ENTREPRENIERSHIP

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CHAPTER ONE

ENTREPRENEURSHIP AND FREE BUSINESS ENTERPRISE

● Unit Objectives

● Introduction

● Contents

1.1 Definition of Entrepreneur, Entrepreneurship and Enterprise

1.2. Difference between entrepreneur and entrepreneurship

1.3. Characteristics of an entrepreneur

1.4. Entrepreneur vs. manager relationship

1.5. Entrepreneurship VS Intrapreneurship

1.6. Levels of Entrepreneurial Development

1.7. Role of entrepreneurship in economic development

1.8. Creativity, Innovation and Entrepreneurship

1.9. The Desire to take up Entrepreneurship as a Career

Unit 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

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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

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at problems and opportunities. Innovation is the ability to apply creative solutions to those

problems and opportunities in order to enhance people’s 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.

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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 were creative enough to become a big success. The

average worker depended on the entrepreneurial hero to give them opportunities. An

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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 else‟s, 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.

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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 one‟s 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 life‟s 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.

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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 single-minded 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 one‟s 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

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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 fun-loving 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:

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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.

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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

small-business entrepreneurs,

international competition,

downsizing of major corporations, and an overall desire to improve efficiency and

productivity

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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 employer–

and 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

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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 owner‟s 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

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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

one‟s 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.

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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

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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 entrepreneur‟s

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.

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 people’s 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

Figure1.1. Creativity, innovation and entrepreneurship

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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:

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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.

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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 entrepreneurs. More recently, Carland, Hoy, Boulton and Carland (1984)

extended and specified Schumpeter‟s 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.

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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.

.

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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 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 individual‟s

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

21

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 self-employment, 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 day-to-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.

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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. Confidence in his/her ability to succeed

B. Value of money over achievement

C. Desire for immediate feedback

D. A future orientation

E. 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?

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CHAPTER TWO

SMALL BUSINESS MANAGEMENT

● Unit Objectives

● Introduction

● Contents

2.1 Concepts and definition of small business

2.2 Economic social & political aspects of small business enterprise

2.2.1. Advantages of Going into Small Business

2.3. Small Business Failure factors.

2.3.1. Problems in Ethiopia small business

2.4. Entrepreneurship and Business Enterprise Creation

2.4.1. Opportunity scouting/ sensing

2.4.2. Environmental scanning

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

Unit 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.

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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 fiancé, poor

operations management, lack of experience, poor financial management, etc,. The process of

setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a

difficult task and involves scanning the environment and the use of creativity and innovation.

2.1. Concepts and definition of Small Business

Specifying size and standard to define small business is necessary, because people adopt

different standards for different purposes. For example, legislators may exclude small firms from

certain regulations and specify ten employees as the cut-off point. Moreover, a business may be

described as “small” when compared to larger firms, but “large” when compared to smaller ones.

For example, most people would classify independently owned gasoline stations, neighborhood

restaurants, and locally owned retail stores as small business.

Similarly, most would agree that the major automobile manufacturers are big businesses. And

firms of in-between sizes would be classified as medium on the basis of individual viewpoints.

There are two approaches to define small business. They are:

1. Size criteria

2. Economic/control criteria.

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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 user‟s 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 firm‟s 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.

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

Australia Manufacturing

services

<100 employees

<20 employees

Germany SME <500 employees

France SME 10 -499 employees

China SME Depends on product group.

Usually 100 employees: investment ceiling US $8 million.

Indonesia SME <100 employees

Malaysia SME <175 full time workers investment US $1 million

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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 paid-up capital (fixed assets) of not more than Birr 20,000, but excluding high-tech

consultancy firms and other high-tech establishments.

Small Enterprises are business enterprises with a paid-up capital of less than Birr 20,000 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 firm‟s share of the market is that it is not large

enough to enable it to influence the prices of national quantities of goods sold to any

significant extent.

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,

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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

decision-making 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 impetus to self development.

More Employment creation capacity

Economic planners have realized the necessity of encouraging small enterprises because they

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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 over-

crowding 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

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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

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

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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 business‟s books begins purchasing materials or goods for himself or herself with

the company's money, the business might find itself bankrupt before too long.

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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 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?

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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 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.

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. Figure 2 - Opportunity – Idea - Analysis

The process may start from an arm‟s length, that is, one may just look around one‟s immediate

context- family, 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,

34

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.

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 entrepreneur‟s 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.

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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 country. Socio-cultural environment is also concerned with attitudes about

work or quality concerns, ethics, values, etc.

36

Legal Environment

The laws of the country can make the process of setting up business very lengthy and difficult or

vice-versa. 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

37

sector are on an upward swing with a favorable climate in the housing sector as well as

government‟s 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 individual‟s ability to accomplish

his/her mission, goals and objectives. Weaknesses are negative internal factors that inhibit an

individual‟s 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 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

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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

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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

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.

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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.

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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 people‟s 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.

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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 socio-economic 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 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?

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CHAPTER THREE

FEASIBILITY ANALYSIS, PROJECT REPORT AND BUSINESS PLAN

Introduction

Objectives

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

Unit 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.

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prepare a sample business plan considering the real world scenario

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. It‟s 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.

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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

seller‟s 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 market for one‟s 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.

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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

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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

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.

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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.

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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.

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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

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.

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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.

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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 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.

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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.

Financial reference from the company's bank.

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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.

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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 entrepreneur‟s 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

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.

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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 investor‟s 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 venture‟s 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

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communication tool for outside financial sources as well as an operational tool for guiding

the venture towards success.

2. Specifically for the financial sources

Since different sources of finance like banks want to know the ability of their clients to pay

back the money that the borrower is borrowed. 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 venture‟s 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

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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.

Section II: Business Description

This part of the business plan includes the following components;

• General description of business

• Industry background-trends, analysis of competitors

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• 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 P‟s will be considered and the result will be

presented. It is mentioned in the following sections.

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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?

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 location’s needs?

Is the area accessible?

How and where you plan to sell your product?

It should be noted here in that you must match your location and distribution strategy to

the buying pattern preferences of your target market.

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 P‟s) 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.

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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 be

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?

• 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

C. Suppliers/transportation cost

D. Labor supply

E. Manufacturing cost data

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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

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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 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.

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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)

Leveraged buyouts

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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.

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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

• Keep the Plan Written in the Third Person

• Capture the Reader‟s 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....................

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5. Work premises at the disposal of the operator.................. .......................................................................................... .......................................................................................... Specify, if there is any problem: ..............................................................................................

6. Yearly sales plan:

Ser. no.

Product/servic

e to be sold,

marketed / year

Unit Qua. Unit

price Total

price Rem

ark

Total sales Months during which sales are expected to be high..................... ................................................................................................

7. Equipment currently owned by the operator:

Ser. no.

Type of equipment

Unit of measure

Qua. Unit

cost

Total cost

Remark

Total cost of

equipment

8. Equipment to be purchased by the operator

Ser. no.

Type of equipment

Unit of measure

Qua. Unit

cost

Total

cost Remark

Total cost of

equipment

9. Yearly raw material requirement:

Ser.

no. Type of raw

material Unit

Qua

.

Unit pric

e

Total

price Remark

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. no. Types of expense Amount of

expense in Birr Remark

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Total expense

11. Yearly production/service plan:

Ser.

no.

Types of

production/service to

be produced or

rendered

Unit

Qua

.

Unit

cost Total

cost Remark

Total cost 12. Financial plan:

Capital requirements Equity Loan Total

Investment capital:

· Machinery + equipment

· Furniture + fixture

· Business premises

· Any other initial and significant outlay

Working capital:

· Salary/wage

· Raw material and/or supplies

· Rent

· Maintenance

· Business promotion

· Other cash outlay to meet

short-term and recurrent expenditure

Total

13. Yearly profit and loss plan

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

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2. Brief Profile of the Entrepreneur

3. Project's Contributions to the Economy

1. Sales and Marketing

1.1 Product description

1.2 Competitors'

1.3 Location

1.4 Market Area

1.5 Main Customers

1.6 Total Demand

1.7 Market Share

1.8 Selling Price

1.9 Sales Forecast

1.10 Promotional Measures

1.11 Marketing Strategy

1.12 Marketing Budget

2. Production

2.1 Production Process

2.2 Fixed Capital

2.3 Life of Fixed Capital

2.4 Maintenance and Repairs

2.5 Sources of Equipment

2.6 Planned Capacity

2.7 Future Capacity

2.8 Terms and Conditions of Purchase of Equipment

2.9 Factory Location and Layout

2.10 Raw Materials Needed

2.11 Cost of Raw Materials

2.12 Raw Materials Availability

2.13 Labor

2.14 Cost of Labor

2.15 Labor Availability

2.16 Labor Productivity

2.17 Factory Overhead Expenses

2.18 Production Cost

3. Organization and Management

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3.1 Form of Business

3.2 Organizational Structure

3.3 Business Experience and Qualifications

of the Entrepreneur

3.4 Pre-Operating Activities

3.5 Pre-Operating Expenses

3.6 Office Equipment

3.7 Administrative Expenses

4. Financial plan

4.1 Project Cost

4.2 Financing Plan and Loan Requirement

4.3 Security for Loan

4.4 Profit and Loss Statement

4.5 Cash Flow Statement

4.6 Balance Sheet

4.7 Loan Repayment Schedule

4.8 Break-even Point (BEP)

4.9 Return on Investment (ROI)

4.10 Financial Analysis

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.

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