St.

Mary’s University Department of Management

PENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT

CHAPTER ONE
Definition: There is lack of agreement on fundamental definition of entrepreneur from time to
time, from country to country and from field of study to field of study. For example,
entrepreneur is
 A concept derived from the French verb enterprenuer, which means to undertake.
 an economic person who facilitate economic process (agent of economic changes or
one of factors of production) -for economists
 Individual who have particular personality- for psychologists.
 Role performer corresponding to the role expected by the society in culture, political or
social successes -for sociologists
 is individual who propelled by an idea, personal interest, goals and ambitions. It brings
together resources. (Donnly)
 is one who incubates new ideas then provide added value to the society (Molt)
 is introducing some thing new in the economy, if it is in the advanced economy and
he/she is one who starts an industry (old or new), undertake risks, uncertainties &
also performs managerial functions, if it is in the developing economy (Schumpter)
 is “an energetic single minded” person having mission and a clear vision (David silver)
 shifting economic resources out of an area of lower in to an area of higher productivity-
Petter Druker
In each definition of entrepreneur, though it lacks completeness, some concept is emphasized:
Thus, the definition show the following basic elements. Entrepreneur is one who is
 assuming risk
 taking initiative / action oriented
 organizing and recognizing
 with clear vision- opportunity
 wealth creator
 decision maker
 using resources in a novel way
 acquiring ability to search for change, respond to it a & exploit it
 Owning organization, founding new organization and bringing new innovation to many
identification of market opportunity.
Entrepreneurship is a human, creative act that builds something of value from practically
nothing. It is the pursuit of opportunity regardless of the resources or lack of resources at
hand. It requires a vision and the passion of commitment to lead other in the pursuit of that
vision. It also requires willingness to take calculated risk.
Historical Perspective of Entrepreneurship. Through the ages, the concept of
entrepreneurship has shown a significant development and change in terms of scope. The
understandings were different at different time, places and among field of study or scholars.
Early periods (before 15th). Entrepreneur was a merchant adventure who signs a contract with
money person to sell goods. Thus, the merchant adventurer traveled great distances to find
market for the goods & played the active role in selling the goods. It was assumed as “between
taker” or “go between”.
In the Middle Ages. The entrepreneur was given to both an actor & a person who run large
production projects. The entrepreneur didn’t take risk but would merely mange the project
using resources provided by the given government. The entrepreneur was responsible for the
construction of great buildings such as castles, cathedrals fortifications abbeys etc. Also in the
early 1600s the French man who organized and lead military expeditions was called
entrepreneurs.

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In 17th C. The concept of risk in the notion of entrepreneurship developed. Entrepreneur was
viewed as a person who entered into a contractual arrangement with the government to perform
a service or supply stipulated products. Since the contract price is fixed earning profit or
incurring loss is dependent up on the effort of entrepreneur i.e. risk if incurred losses.
An economist & author Rchard Cantillon (regarded by some as a founder of the term
entrepreneur) viewed entrepreneur as a risk taker since he/she operating at risk or uncertainty
In the 18th c. At this period, a person with capital was differentiated from one deciding capital
entrepreneur role is distinguished from capital providing role.
In the late 19th & early 20th. . Entrepreneurs were frequently not distinguished for mangers
and were mainly viewed for an economic perspective.
Role of Entrepreneurs
Entrepreneurs are the catalysts that play a crucial role developing a country’s economy.
Entrepreneurs are significant because they have an important effect on world economy and
they are more than just increasing per capita output and income. They involve in initiation &
constituting change in structure of business and society. They are one of the most effective
methods for bridging the gab between science and technology and the market place by creating
new enterprises and bringing new product of service to the market. Following are some
contributions of the entrepreneur:
 Creation of job opportunities – Provide large scale employment by creating small
businesses that can be created in relation to the original venture.
 Better production Methods and Products- processing speed, quality of output, energy
consumption, etc. can be improved.
 Identification of Business opportunities and Markets - entrepreneur devote themselves
to satisfy the market gap or open the opportunity for others to establish their own
similar business.
 Conservation of Natural Resources - using production method that consume less
energy and raw material and result in less pollution.
 Abolition of monopoly and Enhancement of competition- create alternatives methods
that can supply similar or substitute goods and services and foster keener competition
in many markets. It also Promoting balanced regional development and stimulate
equitable redistribution of wealth, income & even political power
 Development of Complementary Goods – For instance the invention of mobile cell
phones will indirectly contribute to a set of a number of local mobile phone repairs or
supply of accessories.
 Increase per Capita output and income – it resulted in an increase in income of
entrepreneur himself, his employees and increase the supply of out put that contribute
to national economy. It also promote capital formation by mobilizing idle saving of the
public
 Generation of Foreign Currency- It make available more foreign currency from high
volume of export and helps to create increased volume of imports. It promote
country’s export trade.
 Improvement of Business Policies and Procedures
 Positive Externalities- construction of facilities like road, school, etc. to society
 Creating Business Opportunity for Suppliers.
 Better Utilization of Resources- Creates combination of economic factors, combines
factors of production such as raw material, labor and capital. Providing market
efficiency
 Serves as a catalyst of economic development or change agent

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According to Hisrich Entrepreneurship is more than creating per capita output & income. It
involves initiating & constructing change- through innovation or product evolution process. It
consists of Recognition of social need, Initiation of social need, Initiation of technology and
creating interactive synthesis leading to invention.

Entrepreneurship and Innovation

Admittedly, all new small businesses have many factors in common. But to be entrepreneurial,
an enterprise has to have special characteristics over and above being new and small. Of
course, entrepreneurs are minority among new business. They create something new,
something different and they change or transmute values.
The terms creativity and innovation are often used to mean the same thing, but each has a
unique connotation. Creativity is the ability to bring something new into existence. The
definition emphasizes the ability not the activity of bringing something new into existence.
Innovation is the process of doing new things. The distinction is important. Ideas have little
value until they are converted into products, services or processes. Therefore, innovation is the
transformation of creative ideas into useful application. To this end, creativity is a prerequisite
to innovation.
A. Creation
Ideas usually evolve through a creative process where by imaginative people germinate
ideas, nurture them and develop them successfully. Various labels have been applied to stages
in the creative process but most social scientists agree on five stages that are labeled as Idea
germination, Incubation, Preparation, Illumination and Verification. In each stage a creative
individual behave differently to move an idea from the seed stage of germination to
verification and behavior varies greatly among individuals & their ideas.
Idea germination. It is a seeding as natural seeding that occurs when pollinated flower seeds
scattered by the wind, find fertile ground to take root. It is a mystery that can not be examined
under microscope. It can be traced to an individual’s interest in or curiously about a specific
problem or area of study.
Eg. Alexander graham Bell was influenced to study human hearing system by his
mother, who had a serious hearing problem. He wanted to produce hearing aid
equipments and began research when he was at school. This research leads him to the
invention of telephone system.
Thus, idea germination begins with interest in a subject or curiosity about finding a solution to
a particular problem.
Preparation. Any individual with an idea will consequently think about it, concentrating
his/her own energies on rational extension of the idea and how it might become realty. More
often conscious deliberation will only overload the mind, but the effon is important in order to
gather information & knowledge vital to an eventual solution.
Incubation. Individuals sometimes concentrate intensely on an idea. They simply allow ideas
time to grow without intentional effort.
Eg. Alexander graham conceived the idea while he was at school and stayed with his idea for
20 years. Thus, this two decades time is incubation time in which necessary information is
gathered and assimilated each other to produce senses.
Illumination: - It occurs when the idea resurfaces as a realistic creation. The fable of the
thunderbolt is captured in this moment. At this time, long and frustrating years of preparation
& incubation may be forgotten. It is a pleasure or astonishing time. The important point is
that most creative people go through many cycles searching for that incident as a catalyst to
give their idea full meaning. Reaching at this stage (illumination stage) separated daydreamers
and thinkers from creative people who find a way to transmute value.

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Verification:- An idea once illuminated in he mind of an individual still has little meaning
until verified as a realistic and useful.
Eg. Alexander graham Bell heard a sound when a sound signal is sent along a wrie to his
magnet receiver (illumination stage). But yet he still had years of work a head to translate
this knowledge into a commercial telephone system. Entrepreneurial effort is essential to
translate an illuminated idea into a verified realistic and useful application. Verification is
the development stage of refining knowledge into application. In this stage many ideas fall
by the wayside as they prove to be impossible or to have little value. But good ideas are
enriched and developed.
The creative process is depicted as follows.
Idea germination preparation Incubation Illumination Verification
*seeding stage of *conscious *subconscious * Recognition *Application
New idea  search for  assimilation of  of idea as being  or test to
(recognition) Knowledge information feasible prove ideas
(Rationalization) (Fantasizing) (Realization) (Validation)

B. Innovation:-
According to Schumpeter (1949) who considered entrepreneurship as the catalyst that
disrupts the stationary circular flow of the economy and thereby initiates and sustains the
process of development. The concept of innovation and its corollary development
embraces five functions: (1) introduction of a new good, (2) introduction of a new method
of production, (3) opening of a new market, (4) conquest of a new source of supply of raw
materials and (5) carrying out of a new organization of any industry. Schumpeter
represents a synthesis of different notions of entrepreneurship. His concept of innovation
included the elements of risk taking, superintendence and co-ordination.
It is important to recognize innovation that implies action, not just concerning
new ideas. To make it clear, we should understand the difference between invention and
innovation.
Invention – is the creation of something new and results in a new knowledge.
Innovation – The transformation of an idea or resources into useful applications and
results in new products services or processes.

Elements in the process of Innovation

Analytical planning Organizing resources Implementation Commercial

To identify To obtain To accomplish Application
. product design . Material .Organization To Provide:
.Market strategy . Technology .Product design .Value to customers
. Financial need . Human resource .Manufacturing .Rewards to employees
. financial (Capital) .Rewards for investors
.Satisfaction for inventors.
Types / classifications of entrepreneurs:
Entrepreneurs are creating some thing new into existence. There are three types of
Entrepreneurs:
1. Entrepreneur: Is an individual who start and run his/her own business.
2. Intrapreneurs : Those individuals who are employed in any organization and contributing
their unreservedly effort for it. As a result, the organizations can maximize their profits.
They are creative, innovative, and hard workers of the organization. The organization
without such individuals may not be profitable and competent
3. Entrepreneurial organizations: People are not the only entrepreneurs, but also there are
organizations which are considered as entrepreneur if they have conducive working

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environments, strong systems, and organizational structures, which invites individuals to

be creative and innovative.

Managers Vs Entrepreneurs:
What are the different between managers and Entrepreneurs?
Search and compile your short note for this topic……

Entrepreneurial Decisions and business environment

What parts of the world are important for making entrepreneurial decisions & finding
opportunities for the new venture is a critical question to be seen thoroughly in order to make a
through analysis of business environment. In order to analyze the business environment of four
separate (although sequentially related) tasks are required
1. Scanning
 Begins by looking around
 Is a process by which the entrepreneur fist identifies the key elements and
their characteristics
 Is a surveillance system for early detection
 Journals magazines, TV, people to people interactions etc physical
environment itself etc
2. Monitoring
 is the process of tracking the evolution development and sequence of critical
events that affect the survival & profitability of the new venture
 Is less general & more focused than scanning
 Resulted in detailed model of how an elements in the environment can
influence & affect the firm.
3. Forecasting
 enables to develop plausible projection for future such as lenses of prices
interest rates, future scenarios for cause and effect
 Used to search for new business opportunities of to uncover potential macro
environmental constraints.
 Follow the following steps:

a. Choosing the critical macro environmental variable

b. Select source of data for the forecast
c. Evaluate various forecasting techniques
d. Integrate forecast results into your plan
e. Keep track of the critical aspects of your forecast.

4. Assessing is the most difficult and important task of environmental analysis. It is an art like
an interpretation.

External Factors affecting Entrepreneurship Development

Entrepreneurship is influenced by four distinct factors: economic development, culture,
technological development and education. In areas where these factors are present, you can
expect to see strong and consistent entrepreneurial growth. These conditions may have both
positive and negative influences on the emergence of entrepreneurship. Positive influences
constitute facilitative and conducive conditions for the emergence of entrepreneurship, whereas
negative influences create inhibiting milieu to the emergence of entrepreneurship.

1. Economic Factors

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Economic environment exercises the most direct and immediate influence on entrepreneurship.
This is likely because people become entrepreneurs due to necessity when there are no other
jobs or because of opportunity. The economic factors that affect the growth of
entrepreneurship are the following:
 Capital: Capital is one of the most important factors of production for the
establishment of an enterprise. Increase in capital investment in viable projects results
in increase in profits which help in accelerating the process of capital formation.
Availability of capital facilitates for the entrepreneur to bring together the land of one,
machine of another and raw material of yet another to combine them to produce goods.
Capital is therefore, regarded as lubricant to the process of production.
 Labor: Easy availability of right type of workers also effect entrepreneurship. The
quality rather than quantity of labor influences the emergence and growth of
entrepreneurship. The problem of labor immobility can be solved by providing
infrastructural facilities including efficient transportation. The considerations of
economic and emotional security inhibit labor mobility. Entrepreneurs, therefore, often
find difficulty to secure sufficient labor.
 Raw Materials: The necessity of raw materials hardly needs any emphasis for
establishing any industrial activity and its influence in the emergence of
entrepreneurship. In the absence of raw materials, neither any enterprise can be
established nor can an entrepreneur be emerged
 Market: The role and importance of market and marketing is very important for the
growth of entrepreneurship. In modern competitive world no entrepreneur can think of
surviving in the absence of latest knowledge about market and various marketing
techniques. Practically, monopoly in a particular product in a market becomes more
influential for entrepreneurship than a competitive market. However, the disadvantage
of a competitive market can be cancelled to some extent by improvement in
transportation system facilitating the movement of raw material and finished goods,
and increasing the demand for producer goods.
 Infrastructure: Expansion of entrepreneurship presupposes properly developed
communication and transportation facilities. It not only helps to enlarge the market, but
expand the horizons of business too.
2. Political and Legal Influences
The political climate of a country is another critical factor for managers to consider in day-to-
day business operations.
 The amount of government activity, the types of laws it passes, and the general political
stability of a government are three components of political climate.
 Is the government stable, or might a coup disrupt the country? How restrictive are the
regulations for foreign businesses, including foreign ownership of business property
and taxation?
 Import tariffs, quotas, and export restrictions also must be taken into account.
 States and local governments also exert control over businesses—imposing taxes,
issuing corporate charters and business licenses, setting zoning ordinances, and similar
regulations.
3. Social Factors
Social factors can go a long way in encouraging entrepreneurship. In fact it was the highly
helpful society that made the industrial revolution a glorious success in Europe. Strongly affect
the entrepreneurial behavior, which contribute to entrepreneurial growth. The social setting in
which the people grow, shapes their basic beliefs, values and norms. The main components of
social environment are as follows:
Caste Factor

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There are certain cultural practices and values in every society which influence the’ actions of
individuals. These practices and value have evolved over hundreds of years. Dominance of
certain ethnical groups in entrepreneurship is a global phenomenon.
Family Background
This factor includes size of family, type of family and economic status of family. The gain
access to political power and exhibit higher level of entrepreneurship. Background of a family
in manufacturing provided a source of industrial entrepreneurship. Occupational and social
status of the family influenced mobility. There are certain circumstances where very few
people would have to be venturesome. For example those members of joint family who gain
wealth by their hard work denied the opportunity to enjoy the fruits of their labor because they
have to share their wealth with the other members of the family.
Education
Education enables one to understand the outside world and equips him with the basic
knowledge and skills to deal with day-to-day problems. In any society, the system of education
has a significant role to play in inculcating entrepreneurial values. Our educational methods
have not changed much even today. The emphasis is still on preparing students for standard
jobs, rather than marking them capable enough to stand on their feet.
Attitude of the Society
A related aspect to these is the attitude of the society towards entrepreneurship. Certain
societies encourage innovations and novelties, and thus approve entrepreneurs’ actions and
rewards like profits. Certain others do not tolerate changes and in such circumstances,
entrepreneurship cannot take root and grow. Similarly, some societies have an inherent dislike
for any money-making activity.
Cultural Value
Entrepreneurial growth requires proper motives like profit-making, acquisition of prestige and
attainment of social status. Ambitious and talented people would take risks and innovate if
these motives are strong. The strength of these motives depends upon the culture of the society.
If the culture is economically or monetarily oriented, entrepreneurship would be applauded and
praised; wealth accumulation as a way of life would be appreciated. In the less developed
countries, people are not economically motivated. Monetary incentives have relatively less
attraction. People have ample opportunities of attaining social distinction by non-economic
pursuits. People with organizational abilities are, therefore, not dragged into business. They
use their talents for non-economic end.
4. Demographic Factors
Demographic factors are an uncontrollable factor in the business environment and extremely
important to managers.
 Demography is the study of people’s vital statistics, such as their age, gender, race and
ethnicity, and location.
 Demographics help companies define the markets for their products and also determine
the size and composition of the workforce.
 Businesses today must deal with the unique shopping preferences of different
generations, which each require marketing approaches and goods and services targeted
to their needs
 Companies recognize the value of hiring a diverse workforce that reflects our society.
Minorities’ buying power has increased significantly as well, and companies are
developing products and marketing campaigns that target different ethnic groups.
5. Psychological Factors

Many entrepreneurial theorists have propounded theories of entrepreneurship that concentrate

especially upon psychological factors. These are as follows :
Need Achievement

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Need achievement is social motive to excel that tends to characterize successful entrepreneurs,
especially when reinforced by cultural factors. Certain kinds of people, especially those who
became entrepreneurs, have this characteristic. Moreover, some societies tend to reproduce a
larger percentage of people with high ‘need achievement’ than other societies. Differences
among societies and individuals accounted for ‘need achievement’ being greater in some
societies and less in certain others. People with high need-achievement are distinctive in
several ways. They like to take risks and these risks stimulate them to greater effort. The ‘need
achievement’ is conditioned more by social and cultural reinforcement rather than by parental
influence and such related factors.
Withdrawal of Status/Respect
There are several other researchers who have tried to understand the psychological roots of
entrepreneurship. One such individual is Everett Hagen who stresses the-psychological
consequences of social change. Hagen says, at some point many social groups experience a
radical loss of status. Hagen attributed the withdrawal of status respect of a group to the
genesis of entrepreneurship. Hagen believes that the initial condition leading to eventual
entrepreneurial behavior is the loss of status by a group. He postulates that four types of events
can produce status withdrawal:
 The group may be displaced by force;
 It may have its valued symbols denigrated;
 It may drift into a situation of status inconsistency; and
 It may not be accepted the expected status on migration in a new society.
Motives
Other psychological theories of entrepreneurship stress the motives or goals of the
entrepreneur. Besides wealth, entrepreneurs seek power, prestige, security and service to
society. Particularly to non-monetary aspects such as independence, self-esteem, power and
regard of the society.

Internal Analysis /Weakness- Strength Analysis

It is one thing to distinguish attractive opportunities and another to be able to take advantage of
these opportunities. In addition, the entrepreneur needs to evaluate his/her strengths and
weaknesses. The entrepreneur should primarily consider his/her ability, to manage changes, to
simulate himself/herself to the business environment (maintaining networks with suppliers,
customers, and regulatory bodies), and his/her financial capacity.
SWOT Analysis
By combining our findings on external analysis and internal analysis, we get the SWOT
(strengths, weakness, opportunities and threats) analysis. External environmental factors can be
classified as opportunities and threats in a SWOT analysis. The internal analysis enables us to
identify the Strengths and Weaknesses.
Below is a typical SWOT matrix. A list of strengths, weaknesses, opportunities and threats are
put in the appropriate quadrant so that to easily see what needs to change to gain the
competitive advantage.
A) Strengths: Refer to the attributes or core competencies of an entrepreneur those are helpful
to achieving the objectives. Strengths are resources possessed and capabilities that an
entrepreneur has developed that can be exploited and developed into a sustainable competitive
advantage. write down answers to the following questions. Where appropriate, use similar
questions:
Strengths:
 What advantages do you have?
 What do you do well?

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 What relevant resources do you have access to? What do other people see as your
strengths?
Consider this from your own point of view and from the point of view of the people you deal
with. Don't be modest. Be realistic. If you are having any difficulty with this, try writing down
a list of your characteristics. Some of these will hopefully be strengths!
In looking at your strengths, think about them in relation to your competitors - for example, if
all your competitors provide high quality products, then a high quality production process is
not strength in the market, it is a necessity.
B) Weaknesses: Refer to the attributes of an entrepreneur those are harmful to achieving the
objectives. Weaknesses are resources and capabilities that are lacking or deficient and prevent
an entrepreneur from developing a sustainable competitive advantage. They are conditions that
can lead to poor performance. write down answers to the following questions. Where
appropriate, use similar questions:
 What could you improve?
 What do you do badly?
 What should you avoid?
Do other people seem to perceive weaknesses that you do not see? Are your competitors doing
any better than you? It is best to be realistic now, and face any unpleasant truths as soon as
possible. Analyzing one's internal strengths and weaknesses, helps him/her in formulating
strategies that best suit for the implementation and development of the project idea.
C) Opportunities: Opportunities are outside conditions or circumstances that an entrepreneur
could turn to its advantage. External changes provide opportunities that well managed
businesses can turn to their advantage can include:
 Changes involving organizations and individuals which directly affect your business
may open up completely new possibilities. For example:
 Deterioration in a competitor’s performance
 Improved access to potential new customers and markets
 Increased sales to existing customers,
 The development of new distribution channels
 Improved supply arrangements, such as just-in-time supply or outsourcing non-core
activities.
 The broader business environment may shift in your favor. This may be caused by:
 Political, legislative or regulatory change. For example, a change in legislation that
requires customers to purchase a product.
 Economic trends. For example, falling interest rates reducing the cost of capital
 Social developments. For example, demographic changes or changing consumer
requirements leading to an increase in demand for your products
 New technology. For example, new materials, processes and information technology
D) Threats: External conditions those are harmful to achieving the objectives. Threats are
current or future conditions in the outside environment that may harm the company and can be
minor or can have the potential to destroy the business. Threats might include:
 Changes involving organizations and individuals that directly affect your business can
have far-reaching effects. For example:
 Improved competitive products or the emergence of new competitors.
 Loss of a significant customer.
 Creeping over-reliance on one distributor or group of distributors.
 Failure of suppliers to meet quality requirements.
 Price rises from suppliers.
 Key personnel leaving, perhaps with trade secrets.
 Lenders reducing credit lines or increasing charges.

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 A rent review threatening to increase costs, or the expiry of a lease.

 The broader business environment may alter to your disadvantage. This may be the
result of:
 Political, legislative or regulatory change. For example, new regulation increasing your
costs or requiring product redesign
 Economic trends. For example, lower exchange rates reducing your income from
overseas.
 Social developments. For example, consumer demands for ‘environmentally-friendly’
products.
 New technology. For example, technology that makes your products obsolete or gives
competitors an advantage.
The final stage is to combine the analyses and feed the results into your business plan or
formulation of strategy. Based on the results of the analysis and priorities set, the following
strategic courses of actions can be considered in crafting the strategy and developing your
business plan:
1. Capitalize on opportunities that match your strengths. For example, opportunities
that match your strengths may prompt you to pursue a strategy of aggressive expansion.
2. Address your weaknesses. Decide which weaknesses need to be addressed as a priority.
Other weaknesses must be acknowledged and respected until time and resources allow a
solution.
3. Protect yourself against threats. For example, build relationships with suppliers and
customers, foster good employee relations, take out insurance cover against obvious
potential disasters, draw up realistic contingency plans to cope with potential crises...etc

Strengths Opportunities
 Ab  Changes in demographics
undant resources  New product
 str  Increased demand
ong brand name  Competitor going out of business
 ene
Maximize
rgetic staff
Weaknesses  go Threats Minimize
  Fierce
Po competition
or management  Product
 substitutes
Un  Decease in
motivated e demands
  Trade
Li regulations
mited resources

Litt
le company
direction

Fig: A SWOT Analysis matrix

Consider the following example for SWOT Analysis.

A start-up small consultancy business might carry out the following SWOT analysis:
Strengths:

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We are able to respond very quickly as we have no red tape, no need for higher management
approval, etc.
 We are able to give really good customer care, as the current small amount of work
means we have plenty of time to devote to customers
 Our lead consultant has strong reputation within the market
 We can change direction quickly if we find that our marketing is not working
 We have little overhead, so can offer good value to customers
Weaknesses:
 Our company has no market presence or reputation
 We have a small staff with a shallow skills base in many areas
 We are vulnerable to vital staff being sick, leaving, etc.
 Our cash flow will be unreliable in the early stages
Opportunities:
 Our business sector is expanding, with many future opportunities for success
 Our local council wants to encourage local businesses with work where possible
 Our competitors may be slow to adopt new technologies
Threats:
 Will developments in technology change this market beyond our ability to adapt?
A small change in focus of a large competitor might wipe out any market position we achieve
The consultancy might therefore decide to specialize in rapid response, good value services to
local businesses. Marketing would be in selected local publications, to get the greatest possible
market presence for a set advertising budget. The consultancy should keep up-to-date with
changes in technology where possible.

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CHAPTER TWO
ENTREPRENEURIAL DECISION AND PROCESS
A. The Entrepreneurial Decision: - Entrepreneurship is the symbol of business strength and
achievement. Entrepreneurs are the founders of today’s business success. Their sense of
opportunity, their drive to innovate, and their capacity for accomplishment have become the
standard by which free enterprise is measured. Entrepreneurs will continue to be critical
contributors to the economic growth through their innovation, research and development
effectiveness, job creation, competitiveness, productivity and formation of new industry.
For the entrepreneur who actually starts his or her business, the experience is filled
with enthusiasm, frustration, anxiety and hard work. On the other respect, there is high rate of
failure due to poor sales, intensive competition or lack of capital. Furthermore, the financial
and emotional risks can be very high. It is in this uncertain condition that entrepreneurial
decision takes place. The next question to be raised is what factors/causes are contributing for
entrepreneurial decisions. In this regard, it is possible to suggest many factors which are
related to the entrepreneur him or herself, government policies, availability of resources,
market conditions etc. In any context, it would be very important to take sound decisions
based on several sub decisions to bring the over all success in the movement from present life
style to a new life style. Therefore, entrepreneurs should decide on
1. To leave the present career or life style
2. The desirability of the venture to the society.
3. The possibility of the venture in reference to the external and internal factors.
1. Decision to Change the Present Life Style
The decision to leave a present career is not an easy one. It takes great deal of energy to
change and create something new. The most important pushing/pulling factors to leave the
present life style and start a business are good opportunities in the Work environment and
Disruption created in it.
i. Work environment. The work environment in which an entrepreneur is working currently
can be the main source of new opportunities. Individuals get experiences on management,
leadership, the use of technology and means to be successful in business. They become
familiar with the market situation or identify unfilled or unsatisfied customers needs and
wants. Moreover, because of research and development, individuals may develop product
ideas or process that may push them to form new business.
ii. Disruption. There is no greater force than personal dislocation to galvanize a person into
action. Any negative forces in the organization serve as inertia to start new business or to
leave a present life style.
Motivation for Entrepreneurship. Motivation refers to the way in which urges, drives,
desires, aspirations, and strivings or needs direct, control or explain the behavior of human
beings. What motivates an entrepreneur to take all the risks and launch a new venture, pursuing
an entrepreneurial career against the over whelming odds for success? Although many people
are interested in starting a new venture and even have the background and financial resources
to do so, few decide to actually start own business.
Motivational factors constitute the inner urge present in an individual who continuously
demands from him to do something new and unique as also to perform better than others.

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McClelland and winter have made considerable studies and concluded that what motivates a
person to do something new or something to seek better is the inner urge which directs him
towards such ends. This urge also forces a person to use the resources efficiently than to be
negligent of it. Also important is the power of motivation which is really the end which one
seeks to attain. These motivational factors induce the person to undertake entrepreneurial
activities which relate to creating a new business where there was none. This also means to
excel the performance in carrying out any activity by striving through persistent efforts unlike
others who do not have sufficient capacity for hard work.
Given the sizable risks, time and energy requirements of entrepreneurship, why do so many
individual take the entrepreneurial thrust every year? Entrepreneurs are motivated to launch
business for a number of reasons. While the motivations for venturing out alone vary greatly,
they can be grouped in to two broad categories: pull factors and push factors.
Pull Factors.
Some individuals are attracted towards small business ownership by positive motive such as a
specific idea which they are convinced to work. Pull factors are those which encourage
individuals to become entrepreneurs by virtue of the attractiveness of the entrepreneurial
option. Some important pull factors are the following.
Independence: “Being my own boss” is a powerful motivator for many entrepreneurs. Who
seek the freedom to act independently in their work? As heads of business, they enjoy the
autonomy of making their own decisions like setting their own work hours, and determining
what they will do and when they will do it.
Need for independence has been suggested as a fundamental motivation of small business
owners. Entrepreneurs prefer to be their own boss, have often escaped from what they
perceived to be hierarchical regimes of the large corporation and to have realized a sense of
purpose through owning and managing their own business.
The need for power or control: The need for power has also been suggested as a source of
motivation. Power has been defined variously either as an attribute of an individual or as a
structural phenomenon. People with a desire for power not only enjoy being in charge but also
accumulate all the symbols and emoluments of power. They prefer to in to competitive and
status oriented situations and tend to be more concerned with gaining influence over other and
with their prestige than with effective performance.
Need for Achievement: Need for achievement is a desire to excel and achieve a particular
goal. The goal is set in relation to a standard and so the individual who is most motivated in
this way will strive to accomplish their goal through entrepreneurship.
Entrepreneurs characteristically like to take personal responsibility for finding solutions to
problems, they like repaid feed back and they aim to achieve moderately difficult tasks. That
is tasks which have a challenge but not beyond their capabilities.
Profit: Many entrepreneurs are enticed by the hefty of a highly successful business, although
the odds in favor of such considerable success are slim. Others are motivated by making their
own money in business surprising however, many entrepreneurs do not rate money as a
primary motivator for starting their own business.

Role Models: Perhaps one of the most important factors influencing entrepreneurs in their
carrier choices is role models. Role models can be parents, brothers or sisters, other relatives
or successful entrepreneurs in the surrounding community or nationally touted individual
entrepreneurs. Highly visible role models seem to stimulate entrepreneurial activity. Watching
other’s successes inspired to start their entrepreneurial career by another entrepreneur, a parent,
a local business person, or a famous entrepreneur.

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Push Factors. Push factors on the other hand are those which encourage entrepreneurship
by making the conventional option less attractive. Many people are pushed (forced) in to
founding a new business by variety of factors. Some of the push factors include:
An Alternative to a Dissatisfying Job: Many entrepreneurs are former executives and
employees of larger corporations who were highly dissatisfied with their jobs. Some were
bored with their work and frustrated with the corporation’s disinterest in their ideas. Others
were frustrated by the slow decision making, the bureaucracy, and their limited autonomy as
managers in large companies.
An important factor that influences some one to start an entrepreneurial career is dissatisfaction
with traditional careers that involve working for someone else. Slow career progress, the
inability to effect quick changes within the organization, low wages, and office politics are just
some of the reasons cited for this dissatisfaction.
Job Insecurity: Given the substantial risks and uncertainly of entrepreneurship, person
security may seem on unlikely motivator. However, in a time of much corporate downsizing
and layoffs, some entrepreneurs view running their own business as a more secure alternative,
especially those in the middle and latter stage of their corporate careers.
Personal and Professional Growth: The challenges of building a business innately involve
individual growth. To be successful, an entrepreneur must be able to cope with risk,
uncertainly, and stress, handle many different interpersonal relationships, and manage a
business with limited resources. Many individuals become entrepreneurs to experience this
growth and the fulfillment gained from building a business in to a purposeful, productive
entity.
Unemployment: Some individuals start their own business when they fail to get employment.
Self-employment is taken as the best alternative for those who arte not employed. When
unemployment increases, many people start their own business and become entrepreneurs.
There are a number of environmental factors that “push” people to find new firms. These
entrepreneurs are motivated as much or more by entrepreneurial rewards than by an “escapist
or refugee” mind set.
2. Decision on Desirability of new Venture
The perception that starting a new company is desirable is influenced by many factors. Some
of these determinant factors that are highly related to the individual’s life are
Culture, Families, Teachers and Peers.
Culture: a culture values differently for various activities. Thus, a culture may totally or
partially stand in support or against for entrepreneurship. There are also subcultures with in
the culture that prohibit you though the culture allows you to become entrepreneur. Thus, there
are many entrepreneurial subcultures in every culture that negatively affect the supportive
environment. For instance, during earlier times of Ethiopia, merchants, handicraftsmen,
weavers’ etc businesses were valued low. American’s promotes those individual to be their
own boss (work independently) after the age of eighteen while Ethiopians don’t have
confidence to let youths to assume any job responsibilities independently.
Family: Family traits play an important role in entrepreneurship. A study indicated that most
of founders of companies had fathers and/or mothers who valued their independence. This is
because families give encouragement, support and value to company formation.
Teachers: Teachers influence individuals significantly as entrepreneurship is one possible
career path. The exercising courses in entrepreneurship and innovation tend to spawn or
generate.
Peers: An area with an entrepreneurial pool and meeting places where entrepreneurs and
potential entrepreneurs meet and discus ideas, problems, solutions spawns etc.

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3. Decision on Possibility of the new Venture

Once the desirability of the ventured is ensured, the next question to be raised is the possibility
of it. Several factors have various positive impacts on the feasibility of the new venture. Some
of these factors Includes Government, background of the entrepreneur, market situations, role
models, sources of finances, etc..
Government. Contribute much by providing infrastructure, establishing fair tax rate or
allowing tax exemptions, levying protection tax, providing incentives, ensuring peace and
security, maintaining and enforcing rules and regulations etc.
Backgrounds of Entrepreneur. Knowledge acquired from education and previous business
experience make a potential entrepreneur self confident and successful in forming or managing
a new venture. In this sense, entrepreneurs are not born but develop.
Marketing. A successful company is established in an area where there is market demand.
Thus, entrepreneurs find potential area of market besides possessing marketing skills in
production, promotion, pricing and distribution.
Role models. Entrepreneurs who start a new venture gain experiences and how to approaches
from role models in a similar business operation. In addition, role models help new starters to
develop strong spirit. This is because; new owners develop the feeling of “if that person could
do it, so I can.”
Finance. While most of the start-up money for any new company comes from personal
savings, credits, friends, and relatives, there is still often a need for additional seed start-up
capital. Therefore, the availability of financial sources or lending agencies enhances the
possibility of the new venture. This is because, entrepreneurs can access loans with less or no
collateral as well as low interest rate either for the long term or short term.

B. The Entrepreneurial Process and Challenges:

In order to establish and run a successful business goes through a process known as the
entrepreneurial process. It consists of the following phases:
1. Identifying and evaluating the business opportunity
2. Developing the business plan
3. Determining the resources required for the business
4. Managing the resulting business
1. Identifying and evaluating the business opportunity. This phase is the first and the most
difficult since most business ideas don’t suddenly appear. Generally a new business
opportunity may be the result of a technological change, market shift, government regulation
or competition. Good business opportunities are often the results of the entrepreneur being
alert to the environment or extra effort in establishing opportunity identification mechanisms.
Most entrepreneurs do not have formal mechanisms to identify new business opportunities.
However, there are some sources such as consumers, members of distribution channels, and
technical people that are generally fruitful. Often the most and best business ideas come from
customers, complaints and remarks such as I wish there were a better product… or I wish I
could find a product that is specially made for… “may result in the inception of a new business
idea and a new product.
Distribution channel members such as whole sellers, distributors and retailers are also good
sources of business ideas. Their proximity to consumers of the product gives them the
opportunity to better see a market gap or a demand for a better product. Technical people are
also good source of ideas for a new business. Technical people are also working on various
projects may come across a new or better way to manufacture a product. Regardless of its
source however, a newly generated business idea must be carefully examined. This evaluation

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of the business idea is perhaps the most critical of the entrepreneurial process as it is the phase
in which the profitability of the business idea will be determined.
The evaluation phase deals with the assessment of the opportunity for its length, its real and
perceived value, its risks and returns, its differential advantage in its competitive environment
and its with the personal skills and goals of the entrepreneur. Here, it is very important to note
that the opportunity must also fit the personal interests of the entrepreneur. A person, without
the necessary interest or skill to start a new venture may not become a successful entrepreneur
even if he or she has a brilliant business idea.
At this particular phase as a matter of formal procedure the entrepreneur may prepare an
opportunity assessment plan. The plan also referred to as opportunity analysis focuses on the
issues that enable the entrepreneur to make the decision whether to act on the opportunity or
not. Focusing entirely on the opportunity this plan includes a description of the product or
service, an assessment of the entrepreneur, the team and the opportunity of all the activities and
resources needed to translate the opportunity into a viable business venture and the sources of
capital to finance the establishment of the ventures well as its growth.
The assessment of the opportunity is not an easy task. However, in fact, it is the most difficult
and critical aspect of the opportunity analysis. Through the assessment analysis the
entrepreneur answers questions such as what market need does the product satisfy, What
resources to use, from which sources will be required to convert the business opportunity in to
a business venture, is the entrepreneur fit to act on the opportunity and how fierce is the local
and international competition?
Remember that a business idea is not a business opportunity until it is assessed objectively and
judged to be feasible. You may wish to choose one of the ideas that seem most promising for
more detailed study. Trying to consider too many would make your focus on only one
business idea. You are more likely to fall love with it and could lose your objectively.
Developing Business Plan
Once a business idea is selected the concept must be sharpened by an in depth planning
process. The result of this step is a comprehensive business plan-the “blueprint” for the
implementation process.
A business plan is a document the entrepreneur prepares before going to he implementation
stage. It details every aspect of the business, and the marketing, financial organizational and
operational plans is also useful to develop and opportunity and determine the resources
required for the business and their sources. In addition the plan will be dealt in greater depth in
chapter four. Developing the business plan is often difficult because the required resources for
the plan may not be readily available and or the entrepreneur may not have rich experience in
business plan preparation.
Determining the Required Resources
The entrepreneur needs to identify the resources required for the business before embarking on
the business opportunity. The entrepreneur starts this phase with an assessment of his present
resources. Then carefully identifies all the resources required to get the business on its feel and
run it successfully. Here the entrepreneur must be careful not to understate the quality and
quantity of the required resources. The entrepreneur also needs to classify the required
resourced in to two: the ones that are vital and the ones that are just helpful. It is also
important to evaluate the impact of insufficient or inappropriate resources on the business. The
next step will be to acquire the needed resources in the right quality and quantity on a timely
basis. The resources needed may be finance, machinery, raw materials etc…
Managing the Venture

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Once the required resources for the business have been acquired, the entrepreneur will deploy
them through the implementation of the business plan. At this stage the entrepreneur examines
the operational problems of the growing enterprise a task that involves the implementation of
an effective management approach and structure. An effective control mechanism also needs
to be set up in order to identity and tackle emerging problems and challenges on time. Some
entrepreneurs find managing and leading the venture they created very difficult a distinction
between entrepreneurs and managers.

weaknesses, and take the greatest possible advantage of opportunities available.

4.2 Developing entrepreneurial strategy

A. Taking Moderate Risk

There is a popular axiom, which states that everyone faces risks everyday. You cannot cross
the street without some potential damage that you will be hit by a car. Life is full of risk. Risk
is simply the possibility of damage, injury or loss. Risk is also defined as a condition where
there is "uncertainty" about the future outcome. For instance, taking a risk does not mean that
we are going to take a fire or storm, or take a ship, or a factory. Rather it is to mean that we
place ourselves in a situation or position where there is some doubt about the future outcome.

Starting or buying a new business and running it involves some forms risk. Unfortunately, the
higher is the reward from the business the greater will be the risk the entrepreneur is to face. It
should be noted that people who successfully innovate and start come in all shapes and sizes
but they do have a few things, which others do not. It has been often expressed that an
entrepreneur is risk taker but not a gambler, (which are seen as uncalculated risks).
Entrepreneurs have special quality to recognize potential risks and prepare effective strategies
to deal with them. It becomes more helpful to see the entrepreneur as a risk manager.

In dealing with uncertainty, the entrepreneur has to identify, assess, evaluate and manage such
risks.

1. Identifying Risks.

The first step to be considered in managing risk is to identify different types of risks that will
occur in the future and damage the business. An entrepreneur would face different types of
risks. Some of these are discussed below. Financial risk in most ventures the individual puts a
significant portion of his/her or others' resource at stake. This money or resource will, in all
likelihood, be lost if the venture fails. The entrepreneur may also be required to sign personally
on the venture's obligation that far exceeds his/her personal network. The entrepreneur, thus,
will be exposed to personal bankruptcy. And that is why many people are unwilling to risk
their savings, house property and salary to start a venture. The following risks are commonly
faced by entrepreneurs when they start their own business

Career risk

A question frequently raised by potential entrepreneurs is whether they will be able to find a
job when go back to their old job if their venture will fail. To reduce such risks, starting a part-
time business is popular gateway to entrepreneurship. Part-time entrepreneurs have the best of

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both worlds; they can ease into business for themselves without sacrificing the security of a
steady paycheck and benefits. A major advantage of going into part-time business is the low
risk in case the venture collapses. Many part-timers are" testing the entrepreneurial wasters" to
see whether their business ideas will work and whether they enjoy being self-employed. As
they grow, many part-time entrepreneurs absorb more of the entrepreneur's time until they
become full-time businesses.

Family and social risks

Starting a new venture consumes more of the entrepreneur's time and energy. Consequently,
his / her other commitments may suffer. For example, those who are married and especially
those with children, expose their families to risks of an incomplete experience, and the
possibility of permanent emotional scars.

Psychic risk

The greatest risk may be to the well being of the entrepreneur. Many can be replaced; a house
can be built; spouse, children and friend can usually adapt the life. But some entrepreneurs
who have suffered from financial catastrophes have been unable to bounce back, at least not
immediately. The psychological impact has proven to be too severing for them. Psychic risk
also comes from taking complete responsibility. It is great to be a boss; but many entrepreneurs
find that they must make decisions on the issue, which they are not well experienced.

When there is no to ask, the pressure can build quickly. The realization that the decisions they
make are the cause of failure or success has devastating effect on some people; it creates more
psychological tension on the mind of the potential entrepreneurs.

Lower quality of life

The long hours and hard work needed to launch a business can take their toll on the rest of the
entrepreneur's life. Business owners often find that their role as a husband or as a wife and as
father or mother take a back seat to their roles as business founders. Even the tension that will
be created because of uncontrollable factors usually tends to give the hardest time of their life.

Long hours and hard work

Business start-ups often demand that owners keep nightmarish/frightening schedules. In many
star-ups, six or seven day workweeks with no paid vacations are that norm. When the business
closes, the revenue stoops coming in and the customers go elsewhere. Even when you own
your own business, you still always are working for someone else-your customers and clients.

Political risk

Political risk refers to the potential instability, corruption, and violence in a country or region.
It is an important variable because incase where political risk is high, it is difficult and costly
to procure, protect, and dispose of resources. This is the risk of governmental nationalization
and legal appropriation.

In general, entrepreneurial activities and existence of risk are inseparable ideas in the
development of entrepreneurship. It is a process that all will be participating for the purpose of
the reward in order to reimburse the limitation of the activity. Hence, as a potential

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entrepreneur, you need to identify and evaluate all possible risks that you will face.

2. Analyzing the Cause of Risks

A successful entrepreneur is someone who is able to assess and evaluate potential risks.

In evaluating risks, the entrepreneur needs to analyze the possible cause of risk. The two
primary cause of business risk are change in market conditions & economic shifts, and the
likelihood of accidents.

Change of market conditions - some of the risks that almost all entrepreneurs face involves
competition, policy changes, style changes, and change from fluctuating economic conditions.
Do you remember our previous financial policy? There were no any private banks and
insurance corporations but as the policy changes many financial institutions starts to flourish.
What will be the future regarding this policy? There are many national policies, which are
subjected to change including education policy, investment policy, tax regulation and property
ownership right policy. The economic shifts like inflation, depression and the like, affects the
success of the business.

Accidents -businesses also face risk beyond these market and economic shifts rather they
would face risks which caused by natural or man made accidents like fire, flood, earth quake,
and upturn. For example, a merchandise shipment of electronics may be destroyed in transit or
a warehouse may burn down and larger amounts of expensive inventory may be lost. So, such
possible causes should be investigated before the damage.

3. Managing the potential risks

Once the potential risks are identified and their possible causes are investigated, the
entrepreneur designs possible strategies to manage the risks. Some risks are easier to control
than others though the action of the owner / entrepreneur will vary with the circumstances
faced by him. Basically, an entrepreneur can use four methods to control risk.

I. Risk Avoidance (Eliminating the Risk)

Upon deep investigation of the nature of the risk, the entrepreneur will avoid the risk totally by
abandoning or refusing to undertake an activity in which the risk seems too costly, i.e.
Entrepreneurs must be willing to take moderate risks when they believe there is a strong likely
hood that they will succeed.

ii. Risk Reduction (Minimizing the Risk).

This method consists of using various methods to reduce the probability that a given event will
occur. Although some risks cannot be avoided, most can be appreciably reduced. The primary
risk reduction technique is prevention.

Effective management is clearly the best way to reduce the impact of many risks. Careful
control of financing, productive control activities, marketing and other management concerns
help ensure that the results of most risks will be profits rather than result in loss or failure of
the business.

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A successful entrepreneur can minimize risks either through the limitation of his/her financial
state or by reducing the degree of uncertainty, so that they can be calculated accurately and
decisions can be made with more reliability. Many entrepreneurs also control risk by keeping
fixed assets to a minimum level or by renting office facilities rather than using personal funds
to purchase land and buildings.

iii. Risk Transfer

It means shifting of the consequence of a risk to persons or organizations outside your

business. The entrepreneur is someone who is willing to accept the risks that cannot be
transferred through insurance, which is the process by which an insurance company agrees to
pay an individual or organization an agreed upon sum of money for a prospective future loss.
However, the availability of insurance is important because it enables the entrepreneur to
transfer risk instead of accepting the full risk liability. For example, if you start in a business,
you will be faced with a number of risks that can prevent the business operating successfully.
These would include theft of stick, fire, damage to vehicles through motor accidents, and
injury to member of the public through the action of the business that can easily be transferred
through insurance policies and in some cases such insurances may be compulsory (must be
done because of law or a rule).

iv. Risk Assumption also known as risk absorption or risk retention.

There are certain risks that are not insurable and the entrepreneur sets methods of controlling
risk by the planned acceptance of the risk or loss. In some instance, reducing certain risks may
be too expensive. Generally, the small business owners will assume risks in which losses that
their occurrence will not produce significant financial consequence on the business. Remember
that most dreams cannot come true unless some risks are taken.

N.B. Most entrepreneurs use a combination of methods when controlling and managing risks,
her tuition fee and daily expense. She considered getting a full - time job but realized that she
would not have enough time to do her studies and keep the job. Her solution was to start a
small business venture (Beauty Salon). But starting and running the business requires a total of
Br. 17,500 to make available equipments, operating supplies and building rent, which is
impossible for her to raise the required capital from her personal saving.

She finally came - up with an idea of organizing a five -day trade - show within the college's
compound together with her classmate, Sitotaw and Mintamir for the purpose of generating the
start - up capital of the Beauty Salon. Upon getting acceptance from her classmates, she
determined that the tradeshow should consist of more of selling convenience items. She
anticipated the total expense (advertising cost of printing posters, cost of printing tickets,
transportation and telephone call) to be Br. 2000. Moreover, the items to be available required
a total of Br. 10,500. But currently, the group members have Br. 4,600 in the bank. She
calculated that the maximum gross receipt would be Br. 18,900, i.e. the business venture would
earn a profit of Br. 6,400.

Required:

i. What risks are involved in this business venture?

ii. How could these risks be reduced or eliminated?

Conflict Management in small business development

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The entrepreneur identifies risk of establishing a venture and the possible entry strategies.
Then, the entrepreneur should discover the effect of conflict management when he / she want
to develop his venture.

Conflict is a natural disagreement resulting from individuals or groups that differ in attitudes,
beliefs, value or needs. It can also originate from past rivalries and personality difference.
Conflicts can emerge among individuals or group members in an organizational setting.

Sometimes, conflicts can also emerge when one has a number of needs or objectives but unable
to satisfy all at one time due to limitation of resources; people have unlimited wants. So it is
common that conflict of interest to emerge.

In order to solve your conflict of interest consider the following points.

To Manage a Conflict within You - "Core Process", it is often in the trying that we find
comfort, not in getting the best solution. The following steps will help you in this regard.

1. Name the conflict, or identify the issue, including what you want that you are not getting.
Specify and list your objectives. Consider:

a. Writing your wants down to come to a conclusion.

b. Talk to someone, including asking him or her to help you summarize the
conflict.

2. Evaluate the relative worth of each objective.

Set priority to each objective based on their relative importance to you. Get perspective by
discussing the issue with your friend or by putting it down in writing. Consider: How
important is this issue? Does the issue seem worse because you are tired, angry at something
else, etc.? What is your role in this issue?

3. Pick at least one thing you can do about the conflict.

a. Identify at least three courses of action.

b. For each course, write at least three pros and cons.
c. Select an action - if there is no clear course of action,
pick the alternative that will not hurt, or be least hurtful, to yourself and others.
d. Briefly discuss that course of action with a friend.

4. Then do something.

a. Wait at least a day before you do anything about the

conflict. This gives you a cooling off period.
b. Identify and calculate the resources available including
time. Evaluate your moral.
c. Then take an action. Develop procedures for routine
tasks.
d. Allocate your resources to the prioritized needs/wants.
e. Evaluate your action and the relative importance of the
objectives you prioritized again. Have in your own mind, a date when you will act again if you
see no clear improvement.

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The conflicts that can arise between/ among individuals in an organizational or group setting
are discussed below.

The ingredient/ causes of conflict

There are certain factors that cause conflict between/ among individuals. Some of them are
noted below.

Needs- needs are things that are essential to our well being. Conflicts arise when we ignore
others' needs, our own needs or the group's needs.

Perception- People interprets reality differently. They perceive differences in the strictness,
cause and consequence of problems. Misconception or differing in perception may come from
self-perception, other's perceptions of situations and perception of threat.

Power- How people define power and use power is an important influence on the number and
type of conflicts that occur. This also affects how conflict is

Managed- Conflicts can arise when people try to make others change their action or to gain
unfair advantage.

Value-Values are beliefs or principles we consider to be very important. Serious conflict arises
when people hold incompatible values or values are not clear.

Conflicts also arise when one party refuses to accept the fact that the other party holds
something as a value rather than a preference.

Feelings and emotion-Many people let their feelings and emotions become a major influence
over how they deal with conflict. Conflict can also occur because people ignore their own or
others' feeling and emotions. Other conflicts occur when feelings and emotions differ over a
particular issue.

Conflict is not always negative. In fact it can be healthy when effectively managed. Healthy
conflict can lead to:

 Growth and innovation

 New ways of thinking
 Additional management option
 .Raise and address problems.
 Energizes work to be on the most appropriate issues

Helps people "be real", for example, it motivates them to participate. Helps people learn how
to recognize and benefit from their differences

If the conflict is understood, it can be effectively managed by reaching a consensus that meets
both the individual's and society's needs. This results in mutual benefits and strengthens the
relationship. The goal is for all to win by having at least some of their needs met.

Conflict is a problem when it:

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1. Hampers productivity.
2. Lowers morale.
3. Causes more and continued conflicts.
4. Causes inappropriate behaviors.

Managing conflicts

There are five steeps to manage conflicts. Some will want to changes to take more quickly than
others.

1. Analyzing the conflict

The first step in managing conflict is to analyze the nature of conflict. To do this, you will find
it helpful to ask questions. Answers may come from your own experience, your partners, or
local media coverage. You may want to actually interview some of the groups involved.

2. Determining Management Strategy

Once you have a general understanding of the conflict, you will need to analyze and select the
most appropriate strategy. The following conflict management strategies are discussed.

i. Collaboration. This result from a high concern for your group's own
interest, matched with a high concern for the interest of other partner. The outcome is
'win/win.' This strategy is generally used when concerns for others are important. It is
also generally the best strategy when society's interest is at stake. This approach helps
build commitment and reduce bad feelings. The drawbacks are that it takes time and
energy. In addition, some partners may take the advantage of the other's trust and
openness. Generally regarded as the best approach for managing conflict, the objective of
collaboration is to reach consensus.
ii. Compromise. This strategy results from a high concern for your
group's own interest along with a moderate concern for the interest other partner. The
outcome is "win some/lose some." This strategy is generally used to achieve temporary
solution, to avoid destructive power struggles or when time pressure exists. One
drawback is that partners can lose sight of important value and long-term objectives. This
approach can also distract the partners from the merit of an issue and create a cynical
climate.
iii. Competition. This strategy results from a high concern for group's own
interest along with a less concern for others. The outcome is "win/lose." This strategy
includes more attempts at bargaining. It is generally used when basic rights are at stake
or to set a precedent. However, it can cause conflict to escalate and losers may try to
retaliate.
iv. Accommodation. This resulted from a low concern for your group's
own interest combined with a high concern for the interest of other partners. The
outcome is "lose/win." This strategy is generally used when the issue is more important
to others than to you. It is a "good will gesture." It is also appropriate when you
recognize that you are wrong. The drawbacks are that your own ideas and concerns do
not get attention.
v. Avoidance. This is resulted from a low concern for your group's own
interest coupled with a low concern of others. The outcome is "lose/lose." This strategy is
generally used when the issue is insignificant or other issues are more pressing. It is also
used when confrontation has a high potential for damage or more information is needed.

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3. Pre -negotiation

To make the stage for effective negotiation, the groundwork must be laid. The following
should occur before negotiation initiation. One partner raises the possibility of negotiation and
begins the process. If one is willing to approach the other to encourage them to reach in
agreement, a trusted outsider could be brought in as a facilitator.

i. Assessment- Conditions must be right for negotiation to be successful. Key

players must be identified and invited. Each side must be willing to collaborate with the
others. Reasonable deadlines and sufficient resources are necessary to support the effort.
Spokesperson for each group must be identified and involved. Parties need to determine
which issues are negotiable and which are not.
ii. Ground rule and agenda-The groups must agree on ground rules for
communication, negotiation and decision -making. This should agree on the objective of
the negotiation process. An agenda of issues to be covered needs to be developed.
iii. Organizations- Meeting logistics must be established including agreed upon
times and places. People must be contacted and encouraged to attend. Minutes must be
taken so that information can be distributed before and after meetings.
iv. Joint fact-finding- The group must agree on what information is relevant to the
conflict. This should include what is known and not known about social and technical
issues. Agreement is also needed on methods for generating answers to the questions.

4. Negotiation

When negotiation starts it should involve the following points.

i. Interest- When negotiating is sure to openly discus interests, rather than stated
options. Interest includes the reasons, needs, concerns and motivations underlying
positions. Satisfaction of interests should be the common goal.
ii. Options- To resolve conflicts, concentrate on inventing options for satisfying
interests. Do not judge ideas or favor any of the options suggested. Encourage
creativity, not commitment.
iii. Evaluation- Only after the partners have finished listing options, should the option
be discussed. Determine together which ideas are best for satisfying various interests.
iv. Written agreement- Documented areas of agreement and disagreement to ensue
common understanding. This helps ensure agreement can be remembered and
communicated clearly.
v. Commitment- Every partner must be confident that the others will carry out their
part of the agreement. Discuss and agree upon methods to ensure partners understand
and honor their commitment.

5. Post negotiation.

Once negotiation is completed, the group will need to implement the decisions made. Some
key steps include:

i. Ratification- The partners must get support for the agreement from stakeholders that
have a role to play in the agreement. These stakeholders must be partners and should
have been involved in the previous steps. Each organization will need to follow its

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own procedures to review and adopt the agreement. You and your partners' jobs are
not done when you have reached agreement. Communication and collaboration
should continue as the agreement is carried out. The partnership will need to have a
plan fort monitor progress, document success, resolve problems, renegotiate terms
and celebrate success.
ii. Negotiation skill- Negotiation is an important skill for coming to an agreement when
conflicts develop at home, at work and when dealing with issues like those related to
watershed management (dividing). Separate people from the problem. When
negotiating, remember that you are dealing with people who have their own needs,
emotion and perception. Some conflicts are based on difference in thinking and
perception. These conflicts may exist mainly in people's mind. It helps for each party
to put themselves in to the other's shoes so they can understand each other's point of
view. Identify and openly discuss differences in perceptions, being careful not to
place blame. In addition, recognize and understand the other side's emotion as well as
your own.
iii. Develop optional solutions- When developing optional solutions that meet the
interest of sides, try to meet as many of each side's interests as possible. Start by
inviting all sides to brainstorm ideas.

Develop objective of criteria.

When you develop criteria for selecting or combining possible alternatives, revisit the conflict
interest. These cannot be ignored or wished away. Instead discuss them as you begin
developing criteria for judging alternatives. Also keep in mind principles such as fairness,
efficiency and scientific merit.

Strive for criteria that are legitimate, practical and unbiased. You may also find it helps to
explore the criteria used in making past decisions and discuss criteria with your partners or out
side experts.

4.5 Managing Personal Time

I do not have enough time! "I have to work late tonight." "I have to pick up the kids from the
school." "I have to go grocery shopping." "I'm too tired to get out of bed that early!" "I am too
exhausted after work." "I think I need another rest day." "I don't have time to take a lunch
break." And there is one challenge that we all must deal with, no matter who we are or how we
are training - the challenge of time management. We have all made these excuses at one time
or another in our life. We can all make these excuses and today. But as committed enthusiasts
and competitors, we have to find a way to overcome what can become an overwhelming
difficulty in what we have been working so hard to achieve.

One of the major stress factors in owning a small business is that there simply is not enough
time to accomplish all that needs to be done to keep your business running smoothly. As an
entrepreneur, you are constantly faced with choices about how to spend your time. Your time
is a valuable commodity and you can only make it go so far. Keep in mind that it is not just
how much time you have, but what you do with it that counts.

As a potential entrepreneur you should consider your personal time management ability
seriously for your success. So, let us discus what time management is and how can we manage
our personal time effectively.

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Time is a-tool that can be drawn upon to help you accomplish results, an aid that takes care of
a need, an assistant in solving problems.

Characteristics of time

1. Time is a resource. Many people refer to time as a resource. A

resource is something that lies for use, or something that can be drawn for aid. Time meets this
definition. "Time is the scarcest resource and unless it is managed nothing else can be
managed." Peter Drucker
2. It is free. Time is not like other resources, because you can not
buy it, sell it, rent it, borrow it, lend it, store it, save it, multiply it, manufacture it, or change it.
3. All you can do is spend it. Time is also free; you receive 24
hours simply by Waking-up early in the morning- And most writers on the subject noted that
our attitude toward time is affected by the fact that time is free-we do not have to buy it.
Probably, that is why most of us do not place much value on time; if we had to buy our time,
we would probably spend it much differently than we do now.
4. Equitable- Not only time is free; it is equitable. "Everyone, not
only entrepreneurs but all, receives exactly the same amount of time each day." Even if we use
our time well, we do not receive an extra amount. We still receive the same daily allotment as
the person who wastes time.
5. Time is life. Since you cannot increase the quantity of time you
receive, the quality of time is the only variable. Your time belongs to no one else. No one else
can spend it for you. Other people may make demands on how you spend your time, but it is
still you who must do the spending. Only you can improve the quality of your time ultimately,
you spend your time, as you well. Hence, time is life. The way you spend your time defines
your life -which you are. Your time is your own and your commitment to the time management
is really a commitment to your self - and what is important to your life.
6. It is not adaptable- Time is not adaptable, but people are,
managing time means adapting ourselves to its passage in some appropriate satisfying manner.
If time seems to be out of control, we must learn to adopt new more appropriate habits.

Hence, we have to change ourselves. Change is difficult because most of our habits are deeply
ingrained. We have to declare war on ourselves if we hope to change the way we spend our
time.

1. Understanding the need for time management

First you have to recognize that a need to use time exist, i.e. you have to be committed to
examining new methods for getting the most out of the day. Without being committed and
motivation you will not succeed. If you fail to recognize that you could, should and can get
more of out of the time, you will never be able to unlearn old habits, and develop new effective
behavior. "Recognize the value of time."

2. Collect information.

Once the needs are established, you have to find out where time goes. If you are going to manage
time effectively, then you need to know you are spending your time. How much time do you spend
in meetings, or on telephone? than usual or less than usual.

3. Time analysis

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The third step in time management is analysis. This requires you to find out what consume
your time. Once you have a list you will have to distinguish between the legitimate users, those
things and activities, which lead to personal and organizational success and the time waster,
which creates little of values to you and the organization.

Moreover, you should examine the information from three points of view necessity,
appropriateness and efficiency. This would allow you to discontinue certain tasks, delegates
others and/or find ways to increase efficiency through technology, new products or personal
work habits.

a. The test of necessity. First you should scrutinize each activity to be sure necessary-not just
nice, but necessary. It is common to do things when their usefulness is past, i.e. monthly
reports where the information is not longer used. This test of necessity should help to reduce
your task to the essential elements.
b. The test of appropriateness. Once the essential tasks have been identified, the next step should
determine who should perform them, i. e. appropriateness in terms of department and/or skill
level. There are probably activities that could be given to others. You may also find you are
doing work beneath.
c. The test of efficiency. The third analysis examines tasks that remain, you are doing necessary
work, you should then ask, "is there a better way?" This will encourage you to find a fast way,
using better technology or establish better procedures to handle recurring activities.

4. Action plan

From your analysis, develop action plan to bring about the desired improvement in your use of
time. This means you to develop a plan that is structure around real priorities. The plan is blue
print of ensuring that they fulfill the target in their key result areas. Setting priorities in the use
of time is a two-step process. (i) listing things that need to be done and (ii) prioritizing items on
the list

A daily-prioritized list is the best way to focus attention on your most important objectives.
Work from the top of your list. If unexpected demands come up, assess their priority and
handle them accordingly. Do not use something unexpected as an excuse for distraction

Hint for Successful Time Management.

1. Clarify your objectives. Set at least one major objectives each day and achieve it.
2. Record a time log periodically to analyze how you use your time, and keep bad time
habits out of life.
3. Analyze everything you do in terms of your objectives Eliminate at least one time
waster from your life each week.
4. Plan your time
5. Make a to-do list every day

CHAPTER THREE
BACKGROUND AND CHARACTERISTICS OF ENTREPRENEURS

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A. Entrepreneurial Background: Although many aspects of an entrepreneur's

background have been explored, only a few have differentiated the entrepreneur from the
general populace of managers. The background areas explored include childhood family,
environment, education, personal values, age and work history.
Childhood Family Environment: This includes birth order, parent's occupation(s) and social
status, and relationship with parents. Being the firstborn or an only child is postulated to result
in the child receiving special attention and thereby developing more self-confidence.
According to Hisrich, since the relationship to entrepreneurship has no been established,
further research on the firstborn effect is still needed to determine if it really does have an
effect on an individual's becoming an entrepreneur.
In terms of the occupation of the entrepreneur's parents, there is strong evidence that
entrepreneurs tend to have self-employed or entrepreneurial fathers. Having a father who is
self-employed provides a strong inspiration for the entrepreneur. The independent nature and
flexibility of self employment exemplified by the father is ingrained at an early age.

The overall parental relationship to the child, regardless of whether they are entrepreneurs, is
perhaps the most important aspect of the childhood family environment in establishing the
desirability of entrepreneurial activity in an individual. Parents of an entrepreneur need to be
supportive and encourage independence, achievement, and responsibility. This supportive
relationship of parents appears to be the most important for female entrepreneurs. Female
entrepreneurs tend to grow up in middle to upper-class environments, where families are likely
to be relatively child centered and tend to be similar to their father in personality.
Education. Education is important in the upbringing of the entrepreneur. Its importance is
reflected not only in the level of education obtained but in the fact that it continues to play a
major role in helping to cope with problems entrepreneurs confront. Education provides a
good background particularly when it is related to the field of the venture. Educational need in
the area of finance, strategic planning, marketing, and management is paramount. The ability
to deal with people and communicate clearly in the written and spoken word is also important
in any entrepreneurial activity.
Personal Value. Personal values are important for entrepreneurs. The nature of the enterprise,
opportunism, institution, and individuality of the entrepreneur diverge significantly from the
bureaucratic organization and the planning rationality, and predictability of its managers.
Perhaps all these traits, not individual ones, are encompassed in a winning image that allows
the entrepreneur to create and enhance the new venture. Entrepreneurs can be differentiated
from managers, unsuccessful entrepreneurs, or even the general populace with regard to these
values. Although personal value scales for leadership as well as those scales for support,
aggression, benevolence, conformity, creativity, veracity and resource seeking are important
for identifying entrepreneurs.
Age. In terms of chronological age most entrepreneurs initiate their entrepreneurial careers
between the ages of 22 and 45. Although an average age has little meaning, earlier starts in an
entrepreneurial career are better than later ones. Also there are milestone years every five
years when an individual is more inclined to start an entrepreneurial career.

Work History. As venture becomes established and starts growing, managerial experience and
skills become increasingly important. Although most ventures start with managing one's own
activities and those of a few part or a full-time employees, as the number of employees'
increases along with the size, complexity and geographic diversity of the business, the
entrepreneurial managerial skills come more and more into play.

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Motivation. Individuals who are comfortable and secure in a job situation, have family to
support, and prefer their present lifestyle and reasonably predictable leisure time often do not
want to take the risks associated with venturing out alone. Although the motivations for
venturing out alone vary greatly, the reason cited most frequently is independence- not wanting
to work for any one else. This desire to be one's own boss is what drives entrepreneurs around
the world to accept all the social, psychological and financial risks and to work large number
of hours needed to create and develop a successful new venture. Nothing less than this
motivation would be enough to inspire the entrepreneur to endure all the frustration and
hardships Money is the second reason for starting a new venture for men where as job
satisfaction, achievement, opportunity, money are the reasons in rank order for women.
Role Models and Support Systems. One of the most important factors influencing
entrepreneurs in their career path is their choice of a role model. Role models can be parents,
brothers or sisters, other relatives. or other entrepreneurs. Role models serve as supportive
capacity as mentors during and after the launch of the venture. They provide moral and
professional support for entrepreneur who wants to establish a new venture.
Profiles or Characteristics of Entrepreneur
The characteristics of an entrepreneur that contribute to success are the result of his
achievement motivation. A successful entrepreneur must be a person with technical
competence, initiative, good judgment, intelligence, leadership qualities, self-confidence,
energy, attitude, creativeness, honesty, tactfulness and emotional stability. He/she must have
clear objectives, capacity to guard the secret of the business, good human relations and
communication skills. Consensus characteristics of entrepreneur found across consumer and
leadership groups include superior product quality, quality service to customers, flexibility, or
the ability to adapt to changes in the marketplace; high caliber management; and honesty and
ethic in business practices. A successful entrepreneur is frequently characterized as a winner;
perhaps winning is prerequisite for his or her actually becoming one. Successful entrepreneurs
have clear vision, drive to achieve, commitment, capacity to assume calculated risk, initiative,
opportunity orientation, persistent to problem solving, self confidence, seeking feed back and
networking, tolerance of uncertainty and failure, and Creativity and innovativeness,.

Men Vs Women Entrepreneurs

Although the characteristics of both male and female entrepreneurs are generally very similar,
female entrepreneurs differ in terms of motivation, business skills, and occupational
backgrounds. Factors in he start-up process of a business for male and female entrepreneurs are
also different, especially in such areas as support systems, sources of funds, and problems.
Men are often motivated by the drive to control their own destinies, to make things happen.
This drive often stems from disagreements with their bosses or a feeling that they can run
things better. In contrast, women tend to be more motivated by the need for achievement
arising from job frustration in not being allowed to perform and grow in their previous
situation.
Departure points and reasons for starting the business are similar for both men and women.
Both generally have strong interest and experience in the area of their venture. However, for
men, the transition from a past occupation to the new venture is often facilitated when the new
venture is an outgrowth of a person job, sideline, or hobby. Women, on the other hand, often
leave a previous occupation with a high level of job frustration as well as enthusiasm for the
new venture rather than practical experience, thereby making the transition somewhat more
difficult.

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Start-up financing is another area where male and female entrepreneurs differ. Whereas men
often list investors, bank loans or personal loans in addition to personal funds as sources of
start-up capital, women usually rely solely on personal assets or savings. This points out a
major problem for many women entrepreneurs-obtaining financing and lines of credit.
Occupationally, there are also vast differences between men and women entrepreneurs.
Although both groups tend to have experience in the field of their ventures, men more often
have experience in manufacturing, finance, or technical areas. Most women, in contrast,
usually have administrative experience that is limited to the middle-management level, often in
service-related areas.
In terms of personality, there are strong similarities between men and women entrepreneurs.
Both tend to be energetic, goal oriented, and independent. However, men are often-more
confident and less flexible and tolerant than women, which can result in very different
management style.
The backgrounds of men and women entrepreneurs tend to be similar, except that most women
are a little older when they embark on their ventures (35 to 40 versus 25 to 35), and their
educational backgrounds are different. Men often have studied in technical or business-related
areas, whereas women frequently have a liberal arts education. Also, many women business
owners are empty nesters or single and, as a result, need to be concerned about business
insurance as well as personal life insurance.
Support groups also provide a point of contrast between the two. Men usually list outside
advisors (lawyers, accountants) as their most important supporters, with the spouse being
second. Women list their spouse first, close friends second, and business associates third.
Moreover, women usually rely heavily on a variety of sources for support and information,
such as trade associations and women’s groups, whereas men are not as likely to have as many
outside supporters.
Finally, businesses started by men and women entrepreneurs differ in terms of the
nature of the venture. Whereas women are more likely to start a business in a service-related
area such as retail, public relations, or educational services, men are likely to enter
manufacturing, construction, or high-technology fields. The result is often smaller women-
owned business with lower net earnings. However, opportunities for women are greater than
ever, with women starting business at a faster rate than men in the fastest growing area of the
economy-the service area.

Non- entrepreneurial Profiles

In many literature, it has been stated that the characteristics of entrepreneur to be any thing of
the best value. However, there are also conditions in which entrepreneurial good qualities can
not be depicted. Some of the non entrepreneurial qualities are indicated below.
Shotgun Sam: An entrepreneurial type who quickly identifies new promising business
opportunities but rarely, if ever, follows through on the opportunity to create a successful new
venture.
Simplicity Sue: An entrepreneurial type who always thinks everything is a lot simpler and
feels one can create a successful business through one or two easy solutions. Usually a great
salesperson, this entrepreneur can make even the most improbable deal seem possible.
Prima Donna Paul: An entrepreneurial type who is so in love with his own idea that he feels
everyone is out to take his idea and take advantage of him.
Ralph the Rookie: An entrepreneurial type who is well grounded in theory but lacks real-
world business experience.
Meticulous Mary: A perfectionist entrepreneurial type who is so used to having things under
control that he cannot manage during a catastrophe and cannot handle periods of ambiguity and
chaos.

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Underdog Ed: An entrepreneurial type who is not comfortable used to actually transforming
the invention into a tangible business success. This entrepreneurial type likes to attend
seminars and discuss problems but does not like putting things into action, so a strong
managerial team.
Hidden Agenda Harry: This is an entrepreneur who does not have the right motives and
objectives for developing and expediting a new enterprise.
Inventor Irving: An inventor more than an entrepreneur, who is more concerned with the
invention itself rather creating and expediting a business

Factors Affecting Entrepreneurial Development-Barriers

Entrepreneurial problems are divided into two groups: External and Internal. External
problems are those which usually result from factors beyond the control of the entrepreneur
like political, social, technological, and other related problems; while internal problems are
those which are not influenced by external forces. The internal forces affecting entrepreneurs
relate to organization, structure, production channel, distribution channel, technical know how,
training, industrial relation and inadequacy of management etc. However, both kinds of
problems are not mutually exclusive, they are co-related.

Management Deficiency: It could be said that management deficiency is one of the biggest
reasons for poor performance of small scale units. In many cases it did not have any prior
training or back ground in management of their enterprises and were adverse to innovations
and changes. In the beginning of business development management problem may not so
critical but with growing sophistication and modernization of market requirements for the
items produced by the small-scale sector. It has become very important for small
entrepreneurs to employ modern of management be it in the field of advanced technology or
marketing.

Limited Access to Finance: Financial inadequacy is one of the most inhibiting factors in the
growth of entrepreneurship.
Limited access to market: Another important factor in the development of entrepreneurship is
the availability of market for the products offered. Entrepreneurs face over all limitations on
penetrating and servicing their markets. The cost of penetrating the existed or the new market
is relatively high for the newly developed business of an entrepreneur.
Political Factors: A variety of forces can be at work in the political arena of an entrepreneurial
environment. Entrepreneurs more and more must anticipate and adjust to changes in regulation
directives and laws form various levels of government and governmental agencies.
Other factors: There are many factors that are associated with the entrepreneurs themselves,
the society in which their businesses are operating and factors related to government.

CHAPTER FOUR

Creativity and the Business Idea

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Sources of new ideas for Entrepreneurs

Ideas can be conceived in one’s mind from various sources during an individual interaction
with/exposure to environment. Some of the more frequently used sources of idea are
 consumers
 Existing companies
 Distribution channels
 Federal government
 Research and development

1. Consumers– the potential consumer should be the final focal point of ideas for the
entrepreneurs. The attention to inputs from potential consumers can take the form of
informally monitoring potential ideas or needs or formally arranging for consumers to have an
opportunity to express their concerns. Care needs to be taken to ensure that the new idea or the
needs represents a large enough market to support a new venture.

2. Existing Companies– with the help of an established formal methods potential

entrepreneurs and intrapreneurs can evaluate competitive products & services on the market
which may result in new and more market appealing products and services.

3. Distribution channels– members of the distribution channels are familiar with the needs of
the market and hence can prove to be excellent sources of new ideas. Not only do the channel
members help in finding out unmet or partially met demands leading to new products and
services, they also help in marketing the offerings so developed.

4. Government– it can be a source of new product ideas in two ways firstly, the patent office
files contain numerous product possibilities that can assist entrepreneurs in obtaining specific
product information, and secondly, response to government regulations can come in the form
of new product ideas.

5. Research & development– Entrepreneur’s own R&D is the largest source of new idea. A
formal and well-equipped research and development department enables the entrepreneur to
conceive and develop successful new product ideas.

Method of generating business idea

Even with a wide variety of sources available, coming up with an idea as the basis for a new
venture can still be a difficult problem. The entrepreneur can use several methods to help
generate and test new ideas including focus groups, brainstorming and problem inventory
analysis

The following are some of the key methods to help generate end test new ideas:

1. Focus Groups – these are the groups of individuals providing information in a

structural format. A moderator leads a group of people through an open, in-depth discussion
rather than simply asking questions to solicit participant response. Such groups form comments
in open-end in-depth discussions for a new product area that can result in market success. In
addition to generating new ideas, the focus group is an excellent source for initially screening
ideas and concept.

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2. Brainstorming – it is a group method for obtaining new ideas and solutions. It is

based on the fact that people can be stimulated to greater creativity by meeting with others and
participating in organized group experiences. The characteristics of this method are keeping
criticism away; free wheeling of idea, high quantity of ideas, combinations and improvements
of ideas. Such type of session should be fun with no scope for domination and inhibition.
Brainstorming has a greater probability of success when the effort focuses on specific product
or market area.

3. Problem inventory analysis– it is a method for obtaining new ideas and solutions
by focusing on problems. This analysis uses individuals in a manner that is analogous to focus
groups to generate new product areas. However, instead of generating new ideas, the
consumers are provided with list of problems and then asked to have discussion over it and it
ultimately results in an entirely new product idea. The entrepreneur is not limited by only the
three methods presented in this article.

There are other creative problem solving methods and techniques that are also available.

Summary: Even with a wide variety of sources available, coming up with an idea as the basis
for a new venture can still be a difficult problem. The entrepreneur can use several methods to
help generate and test new ideas including focus groups, brainstorming and problem inventory
analysis.

The entrepreneur is not limited by only the three methods presented in this article. There are
other creative problem solving methods and techniques that are also available.

PROBLEM SOLVING TECHNIQUES /CREATIVE PROBLEM SOLVING

Creative problem solving is a method for obtaining new ideas focusing on the parameters.
Brainstorming
The first technique, brainstorming, is probably the most well known and widely used for both
creative problem solving and idea generation. It is an unstructured process for generating all
possible ideas about a problem within a limited time frame through the spontaneous
contribution of participants. All ideas, no matter how illogical, must be recorded, with
participants prohibited from criticizing or evaluating during the brainstorming session.
Reverse brainstorming
Similar to brainstorming, but criticism is allowed and encouraged as a way to bring out
possible problems with the ideas.
Synectics
Synectics is a creative process that forces individuals to solve problems through one of four
analogy mechanisms: personal, direct, symbolic and fantasy. This forces participants to
consciously apply preconscious mechanisms through the use of analogies in order to solve
problems.
Gordon method
Gordon method is a method of developing new ideas when the individuals are unaware of the
problem. In this method the entrepreneur starts by mentioning a general concept associated
with the problem. The group responds with expressing a number of ideas.
Checklist method
Developing a new idea through a list of related issues is checklist method of problem solving.
Free association method
Developing a new idea through a chain of word association is free association method of
problem.
Forced relationship

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Forced relationship is the process of forcing relationship among some product combination. It
is technique that asks questions about objects or ideas in an effort to develop a new idea.
Collective notebook method
It is method in which ideas are generated by group members regularly recording ideas.
Heuristics
It is method of developing a new idea through a thought process progression.
Scientific method
This is a more structured method of problem solving, including principles and rules for concept
formation, making observations and experiments, and finally validating the hypothesis.
Value analysis
Value analysis is developing a new idea by evaluating the worth of aspects of ideas.
Attribute listing
This is an idea finding technique that requires the entrepreneur to list the attributes of an item
or problem and then look at each from a variety of viewpoints.
Matrix charting
Matrix charting is a systematic method of searching for new opportunities by listing important
elements for the product area along two axis of chart and then asking questions regarding each
of these elements.
Big dream approach
Developing a new idea by thinking about constraints is big-dream approach of problem
solving.
Parameter analysis
Parameter analysis is developing a new idea by focusing on parameter identification and
creative synthesis
Opportunity Identification
Alternative Business Ownership Opportunities
People become entrepreneurs by launching an entirely new business (starting from scratch), by
purchasing an existing firm (acquisition), or by acquiring a franchised outlet (franchising).
Each of these ownership opportunities presents the entrepreneur with different set of
advantages and challenges.

A. Creating an entirely new business (starting from scratch). Building

businesses from scratch (a start up) is the route most often thought of when discussing new-
venture creation. This requires the entrepreneur to identify a genuine business opportunity,
secure the necessary financial resource to create the venture, acquire labor, material and capital
resources, create an organizational structure by defining the authority and responsibility of
each person and position in the enterprise, and launch the business with the intention of
creating an enterprise which has its own public image and reputation.

The first impression most people have about this alternative is that is difficult and involves a
whole lot of hard work. But in spite of its difficulty, it has the following advantages:
 avoid undesirable precedents, policies, procedures, and legal commitments of existing
firms
 make the decision concerning the ideal location, equipment, products or services,
employees, suppliers, and bankers by him/herself
 developed a new product or service that necessitates new type of business
 Create flexibility in deciding where his/her products or services will be marketed;
where the business will be located and individuals to be hired
 No preexisting equipments and inventory;

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 Credit connections, Suppliers, Customer contacts and relationships are new so that
they can be evaluated and chosen according to the entrepreneur’s needs
 The entrepreneur can create a business that reflects his personality
 There is no previous ill will to compete with
 It gives the entrepreneur an opportunity to provide a unique product or service to the
market
 are not predetermined; which means
Disadvantages of starting from scratch – although this alternative has the above
mentioned advantages, it poses the following problem:
 Obtaining credit or getting investors for the business may be more difficult
because the business is not yet established
 It will take more time and energy than buying an existing business
 It takes much time to create a customer base that has confidence in the company
product or service.
 It is not certain that the business opportunities will be both operationally and
marketwise feasible
 Estimating costs and making other forecasts become very difficult.
Process of creating a new business from scratch. Creating an entirely new
business is a complex process that involves a number of important and highly interrelated
activities and decisions that need to be performed step by step.
i. Identifying a genuine business opportunity. The first in the business creation process is to
identify a good business opportunity. Entrepreneurs can generate a business idea from
various sources that might include: previous work experiences, personal interests/hobbies,
education/courses, chance happenings…and so on. Whatever the source of new idea
maybe, it can fall under any of the following three general categories:
1. Providing customers with a product or service that does not exist in their market
but already exists somewhere else
2. in practicing a technically new process
3. concepts for performing old functions in a new and an improved way
What ever type of business opportunity is involved, it must be genuine.
ii. Developing a business plan – this is an important step in the venture creation process
which is usually overlooked by most entrepreneurs. Developing a business plan helps the
entrepreneur to critically analyze the proposed venture to determine the genuineness of the
process, and develop various strategies that enable the entrepreneur exploit the opportunity
and deal with problems.
iii. Implementing the business plan – the third step in the new venture creation process is to
implement the plan by acquiring the necessary resources, hiring employees, and creating an
organizational structure
iv. Managing the enterprise created – at this stage, most of the decisions to be made by the
entrepreneur will become routine. The entrepreneur will be responsible for supervising the
day to day operation of the new enterprise. He/she is also expected to deal with issues
concerning expansion, merger and acquisitions, legal challenges… and so on.

B. Buying an existing business (acquisition). Entrepreneurs may decide to buy an

already existing business as an alternative to starting a new business from scratch. But this
decision must be preceded by a thorough analysis of the advantages and disadvantages of
this alternative.
Advantages of acquisition. Acquiring an existing business offers the following advantages
to the entrepreneur:
 It reduces the time and cost associated with establishing a new business

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 It reduces the uncertainty involved in launching an entirely new venture. A

successful going concern has demonstrated its ability to attract customers, to
control cost, and make a profit
 An existing business may be available at what seems to be a bargain price
 Existing records of the business are on hand and can be used as guides in running
the business
 The buyer of an existing business typically acquires its personnel, inventories,
physical facilities, established banking connections, and ongoing relations with
suppliers
 A chance to eliminate one competitor

Disadvantages of acquisition –
 Bad will may exist about the business management
 Current employees of the business may be incompetent, and may not be able to
adapt to the new management style.
 The business may be overpriced
 There may be acquisition of outdated inventory and obsolete equipments
 There may be undesirable legal commitments with suppliers, trade unions,
customers, or employees
 It may take a long time to change the personality of the business, especially, if it is
bad
The acquisition process – acquiring an existing business involves the following steps:

i. Finding a business to buy – an entrepreneur can make use of different sources to locate a
business that is for sale which might include business brokers and realtors, advertising,
local chamber of commerce, trade publications and newspapers, trade suppliers,
accountants, attorneys, bankers…and so on.
ii. Evaluating the existing business to be bought. The entrepreneur needs to have certain
information about:
 Reason for selling the business
 The business’s past performance and reputation
 The presence of any unfavorable legal obligations
The owner of the business can be a good source of information; but it is advisable that the
entrepreneur uses additional sources like customers, bankers, suppliers, employees, and
thoroughly investigating the internal records of the venture. When evaluating the business, it
is very important to seek the assistance of external professionals like accountants and lawyers.
As part of the evaluation process, the entrepreneur is expected to estimate the value of the
business on the basis of the book values of plant assets, earning methods and in consideration
of discounted future earnings.
iii. Negotiating the purchase price and terms. once the entrepreneur has some idea about the
probable selling price of the business, he/she can safely initiate the negotiation process-the
primary objective, of course, being to secure a low selling price. But focusing on the final
selling price of the business should not divert the attention of the entrepreneur from other
elements of the sale. These elements include terms of payment, taxes, loan arrangements…
etc.
iv. Closing the deal – as in the purchase of real estate, the purchase of a business is closed at a
specific time. The closing may be handled by a title company or an attorney. Preferable,
the closing should occur under the direction of an independent third party. The buyer
should never go through a closing with out extensive consultation with a qualified attorney.

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A number of important documents are completed during the closing. These include a bill
of sale, certifications as taxing and other governmental authorities, and agreements
pertaining to future payments and related guarantees to the seller.

C. Franchising. it is the third business ownership alternative available for an entrepreneur

and can be defined as an arrangement where by the manufacturer or sole distributor of a
trade marked product or service gives exclusive rights of local distribution to independent
retailers in return for their payment of royalties and conformance to standardized operating
procedures. The party offering the franchise is called the franchisor while the franchisee
is the party who purchases the franchise. The legal arrangement between these two parties
is called the franchise.
Types of franchising. We can classify franchises by using the nature of the franchising
agreement or the parties involved in the agreement.
Types of franchising arrangements – there can be at least four types of different franchising
arrangement.
Product and trade named franchising – it exists when a franchisor gives a franchisee the
right to use widely recognized product or trade name. Examples include gasoline service
stations and soft drink bottlers.
Business format franchising – this arrangement provides the franchisee an entire marketing
system and an ongoing process of assistance and guidance. Fast food outlets and business
services are examples of this type of franchising.
Piggyback franchising – refers to the operation of a retail franchise with in the physical
facilities of a host store. Examples would be a cookie franchise doing business in side a fast
food outlet or a car phone franchise with in an automobile dealership.
Master franchising (sub franchising) – a master franchisor is an individual who has a
continuing contractual relationship with a franchisor to sell its franchises. This independent
businesses person is a type of a sales agent. Master franchisors are responsible for finding new
franchisees with in a specified territory.
Types of franchising systems – depending on the parties involved in a franchising
arrangement and the level they occupy in the value chain; there are three different franchising
systems:
System A franchise – in this system a producer or creator of a product gives franchising rights
to a wholesaler. This system is common in the soft drink industry. Examples include Coca
Cola and Dr Pepper…etc.
System B franchise – in this case, the franchisor is a wholesaler in stead of a producer. This
system prevails among super markets and general merchandising stores.
System C franchise – this is a widely used system, and the franchisor is a producer/creator
while the franchisee is a retailer. Automobile dealerships and gasoline service stations are
prototypes of this system.

Advantages and disadvantages of franchising. Franchising is an alternative business growth

and expansion strategy for the franchisor while it can be alternative business ownership
opportunity for the franchisee. Hence, the franchisee’s and the franchisor’s.

1. Advantages of franchising to the franchisee.

a. Enhances product acceptance –accepted name, product, or service.
b. Providing formal training and management expertise
c. getting financial assistance from franchisor for various

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d. Marketing advantages: it provides details of the profile of the target customer and the
strategies and constantly evaluating market condition.
e. Operating and structural controls: quality control of products and services and establishing
effective managerial controls can be maintained. Standardization in the supplies, products, and
services can be met.

2. Advantages of franchising to the franchisor – in addition to the advantages franchising

offers the franchisee, the franchisor also benefits a lot from it:
Reducing the risk and cost of expansion. It allows the venture to expand quickly using little
capital.
Cost advantages: The franchisor can purchase supplies in large quantities, thus achieving
economies of scale and produce parts, accessories, packaging, and raw materials in large
quantities, then in return sell these to the franchisees.
Franchise revenues. franchising provides the franchisor with a lot of revenue in the form of
initial franchise fees, royalties fees, sales of products and supplies, real estate income, fees for
services like bookkeeping, purchasing contracts, legal assistance, marketing research…etc, and
promotional fees.
3. Disadvantages of franchising to the franchisee
 Cost of franchise – franchise fee and other costs like royalty payments, promotion
costs, inventory and supplies cost, and building and equipment costs. When these costs
are considered with the franchise fee, the total investment may look surprisingly large.
 Restriction on growth – many franchise contracts restrict the franchisee to a defined
sales territory, there by eliminating this form of growth.
 Loss of absolute independence – Even though the franchisor’s regulation of business
operations may be helpful in assuring success, it may be unpleasant to an entrepreneur
who cherishes independence

4. Disadvantages of franchising to the franchisor-

 difficult to find quality franchisees
 Poor management, in spite of all the training and control, can still cause individual
franchisees failures and, therefore, can reflect negatively on the entire franchise system.
 As the number of franchises increases, tight controls become more difficult.

The franchising process – the quality of franchising as an ownership opportunity highly

depends on the image, reputation, and historical success of the franchisor, and the kind of
rights and privileges granted to the entrepreneur by a franchise contract. Therefore, the
entrepreneur, before entering into a franchise arrangement with anyone, must carefully
evaluate his/her options and follow certain procedures.
a. Locating a franchise opportunity – the sources of information in this regard can be
advertisements in news papers and magazines, existing franchise owners, or other publications
and personal contacts.
b. Evaluating the franchise offer –it must be carefully evaluated. Doing so requires a lot of
information which can be obtained from the franchisor himself, existing franchisees,
governmental and trade sources, business magazines, and franchise consultants.
There are certain areas that the entrepreneur should focus on when evaluating a franchise offer.
These include the following:
 Business experience of franchisor
 Experience of the directors and chief executives of the franchisor
 Litigation history of the franchisor
 Bankruptcy history of the franchisees
 Initial funds required to be paid by a franchisee

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 Recurring funds required to be paid by a franchisee

 Financing arrangements
 Restriction on sales
 Termination, cancellation, and renewal of the franchisee
 Training programs
 Financial information concerning the franchisor…etc.
In most countries, the franchisor is legally obliged to provide the franchisee with a disclosure
statement that clarifies the above issues.
c. Initiating the negotiation – All the services and types of assistance offered in a franchise
contract, most of the activities such as accounting, leasing, purchasing, employee training, and
maintenance, Locations, obligations including franchise fees, royalty schedules, brand
management inventory, use of proprietary patents, copyrights, and trademarks, and legal rights
of both parties etc are subject to negotiations.

d. Closing the deal – few franchise contracts are signed by the prospective franchisee without
due diligence and legal assistance. Subsequent to initial meetings with the franchisor,
prospective franchisees will take the negotiated proposal to a professional accountant or
attorney experienced in due-diligence research for through review.
This is not act of mistrust by the franchisee, but only sensible behavior, and most reputable
franchisors will insist on a legal review of the proposal.

CHAPTER FIVE
Small and Medium Enterprises

Definition: we can have different definitions depending on

 the size of the industry we are talking about,
 the purpose of the definition, and
 the country’s the classification criteria
In any way, small businesses can be defined on the basis of size of working capital, number of
employees, asset size, annual sales, market share, and operational domain. To this end, for the

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sake of this discussion, small business is a business which employs less than 100 employees, is
owned by one or few individuals, with the exception of the marketing function has
geographically localized operations, and does not dominate its industry. These small
businesses are found in any type of business like manufacturing, service or merchandising
areas. They also possess various characteristics such as
 Management of the firm is independent, usually managers are owners
 An individual or small group supplies the capital and holds ownership.
 The area of operation is usually local and the workers and owners live in the same
country. But markets are not always local.
 The enterprise is smaller than others in the industry. This measure can be in terms
of sales volume, number of employees or other criteria.
 It is free of legal or financial ties compared to large business enterprise
 It qualifies for small business income tax rate or can be free of tax.

Nowadays, small businesses increase from time to time. This is because

i. Big businesses offer less job security: many employees are dissatisfied with working for
large organization that are impersonal and where the efforts of employees often go
unrecognized.
ii. Many large companies and government departments are being reduced in size and creating
opportunities for sub-contracting work and consulting services. Former employees often
leave their employment and start small business to provide these services.
iii. It is easier to start small business in references to each source: financial, material, human,
information, market etc. Country’s economy grows and unemployment decrease when
small businesses that require less investment enter into activities.
iv. According to researches indication, person who are self employed earn almost 50% more
on average than the persons who are employees

Importance of small business. Athough small business pose a number of challenges to the
entrepreneur and have certain limitations, a countries economy can not do with out them.
This is because small businesses have special features that make them superior over large
ones in certain aspects of business activities.
First, let’s see the special contribution small business make to a country’s economy and
then we will try to see why it is advisable for an individual to start small when embarking
on entrepreneurial ventures.
 Providing job opportunities: this is one ways in which small business contribute to a
country’s economy. In fact, in most countries, the number of new jobs created by small
business is significantly higher than created by large businesses. For example, in the US,
50% the employment comes from small businesses and each year small business account
for about 80% of the new jobs created.
 Introducing innovations: new products which originate in the research laboratories of big
businesses make a valuable contribution to our standard of living. There is a question,
however, as to the relative importance of big businesses in achieving the truly significant
innovations. Usually, the research departments of big businesses tend to emphasize the
improvement of existing products. Records show that many scientific breakthroughs
originated with independent inventors and small organizations.
 Stimulating economic competition: small business by definition is one that does not
dominate its industry, and competition will be closer to perfection when the market is full
of small businesses that can not exert a significant impact on he market price and supply
when operating individually.
 Aiding big business: the fact that some functions are more expertly performed by small
business enables small businesses to contribute to the success of larger ones. Especially,

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there are two types of business activities that are performed by small businesses more
economically and effectively. First, the distribution functions. Few large manufactures of
inexpensive consumer products find it desirable to own wholesale and retail out lets.
Second, supply functions. Most small businesses act as supplies and sub contractors for
large firms.
 Producing goods and services: we depend highly on small businesses for the provision of
most goods and services we need in our lives. In fact, if it was not for small businesses, we
would have not been able to find the goods and services we need at the time we need them,
in a convenient place, and at the quantity we prefer.
In addition to the above general advantages small business offer to a country’s economy, they
have certain benefits to the individual entrepreneur. These include:
 Small b businesses require less time, energy, and financial resources to establish
 They also provide the entrepreneur with greater autonomy, and independence because
the money needed to start small businesses is relatively small the entrepreneur can raise
most of it by him/herself with out relinquishing significant ownership interest and
control.
 In addition to these, small businesses help the entrepreneur develop his skill in running
organizations as he is expected to perform different kinds of activities concerning the
business. These include: business planning, investment and finance, customer the
relations, personnel and human resources, cash control and bookkeeping, inventory
control, purchasing, marketing and sales, and leadership.

3. Risks and causes of failure associated with small business - although a lot of new small
businesses are established in most countries, the success rate is very minimal. This can be
attributed to a lot of factors, which can be generally classified in to two categories: etemal
factors of failure and personal factors of failure.
Economic business cycles, fluctuating interest rates, interrupted supplies, labor market trends,
inflation, government regulations, and unstable financial markets are some of the external
factors t hat might bring about small business failure. Although all business /small or big/ are
subject to these risks, their effect on small business is far more serious than any other business.
This is because the resources a small business owner controls are very limited which makes it
very difficult to deal with these situations.
On the other hand there certain problems that can be attributed to personal weaknesses and
limitations of the entrepreneur. These include:
 Inexperience: too often, entrepreneurs launch their enterprises with out having sufficient
experience to succeed. Inexperience be translated to mean a lack of technical skills or
management acumen.
 Arrogance: many small business person-particularly inventors and innovative
entrepreneurs with new products-become egocentrically engrossed in their ventures. They
become consumed with their own brilliance, convinced beyond reason (often with out
market research) that their bright idea will change the world-it’s got to see! Their arrogance
will not allow tem to take advice from others.
 Mismanagement: humble entrepreneurs steeped in experience can still go under simply
mismanagement of resources; they simply make bad decisions in critical situations. These
may include:
 Over investment on fixed assets: when starting or expanding a business, it is
tempting to buy facilities and equipment rather than lease or subcontract. Every
one likes to own assets, but greater investment on fixed assets means less flexibility
to adjust to adverse conditions.
 Poor inventory control: purchasing too much inventory increases the risk of low
turnover and obsolescence. Having too little inventory undermines customer

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satisfaction and sales. Buying the wrong inventory, or buying at the wrong time,
evaporates cash. In each scenario, the business ties up high powered cash in non-
earning assets, and the inventory items can rarely be disposed of for more than a
fraction of their costs in an emergency. The result is that a business “purchases”
itself in to insolvency.
 Poor financial control: as a result of poor control over credit sales, poor
bookkeeping, and advances and regular payments for inventory purchases, loan
payments, lease payments, utility costs, telephone bills, and payroll expenses.
 Poor business philosophy: An unfortunate aspect of many business failures is that
too often individual owner’s priorities get in the way of sound business practices.
In the least obtrusive way, entrepreneurs may not be fully committed to the long
hours required to make a venture success full.
 Lack of planning: most entrepreneurs frequently underestimate the importance of
planning in business. However, not planning means not anticipating future
problems and challenges and not being prepared for them in advance. This surely
leads the entrepreneur in to making mistakes and facing problems which could have
been easily avoided through sound planning.
Legal Issues for the Entrepreneur
Understanding the legal issues involved in entrepreneurship and taking appropriate measures
protect the entrepreneur from later legal complications which might hinder the smooth running
of the new business. Some of the legal issues the entrepreneur should address in starting a new
business are discussed below.
Intellectual Property: it refers to exclusive right given to the entrepreneur to benefit from
his/her innovations and creations; and this includes: patents, trade marks, copy rights, and trade
marks. These are very important assets to the entrepreneur.
A. Patents: A patent is a contract between the government and an inventor. In this contract,
the inventor agrees to disclose his/her invention in return for grants by the government of
Ethiopia under the proclamation No. 123 in 1995 GC.
According to the proclamation in order to be granted a patent, an invention must fulfill three
conditions:
 It must be new; it should never have been published or publicly used before.
 It should be capable of industrial application: it must be something which can be
industrially manufactured or used.
 It must be "non-obvious": it should not be an invention which would have occurred to
any specialist working in the relevant field.

On the other hand, the proclamation excludes the following from patentability:
1. Inventions contrary to public order or morality,
2. Plant or animal varieties or essentially biological processes for the production of plants
or animals,
3. Schemes, rules or methods for playing games or performing commercial and industrial
activities and computer programs,
4. Discoveries, scientific theories and mathematical methods,
5. Methods for treatment of the human or animal body by surgery or therapy as well as
diagnostic methods practiced on the human or animal body.
Rights of a patentee include: the patentee have the right to make, use and exploit the patented
invention in any other way.
Any person who wants to use the patented invention has to get the authorization of the owner.
However, the patentee does not have import monopoly right over the products of the patented
invention in Ethiopia.

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There are certain limitations of rights of the patentee included in the proclamation:
 Acts done for non-commercial purposes,
 The use of the patented invention solely for the purposes of scientific research and
experimentation,
 The use of patented articles on aircraft, land vehicles or vessels of other countries
which temporarily or accidentally enter in to the air space, territory or waters of
Ethiopia,
 Acts in respect of patented articles which have been put on the market in Ethiopia by
the owner of the patent or with his consent.
 The use of the patented invention for national security, nutrition, health or for the
development of vital sectors of the economy, subject to payment of an equitable
remuneration to the patentee.
The duration of a patent is 15 years which may be extended for a further period of five years if
proof is furnished that the invention is properly worked in Ethiopia.
The Ethiopian government grants patents for machines, compositions of matters such as
chemical compounds to be number of legal conditions. Patents are also available for
significant improvements on previously invented items and for certain types of industrial
designs. Currently, the Ethiopian Science and Technology Institution is the central
government office responsible for the determination of the validity of patents.

Importance of Patents: having laws and regulations concerning patent and other intellectual
properties benefits both the country and the individual entrepreneur in a number of ways:
 It create favorable conditions in order to encourage local inventive and related activities
 It encourages the transfer and adaptation of foreign technology.
 It fulfills the nation’s multidimensional demand for harmonious scientific and
technological progress.
Application to get a patent: to obtain a patent in Ethiopian an individual must write an
application to the Ethiopian Science and Technology Institution. The application should
have three parts:
a. Introduction: it should contain the back ground and advantages of the invention and
the nature of problems that it overcomes. It also should clearly state how the invention
differs from existing offerings.
b. Description of the invention: the application should also contain a brief description of
the drawings that accompany it. Then, this should be followed by a detailed
description of the invention, which may include engineering specifications, materials,
components, and so on, that are vital to the actual making of the invention.
c. Claims: claims serve as the criteria by which any infringements will be determined.
They serve to specify what the entrepreneur is trying to patent.
Disputes: Occasionally, several people apply for a patent for the same invention. Under the
Ethiopian law, the person who first invented the item receives the patent. If it is unclear who
invented the item first, the ESTI decides who gets the patent in a proceeding called
interference. The losing party can appeal the decision in the court of appeals. Most other
countries grant the patent to who ever first applied for the patent protection.
Infringement: It refers to the act of making, using or selling a patented invention with out the
consent of the patent holder. Any one who infringes a patented invention is susceptible to a
legal action by the patentee-the holder of the patent. The infringer might argue that the patent
should not have been given in the first place and it will be up to the court to decide whether or
not the patent is valid. Another defense that can be used by the infringers is the first sell
principle. Under this principle, once the patentee sells a particular item, the purchaser of that
item may use it or resell it with out being considered an infringer.

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Options to avoid infringement: to avoid risks that are associated with patent infringement,
the entrepreneur should follow the following procedures:
 Assess whether the item is patented or not
 If not patented, file for patent
 If a patent exists, determine whether the patent is new or nearly expired
 If it is nearly expired, plan for introduction when the patent expires
 If it is new, determine if other expired patents exist that accomplish the same purpose
 If yes, develop the product using other designs
 If no, see if it is possible to introduce some changes in the product and commercialize
it with out infringement
 If this is not possible, seek a license from the patentee
 If it is possible, produce using the modified version
B. Trade marks:
A trademark is a word, name, symbol or device which is used in trade with goods to indicate
the source of the goods and to distinguish them from the goods of others. A service mark is the
same as a trademark except that it identifies and distinguishes the source of a service rather
than a product. The terms "trademark" and "mark" are commonly used to refer to both
trademarks and service marks.

Trademark rights may be used to prevent others from using a confusingly similar mark, but not
to prevent others from making the same goods or from selling the same goods or services
under a clearly different mark. Trademarks which are used in interstate or foreign commerce
may be registered with the Patent and Trademark Office. The registration procedure for
trademarks and general information concerning trademarks is described in a separate pamphlet
entitled "Basic Facts about Trademarks".

It may be a word, symbol, design, or some combination of such, or it could be a slogan or

even a particular sound that identifies the source of the sponsorship of certain goods or
services. Unlike the patent, trade mark can last indefinitely, as long as it continues to perform
its indicated function.

Most countries of the world legally protect trade marks. The current Ethiopian law also gives
companies the right to register their trade marks and have them protected. Trade mark
registration is carried out by the Ministry of Inland Revenue; and to be eligible for registration
the mark must be used in internal or foreign commerce.

The owner of a trade mark may permit others to use it by granting them a license in return for a
royalty’s fee. The owner of the trade mark must supervise the licensees to make sure that they
provide a consistent type and quality o goods and services. Failure to supervise can result in
loss of rights to the trade mark.

Some times the public may stop thinking of the trade mark as a brand name and begins to think
of it merely as a general category of goods. The trade mark owner has a responsibility to make
sure that this does not happen. If the trade mark owner fails to do so, he/she will lose his/her
legal rights to the trade mark because the source of the good or service can no longer be
identified.

The law forbids the use of some one else’s trade mark in a way that confuses the public about
the source of the product. And, anyone who does this is considered an infringer and can be
sued by the trade mark owner.

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Trademark Directive
It is issued in 1986 with the following objectives:
1. To centrally deposit trademarks which are used by local and foreign enterprises to
distinguish their goods or services?
2. To distinguish the products or services of one enterprise from those of other enterprises
and prevent consumers from being victims of unfair trade practices.
3. To provide information on trademark ownership and right of use when disputes arise
between parties;
4. To provide required information on trademarks to government and individuals.
Protection is granted after publication of cautionary notice.

C. Copy Right: It refers to the right given to prevent others from printing, copying, or
publishing, any original work of authorship. The protection in a copy right does not
protect the idea it self, and thus it allows some one else to use the idea or concept in a
different manner.
D. Trade Secrets: In certain instances, the entrepreneur may prefer to maintain an idea or
process as confidential and sell or license it as a trade secret. The trade secret will have a
life as long as the idea or process remains a secret. Employee involved in working with
an idea or process may be asked to first sign a confidential information agreement that
will protect against their giving out the trade secret either while an employee or after
leaving the organization. The entrepreneur should hire an attorney to help draw up any
such agreement.

The holder of the trade secret has the right to sue any signee who breaches such an
agreement. What or how much information to give to employees is difficult to judge
and is often determined by the entrepreneur’s judgment. Historically, entrepreneurs
tend to protect sensitive or confidential company information form any one else by
simply not making them privy to this information. Today, there is a tendency to take
the opposite view that the more information entrusted to employees, he more effective
and creative employees can be. The argument is that the employees can be creative
unless they have a complete understanding of what is going on in the business.

 Contracts: A contract is a legally enforceable agreement between two or more parties as

long as certain conditions are met. It is very important for the entrepreneur to understand
the fundamental issues related with contracts. Conditions that must be fulfilled for a
contract to be legally enforceable:
 Capacity: the parties in a contractual agreement must have the legal
capacity to participate in contracts. A person is legally capable of singing
contracts if his 18 years of age or older, sane, and not judicially interdicted.
 Consent: for a contract to be enforceable it must be made out of the consent
of the parties involved; and this includes agreement and intention.
 Object: it refers to obligation to perform or pay; that is to deliver the price
of the said thing or object. The object of a contract must be legal and
possible. You can not enter in to a contract to do the impossible or illegal
things.
 Form: contracts can be either written or oral depending on the nature of the
agreement.

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CHAPTER SIX
Developing and Using Business Plan

Introduction

The business plan is probably the single most important document to the entrepreneur at the
start-up stage. Potential investors are not likely to consider investing in a new venture and
potential lenders are not also likely to extend their credit services until the business plan has
been completed. In addition, the business plan helps maintain a perspective for the
entrepreneur of what needs to be accomplished. It is extremely important, especially in the
early stages of any new venture when the entrepreneur will need to prepare a preliminary
business plan. The business plan will become finalized as the entrepreneur has a better sense of
the market, the product or service to be marketed, the management team and the financial need

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of the venture. A the venture evolves from an early start-up to mature business planning will
continue as management seeks to meet its short-term or long-term business goals

For any given organization, it is possible to have financial plans, marketing plans, human
resources plans, production plans and sales plans to list some among others. Plans may be
short-term or long-term, or they may be strategic or operational. Plans will also differ in scope
depending on the types of business or the anticipated size of the start-up operation.

Even though they may serve different functions, all of these plans have one important purpose:
to provide guidance and structure to management in a rapidly changing market environment.

Objectives:

 At the end of this chapter, the students will be able to:

 Define what a business plan is all about
 Know by whom the business plans should be prepared
 Understand the scope and values of the business plan to the investors, lenders, suppliers
and customers

 Identify the major components of a business plan

The nature of business plan

What is the business plan?

The business plan is a written document prepared by the entrepreneur that describes all the
relevant external and internal elements involved in starting a new venture. It is often an
integration of functional plans such as marketing, finance, manufacturing, and human
resources. It addresses the integration and coordination of effective business objectives and
strategies when the venture contains a variety of products and services. It also addresses both
short-term and long-term decision making for the first three years of operation. Thus, the
business plan- or, as it is sometimes referred to, the game plan or road map-answers the
questions, where am I now? Where am I going to? How will I get there? Potential in vestors,
suppliers, and even customers will request or require a business plan.

If we think of the business plan as a road map, we might better understand its significance.
Let's suppose you were trying to decide whether to drive from Addis Ababa to different
regional towns (mission or goal) in a motor home. There are a number of possible destinations;
each requiring different time frames and costs. Like the entrepreneur, the traveler must make
some important decisions and gather information before preparing the plan.

The travel plan would consider external factors such as emergency car repair, weather
conditions, road conditions, sights to see, available campgrounds, and so on. These factors are
basically uncontrollable by the traveler but must be considered in the plan, just as the
entrepreneur would consider external factors such as new regulations, competition, social
changes, changes in consumer needs, or new technology.

On the other hand, the traveler does have some idea of how much money is available, how
much time he or she has, and the choices of highways, roads, campgrounds, sights, and so

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forth. Similarly, the entrepreneur has some control over manufacturing, marketing, and
personnel in the new venture.

The traveler should consider all these factors in determining what roads to take, what
campgrounds to stay in, how much time to spend in selected locations, how much time and
money to allow for vehicle maintenance, who will drive, and so on. Thus, the travel plan
responds to three questions: Where am I now? Where am I going? How do I get there? Then
the traveler in our example--or the entrepreneur, the subject of our book-will be able to
determine how much money will be needed from existing sources or new sources to achieve
the plan.

As we emphasized in the introduction part of this chapter, a business plan is important to

address these questions across a multitude of products and services. The functional elements of
the business plan are discussed here.

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. Although they are not widely available in
underdeveloped countries like Ethiopia, some of the above sources can be found through
services offered by the Small Business Administration (SBA), Service Core of Retired
Executives (SCORE), Small Business Development Centers (SBDC), universities, and friends
or relatives. The Internet also provides a wealth of information as well as actual sample
templates or outlines for business planning. Most of these sources are free of charge or have
minimal fees for workshop attendance or to purchase or download any information. In many
instances entrepreneurs will actually 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.

Figure 7.1. A sample skill Assessment rating table

Skills Excellent Good Fair Poor

Accounting/taxes

Planning

Forecasting

Marketing
research Sales

People manage.

Product design

Legal issues

Organizing

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To help determine whether to hire a consultant or to make use of other resources, the
entrepreneur can make an objective assessment of his or her own skills. The above figure
(Figure 7.1) is an illustration of a rating to determine what skills are lacking and by how much.
For example, a sales engineer recently designed a new machine that allows a user to send a 15-
second personalized message in a greeting card. A primary concern was how best to market the
machine: as a promotional tool a firm could use for its distributors, suppliers, shareholders, or
employees; or as a retail product for end users. This entrepreneur, in assessing his skills, rated
himself as excellent in product design and sales, good in organizing, and only fair or poor in
the remaining skills. To supplement the defined weaknesses the entrepreneur found a partner
who could contribute those skills that were lacking or weak. Through such an assessment, the
entrepreneur can identify what skills are needed and where to obtain them.

Scope and value of the business plan

Who reads the plan?

Employees, investors, bankers, venture capitalists, suppliers, customers, advisors, and

consultants may read the business plan. Whoever is expected to read the plan can often affect
its actual content and focus. Since each of these groups reads the plan for different purposes,
the entrepreneur must be prepared to address all their issues and concerns. In some ways, the
business plan must try to satisfy the needs of everyone; whereas in the actual marketplace the
entrepreneur's product will be trying to meet the needs of selected groups of customers.

However, there are probably three perspectives that should be considered when preparing the
plan, first is the perspective of the entrepreneur, who understands better than anyone else does
the creativity and technology, involved in the new venture. The entrepreneur must be able to
clearly articulate what the venture is all about. Second is the marketing perspective. Too often,
an entrepreneur will consider only the product or technology and not whether someone would
buy it. Entrepreneurs must try to view their business through the eyes of their customer. Third,
the entrepreneur should try to view his or her business through the eyes of the investor. Sound
financial projections are required; if the entrepreneur does not have the skills to prepare this
information, then outside sources can be of assistance.

The depth and detail in the business plan depend on the size and scope of the proposed new
venture. An entrepreneur planning to market a new portable computer will need a
comprehensive business plan, largely because of the nature of the product and market. An
entrepreneur who plans to open a retail video store will not need the comprehensive coverage
required by a new computer manufacturer. A new e-commerce business however may require a
very different focus, particularly on how to market the website that will offer the goods and
services. Thus, differences in the scope of the Business plan may depend on whether the new
venture is a service, involves manufacturing, or is a consumer good or industrial product. The
size of the market, competition, and potential growth may also affect the scope of the business
plan.

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The business plan is valuable to the entrepreneur, potential investors, or even new personnel,
who are trying to familiarize themselves with the venture, its goals, and objectives. The
business plan is important to these people because:

 It helps determine the viability of the venture in a designated market.

 It provides guidance to the entrepreneur in organizing his or her planning activities.
 It serves as an important tool in helping to obtain financing.

Potential investors are very particular about what should be included in the business plan. Even
if some of the information is based on assumptions, the thinking process required to complete
the plan is a valuable experience for the entrepreneur since it forces him or her to assess such
things as cash flow and cash requirements. In addition, the thinking process takes the
entrepreneur into the future, leading him or her to consider important issues that could impede
the road to success.

The process also provides a self-assessment by the entrepreneur. Usually, he or she feels that
the new venture is assured of success. However, the planning process forces the entrepreneur
to bring objectivity to the idea and reflect on such questions as: "Does the idea make sense?
Will it work? Who is my customer? Does it satisfy customer needs? What kind of protection
can I get against imitation by competitors? Can I manage such a business? Whom will I
compete with?" This self-evaluation is similar to role playing, requiring the entrepreneur to
think through various scenarios and consider obstacles that might prevent the venture from
succeeding. The process allows the entrepreneur to plan ways to avoid such obstacles. It may
even be possible that, after preparing the business plan, the entrepreneur will realize the
obstacles cannot be avoided or overcome. Hence, the venture may be terminated while still on
paper. Although this certainly is not the most desirable conclusion, it would be much better to
terminate the business endeavor before investing further time and money.

The value of the business plan to the investors and lenders

How do potential lenders and investors evaluate the plan?

As stated earlier there are a number of cookbooks or computer-generated software packages or

samples on the Internet that are available to assist the entrepreneur in preparing a business
plan. Fore stance, you can brows from Google and from other websites. These sources,
however, should be used only to assist in its preparation, since the business plan should address
the needs of all the potential readers or evaluators. As stated above, these needs may vary
considerably and, thus, could result in rejection of the entrepreneur's request if not addressed
accordingly in the business plan.

It is conceivable that the entrepreneur will prepare a preliminary business plan from his or her
own personal viewpoint without consideration of the constituencies that will ultimately read
and evaluate the plan's feasibility. As the entrepreneur becomes aware of who will read the
plan, appropriate changes will be necessary. For example, one constituency may be suppliers,
who may want to see a business plan before signing a contract to either produce components or
finished products or even supply large quantities of materials on consignment. Customers may
also want to review the plan before buying a product that may require significant long-term
commitment, such as a high technology telecommunications system. In both cases the business
plan should consider the needs of these constituencies, who may pay more attention to the
experience of the entrepreneur(s) and their projection of the marketplace.

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Another group that may evaluate the plans is the potential suppliers of capital. These lenders or
investors will likely vary in terms of their needs and requirements in the business plan. For
example, lenders are primarily interested in the ability of the new venture to pay back the debt
including interest within a designated period. Banks want facts with an objective analysis of
the business opportunity and all the potential risks inherent in the new venture. If for example,
Brtukan and Lydia found this important in their business plan for a hair salon. In fact, their
objectivity and longer-term projections (five years) led to the bank loaning them say, an
additional 5,000 birr. Because of this venture's ability to meet its short-term goals with a strong
likelihood of substantially increasing profits in the future, the bank was favorably impressed
and willingly loaned them the funds.

Typically, lenders focus on the four Cs of credit: character, cash flow, collateral, and equity
contribution. Basically, what this means is that lenders want the business plan to reflect the
entrepreneur's credit history, the ability of the entrepreneur to meet debt and interest payments
(cash flow), the collateral or tangible assets being secured for the loan, and the amount of
personal equity that the entrepreneur has invested.

Investors, particularly venture capitalists, have different needs since they are providing large
sums of capital for ownership (equity) and the expected cashing out within five to seven years.
Investors often place more emphasis on the entrepreneur's character than lenders and often
spend much time conducting background checks. This is important not only from a financial
perspective but also because the venture capitalist will play an important role in the actual
management of the business. Hence, they want to make sure that the entrepreneur(s) is
compliant and willing to accept this involvement. These investors will also demand high rates
of return and will thus focus on the market and financial projections during this critical five- to
seven-year period.

In preparing the business plan, it is important for entrepreneurs to consider the needs of these
external sources and not merely provide their own perspective. This will keep the plan from
being an internalized document that emphasizes only the technical advantages of a product or
market advantages of a service, without consideration of the feasibility of meeting market
goals and long-term financial projections.

Entrepreneurs, in sharing their business plan with others, often become paranoid that one of the
external readers will steal their idea. Most external advisors and potential investors are bound
by a professional code of ethics, and the entrepreneur should not be discouraged from seeking
external advice.

Presenting the plan

It is often necessary for an entrepreneur to orally present the business plan before an audience
of potential investors. In this typical forum, the entrepreneur would be expected to provide a
short (perhaps 20 minutes or half-hour is enough) presentation of the business plan. For
example, in out country, Enterprise Ethiopia invite potential entrepreneurs and a forum is held
semi-annually or yearly with entrepreneurs selected (based on review of business plans) to give
a short 30-minute presentation of their business plans before an audience, mostly of venture
capitalists and private investors. The entrepreneurs are expected to "sell" their business concept
in this short time period with the audience given the opportunity to ask difficult and
penetrating questions. However, the benefit is that they are presenting in one place, to a
number of firms or individuals who could immediately decide they like the plan and request

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further negotiation, leading to a final investment decision. Some investors describe these plans
as the elevator plan. It's analogous to a situation where an entrepreneur would get on an
elevator with an investor and try to persuade that he or she is a good investment before the
elevator reaches its final destination.

It is also likely that a venture capitalist or angel group would ask the entrepreneur to present to
their partners before making a final decision on whether to invest. In all of these instances, the
entrepreneur must decide what to say in this short time frame. Typically the focus is on why
this is a good opportunity, an overview of the marketing program'(addresses how the
opportunity will convert to reality), and the results of this effort (sales and profits). Concluding
remarks might reflect the recognized risks and how the entrepreneur plans to address them.
Remember, this effort is really designed to sell the investors on why this would be a good
investment for them.

Information needs

Before committing time and energy to preparing a business plan, the entrepreneur should do a
quick feasibility study of the business concept to see if there are any possible barriers to
success. The information, obtainable from many sources, should focus on marketing, finance,
and production. The Internet, discussed below, can be a valuable resource for the entrepreneur.
Before beginning the feasibility study, the entrepreneur should clearly define the goals and
objectives of the venture. These goals help define what needs to be done and how it will be
accomplished. These goals and objectives also provide a framework for the business plan,
marketing plan, and financial plan.

Goals and objectives that are too general or that are not feasible make the business plan
difficult to control and implement. The following ideal example illustrates this point.

Bruke and Daniel had a great concept: a retail store that would sell computer software and
video games to the home market rather than the business market. At the time of their
brainstorm, they discovered that there were no retailers trying to meet the needs of this target
market. Thus, their idea was a virtually untapped market niche.

The plan they prepared was weak and overly optimistic in terms of reaching any of their goals.
Fortunately, for them, Daniel was able to turn to an old family friend, Lulseged, for advice on
their business plan. Lulseged shot holes in their sloppily written business plan but imparted
new learning for these entrepreneurs as to what was a good plan. For example, they had
planned to open 12 stores in the first month, with many other openings scheduled throughout
the year and across the country. They had no idea how or where these stores would be opened.
With their newfound supporter and partner Lulseged, who liked the business concept and was
willing to guarantee their 3 million birr line of credit with a bank for one-third equity, the two
entrepreneurs restructured their plan and began pursuit of more reasonable goals. Their first
store was opened in Bar Dar in 1987. They called their company Babbage's, after the 19th
century mathematician Charles Babbage, who was credited with designing the first computing
machine. Solomon and Bedlu acquired the company, which achieved sales of over $250
million, in 1998.

The preceding example illustrates the lack of feasible business goals and an understanding of
how these goals would be achieved. These two entrepreneurs were lucky to have a connection
with someone who could provide them with direction. Not all entrepreneurs are as fortunate.

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The important lesson is that the business plan cannot be taken lightly and that it must reflect
reasonable goals.

Market Information

One of the initial important elements of information needed by the entrepreneur is the market
potential for the product or service. In order to ascertain the size of the market, it is first
necessary for the entrepreneur to define the market. For example, is the product most likely to
be purchased by men or women? people of high income, or low income? rural or urban
dwellers? highly educated or less educated people? A well-defined target market will make it
easier to project market size and subsequent market goals for the new venture. For example, an
entrepreneur has developed a unique training aid for golfers. This product allows the user to
practice in the basement or garage during the off-season. The product will determine distance,
slice, or hook of a drive. The product would thus appeal to a well-defined market: passionate
golfers who are interested in improving their score.

To assess the total market potential, the entrepreneur should consider trade associations,
government reports, the Internet, and published studies. In some instances, this information is
readily available. In our golfing example, the entrepreneur should be able to estimate the size
of the market from secondary data. Golf magazines and associations would provide
information on the golf market by geographic area. Other demographic information about this
market is also likely to be available. Information from golf stores or from pro shops regarding
training aids would also be helpful. Contacting a few of these stores to discuss training aids
could provide valuable insights for the business plan. From this, the entrepreneur would be
able to determine an approximate size or the market.

Operations Information Needs

 The relevance of a feasibility study of the manufacturing operations depends on the

nature of the business. Most of the information needed can be obtained trough direct
contac1j with the appropriate source. The entrepreneur may need information on the
following:
 Location- The Company’s location and its accessibility to customers, suppliers, and
distributors need to be determined.
 Manufacturing Operations- Basic machine and assembly operations need to be
identified, as well as whether any of these operations would be subcontracted and by
whom.
 Raw Materials- The raw materials needed and suppliers' names, addresses, and costs
should be determined.
 Equipment- The equipment needed should be listed and whether it will be purchased
or leased.
 Labor Skills- Each unique skill needed, the number of personnel in each skill pay rate,
and an assessment of where and how these skills will be obtained should be
determined.
 Space- The total amount of space needed should be determined, including whether the
space will be owned or leased.
 Overhead- Each item needed to support manufacturing-such as tools, supplies,
utilities, and salaries-should be determined.

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Most of the above information should be incorporated directly into the business plan. Each
item may require some research, but each is necessary to those who will assess the business
plan and consider funding the proposal.

Financial Information Needs

Before preparing the business plan, the entrepreneur must have a complete evaluation of the
profitability of the venture. The assessment will primarily tell potential investors if the
business will be profitable, how much money will be needed to launch the business and meet
short-term financial needs, and how this money will be obtained (e.g., stock and debt).

There are traditionally three areas of financial information that will be needed to ascertain the
feasibility of the new venture: (1) expected sales and expense figures for at least the first three
years, (2) cash flow figures for the first three years, and (3) current balance sheet figures and
pro forma balance sheets for the first three years.

Determination of the expected sales and expense figures for each of the first 12 months and
each subsequent year is based on the market information discussed earlier. Each expense item
should be identified and given on a monthly basis for the year. Estimates of cash flow consider
the ability of the new venture to meet expenses at designated times of the year. The cash flow
forecast should identify the beginning cash, expected accounts receivable and other receipts,
and all disbursements on a monthly basis for the entire year.

Current balance sheet figures provide the financial conditions or the business at any particular
time. They identify the assets of the business, the liabilities (what is owed), and the investment
made by the owner or other partners.

Using the internet as a resource tool

Internet Computer online service providing important sources of information for starting a new
venture.

The changing world of technology offers new opportunities for entrepreneurs to be able to
access information for many business activities efficiently, expediently, and at very little cost.
The Internet can serve as an important source of informati°9 in the preparation of the business
plan for such segments as the industry analysis, competitor analysis, and measurement of
market potential, to name a few. Entrepreneurs will also find the Internet a valuable resource in
later-stage planning and decision-making. Besides being a business intelligence resource, the
Internet also provides opportunities for actually marketing the new venture's products and
services through the preparation of a home page or website. Some of these opportunities will
be discussed below. However, it is advised that entrepreneurs consult a library or some of the
sources at the end of this chapter to gain the necessary knowledge to maximize their use of the
Internet.

A website or home page typically describes a firm's history, existing products or services,
background of the founders or management team, and any other information that might create
a favorable image for any Internet viewer. Thus, the website can be a vehicle for advertising or
for the direct marketing of the venture's products and services. Incoming orders can actually be
processed through e-mail or the online service. Telephone numbers and addresses can also be
provided for those interested in a sales call or more information. Many new ventures are using

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the website to increase sales contacts and to enhance their opportunities to reach potential
customers.

An entrepreneur should access competitors' websites to gain more knowledge about their
strategy in the marketplace. Internet services are not costly and would be an important vehicle
for the entrepreneur to gather information about 'the market, competition, and customers as
well as to distribute, advertise, and sell company products and services.

In addition to web sites, the entrepreneur can also investigate newsgroups to gather
information anonymously from experts and customers on competitors and market needs. There
are thousands of newsgroups online that cover a wide range of topics. These news groups
represent online customers having the same interest in a topic (for example, gourmet food).
Using the Usenet, which represents the news groups on the Internet, the entrepreneur can use
key words to identify the most appropriate newsgroups. These newsgroups represent potential
customers who can be asked specific questions on their needs, competitive products, and
potential interest in the new venture's products and services. Individuals who are members of
the news groups will then respond to these questions, providing valuable information to the
entrepreneur.

Compared with alternative sources the entrepreneur need only make a small investment in
hardware and software to be ready to use these online services. With the continuous
improvements and modifications in the Internet, the opportunities for the entrepreneur in
planning the start-up or the growth of a venture will be invaluable.

7.5 Writing the business plan

According to Robert D. Hisrich, the business plan could take more than 200 hours to prepare,
depending on the experience and knowledge of the entrepreneur as well as the purpose it is
intended to serve. It should be comprehensive enough to give any potential investor a complete
picture and understanding of the new venture and will help the entrepreneur clarify his or her
thinking about the business. Many entrepreneurs incorrectly estimate the length of time that an
effective plan will take to prepare. Once the process has begun, however, the entrepreneur will
realize that it is invaluable in sorting out the business functions of a new venture.

The outline for a business plan is presented below. Each of the items in the outline is detailed
in the following paragraphs of this chapter. Key questions in each section are also
appropriately detailed

The outline of a business plan

A typical business pan contains the following key elements:

I. introductory page

A. Name and address of business

B. Name(s) and address (e) of principal

C. Nature of business

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D. statement of financing needed

E. Statement of confidentiality of report.,

II. Executive Summary-Three to four pages summarizing the complete business plan

III. Industry Analysis

A. Future outlooks and trends

B. Analysis of competitors

C. Market segmentation

D. Industry forecasts

IV. Description of venture

A. Product(s)

B. Service(s).

C. Size of business

D. Office equipment and personnel

E: Background of entrepreneurs

V. Production Plan

A. Manufacturing process (amount subcontracted)

B. Physical plant.

C. Machinery and equipment

D. names of suppliers of raw materials

VI. Marketing Plan

A. Pricing

B. Distribution

C. Promotion

D. Product forecasts

E. Controls

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VII. Organizational Plan.

A. Form of ownership

B. Identification of partners or principal shareholders

C. Authority of principals

D. Management-team background

E. Roles and responsibilities of members of organization

VIII. Assessment of Risk

A. Evaluate weakens of business

B. New technologies

C. Contingency plans

IX. Financial Plan

A. .Pro forma and income statement

B. Cash flow projections

C. Pro forma balance sheet

D. Break-even analysis

E. Sources and applications of funds

X Appendix (contains backup material)

A. Letters

B. Market research data

C. Leases or contracts

D. Price lists from suppliers

Introductory Page

This is the title or cover page that provides a brief summary of the business plan's contents.
The introductory page should contain the following:

The name and address of the company

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The name of the entrepreneur(s), his telephone number, fax number, e-mail address, and
website address if available

A paragraph describing the company and the nature of the business

The amount of financing needed. The entrepreneur may offer a package, that is, stock, debt,
and so on. However, many venture capitalists prefer to structure this package in their own way.

A statement of the confidentiality of the report

This is for security purposes and is important for the entrepreneur.

This title page sets out the basic concept that the entrepreneur is attempting to develop.
Investors consider it important because they can determine the amount of investment needed
without having to read the entire plan.

Executive Summary

This section of the business plan is prepared after the total plan is written. About two to three
pages in length, the executive summary should stimulate the interest of the potential investor.
This is a very important section of the business plan and should not be taken lightly by the
entrepreneur since the investor uses the summary to determine if the entire business plan is
worth reading. Thus, it would highlight in a concise and convincing manner the key points in
the business plan.

Although determining what is important in any executive summary would be difficult since
every business plan is different, there are a number of significant issues that should be
addressed. First, the entrepreneur should briefly describe the business concept. Second, any
data that support the opportunity for this venture should be briefly stated. For example, trends
and potential growth in the industry should be mentioned. If this were an Internet business, the
entrepreneur should state such facts as growth in the number of internet users, growth in the
average amount of time spent on the Internet, and growth in sales dollars generated on the
Internet, to name a few. After establishing the reality of the opportunity, the executive
summary should then state how this opportunity would be pursued. What is the marketing
strategy that will be implemented, and how does it differ from others in the market? Next, the
executive summary should highlight some of the key financial results that can be achieved
from the implemented marketing strategy. Important experience of the entrepreneur(s), any
important contracts or other legal documents that are in place, and any other information that is
felt can assist in selling the business venture to a potential investor should also be mentioned.
Because the executive summary is limited to two to three pages, it is important for the
entrepreneur to ascertain what is important to the audience to whom this plan is directed.

Environmental and Industry Analysis

It is important to put the new venture in a proper context by first conducting an environmental
analysis to identify trends and changes occurring on a national and international level that may
influence the new venture. A fast and effective means of gathering some of these data is
through the Internet using websites listed at the end of this chapter. Examples of these
environmental factors are: environmental analysis Assessment of external uncontrollable
variables that may impact the business plan

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Economy: The entrepreneur should consider trends in the GNP, unemployment by geographic
area, disposable income, and so on.

Culture: An evaluation of cultural changes may consider shifts in the population by

demographics, for example, the impact of the baby boomers or the growing elderly population.
Shifts in attitudes, such as "Buy American," or trends in safety, health, and nutrition, as well as
concern for the environment, may all have an impact on the entrepreneur's business plan.

Technology: Advances in technology are difficult to predict. However, the entrepreneur

should consider potential technologic development determined from resources committed by
major industries or the government. Being in a market that .is rapidly changing due to
technologic development will require the entrepreneur to make careful short-term marketing
decisions as well as to be prepared with contingency plans given any new technologic
developments that may affect his or her product or service

Legal Concerns: There are many important legal issues in starting a new venture. The
entrepreneur should be prepared for any future legislation that may affect the product or
service, channel of distribution, price, or promotion strategy. The deregulation of prices,
restrictions on media advertising (e.g., ban on cigarette ads or requirements for advertising to
children), and safety regulations affecting product or packaging are examples of legal
restrictions that can affect any marketing program.

All the above external factors are generally uncontrollable. However, as indicated, an
awareness and assessment of these factors using some of the sources identified can provide
strong support for the opportunity and can be invaluable in developing the appropriate
marketing Strategy.

Once an assessment of the environment is complete, the entrepreneur should conduct an

industry analysis that will focus on specific industry trends. Some examples of these factors
are:

Industry Demand: Demand as it relates to the industry is often available from published
sources. Knowledge of whether the market is growing or declining, the number of new
competitors and possible changes in consumer needs are all-important issues in trying to
ascertain the potential business that might be achieved by the new venture. The demand for the
entrepreneur's product or service will require some additional marketing research.

Competition: Most entrepreneurs generally face potential threats from larger corporations.
The entrepreneur must be prepared for these threats and should be aware of who the
competitors are and what their strengths and weaknesses are so that an effective marketing plan
can be implemented. Most competitors can be easily identified from experience, trade journal
articles, advertisements, websites, or even the yellow pages.

The last part of this section should focus on the specific market, which would include such
information as who the customer is and what the business environment is like in the specific
market segment and geographic area where the venture will compete. Thus, any differences in
any of the above variables that reflect the specific market area in which the new venture will
operate must be considered. This information is particularly significant to the preparation of
the marketing plan section of the business plan.

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A list of some key questions the entrepreneur should consider for this section of the business
plan is industry trends and competitive strategies

Description of Venture

The description of the venture should be detailed in this section of the business plan. This will
enable the investor to ascertain the size and scope of the business. This section should begin
with the mission statement or company mission of the new venture. This statement basically
describes the nature of the business and what the entrepreneur hopes to accomplish with that
business. This mission statement or business definition will guide the firm through long-term
decision-making. After the mission statement a number of important factors that provide a
clear description and understanding of the business venture should be discussed. Key elements
are the description of the vulture Provides complete overview of product(s), services and
operations of new venture

1. What are the major economic, technological, legal and political trends on a national and
international level
2. What are tota1 industry sales over the past five years?
3. What is anticipated -growth in this industry?
4. How many new firms have entered this industry in the past three years
5. What new products have been recently introduced in this industry?

6. Who are the nearest competitors?

7. How will your business operation be better than this?

8. Are the sales of each of your major competition growing or declining or steady?

9. What are the strength and weakness of each of your competitors?

10. What trends are occurring in your specific marker area?

11. What is the profile of your customers?

12. How does your customer profile differ from that of your competition?

1. What is the mission of the new venture?

2. What are your reasons for going into business?

3. Why will you be successful in this venture?

4. What development work has been completed date?

5. What are your product(s) and/or service(s)?

6. Describe the product(s) and/or service(s), including patent, copyright, or trademark status. 7.
Where will the business be located?

8. Is your building new, old, or in need of renovations? (1f renovation needed, state costs.)

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9. Is the building leased or owned? (State the terms.)

10. Why is this building and location right for your business?

11. What office equipment will be needed?

12. Will equipment be purchased or leased?

13. What experience do you have and/or will you need to successfully implement the business
plan?

It is adopted from Robert D. Hisrich, Entrepreneurship (2002), 5th edition, Tata McGraw-Hill

The products or services that will be offered, the location and size of the business, the
personnel and the office equipment that will be needed, the background of the entrepreneur(s),
and the history of the venture. Taken from the same source: Some of the important questions
the entrepreneur needs to answer when preparing this section of the business plan are
summarized below:

1. What is the mission of the new venture?

2. What are your reasons for going into business?
3. Why will you be successful in this venture?
4. What development work has been completed to date?
5. What are your product(s) and/or service(s)
6. Describe the product(s) and/or service(s), including the patent, copyright, or trade mark
status
7. Where will the business be located?
8. Is your building new? Old? In need of renovation?( if renovation needed state costs)
9. Is the building leased or owned?( state the terms)
10. Why is this building and location right for your business?
11. What office equipments will be needed?
12. Will equipment be purchased or leased
13. What experience do you have and/or will you need to successfully implement the
business plan?

Location of any business may be vital to its success, particularly if the business is retail or
involves" service. Thus, the emphasis on location in the business plan is a function of the type
of business. In assessing the building or space the business will occupy, the entrepreneur may
need to evaluate such factors as parking, access from roadways to facility, and access to
customers, suppliers, distributors, delivery rates, and town regulations or zoning laws. An
enlarged local map may help give the location some perspective with regard to roads,
highways, access, and so forth.

Recently an entrepreneur considered opening a new doughnut shop at a location diagonally

across from a small stopping mall on a heavily traveled road. Traffic counts indicated a large
potential customer base if people would stop for coffee, and so on, on their way to work. After
enlarging a local map, the entrepreneur noted that the morning flow of traffic required drivers
to make a left turn into the doughnut shop, crossing the outbound lane. Unfortunately, a
concrete center strip with no break to allow for a left-hand turn divided the roadway. The only
possibility for entry into the shop required the customer to drive down about 400 yards and
make a U-turn. It would also be difficult for the customer to get back on the roadway traveling

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in the right direction. Since the town was unwilling to open the road, the entrepreneur
eliminated this site from any further consideration.

This simple assessment of the location, market, and so on, saved the entrepreneur from a
potential disaster. Maps that locate customers, competitors, and even alternative locations for a
building or site can be helpful in this evaluation. Some of the important questions that might be
asked by an entrepreneur are as follows:

 How much space is needed?

 Should I buy or lease the building?
 What is the cost per square foot?
 Is the site zoned for commercial use?
 What town restrictions exist for signs, parking, and so forth?
 Is renovation of the building necessary?
 Is the facility accessible to traffic?
 Is there adequate parking?
 Will the existing facility have room for expansion?
 What is the economic and demographic profile of the area?
 Is there an adequate labor pool available?
 What are local taxes?
 Are sewage, electricity, and plumbing adequate?

If the building or site decision involves legal issues, such as a lease, or requires town variances,
the entrepreneur should hire a lawyer. Problems relating to regulations and leases can be
avoided easily, but under no circumstances should the entrepreneur try to negotiate with the
town or a property owner without good legal advice.

Production Plan or Operational Plan

If the new venture is a manufacturing operation, a production plan is necessary. This plan
should describe the complete manufacturing process. If some or all of the manufacturing
process is to be subcontracted, the plan should describe the subcontractors), including location,
reasons for selection, costs, and any contracts that have been completed. If the manufacturing
is to be carried out in whole or in part by the entrepreneur, he or she will need to describe the
physical plant layout; the machinery and production plan Details how product(s) will be
manufactured equipment needed to perform the manufacturing operations; raw materials and
suppliers' names, addresses, and terms; costs of manufacturing; and any future capital'
equipment needs. In a manufacturing operation, the discussion of these items will be important
to any potential investor in assessing financial needs.

If the venture is not a manufacturing operation but a retail store, service, or some other type of
non-manufacturing business, this section would be titled operational plan and the entrepreneur
would then need to describe the chronological steps in completing a business transaction. For
example, a retail store would need to describe the process of purchasing merchandise, how the
merchandise will be stored and presented for sale, as well as the control system to be used for
inventory control. For a service such as a retail Internet business the entrepreneur would need
to describe the complete transaction process &com the actual development of the website, how
it functions, the procedure for ordering, and the final steps involved in completing a
transaction. Figure 7.6 summarizes some of the key questions needed for this section of the
business plan.

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Marketing Plan

The marketing plan (discussed in detail in Chapter 8) is an important part of the busi ness plan
since it describes how the product( s) or service( s) will be distributed, priced, and promoted.
Marketing research evidence to support any of tlle critical marketing decision strategies as well
as for forecasting sales should be described in this section. Specific forecasts for product(s) or
service(s) are indicated in order to project profitability of the venture. The budget and
appropriate controls needed

1. Will you be responsible for all or part of the manufacturing operation?

2. If some manufacturing is subcontracted, who will be the subcontractor(s)? (Give
names and addresses.)' .
3. Why were these subcontractors selected~
4. What are the costs of the subcontracted manufacturing? (Include copies of any written
contracts.)
5. What will be the layout of the production process? (Illustrate steps if possible.)
6. What equipment will be needed immediately for manufacturing?
7. What raw materials will be needed for manufacturing?
8. Who are the suppliers of new materials and what are the appropriate costs? What are
the costs of manufacturing the product?
9. What are the future capital equipment needs of the venture?

If a Retail Operation or Service:

1. From whom will merchandise be purchased?

2. How will the inventory control &system operate?

3. What are the storage needs of the venture and how will they be promoted?

4. Chronologically, what are the steps involved in a business transaction?

For marketing strategy decisions are also discussed in detail in Chapter 8. Potential investors
regard the. Marketing plan is critical to the success of the new venture. Thus, the entrepreneur
should make every effort to prepare as comprehensive and detailed a plan as possible so that
investors can be clear as to what the goals of the venture are and what strategies are to be
implemented to effectively achieve these goals. Marketing planning will be an annual
requirement (with careful monitoring and changes made on a weekly or monthly basis) for the
entrepreneur and should be regarded as the road map for short-term decision making.

Organizational Plan

The organizational plan is the part of the business plan that describes the venture's form of
ownership--that is, proprietorship, partnership, or corporation. If the venture is a partnership,
the terms of the partnership should be included. If the venture is a corporation, it is important
to detail the shares of stock authorized, share options, as well as names and addresses and
resumes of the directors and officers of the corporation. It is also helpful to provide an
organization chart indicating the line of authority and the responsibilities of the members of the
organization. Alternative forms of organization and discussion of the various layouts of an
organization are included in Chapter 8. Figure 7.7 summarizes some of the key questions the
entrepreneur needs to answer in preparing this section of the business plan. This information

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provides the potential investor with a clear understanding of who controls the organization and
how other members will interact in performing their management functions.

Assessment of Risk

Every new venture will be faced with some potential hazards, given the particular industry and
competitive environment. It is important that the entrepreneur make an as assessment of risk in
the following manner. First, the entrepreneur should indicate the potential risks to the new
venture. Next should be a discussion of what might happen if these risks become reality.
Finally, the entrepreneur should discuss assessment of risk Identifies potential hazards an
alternative strategies to meet business plan goals and objectives

1. What is the form of ownership of the organization?

2. If a partnership, who are the partners and what are the terms 9f agreement?
3. If incorporated, who are the principal shareholders and how much stock do they own?
4. How many shares of voting or nonvoting stock have been issued, and what type?
5. Who are the members of the board of directors? (Give names, addresses, and
resumes.) . Who has check-signing authority or control?
6. Who are the members of the management team and what are their backgrounds?
7. What are the roles and responsibilities of each member of the management team?
8. What are the salaries, bonuses, or other forms of payment for each member of the man-
agement team?

The strategy that will be employed to either prevent, minimize, or respond to the risks should
'they occur. Major risks for a new venture could result from a competitor's reaction;
weaknesses in the marketing, production, or management team; and new advances in
technology that might render the new product obsolete. Even if these factors present no rise to
the new venture, the business plan should discuss why that is the case.

Financial Plan

Like the marketing, production, and organization plans, this is an important part of the business
plan. It determines the potential investment commitment needed for the new venture and
indicates whether the business plan is economically feasible.

Generally, three financial areas are discussed in this section of the business plan. First, the
entrepreneur should summarize the forecasted sales and the appropriate expenses for at least
the first three years, with the first year's projections provided monthly. It includes the
forecasted sales, cost of goods sold, and the general and administrative expenses. Net profit
after taxes can then be projected by estimating income taxes.

The second major area of financial information needed is cash flow figures for three years,
with the first year's projections provided monthly. Since bills have to be paid at different times
of the year, it is important to determine the demands on cash on a monthly basis, especially in
the first year. Remember that sales may be irregular, and receipts from customers may also be
spread out, thus necessitating the borrowing of short-term capital to meet fixed expenses such
as salaries and utilities. The last financial item needed in this section of the business plan is the
projected balance sheet. This shows the financial condition of the business at a specific time. It
summarizes the assets of a business, its liabilities (what is owed), the investment of the en-
trepreneur and any partners, and retained earnings (or cumulative losses). Along with more
detailed explanation of the items included. Any assumptions considered for the balance sheet

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or any other item in the financial plan should be listed for the benefit of the potential investor.
Financial plan Projections of key financial data that determine economic feasibility and
necessary financial investment commitment

Appendix

The appendix of the business plan generally contains any backup material that is not necessary
in the text of the document; Reference to any of the documents in the appendix should be made
in the plan itself.

Letters from customers, distributors, or subcontractors are examples of information that should
be included in the appendix. Any documentation of information that is, secondary data or
primary research data used to support plan decisions should also be included. Leases, contracts,
or any other types of agreements that have been initiated may also be included in the appendix.
Finally, price lists from suppliers and competitors may be added.

Summary

The business plan is a written document prepared by the entrepreneur that describes all the
relevant external and internal elements involved in starting a new venture. It is probably the
single most important document to the entrepreneur at the start-up stage. A business plan has
different scope and values and it has outlined steps in its preparation. The business plan may be
used/ read by employees, customers, investors, suppliers, lenders and consultants. The scope
of the plan will depend on who reads it, the size of the venture and the specific industry for
which the venture is intended.

The business plan is essential in launching a new business. The results of many hours of
preparation will represent a comprehensive well-written and well-organized document that will
serve as guide to the entrepreneur and as instrument to raise the necessary capital and
financing.

Before starting the preparation of a business plan, the entrepreneur will need information on
the market, manufacturing, operations and financial estimation. There are different sources of
data, both primary and secondary data, for this purpose. This information should be evaluated
based on the goals and objectives of the new venture. These goals and objectives also provide a
framework for setting up controls for the business plan.

The outline of a typical business plan has such key elements as introductory information,
executive summary, industry analysis, description of venture production plan, marketing plan,
organizational plan, and assessment of risks financial plan and back materials as appendix.
Each key element in the plan should be careful analyzed, prepared and control decisions must
be presented to ensure the effective implementation of the business plan. In addition to these,
the entrepreneurs should

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CHAPTER SEVEN
FINANCING THE NEW VENTURE
One of primary reasons small business fails is lack of adequate capital. This reason is not meant to
frighten you; it is merely a statement of facts, which you need to consider. By addressing your business
capital needs in business plan preparation, you will avoid a capital shortage in the future. Obtaining
those resources in the amounts needed and at time when they are needed can be difficult for
entrepreneurial ventures because they are generally considered more risky than established enterprise.

Financing means more than merely obtaining money; it is very much a process of managing assets
wisely to use capital efficiently. The critical issue is to assure sufficient cash flow for operations, as
well as to plan financing that coincides with changes in the enterprise.

Finance is one of the important prerequisite to start an enterprise. In fact it is the availability of that
facilitates an entrepreneur to bring together land, labor, machinery and raw material to combine them to
produce goods. The significance of finance in production is elucidated like lubricant to the process of
production. Thus, finance is the life blood of enterprise.

Financing enterprise- weather large or small- is a crucial element for success in business. The truth is
that, many enterprises though potentially successful, failed because they were under-capitalized. To this
end, every enterprise should clearly chalk-out its future financial requirements in its very beginning
itself.

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Need for financial planning

The decision taken by the entrepreneur well in advance regarding the future financial aspects of his/her
enterprise is called financial planning. In other words, financial planning deals with the futurity of
present decision in terms of financial aspects of an enterprise. In short, financial planning is a financial
forecast made for the enterprise in the beginning itself.

In financial plan/ forecast, the entrepreneur should clearly answer the following three questions.
1. How much money is needed?
2. Where will money come from?
3. When does the money needed to be available?
The answer to those questions are given as follows
As regards the money needed, it can be estimated by developing a statements of various assets required
by the enterprise. The structure of assets to be used will vary from enterprise to enterprise depending up
on the nature of the product to be produced or service to be rendered. As the case may be, while
estimating the money needed, the entrepreneur should take the following three things in to
consideration.
1. There should be adequate money to pay the purchase considerations
2. There should be sufficient capital at his/her disposal to support the business operations.
3. Enough provision must be made to meet unexpected/ unplanned business expenses.
Thus, the total of these three amounts will constitute the total money needed to start the new business.
Integral to total amount needed is to decide about its arrangement or sources.

Sources finance
Every business or enterprise the capital needed can be arranged from two sources- internal and external.
Internal sources refer the owners own money known as equity. However, an overwhelming portion of
money needed is arranged from the external sources like financial institutions and commercial banks,
etc
Types and sources of Financing
1. internal financing sources
2. external financing sources
Internal financing sources
Under this source, funds are raised from within the entrepreneur. The internal sources of financing
could be owner’s capital known as equity, given by owners, partners etc to the enterprise. The primary
advantage of equity financing is that, it doesn’t have to be repaid like a loan does. Some of the common
sources are the following.
A. Personal Saving-Many entrepreneurs invest their own savings when they start a business.
B. Personal Belongings – entrepreneurs can provide their personal belongings to the new enterprise
like land, building, equipment etc which are in kind rather than cash.
C. Retained Earning- As your business begins to generate a profit, you can use the money to pay for
its continued growth. Most growing businesses combine their retained earnings with other forms of
equity and debt financing as they expand.
D. Going public (public stock sale) – In some cases, an entrepreneur can go public by selling shares of
a stock in his/her corporations to investors. This is an effective method of raising the needed money,
but it can be an expensive and time consuming process.
E. Angels – angels (individual investors) can play an important role in financing business startups. In
some cases they become a primary source of the start finance for companies in the embryonic stage,
through the growth stage.
F. Love Money (family, relatives and Friends) - Many entrepreneurs rely on friends and relatives for
at least a portion of their financing, either as a free gift or on a debt or equity basis from family,
relatives or friends.
External sources of financing.
Funds raised from other than internal sources are from external sources. Financing a business using
external sources of financing is called debt financing. Thus, debt financing constitutes the funds that the
enterprise owner/owners has/have borrowed, and must pay back to the lender with interest.

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The major sources of these external financial sources are grouped under the following broad categories.
 Banks: includes commercial banks, development banks, private banks etc.
 Trade creditors: can be raw materials, semi-processed or finished goods etc.
 Equipment providers: can be production machines, office equipments, etc. these can be
acquired through purchase or leasing.
 Other financial institutions like saving and loan associations etc.
Etc.
The above loans are taken for a definite period of time and are called ‘term loans’. Based on period,
loans can be broadly classified in to two types

 Short -term loans, and

 Long-term loans

Long -term loans

These are the loans taken for a fairly long duration of time usually ranging from 5 years to 10 years.
Long-term loans are raised to meet the financial requirements of an enterprise for acquiring the fixed
assets which includes the following.

I. Land and site development

II. Building and civil works
III. Plant and machinery
IV. Installation expenses
V. Miscellaneous fixed assets, like vehicle, furniture and office equipments. This
miscellaneous fixed cost may also include infrastructure facilities like road, water
supply, power connection etc, and also it can be used for the expansion of the enterprise
productive capacity by replacing or adding to the existing equipment.
Sources of long-term loans
The following are the sources of raising loan term
 Issue of shares
 Issue of debentures
 Loans from commercial banks
 Loans from other financial institutions
 Public deposit
 Retention of profits.

Short-term loans
Short-term finance/ loan are obtained for a period up to one year. These are required to meet the
day to day business requirements. In other words, short-term finance/ loan is obtained to meet the
working capital requirements of the enterprise. Working capital is that amount of funds which is
required to carry out the day to day operations of an enterprise.

Sources of short term loans

 Loans from banks
 Public deposits
 Trade credits
 Factoring
 Discounting bills of exchange
 Bank overdraft
 Advance from customers
 Accrual accounts.

Maintaining Optional Mix of Financing

I, Capital Structure

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An enterprise can raises business funds from the internal and external sources; ownership capital called
equity and borrowed capital (debt) respectively. The composition equity and debt in overall capital of
an enterprise is called ‘capital Structure’. The capital structure is the ratio between debt and equity
capital, Hence it is also expressed as the debt-equity ratio.
The capital structure differs from financial structure. Capital structure means the permanent financing
of the enterprise primarily by long-term source funds, i.e debt and equity, thus it excludes funds raised
from short term sources. But financial structure refers to how the firm’s assets are financed by raising
funds from both long-term and short-term sources.
A business enterprise needs to maintain a proper mix between equity and debt in order to function
smoothly and efficiently. So, what should be the proper or optimum capital structure? In fact, it
depends upon the business conditions of the enterprise concern. As a general principle, for a successful
business in favorable conditions, debt capital may be twice or even more than equity capital. But, for
business reeling under unfavorable conditions, say incurring losses, the proportion of debt capital
should be as low as possible. This is because in an account of fluctuation in earnings and in adequacy
of cash, the enterprise may not pay interests and the amount of loan.
In short, an optimum mix incurring the least cost but yielding the maximum returns. So it is the
optimum leverage of debt and equity, which means that mix of debt and equity which will minimize the
market value of a company, it minimizes the company’s cost of capital and maximizing the return.
An optimum capital structure bears the following features;
1. The capital structure should involve the minimum cost and the maximum yields.
2. The adopted capital structure should be flexible enough to fulfill future requirements of capital
as and when needed.
3. The use of the debt should be within the repairing capacity of the enterprise.

Factors Determining Capital Structure

1. Nature of Business: The nature of the business itself is one of the factors determine capital
structure to be maintained. The business subject to wide fluctuation in sales need to maintain
smaller proportion of borrowed funds, i.e. debt capital. Ex. Companies manufacturing
television, refrigerator, machines. On the contrary, the business firms dealing in items/goods
having elastic demand like essential consumer goods may have large proper ting of borrowed
capital.
2. Size of the enterprise: Small enterprise has to rely less on borrowed capital and depend more
on owner’s capital. This is because investors consider lending to small firm more risky than
large enterprises.
3. Cash flows: The more the cash flows, more will be the proportion of borrowed capital in the
capital structure.
4. Provision for Future: The scope of changing the capital structure in future happens to be a
basic consideration for determining the capital structure of an enterprise.
5. Trading an equity: In case the rate of return on capital employed is more than the rate of
interest on debentures it is called trading on equity or leverage effect. In such cases, there is a
greater dependence on borrowed capital in the capital structure.

Over-capitalization versus under—capitalizations

Over-capitalization exists in situation when an enterprise processes excess of assets in relation to its
requirement. In this situation, the actual earnings are lower than the expected ones. Thus, in case of
over-capitalization the enterprise fails to pay a fair return on its capital employed. Thus an enterprise is
said to be over-capitalized when its earnings are not large enough to yield a fair return on its capital
employed. Under- capitalization is the reverse of over-capitalization. An enterprise is said to be under-
capitalized when its actual capitalization is lower than the proper capitalization. In this situation the rate
of profit for an enterprise is exceptionally higher in relation to the return enjoyed by similar situated
enterprise in the same industry.

It is clear that both over and under capitalization are not desirable as both bear evil effects. But over-
capitalization is more dangerous. Under capitalization is easily corrected but over-capitalization not. To
this end, every enterprise should try to have a proper or a fair capitalization.

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2, Management of working capital/ short term loans

Working capital refers to the funds required to meet the day- to day operations/ obligations of business.
It is life blood for any kind of enterprises. Therefore, it needs to be maintained at an adequate level.
Because, both excessive and inadequate capital are harmful for an enterprise. For example, if the
current assets are in excessive volume, the profitability of the business will be adversely affected due to
some assets lying idle.

Management of working capital means managing different components of current assets and liabilities.
The following are the major components.

Management of cash: every enterprise irrespective of its scale requires certain amount of cash to meet
its day to day obligations. Hence, the enterprise needs to decide carefully how much should be carried
in cash. Management of cash aims at striking a balance between two contradictory objectives of
meeting the cash disbursement needs and minimizing the amount locked up as cash balance. Cash
management address the following

o Controlling the level of cash

o Controlling inflows of cash
o Controlling outflows of cash
o Optimum use of surplus cash.

Management of inventory: inventories refer to raw material, work-in-progress and finished goods.
There arte three major motives for holding inventories in a firm, namely, transaction motive,
precautionary motive and speculative motive. But, holding inventories involves costs, i.e. ordering
costs and carrying costs. Hence, inventories need to be maintained at an optimum size.

Management of accounts receivable: account receivable represent the amount of goods sold on credit
with the view to increase the volume of sales. Account receivable constitutes the major portion of
current assets. A large size of accounts receivable increases profitability and reduces liquidity and vice
versa. Therefore, account receivables needs to be maintained at an optimum size.

Management of accounts payable: it emerges due to credit purchase. This refers to a loaning of goods
and inventories to the buyer. This is also called ‘buy- now, pay later’. The underlining objective of
accounts payable is to slow down the payments process as much possible. The enterprise has, therefore,
to ensure that the payments to the creditors are made at the stipulated time periods after obtaining the
best credit terms possible.

Businesses obtain cash through two general sources, debt or equity, and both can be obtained from
different sources.

I. DEBT CAPITAL

Debt capital is the financing that a small business owner has borrowed and must repay with interest.
Small enterprises have fewer choices than large firms for obtaining debt financing. They are excluded
from financial sources such as money raised through the sale of bonds debentures, and commercial
papers. Also, many small businesses are limited by size; with small inventories or markets that provide
few assers for up of a small business; many of they must rely on some form of debt capital to launch
their companies.

Lenders of capital are more numerous than investors, although small business loans can be just as
difficult (if not more difficult) to short-term borrowing (one year or lesser) is often required for working
capital and is repaid out of the proceeds from sales. Long-term debt (term loans of one to five years or
long term loans maturing in more than five years) is used to finance the purchase of properly or
equipment, with the purchased asset serving as collateral for the loans. Although borrowed capital

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allows entrepreneurs to maintain complete owners at some point in the future. In addition, because
lenders consider small businesses to be greater risks than bigger corporate customers, they require
higher interest rates on loans to small companies because of the risk return trade off- the higher the risk
the greater the return demanded. Most small firms pay the prime rate the interest rate banks charge
their most credit worthy customers-plus a few percentage point. Still, the cost of debt financing often is
lower than that of equity financing. Because of the higher risks associated with providing equity capital
to small companies, investors demand greater returns than lenders. Also unlike equity financing, debt
financing does not require an entrepreneur or dilute her/his ownership interest in the company. We
now turn to the various sources of debt capital.

1. Commercial Banks: Commercial banks are by far the most frequently used source of short-
term funds by the entrepreneur. Banks tend to be conservative in their lending practices and prefer
to make loans to established small business rather than to high-risk start-ups. Bankers want to see
evidence of a company’s successful track record before committing to a loan. They are concerned
with a firm’s operating past and will scrutinize its records to project its position in the immediate
future. They also want proof of the stability of the firm’s sales and about the ability of the product
or service to generate adequate cash flows to ensure repayment of the loan.

Banks will refuse loan request when, in their opinion, there is not an excellent chance for repayment of
the loan proceeds with interest. Banks view themselves as stewards (custodian or guardian) of the
depositors’ money and under law have a judiciary responsibility to depositors. A banker’s commodity
is money, and once it has left the bank, the banker’s control is virtually nonexistent. Banks certainly
have methods by which they can legally pursue funds but they are both costly and counterproductive.
There fore, bankers need to feel extremely confident that repayment will occur in a timely manner.

Commercial banks provide unsecured and secured loans. Unsecured loan is one in which collateral is
neither requested nor given, i.e., it is a person or signature loan. This type of loan is generally short
term in nature that is, less than one year, and is granted to only the most credit worthy customers.
These loans are generally made for a specific purpose such as the purchase of inventory for a specific
order. Entrepreneur is granted the loan on the strength of his/her reputation. Unsecured signature loan
will have high interest charges.

Secured loans are those with security pledged to the bank as assurance that the loan will be paid. There
are many agreements to pay the loan in the event the borrower defaults but most security is in the form
of tangible assets pledged as collateral. Hence, if they do make loans to a start up venture, banks like to
see sufficient cash flows to repay the loan, ample collateral to secure it. Repayment of the principal is
over the term established and comes chiefly from cash.

To secure a bank loan, an entrepreneur typically will have to answer a number of questions. Five of the
most common questions, together with descriptive commentaries, follow:
1. What do you plan to do with the money? Do not plan on using funds for a high-risk venture
banks seek the most secure venture possible.
2. How much do you need? Some entrepreneurs go to their bank with no clear idea of how much
money they need. All they know is that they want money. The more precisely the entrepreneur
can answer this questions the more likely the loan will be granted.
3. When do they need it? Never rush to the bank with immediate requests for money with no plan.
Such a strategy shows that the entrepreneurs a poor planner and most lenders will not want to set
involved.
4. How long will you need it? The shorter the period of time the entrepreneur needs the money, the
more likely he or she is to get the loan. The time at which the loan will be repaid should
correspond to some important milestone in the business plan.
5. How will you repay the loan? This is the most important question. What if plans go awry
(twisted)? Can other income be diverted to pay off the loan? Does collateral? Even if a quantity

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of fixed assets exists, the bank may be unimpressed because it knows from experience that assets
sold at a liquidation auction bring only a fraction of their value.

BANK LENDING DECISIONS

Due to previous bad loan decisions by banks, banks are far more cautious in lending money since they
cannot afford to incur more bad loans. Commercial loan decisions are made only after the loan officer
and loan committee do a careful review of the borrower and the financial track record of the business.
For this reason the small business owner needs to be aware of the criteria bankers use in evaluating the
credit worthiness of loan applicants. Most bankers refer to these criteria as the five Cs of credit:
Capital, Capacity, Collateral, Character, and Conditions.
1. CAPITAL: A small business must have a stable capital base before a bank will grant a loan. Other
wise the bank would be making in effect, a capital investment in the business. Most banks refuse to
make loans that are capital investments because the potential for return on the investment is limited
strictly to the interest on the loan, and the potential loss would probably exceed the reward. In fact, the
most common reasons that banks give for rejecting small business loan applications are under
capitalization or too much debt. The bank expects the small business to have an equity base of
investment by the owner(s) that will help support the venture during times of financial strain.
2. CAPACITY: The bank must be convinced of the firm’s ability to meet its regular financial
obligations and to repay the bank loan, and that takes cash. More small businesses fail from lack of
cash than from lack of profit. It is possible for a company to be showing a profit and still have no cash
that is, to be technically bankrupt. Bankers expect the small business loan applicant to pass the test of
liquidity. Especially for short-term loans. The bank studies closely the small company’s cash flow
position to decide whether or not it meets the capacity required.
3. COLLATERAL: Collateral includes any assets the owner pledges to the bank as security for
repayment of the loan. If the company defaults on the loan, the bank has the right to sell the collateral
(personal or business assets) as an indication of dedication to making the venture a success. A sound
business plan can improve a banker’s attitude to ward a venture.
4. CHARACTER: Before approving a loan to a loan to a small business, the banker must be satisfied
with the owner’s character. The evaluation of character frequently is based on intangible factors such
as honesty, competence, polish determination, intelligence and ability. Although the qualities judged
are abstract, this evaluation plays a critical role in the banker’s decision. Loan officers know that most
small businesses fail because of incompetent management, and so they try to avoid extending loans to
high-risk managers. The business plan and a polished presentation by the entrepreneur can go far in
convincing the banker of the owner’s capability.
5. CONDITIONS: The conditions surrounding a loan request also affect the owner’s chance of
receiving funds. Banks consider factors relating to the business operation such as potential growth in
the market, competition, location, form of ownership, and loan purpose. Again, the owner should
provide this relevant information in an organized format in the business plan. Another important

Condition influencing the banker’s decision is the shape of the overall economy including interest rate
level, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s
control, they still are an important component in a banker’s decision. The higher a small business scores
on these five Cs the greater its chance will be of receiving a loan. The wise entrepreneur keeps this in
mind when preparing a business plan and presentation.

Non-bank source of debt capital: Banks are not the only source of debt financing. There are some
reasons that forces entrepreneurs to look beyond the bank are to acquire more money, to overcome
bank’s conservatism, to accommodate the diversity of the small business sector, to nourish success, to
forestall failure, to reduce dependence on average, to improve networking and community visibility and
to finance substantive growth.

Let us now turn our attention to other sources of debt financing that entrepreneurs can tap to feed their
cash hungry companies.

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i) Trade credit: It is credit given by suppliers who sell goods on account. This credit is reflected on
the entrepreneur’s balance sheet as account payable and in most cases it must be paid in 30 to 90 or
more day’s interest free. Because of its ready availability, trade credit is an extremely important
source of financing to most entrepreneurs. When banks refuse to lend money to a start up business
because they see it as a bad credit risk, the owner usually is able to turn to trade credit as a viable
source of capital. Getting suppliers to extend credit in the form of delayed payments usually is
much easier for a small business than obtaining bank financing.
ii) Equipment Suppliers: Most equipment vendors encourage business owners to purchase their
equipment by offering to finance the purchase. This method of financing is similar to trade credit
but with slightly different terms. Usually, equipment lenders offer reasonable credit terms with
only a modest down payment will repurchase equipment for salvage value at the end of its useful
life and offer the business owner another credit agreement on new equipment.
iii) Accounts Receivable Financing: is short term financing that involves either the pledge of
receivables as collateral for a loan or the sale of receivables (factoring). Account receivable bank
loans are made on a discounted value of the receivables pledged. A bank may make receivable
loans on a notification or non-notification plan. Under the notification, purchasers of goods are
informed that their accounts have been assigned to the bank, which credits them to the borrower’s
account. Under the non-notification plan, borrowers collect their accounts as usual and then pay off
the bank loan.

Factoring is the sale of Accounts receivable. Under this arrangement, the receivables are sold, at a
discounted value, to a factoring company. Some commercial finance companies also do factoring.
Under a standard arrangement the factor will buy the client’s receivables out right, without
recourse, as soon as the client creates them by its shipment of goods to customers. Factoring fits
some businesses better than others, and it has become almost traditional in industries such as
textiles, furniture manufacturing, clothing manufacturing, toys, shoes, and plastics.
iv) Credit Union: credit union is non-profit financial cooperatives that promote savings and provide
credit to their members, are best know for extending loans. But credit union do not make loans to
just anyone; to quality for a loan an entrepreneur must be a member. Lending practices at credit
unions are very much like those at banks, but they usually are willing to make smaller loans.
v) Insurance Companies: For many small businesses, life insurance companies can be an important
source of business capital. Insurance companies offer two basic types of loans: policy loans and
mortgage loans. Policy loans are extended on the basis of the amount of money paid through
premiums into the insurance policy. It usually takes about two years for an insurance policy to
accumulate enough cash surrender value to justify a loan against it. Once cash value is
accumulated in a policy, an entrepreneur may be deferred indefinitely. However, the amount of
insurance coverage is reduced by the amount of the loan. Only insurance policies that build cash
value, that is, combine a savings plan with insurance coverage offer the option of borrowing. This
includes whole life (permanent insurance), variable life, universal life, and many corporate-owned
life insurance policies. Term life insurance, which offers only pure insurance coverage, has no
borrowing capacity.

Insurance companies make mortgage loans on a long-term basis on real property. They are based
primarily on the value of the real property being purchased. The insurance company will extend a
loan of up to 75 to 80 percent of the real estate’s value, and will allow a lengthy repayment
schedule over 25 to 30 years so the payments do not strain the firm’s cash flow excessively.
iv) Bonds (also known as debt securities): A bond is a long-term contract in which the issuer,
who is the borrower, agrees to make principal and interest payments on specific dates to the
holder of the bond. Bonds have always been a popular source of debt financing for large
companies. Few small business owners realize that they can also tap this valuable source of
capital. Although, the smallest businesses are not viable through bonds when banks and other
lenders say no.

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Although they can help small companies raise much needed capital, bonds have certain disadvantages.
The issuing company must follow the same regulations that govern business-selling stock to public
investors. Debt financing has both advantages and disadvantages;

Advantages
 No relinquishment of ownership is required
 More borrowing allows for potentially greater return on equity
 During periods of low interest rates, the opportunity cost of borrowing is low
Disadvantages
 Regular (month) interest payments are required
 Continual cash flow problems can be intensified because of pay back responsibility
 Heavy use of debt can inhibit growth and development

II) EQUITY-CAPITAL
Equity capital represents the personal investment of the owner (or owners) in a business, and it is some
times called risk capital because these investors assume the primary risk of losing their funds if the
business fails. However, if the venture succeeds, they also share in the benefits, when can be quite
substantial. The use of equity capital thus requires no repayment in the form of debt. It does, however
require entrepreneurs earnings (if there are any) and usually to have a voice in the business’s future
directions. In short, it requires sharing the ownership and profits with the funding sources. Since no
repayment is required, equity capital can be much safer for new ventures than debt financing. Yet the
entrepreneur must consciously decide to give up part of ownership in return for funding. Although 50
percent of something is better than 100 percent of nothing giving up control of your business can be
disconcerting and dangerous.

SOURCE OF EQUITY CAPITAL

I) Personal Savings: The first place entrepreneurs should take for start up money is in their own
pockets. It is the least expensive source of funds available. The sooner you take outside money, the
more ownership in your company you will have to surrender, entrepreneurs apparently see the benefits
of self-sufficiency; the most common source of equity funds used to start a small business is the
entrepreneur’s pool of personal savings. As a general rule, entrepreneurs should expect to provide at
least half of the start up funds in the form of equity capital. If the entrepreneur is not willing to risk his
own money, potential investors are not likely to risk their money in the business either. Furthermore, if
an owner contributes any less than half of the initial capital requirement, he must borrow an excessive
amount of capital to fund the business properly, and the high repayment schedule put intense pressure
on cash flow. In some cases, however, a creative entrepreneur is able to invest as little as 10 percent of
the initial capital requirement. The important point is that an entrepreneur should not surrender all
hopes of going into business he is unable to provide half of the starting funds.

II) Friends and Relatives: After emptying their own pockets, entrepreneur should turn to friends and
relatives who might be willing to invest in the business venture. Because of their relationship with the
founder theses people are most likely to invest. But having them invest can lead to controversy if their
participation is not clear to everyone. Inherent dangers lurk in family business investments, however.
Unrealistic expectation or misunderstood risks have destroyed many friendship and have ruined many
family reunions. To avoid such problem, an entrepreneur must honestly present the investment
opportunities and the nature of risks involved to avoid alienating friends and family members if the
business fails.

III) Angels: After dipping into their own pockets and convincing friends and relatives to invest in their
business ventures, many entrepreneurs still find themselves short of the seed capital they need.
Frequently, the next step on the road to business financing is private investors. These private investors
(or angles) are wealthy individuals, often entrepreneurs themselves, who invest in business start ups in
exchange for equity stakes in the companies.

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Angels are a primary source of start up capital for companies in the embryonic stage through the
growth stage and their role in financing small business is significant. Due to the inherent risks in start
up companies, many venture capitalists have shifted their investment portfolios away from start-ups
toward more established firms. That is why angel financing is so important. Angels will often finance
the deals that no venture capitalists will consider. Most angels have substantial business and financial
experience and prefer to invest in companies at the start up or infant growth stage. Angels also look for
businesses they know something about and most expect to invest their knowledge, experience and
energy as well as their money in a company. Angels tend to invest in clusters as well with the right
approach and entrepreneur can attract and angel who might share the deal with some of his/her closes
friends or companions.

Angels are an excellent source of “patient money” often willing to wait seven years or longer to cash
out their investments. They earn their returns through the increased value of business, not through
dividends and interests. For example, more than 1,000 early investors in Microsoft Inc. (now a giant in
computer software industry) are now millionaires. Angels return on investment targets tend to be lower
than those of professional venture capitalists. While venture capitalists shoot for 60 percent to 75
percent returns annually, private investors usually settle for 35 percent (depending on the level of risk
involved in the venture). Private investors typically take loess than 50 percent ownership, leaving the
majority ownership to the company founder(s)

IV) Partners: An entrepreneur can choose to take on a partner to expand the capital foundation of the
proposed business. Before entering into any partnership arrangement, however, the owner must
consider the impact of giving up some personal control over operations and of sharing profits with one
or more partners. Whenever an entrepreneur gives up equity in his/her business (through what ever
mechanisms), he/she runs the risk of losing control over it. As the founder’s ownership in a company
becomes increasingly diluted, the probability of losing control of its future direction and the entire
decision-making process increases.

a. Venture Capital Companies: Venture capital companies are private, for profit organizations that
purchase equity positions in young businesses they believe have high growth and high profit potential.
They provide start up (seed-money) capital to new ventures, development funds to businesses in their
early growth stage, and expansion funds to rapidly growing ventures that have the potential to “go
public” or that need capital for acquisitions.
a) Small business owners must realize that is very difficult for any small business, especially fledging
or struggling firms, to pass the intense screening process of a venture capital company and quality for
an investment. Two factors make a deal attractive to venture capitalists: high returns and a convenient
(and profitable) exit strategy.

b) Venture capitalists are extremely well informed about the industries in which they invest, and most
have experienced market research departments that provide information vital to the enterprise. As
stockholders, venture capitalists are anxious to help business succeed, and they provide consultation to
assist entrepreneurs in every way possible. Most venture capitalist maintain frequent contract with their
entrepreneurs, and through their contacts, they provide access to prospective customers, suppliers, and
professional services. In many instance, they also become “mentors”/advisors. Venture capitalists are
involved, but they do not try to take over the business. They are primarily investors and are not
interested in managing the business in which they invest. To do so would mean that venture capitalists
would have to personally assume management responsibilities for a dozen or more new business every
year. Consequently, entrepreneurs are not likely to lose control of their businesses. To the contrary,
venture capitalists invest because they are reasonably convinced that entrepreneurs are capable.

Vi. Public Stock Sale (Going Public): In some cases, entrepreneurs can “go public” by selling share of
stock in their corporation to outside investors. This is an effective method of raising large amounts of
capital, but it can be an expensive and time consuming process filled with regulatory nightmares.

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Going public is not for every business. In fact, most small companies do not meet the criteria for
making a successful public stock offering. It is almost impossible for a start up company with no track
record of success to raise money with a public offering.
Here are some of the advantages to this approach;
 Size of capital amount: selling securities is one of the fastest ways to raise large sum of capital
in a short period of time.
 Liquidity: The public market provides liquidity for owners since they can readily sell their
stock.
 Value: The market place puts a value on the company’s stock, which in turn allows value to be
placed on the corporation.
 Image: The image of a publicly traded corporation often is stronger in the eyes of suppliers,
financers, and customers.

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