CHAPTER 1: THE NATURE OF ENTREPRENEURSHIP

1.1 INTRODUCTION
The word ‘entrepreneur’ is widely used, both in everyday conversation and as a technical term in
management and economics. Its origin from a French word, entreprender, where an entrepreneur
was an individual commissioned to undertake a particular commercial project. A number of
concepts have been derived from the idea of the entrepreneur such as entrepreneurial,
entrepreneurship and entrepreneurial process. The idea that the entrepreneur is someone who
undertakes certain projects offers an opening to developing an understanding of the nature of
entrepreneurship. Undertaking particular projects demands that particular tasks be engaged in
with the objective of achieving specific outcomes and that an individual take charge of the
project. Entrepreneurship is then what the entrepreneur does. Entrepreneurial is an adjective
describing how the entrepreneur undertakes what he or she does. The entrepreneurial process in
which the entrepreneur engages is the means through which new value is created as a result of
the project: the entrepreneurial venture.
Chapter Objectives
This chapter is concerned with developing a predominant and integrated perspective of the
entrepreneur and entrepreneurship. It reviews the great variety of definitions given for the word
entrepreneurship and also the different activities performed by the entrepreneur.

After completing this chapter, students will be able to:

 Define the term entrepreneurship and entrepreneur
 Identify types of entrepreneur
 Recognize the role of entrepreneurship in the economy
 Analyze the entrepreneurial competences
 Understand creativity and innovation

1.2 Historical Origin of Entrepreneurship

What is entrepreneurship? And who is an entrepreneur? These two questions are asked more
frequently reflecting the increasing demand in the field of entrepreneurship. Offering a specific
and unambiguous definition of the term entrepreneurship /entrepreneur presents a challenge. This
is not because definitions are not available, but because there are so money. Here let us took in to
the historical development of entrepreneurship so as to grasp the meaning of the word
entrepreneurship.
During the ancient period the word entrepreneur was used to refer to a person managing large
commercial projects through the resources provided to him.
In the 17th Century a person who has signed a contractual agreement with the government to
provide stipulated products or to perform service was considered as entrepreneur. In this case the
contract price is fixed so any resulting profit or loss reflects the effort of the entrepreneur. In the
18th Century the first theory of entrepreneur has been developed by Richard Cantillon. He said
that an entrepreneur is a risk taker. If we consider the merchant, farmers and /or the professionals
they all operate at risk. For example, the merchants buy products at a known price and sell it at
unknown price and this shows that they are operating at risk. The other development during the
18th Century is the differentiation of the entrepreneurial role from capital providing role. The
later role is the base for today’s venture capitalist.
In the late 19th and early 20th Century an entrepreneur was viewed from economic perspectives.
The entrepreneur organizes and operates an enterprise for personal gain. In the middle of the 20 th
Century the notion of an entrepreneur as an inventor as established. “The function of the
entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or
more generally untried technological possibility for producing new commodities or producing an
old one in a new way or opening a new outlet for products by reorganizing a new industry.”
The concept of innovation and newness are at the heart of the above definition. From the
historical development it is possible to understand the fact that the perception of the word
entrepreneur was evolved from managing commercial project to the application of innovation
(creativity) in the business idea.
1.3 Definitions of Entrepreneurship and Entrepreneur
Here we will see some definitions of entrepreneurship and entrepreneur. Intuitively, it is know
that entrepreneurship is the process and entrepreneur is the person undertaking entrepreneurial
activity such as undertaking own business. Finally we will see the common attributes of the
definitions of entrepreneurship and entrepreneur.
1. Entrepreneurship is the process of identifying opportunities in the market place, arranging the
resources required to pursue these opportunities and investing the resources to exploit the
 opportunities for long term gains. It involves creating incremental wealth by bringing
together resources in new ways to start and operate an enterprise.
2. Entrepreneurship is the processes through which individuals become aware of business
ownership then develop ideas for, and initiate a business.
3. 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.
4. Entrepreneurship is the art of identifying viable business opportunities and mobilizing
resources to convert those opportunities into a successful enterprise through creativity,
innovation, risk taking and progressive imagination.
Entrepreneurship is a practice and a process that results in creativity, innovation and enterprise
development and growth. It refers to an individual’s ability to turn ideas into action involving
and engaging in socially-useful wealth creation through application of innovative thinking and
execution to meet consumer needs, using one’s own labor, time and ideas. Engaging in
entrepreneurship shifts people from being “job seekers” to “job creators”, which is critical in
countries that have high levels of unemployment. It requires a lot of creativity which is the
driving force behind innovation.
In general, the process of entrepreneurship includes five critical elements. These are:
1) The ability to perceive an opportunity.
2) The ability to commercialize the perceived opportunity i.e. innovation
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:
1) An entrepreneur is any person who creates and develops a business idea and takes the risk
of setting up an enterprise to produce a product or service which satisfies customer needs.
2) An entrepreneur can also be defined as a professional who discovers a business opportunity
to produce improved or new goods and services and identifies a way in which resources
required can be mobilized.
 3) An entrepreneur is an individual who: has the ability to identify and pursue a business
opportunity; undertakes a business venture; raises the capital to finance it; gathers the
necessary physical, financial and human resources needed to operate the business venture;
sets goals for him/herself and others; initiates appropriate action to ensure success; and
assumes all or a major portion of the risk!
4) An entrepreneur is a person who: create the job not a job-seeker; has a dream, has a vision;
willing to take the risk and makes something out of nothing
5) Other definition, views the term entrepreneur from three perspectives; i.e. from the
economist, psychologist and capitalist philosopher’s point of view.
i) 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.
ii) 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.
iii) 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, entrepreneur refers to the person and entrepreneurship defines the process. Both men
and women can be successful entrepreneurs; it has nothing to do with gender. All entrepreneurs
are business persons, but not all business persons are entrepreneurs.

1.4 Types of Entrepreneurs

Entrepreneurship can take three different forms. They are:

1. The individual entrepreneur: An individual entrepreneur is someone who started;
acquired or franchised his/her own independent organization. The major portion of this
module is also devoted to describe the basic features and activities of the individual
entrepreneur.
2. Intrapreneur: An Intrapreneur is a person who does entrepreneurial work within large
organization. The process by which an intrapreneur affects change is called
Intrapreneurship.
 There are two facts about intrapreneurship
a. The Intrapreneur’s context is often large and bureaucratic organization whereas the
individual entrepreneur operates in the broader, more flexible economic market place.
b. Intrapreneurs are individuals who often engage in the entrepreneurial actions in large
organizations without the blessing of their organizations.
3. The Entrepreneurial Organization: The entrepreneurial function need not be embodied in
a physical person. Every social environment has its own way of filling the entrepreneurial
function.

Individuals working in organizations have the potential for being, as do those working
independently to start their own business. An organization can create an environment in which
all of its members can contribute in some function to the entrepreneurial function.
An organization that creates such an internal environment is defined as entrepreneurial
organization.
1.5 Role of Entrepreneurs in Economic Development
Entrepreneurial development is the most important input in the economic development of any
country. The objectives of industrial development, balanced regional growth, and generation of
employment opportunities are achievable through entrepreneurial development. Entrepreneurs
are at the core of industrial development which results in greater employment opportunities to
the unemployed youth, increase in per capita income, higher standard of living and increased
revenue to the government in the form of income, sales tax, export duties, import duties etc. The
entrepreneurs serve as a key to the creation of new enterprises, thereby rejuvenating economy
and sustaining the process of economic development in the following ways:
1) Improvement in per capita Income/Wealth Generation: Entrepreneurs play a vital in the
economic development of a region. From the fall of Rome (AD 476) to the eighteenth
century, there was virtually no increase in per capita wealth generation in the West. With the
advent of entrepreneurship, however, per capita wealth generation and income in the
west grew exponentially by 20 Percent in the 1700s, 200 percent in the 1800s, 740 percent
in the 1900 (Drayton, 2004).
2) Generation of Employment Opportunities: By creating a new business enterprise,
entrepreneurs generate employment opportunities for others. Unemployment is a major
issue, especially in the context of developing economies like Ethiopia. Educated youth often
 are unable to get to get a suitable employment themselves. Thus, entrepreneurs not only self-
employ themselves, but also create jobs for others.
3) Inspire others Towards Entrepreneurship: The team created by an entrepreneur for his
new undertaking often provides the opportunity for the employees to have a first-hand
experience of getting involved in an entrepreneurial Venture. An existing venture provides a
number of entrepreneurial opportunities through forward and backward linkages, to these
employees even to become entrepreneurs themselves. Thus, this process helps in forming
a chain reaction of entrepreneurial activity which directly contributes to the health of the
economy.
4) Balanced Regional Development: Entrepreneurs help to remove regional disparities in
economic development. They set up the industries in the backward areas to avail
various subsidies and incentives offered by the Central and State Governments, thereby
balancing the economic growth in different regions in the country.
5) Enhance the Number of Enterprise: When new firms are created by entrepreneurs, the
number of enterprises based upon new ideas/ concepts/ products in a region increases. Not
only does an increase in the number of firms enhance the competition for new ideas, but
greater competition across firms also facilitates the entry of new firms specializing in a
particular new product or service. This is because the necessary complementary inputs are
more likely available from small specialist niche firms than from large vertically integrated
products (Jacobs, 1969).
6) Provide Diversity in Firms: Entrepreneurial activity often results into creation of a variety
of firms in a region. These firms operate into diverse activities and it has been found that it is
this diversity in firms which fosters economic development and growth rather than
homogeneity. According to Jacobs (1969), it is the exchange of complementary knowledge
across diverse firms and economic agents that yield an important return on new economic
knowledge.
7) Economic Independence: Entrepreneurship is essential for self-reliance for a country.
Entrepreneurs create industries that manufacture indigenous substitutes, thereby reducing the
dependence on imports. Also, the goods are exported to other countries to earn foreign
exchange. This import substitution and export promotion results in more economic
independence to the country
8) Combine Economic factors: All the products bought and sold in an economy are a mix of
three primary economic factors (the raw materials, nature offers up, the physical and mental
labor people provide and capital (money). Now value is created by combing these three
things together in a way which satisfies human needs.
9) Provide Market efficiency: Efficient means resources are distributed in an optimal way that
is the satisfaction that people can gain from them is maximized. An economic system can
only reach this state if there is competition between different suppliers. If a supplier is not
using competition then they will tend to demand profit in excess of what the market would
allow and reduce the overall efficiency of the system
10) Accepting Risk: Risk is the potential variation in terms of future outcomes. We do not know
exactly what the future will bring. This lack of knowledge creates uncertainty. No matter
how we plan there is always a possibility of adverse deviation from what we expect or hoped
for. Here the primary function of the entrepreneur is to accept risk on behalf of other people.
11) Maximize Investor’s Return: Entrepreneurs create and run organizations which maximize
long-term profit on behalf of the investors which in turn generates overall economic
efficiency.
1.6 Entrepreneurial Competence and Environment
Under this topic entrepreneurial mindset (that will address subtopics such as, who become an
entrepreneur; qualities of successful entrepreneurs; entrepreneurial skills; the entrepreneur’s task
and wealth of the entrepreneur), and Entrepreneurship and Environment.
1.6.1 Entrepreneurial Mindset
1.6.1.1 Who Becomes an Entrepreneur?
Anyone with the following characteristics can be an entrepreneur.
1) The Young Professional: Increasingly young highly educated people often with
entrepreneurial qualifications are skipping the experience of working for an established
organization and moving directly to work on establishing their own ventures.
2) The Inventor: The inventor is someone who has developed an innovation and who has
decided to make a career out of presenting that innovation to the market. It may be a new
product or it may be an idea for a new service. It may be a high-tech or it may be based on a
traditional technology.
3) The Excluded: Some people turn to an entrepreneurial career because nothing is open to
them. Displaced communities and ethnic and religious minorities have not been invited to
join the wider economic community due to a variety of social, cultural and political and
historical reasons. As a result they may form their own internal networks, trading among
themselves and, perhaps, with their ancestral countries.

1.6.1.2 Qualities of an Entrepreneur

In order to be successful, an entrepreneur should have the following qualities:
 Opportunity-seeking
 Persevering
 Risk Taking
 Demanding for efficiency and quality
 Information-seeking
 Goal Setting
 Planning
 Persuasion and networking
 Building self-confidence
 Listening to others
 Demonstrating leadership
1) Opportunity-seeking: An opportunity is a favorable set of circumstances that creates a need
for a new product, service or business. It includes access to credit, working premises,
education, trainings etc. An entrepreneur always seeks out and identifies opportunities.
He/she seizes an opportunity and converts it into a realistic and achievable goal or plan.
2) Persevering: An entrepreneur always makes concerted efforts towards the successful
completion of a goal. An entrepreneur perseveres and is undeterred by uncertainties, risks,
obstacles, or difficulties which could challenge the achievement of the ultimate goal.
3) Risk Taking: The best entrepreneurs tend to:-
F Set their own objectives where there is moderate risk of failure and take calculated
risks
F Gain satisfaction from completing a job well
F Not be afraid of public opinion, skepticism
F Take responsibility for their own actions
Importance of Risk-taking
F Build self confidence
F Create a feeling of leadership
F Create strong motivation to complete a job well
4) Demanding for Efficiency and Quality
Efficiency: Being efficient means producing results with little wasted effort.
Quality refers to:
1. The ongoing process of education, communication, evaluation and constant improvement
of goods/services to meet the customer’s need in a way that exceeds the customer’s
expectations;
2. A characteristic of the product or service that makes it fit to use. It makes a product,
process, or service desirable.
3. The ability of a product or service to meet a customer’s expectations for that product or
service.
The importance of quality management in entrepreneurship is reflected in the income statement
of the business. There is always a demand for quality products and efficient services. Quality
plays an important role in this new era of globalization because it confers certain benefits which
include:
 Reduction of waste: Striving to maintain quality means examining all processes that
contribute to the creation of a product, to remove non-productive processes and waste. If
businesses keep to their standard of maintaining the quality of the product, the number of
defective products will be reduced. Consumers prefer to buy quality products. Hence the
quality products/services help in increasing the share in market and ensure that they will
not be returned.
 Cost-effectiveness: Striving to ensure quality helps businesses to minimize the chances
that they will make mistakes. As a result, the costs of re-doing work or changing the
product after it has been sold are greatly reduced.
 An increase in market share: Customers prefer to buy the same product again and again
if they are satisfied with the quality. If they are satisfied with the quality of a product,
then they will not only purchase the product/services more than once, but they will also
 recommend it to their friends. As a result, this contributes to an increase in the company’s
market share.
 Better profitability: Better quality of product satisfies customers. Increased customers
means increase sales, increased shares in market and consequently increased profits.
 Social responsibility: By providing quality products and services, a company is more
likely to be able to fulfill its responsibility to the community and meet standards set by
government.
 Reputation: Quality of goods and services improves the reputation of the business for
competition in the market and growth.
5) Information-seeking: Successful entrepreneurs do not rely on guesswork and do not rely on
others for information. Instead, they spend time collecting information about their customers,
competitors, suppliers, relevant technology and markets. Gathering relevant information is
important to ensure that the entrepreneur makes well informed decisions. Information on the
area of market, supply, operations, finance, legislation, and infrastructure are important for
entrepreneurs.
6) Goal Setting
A Goal - is a general direction, or long-term aim that you want to accomplish. It is not specific
enough to be measured. It is large in scope, not necessarily time-bound, and is something that
people strive for by meeting certain objectives which will hopefully add up to eventually
achieving the goal.
Objectives - are specific and measurable. They are concise and specific. Think of the word
“object.” You can touch it, it’s there, it’s actual, and it’s finite.
An entrepreneur must have a goal and an objective which is specific, measurable, attainable
relevant, and time bound (SMART).
F Specific: Great goals are well-defined and focused. The moment you focus on a goal, your
goal becomes a magnet, pulling you and your resources toward it. The more focused your
energies, the more power you generate.
F Measurable: A goal without a measurable outcome is like a sports competition without a
scoreboard or scorekeeper. Numbers are an essential part of business. Put concrete
numbers in your goals to know if you’re on track.
 F Attainable: Far too often, entrepreneurs can set goals which are beyond their reach. Dream
big and aim for the stars but keep one foot firmly based in reality.
F Relevant: Achievable business goals are based on the current conditions and realities of
the business climate. For example, you may desire to have your best year in business or
increase revenue by 50%, but if a national economic crisis is looming and three new
competitors just opened in your market, then your goals are not relevant to the realities of
the market.
F Time-Based: Business goals and objectives just don’t get done when there’s no time frame
tied to the goal-setting process. Whether your business goal is to increase revenue by 20%
or to find two new clients, it is important to choose a time-frame to accomplish your goal.
7) Planning: Planning is making a decision about the future in terms of what to do, when to do,
where to do, how to do, by whom to do and using what resources. An effective entrepreneur
therefore usually plans his/her activities and accounts as best as they can for unexpected
eventualities.
8) Persuasion and Networking
Persuasion is a way of convincing someone to get something or make a decision in your favor.
It is inducing or taking a course of action or embracing a point of view by means of argument,
reasoning, or entreaty; to convince; to succeed in causing a person to do or consent to something;
to win someone over, as by reasoning or personal forcefulness; to cause to believe; to induce,
urge, or prevail upon successfully.
Importance of Persuasion in Business
F We purchase goods from people
F We sell goods to people
F We need support from people
F We work with people.
Without people, be they are suppliers, workers, and most importantly customers, there is no
business.
Networking isan extended group of people with similar interests or concerns who interact and
remain in informal contact for mutual assistance or support. In a business environment where we
are in, we network with customers, suppliers, competitors, various firms, different organizations,
government offices and family, etc.
Factors that Affect Persuasion and Networking
F Socio-cultural background and perceptions
F Communication skills (both verbal and non-verbal).
F Negotiation skills
9) Building Self-confidence: Self-confidence is the state of being certain that a chosen course
of action is the best or most effective given the circumstances. Confidence can be described
as a subjective, emotional state of mind, but is also represented statistically as a confidence
level within which one may be certain that a hypothesis will either be rejected or deemed
plausible. Self-confidence is having confidence in oneself when considering a capability.
Overconfidence is having unmerited confidence-believing something or someone is capable
when they are not.
Characteristics of a Self-confident Person
A person with self-confidence may exhibit some of the following characteristics:
F Risk-taking: willing to take risks and go the extra mile to achieve better things.
F Independent: entrepreneurs like to be their own masters and want to be responsible for
their own decisions.
F Perseverance: Ability to endure and survive setbacks and continue to build confidence in
whatever you do in your business.
F Able to learn to live with failure. Entrepreneurs are going to make mistakes. They are
human. But they learn from these mistakes and then move on.
F Ability to find happiness and contentment in work.
F Doing what you believe to be right, even if others mock or criticize you for it.
F Admitting mistakes and learning from them
10) Listening to Others: An entrepreneur does not simply impose his/her idea on others. Rather,
he/she listens to other people in their sphere of influence, analyses their input in line with
his/her own thinking and makes an informed decision.
11) Demonstrating Leadership: An entrepreneur does not only do things by him/herself, but
also gets things done through others. Entrepreneurs inspire, encourage and lead others to
undertake the given duties in time.
1.6.1.3 Entrepreneurial Skills
A skill is simply knowledge which is demonstrated by action. It is an ability to perform in a
certain way. An entrepreneur is someone who has a good business idea and can turn that idea
into reality. To be successful, an entrepreneur must not only identify an opportunity but also
understand it in great depth. He or she must be able to spot a gap in the market and recognize
what new products or services fill the gap. He or she must know what features it will have and
why they will appeal to the customer. The entrepreneur must also know how to inform the
customer about it and how to deliver the new offerings. All this calls for an intimate knowledge
of a particular sector of industry. Turning an idea into reality calls upon two sorts of skills, these
are:
I. General management skills and
II. People management skills
I) General Management Skills: These are skills required to organize the physical and financial
resources needed to run the venture. Some of the most important general management
business skills are:
F Strategy Skills – An ability to consider the business as a whole, to understand how it
fits within its market place, how it can organize itself to deliver value to its
customers, and the ways in which it does this better than its competitors.
F Planning Skills – An ability to consider what the future might offer, how it will
impact on the business and what needs to be done to prepare for it now.
F Marketing Skills – An ability to see past the firm’s offerings and their features, to be
able to see how they satisfy the customer’s needs and why the customer finds them
attractive.
F Financial Skills – An ability to manage money; to be able to keep track of
expenditure and to monitor cash-flow, but also an ability to assess investments in
terms of their potential and their risks.
F Project Management Skills – An ability to organize projects, to set specific
objectives, to set schedules and to ensure that the necessary resources are in the right
plat of the right time.
F Time Management Skills – An ability to use time productively, to be able to
priorities important jobs and to get things done to schedule.
II) People Management Skills: Businesses are made by people. A business can only be
successful if the peoples who make it up are properly directed and are committed to make an
effort on its behalf. An entrepreneurial venture also needs the support of people from outside
the organization such as customers, suppliers and investors. To be effective, an entrepreneur
needs to demonstrative a wide variety of skills in the way he/she deals with other peoples.
Some of the more important skills we might include under this heading are:
 Communication Skills– An ability to use spoken and written language to express
ideas and inform others.
 Leadership Skills – An ability to inspire people to work in a specific way and to
undertake the tasks that are necessary for the success of the venture.
 Motivation Skills – An ability to enthuse people and get them to give their full
commitment to the tasks in hand. Being able to motivate demands an understanding
of what drives people and what they expect from their jobs.
 Delegation Skills– An ability to allocate tasks to different people. Effective
delegation involves more than instructing. It demands a full understanding of the
skills that people possess how they use them and how they might be developed to
fulfill future needs.
 Negotiation Skills– An ability to understand what is wanted from a siturations, what
is motivating others in that situation and recognize the possibilities of maximizing
the outcomes for all parties.
All these different people skills are interrelated. Here entrepreneurial performance results from a
combination of industry knowledge, general management skills; people skills and personal
motivation (see the figure shown below). The successful entrepreneur must not only use these
skills but learn to use them and to learn from using them. Entrepreneurs should constantly avoid
their abilities in these areas, recognize their strengths and weaknesses, and plan how to develop
these skills in the future.
Fig1.1: entrepreneurial skills

1.6.1.4 The Entrepreneurial Tasks

We recognize entrepreneurs, first and foremost, by what they actually do – by the tasks they
undertake. A number of tasks have been associated with the entrepreneur. Some of the more
important are:
1) Owning Organizations: Ownership lies with those who invest in the business and own its
stock – the principals, while the actual running is delegated to professional agents or
managers. Therefore, if an entrepreneur actually owns the business then he is in fact
undertaking two roles at the same time that of an investor and that of a manager. Here we can
also recognize many people as entrepreneur even if they do not own the venture they are
managing.
2) Founding New Organizations: The entrepreneur is recognized as the person who
undertakes the task of bringing together the different elements of the organization (people,
property, productive resource, etc.) and giving them a separate legal entity. The entrepreneur
makes major changes in their organizational word.
3) Bringing Innovations to Market: The idea of innovation encompasses any new way of
doing something so that value is created. Innovation can mean a new product or service but it
can also include a new way of delivering an existing product or service, new methods of
informing the consumer about the product or new ways of organizing the company.
4) Identification of Market Opportunity: An opportunity is the gap in a market where the
potential exists to do something better and create value. New opportunities exist all the time
 but they do not necessarily present themselves. If they are to be exploited they must be
actively sought out. Note that opportunity always takes priority over innovation.
5) Application of Expertise: A slight more technical notion is that they have a special ability in
deciding how to allocate scarce resources in situations where information is limited. It is their
expertise in doing this that makes entrepreneurs valuable to investors.
6) Provision of leadership: Entrepreneurs can rarely drive their innovation to market on their
own. They need the support of other people both from their organizations and from people
outside such as investor customer and supplier.
7) The entrepreneur as manager: At the end of the day the entrepreneur is a manager. The
distinction between an entrepreneur and ordinary manager may lie on what the entrepreneur
manager manages, how they manage, their effectiveness and the effect they have as a
manager not by the particular tasks they undertake.
1.6.1.5 Wealth of the Entrepreneur
Wealth is money and anything that money can buy. It includes money, knowledge and assets of
the entrepreneur.
Who Benefits from the entrepreneur’s Wealth?
No entrepreneur works in a vacuum. The venture they create touches the lives of many other
people. To drive his/her venture forward, the entrepreneur calls up on the support of a number of
different groups. In return for their support these groups expect to be rewarded from the success
of the venture. Peoples who have a part to play in the entrepreneurial venture generally are called
stakeholder. The stakeholder groups are; employees, investor, supplier, customer, the local
community and government. Let us look at the benefits of each stakeholder.
1) Employees: They contribute physical and mental labor to the business. Success of the
entrepreneurial venture depends on their effort and motivation. Therefore, they are rewarded
with:
 Money – their wage or salary
 The possibility of owning a part of the firm through share schemes.
 A stage of which they can develop social relationships.
 The possibility of personal development.
2) Investors: These are the peoples who provide the entrepreneur with the necessary money to
start the venture and keep it running. There are two main sorts of investors: stockholders and
 lenders. Stockholders are those who buy the stock of the company and are true owners of the
firm. The actual return of the stockholders varies depending on how the business
performs.Lenders, on the other hand, are people who offer money to the venture on the basis
of it being a loan. They do not actually own a part of the firm and their return is independent
of the businesses performance. They also take priority for payment over shareholders and
face lower level of risk than the stockholders.
3) Supplier: They are the individuals and organizations who provide the business with the
materials, productive assets and information it needs to produce its output. They are paid for
providing these inputs.
4) Customers: Customers may need to make an investment in using a particular supplier.
Changing supplier may involve switching costs and supplier, risk of quality and expenses
incurred in changing over to new inputs.The entrepreneur may reward customers by offering
quality products, fair prices, regular and consistency of supply, loan arrangement etc.
5) The local community: Business has physical locations. The way they operate may affect the
people who live and other businesses which operate nearby.
A business has a number of responsibilities, which may be defined or not in national laws, to
this local community. Such as:
 Not polluting their shared environment
 Contributing and sponsoring local development activities
 Contribution for political and cultural stabilities and economic improvements
 Acting in an ethical way.
6) Government: The responsibility of government is to ensure that businesses can operate in an
environment which has political and economic stability. In addition, it provides central
services such as education and health-care. These activities cost money to provide.
Therefore, government should be rewarded for its services. Hence, government taxes
individuals and businesses.
1.6.2 Entrepreneurship and Environment

Business environment refers to the factors external to a business enterprise which influence its
operations and determine its effectiveness. Business environment may be healthy or unhealthy.
Healthy business environment means the conditions are favorable to the growth of business
whereas unhealthy environment implies conditions hostile or unfavorable to business operations.
Business and its environment interact with each other. Economic system and other conditions in
the environment determine the success of business enterprises. The firm and its management
have to adjust to the conditions prevalent around it. However, business enterprises try to
influence and shape the environment. Successful working of business concerns improves the
economic and social conditions in the country.
No business concern can ignore the environment around it except at its own peril. “The penalty
of environ mental disregard is heavy. It not only reduces profit margins and makes opportunities
for expansion slip, but it also arouses social hostility and makes social environment growingly
inhospitable to business operations.”
A study of business environment offers the following benefits:

1) It provides information about environment which is essential for successful operation of

business firms.
2) It opens up fresh avenues for the expansion of new entrepreneurial operations. The
entrepreneurs may come forward with new ideas and with new ventures when they find
environment suitable to their enterprises.
3) Knowledge about changing environment enables businessmen to adopt a dynamic
approach and maintain harmony of business operations with the environment.
4) By studying the environment entrepreneurs can make it hospitable to the growth of
business and thereby earn popular support.
Thus, the entrepreneur should continuously study the nature of environment and its influence on
business. However, mere study is not enough. Attempts must be made to influence the
environment in order to make it congenial and favorable to entrepreneurial activities. The most
successful entrepreneur is one who not only adjusts to the environment but also modifies the
environment to suit his requirements through the direct and indirect influences he can exercise
over the system.
1.6.2.1 Phases of Business Environment
Business environment may be classified into two broad categories; namely external; and internal
environment
A) External Environment
It is the environment which is external to the business and hardly to influence independently.
The following are the components of external environment:
i) Economic Environment
Economic environment is of multidimensional nature. It consists of the structure of the economy,
the industrial, agricultural, trade and transport policies of the country, the growth and pattern of
national income and its distribution, the conditions prevailing in industrial, agricultural and other
sectors, the position relating to balance of trade and balance of payments, and other
miscellaneous conditions of the economy.There is a close relationship between a business firm
and the economic environment around it. The success of a business enterprise depends
considerably upon the State and growth of the economy.
ii) Legal Environment
Business must function within the framework of legal structure. Therefore, an adequate
knowledge of laws and rules is necessary for efficient managerial performance. When new laws
are made and controls exercised through legal enactments, the first reaction of the business
community is to oppose them and disobey them. Management should try to understand what
should be the right laws and strictly obey them when so made. In addition, it can influence the
government to change and improve the law and make it useful to the business community.
There are several business laws in our country. A working knowledge of these laws is very
helpful for the entrepreneur. Such knowledge will keep them away from innocent breaches and
resultant penalties. Some laws differ from region to region and amendments arc made from time
to time. Therefore, the entrepreneur must always keep in touch with those who know the latest
position in law. In addition, an entrepreneur should:
b) Read the books that enlighten on the legal side of business
c) Consult government agencies concerned with the implementation of business laws.
d) Retain labor law consultants.
iii) Political Environment
In a democratic country, politics cannot be ignored. Managers and entrepreneurs should
understand the working of the political system. Such understanding and concern for national
problems will help them in the long run in discharging their responsibilities to the satisfaction of
the public.
Public opinion is very important and today's public opinion becomes tomorrow's legislation.
Businessmen should, therefore, learn to take public opinion into account in the decision-making
process. If business does not learn how to deal adequately with public opinion, it will face a
disaster. This does not mean that business should surrender itself to public opinion. Rather, it
implies intelligent response in order to change wherever necessary and a constructive approach
to problems.
iv) Socio-Cultural Environment
It consist the social and cultural norms of a society in a given period of time. The variables that
are appraised are values, beliefs, norms, fashions and fads of a particular society. It can help in
understanding the level of rigidity/flexibility of a given society towards a new
product/service/concept. Traditional culture should be protected in so far as it is not a hindrance
to innovation, motivation, and development.
v) Demographic Environment
It assesses the overall population pattern of a given geographical region. It includes variables like
age profile, distribution, sex, education profile, income distribution etc. The demographic
appraisal can help in identifying the size of target customers.
B) Internal Environment
Internal environment is the environment which is under the control of a given organization.
Following are the components of internal environment of a business:
ii) Raw Material: It assesses the availability of raw material now and in the near future. If the
availability of raw material is less now or would be less in future then the entrepreneur
should give a serious thought to establishing a venture as the entire system can come to a
standstill due to shortage of raw material.
iii) Production/Operation: It assesses the availability of various machineries, equipment, tools
and techniques that would be required for production/operation.
iv) Finance: It assesses the total requirements of finance in terms start-up expenses, fixed
expenses and running expenses. It also indicates the sources of finance that can be
approached for funding.
v) Human Resource: It assesses the kind of human resources required and its demand and
supply in the market. This further helps in estimating the cost and level of competition in
hiring and retaining the human resources.
As stated above, the objective of environmental scanning should be to gather information from
as many sources as possible and to maximize this information for enhanced probability of
success in the business.
1.6.2.2 Environmental Factors Affecting Entrepreneurship
A complex and varying combination of financial, institutional, cultural and personality factors
determines the nature and degree of entrepreneurial activity at any time. The personal
backgrounds of the entrepreneurs are determined mainly by the environment in which they are
born and brought up and work. A multitude of environmental factors determine the
entrepreneurial spirit among people. The entrepreneurs in turn create impact on the environment.
The interaction between the entrepreneur and his environment is an ongoing process. At any
given point of time, the entrepreneurs derive meanings from the environment prevailing at that
time and try to adapt and/or change the environment to suit their needs.
Some of the environmental factors which hinder entrepreneurial growth are given below:
 Sudden changes in Government policy.
 Sudden political upsurge.
 Outbreak of war or regional conflicts.
 Political instability or hostile Government attitude towards industry.
 Excessive red-tapism and corruption among Government agencies.
 Ideological and social conflicts.
 Unreliable supply of power, materials, finance, labor and other inputs.
 Rise in the cost of inputs.
 Unfavorable market fluctuations.
 Non-cooperative attitude of banks and financial institutions.
Entrepreneurship is environmentally determined. The most important essential for
entrepreneurial growth is the presence of a favorable business environment. A healthy business
environment requires active social and cultural behavior of the people, efficient economic
conditions, helpful motivating Government policies, etc. When environment mitigates
entrepreneurship it must be modified.

1.7 Creativity, Innovation and Entrepreneurship

Creativity, innovation and entrepreneurship, have been recognized as important contributors to a
nation’s economic growth. These three terminologies are chronologically interrelated and it is
very important to look in to them to get their full picture.
1.7.1 Creativity

Creativity is defined as the tendency to generate or recognize ideas, alternatives, or possibilities

that may be useful in solving problems, communicating with others, and entertaining ourselves
and others.
Creativity is the ability to come up with new idea and to identify new and different ways of
looking at a problem and opportunities.
It is a process of assembling ideas by recombining elements already known but wrongly assumed
to be unrelated to each other. This definition has several key elements that are worth considering:
F Process: creativity is a process (implying among other things, that it is more like a skill
than an attitude, and that you can get better at it with practice)
F Ideas: creativity results in ideas that have potential value.
F Recombining: the creative process is one of putting things together in unexpected ways.
In order to be creative, you need to be able to view things in new ways of from a different
perspective. Among other things, you need to be able to generate new possibilities or new
alternatives. Tests of creativity measure not only the number of alternatives that people can
generate but the uniqueness of those alternatives. The ability to generate alternatives or to see
things uniquely does not occur by change; it is linked to other, more fundamental qualities of
thinking, such as flexibility, tolerance of ambiguity or unpredictability, and the enjoyment of
things heretofore unknown.
Thus, creativity is the development of ideas about products, practices, services, or procedures
that are novel and potentially useful to the organization.

1.7.1.1 Steps in the Creative Process

Step1: Opportunity or problem Recognition: A person discovers that a new opportunity exists
or a problem needs resolution.
Step2: Immersion: the individual concentrates on the problem and becomes immersed in it. He
or she will recall and collect information that seems relevant, dreaming up alternatives without
refining or evaluating them.
Step 3: Incubation: the person keeps the assembled information in mind for a while. He or she
does not appear to be working on the problem actively; however, the subconscious mind is still
engaged. While the information is simmering it is being arranged into meaningful new patterns.
Step 4: Insight: the problem-conquering solution flashes into the person’s mind at an
unexpected time, such as on the verge of sleep, during a shower, or while running. Insight is also
called the Aha! Experience.
Step 5: Verification and Application: the individual sets out to prove that the creative solution
has merit. Verification procedures include gathering supporting evidence, using logical
persuasion, and experimenting with new ideas.

1.7.1.2 Barriers to Creativity

Be aware that there are numerous barriers to creativity, including:
1. searching for the one ‘right’ answer
2. focusing on being logical
3. blindly following the rules
4. constantly being practical
5. viewing play as frivolous
6. becoming overly specialized
7. avoiding ambiguity
8. fearing looking foolish
9. fearing mistakes and failure
10. believing that ‘I’m not creative

1.7. 2 Innovation

Innovation lies at the heart of the entrepreneurial process and is a means to the exploitation of
opportunity. It is the implementation of new idea at the individual, group or organizational level.
Innovation is a process of intentional change made to rate value by meeting opportunity and
seeking advantage.
There are four distinct types of innovation, these are as follows:
 Invention - described as the creation of a new product, service or process
 Extension - the expansion of a product, service or process
 Duplication - defined as replication of an already existing product, service or process
 Synthesis - the combination of existing concepts and factors into a new formulation
1.7.2.1 The Innovation Process
1. Analytical planning: carefully identifying the product or service features, design as
well as the resources that will be needed.
2. Resources organization: obtaining the required resources, materials, technology,
human or capital resources
3. Implementation: applying the resources in order to accomplish the plans
4. Commercial application: the provision of values to customers, reward employees
and satisfy the stakeholders.

1.7.2.2 Areas of Innovation

The following are some of the major areas in which valuable innovation might be made.
A. New product: A new product can be developed through new or existing technology. The
new product may offer a radically new way of doing something or it may simply be an
improvement on an existing item.The new product must offer the customer an advantage if it
is to be successful.
B. New Services: A service is an act which is offered to undertake a particular task or solve a
particular problem.
C. New Production Techniques: Innovation can be made in the way in which a product is to be
manufactured. A new production technique should allow the end user to obtain the product at
a lower cost, or a product of higher quality or better service in the supply of the product.
D. New Way of Delivering the Product or Service to the Customer: Customer can only use
product/service they can access. A common innovation is to take a more direct routine by
cutting out distributors or middlemen.
E. New Operating Practices: As with innovations in the production of physical products,
innovation in service delivery must address customers need and offer them improved
benefits, for example easier access to the service, a higher quality service, a more consistent
service, a faster or less time consuming service etc.
F. New Means of Informing the Customer about the Product: People will only use a product
or service if they know about it. Demand will not exist if the offering is not properly
promoted to them. Promotion consists of two parts; a message what is said and a means – the
route by which that message is delivered.
G. New Means of Managing Relationship within the Organization: Any organization has a
wide variety of communication channels running through it. The performance of the
organization will depend to a great extent on the effectiveness of its internal communication
channels. These communication channels are guided by the organization’s structure.
H. New Ways of Managing Relationships between Organizations: Organizations sit in a
complex web of relationships to each other. The way they communicate and relate to each
other is very important.
1.7.3 From Creativity to Entrepreneurship
Creativity is the ability to develop new ideas and to discover new ways of looking at problems
and opportunities. Innovation is the ability to apply creative solution to those problems and
opportunities in order to enhance people’s lives or to enrich society.
Entrepreneurship = creativity + innovation.

Fig 1.2: Flow of Creativity, Innovation and Entrepreneurship

CHAPTER 2: BUSINESS PLANNING

2.1INTRODUCTION
In the previous chapter, we dealt with the concept of Entrepreneurship. This unit will help you to
understand the concept of opportunity identification and evaluation, business idea development
and how to prepare a business plan. Virtually to start any type of business or expand the existing
one needs to work on opportunity identification and evaluation, business idea development and
then prepare business plan. Lack of proper opportunity identification and evaluation, idea
development process and business planning are the most often cited reasons for business failure.
The various sections and sub-sections of this chapter will also summarize opportunity identifying
and evaluating processes, business idea development process, and the feasibility study,
importance and preparation of a business plan.

Chapter Objectives
After completing this chapter, students will be able to:
 Identify opportunity in the environment,
 Evaluate the opportunities in the environment,
 Generate business idea,
 Explain the concept of business planning,
 Identify components of business plan,
 Develop business plan,

2.2 Opportunity Identification and Evaluation

Most authors agree that the initial stage in the entrepreneurial process is the identification and
refinement of a viable economic opportunity that exists in the market. Without the recognition of
an opportunity the entrepreneurial process is likely to result in failure.
Opportunity recognition corresponds to the principal activities that take place before a business
is formed or structured. The opportunity identification and evaluation stage can be divided into
five main steps namely; getting the idea/scanning the environment, identifying the opportunity,
developing the opportunity, evaluating the opportunity and evaluating the team.
1) Scanning the Environment/ Getting the Idea
While scanning the environment it may be provide you with idea and business opportunities.
Idea is a thought or suggestion about a possible course of action. Synonymous with “idea” are
the terms thought, intention, scheme, suggestion, proposal, initiative, spur, impulse, brainwave,
insight, concept and connotation. Whereas, opportunity is a favorable time or set of
circumstances for doing something. Synonymous with opportunity are chance, opening and
prospect. A business opportunity is a gap left in a market by those who currently serve it, giving
a chance to others to add unrealized value by performing differently from and better than
competitors in order to create new possibilities.
Business opportunities are distinguished from ideas; an idea is not synonymous with opportunity.
The difference between an idea and an opportunity is that an opportunity is the possibility of
occupying the market with a specific innovative product that will satisfy a real need and for
which customers are willing to pay but idea is all about opinion about anything we can have.
Successful venturing may well rest upon the ability of an individual to recognize or distinguish
an opportunity from an idea.
2) Opportunity Identification
Opportunity identification is ability to see, to discover and exploit opportunities that others miss.
It is the process of seeking out better ways of competing. It includes scanning the informational
environment, being able to capture, recognize and make effective use of abstract, implicit and
changing information from the changing external environments.
It is important for the entrepreneur to understand the cause of the opportunity. Is it technological
change, market shift, government regulation, or competition? These factors and the resulting
opportunity have a different market size and time dimension. The market size and the length
of the window of opportunity form the primary basis for determining risks and rewards which
serves for opportunity evaluation.
Opportunity identification is a very difficult task, as most opportunities do not just appear but
rather result from an entrepreneur’s alertness to possibilities. In developing countries, problems
may be changed to business opportunities.
3) Opportunity Development
Having recognized the opportunity, timely adaptation of that opportunity to suit actual market
need is key to new venture success. Opportunity development is the process of combining
resources to pursue a market opportunity identified. This involves systematic research to refine
the idea to the most promising high potential opportunity that can be transformed into marketable
items.
4) Opportunity Evaluation
Opportunity screening and evaluation is a critical element of the entrepreneurial process. A
professional executed evaluation can tell whether the specific product or service has the returns
needed to justify the investment and the risk to be taken.
Opportunity screening and evaluation is perhaps the most critical element of the entrepreneurial
process, as it allows the entrepreneur to assess whether the specific product or service has
the returns needed for the resources required. This evaluation process involves looking at the
creation and length of the opportunity, its real and perceived value, its risks and returns, its
fit with the personal skills and goals of the entrepreneur, and its differential advantage in its
competitive environment.
5) Assessment of the Entrepreneurial Team
Regardless of how right the opportunity may seem to be, it will not make a successful business
unless it is developed by a team with strong skills. Gartner et al (1999:230) advices that once the
opportunity has been evaluated, the next step is to ask pertinent questions about the people who
would run the company.

2.3 Business Idea Development

A business idea is a short and precise description of the basic operation of an intended business.
There are three types of business ideas. They are:
1. Old Idea – Here an individual copies an existing business idea from someone.
2. Old Idea with Modification – In this case the person accepts an old idea from someone
and then modifies it in some way to fit a potential customer’s demand.
3. A New Idea – This one involves the invention of something new for the first time
2.4 Business Idea Identification

Before you start a business, you need to have a clear idea of the sort of business you want to run.
Your business idea will tell you:
F Which need will your business fulfill for the customers and what kind of customers will
you attract?
F What good or service will your business sell?
F Who will your business sell to?
F How is your business going to sell its goods or services?
F How muchwill your business depend upon and impact the environment? A good business
idea will be compatible with the sustainable use of natural resources and will respect the
social and natural environment on which it depends.
All business ideas are not equally worth. Therefore, to identify promising business idea among
others, it is important to answer the above raised questions.
2.5 Methods for Generating Business Ideas
very business idea should be based on knowledge of the market and its needs. The market refers
to people who might want to buy a good or service; i.e. the customers. The market differs from
place to place, depending on who lives in the area, how they live and for what goods or services
they spend their money. When you understand the market in your area, you might recognize
many business ideas that you may have previously ignored.
When generating business ideas, it is best to try to keep your mind open to everything. Your first
goal is to think of as many ideas as possible and make a list of all the possible business
opportunities. With a list, you will have more choices! You then can scan the list and nail down
the idea(s) that sound most feasible to you and that you think will be most profitable.
There are many ways to come up with business ideas, such as surveying local businesses or
asking existing business owners. The information gained from one approach may supplement
another and help you to clearly describe your business ideas. Below, we will examine a few
different approaches to generating business ideas.
1. Learn from successful business owners
You can learn a lot from people in your area who have already gone through the process of
establishing a business. You should try to get the following information from them:
 What kind of idea did these businesses start with?
  Where did the ideas come from?
 How did they develop their ideas into successful businesses?
 How does the business profit and fit into the local environment?
 Where did they get the money to start their business?
When to meet successful business owners, use the Business Ideas Analysis Form shown below,
to write down their answers to the above listed questions.
2. Draw From Experience
2.1 Your own Experience
Look at the list of your interests, your experiences and your networks. Are there any possible
business ideas that you can derive from your own past experience? Think about each type of
experience.
Start with yourself. What has your experience been as a customer in the market place? Have you
ever searched all day for some items that you could not find in any store in your area? Think
about the goods and services you have wanted at different times and that you have had difficulty
finding.
2.2 Other People’s Experience
The people around you are potential customers. It is important to understand their experience
trying to find goods and services that are unavailable or not exactly what they need. Listen
carefully to what these people say about their shopping experience.
Ask your family and friends about the things they would like to find that are not locally
available. Expand your social knowledge by talking to people from different age groups, social
classes, etc. You can also visit community groups, colleges, etc. for a greater understanding of
the market.
3. Survey Your Local Business Area
Another way of discovering business ideas is to look around your local community. Find out
what type of businesses are already operating in your area and see if you can identify any gaps in
the market.
If you live in a village or small town, you may be able to identify all the fields of business in the
whole town. Otherwise, you may need to focus on the preferred business fields and business
types that you identified. This is an activity that will be much easier to do with a business partner
or friend. Visit the closest industrial area, markets and shopping centers in your area.
4. Scanning Your Environment
You can use your creativity to find more business ideas in your area. Look at the list of existing
local businesses. If the list has included most of the local markets, you may be able to learn about
the industries or service providers on which the local economy relies.
It may be useful to think about business ideas by considering all the resources and institutions in
your area. For example think about:
F Natural resources,
F Characteristics and skills of people in the local community,
F Import substitution,
F Waste products,
F Publications,
F Trade fairs and exhibitions
5. Brainstorming
Brainstorming means opening up your mind and thinking about many different ideas. You start
with a word or a topic and then write down everything that comes to mind relating to that
subject. You continue writing for as long as possible, putting down things that you think of, even
if they seem irrelevant or odd. Good ideas can come from concepts that initially seem strange.
Brainstorming works best in a group. Get your family, friends or classmate together and ask
them to help by writing down ideas they have when they hear the word or subject matter.

6. Structured Brainstorming
Structured brainstorming is when you think of the different processes that are involved in the
operation of a particular business and the goods/services that can be offered with respect to those
processes. This is different from thinking about random items related to a particular business
field and type.
7. Focus Group
Focus group is a group of individuals providing information on a structured format which is led
by moderators. It is characterized by an open and in depth discussion: rather than simply asking
questions to solicit student response. The moderator focuses the discussion in either Directive or
non-directive manner. It is useful for both getting new idea on existing product or screening
idea/concepts.
8. Problem Inventory Analysis
It is similar to focus group to generate new product ideas. The difference is rather than
generating new idea themselves, consumers are provided with a list of problems in general
product category.It is a method of obtaining “New Idea” and solutions by focusing on problems.
9. Free Association
One of the simplest methods that entrepreneurs can use to generate new ideas is free association.
This technique is particularly helpful in developing an entirely new slant to a problem. First, a
word or phrase related to the problem is written down, then another and another, with each new
word attempting to add something new to the ongoing thought processes, thereby creating a
chain of ideas ending with a new product/service idea emerging.
10. Forced Relationships
Forced relationships- as the name implies- is the process of forcing relationships among some
product combinations. It is a technique that asks questions about objects or ideas in an effort to
develop a new idea.
11. Attribute Listing
Attribute listing is an idea-finding technique that has the entrepreneur list the attributes of an
item or problem and then look at each from a variety of viewpoints. Through this process,
originally unrelated objects can be brought together to form a new combination and possibly a
new product/service that better satisfies a need.
2.6Business Idea Screening

Idea screening is the process to spot good ideas and eliminate poor one. To screen the business
idea generated, three approaches are discussed as follow:
1) Macro screening: is aimed screening down ideas to 10. And the common criteria are:
 Are my own competencies (see strength detector) sufficient?
 Can I finance it to a large extent with my own equity?
 Will people buy my product/service (i.e. is it needed and can people afford it)?
2) Micro Screening: is aimed screening down ideas into 3. The common criteria used for
screening are:
 Solvent demand
 Availability of rawmaterials
 Availability ofpersonalskills
 Availability of financialresources
3) Scoring the Suitability of Business Idea:
This approach is most appropriate when deciding on starting a business. When there are more
than one possible business ideas and one needs to decide which one to follow, we use score
business ideas (e.g., BI1, BI2, BI3) by assigning a rating from 1 to 3 for each question, with 3
being the strongest. After we score the ideas we sum the total and select the idea with the highest
score.

S. No Questions BI1 BI2 BI3

1. Are you familiar with the operations of this type of business?
2. Does the business meet your investment goals?
3. Does the business meet your income goals?
4. Does the business generate sufficient profits?
5. Do you feel comfortable with the business?
6. Does your family feel comfortable with the business?
7. Does the business satisfy your sense of status?
8. Is the business compatible with your people skills?
9. Is there good growth projected for the overall industry of the business?
10. Is the risk factor acceptable?
11. Does the business require long hours?
 12. Is the business location-sensitive?
13. Does the business fit your personal goals and objectives?
14. Does this business fit your professional skills?
Totals

Notes: while to answer the above listed questions it is important to conduct survey. Collecting
information on your business idea gives you an opportunity to promote your business idea and to
present yourself as a potential entrepreneur. While to answer the above questions, there are four
important groups that you should talk to:
F Potential customers: Their views are essential to your understanding of whether or not
your proposed product is important to them and if you need to modify your idea to meet
their needs.
F Competitors, suppliers and entities with financial resources: Their views will reveal
the challenges of competition that you would face, as well as other issues related to your
potential business.
F Financial institutions: Find out the lending requirements to determine whether
borrowing for a new business is possible.
F Key informants and opinion leaders: These are people who would know a lot about the
type and field of business you want to go into and/or a lot about your potential customers.
Their views would give you a lot to think about and could also give you a better insight
into the feasibility of your business idea.
When you have completed the summary of your business idea, you can go on to the next step to
start your own business: Prepare a business plan for the proposed business.

2.7 Concept of Business Plan

Planning is the first and the most crucial step for starting a business. A carefully charted and
meticulously designed business plan can convert a simple idea/innovation into a successful
business venture.
A business plan is a road map for starting and running a business. A well-crafted business plan
identifies opportunities, scans the external and internal environment to assess the feasibility of
business and allocates resources in the best possible way, which finally leads to the success of
the plan. It provides information to all concerned people like the venture capitalist and other
financial institutions, the investors, the employees. It provides information about the various
functional requirements (marketing, finance, operations and human resources) for running a
business.
A business plan is the blueprint of the step-by-step procedure that would be followed to convert a
business idea into a successful business venture. A business plan first of all identifies an
innovative idea, researches the external environment to list the opportunities and threats,
identifies internal strengths and weakness, assesses the feasibility of the idea and then allocates
resources (production/operation, finance, human resources ) in the best possible manner to make
the plan successful:.
The objectives of a business plan are to:
F Give directions to the vision formulated by entrepreneur.
F Objectively evaluate the prospects of business.
F Monitor the progress after implementing the plan.
F Persuade others to join the business.
F Seek loans from financial institutions.
F Visualize the concept in terms of market availability, organizational, operational and
financial feasibility.
F Guide the entrepreneur in the actual implementation of the plan.
F Identify the strengths and weakness of the plan.
F Identify challenges in terms of opportunities and threats
F Clarify ideas and identify gaps in management information about their business,
competitors and the market.
F Identify the resources that would be required to implement the plan.
F Document ownership arrangements, future prospects and projected growths of the
business venture.

2.8 Developing a Business Plan

2.8.1 Business Planning Process

A plan, which looks very feasible at the first instance, might actually not be when the details are
drawn. Hence documenting the business plan is one of the early steps that an entrepreneur should
take. As discussed above, the successful entrepreneur lays down a step-by-step plan that she/he
follows in starting a new business. This business plan acts as a guiding tool to the entrepreneur
and is dynamic in nature – it needs continuous review and updating so that the plan remains
viable even in changing business situations. The various steps involved in business planning
process are discussed here below:
1) Preliminary Investigation
Before preparing the plan entrepreneur should:
F Review available business plans (if any).
F Draw key business assumptions on which the plans will be based (e.g. inflation, exchange
rates, market growth, competitive pressures, etc.).
F Scan the external environment and internal environment to assess the strengths,
weakness, opportunities and threats.
F Seek professional advice from a friend/relative or a person who is already into similar
business (if any).
2) Opportunity Identification and Idea Generation
Entrepreneurship is not just limited to innovation (generation of an entirely new concept, product
or service, but it also encompasses incremental value addition to the concept/product/ services
offered to the consumer, shareholder and employee).
Opportunity identification and business idea generation is the first stage of business planning
process. It involves generation of new concepts, ideas, products or services to satisfy demand.

3) Environmental Scanning
Once a promising idea emerges through idea generation phase the next step is environmental
scanning, which is carried out to analyze the prospective strengths, weakness, opportunities and
threats of the business enterprise. Hence before getting into the finer details of setting up
business it is advisable to scan the environment both external and internal and collect the
information about the possible opportunities, threats from the external environment and strengths
and weaknesses from the internal environment (the detail has been addressed in chapter one).
4) Feasibility Analysis
Feasibility study is done to find whether the proposed project (considering the above
environmental scanning) would be feasible or not. It is important to demarcate environmental
scanning and feasibility study at this point. Environmental scanning is carried out to assess the
external and internal environment of the geographical area/areas where, entrepreneur intends to
set up his business enterprise, whereas feasibility study is carried out to assess the feasibility of
the project itself in a particular environment in greater detail.
5) Report Preparation
After environmental scanning and feasibility analysis, a business plan report is prepared. It is a
written document that describes step-by- step, the strategies involved in starting and running a
business.

2.8.2 Essential Components of Business Plan

I) Cover Sheet: Cover sheet is like the cover page of the book. It mentions the name of the
project, address of the headquarters (if any) and name and address of the promoters.
II) Executive Summary: Executive summary is the first impression about the business
proposal. As the saying goes, the first impression is the last impression. A careful
presentation of information should be done to attract the attention of the evaluators. It
should be in brief (not more than two or three pages) yet it should have all the factual
details about the project that can improve its marketability. It should briefly describe the
company; mention some financial figures and some salient features of the project.
Generating interest in the minds of the readers is the prime motive of the executive
summary.
III) The Business: This will give details about the business concept. It will discuss the
objective of the business, a brief history about the past performance of the company (if it
is an old company), what would be the form of ownership (whether it would be a single
proprietor, partnership, cooperative society or a company under company law). It would
also labelthe address of the proposed headquarters.
IV) Funding Requirement: Since the investors and financial institutions are one of the key
bodies examining the business plan report and it is one of the primary objectives of
preparing the business plan report, a careful, well-planned funding requirement should be
documented. It is also necessary to project how these requirements would be fulfilled.
Debt equity ratio should be prepared, which can give an indication about how much
finance would the company require and how it would like to fund the project.
V)The Product or Services: A brief description of product/services is given in this
subsection. It includes the key features of the product, the product range that would be
provided to the customers and the advantages that the product holds over and above the
similar products/ substitute products available in the market. It also gives details about the
patents, trademarks, copyrights, franchises, and licensing agreements.
VI)The Plan: Now the functional plans for marketing, finance, human resources and
operations are to be drawn.
1) Marketing Plan:Marketing mix strategies are to be drawn, based on the market research.
2) Operational Plan:The operational plan would give information about (i) Plant location:
why was a particular location chosen? Is it in the vicinity of the market, suppliers, labor
or does it have an advantage of government subsidies for that particular location or are
there any other specific reasons for choosing the particular location?, (ii) Plan for
material requirements, inventory management and quality control are also drawn for
identifying further costs and intricacies of the business. Finally, the budget for
operational plan is also drawn.
3) Organizational Plan: The organizational plan indicates the pattern of flow of
responsibilities and duties amongst people in the organization, it provides details about
the manpower plan that would be required to put life into the business and it would also
enlist the details about the laws that would be governed in managing the employees of the
organization. In the end the organizational plan is also budgeted.
4) Financial Plan:The financial plan is usually drawn for two to five years for an existing
company. For a new organization the following projections are drawn:
a) Projected Sales
b) Projected Income and Expenditure Statement
c) Projected Break Even Point
d) Projected Profit and Loss Statement
e) Projected Balance Sheet
f) Projected Cash Flows
g) Projected Funds Flow
h) Projected Ratios
VII) Critical Risks: The investors are interested in knowing the tentative risks to evaluate the
viability of the business and to measure the risks involved in the business. This can
further give confidence to the investors as they can calculate the risks involved in the
business from their perspectives as well.
VIII) Exit Strategy: The exit strategies would provide details about how the organization
would be dissolved, what would be the share of each stakeholder in case of winding-up of
the organization. It further helps in measuring the risks involved in investing.
IX) Appendix: The appendix can provide information about the Curriculum Vitae of the
owners, Ownership Agreement and the like.

2.9 Sample Business plan Format

The business plan outlined below presents all necessary chapters in detail, including all
necessary explanations in the context of Ethiopia.

Business plan outline

for micro-enterprises - Ethiopian application

Business Plan
1. Full name of the business operator...................................
2. Address: Woreda.......................... Town...................
Kebele........................... House no..............
3. Type of the plan/work/business in which the operator is to be engaged.
........................................................................................
4. Year of the plan: From............................... to....................
5. Work premises at the disposal of the operator..................
..........................................................................................
..........................................................................................
Specify, if there is any problem:
..............................................................................................

6. Yearly sales plan:

Ser. no. Product/service to Unit Qua. Unit price Total price Remark
 be sold, marketed /
year

Total sales
Months during which sales are expected to be high
........................................................................................................................................................
........................................................................................................................................................
........................................................................................................................................................
1. Equipment currently owned by the operator:
Type of Unit of Unit Total
Ser. no. Qua. Remark
equipment measure cost cost

Total cost of
equipment

8. Equipment to be purchased by the operator

Type of Unit of Unit Total
Ser. no. Qua. Remark
equipment measure cost cost

Total cost of
equipment
9. Yearly raw material requirement:
Type of raw Total
Ser. no. Unit Unit price Remark
material Qua. price

Total yearly raw

material cost

Source of raw material..................................................................................................................

......................................................................................................................................................
10. Other yearly operating expenses (e.g. labor expense, sales expense, depreciation
expense, tax expense etc..)
Amount of expense
Ser. no. Types of expense Remark
in Birr

Total expense

11. Yearly production/service plan:

Types of
Unit Total
Ser. no. production/service to be Remark
Unit Qua. cost cost
produced or rendered

Total cost

12. Financial plan:

Capital requirements Equity Loan Total
Investment capital:
Machinery + equipment
Furniture + fixture
Business premises
Any other initial and significant outlay
Working capital:
· Salary/wage
· Raw material and/or supplies
· Rent
· Maintenance
· Business promotion
· Other cash outlay to meet
 short-term and recurrent expenditure
Total
13. Yearly profit and loss plan
Profit + Loss Statement Format: Accounting

Business plan outline 2 for micro and small enterprises and start ups
Business plan outline
For micro and small enterprises and start ups

Executive summary
1. Brief Description of the Project
2. Brief Profile of the Entrepreneur
3. Project's Contributions to the Economy
1. Sales and Marketing
1.1 Product description
1.2 Competitors'
1.3 Location
1.4 Market Area
1.5 Main Customers
1.6 Total Demand
1.7 Market Share
1.8 Selling Price
1.9 Sales Forecast
1.10 Promotional Measures
1.11 Marketing Strategy
1.12 Marketing Budget
2. Production
2.1 Production Process
2.2 Fixed Capital
2.3 Life of Fixed Capital
2.4 Maintenance and Repairs
2.5 Sources of Equipment
2.6 Planned Capacity
2.7 Future Capacity
2.8 Terms and Conditions of Purchase of Equipment
2.9 Factory Location and Layout
2.10 Raw Materials Needed
2.11 Cost of Raw Materials
2.12 Raw Materials Availability
2.13 Labor
2.14 Cost of Labor
2.15 Labor Availability
2.16 Labor Productivity
2.17 Factory Overhead Expenses
2.18 Production Cost
3. Organization and Management
3.1 Form of Business
3.2 Organizational Structure
3.3 Business Experience and Qualifications of the Entrepreneur
3.4 Pre-Operating Activities
3.5 Pre-Operating Expenses
3.6 Office Equipment
3.7 Administrative Expenses
4. Financial plan
4.1 Project Cost
4.2 Financing Plan and Loan Requirement
4.3 Security for Loan
4.4 Profit and Loss Statement
4.5 Cash Flow Statement
4.6 Balance Sheet
4.7 Loan Repayment Schedule
4.8 Break-even Point (BEP)
4.9 Return on Investment (ROI)
4.10 Financial Analysis