CHAPTER ONE

ENTREPRENEURSHIP AND FREE BUSINESS ENTERPRISE Chapter Objectives Introduction Contents 1.1 Definition of Entrepreneur, Entrepreneurship and Enterprise 1.2. Difference between entrepreneur and entrepreneurship 1.3. Characteristics of an entrepreneur 1.4. Entrepreneur vs. manager relationship 1.5. Entrepreneurship VS Intrapreneurship 1.6. Levels of Entrepreneurial Development 1.7. Role of entrepreneurship in economic development 1.8. Creativity, Innovation and Entrepreneurship 1.9. The Desire to take up Entrepreneurship as a Career Chapter Objectives Dear learner, this chapter is meant to acquaint you with the basic concepts of entrepreneurship. Thus, after going through this lesson you should be able to: Define and know the Meaning of the terms Entrepreneur, Entrepreneurship and Enterprise Discuss the difference among entrepreneur, entrepreneurship and enterprise List the characteristics of entrepreneur Explain the different between entrepreneurship and intrapreneurship Differentiate the roles of an Entrepreneur and a Manager List the levels of Entrepreneurial Development Explain the Role of Entrepreneurship in Economic Development Explain the relationship between Creativity, Innovation and Entrepreneurship Develop the desire to take up Entrepreneurship as a Career

 Differentiate between Wage employment, Self-employment and Entrepreneurship Introduction Do you know that there are a number of unemployed youth in the country and by the time you graduate, this number may increase substantially? Do you want to be part of that group which keeps knocking from pillar to post, checking with employment exchanges, relatives, friends, and neighbors and still not able to get a job to their liking and then settle for a second or third rate job? These all challenges can be solved by the active involvement of entrepreneurship in the economic development of the nation. Entrepreneurship is a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. It requires essential ingredients of an entrepreneurs such as the willingness to take calculated risks; ability to formulate an effective venture team; the creative skill to marshal needed resources; fundamental skills of building a solid business plan; vision to recognize opportunity where others see chaos. Not all entrepreneurs are created equal degrees. Different degrees/ levels of entrepreneurial intensity and drive depend upon how much independence one exhibits, the level of leadership and innovation they demonstrate, how much responsibility they shoulder, and how creative they become in envisioning and executing their business plans. Entrepreneurship is basically concerned with creating wealth through production of goods and services. This results in a process of upward change whereby the real per capita income of a country rises overtime or in other words economic development takes place. Thus entrepreneurial development is the key to economic development. In fact it is one of the most critical inputs in the economic development of a region. It speeds up the process of activating factors of production leading to a higher rate of economic growth, dispersal of economic activities and development of backward regions. Entrepreneurship is characterized by the utilization of a given opportunity through creativity and innovation. Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities. Innovation is the ability to apply creative solutions to those problems and opportunities in order to enhance peoples lives or to enrich society.

1.1. Definition of Entrepreneur, Entrepreneurship and Enterprise Dear learner, what do you understand by the words entrepreneur, entrepreneurship, and enterprise? What is the difference between entrepreneurship and intrapreneurship? The term entrepreneur stems from the French word entrependre meaning one who undertakes or one who is a go-between. According to Richard Cantillon, an entrepreneur is a person who pays a certain price for a product to resell it at an uncertain price, thereby making decisions about obtaining and using the resources while consequently admitting the risk of enterprise. According to J.B. Say, an entrepreneur is an economic agent who unites all means of production- land of one, the labor of another and the capital of yet another and thus produces a product. By selling the product in the market he pays rent of land, wages to labor and interest on capital and what remains is his profit. He shifts economic resources out of an area of lower productivity into an area of higher productivity and greater yield. Entrepreneurship can be described as a process of action an entrepreneur undertakes to establish his/ her enterprise. Entrepreneurship is a creative activity. It is the ability to create and build something from practically nothing.

According to Peter Drucker Entrepreneurship is defined as a systematic innovation, which consists in the purposeful and organized search for changes, and it is the systematic analysis of the opportunities such changes might offer for economic and social innovation. According to Schumpeter entrepreneurs are innovators who use a process of shattering the status quo of the existing products and services, to set up new products, new services. David McClleland: An entrepreneur is a person with a high need for achievement. He is energetic and a moderate risk taker. Entrepreneurship is a creative activity. It is the ability to create and build something from practically nothing. It is a knack of sensing opportunity where others see chaos, contradiction and confusion. Entrepreneurship is the attitude of mind to seek opportunities, take calculated risks and derive benefits by setting up a venture. It comprises of numerous activities involved in conception, creation and running an enterprise. In an integrate, entrepreneurship is a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. It requires essential ingredients that include: the willingness to take calculated risk; the ability to formulate an effective venture team; the creative skill to marshal needed resources; the fundamental skills of building a solid business plan; and the vision to recognize opportunity where others see chaos, contradiction, and confusion. 1.2. The relationship among an entrepreneur, entrepreneurship and enterprise The term entrepreneur is used to describe men and women who establish and manage their own business. The process involved in creating and starting an enterprise is called entrepreneurship. Entrepreneurship is an abstraction whereas entrepreneurs are tangible people. Entrepreneurship is a process and an entrepreneur is a person. Entrepreneurship is the outcome of complex socio-economic, psychological and other factors. The entrepreneur is the key individual central to entrepreneurship who makes things happen. The entrepreneur is the actor, entrepreneurship is the act. Entrepreneurship is the most effective way of bridging the gap between knowledge and the market place by creating new enterprises. An entrepreneur is the catalyst who brings about change. An enterprise is the business organization that is formed and which provides goods and services, creates jobs, contributes to national income, exports and overall economic development. 1.3. Essential Characteristics of an Entrepreneur In the past, an entrepreneur was seen almost as a hero, such as Thomas Edison or Henry Ford, who had a big idea, worked hard, and was creative enough to become a big success. The average worker depended on the entrepreneurial hero to give them opportunities. An entrepreneur frequently has to wear many hats. He has to perceive opportunity, plan, organize resources, and oversee production, marketing, and liaison with officials. Most importantly he/she has to innovate and bear risk. In general, business literature shows several characteristics essential for entrepreneurs that distinguish ordinary entrepreneurs from the extraordinary ones. The following are characteristics that are found within all successful entrepreneurs and without which most people will fall short of what it takes to succeed in an entrepreneurial enterprise. Confident Confidence is a hallmark of the entrepreneur. Not all of us are born with confidence, but that does not mean we are not capable of it. Many confident women and men gain their sense of self esteem and faith in their ability to greet challenges by experience and formal education.

 Feel a Sense of Ownership Taking responsibility for getting things done and doing them with care and attention meaning, to act like an owner. Rather than viewing a problem as someone elses, the entrepreneur sees it as his or her own and takes pride in finding a solution; leaving things in better shape than they were before, and improving upon situations rather than leaving them unattended. Rather than controlling situations in an attempt to possess them, the entrepreneur teaches other people how to take charge. In that way the clever entrepreneur uses individual accountability in the ultimate pursuit of profitability, teamwork, and overall success. Able to Communicate Entrepreneurs recognize that the most important part of any business is the human element. Human resources whether in the form of clients, employees, or strategic partners are what make or break a business, and communication is the key to successful relationships with people. The entrepreneur works to sharpen communication skills, whether those are written, spoken, or non-verbal messages conveyed through body language. And to support communication, he or she will take advantage of all available tools and resources. Passionate about Learning Entrepreneurs are often autodidactic learners, which mean that much of what they know is learned not in a formal classroom setting, instead on their own by seeking out information, asking questions, and by personal reading and research. They also are quick to learn from their own mistakes, which mean they are less prone to keep repeating them due to arrogance, ego, or blindness to ones own faults, shortcomings, or errors in judgment. To teach is to learn. To lead, train, and impart experience to others the entrepreneur is constantly striving to learn more, and get better educated. Because of the passion for education, true entrepreneurs surround themselves with people who either know more than they do or know things that are different from what they know. They entertain the views and perspectives of others that may be unlike their own, for instance, to be better students of human nature. In this way they continue to enrich themselves with knowledge while making a concerted effort to grow that knowledge by sharing it with others who are also front row students of lifes valuable and unlimited lessons. Team Player Team players know how to succeed by employing the physics of interpersonal synergy and dynamic relationships. One twig can be easily snapped, but a bundle of those small twigs becomes stronger than the sum of its individual parts and can be impossible to bend, much less break. The same goes for businesses, and successful entrepreneurs leverage teamwork to get the heavy lifting done without breaking stride. System-Oriented Like mathematical formulas, good systems allow us to reproduce great results every time with less and less exertion of energy or resources. Entrepreneurs rely upon systems before they rely upon people, and they look for system based solutions before searching for human resource solutions. If the person gets the job done but falls sick or leaves, the job is threatened. But if a system is created to get the job done, anyone can step in and follow the blueprint to get the desired result. Designing, implementing, and perfecting systems is one of the most useful and rewarding skills of an entrepreneur. Dedicated Entrepreneurs dedicate themselves to the fulfillment of their plans, visions, and dreams, and that tenacity of purpose generates electricity throughout the whole organization. One of the biggest reasons that

companies fail is because they lose focus. Target a goal, clarify the objective, refine the brand, and narrow the margin of error. Regardless of what the effort might involve, an entrepreneur brings a singleminded dedication to the task by being committed to a positive outcome and ready and willing to do the needful. No matter what that might mean in terms of rising to meet a challenge or acting above and beyond the call of duty, the entrepreneur shows steadfast dedication. Grateful Being grateful for what we have opens us up to receive more, and one reason that is true is because those who are grateful appreciate what they are given. They respect it and nurture it. They do their best to make it grow instead of allowing it to dwindle away due to neglect. Entrepreneurs learn to take nothing for granted in this world. That gives them the agility and flexibility to adapt to changes and demands, while it also invests in them a thankfulness that reminds them that riches and wealth are not about stuff, but are about fulfillment, satisfaction, and the pleasure that comes from ones accomplishments and contributions. Optimistic A positive outlook is essential for the entrepreneur, who learns to see setbacks as bargain priced tuition for the valuable business lessons gained through firsthand experience. Past shortcomings, failures, or disappointments are relegated to the past so that they cannot continue to haunt the present or obstruct the future. And when things go right and business prospers, this further fuels the optimism and positive mindset of an entrepreneur, helping to give impetus and momentum for greater accomplishments and increased hopefulness. Gregarious Because business is all about people, entrepreneurs tend to be socially outgoing. They get excited about sharing ideas, products, and services, and that excitement is contagious to their employees, clients, friends, and other contacts both within and beyond the business sphere. But women and men who work hard as entrepreneurs also enjoy the unique opportunity to have fun doing something that they love as their primary vocation. Human resource experts, career counselors, and business psychologists all agree that those who do jobs they enjoy and are good at have higher rates of success and broader measures of satisfaction. Entrepreneurs know that firsthand, from their own experience, and they tend to be a funloving group of people both on and off the job. Leader by Example Entrepreneurs not only lead themselves through self-motivation as self-starters who jump into tasks with enthusiasm, but they are also skilled at leading others. They know the importance of teamwork, and they understand the need to appreciate others, support them, and reward them accordingly. True leaders do not become indispensable, otherwise things fall apart in their absence and they can never rise to the highest level of entrepreneurial freedom and prosperity. Not Afraid of Risk or Success Many people could be successful if they only took chances. And many people who do take chances and become somewhat successful find the realization of their dreams an overwhelming possibility, so they interrupt their continued success by retreating back into a comfort zone of smallness. Those who cling to what is familiar to them even if it means the denial of their dreams lack the perseverance and ambition that the real entrepreneur exhibits. Entrepreneurs are not immune to fear. But they prioritize their approach to life so that the fear of failure, frustration, boredom, drudgery, and dissatisfaction far outweighs the persistent fear of success.

1.4. Entrepreneur vs. manager Are all small entrepreneurs managers? Are all small business managers entrepreneurs? The terms entrepreneur and manager are many times used interchangeably yet they are different. An entrepreneur starts a venture then a manager takes over to organize and co-ordinate continuous production. An entrepreneur is being enterprising as long as he starts something new then the routine day-to-day management of the business is passed on to the manager. The main differences between the two are summed up below: Entrepreneur An entrepreneur is involved with the start-up process An entrepreneur assumes financial, material and psychological risks An entrepreneur is driven by perception of opportunity An entrepreneur initiates change An entrepreneur is his own boss An entrepreneur gets uncertain reward Manager A manager runs the business over a long period of time A manager does not have to bear risks A manager manages by the resources he currently possesses A manager follows rules & procedures A manager gets fixed rewards and salary Some business literature tells us that a business owner who hires a professional manager to run his business and then turns his own interests to other things is not an entrepreneur. Although he is assuming the risk of the venture, he is not actively involved in organizing and operating it. A professional manager whose job is running someone else's business is not an entrepreneur. Although she may be organizing and operating the enterprise, she is assuming no personal risk for its success or failure. These traits are administrative. These literatures reveal the following as behaviors seen in administrative organizations: measuring success based on the use of existing resources focusing on quick results making decisions slowly showing little willingness to change after a decision to commit resources is made using well defined structures with a well defined line of authority and responsibility Concentrating on risk reduction. 1. 5 Intrapreneurship: Developing Entrepreneurship in the Corporation Intrapreneurship is also known as corporate entrepreneurship or corporate venturing. It is the practice of developing a new venture within an existing organization, to exploit a new opportunity and create economic value Intrapreneur is a person who focuses on innovation and creativity and who transforms a dream or an idea into a profitable venture, by operating within the organizational environment. Intrapreneurs, by definition, embody the same characteristics as the entrepreneur: conviction, passion, and drive. An intrapreneur thinks like an entrepreneur seeking out opportunities, which benefit the corporation. It is a new way of thinking, in making companies more productive and profitable. It indicates visionary employees who think like entrepreneurs.

If the company is supportive, the intrapreneur succeeds. When the organization is not, the intrapreneur usually fails or leaves to start a new company. The major thrust of intrapreneuring is to develop the entrepreneurial spirit within organisational boundaries, thus allowing an atmosphere of innovation to prosper. Reasons for rise of Intrapreneurship This need has arisen in response to a number of pressing problems, including: a rapidly growing number of new and sophisticated competitors, a sense of distrust in the traditional methods of corporate management, an exodus of some of the best and brightest people who are leaving corporations to become smallbusiness entrepreneurs, international competition, downsizing of major corporations, and an overall desire to improve efficiency and productivity 1.6. Levels of Entrepreneurial Development Dear learner, what do you understand by the different levels/ degrees of entrepreneurial development? What relationship do you think among creativity, innovation, and entrepreneurship? Do you think that entrepreneurship can be a career option? Brad Sugars, a world-renowned business author and founder of his own international franchise with nearly 1,000 offices worldwide, identifies five different types or levels of entrepreneurial mindsets, patterns of thinking, and belief systems. Level One: The Self-Employed Mindset The driving force behind the self-employed person is not security but a desire for greater control over his or her life, career, and destiny. Relinquishing the control of a boss every day is not their idea of happiness, and they believe that they could do their job just as well without an employerand perhaps without the need for other employees. They want more autonomy. They want to do things their own way. And they usually begin by creating a situation where they do the same type of work they did while being an employee, but they figure out how to do it by themselves and for themselves. Level Two: The Managerial Perspective Those with a managerial outlook are often in a great position to succeed as entrepreneurs, expect for two big misconceptions that lead to massive problems. Many managers believe that if a business is not working, the solution lies in hiring more employees. They throw extra bodies at the problem, but this only aggravates the situation because it fails to address the underlying cause of the difficulty. Another mistaken belief that is common to this mindset is that the route to success is through growth not profit; growth but overall structural growth of the enterprise itself. Once again, bigger is not necessarily better unless and until the fundamentals are sound and efficient. Growing larger to fix the problems of a small business only generates a much bigger company with problems that are expanded, magnified, and much more expensive to remedy. Many managerial entrepreneurs go into bankruptcy thanks to vigorous growth, but they never figure out why. A third misstep common to the managerial attitude is that the entrepreneur wants to be the boss, even if that means sacrificing the talent or potential of employees. To give orders and be in charge requires no great skill or aptitude, but to be a leader one who knows how to inspire and train others to rise to greater heights is a rare quality. Managers who become leaders succeed because they accept the challenge and responsibility of ensuring that others under their wings also succeed and flourish.

By getting the most out of employees, managers themselves are able to delegate aspects of their business to others and set higher goals. They not only manage but also lead, can rise to the next level and become owner/leaders one step closer to the real definition of an entrepreneur. Level Three: The Attitude of Owner/Leader The entrepreneur who attains the level of an owner/leader enjoys remarkable benefits by knowing how to step aside and let the business and those employees working in it operate as a profit center not reliant upon the owners constant hands-on participation. This kind of entrepreneur has created an organization that is more self-sufficient and self-sustaining, and by doing so has created more wealth, personal freedom, and free time. Rather than being the only person who could get the job done the best, this leader has passed that torch of responsibility and expertise along to others who now enjoy for themselves a greater level of career achievement. The owner/leader can therefore focus not so much on sales and revenues, but on net profits. While the business continues to run smoothly and generate more transactions the owner/leader concentrates on fine tuning it for increased profitability while letting others handle the day-to-day operational details. Level Four: The Entrepreneurial Investor With a business that generates profits, the entrepreneur who has succeeded this far can begin to accept another exciting challenge, that of managing money so that it works to produce more money. Investing for maximum returns involves smart leverage of assets, and the entrepreneurial investor will often leverage the success of the first business to create a second or third company based on the same model or system. By franchising the original venture or buying other healthy businesses, the investor can get into the career of not just selling basic products and services, but of selling entire businesses. The goal, of course, is still to turn a profit. So rather than remaining at the control of these companies the investor will buy them, ensure that they have valuable equity or attractive allure and potential, and then sell them to other entrepreneurs or would-be entrepreneurs. The challenge is to avoid falling back into the role of running a business as an administrator or manager, and to meet this problem with a viable solution, the entrepreneur will typically appoint someone else to take the reins of the company as the president or chief executive officer(CEO). Then the investor becomes more of a director or silent partner who shares in the profits while enjoying the relief of not having to share the routine responsibilities of running the business from the inside. This all becomes possible because the entrepreneur has not just created a business but has also designed excellent systems for keeping it going. Rather than dealing on the level of isolated actions and reactionary tactics, in other words, the entrepreneurial investor has risen to the level of broad and comprehensive strategies that work across all sorts of products, services, and economic cycles. Working smart replaces working hard, and the rewards both financial and personal are abundant. Level Five: The True Entrepreneur Having learned new things every step of the way and evolved through various stages of entrepreneurial accomplishment and insight, it is possible to reach the ultimate goal and realize ones dreams in a really life-changing way. The true entrepreneur experiences a paradigm shift that involves a four-step process of changed thinking: Idealization Imagine gigantic, all-encompassing dreams for creating the ideal world. Visualization Picture the ideal world as a reality and begin to clarify this vision on a daily basis, filling in more details each day.

Verbalization Begin to put words to the dream and talk of it as if it was already happening. Talk about it to others as if it were real and continue to have a personal dialog with the ideal to make it come true. Materialization Because the effort and intention of designing and believing in the ideal and the dream, things begin to fall into place and happen in a natural and automatic way. The idea becomes a real and tangible fact that materializes in the world and influences others while opening new doors to fresh opportunities and the birth of more dreams. 1.7. Role of entrepreneurship in economic development The industrial health of a society depends on the level of entrepreneurship existing in it. A country might remain backward not because of lack of natural resources or dearth of capital [as it is many times believed] but because of lack of entrepreneurial talents or its inability to tap the entrepreneurial talents existing in that society. Entrepreneurs historically have altered the direction of national economies, industries or markets. The following are some of the roles of entrepreneurship in economic development. Increasing the per capita output and income of the people of the country. Initiating and creating change in the structure of business and society. Further growth and increased output arises, thus to enable more wealth to be divided among the various participants (stakeholders). Generation of innovation that leads to the creation of new products and services. Improvisation and modification on existing product to better suit market and customers needs. Creation of self employment and to cut back the dependency of potential employment of new workers in government sectors. Streamline of the private sector and encourage the inclusion of new technology that is less labor dependent. Increase in the national outputs which in turn lead to greater and stronger economic growth. Laying the seed bed for creating new entrepreneurs in various new technologies Acting as a catalyst to nurture intrapreneurs in a business organization.

1.8. The Relationship between Creativity, Innovation and Entrepreneurship Creativity is thinking new things, and innovation is doing new things. What is the entrepreneurs secret for creating value in the marketplace? In reality, the secret is no secret at all. It is applying creativity and innovation to solve problems and to exploit opportunities that people face every day. Let us define creativity and innovation and show the following relationship.

Figure1.1. Creativity, innovation and 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 solutions to those problems and opportunities in order to enhance peoples lives or to enrich society. In other words, creativity is thinking new things, and innovation is doing new things. Researchers believe that entrepreneurs succeed by thinking and doing new things, or doing old things in new ways. Both innovation and job creation involve the creation of new organizations with interdependent activities carried out by several people to accomplish a goal. Through innovation, entrepreneurs create new organizations in our economy, our political process and our educational process and generate economic, cultural, social and political variety. In doing so, they also precede and create the context for management. In other words, they develop organizations that are subsequently in need of strategy, structure, performance, culture and, above all, change. In short, having a great new idea is not enough, something must happen Income Entrepreneurship = creativity + innovation. In turn, entrepreneurship is the result of a disciplined, systematic process of applying creativity and innovation to needs and opportunities in the marketplace. It involves applying focused strategies to new ideas and new insights to create a product or a service that satisfies customers needs or solves their problems. A lot of people come up with creative ideas for new or different products and services but most of them never do anything with them. Entrepreneurs are those who marry their creative ideas with the purposeful action and structure of a business. Successful entrepreneurs are associated with a constant process that relies on creativity, innovation and application of that innovation in the marketplace. 1.8.1. Creativity Entrepreneurs must always be on guard against traditional assumptions and perspectives about how things ought to be. Such assumptions are quick killers of creativity. Such self-imposed mental constraints and other paradigms that people tend to build over time damage creative minds. A paradigm is a preconceived idea of what the world is? What should Creativity and Innovation look like? And how they should operate? Sometimes, these ideas become so deeply rooted in our minds that they become immovable blocks to creative thinking, even though they may be outdated, obsolete and no longer relevant. These blocks can act as logjams to creativity. The following is a creativity Model that can help in real situations to remove these logjams and enhance creative thinking.

Modeling creativity Building a creative environment takes time, but the payoffs can be phenomenal. Research shows that to encourage people to be more creative entrepreneurs have to create an environment that values their creativity. Although new ideas may appear to strike suddenly, they are actually the result of the systematic process which involves the following steps: Phase1. Preparation: It is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition. This is through reading, professional conferences, talking, visit to library. Phase 2: Incubation process: It is a stage during which a person considers an idea, thinks about a problem; it is the mulling/considering things over phase. This phase requires sleep on the issue, and exercises it Phase 3: idea generation or eureka experience, usually this phase slowly but surely formulates the solution. Phase 4: Evaluation and implementation, e.g. prototypes, advice. This is a stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. Then the creative idea is put into a final form; details are worked out and idea is transformed into something valuable. Barriers to Creativity The following discussions of background material about barriers to creativity and developing creativity are not as important as the discussion above about developing creativity, but we might like to consider it as an optional reading. The number of potential barriers to creativity is almost limitless. They include time pressures, unsupportive environment and overly rigid policies and strategies. Perhaps the most difficult hurdles to overcome, however, are those that individuals impose on themselves. Roger Von Oech (1990) identifies ten mental locks that limit individual creativity: 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 am not creative. By avoiding these ten mental locks, entrepreneurs can set free their own creativity as well as the creativity of those people around them. Research shows that successful entrepreneurs are willing to take some risks, explore new ideas, constantly ask what if? and learn to appreciate ambiguity. By doing so, entrepreneurs can develop the skills, attitudes and motivation that make them much more creative one of the keys to entrepreneurs is successful performance. 1.8.2. Innovation Entrepreneurship centers on novelty and the generation of variety in the marketplace and means that the processes of innovation are at work. In some economic theories, innovation is a key, defining aspect of entrepreneurship. Schumpeter (1934) was first to point out the importance of new value created by

10

entrepreneurs. More recently, Carland, Hoy, Boulton and Carland (1984) extended and specified Schumpeters idea, saying that entrepreneurs: Introduce new goods Introduce new services Introduce new methods of production Open new markets Open new sources of supply, and Reorganize industry. Four Types of Innovation There are four distinct types of innovation, these are: invention, extension, duplication and synthesis. Invention has been described as the creation of a new product, service or process. Extension is said to be the expansion of a product, service or process. Duplication has been defined as replication of an already existing product, service or process. Finally, the combination of existing concepts and factors into a new formulation has been identified as synthesis. Peter Drucker (1984) defines entrepreneurship in terms of the generation of new jobs and the production of new flows of income. To some people innovation refers to an end product or practice perceived as new by the individuals. However, innovation also implies commercialization of new ideas and/or the implementation and change of existing systems, products, and resources. To Peter Drucker (1985), innovation is the specific function of entrepreneurship and defines what is entrepreneurial and what is managerial. He refers to innovation as a process of bringing inventions into use through engineering, organizing and marketing. Other observers and writers focus on innovations embedded in larger organizations. Innovation is thought to be necessary for change and long-term survival of these organizations. They see the innovation process as one that is recognized as new by the adopting system and/or one that results in a major restructuring of the adopting system. So far we have talked about what innovation means within the context of entrepreneurship, we now turn our attention to the innovation process. The Innovation Sources Sources of innovation in terms of the main areas are where new ideas come from. The main areas are: unexpected occurrences, process needs, and gaps between expectations and reality. The market is one of the main sources of innovation. In a constantly changing market new ideas are always presenting themselves. Other sources include demographic changes and changes in perception. Principles of Innovation While innovation encompasses a large area, it is pertinent to point out that there are a number of principles of innovation. An important message here is that entrepreneurs must realize that these principles exist and that they can be learned. One of the principles is to be action-oriented. The entrepreneur must always be looking for new ideas. Making the product, process or service simple and understandable is another example of a principle of innovation. A few more include: make the product, process or service customer-based, start small, aim high, follow a milestone schedule, and the like. Taking the preceding framework into account, it is significantly important to remember that the last, but by no means least important, principle is work, work and more work. . 1.9. Entrepreneurship as a career option After finishing your graduation you will be at the crossroads of life. You will face the dilemma of choosing what you have to do in life. The vast majority of human beings direct their activities towards earning a living, generating wealth and improving their standard of living. You can choose your career from two broad categories of options Wage Employment or Entrepreneurship. The term career signifies a continuous, ever evolving, ever expanding opportunity for personal as well as business growth

11

and development. We may define entrepreneurship as a career in your own business [YOB] rather than wage employment [JOB] .If you opt for a job then you will work for others. In case you opt for entrepreneurship you will be your own boss. In case of wage employment one is engaged in routine work carried on for others for which he receives salary or wages. He/she has to follow instructions and execute plans laid down by his/her superior. One can choose to be employed in the Public Sector or the Private sector. Some of the main differences between entrepreneurship and wage employment career options are as under- the context of employment generation. The three terms- Income generation, Self- employment and Entrepreneurship are often used interchangeably. Income generation is the initial stage in the entrepreneurial process in which one tries to generate surplus or profit. They are often taken on part- time or on casual basis to supplement income e.g. a man with some surplus money might put his money in a fixed deposit account in a bank or a chit -fund to earn some interest. Self-employment is the second stage in the entrepreneurial process and refers to an individuals fulltime involvement in his own occupation. e.g. a person who starts a tea shop and remains happy and satisfied and has no plans to add on any other items like buns, soft drinks etc. or to grow in any other manner[e.g. supplying tea/coffee/sandwiches to others in the vicinity]. Entrepreneurship is the terminal stage of the entrepreneurial process wherein after setting up a venture one looks for diversification and growth. We will learn more about entrepreneurship a little latter in the lesson. An entrepreneur is always in search of new challenges. An entrepreneur is not a routine businessman. He might not have resources but he will have ideas. He is innovative and creative. He can convert a threat into an opportunity. Small businessman might shut-down or change his business if he anticipates losses but an entrepreneur will try again after analyzing the situation. On the other hand an entrepreneur can leave a perfectly running business to start another venture if he so desires. Functionally all entrepreneurs are self-employed and income generating persons but the reverse is not true- all self-employed and income generating persons are not entrepreneurs. If seen on a continuum, income generation, self-employment and entrepreneurship can be considered as the initial, middle and final stages of the entrepreneurial growth process. Income generating experience encourages selfemployment, which in turn facilitates graduating into entrepreneurship. Summary The term entrepreneur stems from the French word entrependre meaning one who undertakes or one who is a go-between. . Entrepreneur is the key individual central to entrepreneurship who makes things happen. Entrepreneur is the actor, entrepreneurship is the act. Entrepreneurship is a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. It requires essential ingredients include: the willingness to take calculated risk; the ability to formulate an effective venture team; the creative skill to marshal needed resources; the fundamental skills of building a solid business plan; and the vision to recognize opportunity where others see chaos, contradiction, and confusion. The terms entrepreneur and manager are many times used interchangeably yet they are different. An entrepreneur starts a venture then a manager takes over to organize and co-ordinate continuous production. An entrepreneur is being enterprising as long as he starts something new then the routine dayto-day management of the business is passed on to the manager. Not all independent business people are true entrepreneurs, and not all entrepreneurs are created equal. Different degrees or levels of entrepreneurial intensity and drive depend upon how much independence one exhibits, the level of leadership and innovation they demonstrate, how much responsibility they shoulder, and how creative they become in envisioning and executing their business plans.

12

Entrepreneurship is the result of a disciplined, systematic process of applying creativity and innovation to needs and opportunities in the marketplace. It involves applying focused strategies to new ideas and new insights to create a product or a service that satisfies customers needs or solves their problems. Self Assessment Questions Part I Multiple choice questions 5. Where individual skills are collectively integrated into a group, this is known as:A. Collective entrepreneurship B. Intrapreneurship C. Team entrepreneurship D. Dual innovation E. None of the above 6. Which of the following is not considered a typical characteristics of entrepreneurs? A. Ability to seize opportunities B. Persistent C. Optimistic D. The desire to be a winner E. None of the above 7. Which of the following is NOT a characteristic of a typical entrepreneur? A. B. C. D. E. Confidence in his/her ability to succeed Value of money over achievement Desire for immediate feedback A future orientation None

Part II Discussion Questions 1. How creativity, innovation, and entrepreneurship are are related? 2. What contributions does entrepreneurship have for the economic development of the country? 3. Can entrepreneurship be a career option?

CHAPTER TWO SMALL BUSINESS MANAGEMENT Chapter Objectives Introduction Contents 2.1 Concepts and definition of small business 2.2 Economic social & political aspects of small business enterprise 2.2.1. Advantages of Going into Small Business 2.3. Small Business Failure factors.

13

2.3.1. Problems in Ethiopia small business 2.4. Entrepreneurship and Business Enterprise Creation 2.4.1. Opportunity scouting/ sensing 2.4.2. Environmental scanning 2.4.2.1. Opportunities in contemporary business Environment 2.4.3. Idea Generation 2.4.3.1. Role of Creativity and Innovation in Idea Generation Chapter objectives Dear learner, this chapter is meant to acquaint you with the basic concepts of small business management. Thus, after going through this lesson you should be able to: Understand general concepts of small business write economic, social, and economic contribution of small business enterprise Identify small business failure factors Integrate the knowledge necessary to establish a small business venture Scan the business environment in terms of the entrepreneurial opportunities and threats Identifying important business ideas Tap the sources for idea generation.

Introduction Specifying size and standard to define small business is necessarily arbitrary, because people adopt different standards for different purposes. Based on socio- economic conditions, countries define small business differently. But all may use size and economic criteria as a base to define small business. Size criteria include number of employees and the startup capital. Size does not always reflect the true nature of an enterprise; in addition, qualitative characteristics are used to differentiate small business from other business. The economic/control definition covers market share, independence and personalized management. Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an important role in both developed and developing economies. Ethiopia is no exception and SMEs occupy a prominent position in the development of the Ethiopian economy. While the small entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the vagaries of the market, they have to face many problems like lack of fianc, poor operations management, lack of experience, poor financial management, etc,. The process of setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a difficult task and involves scanning the environment and the use of creativity and innovation. 2.1. Concepts and definition of Small Business Specifying size and standard to define small business is necessary, because people adopt different standards for different purposes. For example, legislators may exclude small firms from certain regulations and specify ten employees as the cut-off point. Moreover, a business may be described as small when compared to larger firms, but large when compared to smaller ones. For example, most people would classify independently owned gasoline stations, neighborhood restaurants, and locally owned retail stores as small business.

14

Similarly, most would agree that the major automobile manufacturers are big businesses. And firms of inbetween sizes would be classified as medium on the basis of individual viewpoints. There are two approaches to define small business. They are: 1. Size criteria 2. Economic/control criteria. 1. Size Criteria Even the criteria used to measure the size of businesses vary. Size refers to the scale of operation. Some criteria are applicable to all industrial areas, while others are relevant only to certain types of business. Examples of criteria used to measure size are: number of employees; volume, and value of sales turnover, asset size, and volume of deposits, total capital investment, volume/value of production, and a combination of the stated factors. Even though number of employees-is the most widely used yardstick, the best criterion in any given case depends upon the users purpose. To provide a clearer image of the small firms, the following general criteria for defining a small business are suggested by Small b Business Administration (SBA) Financing of the business is supplied by one individual or a small group. Only in a rare case would the business have more than 15 or 20 owners. Except for its marketing function, the firms operations are geographically localized. Compared to the biggest firms in the industry, the business is small. The number of employees in the business is usually fewer than 100. Manufacturing services SME SME SME <100 employees <20 employees <500 employees 10 -499 employees Depends on product group. Usually 100 employees: investment ceiling US $8 million. <100 employees <175 full time workers investment US $1 million

Australia

Germany France China

Indonesia Malaysia

SME SME

This size criteria based definition of SMEs varies from country to country. All over the world, number of employees or capital investment or both have been used as the basis for defining SMEs The following are size criteria definitions of SMEs in some of the developing and developed countries: Using capital as size criteria, Ministry of Trade and Industry of Ethiopia adopted official definition of Micro and Small enterprises as follows: Microenterprises are business enterprises found in all sectors of the Ethiopian economy with a paidup capital (fixed assets) of not more than Birr 20,000, but excluding high-tech consultancy firms and other high-tech establishments.

15

Small Enterprises are business enterprises with a paid-up capital of less than Birr 20,000 but not more than Birr 500,000, but excluding high-tech consultancy firms and other high-tech establishments. 2. Economic/Control Criteria Size does not always reflect the true nature of an enterprise. In addition, qualitative characteristics may be used to differentiate small business from other business. The economic/control definition covers: Market share Independence Personalized management

All three of these characteristics must be satisfied if the business is to rank as a small business. Market share: The characteristic of a small firms share of the market is that it is not large enough to enable it to influence the prices of national quantities of goods sold to any significant extent. Independence: Independence means that the owner has control of the business himself. It, therefore, rules out those small subsidiaries which though in many ways fairly autonomous, nevertheless have to refer to major decisions (e.g., on capital investment) to a higher level of authority, Personalized Management: It is the most characteristics factor of all. It implies that the owner actively participates in all aspects of the management of the business, and in all major decisionmaking process. There is little delegation of authority. One person is involved when anything material is involved. Technology: Small business is generally labor intensive. Only few are technology intensive. Geographical area of operation: The area of operation of a small firm is often local.

Generally, small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned companies, partnerships, sole proprietorships, or cooperatives. 2.2. Economic social & political contributions of small business enterprise Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an important role in both developed and developing economies. Ethiopia is no exception and SMEs occupy a prominent position in the development of the Ethiopian economy. Over the years, the number of SMEs is growing form time to time. They need a strong support on Scio- economic and political ground. Some of the contributions are hereunder. Equitable distribution of wealth and decentralization of economic power

Unregulated growth of large-scale industries results in concentration of economic power in the hands of a few and consequently gross inequalities in the distribution of income and wealth wi;; occur. On the other hand, income generated in a large number of small enterprises is dispersed more widely and its benefit is derived by the large segments of the society. This is due to wide spread ownership and decentralized location of small scale enterprises. In this way small scale enterprises bring about greater equality of income distribution. It is also argued that most of the small scale units are either proprietary or partnership concerns. As a result, relations between workers and employers are more harmonious in small enterprises than in large enterprises. Small enterprises also encourage competitive spirit and generate the

16

impetus to self development. More Employment creation capacity Economic planners have realized the necessity of encouraging small enterprises because they require less capital but generate more employment. The small-scale sector has the capacity to generate a much higher degree of employment than the large-scale sector. This is because small scale enterprises are labor intensive and thus create more employment with a given level of capital. More production needs more capital in such a situation. The small firms will stand in good position because they are less capital intensive and more labor intensive. Removing Regional Imbalance Another problem is the continuous shifting of people from rural to urban areas which causes overcrowding in cities with slum conditions due to lack of social and medical amenities which require heavy investments. This problem can be solved by inducing people to set up small firms in rural areas. Large scale industries have the tendency to concentrate in big cities. As a result semi urban and rural areas remain deprived of the benefits of industrialization. Moreover, undue concentration of large industries in urban areas creates several problems, e.g., pollution, shortage of civic facilities, etc. Due to lack of employment opportunities in the country side, people migrate in large numbers to big cities. Small scale units can be located in rural and semi urban areas to reduce regional disparities. Ancillary Function Many small-scale enterprises supply parts and accessories to bigger enterprises. This ancillary function involves specialization in specific areas and results in greater profitability. Export Promotion Small-scale enterprises are opening up fresh avenues in the export market in our world. Realizing the importance of the small-scale sector in the economy the Ethiopian government has adopted several measures to speed up the growth of small enterprises. 2.2.1. Advantages of going into Small Business The desire for individuals to own and operate their own small business is growing. As stated earlier, this continual creation of new business is at the heart of free enterprise system. For individuals pursuing a career in business ownership, numerous benefits can be attained personally as well as professionally. The next section explains the following common advantages of owning a small business: Independence Most small business owners enjoy being their own boss; they like the freedom to do things their own way. Although a great deal of responsibility is associated with this independence, they are also willing to assume it. Financial Opportunities Another major reason for going into business for oneself is financial opportunity. Many small business owners make more money running their own company than they would be working for someone else. Community Service Sometimes an individual will realize that a particular good or service is not available. If the person has reason to believe the public will pay for such output, he or she will start a small company to provide it. Job Security: When one owns a business, job security is ensured. The individual can work as long as he or she wants; no mandatory retirement exists. Family Employment Another advantage is the opportunity to provide family members with employment. This has several benefits. First, owner-managers want to perpetuate their business and how better to do it, then to get children or relatives to take it over. Second, higher moral and trust usually occur more in family-run

17

businesses than others. Third, in times of severe economic downturn, small business owners can provide employment for family members. Learning from Challenge Many small business owners are attracted by the challenge that accompanies going in to business for oneself. Research reveals that most successful small business owners like to feel they have a chance to succeed (they want to know success is possible) and the chance to fail. They learn from the past failure or success. Introducing Innovation: New products that originate in the research laboratories of big business make a valuable contribution to our standard of living. There is question, however, as to the relative importance of big business in achieving the truly significant innovations. The record shows that many scientific breakthroughs originated with independent inventors and small organizations. Catering for small or niche markets: Large firms with high overheads must produce high levels of output to spread costs. By contrast, small firms are able to make a profit on much lower sales figures. They can therefore sell into much smaller markets that are ignored by larger organization: e.g. a local window cleaner serving a few hundred houses, a specialist jeweler with personal clients. 2.3 Small Business Failure factors The following are some of the major factors, which cause most small business failures. Poor operations management The manager lacks the ability to operate a small business. Lack of experience Many owners start businesses in industries in which they have no experience Poor financial management Many owners start with too little money and with little or no understanding of financial spreadsheet applications. Over-investing in fixed assets Owners who over-invest in fixed assets may find themselves with no access to funds for working capital. Poor credit practices Owners often sell on credit to meet (or beat) the competition and find that they lack the additional working capital required or the ability to collect receivables. Failure to plan The lack of a strategic plan to guide the business in the long run Unplanned and uncontrolled growth Growth is natural and healthy, but unplanned growth can be fatal to a business. Inappropriate location Owners who choose a business location without proper analysis, investigation, and planning often fail. Too often, owners seek cheap sites and locate themselves straight into failure. Other common causes of business failure include neglect, fraud, and disaster. Neglect occurs whenever an owner does not pay sufficient attention to the enterprise. The owner who has someone else manage the business while he or she goes fishing often finds the business failing because of neglect. Fraud involves intentional misrepresentation or deception. If one of the people responsible for keeping the businesss books begins purchasing materials or goods for himself or herself with the company's money, the business might find itself bankrupt before too long. Disaster refers to some unforeseen happening. If a hurricane hits the area and destroys property in the company's yard, the loss may require the firm to declare bankruptcy. The same is true for fires, burglaries, robberies, or extended strikes. 2.3.1. Problems in the Ethiopian small business Small-scale businesses have not been able to contribute substantially to the economic development, particularly because of financial, production, and marketing problems. These problems are still major

18

handicaps to their development. Lack of adequate finance and credit has always been a major problem of the Ethiopian small business. Small-scale units do not have easy access to the capital because they mostly organized on proprietary and partnership basis and are of very small size. They do not have easy access to industrial sources of finance partly because of their size and partly because of the fact that their surpluses which can be utilized to repay loans are relatively small. Because of their size and partly because of the limited profit, they search for funds for investment purposes. Consequently, they approach traditional money lenders who charge extra high rate of interest hence small enterprise continue to be financially weak. Small scale enterprises find it difficult to get raw materials of good quality at reasonable prices in the field of production. Furthermore, the techniques of production, which the enterprises have adopted, are usually outdated. Because of their poor financial position they are not able to buy new equipment, consequently their productivity suffers. Small business owner can avoid some of the common pitfalls that lead to business failure by: Knowing the business in depth Developing a solid business plan Managing financial resources Understanding financial statements Learning to manage people effectively Etc 2.4. Entrepreneurship and Business Enterprise Creation Dear learner! What do you understand by terms opportunity scouting, environmental scanning, and SWOT analysis as entrepreneurship process of setting new business venture? What small business opportunities does this country have? In the first chapter we have learnt that the entrepreneur is at the center of this phenomenon of entrepreneurship. He/ she is the one who makes things happen by capturing an opportunity and organizing the resources needed to exploit this opportunity. He creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth. Entrepreneurs look ahead to see what can be done in future rather than concentrating on the past. Where others see problems and shortcomings, entrepreneurs see opportunities for starting a business. Once an individual decides to take up entrepreneurship as a career path, to be a job provider instead of a job seeker, he/she has to establish an enterprise. However, setting up of a small new enterprise is a very challenging as well as a rewarding task. Several problems are involved in this task. It is extremely important to take utmost care in identifying the product or service to be launched by the entrepreneur; otherwise it might prove to be a costly mistake. He/ she must develop sensitivity to changes around him/her, which can provide business opportunities and then carefully scan his/her environment to generate ideas. After tentatively identifying four to five ideas, he/ she should go in for detailed assessment and feasibility study. This will help the entrepreneur to crystallize one idea in an objective and systematic manner, which will greatly enhance his/ her chances of success. Figure 2 shows the entrepreneurial process to set up a business. And then the detail of each process is herewith. 2.4.1. Opportunity scouting/ sensing

19

The entrepreneurial process begins with identifying an opportunity and evaluating it through an initial screening process. If it appears reasonable, a detailed business plan can be made. If not it can be discarded. Clearly, except in rare cases, opportunities just do not occur to the individual. These have to be actively searched/ scouted for. Hence, the startup process for a new venture creation begins with scouting for opportunities.

. Figure 2 - Opportunity Idea - Analysis The process may start from an arms length, that is, one may just look around ones immediate contextfamily, community, and job and build up a case for business from the bottom-up. Else, one may take a top-down approach, starting from the scanning of the international and macroeconomic environment and conducting/using industrial/consumer surveys and identifying appropriate business ideas. An entrepreneur can sense and intelligently seize opportunities, which exist in the environment. Often it is said that necessity is the mother of all inventions. However, in the context of entrepreneurship, opportunities besides existing in the environment in the form of needs and problems of people around might have to be created. Thus, the entrepreneurs meet not only the existing needs; but they also create the new needs as well. 2.4.2. Opportunity scanning Once the entrepreneur perceives opportunities, it becomes important for him/ her to scan the environment. It is quite possible that many of the promising opportunities might not make commercial sense. Scanning involves close examination of the environmental conditions and their impact upon the business idea. It is not a superficial exercise but rather an attempt to look beyond the immediate opportunities to the emerging trends. An attempt can be made to modify, adapt, rearrange, substitute, combine, reverse etc. What to be scanned by an entrepreneur are shown as follows: I. Environmental analysis Entrepreneurship does not exist in a vacuum. It is affected by and affects the environment. Relationship between entrepreneurship and environment is shown in the figure below.

20

Figure 3 Entrepreneurship Vs Environment As the economies are getting internationally integrated, for an analysis of the environment of entrepreneurship you would be required to develop an understanding of macroeconomic, and industry/sector specific factors. a. Macro environment The macro environment of an entrepreneur consists of the political, technological, social, legal and economic environments. All of these are not immediate part of the entrepreneurs venture yet they have an impact on his enterprise. Let us now examine the elements of the macro environment of the entrepreneur one by one. Political Environment Entrepreneurship can flourish under a stable and conducive political climate. Government policies which give priority to growth of trade and industry, infrastructural facilities, and institutional support gives a stimulus to entrepreneurship. Considering the employment and export potential, the short gestation period and the fact that small industries act as a seedbed for nurturing and developing entrepreneurship, the government is supportive of the small-scale sector. It has created an extensive institutional framework for provision of finance, technology as well as help in marketing is made available by government institutions. Technological Environment The level of technology, the trends and the rate of change in technology all have a direct impact on enterprise creation. Changes in technology, both innovation and invention change industry structures by altering costs, quality requirements and volume capabilities. In the advanced countries of the West more pure inventions have been taking place which createed new industries for example Automobile, Aeronautical, Computer Hardware, Telecommunications, Pharmaceuticals etc. In developing economies there is usually an imitation of the above through greater process innovation. It has been observed that many small units use obsolete technologies and do not invest in research and development (R&D). As a result their goods are of poor quality and lack standardization. A direct consequence of this is their inability to face competition. In many industries the technological threshold is low and as a result the success of an entrepreneur promotes many others to start similar businesses and he loses the initial competitive advantage. On the other hand if he/she uses certain costly technology chances of others to quickly becoming his competitors are less. Socio-Cultural Environment The customs, norms and traditions of the society also play an important role in either hindering or promoting enterprise. For example, we sometimes say that the Gurage people are very enterprising. In many traditional communities of our country working of females out of the home environment is frowning upon. Many times the choice of occupation is also dictated by the family traditions. Socio-cultural factors are also crucial for the operations of multinational companies. It is very important for a multi-national company to understand the socio-cultural background of its customers in the host

21

country. Socio-cultural environment is also concerned with attitudes about work or quality concerns, ethics, values, etc.

Legal Environment The laws of the country can make the process of setting up business very lengthy and difficult or viceversa. The labor laws and legal redressing system also have a bearing on business operations. Patents, agreements on trade and tariffs and environmental laws also need to be studied. Copyright, trademark infringement, dumping and unfair competition can create legal problems in the shape of long drawn out court battles. Simpler legal procedures can facilitate the process of new venture creation and its smooth functioning including setting up of ancillaries, foreign tie-ups and joint ventures. Economic Environment Liberalization, globalization and opening of the economy of Ethiopia, has increased the space for business operations. It has also opened channels for foreign investors to start operations. The resultant competition, rapid and complex changes have generated uncertainties, which have to be handled by the entrepreneurs. b. Sectoral Analysis After having understood the general environment in which the business has to take birth, it is important to study the sector or industry conditions in which the entrepreneur proposes to launch a venture. This will help to put the proposed venture in the proper context. The purpose of industry analysis is to determine what makes an industry attractive- this is usually indicated either by above normal profits or high growth rates. For such analysis one should study the history of the industry, the future trends, new products developed in the industry, forecasts made by the government or the industry. It is also advisable to study the existing or potential competition, threat of substitutes and entry barriers. Sometimes there might be bilateral agreements between countries regarding some sectors or government policy that is sector specific or some event that throw up challenges. . There might be certain constraints regarding availability of technology, manpower or raw materials, which are industry specific. Similarly there might be certain strengths of a particular sector, which might outweigh some negative general trends. Currently the cement and steel sector are on an upward swing with a favorable climate in the housing sector as well as governments thrust on the construction sector. II. SWOT analysis At this stage, conducting a SWOT analysis will help the entrepreneur to clearly identify his/her own strengths and weaknesses as well as the opportunities and threats in the environment. Threats in the environment can arise from competition, technological breakthroughs, change in government policies etc. He / she might posses certain unique skills or abilities, which along with his/ her knowledge and experience can provide him/ her cutting edge. Strengths are positive internal factors that contribute to an individuals ability to accomplish his/her mission, goals and objectives. Weaknesses are negative internal factors that inhibit an individuals ability to accomplish his/her mission, goals and objectives. An entrepreneur should try to magnify his strengths and overcome or compensate for his/her weaknesses. Opportunities are positive external options that an individual could exploit to accomplish his/her mission, goals and objectives. Threats are negative external forces that hinder an individual from accomplishing his/her mission, goals and objectives. These could arise due to competition, change in government policy, economic recession, technological advances etc. An analysis of the above can give the entrepreneur a

22

more realistic perspective of the business, pointing out foundations on which he can build future strengths and remove obstacles. The hierarchical approach to the development of business idea is given below.

Figure 4 Hierarchical environmental analysis The entrepreneur has to use the opportunities provided by the environment, combine these with his/her unique strengths in terms of knowledge, skills, experience etc. and then take a decision to launch a particular product or service. The proposed product / service should be compatible with the capability of the entrepreneur, resources available in the environment and the need of the society. 2.4.2.1. Opportunities in contemporary business Environment We have observed above that the business environment is constantly evolving as a result of demographic, technological, legal and other changes. These constantly throw up new challenges for entrepreneurs. Some opportunities, which can be explored by the potential entrepreneur, are given below. Niche Marketing Niche marketing is a marketing strategy, which can be intelligently used by a small entrepreneur. The entrepreneur can try and identify a very specific market segment called a niche. By providing personal service, convenience and value to the customers the small entrepreneur can successfully compete with the bigger market players. The standardized goods produced on large scale cannot cater to the special requirements of a small segment of the market. For example there is an emerging niche in the world food market for health conscious people who want to consume only organically grown foods. Service Sector Unlike products, services are not tangible, they cannot be stocked, and they cannot be marketed through wholesalers and retailers - if you want a haircut you will have to go the barber or a beauty saloon. Production and consumption are simultaneous. Another advantage of setting up a service enterprise is that they require lower investments compared to the manufacturing sector. . Franchising Franchising takes a proven formula for success and expands it. Business franchising is a name given to relationship in which the owner of a product, process or service allows a local operator to set up a business under that name, for a specified period. Franchising is an arrangement between the buyer who is called a franchiser and the seller who is called the franchisee. The buyer gets the right to sell the trademark product or service to the franchisee. He is relieved of most of the functions involved in setting up of an enterprise and gets the benefit of visibility and recognition. Usually the franchiser looks after the training, design and layout, etc. for the franchisee. The franchisee is able to expand his market geographically without having to worry about day-to-day operations. The licensing system gives the franchisee barriers to entry, standardization and incentives for growth. However the franchisee is obliged by the franchising agreement to be careful that the standards of quality are adhered to. Tourism

23

Tourism is amongst the fastest growing industries the world over, It is the highest foreign exchange earning sector for many countries and offers tremendous opportunity for entrepreneurship and employment. It includes any business connected with the activities of tourists: Travel arrangement (rail, road, air or sea) Accommodation (hotels, motels, guest houses) Food Entertainment Apart from the potential in providing these direct services, tourists use many indirect services. For example, they hire taxis for local site visit, they need guides and interpreters. There is an a shortage of service providers in all these areas. The gap between the demand and supply is likely to increase in the foreseeable future opportunity. The growing segments of tourism include Cultural Tourism, Heritage Tourism, Adventure Tourism, Eco-Tourism, Rural-Tourism, and Religious Tourism. Some people have even capitalized on the high cost of Medical Services abroad and have promoted Medical Tourism. It is clear from the above that this sector has untapped potential which can be exploited by potential entrepreneurs. Entertainment

The entertainment industry is another sector, which boasts of very high rates of growth. Hundreds of films are made annually in Ethiopia. There are innumerable entertainments ranging from news, sports, cartoons, family dramas, music, religious etc. Music industry is also flooded with music videos, remixes, music and film nights, preparation and launch of CDs and DVDs. Enterprises can be set up to provide services for pre and post production including script writing, music, dubbing, animation, editing to name a few. Like the tourism sector the entertainment sector too has a host of feeder activities attached to it - supply of jewelry, food, banners, posters which provide endless entrepreneurial opportunities. Green Entrepreneurship Conservation and Environment protection are presently getting a lot of attraction. Green Entrepreneurship signifies concern for the environment. Such business activity should be chosen which has the least adverse impact on the environment. This concept also stresses upon the prevention of waste at the source rather than at the end of the process. It concentrates on new and creative ways to recycle usable materials, use of substitutes or processes that are less polluting as well as adoption of waste minimization strategies. 2.4.3. Idea Generation The starting point for any successful new venture is the basic product / service to be offered. This idea can be either generated internally or externally .For a new entrepreneur it becomes very difficult to filter information from the business environment, identify opportunities, evaluate them and then crystallize one specific idea. Developing a hobby, difficulty in obtaining a satisfactory product or service, evaluating new products being offered in the market and active engagement in Research and Development can help in generating a number of ideas. A reading of the Economic Times, business magazines, watching special business programs on the television, discussions with professionals, friends, even teachers, surfing the internet all help to provide valuable inputs .A study of government policies for example tax incentives and holidays for setting up projects in backward area can help an entrepreneur to arrive at some decision . Attending an Entrepreneurial Development Programs can provide him/her with a sound understanding of all the steps one has to take to initiate and run a venture. The sources of idea generation are listed in the figure below.

24

Once the idea or group of ideas is generated it has to screened or evaluated to determine its apropriativeness for further development. Ideas showing the most potential are subjected to a feasibility analysis and a Project Appraisal is then made. You will learn about these stages of a venture starter in the next chapter 2.4.3.1. Role of Creativity and Innovation in Idea Generation It is frequently commented that the only constant thing in business is change. It is a true statement as the business environment is constantly changing for any number of reasons. There can be technological break thorough like the IT revolution, demographic changes like nuclear families, working parents, which have fueled a demand for day care centers, old peoples homes, fast food etc. Changes in tastes and preferences have resulted in mushrooming of restaurants and designer clothes. A natural disaster can create a demand for tents, blankets, medicines, torches, food etc. An entrepreneur with his/her vision, creativity and innovation can capitalize on these changes and create customers. Creativity is the ability to bring something new into existence. Innovation is the translation of an idea into application, which has a commercial value. Creativity is a prerequisite for innovation. It can be developed by any individual who has a concern for excellence and is willing to work hard. A creative person develops new alternatives and offers innovative solutions. It is through their creative thinking that entrepreneurs find solutions to problems, handle adversity and exercise control over business. Creativity helps not only in doing different things but also in doing the things differently. Idea generation, as part of creativity process, a number of ideas and solutions are generated depending upon the personal knowledge, experience, insight etc. of the potential entrepreneur. Summary In most parts of the world the nomenclature used to define Small and Medium Enterprises (SMEs) and the criteria for defining include the number of employees and /or the turnover, and finical. That means using both size and economic control criteria. In Ethiopia the Small Scale Industry evokes several socioeconomic and political contributions. However, it is a sector which is highly affected by different factors. Thus due attention is given in setting the enterprises and good management is required while its operation. The process of setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a difficult task and involves scanning the environment and the use of creativity and

25

innovation. The process involves both market identification as well as product / service identification. Rarely can one hit upon an idea straight away. One has to be very sensitive to the changes in the business environment. A careful analysis can help an entrepreneur to crystallize an idea. If it appears to be promising its viability can be studied through a proper feasibility analysis. Self assessment questions 1. What are the major causes for failure of most small business? 2. How can the small business owner avoid the common pitfalls that lead to business failure? 3. What crucial roles do you think from the well managed small business? 4. What do you understand by the term business opportunity? What is its relevance for an entrepreneur? 5. Do you think it is important for an entrepreneur to scan for opportunities in the small scale sectors? Give reasons. 6. In your opinion what precautions should a potential entrepreneur take at the Idea Generation Stage in an ever-changing business environment?

CHAPTER THREE FEASIBILITY ANALYSIS, PROJECT REPORT AND BUSINESS PLAN Objectives Introduction Contents 3.1. Feasibility Analysis 3.1.1 Market Analysis 3.1.2 Financial Analysis 3.1,3 Technical Analysis 3.1.4 Economic Analysis 3.1.5 Ecological Analysis 3.1.6 Legal and Administrative Analysis 3.2. Project Report 3.3 Registration 3.4. Business Plan

Chapter objectives Dear learner, this chapter is meant to acquaint you with the basic concepts and detailed analysis of a business idea so that the venture becomes profitable. Thus, after going through this lesson you should be able to: Conduct a feasibility analysis of the proposed business ideas with regard to marketability, technical viability, funding, and legalities Prepare a business plan Recognize basic startup problems. define what business plan is. List users of business plan Understand the pitfalls that may be encountered while preparing business plan and find out their respective remedies. Point out the different elements of business plan. prepare a sample business plan considering the real world scenario

26

Introduction The process of setting up a business is preceded by the decision to choose entrepreneurship as a career and identification of promising business ideas upon a careful examination of the entrepreneurial opportunities. Generation of ideas is not enough; the business ideas must stand the scrutiny from techno-economic, financial and legal perspectives. That is, after the initial screening of the ideas that do not seem promising, you should conduct an in-depth examination of the chosen three to four before settling for the one where you would like to exert your time, money and energy. You should prepare a business plan that will serve as the road map for effective venturing, whether you may require institutional funding (in which case it is necessary to do so) or not. Setting up of new business enterprise is a very challenging task; you are likely to encounter many problems en route. Its advisable to be aware of these problems as to forewarn means to fore arm. Plans are part of any business operation. Planning is a process that never ends for a business. It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan. For any given organization, it is possible to find financial plans, marketing plans, human resource plans, production plans, and sales plans, to name a few. Plans may be short term or long term, or they may be strategic or operational. Plans also differ in scope depending on the type of business or the anticipated size of the start up operation. In this regard, plans can be classified in to three types: strategic plans, tactical plans, and operational plans.Even though they may serve different functions, all these plans have one important purpose: to provide guidance and structure to management in a rapidly changing market environment.

3.1. Feasibility Analysis Dear learner, do you know something about the important facets of business venture feasibility study? What factors are to be kept in mind while deciding on product/service development? Feasibility literally means whether some idea will work or not. It is necessary to know beforehand whether there exists a sizeable market for the proposed product/service, what would be the investment requirements and where to get the funding from, whether and wherefrom the necessary technical know-how to convert the idea into a tangible product may be available, and so on. In other words, feasibility study involves an examination of the operations, financial, HR and marketing aspects of a business before the venture comes into existence. The module presents hereunder a brief outline of the issues impinging upon the various aspects of the feasibility of the proposed business idea. By now, you would have understood that feasibility is a multivariate concept; that is, a project has to be viable not only in technical terms but also in economic and commercial terms too. Moreover, there always is a possibility that a project that is technically possible may not be economically viable. . 3.1.1 Market Analysis A market, whether a place or not, is the arena for interaction among buyers and sellers. From sellers point of view, market analysis is primarily concerned with the aggregate demand of the proposed product/service in future and the market share expected to be captured. Success of the proposed idea clearly pivots on the continuing support of the customers. However, it is may be difficult to identify the

27

market for ones product/service. After all, the whole world cannot be your market. You have to carefully segment the market according to some criteria such as geographic scope, demographic and psychological profile of the potential customers. It is a study of knowing who are your customers; for this you require information on: consumption trends, past and present supply position, production possibilities and constraints, imports and exports competition, cost structure, elasticity of demand, consumer behavior, intentions, motivations, attitudes, preferences and requirements; distribution channels and marketing policies in use; administrative, technical and legal constraints impinging on the marketing of the product. 3.1.2 Financial Analysis The objective of financial analysis is to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. While conducting a financial appraisal certain aspects has to be looked into like: investment outlay and cost of the project; means of financing; projected profitability; break- even point; cash flows of the project; investment worthiness judged in terms of various criteria of merit; and projected financial position. 3.1,3 Technical Analysis The issues involved in the assessment of technical analysis of the proposed project may be classified into those pertaining to inputs, process and outputs. Input Analysis: Input analysis is mainly concerned with the identification, quantification and evaluation of project inputs, that is, machinery and materials. You have to ensure that the right kind and quality of inputs would be available at the right time and cost throughout the life of the project. You have to enter into long-term contracts with the potential suppliers; in many cases you have to cultivate your supply sources. Process Analysis: It refers to the production/operations that you would perform on the inputs to add value. Usually, the inputs received would undergo a process of transformation in several stages of manufacture. Where to locate the facility, what would be the sequence, what would be the layout, what would be the quality control measures, etc. are the issues that you would learn in greater details in subsequent lessons. Output Analysis: this involves product specification in terms of physical features- color, weight, length, breadth, height; functional features; chemical material properties; as well as standards to be complied with such as industry level standard and country level standard. 3.1.4 Economic Analysis Economic analysis is the study of costs- and- benefits. In regard to the feasibility of the study the entrepreneur is concerned whether the total cost of the product is justifiable in comparison with the price at which it will sell at the market place. This cost-benefit analysis goes into financial calculations for profitability analysis that we discussed under financial analysis. At this stage it is also useful to distinguish between the economic and commercial feasibility; whereas economic feasibility leads one to the unit cost of the product, commercial feasibility informs whether enough units would sell. 3.1.5 Ecological Analysis In recent years, environmental concerns have assumed a great deal of significance especially for projects, which have significant ecological implications like power plants and irrigation schemes, and for environment polluting industries (like bulk drugs, chemicals and leather processing). The concerns that are usually addressed include the following: What is the likely damage caused by the project to the environment? What is the cost of restoration measures required to ensure that the damage to the environment is contained within acceptable limits? 3.1.6. Legal and Administrative Analysis

28

The entrepreneur has to be sure of the administrative and legal issues involved in the business project which is going to be selected. These include, choice of the form of business ownership, registration and clearances and approvals from the diverse authorities. I. Types of Business Ownership in Ethiopia

One of the first decisions that you will have to make as a business owner is how the company should be structured.. In making a choice, we will want to take into account the following:

Your vision regarding the size and nature of your business. The level of control you wish to have. The level of structure you are willing to deal with. The business vulnerability to lawsuits. Tax implications of the different ownership structures. Expected profit (or loss) of the business. Whether or not you need to reinvest earnings into the business. Your need for access to cash out of the business for yourself. A) Sole proprietorships

The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities. In the eyes of the law and the public, you are one and the same with the business entity. Advantages of a Sole Proprietorship:

Easiest and the least expensive to organize. Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit. Sole proprietors receive all income generated by the business. Profits from the business flow directly to the owner's personal tax return. The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship:

Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk. May be at a disadvantage in raising funds and are often limited to using funds from personal savings or bank loans. May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business. Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income.

29

B). Partnerships In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be brought out, and what steps will be taken to dissolve the partnership when needed. Yes, it's hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front how much time and capital each will contribute. Advantages of a Partnership:

Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement. With more than one owner, the ability to raise funds may be increased. The profits from the business flow directly to the partners' personal tax returns. Prospective employees may be attracted to the business if given the incentive to become a partner. The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership:

Partners are jointly and individually liable for the actions of one or more partners. Profits must be shared. Since decisions are shared, disagreements can occur. Some employee benefits are not deductible from business income on tax returns. The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of partnerships General-Partnership Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently. Limited Partnership Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership. Joint Venture

30

Acts like a general partnership, but is clearly for a limited period of time of a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity. C. Corporations A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. Advantages of a Corporation:

Shareholders have limited liability for the corporation's debts or judgments against the corporations. Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.) Corporations can raise additional funds through the sale of stock. A corporation may deduct the cost of benefits it provides to officers and employees. Disadvantages of a Corporation:

The process of incorporation requires more time and money than other forms of organization. Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.

D. Limited Liability Company (LLC) The LLC is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership rights. E. Cooperatives Proprietorships, partnerships, and corporations are by far the most popular forms of business organizations. There is yet another form of organization that is small in number but which serves a very useful purpose. This particular type of business is called a cooperative (co-op) and is some-what like a corporation. A Cooperative is a business owned and operated by its user members for the purpose of supplying themselves with goods and services it is an organization owned by members/ customers who pay an annual membership fee and share in any profits (if it is profit making organization). Owners, managers, workers, and customers are all the same people. These cooperatives are formed to give members more economic power as a group than they would have

31

as individuals. The best example of such cooperatives is a farm cooperative. The idea at first was for farmers, to join together to get better prices for their food products. A cooperative is an enterprise owned and controlled by all those who work in it. It can register and have limited liability for its members, but has to adopt the following principles: Members have an equal vote in decisions membership is open to everyone who fulfils specified conditions (e.g. number of hours worked) assets controlled, and usually owned jointly by members profit shared equally between members with limited interest payable on loans made by members Share capital remains at its original value members benefit from participation, not investment. 3.2. Project Report The findings of the feasibility analysis may be compiled in a project report. These findings may be vetted by the independent consultants/experts. Funding agencies have their own set-up for the appraisal of these reports. The idea is that the optimist entrepreneur may have overlooked certain aspects that may have a bearing on the ultimate feasibility of the proposed business idea. It is often felt that financial institutions tend to overemphasize the financial feasibility of the project and do not pay adequate attention to its commercial and economic viability.

3.3. Registration The first step for registration is to submit an application to the registrar in a prescribed form. In addition, the following documents should be lodged with the registrar of the business organization. The memorandum of association or the contract of partnership. A notice published in a news paper announcing the establishment of the business organization. Where the applicant is a share company, the following additional documents are required to be submitted.

A bank statement showing one quarter of the par-value of the shares or the capital raised by public subscription is deposited.

A specimen of share certificates for each class of shares. Where the shareholder is a legal person incorporated in Ethiopia, the following additional documents are required to be submitted.
A copy of the company's entry in the commercial register. A resolution of the appropriate body of the company agreeing to the company's participation in the company to be formed. Where the shareholder is a legal person incorporated abroad, the following additional documents are required to be submitted. A notarized copy of registration of the company in the country of origin. Copy of the memorandum and article of associations. An authenticated decision of the company's board of directors or a similar authorized body to undertake business activities in Ethiopia. The decision should indicate the amount of capital allocated and the individual appointed by the company to act on its behalf. An authenticated power of attorney issued by an authorized organ of a company for the permanent representative in Ethiopia.

32

Financial reference from the company's bank.

3.4. Business Plan 3.4.1 The concept of business planning 3.4.1.1 Planning As Part of Business Operation Plans are part of any business operation. Planning is a process that never ends for a business. It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan. For any given organization, it is possible to find financial plans, marketing plans, human resource plans, production plans, and sales plans, to name a few. Plans may be short term or long term, or they may be strategic or operational. Plans also differ in scope depending on the type of business or the anticipated size of the start up operation. In this regard, plans can be classified in to three types: strategic plans, tactical plans, and operational plans.Even though they may serve different functions, all these plans have one important purpose: to provide guidance and structure to management in a rapidly changing market environment. 3.4.2 What Is A Business Plan? It is a written document describing all relevant internal and external elements and strategies for starting a new venture. It includes: functional plans such as research and development, manufacturing, marketing, finance, and human resources expected results critical risks Business plan answers the questions: Where am I now? Where am I going? How will I get there? Potential investors, lenders, suppliers, employees and customers require a business plan.

3.4.3 Who Should Write The Plan? The business plan should be prepared by the entrepreneur. However, he or she may consult with many other sources in its preparation. Lawyers, accountants, marketing consultants, and engineers are useful in the preparation of the plan. Entrepreneurs may also hire or offer equity (partnership) to another person who might provide the appropriate expertise in preparing the business plan as well as become an important member of the management team. The following skill assessment criteria are used for deciding in the preparation of business plan for it to be either by the entrepreneur or to make use of other resources depending on the entrepreneurs assessment of his/her own strengths and weaknesses. 1. Management planning, organizing, supervising, directing, and controlling. 2. Marketing identifying customers, distribution channels, supply chain 3. Financial managing financial resources, accounting, budgeting 4. Legal organization form, risk management, privacy and security 5. Administrative people relations, advisory board relations 6. Higher-order learning, problem-solving

33

3.4.4 Scope and Value of the Business Plan-Who Reads the Plan? The following parties may read a business plan and hence prior to its preparation the business plan should consider those parties who determine its scope and value. employees, investors,

bankers, venture capitalists, suppliers, customers, advisors and consultants. Who is going to read the plan often affects the actual content and focus of the business plan. There are three very essential perspectives that should be considered in preparing the business plan. These are: 1. The entrepreneur: The entrepreneur should thoroughly understand what the venture is all about as well as the technology and creativity involved in the venture. 2. The market: You must also try to view your business through the eyes of the customers. Consider whether there are enough customers to buy the product or use the service. 3. The investor: From an investors perspective, sound financial projections that indicate the feasibility of the venture is better be included in the business plan. Generally, the depth and detail of the business plan depend on the size and scope of the proposed new venture. 3.4.5 Benefits of a Business Plan The benefit of business plan is unquestionable in that many successful businesses start their operation once they have the necessary and feasible business plan. The plan can benefit various parties which will have stake the new venture. However, for the purpose of this course we are going to see the benefits of the plan for the entrepreneur, financial sources and customers. 1. Specifically for the entrepreneur The time, effort, research, and discipline needed to put together a formal business plan force the entrepreneur to view the venture critically and objectively. The competitive, economic, and financial analysis included in the business plan subject the entrepreneur to close scrutiny (analysis) of his or her assumptions about the ventures success. Since all aspects of the business venture must be addressed in the plan, the entrepreneur develops and examines operating strategies and expected results for outside evaluators. The business plan quantifies objectives, providing measurable benchmarks for comparing forecasts with actual results. The completed business plan provides the entrepreneur with a communication tool for outside financial sources as well as an operational tool for guiding the venture towards success. 2. Specifically for the financial sources

34

Since different sources of finance like banks want to know the ability of their clients to pay back the money that the borrower is borrowed. One of the most relevant documents that can make them approve the ability of a client is the business plan. Hence, in this regard, business plans are highly reviewed and evaluated by the financial sources of businesses since they get the following information in the business plan. Details of the market potential and plans for securing a share of that market. The ventures ability to service debt or provide an adequate return on equity. Critical risks and crucial events with a discussion of contingency plans. A clear, concise document that contains the necessary information for a thorough business and financial evaluation of the feasibility of the new venture.

3.4.6 Pitfalls to Avoid in Planning Dear learner, since business plan is important and used for variety of purposes, it needs careful and well managed preparation since absence of important consideration (pitfalls in business planning) can result in disastrous consequences. The pitfalls in planning are the following: Pitfall 1: No Realistic Goals Indicators: lack of attainable goals, time frame, priorities and action steps Remedy: setting up a time table with specific steps to be accomplished during a specific period. Pitfall 2: Failure to Anticipate Roadblocks Indicators: no recognition of future problems, no admission of possible weaknesses of the plan, no contingency plans Remedy: listing the expected obstacles and solutions

Pitfall 3: No Commitment or Dedication Indicators: excessive procrastination, missed appointments, no desire to invest personal money Remedy: acting quickly and follow professional appointments, show financial commitment. Pitfall 4: Lack of Demonstrated Experience (Business or Technical) Indicators: no experience in business, no experience in specific area of the venture, not understanding the industry. Remedy: giving evidence of personal experience and background, build effective team. Pitfall 5: No Market Segment Indicators: uncertainty regarding who will buy, no proof of unsatisfied need Remedy: having a specific target market, justify why and how your product will satisfy the need. 3.4.7 Developing a Well-Conceived Business Plan There are many different business plan formats. The layout may vary depending on the type of the business, the purpose of the plan and the leadership. The following format can be amended to meet the needs of a business. 3.4.7.1 Complete Outline of a Business Plan Section I: Executive Summary This is a concise summary of the business opportunity; however it covers all important components of the plan. As a future-oriented, two page document, it demonstrates your knowledge of the business opportunity and proves that any investment in the future will yield a good return. It is important to develop a concise description of your business to capture the interest and support of the readers like investors, partners, lenders or regulatory agencies.

35

Section II: Business Description This part of the business plan includes the following components; General description of business Industry background-trends, analysis of competitors Company history or background Goals and potential of the business and milestones (if any) Uniqueness of product or service

The general description of the business refers Form of business Owners Name of the business Business startup date Business operation- for instance, full time venture Monday to Friday, 7:00 AM to 6:00 PM Business type- supplier of high quality child care products Location- kebele, telephone, fax, E-mail Advisors: lawyers, accountants etc.

Section III: Research and analysis Under this section of a business plan a thorough analysis of both direct and indirect competitors, Strengths and weaknesses of the competitors, the status of their business- steady, increasing or decreasing; and the difference of their product from your product are expected to be evaluated and presented. Hence, different information about the market concerning the following marketing components will be incorporated. 1. Target market (customers) identified 2. Market size and trends 3. Competition 4. Estimated market share Regarding the Marketing plan, the four Ps will be considered and the result will be presented. It is mentioned in the following sections.

1. Product or service Product and/or services outputs and the whole activities of the business and the reasons why customers are coming to your organization from which your business gains revenues, knowing what products and services you produce are important. In this regard, the following questions might be asked and given reply to be competitive in the market. What are you selling?

36

 How your product or service will benefit the customer? Which product or services are in demand? What is different about the product or service your business is offering? 2. Distribution Here the following questions should be addressed: What are your locations needs? Is the area accessible? How and where you plan to sell your product?

It should be noted here in that you must match your location and distribution strategy to the buying pattern preferences of your target market. 3. Price This part of the marketing plan is used to improve your overall competitiveness. This is due to the fact that price is the only element (among the four Ps) that is used to generate revenue while all the other elements let a business incur costs. Here the entrepreneur is expected to know different pricing strategies and try to decide a strategy that suits its objectives. Hence, it is should be bore in mind here in that getting a feel for the pricing strategy of competitors is important to see the relationship of your price with the competitors and the industry average. 4. Advertising and promotions These are methods you choose to communicate to your target market to obtain your sales projections. A new business must create awareness about its products or services with an action plan to generate business. Hence, a well-defined plan of action includes the timing, costs and expected return of the chosen promotional methods which have impact on cash flow, both cash receipt and cash disbursements. Section IV. Research, Design, and Development Under this section the following technical and engineering parts of a business plan will considered. A. Development and design B. Technical research results C. Research assistance needs D. Cost structure Section V: Manufacturing The manufacturing section of the business plan comprises of the following components. A. Location analysis Is the area desirable? The building desirable? be

Is it easily accessible? Is the public transportation available? Is street lighting adequate? Are market shifts or demographic shifts occurring? B. Production needs: facilities and equipment

37

C. Suppliers/transportation cost D. Labor supply E. Manufacturing cost data Section VI: Management The intent of the Management Plan is to explain in detail who will run the business, what skills and credentials these people have, and how everyone will fit into the organization's structure. While writing the Management Plan, it is essential to take into account how each person will affect the business' bottom line as well, since a business plan is supposed to show a business' potential profitability. So, the plan encompasses: A. Management team key personnel B. Legal structure stock agreements, employment agreements, ownership C. Board of directors, advisors, and consultants Section VII: Critical Risks Critical risks of a business may include: a. Potential Problems Potential problems include: effect of unfavourable trend in the industry, design or manufacturing cost overruns, and longer lead times in material purchases, unplanned-for competition. b. What-ifs What-ifs are those conditions which may happen in the future but not yet to be known about their occurrence currently. Some of them might be competitors price cut, inaccurate sales projections, breaking up of management team. c. Obstacles and risks d. Alternative courses of action (i.e. contingency plans) Section VIII: Financial 1. Financial forecast Under this section different information about financial conditions of the business will be considered using various financial statements. a. Profit and loss statement Provides you with an overall profitability summary for a period of time and will determine your tax liability for the year as it is depicted below. Income statement ___________________ Sales ___________________ Expenses ____________________ (Variable or fixed) ____________________ Profit/ loss ____________________ ____________________ Tax owed ____________________ ____________________ b. Cash flow statement This takes the predictions and estimates that you have determined in your business pan and transferred to a comprehensive financial statement. Preparing cash flow statement helps to

38

determine whether or not the business is viable and if you will be able to draw funds from the business. It also Helps to know your monthly sales and expenses that will also help make good decisions such as when to purchase equipment or hire staff and if you need to obtain a line of credit. This part will be clearly shown in the sample business plan. Additionally, the following financial instruments may also be included. c. Break-even analysis d. Cost controls e. Balance sheet 2. Sources of finance and application of funds There are different of sources financing a new venture and an already running business. Basically, the two major sources of finance are; Debt financing equity financing Concerning the application of funds, budget plans and financing stages will be included in the business as part of the financial section of a business plan. 3. Budgeting plans A budget is a powerful tool you can use to help you take control of your money. Some people say they can't budget. They say it's too complicated or they don't know where to start. Or they think they've got enough money and don't want to be restricted by a budget because it might mean going without. The truth is, everybody who does a budget can see how it pays off. Basically, it helps you understand where your money goes so you can take control. A budget helps you decide what you want and plan how to achieve it. 4. Financing stages It is rarely possible for startups to raise sufficient capital to start their operations, launch products and break even. Although a one-time investment strategy is theoretically possible, it is hard to cite examples of any successful startup that has gone this route. Moreover, most angel investors and venture capitalists prefer to fund startups in steps. This practice helps investors assess the value of the company and minimize the startup risk. Therefore, entrepreneurs should articulate their investment requirements, while keeping in mind how investors like to fund startups. Venture capitalists and angel investors categorize startups into stages based on a number of startup parameters including who makes up the management team, the value proposition, the risk, customers profiles and engagement, revenue, etc. and provide equity finance accordingly. Most startups are categorized into the following stages: Early Stage Seed round First round Expansion Stage Second round Third round Bridge loan Liquidation Stage Merger & Acquisition round Initial Public Offering (IPO)

39

 Leveraged buyouts Section IX: Milestone Schedule This part of the business plan contains topics like: A. Timing and objectives B. Deadlines/milestones C. Relationship of events Milestone scheduling: this is a step by step approach to illustrate accomplishments in a piece-meal fashion. Milestones should be related to such activities as: Product design and development.

Establishing the management team Production and operations scheduling Market planning Incorporation of the business Completion of design and development Hiring of sales representatives Product display at trade shows Signing up distributors and dealers Ordering production quantities of materials Receipt of first orders First sales and first deliveries Payment of first account receivables (cash-in) Section X: Appendix This section of the business plan contains documents and other materials which have been used for preparing business plan. This can be financial, administrative, human resource or other related data. 3.4.7.2 Guidelines to Remember The following key points are found to be pertinent that should be given due consideration while preparing a business plan. Keep the Plan Respectably Short Organize and Package the Plan Appropriately Orient the Plan Toward the Future Avoid Exaggeration Highlight Critical Risks Give Evidence of an Effective Entrepreneurial Team Do Not Over diversify Identify the Target Market

40

 Keep the Plan Written in the Third Person Capture the Readers Interest 3.4.8 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: Product/servi Ser. ce to be sold, no. marketed / year Total sales Months during which sales are expected to be high..................... ................................................................................................ 7. Equipment currently owned by the operator: Ser Unit of Type of . measur equipment Qua. no. e Total cost of

Uni t

Qua.

Unit price

Tota l price

Rem ark

Uni t cost

Total cost

Remar k

41

equipment 8. Equipment to be purchased by the operator Ser. no. Type of equipment Total cost of equipment 9. Yearly raw material requirement: Ser. no. Type of raw material 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..) Ser. Amount of Remar Types of expense no. expense in Birr k Total expense 11. Yearly production/service plan: Types of Ser. production/service to Uni no. be produced or t rendered Total cost 12. Financial plan: Capital requirements Investment capital: Machinery + equipment Furniture + fixture Business premises Any other initial and significant outlay Working capital: Equit y Loan Total Uni t Qu a. Uni t pric e Total price Remark Unit of measure Qua. Uni t cost Total Remark cost

Qu a.

Uni t cost

Tota l cost

Remark

42

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 See Profit + Loss Statement Format: Accounting

Business plan outline 2 for small and medium enterprises and start ups Business plan outline for small and medium 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

43

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 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

and

Qualifications

Self assessment questions 1. What are the important facets of a project feasibility study? 2. What factors are to be kept in mind while deciding on product/service? 3. Describe the various forms of business organization? 4. Explain legal considerations in the establishment of a small scale enterprise? 5. What is business plan? Write the importance of business plan for the entrepreneur, financial sources and customers. 6. Discuss the pitfalls to avoid in planning and their respective solutions. 7. List and describe the different elements of a business plan. 8. Take any hypothetical small business which is going to be launched by you and prepare a business plan that helps for effective establishment and running of the venture.

44