and control of costs.

The growth of a business firm is similar to that of a human being who passes through the stages
of infancy, childhood, adulthood, and old age. An enterprise may be considered growing when
there is a permanent increase in its sales turnover, assets; volume of output, etc. business growth
is natural and ongoing process. Many business firms started small and have become big through
continuous growth. But growth may be restricted by constraints of market demand, finance,
technology, management skills, etc.
Need for Growth
In modern business, very few firms remain static for long. Most of the firms are in a state of
continued flux, either expanding or contracting but always changing like time. Business firms
grow on account of several factors. The important motives which drive business firms towards
growth are the advantages of growth which are described below:
§ Survival: severe competition forces a firm to grow and gain competitive strength.
§ Economies of scale: large scale operations provide several economies in production,
marketing, finance, and management.
§ Expansion of market: increase in demand for goods and services have led business firms
to expand in size. Population explosion and transportation led to widening of markets
which in turn resulted in mass production.

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§ Owner’s mandate: the owner of a company gets the ultimate benefit of growth in the
form of higher dividends and rise in the market value of shareholdings. Therefore, they
may direct the management to ensure growth of the company through continuous
plugging back of profits instead of distributing the entire earnings.
§ Technology: business firms also grow in order to reap the benefits of modern
technology.
§ Prestige and power: some business people have a lust for economic and social power.
Big business commands power and respect.
§ Government policy: generally, business firms operate under a plethora of government
controls. Government may provide several incentives in the form of subsidies and tax
concessions to industrial units in backward areas and those producing goods for export
purposes. A firm may grow to face government controls or to secure these incentives.
§ Self-sufficiency: some firms grow to become independent in terms of marketing of raw
materials or marketing of products.

7.3. New Venture Expansion Strategies and Issues

Types of Growth Strategies
Different firms may adopt different strategies in order to grow. The main strategies for
growth are as follows:
 Expansion
 Diversification
 Mergers
 Acquisition
 Franchising
 Licensing, and
 Sub-contracting
Merger
Merger is an external growth strategy. A merger means a combination of two or more firms into
one. It may occur in two ways: 1) takeover or acquisition of one company by another, and 2)
creation of new company by complete consolidation of two or more units. The former is called
absorption whereas the latter is aka amalgamation.
Types of mergers

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Mergers are of four types:

1) Horizontal mergers: these take place when there is a combination of two or more firms
engaged in the same production or marketing process. For instance, Brook Bond and
Lipton India Ltd. Merged together and formed a new company ‘Brook Bond Lipton India
Ltd.’ (BBIL).
2) Vertical mergers: it takes place when the combining firms are complementary to each
other either in terms of supply of inputs or marketing of output. For example, a footwear
company may take-over a leather tannery.
3) Concentric mergers: when the combining firms are similar either in terms of technology
or marketing system there is concentric merger.
4) Conglomerate mergers: it occurs when two unrelated firms combine together, i.e., a
footwear company combining with a cement firm.
Advantages of mergers
Mergers are used due to the following reasons:
 A merger provides economies of large-scale operations
 Better utilization of funds can be made to increase profits
 There is possibility of diversification
 More efficient use of resources can be made
 Sick firms can be rehabilitated by merging them with strong and efficient concerns.
 It is often cheaper to acquire an existing unit than to set up a new one
 It is possible to gain quick entry into new lines of business
 It can provide access to scarce raw materials and distribution network and managerial
expertise.
Disadvantages of Mergers
Mergers are not always successful due to the following drawbacks.
The combined enterprise may be unwieldy. Effective coordination and control becomes
difficult. As a result efficiency and profitability may decline.
Mergers give rise to monopoly and concentration of economic power, which often
operate against the interest of the society and the country.
Licensing

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Under a licensing agreement, one firm permits another to use its intellectual property for
compensation designated as royalty.
The property licensed may include:
Patents
Trademarks
Copyrights
Technology
Technical know-how
Specific business skills
Benefits and Costs of Licensing
Benefits
It requires neither capital investment nor detailed involvement with foreign customers.
It capitalizes on research and development already conducted.
It helps avoid host country regulations applicable to equity ventures.
Costs
It is a very limited form of foreign market participation.
It does not guarantee a basis for future expansion.
The licensor may create its own competitor.
Franchising
Franchising is the granting of the right by a parent company to another independent
entity to do business in a prescribed manner.
The major forms of franchising are:
Manufacturer-retailer systems such as car dealerships,
Manufacturer-wholesaler systems such as soft drink, companies
Service-firm retailer systems such as fast-food outlets.
To be successful, the firm must offer unique products or propositions, and a high degree
of standardization.
Key Reasons for Franchising
 Saturated Domestic Markets
 Market Potential
 Financial Gain

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Inter-firm Cooperation
A strategic alliance is an arrangement between two or more companies with a common
business objective.
To better compete, many companies form strategic alliances with suppliers, customers,
competitors, and companies in other industries to achieve goals.
Reasons for inter-firm cooperation include:
Market development
To share risk or resources
To block and co-opt competitors

Contractual Agreements

Strategic alliance partners may join forces for R&D, marketing, production, licensing,
cross-licensing, cross-market activities, or outsourcing.

Contract manufacturing allows the corporation to separate the physical production of

goods from the R&D and marketing stages.

Management contracts involve selling one’s expertise in running a company while

avoiding the risk or benefit of ownership.

A turnkey operation is a contractual agreement that permits a client to acquire a complete

system following its completion.

Joint Ventures

A joint venture involves the participation of two or more companies in an enterprise in

which each party contributes assets, has some equity, and shares risk.
The 3 reasons for establishing a joint venture are:
Government policy or legislation.
One partner’s needs for another partner’s skills.
One partner’s needs for another partner’s attributes or assets.
The key to a joint venture is the sharing of a common business objective.

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