JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
Continuing and Distance Education

Entrepreneurship and Enterprise Development

Revised by: Tsigereda Aboye (MBA)

Abera Jaleta (MBA)

January, 2020
Jimma, Ethiopia
Table of Contents
CHAPTER ONE ........................................................................................................1
ENTREPRENEURSHIP AND FREE BUSINESS ENTERPRISE ..........................1
Contents .....................................................................................................................1
Unit Objectives ..........................................................................................................1
Introduction ................................................................................................................2
1.1. Definition of Entrepreneur, Entrepreneurship and Enterprise ............................................. 3
1.2. The relationship between Entrepreneur, Entrepreneurship and Enterprise ......................... 4
1.3. Essential Characteristics of an Entrepreneur ....................................................................... 5
1.3.1 Entrepreneurial Mindset............................................................................................ 9
1.3.2 Entrepreneurial Skills.................................................................................................... 9
1.3.3 Wealth of the Entrepreneur .......................................................................................... 12
1.5 Intrapreneurship: Developing Entrepreneurship in the Corporation .................................. 15
1.6Role of entrepreneurship in economic development ........................................................... 16
1.7The Relationship between Creativity, Innovation and Entrepreneurship ............................ 17
1.7.1Creativity....................................................................................................................... 18
1.7.2. Innovation ................................................................................................................... 20
1.8Entrepreneurship as a career option ..................................................................................... 22
Self-Assessment Questions ......................................................................................24
CHAPTER TWO .....................................................................................................26
SMALL BUSINESS MANAGEMENT ..................................................................26
Unit objectives .........................................................................................................26
Introduction ..............................................................................................................26
2.1. Concepts and definition of Small Business ....................................................................... 27
2.2. Importance of small business enterprise ............................................................................ 29
2.2.1. Advantages of going into Small Business .................................................................. 31
2.3 Small Business Failure factors ............................................................................................ 32
2.3.1. Problems in the Ethiopian small business ................................................................... 35
 Securing finance: One of the primary problems that could be given priority is the
difficulty in securing funds for the establishment and running of the small business
enterprises. ............................................................................................................................ 35
o The availability of finance is not quite enough for people with interest on the small
scale business industry. By lacking finance, the economically poor people left with only
passion are refrained from making their ideas into profitable businesses. And also the
existing small businesses suffer from the non-availability of enough finance to keep the
business running.................................................................................................................... 35
 Lack of management competence and exposure: The business activities are to be
guided and lead by competitive personnel to attain the desired financial and non-financial
goals. ..................................................................................................................................... 35
o Lack of enough exposure to the technology and complicated situations make the
available owners or managers incompetent for guiding the businesses towards the desired
target. .................................................................................................................................... 35
  Non availability of raw materials: One of the serious problems facing today‘s small
entrepreneurs in Ethiopia is the lack of suitable raw materials.......................................... 35
o Though the foreign investment and technology brings enough for the functioning of
small businesses, the non-availability of raw materials in the desired quantity and quality
keeps the capital and efficiency of the workforce unused to the optimum level. ................. 36
 Markets and distribution networks: Finding markets in the economy is another
obstacle for the development and growth of small business entrepreneurs. ......................... 36
o Though the marketing activities are remaining in a vulnerable stage the distribution
network is also not found satisfactory. ................................................................................. 36
o The infrastructures like roads and related facilities in developing areas form a
considerable hurdle for marketing and distribution activity. ................................................ 36
 Limited government support: The amount of support provided to the small
entrepreneurs and women business population is not reached the required level. ............... 36
o So the encouragement for people to engage in small businesses remains to be
challenging. ........................................................................................................................... 36
 Absence of technological know-how: One of the serious problem hinders the growth
of small business in Ethiopia is lack of education and especially in the technical knowhow.
36
o Irrespective of the government steps in increasing the education and training in the
entire needed fields like agriculture, information technology, health, etc the problem of poor
knowledge still persists to become a major factor responsible for the wastage of resources.
This costs so much for the small businesses too, which operates with little capital............. 36
 Widespread corruption: When the issue of corruption is raised in Ethiopia almost
always we mean the involvement of a private party that pays, or is ready to pay, money to a
public figure in order to gain advantage. .............................................................................. 36
o This is generally referred to as private to public corruption. Because this type of
corruption is said to impede the development of markets, drive away investment, increase
the costs of doing business, and undermine the rule of law.................................................. 36
o But private to private corruption which is in an undisguised or disguised form also
present in has not attracted the same interest or attention. Private to private corruption is as
serious as the private to public corruption. ........................................................................... 36
2.4. Entrepreneurship and Business Enterprise Creation .......................................................... 37
2.4.1. Steps in Setting a Small Business ............................................................................... 38
iv. Business Structure selection: The structure of a business is not simple activity to
make decision........................................................................................................................ 39
 Whether to choose the partnership, or a sole proprietorship or any form of a corporation
will have an impact on the business liability, fund-ability as well as taxes due. .................. 39
vi. Business Location: One of the multitudes of tasks in starting a business is locating a
site for the preferred business. .............................................................................................. 39
 A lot of variables should be taken into account if one should decide to do a business in a
certain location. ..................................................................................................................... 39
 There are many steps in office set up including where to locate the office either in home
or to hire a specific office space, buying the necessary office equipment, designing your
work space and getting supplies. .......................................................................................... 39
2.5 Legal Forms of Business Ownership .................................................................................. 40
Summary ..................................................................................................................47
Self-assessment questions ........................................................................................47
CHAPTER THRE ....................................................................................................48
FEASIBILITY ANALYSIS, PROJECT REPORT AND BUSINESS PLAN ........48
Contents ...................................................................................................................48
Unit objectives .........................................................................................................48
Introduction ..............................................................................................................48
3.1. Feasibility Analysis............................................................................................................ 49
3.1.1 Market Analysis ........................................................................................................... 50
3.1.2 Financial Analysis........................................................................................................ 50
3.1.3 Technical Analysis ....................................................................................................... 51
3.1.4 Economic Analysis ...................................................................................................... 51
3.1.5 Ecological Analysis ..................................................................................................... 52
3.1.6. Legal and Administrative Analysis ............................................................................. 52
3.2 Project Report ..................................................................................................................... 52
3.3Registration .......................................................................................................................... 53
3.4 Preparing a Business Plan ................................................................................................... 54
The business plan is a written document that sets out the basic idea underlying a business
and related start-up considerations. It can be viewed as entrepreneur‘s game plan. For the
starting of a new venture, a business plan has four basic objectives that include: ............ 54
 It identifies the nature and context of the business opportunity. .................................... 54
 It presents the approach the entrepreneur plans to take to exploit the opportunity. ....... 54
 It identifies the factors that will most likely determine the success of the venture........ 54
 It serves as a tool to raise financial capital. .................................................................... 54
A business plan has two primary functions: ....................................................................... 54
 To provide a clearly articulated statement of goals and strategies for internal use and . 54
 To serve as a selling document to be shared with outsiders........................................... 54
3.4.1 Advantages of writing a business plan......................................................................... 54
3.4.2 Elements of a Business Plan ........................................................................................ 56
1. Introductory Page ............................................................................................................. 57
2. Table of Contents .............................................................................................................. 58
4. Environment and Industry Analysis.................................................................................. 58
5. Description of venture....................................................................................................... 60
6. Production/Operation/ Plan............................................................................................... 61
7. Marketing Plan .................................................................................................................. 61
8. Financial Plan.................................................................................................................... 65
10. Assessment of Risk ......................................................................................................... 70
Summary ..................................................................................................................71
Self-assessment questions ........................................................................................72
Discus the Following Questions ..............................................................................72
Chapter Four ............................................................................................................73
Product and Service Concept ...................................................................................73
Contents ...................................................................................................................73
Unit objective ...........................................................................................................73
Introduction ..............................................................................................................73
4.1. Product and Service Concept ............................................................................................. 74
4.2 Product development process ............................................................................................. 76
4.3 New Product Development Process .................................................................................... 76
4.4 Product Protection............................................................................................................... 78
4.4.1 Patent............................................................................................................................ 79
4.4.2Trademark ..................................................................................................................... 80
Registration can be used as a basis for obtaining registration in foreign countries. ............. 81
4.4.3Copyright ...................................................................................................................... 83
4.5The Intellectual Property System in Ethiopia ...................................................................... 84
4.6 Challenges facing the IP System in Ethiopia ...................................................................... 87
Unit summary ...........................................................................................................87
Self –Check Review Questions................................................................................88
CHAPTER FIVE .....................................................................................................91
MARKETING AND NEW VENTURE DEVELOPMENT ...................................91
Contents ...................................................................................................................91
Unit objective ...........................................................................................................91
Introduction ..............................................................................................................91
5.1Marketing Research ............................................................................................92
5.1.2 Marketing Research Components .................................................................................... 92
5.1.3 Marketing research classification .................................................................................... 93
5.1.4Marketing Research Process ......................................................................................... 94
5.2 Marketing Intelligence ........................................................................................................ 97
5.2.1The importance of Market and Competitive Intelligence ............................................. 97
5.2.2 Ways to undertake market intelligence ........................................................................ 97
5.3 Competitive Analysis .......................................................................................................... 98
5.3.3 Steps of Competitive Analysis ..................................................................................... 99
5.4 Marketing Strategy............................................................................................................ 101
5.4.1 Pricing Strategy.......................................................................................................... 101
5.4.2 Promotion Strategies .................................................................................................. 102
5.4.3. Distribution Strategies .............................................................................................. 103
5.5International Marketing ..................................................................................................... 105
5.5.1 Why go international? ................................................................................................ 105
5.2.2Challenges (unique features) of IM ............................................................................ 106
5.5.3 International market Entry Strategies ........................................................................ 106
Summary ................................................................................................................108
Self –Check Review Questions..............................................................................109
CHAPTER SIX ........................................................................................................112
FINANCING THE NEW VENTURE ........................................................................112
Contents .................................................................................................................112
Unit objectives .......................................................................................................112
Introduction ............................................................................................................112
6.1 Financial Requirements .................................................................................................... 113
6.2 Sources of Finance ............................................................................................................ 115
6.2.1Equity or Debt Financing ............................................................................................ 115
Advantages and disadvantages of equity Financing ........................................................... 117
6.2.2Lease Financing .......................................................................................................... 118
Summary ................................................................................................................119
Self-assessment questions ......................................................................................119
CHAPTER SEVEN ..................................................................................................121
GROWTH STRATEGIES FOR SMALL BUSINESS .........................................121
Contents .................................................................................................................121
Unit objectives .......................................................................................................121
Introduction ............................................................................................................121
7.1 Need for Growth ............................................................................................................... 122
7.2 Types of Growth Strategies .......................................................................................... 124
7.2.1 Expansion.................................................................................................................. 124
7.2.2 Diversification............................................................................................................ 126
7.3 External Growth Strategy (Joint Ventures and Mergers) .......................................... 132
7.4 Sub - Contracting .............................................................................................................. 137
Summary ................................................................................................................137
Self- assessment questions .....................................................................................138
References ..............................................................................................................141
 CHAPTER ONE

ENTREPRENEURSHIP AND FREE BUSINESS ENTERPRISE

Contents
1.1 Definition of Entrepreneur, Entrepreneurship and Enterprise
1.2. Difference between entrepreneur and entrepreneurship
1.3. Characteristics of an entrepreneur
1.4. Entrepreneur vs. manager relationship
1.5. Entrepreneurship VS Intrapreneurship
1.6. Levels of Entrepreneurial Development
1.7. Role of entrepreneurship in economic development
1.8. Creativity, Innovation and Entrepreneurship
1.9. The Desire to take up Entrepreneurship as a Career

Unit Objectives
Dear distance learner, after studying this chapter you should be able to:-
 Define and know the Meaning of Entrepreneur, Entrepreneurship and Enterprise
 Discuss the difference among entrepreneur, entrepreneurship and enterprise
 List the characteristics of entrepreneur
 Explain the different between entrepreneurship and intrapreneurship
 Differentiate the roles of an Entrepreneur and a Manager
 List the levels of Entrepreneurial Development
 Explain the Role of Entrepreneurship in Economic Development
 Explain the relationship between Creativity, Innovation and Entrepreneurship
 Develop the desire to take up Entrepreneurship as a Career
 Differentiate between Wage employment, Self-employment and Entrepreneurship

1
 Introduction
Do you know that there are a number of unemployed youth in the country and by the time you
graduate, this number may increase substantially? Do you want to be part of that group which
keeps knocking from pillar to post, checking with employment exchanges, relatives, friends,
and neighbors and still not able to get a job to their liking and then settle for a second or third
rate job? These all challenges can be solved by the active involvement of entrepreneurship in
the economic development of the nation.
Entrepreneurship is a dynamic process of vision, change, and creation. It requires an application
of energy and passion towards the creation and implementation of new ideas and creative
solutions. It requires essential ingredients of entrepreneurs such as the willingness to take
calculated risks; ability to formulate an effective venture team; the creative skill to marshal
needed resources; fundamental skills of building a solid business plan; vision to recognize
opportunity where others see chaos. Not all entrepreneurs are created equal degrees. Different
degrees/ levels of entrepreneurial intensity and drive depend upon how much independence one
exhibits, the level of leadership and innovation they demonstrate, how much responsibility they
shoulder, and how creative they become in envisioning and executing their business plans.

Entrepreneurship is basically concerned with creating wealth through production of goods and
services. This results in a process of upward change whereby the real per capita income of a
country rises overtime or in other words economic development takes place. Thus
entrepreneurial development is the key to economic development. In fact it is one of the most
critical inputs in the economic development of a region. It speeds up the process of activating
factors of production leading to a higher rate of economic growth, dispersal of economic
activities and development of backward regions.

Entrepreneurship is characterized by the utilization of a given opportunity through creativity and

innovation. Creativity is the ability to develop new ideas and to discover new ways of looking
at problems and opportunities. Innovation is the ability to apply creative solutions to those
problems and opportunities in order to enhance people’s lives or to enrich society.

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1.1. Definition of Entrepreneur, Entrepreneurship and Enterprise

 Activity
Dear distance learner, what do you understand from the words entrepreneur, entrepreneurship,
and enterprise?
(Write your answer in the space provided below)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
The term entrepreneur stems from the French word ‗entrependre‘ meaning one who undertakes
or one who is a ‗go-between‘. According to Richard Cantillon, ―an entrepreneur is a person who
pays a certain price for a product to resell it at an uncertain price, thereby making decisions about
obtaining and using the resources while consequently admitting the risk of enterprise‖.
According to J.B. Say, an entrepreneur is an economic agent who unites all means of production-
land of one, the labor of another and the capital of yet another and thus produces a product. By
selling the product in the market he pays rent of land, wages to labor and interest on capital and
what remains is his profit. He shifts economic resources out of an area of lower productivity into
an area of higher productivity and greater yield.
Entrepreneurship can be described as a process of action an entrepreneur undertakes to establish
his/ her enterprise. Entrepreneurship is a creative activity. It is the ability to create and build
something from practically nothing.
According to Peter Drucker Entrepreneurship is defined as ‗a systematic innovation, which
consists in the purposeful and organized search for changes, and it is the systematic analysis of
the opportunities such changes might offer for economic and social innovation.‘
According to Schumpeter entrepreneurs are innovators who use a process of shattering the status
quo of the existing products and services, to set up new products, new services. David
McClleland also defined entrepreneur as a person with a high need for achievement. He is
energetic and a moderate risk taker.

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Entrepreneurship is a creative activity. It is the ability to create and build something from
practically nothing. It is a knack of sensing opportunity where others see chaos, contradiction
and confusion. Entrepreneurship is the attitude of mind to seek opportunities, take calculated
risks and derive benefits by setting up a venture. It comprises of numerous activities involved in
conception, creation and running an enterprise.
In general, entrepreneurship is a dynamic process of vision, change, and creation. It requires an
application of energy and passion towards the creation and implementation of new ideas and
creative solutions. It requires essential ingredients that include: the willingness to take calculated
risk; the ability to formulate an effective venture team; the creative skill to marshal needed
resources; the fundamental skills of building a solid business plan; and the vision to recognize
opportunity where others see chaos, contradiction, and confusion.

1.2. The relationship between Entrepreneur, Entrepreneurship and

Enterprise

 Activity
Dear students, how can we link an entrepreneur with entrepreneurship and enterprise?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________

The term entrepreneur is used to describe men and women who establish and manage their own
business. The process involved in creating and starting an enterprise is called entrepreneurship.
Entrepreneurship is an abstraction whereas entrepreneurs are tangible people. Entrepreneurship
is a process and an entrepreneur is a person. Entrepreneurship is the outcome of complex socio-
economic, psychological and other factors. The entrepreneur is the key individual central to
entrepreneurship who makes things happen. The entrepreneur is the actor, entrepreneurship is
the act. Entrepreneurship is the most effective way of bridging the gap between knowledge and

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the market place by creating new enterprises. An entrepreneur is the catalyst who brings about
change.
An enterprise is the business organization that is formed and which provides goods and services,
creates jobs, contributes to national income, exports and overall economic development.

1.3. Essential Characteristics of an Entrepreneur

 Activities
Dear distance students, what kind of characteristics is essential to be extraordinary entrepreneur?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________

In the past, an entrepreneur was seen almost as a hero, such as Thomas Edison or Henry Ford,
who had a big idea, worked hard, and was creative enough to become a big success. The average
worker depended on the entrepreneurial hero to give them opportunities. An entrepreneur
frequently has to wear many hats. He has to perceive opportunity, plan, organize resources, and
oversee production, marketing, and link with officials. Most importantly he/she has to innovate
and bear risk.
In general, business literature shows several characteristics essential for entrepreneurs that
distinguish ordinary entrepreneurs from the extraordinary ones. The following are characteristics
that are found within all successful entrepreneurs and without which most people will fall short
of what it takes to succeed in an entrepreneurial enterprise.
 Confident
Confidence is a hallmark of the entrepreneur. Not all of us are born with confidence, but that
does not mean we are not capable of it. Many confident women and men gain their sense of self
esteem and faith in their ability to greet challenges by experience and formal education.
 Feel a Sense of Ownership
Taking responsibility for getting things done – and doing them with care and attention –
meaning, to act like an owner. Rather than viewing a problem as someone else‘s, the

5
entrepreneur sees it as his or her own and takes pride in finding a solution; leaving things in
better shape than they were before, and improving upon situations rather than leaving them
unattended. Rather than controlling situations in an attempt to possess them, the entrepreneur
teaches other people how to take charge. In that way the clever entrepreneur uses individual
accountability in the ultimate pursuit of profitability, teamwork, and overall success.

 Able to Communicate
Entrepreneurs recognize that the most important part of any business is the human element.
Human resources –whether in the form of clients, employees, or strategic partners – are what
make or break a business, and communication is the key to successful relationships with people.
The entrepreneur works to sharpen communication skills, whether those are written, spoken, or
non-verbal messages conveyed through body language. And to support communication, he or she
will take advantage of all available tools and resources.
Passionate about Learning
Entrepreneurs are often ―autodidactic‖ learners, which mean that much of what they know is
learned not in a formal classroom setting, instead on their own by seeking out information,
asking questions, and by personal reading and research. They also are quick to learn from their
own mistakes, which mean they are less prone to keep repeating them due to arrogance, ego, or
blindness to one‘s own faults, shortcomings, or errors in judgment. To teach is to learn. To lead,
train, and impart experience to others the entrepreneur is constantly striving to learn more, and
get better educated. Because of the passion for education, true entrepreneurs surround
themselves with people who either know more than they do or know things that are different
from what they know. They entertain the views and perspectives of others that may be unlike
their own, for instance, to be better students of human nature. In this way they continue to enrich
themselves with knowledge while making a concerted effort to grow that knowledge by sharing
it with others who are also front row students of life‘s valuable and unlimited lessons.
 Team Player
Team players know how to succeed by employing the physics of interpersonal synergy and
dynamic relationships. One twig can be easily snapped, but a bundle of those small twigs
becomes stronger than the sum of its individual parts and can be impossible to bend, much less

6
break. The same goes for businesses, and successful entrepreneurs leverage teamwork to get the
heavy lifting done without breaking stride.
 System-Oriented
Like mathematical formulas, good systems allow us to reproduce great results every time – with
less and less exertion of energy or resources. Entrepreneurs rely upon systems before they rely
upon people, and they look for system based solutions before searching for human resource
solutions. If the person gets the job done but falls sick or leaves, the job is threatened. But if a
system is created to get the job done, anyone can step in and follow the blueprint to get the
desired result. Designing, implementing, and perfecting systems is one of the most useful and
rewarding skills of an entrepreneur.
 Dedicated
Entrepreneurs dedicate themselves to the fulfillment of their plans, visions, and dreams, and that
tenacity of purpose generates electricity throughout the whole organization. One of the biggest
reasons that companies fail is because they lose focus. Target a goal, clarify the objective, refine
the brand, and narrow the margin of error. Regardless of what the effort might involve, an
entrepreneur brings a single-minded dedication to the task by being committed to a positive
outcome and ready and willing to do the needful. No matter what that might mean in terms of
rising to meet a challenge or acting above and beyond the call of duty, the entrepreneur shows
steadfast dedication.
 Grateful
Being grateful for what we have opens us up to receive more, and one reason that is true is
because those who are grateful appreciate what they are given. They respect it and nurture it.
They do their best to make it grow instead of allowing it to dwindle away due to neglect.
Entrepreneurs learn to take nothing for granted in this world. That gives them the agility and
flexibility to adapt to changes and demands, while it also invests in them a thankfulness that
reminds them that riches and wealth are not about ―stuff‖, but are about fulfillment, satisfaction,
and the pleasure that comes from one‘s accomplishments and contributions.
 Optimistic
A positive outlook is essential for the entrepreneur, who learns to see setbacks as bargain priced
tuition for the valuable business lessons gained through firsthand experience. Past shortcomings,
failures, or disappointments are relegated to the past so that they cannot continue to haunt the

7
present or obstruct the future. And when things go right and business prospers, this further fuels
the optimism and positive mindset of an entrepreneur, helping to give impetus and momentum
for greater accomplishments and increased hopefulness.
 Gregarious
Because business is all about people, entrepreneurs tend to be socially outgoing. They get excited
about sharing ideas, products, and services, and that excitement is contagious to their employees,
clients, friends, and other contacts both within and beyond the business sphere. But women and
men who work hard as entrepreneurs also enjoy the unique opportunity to have fun doing
something that they love as their primary vocation. Human resource experts, career counselors,
and business psychologists all agree that those who do jobs they enjoy and are good at have
higher rates of success and broader measures of satisfaction. Entrepreneurs know that firsthand,
from their own experience, and they tend to be a fun-loving group of people both on and off the
job.
 Leader by Example
Entrepreneurs not only lead themselves through self-motivation as self-starters who jump into
tasks with enthusiasm, but they are also skilled at leading others. They know the importance of
teamwork, and they understand the need to appreciate others, support them, and reward them
accordingly. True leaders do not become indispensable, otherwise things fall apart in their
absence and they can never rise to the highest level of entrepreneurial freedom and prosperity.
 Not Afraid of Risk or Success
Many people could be successful if they only took chances. And many people who do take
chances and become somewhat successful find the realization of their dreams an overwhelming
possibility, so they interrupt their continued success by retreating back into a comfort zone of
smallness. Those who cling to what is familiar to them – even if it means the denial of their
dreams – lack the perseverance and ambition that the real entrepreneur exhibits. Entrepreneurs
are not immune to fear. But they prioritize their approach to life so that the fear of failure,
frustration, boredom, drudgery, and dissatisfaction far outweighs the persistent fear of success.

 Dear students from the given entrepreneur characteristics which one is seen in
your character and which one is not seen?
(Give your answer here below)

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 ________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

1.3.1 Entrepreneurial Mindset

 Activity
Dear students, Who Becomes an Entrepreneur?
______________________________________________________________________________
______________________________________________________________________________
Anyone with the following characteristics can be an entrepreneur.
1) The Young Professional: Increasingly young highly educated people often with
entrepreneurial qualifications are skipping the experience of working for an established
organization and moving directly to work on establishing their own ventures.
2) The Inventor: The inventor is someone who has developed an innovation and who has
decided to make a career out of presenting that innovation to the market. It may be a new
product or it may be an idea for a new service. It may be a high-tech or it may be based on a
traditional technology.
3) The Excluded: Some people turn to an entrepreneurial career because nothing is open to
them. Displaced communities and ethnic and religious minorities have not been invited to
join the wider economic community due to a variety of social, cultural and political and
historical reasons. As a result they may form their own internal networks, trading among
themselves and, perhaps, with their ancestral countries.

1.3.2 Entrepreneurial Skills

A skill is simply knowledge which is demonstrated by action. It is an ability to perform in a

certain way. An entrepreneur is someone who has a good business idea and can turn that idea
into reality. To be successful, an entrepreneur must not only identify an opportunity but also

9
understand it in great depth. He or she must be able to spot a gap in the market and recognize
what new products or services fill the gap. He or she must know what features it will have and
why they will appeal to the customer. The entrepreneur must also know how to inform the
customer about it and how to deliver the new offerings. All this calls for an intimate knowledge
of a particular sector of industry. Turning an idea into reality calls upon two sorts of skills, these
are:
I. General management skills and
II. People management skills
I) General Management Skills: These are skills required to organize the physical and financial
resources needed to run the venture. Some of the most important general management
business skills are:
 Strategy Skills – An ability to consider the business as a whole, to understand how it
fits within its market place, how it can organize itself to deliver value to its
customers, and the ways in which it does this better than its competitors.
 Planning Skills – An ability to consider what the future might offer, how it will
impact on the business and what needs to be done to prepare for it now.
 Marketing Skills – An ability to see past the firm‘s offerings and their features, to be
able to see how they satisfy the customer‘s needs and why the customer finds them
attractive.
 Financial Skills – An ability to manage money; to be able to keep track of
expenditure and to monitor cash-flow, but also an ability to assess investments in
terms of their potential and their risks.
 Project Management Skills – An ability to organize projects, to set specific
objectives, to set schedules and to ensure that the necessary resources are in the right
plat of the right time.
 Time Management Skills – An ability to use time productively, to be able to
priorities important jobs and to get things done to schedule.
II) People Management Skills: Businesses are made by people. A business can only be
successful if the peoples who make it up are properly directed and are committed to make an
effort on its behalf. An entrepreneurial venture also needs the support of people from outside
the organization such as customers, suppliers and investors. To be effective, an entrepreneur

10
 needs to demonstrative a wide variety of skills in the way he/she deals with other peoples.
Some of the more important skills we might include under this heading are:
 Communication Skills – An ability to use spoken and written language to express
ideas and inform others.
 Leadership Skills – An ability to inspire people to work in a specific way and to
undertake the tasks that are necessary for the success of the venture.
 Motivation Skills – An ability to enthuse people and get them to give their full
commitment to the tasks in hand. Being able to motivate demands an understanding
of what drives people and what they expect from their jobs.
 Delegation Skills – An ability to allocate tasks to different people. Effective
delegation involves more than instructing. It demands a full understanding of the
skills that people possess how they use them and how they might be developed to
fulfill future needs.
 Negotiation Skills – An ability to understand what is wanted from a situations, what
is motivating others in that situation and recognize the possibilities of maximizing
the outcomes for all parties.
All these different people skills are interrelated. Here entrepreneurial performance results from a
combination of industry knowledge, general management skills; people skills and personal
motivation (see the figure shown below). The successful entrepreneur must not only use these
skills but learn to use them and to learn from using them. Entrepreneurs should constantly avoid
their abilities in these areas, recognize their strengths and weaknesses, and plan how to develop
these skills in the future.

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Fig1.1: entrepreneurial skills

1.3.3 Wealth of the Entrepreneur

 Activity

Dear distance students, who will benefits from the entrepreneur‘s Wealth?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Wealth is money and anything that money can buy. It includes money, knowledge and assets of
the entrepreneur.
No entrepreneur works in a vacuum. The venture they create touches the lives of many other
people. To drive his/her venture forward, the entrepreneur calls up on the support of a number of
different groups. In return for their support these groups expect to be rewarded from the success
of the venture. Peoples who have a part to play in the entrepreneurial venture generally are called
stakeholder. The stakeholder groups are; employees, investor, supplier, customer, the local
community and government. Let us look at the benefits of each stakeholder.
1) Employees: They contribute physical and mental labor to the business. Success of the
entrepreneurial venture depends on their effort and motivation. Therefore, they are rewarded
with:
 Money – their wage or salary
 The possibility of owning a part of the firm through share schemes.
 A stage of which they can develop social relationships.
 The possibility of personal development.
2) Investors: These are the peoples who provide the entrepreneur with the necessary money to
start the venture and keep it running. There are two main sorts of investors: stockholders and
lenders. Stockholders are those who buy the stock of the company and are true owners of the
firm. The actual return of the stockholders varies depending on how the business performs.
Lenders, on the other hand, are people who offer money to the venture on the basis of it
12
 being a loan. They do not actually own a part of the firm and their return is independent of
the businesses performance. They also take priority for payment over shareholders and face
lower level of risk than the stockholders.
3) Supplier: They are the individuals and organizations who provide the business with the
materials, productive assets and information it needs to produce its output. They are paid for
providing these inputs.
4) Customers: Customers may need to make an investment in using a particular supplier.
Changing supplier may involve switching costs and supplier, risk of quality and expenses
incurred in changing over to new inputs. The entrepreneur may reward customers by offering
quality products, fair prices, regular and consistency of supply, loan arrangement etc.
5) The local community: Business has physical locations. The way they operate may affect the
people who live and other businesses which operate nearby.
A business has a number of responsibilities, which may be defined or not in national laws, to
this local community. Such as:
 Not polluting their shared environment
 Contributing and sponsoring local development activities
 Contribution for political and cultural stabilities and economic improvements
 Acting in an ethical way.
6) Government: The responsibility of government is to ensure that businesses can operate in an
environment which has political and economic stability. In addition, it provides central
services such as education and health-care. These activities cost money to provide.
Therefore, government should be rewarded for its services. Hence, government taxes
individuals and businesses.
1.4. Entrepreneur vs. manager
 Activity
Dear distance learner, Are all small entrepreneurs managers? Are all small business managers
entrepreneurs?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

13
The terms entrepreneur and manager are many times used interchangeably yet they are different.
An entrepreneur starts a venture then a manager takes over to organize and co-ordinate
continuous production. An entrepreneur is being enterprising as long as he starts something new
then the routine day-to-day management of the business is passed on to the manager. The main
differences between the two are summed up below:

Entrepreneur Manager
 An entrepreneur is involved with the  A manager runs the business over a
start-up process long period of time
 An entrepreneur assumes financial,  A manager does not have to bear risks
material and psychological risks
 An entrepreneur is driven by perception  A manager manages by the resources
of opportunity he currently possesses
 An entrepreneur initiates change  A manager follows rules & procedures
 An entrepreneur is his own boss  A manager gets fixed rewards and
salary
 An entrepreneur gets uncertain reward

Some business literature tells us that a business owner who hires a professional manager to run
his business and then turns his own interests to other things is not an entrepreneur. Although he
is assuming the risk of the venture, he is not actively involved in organizing and operating it. A
professional manager whose job is running someone else's business is not an entrepreneur.
Although she may be organizing and operating the enterprise, she is assuming no personal risk
for its success or failure. These traits are administrative. These literatures reveal the following
as behaviors seen in administrative organizations:
• measuring success based on the use of existing resources
• focusing on quick results
• making decisions slowly
• showing little willingness to change after a decision to commit resources is made
• using well defined structures with a well-defined line of authority and responsibility

14
 • Concentrating on risk reduction.

1.5 Intrapreneurship: Developing Entrepreneurship in the Corporation

 Activity
Dear students who is intrapreneur and where we find him or her? What kinds of situations
motivate a person to be intrapreneur.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Intrapreneurship is also known as corporate entrepreneurship or corporate venturing. It is the
practice of developing a new venture within an existing organization, to exploit a new
opportunity and create economic value.

Intrapreneur is a person who focuses on innovation and creativity and who transforms a dream or
an idea into a profitable venture, by operating within the organizational environment.
Intrapreneurs, by definition, embody the same characteristics as the entrepreneur: conviction,
passion, and drive. An intrapreneur thinks like an entrepreneur seeking out opportunities, which
benefit the corporation. It is a new way of thinking, in making companies more productive and
profitable. It indicates visionary employees who think like entrepreneurs.

If the company is supportive, the intrapreneur succeeds. When the organization is not, the
intrapreneur usually fails or leaves to start a new company. The major thrust of intrapreneuring is
to develop the entrepreneurial spirit within organisational boundaries, thus allowing an
atmosphere of innovation to prosper.
Reasons for rise of Intrapreneurship
This need has arisen in response to a number of pressing problems, including:
 a rapidly growing number of new and sophisticated competitors,
 a sense of distrust in the traditional methods of corporate management,
 an exodus of some of the best and brightest people who are leaving corporations to become
small-business entrepreneurs,

15
  international competition,
 downsizing of major corporations, and an overall desire to improve efficiency and
productivity

1.6Role of entrepreneurship in economic development

 Activity
Dear distance students, do you agree that entrepreneurship is significant for the economic
development of one country if your answer is yes, then how it could be?
(Give your answer on the space provided below)
________________________________________________________________
________________________________________________________________
______________________________________________________________
Economic development essentially means a process of upward change whereby the real per
capita income of a country increases for a long period of time. The economic history of the
presently developed countries, for example, USA and Japan tends to support the facts that the
economy is an effect for which the entrepreneurship is the cause.
The crucial role played by the entrepreneurs in the western countries has made the people of
underdeveloped countries conscious of the significance of entrepreneurship in economic
development. Therefore, entrepreneurship is a necessary dynamic force for economic
development. The important role that an entrepreneurship plays in the economic development of
an economy can be put in a more systematic manner as follows:
 Entrepreneurship promotes capital formation by mobilizing the idle saving of the public.
 It provides immediate large-scale employment. Thus it helps to reduce unemployment in
the country.
 It provides balanced regional development.
 It helps reduce the concentration of economic power.
 It stimulates the equitable redistribution of wealth, income and even political power in the
interest of the country.
 It encourages effective resources mobilization of capital and skill which might otherwise
remain unutilized and idle.

16
  It also induces backward and forward linkages which stimulated the process of economic
development in the country.
 It promotes country‘s export trade i.e. an important ingredient for economic development.

1.7The Relationship between Creativity, Innovation and Entrepreneurship

 Activity
Dear students, is there any relationship among creativity, innovation, and entrepreneurship? If
there is a relationship what are they?
(Write your answer here below)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Creativity is thinking new things, and innovation is doing new things. What is the entrepreneur‘s
secret for creating value in the marketplace? In reality, the secret‟ is no secret at all. It is
applying creativity and innovation to solve problems and to exploit opportunities that people face
every day. Let us define creativity and innovation and show the following relationship.

Figure1.1. Creativity, innovation and entrepreneurship

17
Creativity is the ability to develop new ideas and to discover new ways of looking at problems
and opportunities. Innovation is the ability to apply creative solutions to those problems and
opportunities in order to enhance people’s lives or to enrich society. In other words, creativity
is thinking new things, and innovation is doing new things. Researchers believe that
entrepreneurs succeed by thinking and doing new things, or doing old things in new ways. Both
innovation and job creation involve the creation of new organizations with interdependent
activities carried out by several people to accomplish a goal. Through innovation, entrepreneurs
create new organizations in our economy, our political process and our educational process and
generate economic, cultural, social and political variety. In doing so, they also precede and create
the context for management. In other words, they develop organizations that are subsequently in
need of strategy, structure, performance, culture and, above all, change. In short, having a great
new idea is not enough, something must happen
Income
Entrepreneurship = creativity + innovation. In turn, entrepreneurship is the result of a
disciplined, systematic process of applying creativity and innovation to needs and opportunities
in the marketplace. It involves applying focused strategies to new ideas and new insights to
create a product or a service that satisfies customers’ needs or solves their problems. A lot of
people come up with creative ideas for new or different products and services but most of them
never do anything with them. Entrepreneurs are those who marry their creative ideas with the
purposeful action and structure of a business. Successful entrepreneurs are associated with a
constant process that relies on creativity, innovation and application of that innovation in the
marketplace.

1.7.1Creativity

Entrepreneurs must always be on guard against traditional assumptions and perspectives about
how things ought to be. Such assumptions are quick killers of creativity. Such self-imposed
mental constraints and other paradigms that people tend to build over time damage creative
minds. A paradigm is a preconceived idea of what the world is? What should Creativity and
Innovation look like? And how they should operate? Sometimes, these ideas become so deeply

18
rooted in our minds that they become immovable blocks to creative thinking, even though they
may be outdated, obsolete and no longer relevant. These blocks can act as logjams to creativity.

The following is a creativity Model that can help in real situations to remove these logjams and
enhance creative thinking.

Modeling creativity
Building a creative environment takes time, but the payoffs can be phenomenal. Research shows
that to encourage people to be more creative entrepreneurs have to create an environment that
values their creativity. Although new ideas may appear to strike suddenly, they are actually the
result of the systematic process which involves the following steps:

Phase1. Preparation: It is the background, experience, and knowledge that an entrepreneur

brings to the opportunity recognition. This is through reading, professional conferences, talking,
visit to library.

Phase 2: Incubation process: It is a stage during which a person considers an idea, thinks about
a problem; it is the ―mulling/considering things over‖ phase. This phase requires sleep on the
issue‟, and exercises it
Phase 3: idea generation or ‘eureka’ experience, usually this phase slowly but surely
formulates the solution.
Phase 4: Evaluation and implementation, e.g. prototypes, advice. This is a stage of the
creative process during which an idea is subjected to scrutiny and analyzed for its viability.
Then the creative idea is put into a final form; details are worked out and idea is transformed into
something valuable.

Barriers to Creativity
The following discussions of background material about barriers to creativity and developing
creativity are not as important as the discussion above about developing creativity, but we might
like to consider it as an optional reading. The number of potential barriers to creativity is almost
limitless. They include time pressures, unsupportive environment and overly rigid policies and

19
strategies. Perhaps the most difficult hurdles to overcome, however, are those that individuals
impose on themselves. Roger Von Oech (1990) identifies ten ―mental locks‟ that limit individual
creativity:
1. Searching for the one ―right‖ answer.
2. Focusing on being logical.
3. Blindly following the rules.

4. Constantly being practical.

5. Viewing play as frivolous.

6. Becoming overly specialized.

7. Avoiding ambiguity.

8. Fearing looking foolish.

9. Fearing mistakes and failure.

10. Believing that ―I am not creative”.

By avoiding these ten mental locks, entrepreneurs can set free their own creativity as well as the
creativity of those people around them. Research shows that successful entrepreneurs are willing
to take some risks, explore new ideas, constantly ask ―what if?‖ and learn to appreciate
ambiguity. By doing so, entrepreneurs can develop the skills, attitudes and motivation that make
them much more creative – one of the keys to entrepreneurs is ‟successful performance‖.

1.7.2. Innovation

Entrepreneurship centers on novelty and the generation of variety in the marketplace and means
that the processes of innovation are at work. In some economic theories, innovation is a key,
defining aspect of entrepreneurship. Schumpeter (1934) was first to point out the importance of
new value created by entrepreneurs. More recently, Carland, Hoy, Boulton and Carland (1984)
extended and specified Schumpeter‘s idea, saying that entrepreneurs:
• Introduce new goods
• Introduce new services
• Introduce new methods of production

20
 • Open new markets
• Open new sources of supply, and
• Reorganize industry.

Four Types of Innovation

There are four distinct types of innovation, these are: invention, extension, duplication and
synthesis. Invention has been described as the creation of a new product, service or process.
Extension is said to be the expansion of a product, service or process. Duplication has been
defined as replication of an already existing product, service or process. Finally, the combination
of existing concepts and factors into a new formulation has been identified as synthesis.

Peter Drucker (1984) defines entrepreneurship in terms of the generation of new jobs and the
production of new flows of income. To some people innovation refers to an end product or
practice perceived as new by the individuals. However, innovation also implies
commercialization of new ideas and/or the implementation and change of existing systems,
products, and resources. To Peter Drucker (1985), innovation is the specific function of
entrepreneurship and defines what is entrepreneurial and what is managerial. He refers to
innovation as a process of bringing inventions into use through engineering, organizing and
marketing. Other observers and writers focus on innovations embedded in larger organizations.
Innovation is thought to be necessary for change and long-term survival of these organizations.
They see the innovation process as one that is recognized as new by the adopting system and/or
one that results in a major restructuring of the adopting system. So far we have talked about what
innovation means within the context of entrepreneurship, we now turn our attention to the
innovation process.

The Innovation Sources: Sources of innovation in terms of the main areas are where new ideas
come from. The main areas are: Unexpected occurrences, process needs, and gaps between
expectations and reality. The market is one of the main sources of innovation. In a constantly
changing market new ideas are always presenting themselves. Other sources include
demographic changes and changes in perception.

21
Principles of Innovation While innovation encompasses a large area, it is pertinent to point out
that there are a number of principles of innovation. An important message here is that
entrepreneurs must realize that these principles exist and that they can be learned. One of the
principles is to be action-oriented. The entrepreneur must always be looking for new ideas.
Making the product, process or service simple and understandable is another example of a
principle of innovation. A few more include: make the product, process or service customer-
based, start small, aim high, follow a milestone schedule, and the like. Taking the preceding
framework into account, it is significantly important to remember that the last, but by no means
least important, principle is work, work and more work.
.

1.8Entrepreneurship as a career option

 Activity

Do you think that entrepreneurship can be a career option?

__________________________________________________________________
__________________________________________________________________

After finishing your graduation you will be at the crossroads of life. You will face the dilemma
of choosing what you have to do in life. The vast majority of human beings direct their activities
towards earning a living, generating wealth and improving their standard of living. You can
choose your career from two broad categories of options – Wage Employment or
Entrepreneurship. The term ‗career‘ signifies a continuous, ever evolving, ever expanding
opportunity for personal as well as business growth and development. We may define
entrepreneurship as a career in your own business [YOB] rather than wage employment [JOB] .If
you opt for a job then you will work for others. In case you option for entrepreneurship you will
be your own boss.
In case of wage employment one is engaged in routine work carried on for others for which he
receives salary or wages. He/she has to follow instructions and execute plans laid down by
his/her superior. One can choose to be employed in the Public Sector or the Private sector. Some
of the main differences between entrepreneurship and wage employment career options are as

22
under- the context of employment generation. The three terms- Income generation, Self-
employment and Entrepreneurship are often used interchangeably.

Income generation is the initial stage in the entrepreneurial process in which one tries to generate
surplus or profit. They are often taken on part- time or on casual basis to supplement income e.g.
a man with some surplus money might put his money in a fixed deposit account in a bank or a
chit -fund to earn some interest.
Self-employment is the second stage in the entrepreneurial process and refers to an individual‘s
fulltime involvement in his own occupation. e.g. a person who starts a tea shop and remains
happy and satisfied and has no plans to add on any other items like buns, soft drinks etc. or to
grow in any other manner[e.g. supplying tea/coffee/sandwiches to others in the vicinity].

Entrepreneurship is the terminal stage of the entrepreneurial process wherein after setting up a
venture one looks for diversification and growth. We will learn more about entrepreneurship a
little latter in the lesson. An entrepreneur is always in search of new challenges. An entrepreneur
is not a routine businessman. He might not have resources but he will have ideas. He is
innovative and creative. He can convert a threat into an opportunity. Small businessman might
shut-down or change his business if he anticipates losses but an entrepreneur will try again after
analyzing the situation. On the other hand an entrepreneur can leave a perfectly running business
to start another venture if he so desires.

Functionally all entrepreneurs are self-employed and income generating persons but the reverse
is not true- all self-employed and income generating persons are not entrepreneurs. If seen on a
continuum, income generation, self-employment and entrepreneurship can be considered as the
initial, middle and final stages of the entrepreneurial growth process. Income generating
experience encourages self-employment, which in turn facilitates graduating into
entrepreneurship.

Summary
23
The term entrepreneur stems from the French word ‗entrependre‘ meaning one who undertakes
or one who is a ‗go-between. . Entrepreneur is the key individual central to entrepreneurship who
makes things happen. Entrepreneur is the actor, entrepreneurship is the act. Entrepreneurship is a
dynamic process of vision, change, and creation. It requires an application of energy and passion
towards the creation and implementation of new ideas and creative solutions. It requires essential
ingredients include: the willingness to take calculated risk; the ability to formulate an effective
venture team; the creative skill to marshal needed resources; the fundamental skills of building a
solid business plan; and the vision to recognize opportunity where others see chaos,
contradiction, and confusion.
The terms entrepreneur and manager are many times used interchangeably yet they are different.
An entrepreneur starts a venture then a manager takes over to organize and co-ordinate
continuous production. An entrepreneur is being enterprising as long as he starts something new
then the routine day-to-day management of the business is passed on to the manager.
Not all independent business people are true entrepreneurs, and not all entrepreneurs are created
equal. Different degrees or levels of entrepreneurial intensity and drive depend upon how much
independence one exhibits, the level of leadership and innovation they demonstrate, how much
responsibility they shoulder, and how creative they become in envisioning and executing their
business plans.

Entrepreneurship is the result of a disciplined, systematic process of applying creativity and

innovation to needs and opportunities in the marketplace. It involves applying focused strategies
to new ideas and new insights to create a product or a service that satisfies customers‟ needs or
solves their problems.

Self-Assessment Questions
Part I Multiple choice questions

1. Who are the potential candidates to be entrepreneur?

A. investors
B. young professionals

24
C. the excluded
D. all of the above
2. Where individual skills are collectively integrated into a group, this is known as:-
A. Collective entrepreneurship
B. Intrapreneurship
C. Team entrepreneurship
D. Dual innovation
E. None of the above
3. Which of the following is NOT a characteristic of a typical entrepreneur?
A. Confidence in his/her ability to succeed
B. Value of money over achievement
C. Desire for immediate feedback
D. A future orientation
E. None

Part II Discussion Questions

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

25
 CHAPTER TWO
SMALL BUSINESS MANAGEMENT
● Contents
2.1 Concepts and definition of small business
2.2 importance of small business enterprise
2.3 Small Business Failure factors.
2.4 Entrepreneurship and Business Enterprise Creation
2.5 legal forms of business ownership

Unit objectives
Dear learner, this chapter is meant to acquaint you with the basic concepts of small business
management. Thus, after going through this lesson you should be able to:
 Understand general concepts of small business
 write economic, social, and economic contribution of small business enterprise
 Identify small business failure factors
 Integrate the knowledge necessary to establish a small business venture
 Scan the business environment in terms of the entrepreneurial opportunities and threats
 Identifying important business ideas
 Tap the sources for idea generation.
 To know different forms of legal ownership

Introduction
Specifying size and standard to define small business is necessarily arbitrary, because people
adopt different standards for different purposes. Based on socio- economic conditions, countries
define small business differently. But all may use size and economic criteria as a base to define
small business. Size criteria include number of employees and the startup capital. Size does not
always reflect the true nature of an enterprise; in addition, qualitative characteristics are used to
differentiate small business from other business. The economic/control definition covers market
share, independence and personalized management.

26
Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an
important role in both developed and developing economies. Ethiopia is no exception and SMEs
occupy a prominent position in the development of the Ethiopian economy. While the small
entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the flexibility
to handle the vagaries of the market, they have to face many problems like lack of fiancé, poor
operations management, lack of experience, poor financial management, etc,. The process of
setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a
difficult task and involves scanning the environment and the use of creativity and innovation.

2.1. Concepts and definition of Small Business

 Activity
Dear distance learner, what are the criteria‘s to classify a business under small business
enterprise?
(Write your answer on the space provided below)
________________________________________________________________
______________________________________________________________
Specifying size and standard to define small business is necessary, because people adopt
different standards for different purposes. For example, legislators may exclude small firms from
certain regulations and specify ten employees as the cut-off point. Moreover, a business may be
described as ―small‖ when compared to larger firms, but ―large‖ when compared to smaller ones.
For example, most people would classify independently owned gasoline stations, neighborhood
restaurants, and locally owned retail stores as small business.
Similarly, most would agree that the major automobile manufacturers are big businesses. And
firms of in-between sizes would be classified as medium on the basis of individual viewpoints.
There are two approaches to define small business. They are: Size criteria and Economic/control
criteria.
The legal definition of "small" varies by country and by industry, ranging from fewer than 15
employees under the Australian Fair Work Act 2009, 50 employees in the European Union, and
fewer than 500 employees to qualify for many U.S. Small Business Administration programs.

27
Small businesses are common in many countries, depending on the economic system in
operation.

―A 'small business' is a separate and distinct business entity, including cooperative enterprises
and non-governmental organizations, which is managed by one or more owners and which
predominantly carries on business in any sector or subsector of the economy.‖

There is no universally accepted definition of MSEs both in Ethiopia and in the rest of the world.
Most of the time even definitions in other countries lack uniformity and usually reflect the
relative development of the respective economies (Beyene, 2000). And in the same way, the
definition employed in Ethiopia is also quite different from others defined. Thus, as it is shown
in the FMSEDA (2011), the government of Ethiopia defined as:
 MSE engaged in manufacturing
o Micro Enterprises are those business enterprises engaging up to 5 persons
including self-employment and with total assets not exceeding Birr 200,000 and
o Small Enterprises are those business enterprises engaging between 6 and 30
persons and with total assets of above Birr 200,000 and not exceeding Birr
1.5million.
 MSE engaged in trade and service sector as:
o Micro Enterprises are those business enterprises engaging up to 5 persons
including self-employment and with total assets not exceeding Birr 50,000 and
o Small Enterprises are those business enterprises engaging between 6 and 30
persons and with total assets of above Birr 50,000 and not exceeding Birr
500,000.

Table 1: MSE Definitions Employed in Ethiopia--- defined both in terms of paid up capital
and number of workers.
Enterprise scale Sector Human Total asset
Resource
Manufacturing ≤5 ≤ Br. 100,000
Micro enterprise Service ≤5 ≤ Br. 50,000
Manufacturing 6-30 ≤ Br. 1.5 million
Small enterprise Service 6-30 ≤ Br. 500,000
Medium enterprise Manufacturing Over 30 >1.5 million

28
 Service Over 30 > Br. 500,000

Source: Micro and Small Enterprises Development Policy and Strategy of Ethiopia, (2011)
Here, the government of Ethiopia uses total assets and the number of employees and in both
definitions if one of the criteria is not fulfilled the governing criteria will be total asset and the
enterprise will be defined or categorized accordingly.

2.2. Importance of small business enterprise

 Activity
Dear learners, what is the role of small business enterprise in economy.

________________________________________________________________
________________________________________________________________
The role of small business is of decisive importance in any economy. Most countries define
small business, as an enterprise in terms of employment levels. The small business sector is very
important in most nations of the world as they offer the major economic advantages. Therefore,
entrepreneurship is needed to encourage small business for the following advantages;
1. Source of new goods and services: The small businesses which owned and controlled by the
innovative entrepreneurs offers a wide scope for new product and service development. The
innovation of entrepreneurs to be competitive results in the improved goods and services
availability for the public.
2. Employment generation: The small business sector can make significant contribution to
employment generation and also to rural industrialization, because of its low capital intensity
and high labor absorption nature.
3. Growth potential: The small business industry is ideally suited to build on the strengths of
our traditional skills and knowledge by infusion of the technologies, capital and innovative
marketing practices. The opportunities for the small businesses are enormous due to various
reasons like extensive promotion and support by the government and its need of low
technical and managerial skills.
4. Export contribution: Overall small business production contributes to the growth of export
trade and related business to the country and improves the foreign trade which would result
in foreign currency income.

29
5. Flexibility: Small firms are better able to adapt to changing and sometimes disruptive
economic circumstances. Due to its flexibility, the sector is hovering to attract both
technology and funds to generate rapid growth and sustained process of technology up
gradation and quality improvement.
6. Decentralization: Large enterprises are most concentrated in grown and big cities. Since the
small business units are located mostly in the rural belt these firms prevent the concentration
of power in a few hands. In addition, they also help in ensuring equitable distribution of
wealth.

7. Distribution of economic power: the equality argument implies that the income generated
from large number of small enterprises is distributed more widely in the community as
compared to income generated in a few large enterprises. The income benefit to small
enterprises is derived by a large population, while large enterprises encounter more
concentration of economic power.

8. Mobilization of resources: The small enterprises are able to tap talent resources. In fact, the
growth of an entrepreneurial class requires a congenial environment. Small enterprises
provide that environment which encourages a growing network of feeder and complementary
relations among plants and firms. It is in this environment that latent talents of individual
entrepreneurs find self-expression in localized innovations and cost saving measures.

9. Optimal utilization of local resources: The wide spread dispersal of small businesses also
contributes to an effective and optimal utilization of local resources. This is augmented by
the fact that the use of traditional or conservative technologies by the small firms does not
require superior inputs. The servicing of local demands and markets by small business units
enables better utilization of local resources especially raw material which if transported
outside, will lead to drain of material from the country. Independence is another advantage of
owning a small business.
Small and medium enterprises (SMEs) cover a wider spectrum of industries and play an
important role in both developed and developing economies. Ethiopia is no exception and SMEs
occupy a prominent position in the development of the Ethiopian economy. Over the years, the
number of SMEs is growing form time to time. They need a strong support on Scio- economic
and political ground. Some of the contributions are hereunder.

30
2.2.1. Advantages of going into Small Business

The desire for individuals to own and operate their own small business is growing. As stated
earlier, this continual creation of new business is at the heart of free enterprise system. For
individuals pursuing a career in business ownership, numerous benefits can be attained
personally as well as professionally. The next section explains the following common
advantages of owning a small business:
 Independence
Most small business owners enjoy being their own boss; they like the freedom to do things their
own way. Although a great deal of responsibility is associated with this independence, they are
also willing to assume it.

 Financial Opportunities
Another major reason for going into business for oneself is financial opportunity. Many small
business owners make more money running their own company than they would be working for
someone else.
 Community Service
Sometimes an individual will realize that a particular good or service is not available. If the person has
reason to believe the public will pay for such output, he or she will start a small company to provide it.
 Job Security
When one owns a business, job security is ensured. The individual can work as long as he or she wants;
no mandatory retirement exists.
 Family Employment
Another advantage is the opportunity to provide family members with employment. This has several
benefits. First, owner-managers want to perpetuate their business and how better to do it, then to get
children or relatives to take it over. Second, higher moral and trust usually occur more in family-run
businesses than others. Third, in times of severe economic downturn, small business owners can provide
employment for family members.
 Learning from Challenge
Many small business owners are attracted by the challenge that accompanies going in to
business for oneself. Research reveals that most successful small business owners like to feel

31
they have a chance to succeed (they want to know success is possible) and the chance to fail.
They learn from the past failure or success.

 Introducing Innovation
New products that originate in the research laboratories of big business make a valuable
contribution to our standard of living. There is question, however, as to the relative importance
of big business in achieving the truly significant innovations. The record shows that many
scientific breakthroughs originated with independent inventors and small organizations.

 Catering for small or niche markets: Large firms with high overheads must produce high
levels of output to spread costs. By contrast, small firms are able to make a profit on much lower
sales figures. They can therefore sell into much smaller markets that are ignored by larger
organization: e.g. a local window cleaner serving a few hundred houses, a specialist jeweler with
personal clients.

2.3 Small Business Failure factors

Dear distance students, try to explain the cause of small business failure?
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________________________
As far as the causes for the failure in small business industry are concerned, it cannot be
attributed to a single factor. In fact, it is an outcome of the cumulative effect of many factors
working simultaneously which may not be closely inter-related. The important causes of failure
can be listed as given below;
Mismanagement: Management must be intelligent, brilliantly capable, decisive, innovative,
very efficient and assuring.
 Comparatively management in small businesses is inherently more difficult and complex
due to its nature of single management band. As a result of this all areas of small
business are not effectively managed.

32
  In most of the failed small enterprises the management fails to take proper decisions on
routine matters. Important decisions regarding site selection, production process,
promotion avenues, marketing management e.t.c are often ignored.
Implementation delay: In cases of newly established small business, it often faces a delay in the
implementation of its plans. For example, a delay in the construction of the building within the
scheduled time, would lead to delay in the installation of plant and machinery and consequently
the working capital could not be used in time.
 Inability to implement the contingency plan in time would in turn, delay the release of
further installations. Side by side, costs also shoot up and the demand projections become
obsolete. It is obvious that in such cases of sequential delays in implementation of plans,
failure is anticipated from the very initial stage of a project.
Poor information system: Extremely poor information and reporting system is a normal
feature in small businesses where accounts, flow planning, costing, budget control, breakdowns,
sales revenues, financial statements, statement of chargeable current assets etc, are not properly
reported on a day-to-day basis.
 It shows the presence of intensely low level of communication and information system.
Improper technology: Obsolete technology has been one of the major causes of failure in small
business units.
 Frequent breakdowns, inefficiency in machinery performances due to inadequate
maintenance, and delays in renovating or replacing the machinery are a normal feature
in these industries.
 The situation becomes worse when instead of using the funds for depreciation or
development rebates are diverted towards new and unrelated activities.
Marketing: Small business generally adopts a traditional way of marketing where ‗more‘ is
regarded as ‗better‘.
 If marketing places a continuous reliance on the promotion of material consumption, it
would lead to a prosperous stage of industrial growth small enterprises fail mainly
become sick mainly because of their inability to market their products for various
reasons such as poor quality of products, lack of market information, poor advertising,
obsolete technical back-ups, less competitive potentials, lack of professionalism, etc.

33
Overtrading: The firms grow at a faster rate than they are able to finance from internally
generated cash flow and bank borrowings.
 The firm focuses only on sales, regardless of whether or not, the same is profitable.
Profit margins are reduced and unprofitable buyers are wooed just to increase the
unprofitable sales growth.
 There is also shortage of cash because the unit‘s sale, stock levels and general sales
grows faster than their capital allows. A business which tends to have such way of career
is ensured of its failure.
Competition: In the present liberalized atmosphere, the small units have to face intense
competition in the market.
 Those having greater price inelasticity of the product suffer more; they generate fewer
profits and have lower borrowing power.
 With scarce funds and lots of competitors, the firms will not be able to invest much in
the development of new products, innovative marketing techniques, product promotions
etc.
Raw materials and cost of production: Cost of production depends on the availability of raw
material used in production. But, mostly due to shortage or poor quantity of raw materials, cost
acceleration makes the product less competitive. Further, shortage of raw material leads to
waste of productive capacity, which is loss for the production unit.
 Entrepreneurs depend on intermediaries for arranging the required materials which
further inflate the cost and also they may provide inferior quality of raw material on the
other hand. These factors adversely affect the final product.
Human resource: The availability of cheaper labor is abundant but the trained and skilled
personnel are more mandatory for the organizations.
 The most efficient use of the resources largely depends upon the quality of the manpower
employed.
 The business units established in remote and least developed areas are likely to face the
problem of skilled manpower like qualified engineers, senior managers etc., who are at times
not interested to work in such remote locations.

34
In addition to these factors the other factors which is responsible for failure of the small business
firms are a high degree of gap of communication, absolutely no reward or recognition system
and poor delegation of authority and responsibility.

2.3.1. Problems in the Ethiopian small business

 Activity
Dear students have you notice the problem of small business enterprise in our country? What are
they?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Micro and small enterprises are faced with a myriad of constraints and challenges. Some of the
identified problems of small businesses in Ethiopia are listed here;
 Securing finance: One of the primary problems that could be given priority is the difficulty
in securing funds for the establishment and running of the small business enterprises.
o The availability of finance is not quite enough for people with interest on the small
scale business industry. By lacking finance, the economically poor people left with only
passion are refrained from making their ideas into profitable businesses. And also the
existing small businesses suffer from the non-availability of enough finance to keep the
business running.
 Lack of management competence and exposure: The business activities are to be guided
and lead by competitive personnel to attain the desired financial and non-financial goals.
o Lack of enough exposure to the technology and complicated situations make the
available owners or managers incompetent for guiding the businesses towards the
desired target.
 Non availability of raw materials: One of the serious problems facing today‘s small
entrepreneurs in Ethiopia is the lack of suitable raw materials.

35
 o Though the foreign investment and technology brings enough for the functioning of
small businesses, the non-availability of raw materials in the desired quantity and
quality keeps the capital and efficiency of the workforce unused to the optimum level.
 Markets and distribution networks: Finding markets in the economy is another obstacle
for the development and growth of small business entrepreneurs.
o Though the marketing activities are remaining in a vulnerable stage the distribution
network is also not found satisfactory.
o The infrastructures like roads and related facilities in developing areas form a
considerable hurdle for marketing and distribution activity.
 Limited government support: The amount of support provided to the small entrepreneurs
and women business population is not reached the required level.
o So the encouragement for people to engage in small businesses remains to be
challenging.
 Absence of technological know-how: One of the serious problem hinders the growth of
small business in Ethiopia is lack of education and especially in the technical knowhow.
o Irrespective of the government steps in increasing the education and training in the
entire needed fields like agriculture, information technology, health, etc the problem of
poor knowledge still persists to become a major factor responsible for the wastage of
resources. This costs so much for the small businesses too, which operates with little
capital.
 Widespread corruption: When the issue of corruption is raised in Ethiopia almost always
we mean the involvement of a private party that pays, or is ready to pay, money to a public
figure in order to gain advantage.
o This is generally referred to as private to public corruption. Because this type of
corruption is said to impede the development of markets, drive away investment,
increase the costs of doing business, and undermine the rule of law.
o But private to private corruption which is in an undisguised or disguised form also
present in has not attracted the same interest or attention. Private to private corruption is
as serious as the private to public corruption.
Energy problem: Shortage and unavailability of power has done irreparable harm to most of the
small businesses.

36
  Especially in country like Ethiopia where the power source is depending solely on the
water resources the small business fails to flourish due to lack of enough power.
 So a better managed power sector and energy policy is required to encourage small
entrepreneurs and to save the small businesses from falling sick due to this power
shortage.

2.4. Entrepreneurship and Business Enterprise Creation

Setting a Small Business

 Activity
Dear distance learner, what is a basic Business idea?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
All new ventures begin with an idea. A business idea is a concept which can be used for
commercial purposes.
 It typically centers on a commodity or service that can be sold for money, according to a
unique model. There are several methods for developing and testing a business idea.
 The ability to come up with a business idea can be transformed into a viable business,
where ideas supported by feasibility and a business plan can then be sold to interested
investors, firms, and interested parties for a lump sum or a management contract, or as
agreed.
 Business ideas, if introduced at the right time, when demand for such service or a
product introduced by the idea is expected to surge, can lead to a very profitable business.
 Business ideas are always available through different sources; however, it is the
application applied on these ideas, and timing makes all the difference in failure or
success.
There should be an idea to decide what business to go in with.

37
  Some entrepreneurs choose their field because they already have extensive experience
with it.
 They have worked in a family business or held jobs with other employers.

2.4.1. Steps in Setting a Small Business

Starting a business means to share rewards and risks and so it is a serious endeavor and requires
considerable preparation. Starting a small business requires determination, motivation, and
know-how.
 If an entrepreneur is going to accept the challenge, then he/she must do everything he/she
can to improve the chances for success. Though there is no standard rule for the process
of starting a new business unit, the following steps are most common;
i. Identify Business Opportunity: Choosing what kind of business to start can be an
immobilizing task when confronted with the multitude of opportunities.
 It's important to determine where the entrepreneur‘s passion lays and to understand his
personality type. Yet, equally important is what skills he brings to the table for the
selected business. Identifying the opportunity and catch holding is itself a predominant
skill of an entrepreneur.
ii. Build a Business Plan: For any start-ups, a business plan allows to gain a better
understanding of the industry structure, competitive landscape, and the capital requirements
of starting a small business.
 New business success requires a combination of knowing is to be done and capitalizing
on a good opportunity. Writing a business plan just makes good business sense, which
will then serve as a road map. It will give a sense of direction and help to get on to the
destination with a minimum of time, effort, and expense.
iii. Funding the business plan: To start a business, financing is more important in the
business. The journey of finding startup funds will be different for each individual.
 Some startups such as consulting, requires a few thousands to get a business card even,
whereas a retail store could need more.
 Finding the money needed for the business may come from personal contacts, savings,
bank loans, government agencies etc. but formally pooling the finance resources is quite
important to have a physical start for a small business.

38
 iv. Business Structure selection: The structure of a business is not simple activity to make
decision.
 Whether to choose the partnership, or a sole proprietorship or any form of a
corporation will have an impact on the business liability, fund-ability as well as taxes
due.
v. Legalization: The business has to accomplish the legal requirements to have a smooth
startup and for various aids and benefits from the government for the future.
 Starting a small business requires a routine, yet necessary, paperwork and regulations.
That is like choosing the right name for the company, registering the business as per
the prevailing rules and regulations etc.
 The right business name will help to distinguish the business from competitors,
providing the customers with a reason, and aid in the branding of the company.
vi. Business Location: One of the multitudes of tasks in starting a business is locating a site for
the preferred business.
 A lot of variables should be taken into account if one should decide to do a business
in a certain location.
 There are many steps in office set up including where to locate the office either in
home or to hire a specific office space, buying the necessary office equipment,
designing your work space and getting supplies.
vii. Marketing: One major task in setting a new business is to market the goods or services
which is been produced or manufactured.
 Marketing the product or service of the business involves finding the right customers
and getting the right way to reach them, obtaining feedback from the market, facing
the available competition etc.
 Each step, executed in order, builds a solid foundation for the steps that follow. By
progressing in this manner, rather than using the typical haphazard approach, you
begin to gain the needed experience.
viii. Manage business to achieve preset goals: The last step in the process involves the
ongoing management of the started business. Getting a company started is only half the
battle. Once business is started, strong management tools and marketing skills are needed in
order to stay in business.

39
2.5 Legal Forms of Business Ownership
 Activity
A business can be start by one individual or with the group of people‘s dear students,
what are the legal forms of a business ownership?
(Write your answer on the space provided below)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
One of the first decisions a small business owner must make is to determine the legal form
of ownership of the enterprise. The vast majority of all legal business enterprises are
organized in one of the following four legal forms: sole proprietorships, partnerships,
limited companies or cooperatives.
1. Sole proprietorship/Sole trader
 It is a business concern owned and operated by one person. The sole proprietor is a
person who carries on business exclusively by and for him/herself.
 It is the most common and the easiest business to start and the initial costs are
usually lower than those for other legal forms.
 A business organized as a sole proprietorship is not separate from its owner, the
owner is the business and the business is the owner. They're inseparable.
Characteristics of sole proprietorship
 Single ownership
 One-man control/owner manager- No separate entity of the business
 Undivided risk
 Unlimited liability: A sole proprietor is personally liable for all the debts of the
business. If necessary, this liability includes all of the proprietor‘s personal
property and assets.
 Minimum government regulations (Since they have few legal requirements,
sole proprietorships are easy to form and operate).

Advantages of sole proprietorship Disadvantages of sole proprietorship

40
  Simplicity: it is very easy to  Unlimited liability
establish and dissolve the business.
 Quick decision  Limited skills
 High secrecy  Lack of continuity/uncertain life:
The business is terminated upon the
death or incapacity of the owner.
 Low costs to start  Difficulty in raising capital/limited
financial sources
 Minimum regulations  The sole proprietor is responsible
for all decisions
 Direct control of business/ personal
touch: the owner can maintain
personal contact with his employees
& clients.
 Low working capital requirements
 Tax advantages
 Owner receives all profits/ direct
motivation
 Flexibility

2. Partnership
 It is formed through an agreement among two or more persons to carry on jointly a
legalized business as co-owners.
 Like the sole proprietorship, it is not a separate legal entity from its owners.
 It is recommended that a partnership agreement, called the Articles of Co-
partnership or Memorandum of Association, be prepared in writing by a competent
attorney.
 The Memorandum of Association should contain at least the following provisions:

 division of profit or  compensation to each

loss partner

41
  distribution of assets in  duties of each partner
the event of dissolution  Persons who enter into such
 duration of the partnership agreement are partners.

Characteristics of Partnership
 Association of two or more persons
 Contractual relationship/ mutual agreement
 Existence of lawful business
 Sharing of profit and loss
 Mutual agency among partners: Each partner is responsible and liable for the faults
and wrongful acts of co-partners with regard to business obligations.
 No separate legal entity of the business
 Unlimited liability
 Restriction on transfer of interest
 Utmost good faith

Advantages of Partnership Disadvantages of Partnership

 Easy to form  Unlimited liability
 Low costs to start  Lack of continuity
 Larger/added capital sources  Lack of harmony
 Shared management/specialization  Shared authority
 Protection of minority interest: each  Difficulty in raising additional
partner has an equal role in capital/limited financial sources
management of firm‘s affair.
 Capacity for survival  Non-transferability of interest
 Tax advantages  Difficulty in finding suitable partners
 Business secrecy 

3. Share Company (Corporation)

 It is an association of stockholders that has been established to allow a group of
entrepreneurs to act as one.

42
 The officials of the share company must file a special document, called the Articles
of Incorporation/Charter.
 It is essentially an "artificial person" created and operated with the permission of
the state where it is incorporated.
 It's a person like you, but only "on paper.‘‘
 It has a separate legal entity, this allows the corporation to actually owns and
operates the business on behalf of the shareholder, under the shareholder's total
control.

 The separation between the owners and the business provides a legal distinction
between them and provides three important benefits:

1. It allows you, the owner, to hire yourself as an employee (typically as president)

and then participate in company-funded employee benefit plans like medical
insurance and retirement plans.

2. Since you and your company are now two separate legal entities, lawsuits can be
brought against your company instead of you personally.

3. When debt is incurred in the company name, a separate legal entity, you are not
personally liable and your assets cannot be taken to settle company obligations.

4. It is more difficult to form a share company than the other two types of business
given above, and it is usually more costly.

5. It is usually in the best position to obtain additional capital. In addition to pledging

corporate assets as collateral, a limited company may sell additional stock in the
company to raise funds.
Characteristics of Share Company
 Artificial personality: separate legal personality distinct from owners.

 Limited liability

 Continuity: it has a separate and continuous life of its own, and does not dissolve if
a stockholder dies or the stock is sold to another person.

44
  Double taxation/taxed twice: first there is tax on the amount of the business profits.
Then the owners are also taxed on any dividends they may receive.
 Managed by professional managers

Advantages of Share Company

 Limited liability
 Management can specialize
 Transferable of ownership
 Continuous existence/perpetuity
 Separate legal entity
 Potential tax advantages
 Easier to raise capital
 Separation of ownership and
management

45
Disadvantages of Share Company
 Closely regulated by state
 Most expensive form to organize (cost, time and paperwork)
 Charter restrictions
 Extensive record keeping required
 Double taxation (company and stockholders)
4. Cooperative
 It is a group of ten or more people operating a business through a jointly owned and
democratically run organization.

 The cost of registering a cooperative is usually lower than the cost for registering a
share company. A written cooperative agreement is required and must be filed with
the appropriate government authorities.

 The management of a cooperative is elected by the members of the cooperative.

 Each member of the cooperative is liable for the debts of the cooperative but only
in accordance with cooperative laws & regulations.
Advantages of cooperative Disadvantages of cooperative

 Means to empower poor women,  Hard to keep qualified members

disabled persons and other groups
who often lack a voice
 Joint self-help  Members contributing to cooperative
unequally
 Organizational structure helps all  Shared authority
members
 Shared risk-taking  Gender issues
 Easier to raise capital  Governance challenge
 Combines individual skills  Hard to keep qualified members
 Members contributing to cooperative
unequally

46
Summary
In most parts of the world the nomenclature used to define Small and Medium Enterprises
(SMEs) and the criteria for defining include the number of employees and /or the turnover, and
finical. That means using both size and economic control criteria. In Ethiopia the Small Scale
Industry evokes several socio-economic and political contributions. However, it is a sector which
is highly affected by different factors. Thus due attention is given in setting the enterprises and
good management is required while its operation. The process of setting up a venture begins with
searching for an opportunity. Identifying a good opportunity is a difficult task and involves
scanning the environment and the use of creativity and innovation. The process involves both
market identification as well as product / service identification. Rarely can one hit upon an idea
straight away. One has to be very sensitive to the changes in the business environment. A careful
analysis can help an entrepreneur to crystallize an idea. If it appears to be promising its viability
can be studied through a proper feasibility analysis.

Self-assessment questions
1. What are the major causes for failure of most small business?
2. How can the small business owner avoid the common pitfalls that lead to business failure?
3. What crucial roles do you think from the well managed small business?
4. What do you understand by the term business opportunity? What is its relevance for an
entrepreneur?
5. Describe the various forms of business ownership?
6. Do you think it is important for an entrepreneur to scan for opportunities in the small scale
sectors? Give reasons?
7. In your opinion what precautions should a potential entrepreneur take at the Idea Generation
Stage in an ever-changing business environment?

47
 CHAPTER THRE
FEASIBILITY ANALYSIS, PROJECT REPORT AND BUSINESS
PLAN
Contents
3.1. Feasibility Analysis
3.1.1 Market Analysis
3.1.2 Financial Analysis
3.1,3 Technical Analysis
3.1.4 Economic Analysis
3.1.5 Ecological Analysis
3.1.6 Legal and Administrative Analysis
3.2. Project Report
3.3 Registration
3.4. Business Plan

Unit objectives
Dear learner, this chapter is meant to acquaint you with the basic concepts and detailed analysis
of a business idea so that the venture becomes profitable. Thus, after going through this lesson
you should be able to:
 Conduct a feasibility analysis of the proposed business ideas with regard to marketability,
technical viability, funding, and legalities
 Prepare a business plan
 Recognize basic startup problems.
 Define what business plan is
 Know the advantage of preparing a business plan
 To identify the elements of business plan

Introduction
The process of setting up a business is preceded by the decision to choose entrepreneurship
as a career and identification of promising business ideas upon a careful examination of the

48
 entrepreneurial opportunities. Generation of ideas is not enough; the business ideas must
stand the scrutiny from techno-economic, financial and legal perspectives. That is, after the
initial screening of the ideas that do not seem promising, you should conduct an in-depth
examination of the chosen three to four before settling for the one where you would like to
exert your time, money and energy. You should prepare a business plan that will serve as the
road map for effective venturing, whether you may require institutional funding (in which
case it is necessary to do so) or not. Setting up of new business enterprise is a very
challenging task; you are likely to encounter many problems en route. It‘s advisable to be
aware of these problems as to forewarn means to fore arm.

Plans are part of any business operation. Planning is a process that never ends for a business.
It is extremely important in the early stages of any new venture when the entrepreneur will
need to prepare a preliminary business plan. For any given organization, it is possible to find
financial plans, marketing plans, human resource plans, production plans, and sales plans, to
name a few.
Plans may be short term or long term, or they may be strategic or operational. Plans also
differ in scope depending on the type of business or the anticipated size of the start up
operation. In this regard, plans can be classified in to three types: strategic plans, tactical
plans, and operational [Link] though they may serve different functions, all these plans
have one important purpose: to provide guidance and structure to management in a rapidly
changing market environment.

3.1. Feasibility Analysis

 activity
Dear learner, do you know something about the important facets of business venture feasibility
study? What factors are to be kept in mind while deciding on product/service development?
(Write your answer on the space provided below)

___________________________________________________________________________
___________________________________________________________________________
_________________________________________________________________________

49
 Feasibility literally means whether some idea will work or not. It is necessary to know
beforehand whether there exists a sizeable market for the proposed product/service, what
would be the investment requirements and where to get the funding from, whether and
wherefrom the necessary technical know-how to convert the idea into a tangible product may
be available, and so on. In other words, feasibility study involves an examination of the
operations, financial, HR and marketing aspects of a business before the venture comes into
existence. The module presents hereunder a brief outline of the issues impinging upon the
various aspects of the feasibility of the proposed business idea.
By now, you would have understood that feasibility is a multivariate concept; that is, a
project has to be viable not only in technical terms but also in economic and commercial
terms too. Moreover, there always is a possibility that a project that is technically possible
may not be economically viable.
.

3.1.1 Market Analysis

A market, whether a place or not, is the arena for interaction among buyers and sellers. From
seller‘s point of view, market analysis is primarily concerned with the aggregate demand of the
proposed product/service in future and the market share expected to be captured. Success of the
proposed idea clearly pivots on the continuing support of the customers. However, it is may be
difficult to identify the market for one‘s product/service. After all, the whole world cannot be
your market. You have to carefully segment the market according to some criteria such as
geographic scope, demographic and psychological profile of the potential customers. It is a study
of knowing who are your customers; for this you require information on: consumption trends,
past and present supply position, production possibilities and constraints, imports and exports
competition, cost structure, elasticity of demand, consumer behavior, intentions, motivations,
attitudes, preferences and requirements; distribution channels and marketing policies in use;
administrative, technical and legal constraints impinging on the marketing of the product.

3.1.2 Financial Analysis

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The objective of financial analysis is to ascertain whether the proposed project will be
financially viable in the sense of being able to meet the burden of servicing debt and whether the
proposed project will satisfy the return expectations of those who provide the capital. While
conducting a financial appraisal certain aspects has to be looked into like: investment outlay and
cost of the project; means of financing; projected profitability; break- even point; cash flows of
the project; investment worthiness judged in terms of various criteria of merit; and projected
financial position.

3.1.3 Technical Analysis

The issues involved in the assessment of technical analysis of the proposed project may be
classified into those pertaining to inputs, process and outputs.
Input Analysis: Input analysis is mainly concerned with the identification, quantification and
evaluation of project inputs, that is, machinery and materials. You have to ensure that the right
kind and quality of inputs would be available at the right time and cost throughout the life of the
project. You have to enter into long-term contracts with the potential suppliers; in many cases
you have to cultivate your supply sources.
Process Analysis: It refers to the production/operations that you would perform on the inputs to
add value. Usually, the inputs received would undergo a process of transformation in several
stages of manufacture. Where to locate the facility, what would be the sequence, what would be
the layout, what would be the quality control measures, etc. are the issues that you would learn in
greater details in subsequent lessons.
Output Analysis: this involves product specification in terms of physical features- color, weight,
length, breadth, height; functional features; chemical material properties; as well as standards to
be complied with such as industry level standard and country level standard.

3.1.4 Economic Analysis

Economic analysis is the study of costs- and- benefits. In regard to the feasibility of the study
the entrepreneur is concerned whether the total cost of the product is justifiable in comparison
with the price at which it will sell at the market place. This cost-benefit analysis goes into
financial calculations for profitability analysis that we discussed under financial analysis. At this
stage it is also useful to distinguish between the economic and commercial feasibility; whereas

51
economic feasibility leads one to the unit cost of the product, commercial feasibility informs
whether enough units would sell.

3.1.5 Ecological Analysis

In recent years, environmental concerns have assumed a great deal of significance especially for
projects, which have significant ecological implications like power plants and irrigation schemes,
and for environment polluting industries like bulk drugs, chemicals and leather processing. The
concerns that are usually addressed include the following:
 What is the likely damage caused by the project to the environment?
 What is the cost of restoration measures required to ensure that the damage to the
environment is contained within acceptable limits?

3.1.6. Legal and Administrative Analysis

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

3.2 Project Report

 Activity
Dear learners why do we write a project report?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
The findings of the feasibility analysis may be compiled in a project report. These findings may be
vetted by the independent consultants/experts. Funding agencies have their own set-up for the
appraisal of these reports. The idea is that the optimist entrepreneur may have overlooked certain
aspects that may have a bearing on the ultimate feasibility of the proposed business idea. It is often
felt that financial institutions tend to overemphasize the financial feasibility of the project and do not
pay adequate attention to its commercial and economic viability.

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3.3Registration
The first step for registration is to submit an application to the registrar in a prescribed form. In
addition, the following documents should be lodged with the registrar of the business
organization.
 The memorandum of association or the contract of partnership
 A notice published in a newspaper announcing the establishment of the business
organization.
Where the applicant is a share company, the following additional documents are required to be
submitted.
 A bank statement showing one quarter of the par-value of the shares or the capital
raised by public subscription is deposited.
 A specimen of share certificates for each class of shares.
Where the shareholder is a legal person incorporated in Ethiopia, the following additional
documents are required to be submitted.
 A copy of the company's entry in the commercial register.
 A resolution of the appropriate body of the company agreeing to the company's
participation in the company to be formed.
Where the shareholder is a legal person incorporated abroad, the following additional documents
are required to be submitted.
 A notarized copy of registration of the company in the country of origin.
 Copy of the memorandum and article of associations.
 An authenticated decision of the company's board of directors or a similar authorized
body to undertake business activities in Ethiopia. The decision should indicate the
amount of capital allocated and the individual appointed by the company to act on its
behalf.
 An authenticated power of attorney issued by an authorized organ of a company for
the permanent representative in Ethiopia.
 Financial reference from the company's bank.

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3.4 Preparing a Business Plan
 Activity
Dear students what is business plan and why we write business plan?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

The business plan is a written document that sets out the basic idea underlying a business and
related start-up considerations. It can be viewed as entrepreneur‘s game plan. For the starting of
a new venture, a business plan has four basic objectives that include:
 It identifies the nature and context of the business opportunity.
 It presents the approach the entrepreneur plans to take to exploit the opportunity.
 It identifies the factors that will most likely determine the success of the venture.
 It serves as a tool to raise financial capital.
A business plan has two primary functions:
 To provide a clearly articulated statement of goals and strategies for internal use and
 To serve as a selling document to be shared with outsiders.
Business Plans contain key elements that function to define the endeavors of a business
enterprise. The preparation of a business plan must be completed by the entrepreneur.
 Business plans are the difference between a business that succeeds and one that does not.
While the entrepreneur must develop his/her own plan, it is essential to have the plan
reviewed by professionals, and modified accordingly.
 It may also be advisable to employ a professional proposal writer, accountants, lawyers,
and other key individuals in its preparation. If the entrepreneur is going to need financing,
partners, or government approval of some kind, then the need for a professional business
plan writer becomes vital.
 Often the difference between the well accepted and funded business, and the ones which
fail, is in the presentation of the ideas and the packaging of the proposal.

3.4.1 Advantages of writing a business plan

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 1. Obtaining Bank Finance
For most banks it is usually enough that an applicant provides past and current financial
statement to get a formal hearing of loan if the business is not new but in today‘s world, just
getting hearing is not enough. Because more businesses are seeking bank financing than can be
financed by the bank, it is only those businesses that present the best case that are financed.
Therefore, the business plan helps you to present the business in convincing and feasible manner
and be financed. Since bankers are risk averse, a written business plan carries an important
message even before it is read. It is an indication that the company‘s executives are serious
enough to do formal planning and the project to be financed is a well thought over and
articulated business idea that can serve as an assurance for being financed.
2. Seeking investment fund
Venture capitalist and others require a business plan from any company that want to be taken
seriously for financing. Business plan is the most important one in this condition just like the
curriculum vitae for job application. Venture capitalists use business plans to screen out those
businesses to be financed. From among the potential applicants for finance those, which are more
convincing, well-articulated, feasible in terms of profitability and continuity will be selected. So
a well-written business plan expands the chance of being financed.

3. Arranging strategic alliance

Strategic alliances are arrangements between large and small companies to carry out joint
research, marketing and other activities. For small business arranging strategic alliance with a
large company can mean gaining access to important financial, distribution and other resources.
But before a large company will even consider a strategic alliance, its executive will want to
examine a smaller company‘s business plan.

4. Obtaining large contract

Smaller companies seek to obtain a large chunk of business from different corporation but
obtaining large contract is a common obstacle for small business. It comes when the corporation
representatives says something like ‗everyone knows who we are and we will be around long
enough to fill all the obligations, but very few people know the small and new business. At this
point, producing a business plan can go a long way towards reassuring a corporation that we will
be around and will discharge our responsibility that arises from the contract. The business plan

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demonstrates that you have thought well for longer period for several years and have plans for
what you have accomplished.
5. Attracting key employees
When a new or early stage company goes to hire top-level managers, it faces difficulty unlike
large companies. A prospective manager your company wants to hire may be considering leaving
a secure job with a larger business and wandering how long your company is going to be around.
If he/she feels too unsecured you cannot convince that person to join your company. Therefore,
availability of a business plan can serve as an indication of long-sighted nature of your business.
6. Completing merger and acquisition
Whether you want to acquire a new business or want to sell your business can also be indicated
in your business plan and the action of doing this will not be reactive as things are available to
you but it will be proactive and actions will move together with your plan.
7. Motivating your management Team
One of the major problem confronting growing companies is communicating company‘s strategy
and business approach within the company so that everyone will work towards the same goal.
 When individuals in a business have different visions about the company strategy,
customers will be confused about what the company is trying to accomplish.
 A written business plan that is based on inputs from all members of the company‘s
management team and distributed to all managers ensure that everyone understands what
where the company is headed.
 In the process, the plan serves as a motivational tool by laying out the company‘s
financial, marketing and production goals. Other benefits are derived from a business
plan from both the entrepreneur and the financial sources that read it and evaluate the
venture. Writing a business plan particularly for entrepreneurs have the following merits.

3.4.2 Elements of a Business Plan

There are no substitutes for a business plan and there is no short cut to produce a business plan.
Each of it is unique in terms the nature and the special contribution of the business to the
economy.

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  The elements of a business plan may be started but how entrepreneurs tell their story
should be unique and reflect their personal excitements about the new venture.
 Although building a business plan doesn‘t guarantee success, it does raise an
entrepreneur‘s chance of succeeding in a business.
A business plan typically ranges from 25-55 pages length. Shorter plans typically are too sketchy
to be of any value and those much longer ones are too long to be grasped very easily. The
following are part of a business plan.
1. Introductory Page
2. Executive Summery
3. Industrial analysis
4. Description of venture
5. Production/ Operation/ plan
6. Marketing plan
7. Organizational plan
8. Assessment of risk
9. Financial plan
10. Appendix

1. Introductory Page

This is the title or the cover page that provides a brief summary of the business plan‘s content. It
contains:
 The name and address of the company
 The name of the entrepreneur and addresses (Tele, fax, website, etc)
 A paragraph describing the company and the nature of the business
 The amount of financing needed and probably the combination of sources (stock, debt,
and their one investment)
 A statement of confidentiality of the report so that the idea will not be taken by some
body without the consent of the author.
 This page summarizes basic information that could take to much time and effort to
extract form the body of the report.

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2. Table of Contents

This includes the logical listing of all the business plans section together with section titles and
page numbers. Be sure to list the major section as well as for important sub- sections.
 This section enables potential reviewers or reader of the business plan to quickly go and
read the particular section of the business plan in which they are interested among other
parts of the business plan.
3. Executive Summery
This part of the plan is prepared after the total plan is written. This part should stimulate the
reader to go further and read the entire business plan.
 This is important section that shouldn‘t be written without proper care because investors
and other potential sources of finance decide whether reading the entire plan or not by
reading this part of the plan.
 It on average is written on two to three pages. An executive summery among other
things should contain at least the following.
 Brief discussion of the business concept
 The facts that support the relevance or opportunities of establishing the business
should be mentioned. This is the change in the economy, industrial expansion,
information technology expansion etc that are supported by facts should be presented
 The strategy that is designed to exploit this opportunity by establishing this business
should be briefly discussed. The kind of marketing strategy, management system, the
technique employed to pursue that opportunity and what makes this strategy to be
different from other which are being practiced in other organizations
 The potential benefits that can be accumulated by pursuing that strategy and the
financial feasibility of operating it should be presented
 In addition to this other information which is believed to have positive impact on
investors can be included in this part of the business plan.

4. Environment and Industry Analysis

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It is important to put a new venture in proper context by conducting environmental analysis to
identify trends and changes that is occurring in a national and international level that may affect
the new venture. The environmental analysis includes the following
Economy: The entrepreneur should consider trends in the gross national product, unemployment
by geographic area, disposable income of residents, the saving habit of people and so on.
Culture: An evaluation of cultural change may consider shifts in population, value system
towards for instance fashion, work, saving, safety, health and nutrition etc.
Technology: Although advances in technology are difficult to predict, the entrepreneur should
consider some potential changes in technology by considering resources allocated for
technological advancement by different organization.
 Being in a market that is rapidly changing due to technological development will require
the entrepreneurs to make careful short term decisions as well as to be prepared with
contingency given any new technological development that may affect the product.
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 price restriction on
media advertisement, safety regulation affecting the product or packaging should be assessed.
Such external variables are generally uncontrollable yet have impact on the business operation.
Once an assessment of the environment is complete; the entrepreneur should make industrial
analysis that will focus on specific industrial trends. Two of them are the industrial demand and
completion.
o Industrial Demand
It is often available from published sources. Knowledge about whether the market is growing or
declining, the number of new competitors, and the possible changes in consumers‘ needs are
important issues in trying to ascertain the potential benefit that might be achieved by the new
venture. The demand for entrepreneur‘s product requires marketing research that is going to be
discussed I the marketing plan component of the business plan.
o Competition
Most entrepreneurs generally face threats from larger corporations. The entrepreneurs must be
prepared for these threats and must keep him/her informed about who the competitors are and
what their strengths and weaknesses are so that effective marketing strategy is put into effect.

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The industrial analysis should finally need to have a briefing of the potential customers and their
profile; their location and trends occurring in the market area, and the market segment where by
the venture will serve and compete with.

5. Description of venture

This section begins by mission statement of the enterprise. This statement describes the nature of
business and what the entrepreneur hopes to achieve with the business. This mission statement is
also called the definition of business that guides the firm through long term decision-making.
After a mission statement important information that provides clear description and
understanding of the business venture is discussed. Some of the vital areas described here are the
following.
 Product
The business owner should describe the company‘s overall product line, giving an over view of
how customers use goods and services. Drawing, diagrams and illustration may be required if the
product is complicated. It is best to write product description so that anyone can understand it.
The entrepreneur should include a summary of any patent, copyright or trademark protecting the
product from infringement by competitors. Finally, the owner should honestly compare its
product with that of competitors citing specific advantages that makes the business‘s product
different from others.
 Location
The location of the business is vital for success of the business particularly if the business is
retail or involves service delivery. Thus the emphasis of location in the business plan is a
function of the type of business. In assessing the building or space that the business is going to
occupy, the entrepreneur is going to evaluate such factors as parking, access from road way to
facility, and access to customers, suppliers, distributors, delivery rates, town regulations, or
zoning laws. Too many entrepreneurs never look for location beyond their own home cities or
towns. When entrepreneurs try to stay in this ‗comfort zone‘, they often fail to discover location
that would be far superior and contribute significantly to the success of their own venture.
Consider these questions while addressing this section of the business plan:
 What does the location needs?
 What kind of space will you need?

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  What are the things desirable (building, new, old)
 Is that leased, rented, owned?
 Is it easily accessible?
 What are the facilities available (light, water, transportation, telephone access
e.t.c.)

6. Production/Operation/ Plan

If the venture is a manufacturing company, there is need to have a production plan.

 This plan should describe the complete manufacturing process.
 If some or all of the manufacturing process is to be sub-contracted or outsourced then the
production plan should describe the location of the contractors, why they are selected,
cost of contract and if possible terms of contract, for how long the contract is signed etc.

 Whereas if part or all of the manufacturing is being done by the new enterprise, then the
entrepreneur should describe the physical layout, the machinery and equipment needed,
the form of acquiring that equipment that is purchasing or leasing.

 In addition, the availability of raw material, the possible sources or potential suppliers
name, address, cost of the raw materials, cost of manufacturing and other additional
physical capital required need to be maintained.

 Moreover, the detail operational plan also indicates the amount of production produced in
months, or years. This can be derived from the forecast of the market and expected
demand of the product.
 If the enterprise, however, is non-manufacturing one like merchandising and service
delivery organization, this part of the plan is named as operational plan.
o It indicates the steps or processes in procuring the products, storing and selling
them. The inventory control techniques employed to avoid wastage, spoilage of
resources and ensuring the continuous availability of products to customers.

7. Marketing Plan

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The marketing plan is the major component of a business plan which indicates how the
entrepreneur has planned to be effective in competing and implementing in the market place and
be able to achieve goals for which the business is initially established.
 Every entrepreneur must, therefore, describe the company‘s target market and its
characteristics.
 Defining the target market and its potential is the most important and difficult part of
developing a business plan. Building a successful business depends on the
entrepreneurial ability to attract those customers that are willing and able to spend
money to buy the product of the enterprise.
 Perhaps the worst error an entrepreneur commits is failing to define his target market.
This is one of the major tasks that are accomplished in preparing the marketing plan part
of the business plan.
 As part of a business plan the marketing plan should focus on the strategies for the first
few years.
 Each year the entrepreneur should prepare annual marketing plan before any decision is
made regarding production, personnel and financial plans. Then the annual plan becomes
a basis for planning other aspects of the business mentioned previously.

Information for development of marketing plan may require undertaking of research in order to
know the potential customers, the size of the potential market, the price of the product and its
affordability for potential customers, the effective form of promotional strategy and appropriate
distribution channel. Since conducting marketing research is costly, the entrepreneur needs to
assess available sources and information needed to determine the marketing mixes and potential
customers.
 The study could be conducted to define different kinds of marketing mixes (about
pricing, promotion, distribution, and kind of product and test of customers to the
product).
 Information for the research can be collected from secondary sources such as government
offices, research findings in universities, libraries etc. and/or primary data can also be
collected through observation, focus group discussion, interview and so on.

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  Analysis of these data collected through different techniques and sources will enable
entrepreneurs to know about the kind of customers, size of the market, the test and
preference of customers and the kind of strategies used in utilizing the marketing mixes.
 Sometimes, this research may reveal that there is enough market to exploit or there is no
enough market and the business is not feasible. So it is a valuable part of the business
plan.
A marketing plan answers three basic questions of a business.
First, it enables us to know the current condition of the enterprise.
 It tells us the background of the company, its strengths and weakness, some background
on the competition, strength and weakness of the company and the possible opportunities
that can be exploited or threats that may challenge the performance of the business.
Second, it also tells us where we want to go in the marketing aspect of the business at least in the
short run.
Third, it also tries to address the specific marketing strategy that will be implemented, when the
strategy is going to be used and who is responsible to do so.

Steps in preparing marketing Plan

1. Defining the Business situation
This is like assessment of the business environment, which could be done in industrial and
environmental analysis part of the business plan. So here we need to revise what we have done in
the first part of the business plan.
2. Define the target market
From the marketing research, the entrepreneur should have a good idea of who the customers or
target market will be. Knowledge of the target market provides a basis for determining the
appropriate marketing action and strategy that will efficiently meet its needs. The defined target
market will usually represent one or more segments of the entire market.
3. Considering Strengths and Weaknesses
The entrepreneur should genuinely present the weakness and strength of the business. Strengths
of a new business could be the experience of the entrepreneur in working on businesses that are
related the newly established business and the skill, knowledge and working experience of the
management team. The weakness can also be the limited financial, technological and channel of
distribution of the business etc..

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 4. Establishing a goal or objective
Here the goal of the enterprise will be presented. The goal answers ‗the where we want to
question‘ This part tries to specify such things as the market share of the business in the industry,
profit, market penetration, number of distributor, pricing policy, sales promotion and
advertisement support.
Defining the market strategy and Action Program
This strategy and action plans respond to the strategy of the organization and on marketing
mixes. Some of the decisions to be taken on marketing mixes and customers can be the following
Product
This element of the marketing mix indicates a description of the product to be marketed in the
enterprise. Product description involves the package, the brand name, price, warranty, image,
service, delivery time feature and style and so on.
Pricing
Determining the price of the product is the more difficult part of the decision. A product with
quality and expensive component will require a high price to maintain the proper image.
 The entrepreneur must also consider many other factors such as cost discount, freight,
and markups.
 The problem in estimating price is often associated the difficult task of estimating cost.
Marketing research can also indicate the reasonable price the customers are willing to pay
for the product.
Distribution
This factor provides place utility for customers by providing the product on the right place
available when it is needed.
 There are many options for entrepreneurs to be considered in distributing the product.
Issues such as type of channel of distribution, member of intermediaries, and location of
channel members should be described in this section of the marketing plan.
Promotion
It is necessary for entrepreneurs to inform potential consumer about the products availability.
This informing, persuading and instructing of potential customers can be done using various
media such as television, radio, prints etc.

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  Promoting products can be done with or without payment. Those paid promotional
methods are advertisement and personal selling whereas the unpaid promotional method
is publicity.
 Particularly unique and creative marketing ideas are often special interest to the media.
Local newspapers radios and magazines can publicize the marketing idea.
 Depending on the outreach and market size of the product the entrepreneur needs to
select the best channel of promotion that is cost effective and can reach potential
customers.
All these marketing mixes need to be specified in the marketing plan of the business plan.

Equally or more importantly there is a need to develop a strategy on meeting the needs of
customers better than competitors are doing. For these different activities should be performed of
which following are worth mentioning.
 Develop a statement of customers‘ service principles that are known and be followed by
the employees.
 Provide training particularly to those employees who have direct contact with customers
on how to serve customers, how to persuade customers, how to maintain customers and
so on and reward those employees who are high quality customers‘ service.
 Make regular contact with consumers using different methods so as to know their
suggestions, complaints and inform new progresses in the services or goods of the
business.
In so doing the business should be able to meet customers‘ expectation more than competitors
are doing. Satisfying customers are another technique of advertisement because they can also
good mouth and attract potential customers without any promotional expense.
8. Financial Plan
Developing Capital and Operational Budget
Business plan can be complete when the marketing plan is accompanied by budget for operation
and procurement of capital for the business.
 The capital budget states the budget required to provide a basis for evaluating
expenditure that will impact the business for more than one year. The capital budget
projects the financial requirement to acquire new equipment, vehicle, building etc.

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  It may also consider evaluating the cost of making or buying decision in manufacturing,
moreover, the capital budget also consider possible investment options that can be
considered and evaluated using different techniques such as the pay back criterion, the
Internal rate of return, and net present values of the investment.
 Such kinds of capital budget are experienced when the business wants to expand by
being involved in different projects. But for a small business which is looking for a fund
for the first time the business itself is a project and more attention will be on operational
budget that covers the cost of running the business. But capital budget component of such
businesses include costs of fixed capital that must be acquired to run the business.

The initial data required for budgeting and development of Pro forma income statement, cash
flow and balance sheet that can be present for potential investors is the sales forecast.
 Based on the sales forecast the entrepreneur will then develop the cost of sales. In
manufacturing venture the entrepreneur can compare the cost of producing the products
internally or through subcontracting them to another manufacturer. This determination of
cost of sales includes the cost of the ending inventory that should be available in case of
possible market fluctuation.
After determining the sales budget, the entrepreneur focuses on operating costs. From the total
operating costs some are fixed and some are variable. Fixed costs include salary, depreciation, utility
and other overhead costs.
Pro forma Income statement
Using the forecasted sales volume and the operation costs that are derived from the sales forecast
income statement is developed.
 Sales can be forecasted using survey of buyers‘ intension, composition of sales forecast,
expert opinion or time series analysis.
 The Pro forma income statement also provides projection of operation expenses and for
each of the months that leads to the determination of net profit.
 Each of the expenses should be properly projected and exhaustively mentioned so that
any probable change, modification or addition of other operating expense that may not be
present in the previous months.

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The items presented in the operating expense section of the Pro forma income statement should
reflect the potential and planned changes with regards to different activities in the business. For
instance,
 Advertisement expense could be high in the first few months because there is a need to
promote our product to our potential customers.
 Moreover, there may be an increase in wage and salary expense as time passes because
the enterprise may need to employee additional staff as the business keep on growing and
expanding.
 Moreover, it is expected usually the new businesses will not profitable at the beginning of
their establishment because the produce is new to the customers and there are fixed costs
that should be covered by the time the business is established.
 So observing losses on income statement for some months or even years is not a surprise
even for investors. Pro forma income statement is also prepared for the coming two, three
years at least in gross terms so that potential investors can assess the profitability of the
business.

Pro forma Cash Flow

Cash flow statement indicates the difference between actual cash received and cash actually
dispersed.
 Cash flows only when actual payments are received or made. So sales made on account
and purchases made on account don‘t show any cash inflow or cash out flow.
 In addition, cash payments to reduce principal on loan don‘t constitute a business expense
but reduces the cash on hand.
 Receiving of cash in return for accounts receivable does also have an effect on amount of
cash at hand but doesn‘t have impact in increasing net income or profit.
 It is important for the entrepreneur to make monthly projection of the cash flow.
 The numbers in the cash flow statements are modification of those in the income
statement. Modification made on the numbers of the income statement is on those
accounts for the expected timing of the changes in cash on some current asset or liability
is made.
The Pro forma cash flow statement helps to answer the following questions.
 The liquidity position of the firm

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  The causes for changes in the enterprises working capital or cash position
 What fixed assets are acquired by the firm
 Whether the enterprise pay dividend to the stockholders
 Whether the firm used external sources of finance to meet its need for fund
 Did the enterprise sell any of its non-current asset
Pro forma Balance Sheet
This statement shows the condition of the business at the end of the first year.
 The balance sheet will require the use of Pro forma income and cash flow statements to
help justifying some of the figures.
 It reflects the position of the business at the end of the first year. It summarizes assets,
liabilities and capital of the business at a certain point in time.
The balance sheet also reflects the fixed asset and current asset of the business and at the
sometime the liability of the business.
9. The Organization Plan
The three major issues presented in this part of the business plan are the legal ownership forms,
the organization structure and design, and the management team.
1. Types of legal business ownership
In choosing a particular form of organization, an entrepreneur will try to find out how far his
requirements will be met by a particular form of organization. He/she will generally consider the
following factors while making this type of assessment.
1. Ease of formation- an ideal form of organization is one, which can be brought into existence
with the least difficulty. A good form of organization, as judged from the point of view of
ease of formation, is one that involves the least expense in formation and minimum legal
formalities.
2. Ease of raising capital- where a large amount of capital is needed, it is desirable to ensure
that investors in the business concerned are assured of safety of investment, fair return on
investment and the transferability of investment.
3. Limited liability- from the point of view of risk, the entrepreneur will naturally prefer
limited liability. This means that in case of insolvency or winding up, the owner or owners'

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 will be held responsible only up to the amount of capital they have agreed to be contributed
by them.
4. Direct relationship between ownership control and management- the right of an
individual or a group of individuals represents ownership or a business. As a rule, the control
should lie where the ownership lies. This will ensure that the management will take active
interest in the efficient running of the enterprise. If the responsibility for management or the
control of management is not with the owners' the management may not have a direct
personal interest in maximizing profits through increased efficiency.
5. Flexibility of operations- a good form of organizations offers the maximum flexibility and
adaptability to situations. This means that the organization should lend itself to change and
adjustment without much difficulty as the need be.
6. Continuity or stability- an ideal form of organization enjoys an uninterrupted existence over
a long period of time. Form the point of view of entrepreneur; it is important that he should
be able to formulate plans for the future and to make investments paying for considerable
periods of time. From the social point of view also, it is desirable that there should be an
agency that meets its economic needs continuously and provides continuous employment to a
section of a society.
7. Retention of business secrets- The entrepreneur will also have to be careful to ensure that
the form of organization chosen by him will allow the vital business secrets to be retained
without being leaked out to the competitors.
8. Freedom from state regulation- various forms of organization are exposed to varying
degrees of control and regulations by state. Where the extent of regulation by government is
considerable the enterprise may have to spend considerable amount of time, money and
energy in complying with legal formalities and instructions.
9. Law tax burden- various forms of organizations are assessed to income tax on different
bases. Obviously other things being equal, the ideal form of organization will be that which
attracts the minimum amount of tax liability.

2. Organization Structure
The organization structure or design is the entrepreneur‘s explicit and formal indication to the
members of the organization as to what is expected of them and the possible changes that are

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planned to be accommodated accordingly. Typically, these expectations can be grouped into the
following areas.
 It defines the members‘ jobs and communication and relationship these jobs have with
each other. These relationships are depicted in the organization chart. The chat shows the
following.
 Who reports to whom
 How many subordinates work for each manager
 Channel of official communication through the solid lines that connect each job
 How the company is structured (basis of departmentalization which we will see later)
 The hierarchy of decision making
 When the existing structure is formulated (if the date is available on the chart)
 Type of authority and relationship. Solid line connects line authority and dotted lines
should start and functional authority.

3. Management Team
The management team of the organization is committed to the goals of the new venture. The
management team should be able to work together effectively towards this end.
 Investors will demand that the management team must attempt to operate full time in that
organization, they should not work as a par-time, while they are working for another
organization.

10. Assessment of Risk

Every new enterprise may face potential hazards given the particular industry and

competitive environment.

 The entrepreneur should be able to indicate the potential risks to the new venture.
Moreover, the entrepreneur should discuss what will be going to happen if that expected
risk happens and present the strategy that will be employed to prevent, minimize, or
respond to the risks that could occur.
11. Appendix

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This is the last part of the business plan that comprises of documents that are cited in the body of
the business plan and which are thought to be sought by potential readers of the plan in detail. It
may include for example the marketing research, the resume of the management team and the
owner etc.

Summary

Virtually to start any type of business or expand the existing one needs to work on opportunity
identification and evaluation, business idea development and then prepare business plan. Lack of
proper opportunity identification and evaluation, idea development process and business
planning are the most often cited reasons for business failure.
Opportunity identification and evaluation are the initial stages of the entrepreneurial process and
principal activities that take place before a business is formed or structured. The opportunity
identification and evaluation process have five main steps namely, getting the idea/scanning the
environment, identifying the opportunity, developing the opportunity, evaluating the opportunity
and evaluating the team.
After opportunity is recognized, you need to have a clear idea of the sort of business you want to
run. Your business idea will address: Which need will your business fulfill for the customers and
what kind of customers will you attract?; What good or service will your business sell? Who will
your business sell to? And how is your business going to sell its goods or services? All business
ideas are not equally worth. Therefore, to identify promising business idea among others, it is
important to answer the raised questions so that to proceed into the phase of preparing plan on
the selected business idea.
Business plans help companies identify their goals and objectives and provide them with tactics
and strategies to reach those goals. It is not historical document; rather, they embody a set of
management decisions about necessary steps for the business to reach its objectives and perform
in accordance with its capabilities. Business plans have several major uses. These include
internal planning and forecasting, obtaining funding for ongoing operations or expansion,
planned divestiture and spinoffs, and restructuring or reorganizing. While business plans have

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elements common to all uses, most business plans are tailored according to their specific use and
intended audience.
Business plan is an outline of a business giving details of the finance, assets, staff, products or
services and markets. It guides the entrepreneur, identifies possible problems and is also used in
funding applications. The business plan sets out how the owner of a business intends to realize
its objectives. Steps in a business plan include: Idea Generation, Environmental Scanning,
Feasibility Analysis, Functional Plan (Marketing plan, financial plan, organizational plan and
operational plan), Project Report Preparation, Evaluation, Control and Review.

Self-assessment questions
Discus the Following Questions
1. What are the important facets of a project feasibility study?
2. What factors are to be kept in mind while deciding on product/service?
3. Describe the various forms of business organization?
4. Explain legal considerations in the establishment of a small scale enterprise?
5. What is business plan? Write the importance of business plan for the entrepreneur,
financial sources and customers.

6. Discuss the pitfalls to avoid in planning and their respective solutions.

7. List and describe the different elements of a business plan.

8. Take any hypothetical small business which is going to be launched by you and prepare a
business plan that helps for effective establishment and running of the venture.

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 Chapter Four
Product and Service Concept
Contents
4.1 product and service concepts
4.2 product development process
4.3 new product development processes
4.4 product protection
4.5 The intellectual property system in Ethiopia
4.6 challenges facing the IP system in Ethiopia

Unit objective
After completing this unit you will be able to:
 Define what products and services are.
 List and explain the different stages of new product development
 Point out the different characteristics of services
 Recognize the different mechanisms of protection of proprietary rights

Introduction
In Entrepreneur‘s business, product/service development is the term used to describe the
complete process of bringing a new product or service in the market and it's an ongoing practice
in which the entire business is looking for opportunities as new products provide growth promise
to businesses that allow them to strengthen their market position. The new product development
process involves the idea generation, product design, and detail engineering; and also involves
market research and marketing analysis. Intense global competition, short product and
technology lifecycles, unpredictable consumer buying patterns and possible market stagnation
makes new product development a critical activity in most businesses. Hence, this chapter
explores the new product development process and at the same time sketch outs the product
development procedure in reality where consideration of real life situation and consumer insight

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are the main concern. Besides, the chapter; considering (often entrepreneur), because of their
lack of understanding of intellectual property, ignore important steps that they should have taken
to protect these asset; will describe all the important types of intellectual property which have
become unique problems to the Patent and Trademark Office.

4.1. Product and Service Concept

 Activity
Dear learners, what is the meaning of product? And what is the difference between service and
goods?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
A product is a good, service or idea consisting of a bundle of tangible and intangible attributes
that satisfies consumers and is received in exchange for money or some other unit of value (time
and other valuables).
In marketing Product anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a -want or need. It includes physical objects, services, persons,
places, organizations and ideas.
A service is any activity or benefit that one party can offer to another which is essentially
intangible and does not result in the ownership of anything.
Activities such as renting a hotel room, depositing money in a bank, travelling on an
airplane, visiting a doctor, getting a haircut, having a car repaired, watching a professional
sport, seeing a movie, having clothes cleaned at a dry cleaner and getting advice from a
solicitor all involve buying a service.
Service Characteristics
A company must consider five main service characteristics when designing marketing
programmes: intangibility, inseparability, variability, perishability and lack of ownership.
We will look at each of these characteristics in the following sections.
Intangibility

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Service intangibility means that senses cannot be readily displayed, so they cannot be seen,
tasted, felt, hear or sine lied before they are bought. A buyer can examine in detail before
purchase the color, features and performance of an audio hi-fi system that he or she wishes
to buy. In contrast, a person getting a hair-cut cannot see the result before purchase, just as
an airline passenger has nothing but a ticket and the promise of safe delivery to a chosen
destination.
Inseparability
Physical goods are produced, then stored, later sold and still later consumed. In contrast,
services are first sold, then produced and consumed at the same time and in the same
place. Service inseparability means that services cannot he separated from their providers,
whether the providers are people or machines. If; a person provides the service, then the
person is a part of the service.

A second feature of the inseparability of services is that other customers are also present or
involved. The concert audience, students in the class, other passengers in a train, customers
in a restaurant, all are present while an individual consumer is consuming the service.

Because of the simultaneity of service production and consumption, service providers face
particular difficulty when demand rises. A goods manufacturer can make more, or mass
produce and stock up in anticipation of growth in demand.
Variability
As services involve people in production and consumption, there is considerable potential for
variability. Service variability means that the quality of services depends on who provides them,
as well as when, where and how they are provided. As such, service quality Is difficult to
control. For example, some hotels have reputations for providing better service than others.
Perishability
Service perishability means that services cannot be stored for later sale or use, In some countries,
dentists and general practitioners charge patients for missed appointments because the service
value existed only at that point and disappeared when the patient did not show up.
Lack of Ownership
When customers buy physical goods, such as cars and computers, they have personal
access to the product for an unlimited time. They actually own the product. They can even

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sell it when they no longer wish to own it. In contrast, service products lack that quality of
ownership. The service consumer often has access to the service for a limited time. An
insurance policy is yours only when you have paid the premium and continue to renew it. A
holiday is experienced and, hopefully, enjoyed, but after the event, it remains ephemeral,
unlike a product in the hand.

4.2 Product development process

In the face of changing customer needs, technologies and competition, product innovation
or the development of new products has become vital to a company's survival. Introducing
new products, however, is not sufficient. The firm must also know how to manage the new
product as it goes through its life cycle: that is, from its birth, through growth and maturity,
to eventual demise as newer products come along that better serve consumer needs.

This product life cycle presents two principal challenges. First, because all products
eventually decline, the firm must find new products to replace ageing ones (the problem of
new-product development). Second, the firm must understand how its products age and
adapt its marketing strategies as products pass through life-cycle stages (the problem of
product life-cycle, strategies'). We therefore look initially at the problem of finding and
developing new products, and then at the challenge of managing them successfully over
their life cycles.

4.3 New Product Development Process

There are stages that we follow in new product development. These include
1. Idea generations
This is the continuous & systematic search few new product opportunities. It involves
delineating the sources of new ideas and methods for generating them.
Some of the major sources of new product are:
 Customer need – product idea can originate form customer need & wants through
research.
 Employees of the organizations are important sources of new ideas.

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  Competitors‘ products and services are also sources for idea generation by analyzing the
strength and weakness and studying the liking and disliking of customers associated with
competitors product.
 Sales representative and intermediaries – since they are closer to customers they can
provide new idea for the organization.
 Other sources – This include inventors, investors, Universities (Colleges), consultants
and advertising agencies.
2. Idea screening
After the firm has identified a set of potential product idea, it must screen them. In idea screening
poor, unsuitable or unattractive ideas are weeded out form further considerations. Moreover,
screening requests for developing a checklist for requirements that the idea must fulfills and
product ideas that do not fulfill the criteria will be rejected.
3. Concept testing
A firm needs to acquire consumer feedback about its product idea so the screened ideas must be
tested with appropriate group of target consumers. For this consumers are asked about the
product idea and express their own opinion an enthusiasm about the product. This stage involves
asking potential consumers to react to the picture, written statement, or oral description of the
product, thus enabling the firm to determine initial attitude of consumer prior to expensive and
time consuming prototype development.
4. Business analysis
The stage requires the study of the attractiveness of the business such as the extent of demand for
the product; sales, cost and profit estimates.
5. Product development
This stage converts a product idea in to a physical form and identifies a basic marketing strategy.
The goal of product development is to find the prototype that the consumer sees embodying the
key attributes desired in the product concept. The prototype can be supplied to consumers so that
they can lest and give reactions.
6. Market testing
This involves placing a fully developed new product for sale in one or few selected area and
observing its performance. It helps to learn about consumer real behavior and competitors action
and responses.

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Based on the result of market testing the firm can decide whether to go ahead with its plan
(production) in large sale, modify the product, modify the marketing plan or drop the product.
7. Commercialization
After testing is completed, the firm will be ready to introduce the product to its full target market
these stage requires considerable expenditure and commitment on promotion and distribution.

4.4 Product Protection

Dear distance learners, by what means intellectual properties can be protected?

(Write your answer on the space provided below)

__________________________________________________________________
__________________________________________________________________
_______________________________________________________________
Ideas are a difficult thing to protect, because they are so easily imitated or copied. We don't yet
live in the world of Star Trek where you can just have a replicator instantly make you an exact
duplicate of physical things like a cup of coffee or some exotic alien delicacy, but we can easily
duplicate the ideas of others, such as copying a piece of written material, using a similar brand
name, or creating a product in imitation of someone else's product.

Products take time to develop and bring to market. Once a product has been developed, it can be
imitated in a fraction of the time. It would be easy for other companies to create competitive
products or services within a very short period of time. For example, consider the recent
"employee discount" advertising campaigns from the major auto manufacturers. General Motors
came up with the idea, but Ford and Chrysler had imitated it within a couple of weeks after the
GM campaign started. Advertising campaign ideas generally aren't protectable intellectual
property.

On the other hand, consider the innovative Segway transportation device. Once the very first one
become publicly available, it would have been very easy for someone else to disassemble one,
see how it was made, and start building less expensive imitations. That hasn't happened and
won't happen any time soon, because the Segway is protected by a patent, and the makers of
Segway would have a solid legal basis for going after such a competitor for a lot of money.

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"Intellectual property" refers to those ideas that can be considered "owned" by an individual or
company and are therefore protectable under the law. The intent of intellectual property law is to
encourage innovation by giving the creators of new ideas ample time to profit from their ideas
and recuperate their development costs.

In theory, your intellectual property is protected under the law from the moment you create
it, assuming someone else hasn't created it first. However, making the case in court may be
very difficult if all you have to go on is your own records. Intellectual property registration
exists so that you can make an official record of your ideas and more easily protect them
should a conflict ever arise.

When we come to our case, The Ethiopian Intellectual Property Office (EIPO) is an
autonomous unit of the Ethiopian Science and Technology Agency. It was established
in 2003 to provide legal protection for intellectual property (IP) rights. Under a Director-
General the EIPO comprises five core business units and two support units. It is based
in Addis Ababa. The Intellectual property law in the case of Ethiopia will be discussed at the
end of this chapter.

Generally, as literature of the discipline state there are three basic forms of product protection
which are discussed hereunder:

4.4.1 Patent

It is a set of exclusive rights granted by a state to an inventor or his assignee for a fixed
period of time in exchange for a disclosure of an invention. Patents protect an invention that
is "novel" (new and original) and "non obvious" (to someone with technical expertise in the
field of the invention). This has traditionally been used for physical devices (machines,
electronics, certain manufactured goods), but has recently been applied to more abstract
concepts, such as computer software algorithms or business processes.
Rationale for Use of Patents
There are four primary incentives embodied in the patent system:
I. to invent in the first place;

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 II. to disclose the invention once made;

III. to invest the sums necessary to experiment, produce and market the invention;(post R and
D costs are higher than conception)

IV. to design around and improve upon earlier patents.

What can you patent?

There are 3 basic criteria for a new product to be patented. These are;

1. The invention must be new (first in the world).

2. It must be useful (functional and operative).
3. It must show inventive ingenuity and not be obvious to someone skilled in that
area.

The invention can be a product (a door lock), a composition (a chemical composition used in
lubricants for door locks), an apparatus (a machine for making door locks) or a process (a
method for making door locks), or an improvement on any of these.

Ninety percent of patents are, in fact, for improvements to existing patented inventions. A
patent is granted only for the physical embodiment of an idea—e.g., the description of a
plausible door lock—or for a process that produces something saleable or tangible.

You cannot patent a scientific principle, an abstract theorem, an idea, a method of doing
business, a computer program, or a medical treatment.

Where to register

You must obtain patent protection in each country where you want protection. Patents are
generally the most expensive forms of IP protection.

4.4.2Trademark

A trademark is a distinctive sign or indicator used by an individual, business organization, or

any legal entity to identify that the products or services to consumers with which the trademark

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 appears originate from a unique source, and to distinguish its products or services from those
of other entities.
Trademarks protect your brand, i.e., the name of your company or a specific product. The
scope of trademark protection is just within one field of business, e.g., a computer company
could name their new computer "Nike", and it (probably) wouldn't be a trademark infringement
upon the athletic shoe company.

A trademark is designated by the following symbols:

• ™ (for an unregistered trade mark, that is, a mark used to promote or
brand goods)

• ℠ (for an unregistered service mark, that is, a mark used to promote or

brand services)

• ® (for a registered trademark)

A trademark is typically a name, word, phrase, logo, symbol, design, image, or a combination
of these elements.
There is also a range of non-conventional trademarks comprising marks which do not fall into
these standard categories, such as those based on color, smell, or sound.
Benefits of Trademark Registration
• Constructive notice nationwide of the trademark owner‘s claim.

• Evidence of ownership of the trademark.

• Jurisdiction (control) of federal courts may be invoked.

Registration can be used as a basis for obtaining registration in foreign countries.

Types of trademarks

There are three basic categories of trade-marks:

 Ordinary marks are words or symbols (or a combination of these features), that
distinguish the wares or services of a specific firm or individual. Suppose you opened a

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 courier business which you called "Giddy-up." You could register the words as a trade-
mark (assuming all legal requirements were met) for the service you offer.
 Certification marks identify wares or services which meet a defined standard. They are
owned by one person but licensed to others to identify wares or services which meet a
defined standard. Examples are: the Woolmark design owned by Woolmark Americas,
Ltd., for use on clothing and other wares and the logo of the Association of Professional
Engineers.
 Distinguishing guise identifies the shaping of wares or their containers, or is a mode of
wrapping or packaging wares. If you manufactured candy molded to look like butterflies,
you might want to register the butterfly shape as a trade-mark under "distinguishing
guise."

Do you need to register a trademark?

Although trademarks are established by common law (you establish your trademark simply by
using it), in the event of dispute, you will have a much stronger case if you have registered your
trade mark with the appropriate body.

Where to register

Trademarks must be registered in each country where the item will be sold.

Duration of protection

Your federal trademark registration lasts 15 years, with 15-year renewal terms. Your trademark
rights can last indefinitely if you follow these steps and continue to use the mark to identify your
goods and services.

Unregistered trademarks

Before a trademark is formally registered, the owner has what are called "common law" rights to
the mark, provided that person or entity is the first to use it in commerce. But this will depend on
factors such as the extent to which, and the manner in which, the trademark has been used and
has become known.

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Unregistered trademarks have further drawbacks. Under Ethiopian trademark law, a company is
prohibited from directing attention to its product in a way that is confusing to the public. A
company is also prohibited from making use of a false description that will mislead the public as
to the character, quality, quantity or composition of the product, the geographical origin of the
product, or the mode of manufacture, production, or performance of the product.

4.4.3Copyright

A copyright protects the specific form in which ideas are recorded, and is the form of protection
used to protect literary (books, articles, poems) and artistic (cartoons, music) works. Anything
you write or records, even discussion forum posts, is immediately protected under copyright law
unless you specifically place it into the public domain or some other licensing agreement
(e.g., Creative Commons or the user agreement of the web site on which it is first posted).
The specific laws regarding intellectual property vary from country to country, but the basic
principles are recognized internationally, and a patent, trademark or copyright filed in one
country does offer you legal protection in other countries under a collection
of treaties administered by the World Intellectual Property Organization.

You do not have to have proprietary intellectual property to have a successful business, but if
you have spent time and money developing unique intellectual property, you definitely want to
take advantage of the laws that allow you to protect those ideas from unfair competition. Take
inventory of your intellectual assets and consider what forms of intellectual property protection
might be right for you.

What can you copyright?

You can copyright any of your creative work, such as:

Books, Music, Art, Film, Photographs, Movies/videos, Sculpture, User Guides, Manuals

What is actually copyrighted?

Copyright does not protect the idea behind the work. It only protects the work once it is written
or in a fixed state.

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 Copyright gives you the right to the unique way you express an idea, but not to the idea itself
(titles, names, catch phrases and short word combinations are not protectable by copyright).

Levels of protection

The date a particular work was created is extremely important (in other words, who came up
with it first). The easiest way to prove ownership is to send a copy of the work to yourself by
registered mail (but don't open it) or by email.

4.5The Intellectual Property System in Ethiopia

Ethiopia became a party to the convention establishing the world intellectual Property
Organization (WIPO) in February 1998. Ethiopia joined the Nairobi Treaty on the Protection of
the Olympic Symbol in 1981. It is a member of the Treaty establishing the Common Market for
Eastern and Southern Africa (COMESA) which was formed in 1994, the Partnership Agreement
between members of the African, Caribbean and Pacific (ACP) Group of states and the European
Union (EU). Ethiopia has also applied to become a member of the World Trade Organization
(WTO) and negotiation will start in the near future.

The government established the Ethiopian Intellectual Property Office in 2003 in having the
understated Objectives:
 To facilitate the provision of adequate legal protection for and exploitation of
intellectual property in the country;
 To collect, organize and disseminate technological information contained in patent
documents and encourage its utilization;
 To study, analyze and recommend policies and legislation on intellectual property to the
government;
 To promote knowledge and understanding of intellectual property among the general
public.

The existing laws and directives in Ethiopia in the field of Intellectual Property (IP) are the
Patent Proclamation and the Implementing Regulation, the Copyright and Related Rights
Proclamation and The Trademark Registration Directive.

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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.

The proclamation excludes the following from patentability:

Inventions contrary to public order or morality,
 Plant or animal varieties or essentially biological processes for the production of plants
or animals,
 Schemes, rules or methods for playing games or performing commercial and industrial
activities and computer programs,
 Discoveries, scientific theories and mathematical methods,
 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 making, using and exploiting the patented invention in any other
way. Any person who wants to use the patented invention has to get the authorization of the
owner. The patentee does not have import monopoly right over the products of the patented
invention in Ethiopia.

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.

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  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.

Trademark Directive is issued in the country in 1986 with the following objectives in that it
helps
 To centrally deposit trademarks which are used by local and foreign enterprises to
distinguish their goods or services.
 To distinguish the products or services of one enterprise from those of other enterprises
and prevent consumers from being victims of unfair trade practices.
 To provide information on trademark ownership and right of use when disputes arise
between parties;
 To provide required information on trademarks to government and individuals.
Protection is granted after publication of cautionary notice.
Copyright is protected on the basis of the copyright and related rights proclamation issued in
2004. The proclamation gives protection to literary, artistic and scientific works which include:
 books, pamphlets, articles, computer programmes and other writings;
 speeches, lectures, addresses, sermons, and other oral works;
 dramatic, dramatic-musical works, pantomimes, choreographic works, and other
works created for stage production;
 musical works, with or without accompanying words;
 audiovisual works and sound recordings
 works of architecture;
 works of drawing, painting, sculpture, engraving, lithography, tapestry, and other
works of fine arts;
 photographic and cinematographic works;
 illustrations, maps, plans, sketches, and three dimensional works related to
geography, topography, architecture or science;
 derivative works;
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  collection of works, collection of mere data (databases) whether readable by
machine or other form.
The Proclamation gives protection to:

 works of authors who are nationals of or have their habitual residence in Ethiopia;
 works first published in Ethiopia; or works first published in another country and
published within thirty days in Ethiopia;
 audio-visual works whose producer has his headquarter or habitual residence in
Ethiopia; and
 works of architecture erected in Ethiopia and other artistic works incorporated in a
building or other structure located in Ethiopia.

The author of a work shall be entitled to protection, for his work upon creation where it is an
original work; and written down, recorded, fixed or otherwise reduced to any material form.
Quality of the work and the purpose for which the work may have been created is not taken in to
consideration.
The rights of performers, producers of phonograms and broadcasting organizations are also
protected by law. Copyright is protected for the life of the author plus fifty years. Fifty years for
the rights of performers and producers of sound Recordings and 20 years for the rights of
broadcasting organizations

4.6 Challenges facing the IP System in Ethiopia

According to Wondwossen Belete, Ethiopian Intellectual Property Office (December 2004) the
following are some of the major problems related to IP system in Ethiopia is;
 Lack of Institutional IP policies and management units
 Weak coordination between IP policies and other relevant government policies.
 Weak institutional capacity and in particular there is a lack of experienced and well-
qualified officials for IP administration.

Unit summary
Product is a key element in the market offering. In marketing, a product is anything that can be
offered to a market that might satisfy a want or need. In retailing, products are called
merchandise.
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In business and engineering, new product development (NPD) is the term used to describe the
complete process of bringing a new product or service to market. There are two parallel paths
involved in the NPD process: Idea Generation, Idea Screening, Business Analysis, Development,
Market Testing, and Commercialization.
A service is any act or performance that one party can offer to another that is essentially
intangible and does not result in the ownership of anything. Its production may or may not be
tied to a physical product. Services have four major characteristics that greatly affect the design
of marketing programs: intangibility, inseparability, variability, and perishability.

Generally, as the literature of the discipline states there are three basic forms of product
protection which are discussed: Patent, Trademark, Copyright.

Self –Check Review Questions

Part I Choose the best answer

1. Which of the following cannot be the right of the author of ―Dertogada‖?

a. to import or export the work
b. to create derivative works
c. to perform or display the work publicly
d. A and C
e. all
2. Which of the following is true?
a. Trademarks are used to protect a firm‘s product from other firms in a
perfectly competitive market.
b. It is legal for a consumer to use a book which has a trademark than a
book which has not.
c. Patents are used to discourage both creativity and informal use of
resources.
d. A and C
e. None

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 3. Abera is an Ethiopian artist who recently produced a new music for Christmas sale.
Which one of the following can be the right of the artist concerning his new music?
a. The right to be credited (qualified) for the work,
b. The right to determine who may adapt the work to other forms,
c. The right to assign a person who may perform the work,
d. The right to financially benefit from it and other related rights
e. The right to have all the above rights.
4. What is the major need of market testing before commercialization?
a. To know customers‘ acceptance of the product
b. To determine the price of the product
c. To know customers‘ preference of distribution channel
d. To know none of the above
e. To know the market share of the firm for that product
5. One of the following sentences does not differentiate services from goods?
a. Goods can stay longer than services after production.
b. Goods are first produced, then sold, and then consumed. But services are
first sold ,and then produced and consumed simultaneously
c. The product user mostly uses fresh products in case of services than in
case of goods.
d. All of the above
e. None of the above

Part II Discuss the following questions briefly

1. Define what products and services are.
2. Write the different characteristics of services.
3. What is New Product Development? Enlist and describe the various stages of New
Product Development.
4. What are the major product protection tools? Discuss their advantages, application and
characteristics.
5. What does Intellectual Property System in Ethiopia look like? Discuss it.

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 CHAPTER FIVE
MARKETING AND NEW VENTURE DEVELOPMENT
Contents
5.1 marketing research
5.2 marketing intelligence
5.3 competitive analysis
5.4 marketing strategy
5.5 international marketing

Unit objective
After completing this unit you will be able to:
 Define what marketing research is and enlist the different stages of in the process
of marketing research.
 explain the use of marketing research
 define what marketing intelligence is and explain its use
 Explain the different ways of conducting marketing intelligence.
 Define what competitive analysis is, stating its use.
 List the different steps of conducting competitive analysis.

Introduction
Marketing Research is a Systematic & objective process of designing, gathering, analyzing &
reporting information that is used to solve a specific problem. Business firms and non-profit
organization engage in marketing. Products marketed include goods as well as services, ideas,
people and places. Marketing activities are targeted at markets, consisting of product purchases
and also individuals and groups that influence the success of an organization. The foundation of
marketing is exchange, in which one party provides to another party something of value is return
for something else of value. In a broad sense, marketing consists of all activities designed to
generate or facilitate an exchange intended to satisfy human needs. This chapter discusses about
marketing research, intelligence and also marketing strategies increase market share by
satisfying our customers need better than our competitors done.
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5.1Marketing Research
 Activity

Dear students what is the meaning of marketing research?

(Write your answer on the space provided below)

__________________________________________________________________
__________________________________________________________________
______________________________________________________________

Marketing research is the systematic and objective identification, collection, analysis, and
dissemination of information for the purpose of assisting management in decision making related
to the identification and solution of problems and opportunities in marketing.
Marketing research is systematic. Thus systematic planning is required at all the stages of the
marketing research process. The procedures followed at each stage are methodologically sound,
well documented, and, as much as possible, planned in advance. It uses the scientific method in
that data are collected and analyzed to test prior thinking or hypotheses.
Marketing research is objective. It attempts to provide accurate, impartial information.
Accordingly, marketing research involves the identification, collection, analysis, and
dissemination of information.
5.1.1 The Role (significance) of Marketing Research in Decision Making
There are three Functional Roles of Marketing Research. These are:
1. Descriptive Function - the gathering and presentation of statements of fact.
2. Diagnostic (analytical) Function - The explanation of data.
3. Predictive Function - Specification of how to use the descriptive and diagnostic research to
predict the result of a planned marketing decision.

5.1.2 Marketing Research Components

Marketing researchers deal with many aspects of a market including the following:
1. Market size: this deals with the number or value of units sold to a market in a given
period.

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 2. Market Share: this one is about a specific corporation‘s share of the market size out of
the whole market of a product or products of the same purpose.

3. Market penetration: this is a marketing strategy which is used to know when a company
enters/penetrates a market with current products to get better market share by lowering
the price of a product.

4. Brand equity research – this research is conducted to know how favorably consumers
view the brand.

5. Buyer decision processes research – this part of marketing research activity is used to
determine what motivates people to buy and what decision-making process they use.

5.1.3 Marketing research classification

 Activity
Dear students what is the difference between consumer and business market?
(write your answer on the space provided below )
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
It is generally divided into two categories:
1) consumer market research

2) business-to-business (B2B) market research

Customers occupy the central role in the marketing research process.

Customer satisfaction research

In this type of research there are different types of research that are used to assess about
customers.
 Distribution channel audits - to assess distributors‘ and retailers‘ attitudes toward a
product, brand, or company.

 Marketing effectiveness and analytics - Building models and measuring results to

determine the effectiveness of individual marketing activities.

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  Mystery Consumer or Mystery shopping – here the researcher acts as a shopper. This
is often used for quality control or for researching competitors' products.

 Positioning research – this research is mostly conducted to answer questions like

 How does the target market see the brand relative to competitors?

 What does the brand stand for?

 Price elasticity testing – here the objective of the research is to determine how sensitive
customers are to price changes

 Sales forecasting - to determine the expected level of sales given the level of demand.
with respect to other factors like advertising expenditure, sales promotion etc.

 Segmentation research – this type of research helps to determine the demographic,

psychographic, and behavioral characteristics of potential buyers.

 Test marketing – this is a small-scale product launch used to determine the likely
acceptance of the product when it is introduced into a wider market.

5.1.4Marketing Research Process

 Activity

Dear learners, what are the steps to study market research?

________________________________________________________________
________________________________________________________________
____________________________________________________________

Since research is a process which consists of a number of steps to be accomplished in a logical

and systematic manner marketing research consists of the following related phases:
Step 1 Define the research purpose or objectives
The following questions help to establish objectives:
 Where potential customers buy the product?

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  Why they purchase there?

 What is the size of the market? How much of it can your business capture?

 How does your business compare with competitors?

 The impact of promotion on customers

 What types of products are desired by potential customers?

Step 2: Research Design Formulation

The research design is a blueprint for conducting the marketing research. More formally,
formulating the research design involves the following steps
 Study period and place determination

 Qualitative data collection methods

 Methods of collecting quantitative data (survey, observation, and

experimentation)

 Definition of the information needed

 Questionnaire design

 Measurement and scaling procedures

 Sampling process and sample size

 Plan of data analysis

Step [Link] secondary data

At this stage secondary data, a data which is originally collected by others for their own purpose,
but such data can be used by the researcher when it is relevant to the current study. Secondary
data:
 is less expensive

 Can be acquired within or outside the venture.

 May be outdate and less valid.

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Step [Link] Primary Data
Primary data collection techniques can be categorized as;

1. Observational techniques-do not involve contact with respondents

2. Focus groups
3. Experimentation-investigates cause and effect relationships.
4. Survey techniques- generate data by asking people questions and recording their
responses.
The following are examples of survey techniques.
A. Mail questionnaires
B. Telephone interviews
C. Personal interviews
Step 5: Data Processing and Analysis
Data processing includes the editing, coding, transcription, and verification of data. And data
analysis, guided by the plan of data analysis, gives meaning to the data that have been collected.
Research results should be evaluated and interpreted in response to the research objectives.
Step 6 Report Preparations and Presentation
At the end the research results will be written in a report form and presented to the concerned
parties. The report includes:
 the specific research questions identified,

 describes the approach,

 the research design,

 the data collection, and sampling procedures

 the data processing and analysis procedures

 the major findings and suggestions for actions.

 In addition, an oral presentation should be made to management using tables, figures, and
graphs to enhance clarity and impact.

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5.2 Marketing Intelligence
Definition
Market intelligence is the systematic process of gathering, analyzing, supplying and applying
information (both qualitative and quantitative) about the external market environment.
Marketing intelligence is used to determine:
 current and future market needs

 Changes in the business environment that may affect the size and nature of the market in
the future.

 Environment that may affect the size and nature of the market in the future.

5.2.1The importance of Market and Competitive Intelligence

Marketing intelligence provides the following benefits;

 Market and customer orientation – promote external focus

 Identification of new opportunities.

 Smart segmentation

 Early warning of competitor moves

 Minimizing investment risks

 Quicker, more efficient and cost-effective information

5.2.2 Ways to undertake market intelligence

 Unfocused scanning: Any information that may be useful is gathered without

any specific purpose in mind.

 Semi-focused scanning: no specific purpose. The manager is not in search of

particular pieces of information that he/she is actively searching but does narrow
the range of media that is scanned. For instance, the manager may focus more on

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 economic and business publications, broadcasts etc. and pay less attention to
political, scientific or technological media.

 Informal search: limited and unstructured attempt to obtain information for a

specific purpose. For example, entering the business of importing frozen fish
from a neighbouring country may make informal inquiries as to prices and
demand levels of frozen and fresh fish.

 Formal search: this is a purposeful search for information in some systematic

way.

Marketing intelligence is carried out by the manager him/herself rather than a professional
researcher. Scope of the search in this case is likely to be narrow and far less intensive (less
rigorous) than marketing research.

5.3 Competitive Analysis

5.3.1 Meaning
Competitive analysis refers to determining the strengths and weaknesses of competitors and
designing ways to take opportunities or tackle threats posed by competitors.
5.3.2 Importance of competitive analysis
Competitive analysis is important for businesses since it has some advantages such as the
following.
• It helps management understand its competitive advantages/disadvantages relative to
competitors

• It generates understanding of competitors‘ past, present (and most importantly) future

strategies.
• It provides an informed basis to develop strategies to achieve competitive advantage in
the future (e.g. how will competitors respond to a new product or pricing strategy?)
l• It helps forecast the returns that may be made from future investments
Competitive analysis is a method of gathering data about competitors from different
sources. It should answer, among other things, the following questions:
 Who are your competitors?

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  What customer needs and preferences are you competing to meet?

 What are the similarities and differences between their products/services and yours?
What are the strengths and weaknesses of each of their products and services?

 How do their prices compare to yours? How are they doing overall?

 How do you plan to compete? Offer better quality services? Lower prices? More
support? Easier access to services? How are you uniquely suited to compete with
them?

5.3.3 Steps of Competitive Analysis

Every business owner should have a complete understanding of the competitive landscape in the
market. Competition is defined as any business that provides a similar service or product in the
same market, region or industry. A strategic business owner not only knows who his competitor
is but also understands the best way to position himself ahead of his competitor. The following
provides a step-by-step process in creating your competitive analysis.
1.) Identify your competitors:
 Determine both local and international competitors.

 Be sure to define the competitive landscape broadly. Your competition includes

anything that could draw customers away from your business..

2.) Gather information about competitors:

At this stage you need to know:
 What markets or market segments your competitors serve;

 What benefits your competitors offer;

 Why customers buy from them;

 And as much as possible about their products and/or services,

pricing, and promotion strategies.

3. Gathering Information on Competitors

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To gather information about your competitor you can go either to your competitors‘ company
site or to the company's Web site (if any). Using which you can learn about:
 promotion strategies by visiting their business site

 Prices

 your competitors‘ customers

 Vendors or suppliers, and their employees.

 trade shows

 Publicly available information - from Newspapers, magazines, press

releases and online publications.

4. Analyzing the Competition

After studying the information you have gathered about each of your competitors, ask
yourself this primary question:
How are you going to compete with that company?
By identifying market niche (a small segment market).
 Is there a particular segment of the market that your competition has overlooked?

 Is there a service that customers or clients want that your competitors do not
supply?

5. Develop a pricing model:

The last step in the process is to develop a pricing model that represents what you are
offering the market and the value you bring to your target buyers. There are many factors that
go into designing the appropriate pricing structure so you will need to do some research and
evaluate what price levels your market will bear, your cost basis for the development of your
product, how much you need to cover overhead and marketing cots and lastly how much
profit you think is appropriate for what you are offering. Do not immediately think you have
to price your products below your competition, people appreciate the value in your product
and set your price accordingly.

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 The goal of your competitive analysis is to identify and expand upon your competitive
advantage. To make your competitive analysis effective, transfer the weaknesses of your
competitors into potential strengths for your business.

5.4 Marketing Strategy

 Activity
Dear distance learner, what is marketing strategy?
(Write your answer on the space provided below)
______________________________________________________________________________
______________________________________________________________________________
A marketing strategy is a process that can allow an organization to concentrate its limited
resources on the greatest opportunities to increase sales and achieve a sustainable competitive
advantage.
Marketing strategy is a method of focusing an organization's energies and resources on a
course of action which can lead to increased sales and dominance of a targeted market.
A marketing strategy combines product development, promotion, distribution, pricing,
relationship management and other elements; identifies the firm's marketing goals, and
explains how they will be achieved, ideally within a stated timeframe. Marketing strategy
determines the choice of target market segments, positioning, marketing mix, and allocation
of resources. It is most effective when it is an integral component of the overall firm strategy,
defining how the organization will successfully engage customers, prospects, and
competitors in the market arena.

5.4.1 Pricing Strategy

Price is the value placed on what is exchanged. Something of value is exchanged for
satisfaction and utility, includes tangible (functional) and intangible (prestige) factors. It can
even be barter.
Price is often the only element the marketer can change quickly in response to demand shifts.
It relates directly to total revenue TR = Price * Quantity
Profit = TR - TC

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 Pricing strategies are subject to incredibly complex environmental and competitive forces. A
company sets no single price, but rather a pricing structure that covers different items in its
line. This pricing structure changes through time as products pass through their life cycles.
To come up with this situations marketers use dynamic pricing strategies. The following
are some of pricing strategies mostly applicable in the real world scenario.
 Price Skimming: this is a type of marketing strategy that firms use by charging the
highest possible price that buyers who most desire the product will pay. It attracts a
market segment that is more interested in quality, status, uniqueness etc. In this
case, consumers‘ demand must be inelastic.

 Penetration Pricing: In this strategy, prices of products are reduced compared to

competitors‘ price for the same product to penetrate into markets and to increase
sales. However, the quality of the product should not be lower as compared to other
competitors‘ product. It should be again noted that the cost of production should be
lower to the extent that can enable the firm to get the desired profit. This is
appropriate when the demand is elastic.

 Cost-plus pricing: Any amount that is above unit cost may be considered.

 Mark-up pricing. A certain percentage of the selling price is added to unit cost.

 Competition Oriented Pricing: Considers competitors prices primarily; but the

market type matters- monopolistic competition or oligopoly?

 Odd-even pricing: This is Psychological pricing method based on the belief that
certain prices or price ranges are more appealing to buyers. This method involves
setting a price in odd numbers (just under round even numbers) such as $49.95
instead of $50.00. Although not supported by any research findings, its
proponents claim that the consumers see a $49.95 price as 'just above $40' and not
as 'just below $50.

5.4.2 Promotion Strategies

Promotion is communication of the company and its products to customers.

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 Promotional strategy is choosing a target market and formulating the most
appropriate promotion mix to influence it. An organization‘s promotional strategy can consist
of:
1. Advertising:

It is any paid form of non personal, one-way, mass communication about an organization,
good, service, or idea by an identified sponsor.

.
2 Personal selling

This is the two-way flow of communication between a buyer and seller, often in a face to face
encounter, designed to influence a person‘s or group‘s purchase decision.
3. Public relations
Public relation is a form of communication that seeks to change the perceptions of customers,
shareholders, suppliers, employees and other publics about a company and its products.
4. Sales promotion

This promotion type involves short term incentives of value such as discounts, free samples,
and prizes to be offered to arouse interest of customers in buying the good/service.
Businesses may use one of the above promotional mix elements to arouse the interest of
customers and make them take action by informing, persuading and reminding about the goods
and services that they provide to the market.

5.4.3. Distribution Strategies

A successful product or service means nothing unless the benefit of such a service can be
communicated clearly to the target market. For product-focused companies, establishing the
most appropriate distribution strategies is a major key to success, defined as maximizing sales
and profits. Unfortunately, many of these companies often fail to establish or maintain the most
effective distribution strategies. Problems that researchers identified include:

 Unwillingness to establish different distribution channels for different products

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  Fear of utilizing multiple channels, especially including direct or semi-direct
sales, due to concerns about erosion of distributor loyalty or inter-channel
cannibalization
 Failure to periodically re-visit and update distribution strategies
 Lack of creativity, and
 Resistance to change

As can be noted from the above points marketing channels are the most important actors for

the effective and efficient distribution of products.

Marketing Channels: These are individuals/organizations involved in the process of making
the product available for use or consumption by consumers. Channels are used to improve
exchange efficiency.
Direct and Indirect channels:
6. Direct channels:

In this type of channel, producers and end users directly interact.

7. Indirect channels:

In this type of channel intermediaries are inserted between seller and buyer.
Intermediaries include Merchant Wholesalers, retailers, dealers, agents, brokers; and
manufacturer‘s branches and offices.
Decisions about marketing channels, which help producers deliver goods and services
to their target markets, are among the most critical tasks facing management—because
the channels that are chosen intimately affect all of the other marketing decisions. For
example, the company‘s pricing depends on whether it uses a direct channel, discount
merchants, or high-quality boutiques. Also, the firm‘s sales force and advertising
decisions depend on how much training and motivation its dealers need.
The following factors should be considered to select the best channel under the
condition of using best distribution strategy.
1. Company Factors: financial, human and technological capabilities of a
company to do its business activities.

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 2. Market Characteristics: Geography, market density, market size, target
market

3. Product Attributes – perishability, value and sophistication of the product

4. Environmental Forces – those forces that affect the business like competition,
technology and culture.

5.5International Marketing
 Activity

Dear learners, what makes international market different from domestic market? And how do we
enter on international market ?

(Write your answer on the space provided below)

______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________

Once the need of the local demand is satisfied and the business expands itself with the
production of more number of products, it starts to go abroad for exploiting the international
market.
International marketing (IM) is the marketing of goods and/or services in more than one nation.
5.5.1 Why go international? (Importance of international marketing)
Firms go international because of the following major reasons:
 Searching for more profit.

 Competitive pressures at home country.

 Excess production capacity.

 Declining market opportunity and sales in home country.

 Technological advantage over the host country.

 Tax and other policy benefits provided by the host country.

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5.2.2Challenges (unique features) of IM

In doing business internationally, you have to expect and be ready to (plan for) the following
environmental factors:

.
1 Cultural diversity - differences in customs, values, languages, etc.

2. Economic considerations – stages of economic development, infrastructure

availability, consumer purchasing power, exchange rates, tariffs, etc.
3. Political-regulatory environment –current government policies and attitudes,
political system and stability, trade regulations etc.
4. Industry and market conditions –size of the market and rate of growth, level
of competition in the industry etc.
5. Competition –level of competition in host country, your relative competitive
advantage, etc

5.5.3 International market Entry Strategies

Once you decide to go international after considering the above challenges, you can select
one or a combination of the following modes of market entry:
1. Exporting
As part of international marketing strategy exporting refers to producing goods in one
country and selling them in another country.
Exporting can be indirect or direct
i) Indirect exporting – involves the use of domestic trading companies or export houses. This is
an easier way to start exporting.

ii) Direct exporting – when a firm sells its goods to a foreign market without use of a
domestic intermediary. The good can be sold to a foreign purchaser in the local market
but shipped out of the country.

The advantages of exporting are:

 Manufacturing is home based thus, exporting is less risky than overseas based
manufacturing.

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 Exporting gives an opportunity to "learn" overseas markets before investing on
manufacturing plants.

However, high transportation costs, trade barriers (like tariff, quota), and weaknesses of
foreign distributors are major problems (disadvantages).
2. Licensing
This is a type of international trade entry type which is made by giving a foreign manufacturer
the right to use his patent, production technology, process or product in return for the payment
of a royalty by the manufacturer (licensor)
Generally, Licensing gives the following advantages:
 Good way to start in foreign operations and open the door to low risk
manufacturing relationships

 Linkage of parent and receiving partner interests means both get most out of
marketing effort

 Capital not tied up in foreign operation

Though it has the above advantages it is not free from the following disadvantages, which are:
 limited form of participation in the foreign market

 potential returns from marketing and manufacturing may be lost

to the licensee

 licensor develops know-how gradually and so licence is short lived

 Licensee may become competitor in the long term.

3. Joint Venture
Joint venture refers to the joining of two firms in order to form a new company sharing
ownership, control and profits.
The advantages of joint ventures include:
 Access to foreign partner‘s knowledge

 Shared financial, physical, and managerial resources and risks.

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  Political acceptability in the host country

But it has the following Disadvantages:

 disagreements on policies or courses of action

 Lack of full control of management by either partner.

4. Foreign Direct Investment (FDI)

FDI refers to a domestic firm (your firm) actually investing in and owning a foreign subsidiary or
division. Usually firms invest directly in a foreign country after they ‗test‘ one or more of the
above three entry modes.
The advantages of this strategy include:
 Cost savings once the foreign division is established.

 Better understanding of host country market conditions

 Fewer restrictions

 Protection of production technology

However, FDI involves the following disadvantages

 High costs of establishing the foreign division and

 High risks associated with economic and political system of the host country
government. Example – Expropriation and nationalization.

Generally the amount of profit potential as well as the financial

 commitment risk and market control increase as one moves from

exporting to licensing to joint venture and to FDI, respectively.

Summary
Marketing research is the systematic and objective identification, collection, analysis, and
dissemination of information for the purpose of assisting management in decision making related

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to the identification and solution of problems. Marketing researches deal with many aspects of a
market including the following: Market size, Market Share, Market penetration, Brand equity
research and Buyer decision processes research.
There are three Functional Roles of Marketing Research. These are descriptive, analytical, and
predictive functions. Marketing Research Process includes: defining the research purpose or
objectives, formulating research design, gathering secondary data, gathering primary data,
processing and analyzing data, reporting preparations and presentation.
Market intelligence is the systematic process of gathering, analyzing, supplying and applying
information (both qualitative and quantitative) about the external market environment.
Marketing intelligence provides the following benefits: market and customer orientation which
promote external focus, identification of new opportunities, smart segmentation, early warning of
competitor moves, minimizing investment risks and quicker, more efficient and cost-effective
information. There are different ways to undertake market intelligence namely; unfocused
scanning, semi-focused scanning, informal search and formal search.
Competitive analysis refers to determining the strengths and weaknesses of competitors and
designing ways to take opportunities or tackle threats posed by competitors.

Self –Check Review Questions

Part I choose the best answer
1. XYZ Company is a company established by an entrepreneurial team which is producing
and selling leather products only in Gambella region. Considering its financial capacity
and its need for more profit the company wanted to gradually expand its distribution in
other regions. It then planned to firstly distribute its products in Addis Ababa region.
However, in the city there are a lot of companies producing the same product where the
products are price elastic. What is good, other product attributes the same; the company
comparatively produces its products at low cost since its production location is endowed
with cheap natural resources and labor. If you are one of the team members which pricing
strategy do you suggest to the group to apply?
a. price segmentation
b. Prestige pricing

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 c. price skimming
d. penetration pricing
e. None of the above

2. Based up on the above case if the company wants to distribute its products to selected
governmental organizations of the city, which promotional mix element is appropriate?

a. Advertising
b. Personal selling
c. Public relations
d. Sales promotion
e. None of the above
3. Which of the following products earn better profit if the company is to expand its
market?
a. They should be new since the cost is different from competitors
b. They should not necessarily be new
c. The company‘s products should be very much different from competitors‘
products
d. The quality of the products should be low as compared to other competitors‘
products
e. All of the above
4. Which of the following can be a reason why entrepreneurs prefer marketing research to
marketing intelligence?
a. The latter is costly while the former can be made with least cost.
b. The former can be used to get information even from inside the entrepreneurs
company
c. The former gives emphasis to information about competitors than the later
d. The later takes more time to conduct than the former
e. All but C
5. Gathering any information that may affect a new business from any media is known as
a. Informal search
b. Formal search
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 c. Unfocused scanning
d. Semi-focused scanning
e. None of the above

Part II Discuss the following questions briefly

1. What are the different steps to be followed during marketing research?

2. Describe the significance of marketing research in decision making?

3. Write what marketing intelligence is, its importance and the various ways used for
gathering information

4. Discuss the marketing strategies that you know as applied in businesses.

5. What is international marketing? Discuss the different ways of dealing with international
marketing.

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 CHAPTER SIX
FINANCING THE NEW VENTURE
Contents
6.1 Financial Requirement
6.2 Sources of Finance
6.2.1 Equity and debt financing
6.2.2 Lease Financing

Unit objectives
Dear learner, this chapter is meant to acquaint you with the basic concepts of financing
the new venture
After going through this lesson, you will be able to:

Know the need for obtaining finance to business

Discuss the different sources of financing the new venture
Explain the different types of lease agreement
Identify the advantages of Leasing

Introduction
Sourcing money may be done for a variety of reasons. Traditional areas of need may be
for capital asset acquirement - new machinery or the construction of a new building .
The development of new products can be enormously costly and here again capital may
be required.
Normally, such developments are financed internally, whereas capital for the
acquisition of machinery may come from external sources. In this day and age of tight
liquidity, many organizations have to look for short term capital in the way of loans,
working capital etc. in order to provide a cash flow cushion.

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6.1 Financial Requirements

 Activity

Dear students, for what purpose a business enterprise requisite finance?

(Write your answer on the space provided below)

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

All business needs money to finance a host of different requirements. In looking at the types and
adequacy of funds available, it is important to match the use of the funds with appropriate
funding methods.
1) Permanent Capital- Equity Capital
The permanent capital base of a small firm usually comes from the form of equity
investment in shares in a limited company, or personal loans to or from partners or sole
traders. It is used to finance the start - up costs of an enterprise, or major developments
and expansions in its life - cycle. It may be required for a significant innovation, such as
a new product development.

In some cases, it is required to refinance a firm that has acquired borrowings which are
inappropriate to its current situation; short - term borrowings, in the form of loans or
overdrafts, may need to be converted into more permanent capital.

Equity from private investors may also be sought to take a small firm into the medium
or large size category or as an exit route for the original investors.

Ideally, permanent capital is only serviced when the firm can afford it; investment in
equity is rewarded by dividends from profits, or a capital gain when shares are sold. It is
not therefore a continual drain from the cash flow of a company, such as a loan, which
needs interest and capital repayments on a regular basis.

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 Equity capital usually provides a stake in the ownership of the business, and
therefore the investor accepts some element of risk in that returns are not
automatic, but only made when the small firm has generated surpluses.

2) Working Capital:- Short-Term Finance

Most small firms need working capital to bridge the gap between when they get paid,
and when they have to pay their suppliers and their overhead costs. Requirements for
this kind of short-term finance will vary considerably by business type.

For example, a manufacturer or small firm selling to other businesses will have to offer
credit terms, and the resulting debtors will need to be financed; the faster the growth,
the more the debtors, and the larger the financial requirement.

A retailer, a restaurant, a public house, or other types of out let selling direct to the
public will often collect cash with the sale however, earns, the cash flow will be
advantageous.

In some cases, this will be sufficient to finance the start - up of a small firm, so that
suppliers are effectively financing the business.

However, even these types of business may need working capital to fund temporary
loses, caused by seasonal fluctuations, or to cope with prepayment of expenses such as
rent payable in advance.

Although short-term finance is normally used to fund the trading of a business, it is also
sometimes needed to purchase assets, which are short-lived such as company vehicles,
which may be changed every 4 or 5 years.

3) Asset Finance:- Medium to Long-Term Finance

The purchase of tangible assets is usually financed on a longer-term basis, from 3 to 10
years, or more depending on the useful life of the asset.
Plant, machinery, equipment, fixtures, and fittings, company vehicles and buildings
may all be financed by medium or long-term loans from a variety of lending bodies.
4) International Trade Finance

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Exporting brings its own set of money problems. Currency fluctuations, lengthy
payment terms and security of payment all give rise to the need for some kind of
specialist financer known as export financing bank.

6.2 Sources of Finance

 Activity
Dear distance learner, where will be the source of finance to run our business? And
what are the options to acquire finance?
(Write your answer on the space provided below)
____________________________________________________________
____________________________________________________________
______________________________________________________
To meet these differing types of funding requirements, the owner manager has a number
of options to obtain finance. For an entrepreneur available financing needs to be
considered from the perspective of debt Vs equity finance and external Vs internal
financing. Financing a business can be seen in terms of short term and long term
financing as well.

6.2.1Equity or Debt Financing

Debt financing
The debt financing is the methods of financing a business involving interest bearing instrument
usually a lone, the payment of which is only indirectly related to the sales and profit of the
venture.
 Such kind of financing usually requires a certain kind of asset as collateral to the lender
as a security in case of failure of the borrower to pay back the money.
 Such kind of financing also requires the payment of the principal and an interest as return
for using the money for specified period of time.
Debt financing could be short term (the one which should be paid within a year) or could be long
term (the one that requires more than a year to be paid).

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  The short term debt financing is usually used for financing working capital such as
purchase of inventory, accounts receivable and other operation of the business.
 Whereas the long term debt financing is used for purchasing fixed asset such as
machineries and equipment while interest rate is low debt financing will be preferred
over equity financing because it enables the entrepreneur to retain a large ownership
portion of the business.
The most common type of financing used by small business is Bank loan
 One acronym often used by bankers as framework to decide upon financing or not
financing the business is CAMPARI.
Character: This part of the framework addresses the characteristic of the potential borrower
with regards to his/ her or their credit history, honesty and integrity.
Ability: This is about the managerial, planning and implementation capacity of the owner or
management team. This can partly be revealed through assessing business plans and
communicating it with the borrowers. In addition, their financial and personal intelligence,
sharpness, good judgmental ability is assessed.
Management: This is about the adequacy of the management team in managing the business.
This can be assessed though the qualification, number, proven experience of the management
team.
Purpose: This is tracing the purpose of the loan as to whether it is within the banking policy and
area of interest, legality of financing it and whether the required fund is within the best interest of
the business.
Amount: Is the amount requested correct and reasonable for the activities business intended to
perform or is that more than the actual requirement of running the business.
Repayment: This is an assessment as to whether the business is capable of producing profit and
paying back the loan or is that predicted to be loss-making business and make the bank inn risk
of not being paid.
Insurance/collateral: Banks assesses the security of funding the business and may require
collateral to offer the fund to the borrower. Good entrepreneurs are able to keep good
relationship with bankers. And their relationship will be based on trust, respect and integrity.
This norm between the bankers and the entrepreneur can allow both parties to discharge their
responsibilities smoothly.

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Equity financing doesn't require collateral but finance is gained in exchange of sharing
ownership. The investor shares the profit of the venture as well as disposition of the asset
proportionally.
Which source of finance is preferable?
The preference of the entrepreneur to finance his/her business using equity or debt financing
depends on the availability of the sources, the interest rate, nature of the business, the interest of
the owner to share ownership and so on.
Advantages and Disadvantages of Debt financing
Advantages of Debt financing
 Interest paid to the use of borrowed money is not taxed. This effectively reduces the cost
of using the money.
 Borrowing is convenient for short-term needs. It makes it unnecessary to keep large
amount of cash for peak needs.
 Borrowed money provides additional capital without giving up an ownership or control
of the business.
 Owners who are able to borrow money make profits without increasing their investment.
Disadvantages of Debt Financing
 Borrowed money is sometimes unavailable or can only be obtained at a high interest rate.
Businesses that rests on debt financing may encounter many difficulties
 Businesses that use borrowed money must meet interest payments regularly. This can be
a burden when revenues are down or the company is facing other financial difficulties.
 During liquidation, borrowers have an upper hand to get their money first over equity
financers'. In trust receipts the bank advances a large percentage of the invoice price of
the goods and is paid on a prorate basis as the inventory sold. Hence it threatens owners
right in case of insolvency or bankruptcy.

Advantages and disadvantages of equity Financing

The major advantages of equity financing are:

 No interest charges must be paid

 Their solvency is less likely to be threatened by an inability to meet obligation to lenders.

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  Profits produced by a business financed by owners belong to owners and are not reduced
by loan payment.
The major disadvantages of equity financing
 Capital needs of business vary over time. If requirement decreases,
 Invested money may remain idle
 Greater total investment by owners is required to a given scope operation when little or
no borrowed money is used
 Equity financing has the major drawback of diluting ownership. In effect, the original
owners sacrifice a portion of their control & profits.

6.2.2Lease Financing

In simple words, a lease is a sort of contract.

 A lease contract can be defined as a contract whereby the owner of an asset
(called lessor) grants to another party (called lessee) the exclusive right to use
the asset for an agreed period in return for the payment of rent.
 In other words, lease is a contract under which one party, the lessor of an asset
agrees to grant the use of that asset to another, the lessee, in exchange for
periodic rental payments.
Types of Lease Agreements
1) Capital Lease: This is also called 'financial lease'. A capital lease is a long term
arrangement which is not cancelable.
 The lessee is obligated to pay rent till the expiry of the lease period.
 The period of lease agreement generally corresponds to the useful life of
the asset concerned.
2) Operating Lease: Contrary to capital lease, the period of operating lease is shorter
and it is often cancelable at the option of lessee with prior notice. Hence, operating
lease is also called as an 'open-end lease arrangement'.
 The lease term is shorter than the economic life of the asset. Thus, the leaser
does not recover its investment during the first lease period.
 Some examples of operating lease are leasing of copying machines, computer
hardware, word processors, automobiles, etc.

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3) Sale and Leaseback: Under a sale and leaseback arrangement, a firm sells an asset to
another party who in turn leases it back to the firm.
 The asset is usually sold at the market value on the day. The firm, thus, receives the
sales price in cash, on the one hand, and economic use of the asset sold, on the other.
 Yes, the firm is obligated to make periodic rental payments to the lessor. Sale and
leaseback arrangement is beneficial both for lessor and lessee.
 While the former gets tax benefits due to depreciation, the latter has immediate cash
inflow which improves his liquidity position. In fact, such arrangement is popular
with the companies facing short-term liquidity crisis.
4) Leveraged Leasing: A special form of leasing has become very popular in recent years. This
is known as Leveraged Leasing. This is popular in the financing of "big-tickets" assets such as
aircraft, oilrigs and railway equipment‘s. In contrast to earlier leasing, three parties are involved
in such lease arrangement - Lessee, Lessor, and the Lender. Leveraged leasing can be defined as
a lease arrangement in which the lessor provides an equity portion of the leased asset's cost and
the third party lenders provide the balance of the financing.

Summary
All business enterprises need finance to for their activities. A business require permanent capital
to finance the startup cost of an enterprise .most business enterprise also needs working capital to
pay for their suppliers and overhead costs.
Plants, machineries, equipment‘s and different fixed costs are financed by medium and long term
finance. Therefore to cover all these permanent and working capital costs the business may
obtain finance from equity, debt and also lease from financial institutions and also traditional
financial sources.

Self-assessment questions
Part I: Multiple choice questions

1) Which one of the following is the source of permanent capital?

a) Working capital b) Equity capital c) Promissory Notes d) All

2) Which one of the following is the advantage of leasing?

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 a) It is alternative use of funds

b) Free from restrictive covenants

c) Tax shielding

Part II: Discussion questions

1) Why does a business need money? Discuss
2) Identify and explain the sources of funds for small business
3) Which source of capital is needed for financing start-up, expansion and
development activities of small business
4) Cash is critical to survival, representing the life blood of business. Do you agree?
5) Explain the difference between debt capital and equity capital
6) Discuss the types of lease agreements that can be used in financing small business

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 CHAPTER SEVEN
GROWTH STRATEGIES FOR SMALL BUSINESS
Contents
7.1 Need for growth
7.2 Types of growth strategies
7.2.1 Expansion
7.2.2 Diversification
7.3 External Growth strategy
7.4 Sub-contracting

Unit objectives
Dear learner, this chapter is meant to acquaint you with the basic concepts about growth
strategies for business organization.
After going through this lesson, you will be able to:
Understand business expansion and diversification
Differentiate expansion from diversification
Discuss different types of growth strategies
Differentiate between horizontal integration, vertical integration, concentric and
conglomerate diversification
Differentiate among the different the types of external growth strategy
Differentiate among joint ventures and mergers

Introduction
The growth of a business firm is similar to that of a human being who passes through
the stages of infancy, childhood, adulthood, and old age. An enterprise may be
considered growing when there is a permanent increase in its sales turnover, assets, and
volume of output. Business growth is a natural and [Link] process. Many business
firms started small and have become big through continuous growth. However, growth
may be restricted by constraints of market demand, finance, technology, management
skills, etc

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7.1 Need for Growth
 Activity
Dear distance learner, why small business enterprise wants to grow?
(Write your answer on the space provided below)
______________________________________________________________________
______________________________________________________________________
_____________________________________________________________________
In modern business, very few firms remain static for long. Most of the firms are in a
state of continued flux, either expanding or contracting but always changing like time.
Business firms grow because of several factors. The important motives, which drive
business firms towards growth, are the advantages of growth that are described below:

a) Survival: Severe competition forces a firm to grow and gain competitive

strength. Any business firm that fails to grow cannot survive for long. With
increasing competition and shrinking profit margins, firms have to grow in order
to maintain their existence. In a growing industry, a firm has to grow just to
retain its present position. A growing firm tends to be an innovator and it can
easily face business risks. It can easily absorb the shocks of market forces.
Growth provides protection or security against periods of adversity such as
recession. By diversifying the range of its products and markets, a firm can meet
competition in the market and minimize its risks. Thus, growth is a means of
survival in a challenging a turbulent environment.
b) Economies of Scale: Large-scale operations provide economies in production,
marketing, finance, and management. In the words of Florence, "there are
logical reasons for supposing that granting the advantages of mechanical and
human specialization, production especially when conducted in large-scale,
firms and plants result in maximum efficiency." A large firm enjoys the
advantages of bulk purchase of materials, strong bargaining power, spreading of
overheads, well organized promotion campaigns, cheaper finance, automation,
expert management, etc. These economies result in reduction in per unit cost of
operations and increase in profits.

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c) Expansion of Market: Increase in demand for goods and services have led
business firms to expand in size. Population explosion and transportation led to
widening of markets, which in turn resulted in mass production. Business firms
grow to cater to expanding markets that provide opportunities for business
growth.
d) Owner's Mandate: The owner of a company get the ultimate benefit of growth
in the form of higher dividends and rise in the market value of shareholdings.
Therefore, they may direct the management to ensure growth of the company
through continuous ploughing back of profits instead of distributing the entire
earnings. Capable management may on its own like to take carefully calculated
risks and expand the size of the company.
e) Technology: Business firms also grow in order to reap the benefits of modern
technology. Many firms invest in research and development to develop new
products and new techniques. Only a large firm can take full advantage of
sophisticated machinery and equipment. Rationalization and automation result
in more efficient use of resources and a firm may grow to obtain them. With
advancement in science and technology, there occurs growth in the scale of
operations.
f) Prestige and Power: Some businesspersons have a lust for economic and
social power. Big business commands power and respect. Industrial magnets
have great say in the economic and social life of people. Businesspersons satisfy
their craze for power by building business empires. They take pride in the
growth of firms established by them. Other personal factors such as personal
ambition, exceptional organizing ability, strategic genius, etc also lead to growth
of firms.
g) Government Policy: Generally, business firms operate under a plethora of
government controls. Government may provide several incentives in the form of
subsidies and tax concessions to industrial units in backward areas and those
producing goods for export purposes. A firm may grow to face government
controls or to secure these incentives.
h) Self-Sufficiency: Some firms grow to become independent in terms of

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 marketing of raw materials or marketing of products. They integrate the various
stages of industry or acquire other firms to gain control over the supply of
materials and marketing of finished products.

7.2 Types of Growth Strategies

 Activity
Dear students , let us say that you have a small business enterprise then if you
want to grow that business then what kind of strategy you will prefer to use
for the growth of your business ?
(Write your answer on the space provided below )
______________________________________________________________
______________________________________________________________
__________________________________________________________
Strategy means a deliberate and well-planned course of action designed to achieve
specific objectives. Growth strategy may be defined as a strategic plan formulated and
implemented to expand the operations of a business firm. It contains the growth
objectives in terms of sales volume, market share, etc and the scheme of action to be
employed to realize these objectives. Different firms may adopt different strategies in
order to grow. The main strategies for growth are as follows:

7.2.1 Expansion

Expansion and diversification are forms of internal growth. Internal growth implies
increase in scale of operations without joining hands with other firms. A firm expands
its product - market scope. Expansion may take place in the following forms:
a) Market Penetration: It implies increasing the sale of existing products in the existing
markets. For example, LML launched a scheme of exchanging old scooters for new to
increase its sales. Nestle introduced coffee shake to increase sales - during summer.
b) Market Development: It involves exploring new markets for existing products. Some
firms, for example, grow through exports. Manufacturers of transistor and TV sets
increased their sales by exploring rural areas.

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c) Product Development: It implies developing new or modified products for sale in the
existing markets. For example, Pepsi Corporation has developed and launched Lehar
Namkeen in addition to its cold drinks in India.
Advantages of Expansion
 Growth is natural and gradual. It can, therefore, be handed easily.
 Expansion can be financed from the firm‘s own funds
 No major changes are required in the organization structure and
management systems of business
 Better utilization of existing resources becomes possible
 Expansion provides economies of large scale operations
 The expanding firm can better face competition in the market

Limitations of expansion
 Growth is slow and take time
 It is not always possible to grow in the present product market
 A business firm may not be able to exploit many business opportunities
by confining its operations to the existing products and markets

Practical Problems in Expansion

When small business firms attempt to expand, they have to face many problems. Some
of these problems are given below:
(i) Shortage of funds: Expansion requires additional funds for investment in both fixed
assets and current assets. Funds for fixed capital and working capital are not easily
available. Many a times a small firm has to borrow funds at high rates of interest.
(ii) Technology: In order to expand, it is often necessary to upgrade technology and
replace plant and machinery. Modernization of technology is time consuming and
expensive process. It becomes essential to recruit new staff or retain the existing staff in
the use and operation of new technology.
(iii) Marketing: Expansion is possible and profitable only when the increased output
can be sold at remunerative prices. Small-scale units face hurdles in selling and
distribution of their products due to competition from large-scale units.

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(iv) . Risk: Expansion involves additional risk. Few small-scale firms have the ability
or will - power to assume these risks particularly where the competition is acute and
raw materials have to be imported. Better managerial skills are required to manage
growth successfully. Some small-scale owners continue to operate at a given scale due
to the risks and difficulties involved in expansion

7.2.2 Diversification

Beyond a certain point, it is no longer possible for a firm to expand in the basic product
market. It is not able to grow any more through market penetration. Therefore, the firm
must add new products, or markets to its existing business line. This approach towards
growth is called diversification. Diversification is the process of entry in a field of
business, which is new to an enterprise in terms of either the market or the technology
or both. It is a strategy in which the growth objective is sought to be achieved by adding
new products or services to the existing ones.

Diversification is much talked about and widely used strategy for growth. Several
companies and small businesses both in the private and public sectors have adopted it.
For example, ITC Ltd, originally a cigarette company has diversified into hotel, finance,
agri-business, paper and deep sea fishing. Similarly, Larsen and Tourbo, an engineering
company, diversified into cement. Bloplast, a moulded-luggage manufacturer,
diversified into plastic seating systems and branded toys.
Advantages of Diversification
Companies have increasingly adopted diversification strategy due to the following
reasons:
(i) Diversification enables an enterprise to make better use of its resources. By adding
up related products to its existing product portfolio, a company can more effectively
utilize its managerial personnel, marketing network, research and development
facilities, etc. Diversification in to related areas of technology or marketing networks
provides synergistic advantage.
(ii) A company can use diversification strategy to mitigate the decline in sales of its
present products. By developing new products, the sales revenue and earnings can be
maintained or even increased.
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 (iii) Diversification provides opportunity for a company to adapt it self to rapidly
changing environment and increasing competition. An enterprise faces competition not
only from direct competitors but also from competitors offering substitute products.
Competition of this type can be met adequately by diversifying into new technological
areas.
(iv) Diversification helps to minimize risk. A company can spread its risks by
developing a balanced portfolio of business through diversification. When one line of
business faces decline, another line may be in high growth stage.
(v) A well-diversified company can use cash surplus of one business to finance another
business having good potential for growth.
(vi) Diversification adds to size of business, which improves the competitiveness of a
firm. It offers a lot of economy in operations because common facilities can be used for
several products. In other words, diversification can be used to capitalize on corporate
strengths or to minimize weakness.
Diversification is be suitable under the following conditions
 When the firm cannot attain its growth target by expansion alone
 When diversification promises greater profitability than expansion
 When the financial resources of the firm are much in excess of the
requirements of expansion
Disadvantages
a) Reorganization is necessary
b) Difficulty in coordinating diverse business
Types of diversification
Diversification is of four types
a) Horizontal integration
b) Vertical integration
c) Concentric and
d) Conglomerate

a) Horizontal Integration

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 In this type of diversification, a company adds up same type of products at the same
level of production or marketing process. They may happen internally or externally.
Internally, a company may decide to enter a parallel product market in addition to the
existing product line. Externally, a company combines with a competing firm. Two or
more competing firms are brought together under single ownership and control.
Advantages
Horizontal integration offers the following benefits:
i) Wasteful competition among the combining firms is eliminated
ii) It provides economies of large-scale operations.
iii) It provides greater control over the market and increases the competitiveness of the
company.
iv) It permits the firm to influence supply and prices of the product.
Disadvantages
Horizontal integration suffers from the following limitations:
 The firm is not assured of supply of raw materials.
 When several firms combine to form horizontal integration, there is danger of
over-capitalization.
 The management of the firm may become bureaucratic and inflexible.
 The company may acquire monopoly power, which may be used to exploit
consumers and labor.
b) Vertical Integration
In this type of growth strategy, new products or services are added which are
complementary to the existing product or service line. New products serve the firm's
own needs by either supplying inputs or serve as a customer for its output. It involves
moving backward or forward from the present product or service. Linkages are
established between products, processes or distribution systems. Vertical integration
may be of two types: backward and forward integration.

Backward Integration: It implies moving towards the production of source of raw

materials. Also called upstream development, it is aimed at moving lower on the
production process so that the firm is able to supply- own raw materials or basic

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 components. For example, a TV manufacturer may start producing picture tubes; a
textile factory may buy a cotton farm.
Advantages
Backward integration offers the following benefits:
 It helps ensure regular supply of raw materials or components.
 It improves or ensures quality control over the final product.
 It facilitates higher return on investment for the company as a whole through better
use of overhead facilities.
 It improves the company's power of negotiation with suppliers on the basis of
known costs.
 It saves indirect taxes payable on the purchase of inputs.
 It improves the competitive power of the company.
An integrated firm can differentiate itself from its competitors by offering a wide range of
value added products. As it controls more elements of the production process, it
has advantages over the other firms in the form of lower costs, lower prices, and
lower risks.
Disadvantages
Backward integration suffers from the following limitations:
 The firm loses the opportunity of purchasing at a lower cost from technically more
efficient suppliers.
 If an existing input producing unit is bought, it may require technological up
gradation, which involves considerable investment.
 Heavy investment in the process of backward integration may hamper the
development of the final products and advancement of later stages in the
manufacturing process. This in turn may lead to undue pressure on pricing and
sales effort.
 When the divisions using the inputs do not have the freedom of comparing market
conditions of supply, the problem of' transfer pricing may become acute.
 Changing economic conditions affecting the main product market may cause a
magnified effect on the production of inputs.

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Forward Integration
Forward integration involves the entry of a firm into the business of finishing,
distributing, or selling existing products. It is also known as 'downstream expansion'. It
refers to moving higher up in the production/distribution process towards the ultimate
consumer. The firm develops outlets for the use/sale of its own products. For example,
many textile companies have set up their own retail distribution system to sell their
fabrics.
Advantages
i) It enables the firm to gain greater control over sales and prices of its products. This is
very useful in an oligopolistic market.
(ii) It improves the scope of quality control because the firm's own retail stores serve as
better source of customer feedback.
(iii) The firm can increase its profits by eliminating intermediaries and by reducing the
costs of distribution.
(iv) The firm can secure the economies of integration. Handling and transportation costs
can be reduced. Similarly, the firm can reduce costs of internal control and
coordination. It can better monitor the market and predict the demand. These economies
help to improve the competing power of the firm.
Disadvantages
Forward integration suffers from the following drawbacks.
i) Forward integration reduces the flexibility of operations. There is difficulty in coping
with changes in technology, character, size or number of additional units of
production/distribution. Due to technological change, product designs change, etc. the
in house distribution channel may not work efficiently.
ii) The proportion of fixed costs in the firm's cost structure increases. As a result the
firm is exposed to greater cyclical changes in earnings. Moreover, the fortunes of
business are tied to the in house distribution system. From this point of view, forward
integration increases business risk.
iii) In the absence of proper balance between up-stream and down-stream units, the firm
has to buy from or sell in the open market. The firm may be competing with its own
customers.

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iv) Forward integration requires high capital investment. It also reduces the flexibility in
capital investment. As, the performance of the entire chain is dependent on each
of its links, the firm may have to invest in marginal links to preserve the total
chain.
(v) It is very difficult to efficiently manage an integrated firm because every business
has its own structure, technology and problems.
Concentric Diversification
When a firm enters into some business, which is related with its present business in
terms of technology, marketing or both, it is called concentric diversification.

In technology-related concentric diversification, new product or service is provided

with the help of existing or similar technology. For example, Nestle has added 'Tomato
Ketchup' and 'Maggi Noodles' to its range of baby food.
In marketing related concentric diversification, the new product or service is sold
through the existing distribution system. For instance, a hire-purchase firm may start
providing lease finance for purchase of consumer durables.

In technology and marketing-related concentric diversification, both existing

technology and existing distribution system are used for the new product or service. For
instance, a tea company may diversify into coffee.

Concentric diversification may be employed for the following purposes:

i) To counteract cyclical fluctuations in the present products or services

ii) To utilize the cash flows generated by the existing products or services.
(iii) To face saturation of demand for present product or service
(iv) To gain managerial expertise in new field of business, and
(v) To capitalize on the reputation of present product or service
Conglomerate Diversification

In this growth strategy, a firm enters into business, which is unrelated to its existing
business both in terms of technology and marketing. Conglomerate diversification
strategy may be adopted for the following reasons:

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 i) To achieve a growth rate higher than what can be realized through expansion.
ii) To make better use of financial resources with retained profits exceeding immediate
investment needs.
iii) To avail of potential opportunities for profitable investment
iv) To achieve distinctive competitive advantage and greater stability
v) To spread the risk, and
vi) To improve the price earnings ratio and market price of the company's shares.

7.3 External Growth Strategy (Joint Ventures and Mergers)

 Activity
Dear students what is the difference between joint venture and merger?
(Write your answer on the space provided below)
_____________________________________________________________
_____________________________________________________________
____________________________________
External growth occurs when two or more firms combine in one firm. It is also called
integrative growth strategy.

Advantages

Integrative growth strategy has the following advantages:

1) Growth is very fast or quick

(2) The firm gets running business units
(3) The strategy offers economies of scale and control over the market.
(4) Wasteful competition can be eliminated.

Disadvantages
Integrative growth strategy suffers from the following limitations:
(1) Large amounts of financial resources are required to take over running units
(2) Drastic changes are required in the organization structure and management of the firm.
(3) Co-ordination and control of integrated units becomes very difficult.
(4) Frequent takeovers may create uncertainty and instability in the economy.

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Integrated growth strategy may take the form of Joint-venture, merger, or takeover.

i) Joint Ventures
When two or more independent firms together establish a new enterprise, contribute to the total
equality capital and participate in its business operations, it is known as a joint venture. A joint
venture is a temporary partnership or consortium between two or more companies for a specified
purpose. Firms within a country as well as firms in different countries may participate in a joint
venture.

Advantages
Joint ventures are set up for the following reasons:
(1) A joint venture between two or more companies within the same country helps to reduce
competition or influence suppliers.
(2) High risks involved in new ventures can be reduced through joint ventures.
(3) Small firms can compete with large firms by joining hands.
(4) The foreign partner in a joint venture can provide advanced technology and technical know
how not available within the country.
(5) The import content of a project can easily be financed through equity participation by the
foreign company
(6) Multinational corporations can enter a country more easily through joint ventures than by
setting up subsidiaries.
(7) Joint ventures help reduce production and marketing costs through higher sales volume.
(8) Risk of business is shared among partners. Many join ventures have been set up in
construction industry for this purpose.
(9) A joint venture can provide the benefit of synergy. According to Drucker, joint venture is
the most flexible instrument for making the fits out of misfits. The distinctive competence of
two or more independent firms can be pooled together.
(10) The amount of investment in joint venture is contributed by two or more firms. As a result
each partner has to contribute less than when he has to set up the venture alone.

Disadvantages
The main problems of joint ventures are as follows:

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(a) Problems often arise in equity participation because both the local partner and the foreign
partner desire to have majority stake in the joint venture.
(b) Often there are legal restrictions on foreign investment. Some countries set a limit of
permissible foreign share holding in their local investment.
(c) Differences in cultures and stages of economic development of the countries to which the
parties belong often create conflicts.
. (d) Joint ventures between unequal partners often are tantamount to quasi mergers and may
attract anti-monopoly regulations.
(e) Lack of proper coordination among partners may affect the efficient functioning of a joint
venture.
Joint ventures are likely to be more appropriate under the following conditions:
(1) When an activity is uneconomical for a single firm
(2) When the risk of business has to be shared and reduced for the participating firms.
(3) When the distinctive competence of two or more firms can be brought together.
(4) When setting up a venture requires overcoming hurdles such as import quotas, tariffs,
nationalistic political interests, and cultural roadblocks. .
Thus, joint ventures are effective for the joint growth strategy when development costs have to
be shared, risks are to be spread out and expertise has to be complemented to make effective use
of resources.

Strategic Issues in Joint Ventures: The major decisions that should be carefully taken
into consideration in a joint venture are given below:
(i) Objectives of joint venture: first of all the basic objectives of joint venture should be spelled
out clearly. The interests of two partners may not be identical and compatible. Therefore, basic
differences in their objectives should be stated in advance. A way to break the disagreement
should be built into the joint venture from the very start. Even provision can be made for
arbitration and arbitrator acceptable to both parties should be named.
(ii) Choice of partner: several criteria may be used to select a venture. These are financial
capacity, technical capacity, management competence, etc. In addition, the intention and
sincerity of the partners should be considered.

(iii) Pattern of shareholding: an explicit provision should also be made for disinvestment

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of shareholding by the foreign party .after certain period of time. Key consideration in
dividing foreign equity participation is the inflow of foreign technology on continuous
basis and discharge of export obligation and the government policy. .

(iv) Management pattern: the joint venture should be autonomous. The composition of
the board of directors may be decided in the light of choice of partners, .shareholding
pattern, etc.
ii) Merger
Merger is an external growth strategy. A merger means a combination of two or more
firms into one. It may occur in two ways: (a) takeover or acquisition of one company by
another, and (b) creation of new company by complete consolidation of two or more units.
The former is called absorption where as the latter is known as amalgamation.

Types of Mergers

Mergers are of four types:

1) Horizontal mergers
These take place when there is a combination of two or more firms engaged in the same
production or marketing process. For instance, Brook Bond and Lipton India Ltd. Merged
together and formed a new company
2) Vertical Mergers: It takes place when the combining firms are complementary to each
other either in terms of supply of inputs or marketing of output. For example, a footwear
company may take over a leather tannery.
3) Concentric mergers: When the combining firms are similar either in terms of
technology or marketing system there is concentric merger.
4) Conglomerate mergers: It occurs when two unrelated firms combine together, i.e., a
footwear company combining with a cement firm.

Why Mergers
A) From the buying firm‘s view point
1. To gain quick entry into new markets and industries
2. To achieve faster rate of growth
3. To diversify quickly

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4. To reduce competition and avoid dependence
5. To gain tax benefits
6. To achieve synergistic advantages
5. To have quick access to research and development and other facilities
6. To fill the gap in the existing product line
7. To stabilize sales and profits
8. To increase the value of the firm

B) From the selling firm‘s view point

1) To turn around a sick unit
2) To increase the value of the owner‘s stock
3) To increase the growth rate
4) To acquire resources for stability of operations
5) To deal with problem of top management succession
6) To reduce tax burden

Advantages of merger
Mergers are used for the following reasons:
a) A merger provides economies of large-scale operations
b) Better utilization of funds can be made to increase profits
c) There is possibility of diversification
d) More efficient use of resources can be made
e) Sick firms can be rehabilitated by merging them with strong and efficient concerns
f) It is of ten cheaper to acquire an existing unit than to set up a new one
g) It is possible to gain quick entry into new lines of business
h) It can provide access to scarce raw materials and distribution net work and managerial
expertise

Disadvantages
Mergers are not always successful due to the following drawbacks:
(a) The combined enterprise may be unwieldy. Effective coordination and control becomes

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difficult. As a result efficiency and profitability may decline.
(b) Mergers give rise to monopoly and concentration of economic power, which often operate
against the interest of the society.

7.4 Sub - Contracting

Sub-contracting implies hiring another firm to perform some of the manufacturing process or to
give sub-assemblies that will be included in the finished product. Sub-contracting is also used to
describe contractual arrangements between government agencies and industrial concerns. For
example, civic authorities enter into sub-contracts with business concerns. Under such contract
business firms carry out the specified work on roads, parks, etc. to civic authorities in exchange
of specified fee.
Large business firms similarly assign some of the jobs to small scale units. These jobs may
involve some manufacturing or office work. In case of manufacturing work, it may be called
industrial sub-contracting while in the other cases it is known as commercial sub-contracting.
Small-scale firms play an important role in subcontracting and thereby serve as feeders to large-
scale firms.
Sub-contracting has several advantages. First, it is the fastest method of increasing output. It
enables the contractor to use technical and managerial skills already existing with the sub-
contractor. It avoids the need of setting up new plants and equipment, which involves time and
expense. Second, subcontracting saves the main contractor from incurring investment in
specialized machinery and equipment, which may not be required for regular production. Third,
sub-contracting may enable the contractor to buy the components at a cost lesser than that of
manufacturing. Lastly, sub-contracting, checks over-expansion of productive facilities in case of
temporary demand.

Sub-contracting, however, may be unsuitable in case the contractor requires the inputs on a large
scale and on regular basis. It is the case when the contractor can manufacture the components at
a cost lesser than the price charged by the sub-contractor. Sub-contracting provides business to
small-scale firms and helps in their development.

Summary

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Many business firms started small and have become big through continuous growth. However,
growth may be restricted by constraints of market demand, finance, technology, management
skills, etc

The important motives, which drive business firms towards growth, are: survival, economic of
scale, expansion of markets, owner‘s mandate, technology, prestige and power, government
policy and self-sufficiency.

There are different types of growth strategy. The main strategies for growth are expansion,
diversification, mergers and sub-contracting. Each of strategies has its own advantages and
disadvantages.

The four main types of diversification are horizontal integration, vertical integration, concentric
and conglomerate integration.

Self- assessment questions

ii) Choose the best answer from the given alternatives

1. All of the following are the motives that drives business firms toward growth
except,

a) Survival

b) Expansion of markets

c) Technology

d) Economic of scale

e) None

2. Which one of the fallowing is true about expansion?

a) It can be financed from the firm‘s own funds

b) It is form of external growth

c) It provides economies of large scale operations

d) A and C

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 e) All

3. Which one of the following includes the others

a) Horizontal integration

b) Conglomerate

c) Diversification

d) Vertical integration

e) None

4. The type of diversification that new products are added which are
complementary to the existing product line is termed as _________________

a) Conglomerate

b) Vertical integration

c) Horizontal integration

d) Concentric diversification

e) Market penetration

Discussion Questions

1. What do you understand by business growth? Explain the need for growth of a business firm?

2. Discuss the advantages and limitation of diversification as a strategy of growth?

3. Vertical integration is a means to achieve internal and external economies. Discuss?

4. What are the practical problems faced in expansion and diversification?

5. Explain the different types of mergers?

6. Write notes a short and precise explanation on:

a) Sub contracting

139
b) Joint venture

c) Diversification

d) Horizontal versus Vertical diversification

e) Merger

140
References
Baumol, W.J. (1990), ―Entrepreneurship: Productive, unproductive, and destructive‖, Journal of
Political Economy, 98(5), 893-921.
Central Board of Secondary Education, 2002. Entrepreneurship. Secretary, CBSE, Preet Vihar,
Delhi.
Charantimath Poornima, 2006. Entrepreneur Development Small Business [Link]
Kindersley (India) [Link]., New Delhi.
Dollinger, 2006. Entrepreneurship, Strategies and Resources. Pearson, Low priced edition, New
Delhi, Third Edition.
[Link] and [Link], ―Entrepreneurship: A Cotemporary Approach‖ Fourth
Edition.
Gupta C.B., Khanka S.S., 2003. Entrepreneurship & Small Business Management. Sultan Chand
& Sons, New Delhi, Fourth Edition.
HailayGebretinsae, Entrepreneurship and Small Business Management, 2nd Edition.
HirshRobertD. and D. and PetersMichaelP. ―Entrepreneurship‖ Fifth Edition, Tata McGraw Hill
Edition, 2002.
Hisrich-Peters, 1995. Entrepreneurship, Starting, Developing & Managing a new enterprise.
Irwin, Chicago, Third Edition.
Philip Kotler (2001) Marketing Management, Millenium Edition. Pearson Custom Publishing. A
Pearson Education Company.
Shane, S. (2003), “A General Theory of Entrepreneurship: The Individual-Opportunity
Nexus”,Edward Elgar, Cheltenham, UK.
Taneja Satish, Gupta S.L., 2001. Entrepreneur Development, New Venture Creation galgotia
Publishing Company, New Delhi.
Zimmerman, T.W., Scarborough N.M., 1998, Essentials of Entrepreneurship & Small business
Management. Prentice Hall, New Jersey, Second Edition.

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 JIMMA UNIVERSITY
DISTANCE AND CONTINUING EDUCATION

Assignment
Course Name: Entrepreneurship and Small Business Management
Course Code: Mgmt 406

Student‘s Personal Information

Name_________________________________________________
ID NO____________________________
Department___________________________________
Term ___________________________________________
Center ______________________________________________

General Instructions:
 Write all the necessary information both on the question paper and the answer sheet
 Use capital latter for multiple-choice questions
 Make sure that the booklet contains three parts (fifteen true/ false questions, 30 multiple-
choice questions, and five workout questions)
 Total weight of this assignment is 30%
 Do not use red pen and pencil

142
 Part I: True or False Questions
Write true if the statement is correct and false if the statement is
incorrect (0.5 point)
1. The small-scale sector has the capacity to generate a much higher degree of employment than
the large-scale sector because small-scale industries are machine intensive.
2. In Sole proprietorship proprietors have limited liability and are legally responsible for all
debts against the business
3. In corporation business, shareholders have unlimited liability for the corporation's debts or
judgments against the corporations
4. Growth is defined as the process of entry in a field of business that is new to an enterprise in
terms of either the marked or technology

5. External growth occurs when two or more firms combine in one firm and called
integrative growth strategy.

6. When two or more independent firm together establishes a new enterprise,

contribute to the total equality capital and participate in its business operations, it is
known as a joint venture

7. Forward integration implies moving towards the sources of raw materials

8. A sort of contract whereby the owner of an asset grants to another party the
exclusive rights to use the asset for an agreed period in return for the payment
of rent is termed as a lease

9. Creativity is doing new things and innovation is thinking new things

10. Entrepreneurs are autodidactic means what they know the result of what they have
learned from classroom
11. It can be said that all small business activities are identical in their philosophies and
operations
12. Smaller markets, which are ignored by larger organization, are called niche market.
13. The entrepreneurial process begins with evaluating the environment through an initial
screening process.
14. Ecological analysis is concerned the cost and benefit of the ideas that going to be a business
15. In Sole proprietorship proprietors have limited liability and are legally responsible for all
debts against the business

PART II: Multiple-choice questions

143
Select the best answers of the following multiple-choice questions
(0.5 point)
1. All are common primary motivation of most entrepreneurs except
A. Having the opportunity to be creative
B. Being his/ her own boss
C. Being recognized within the community
D. Having job security
E. None of the above
2. Someone who improves the performance an existing business can be called_____
A. An intrapreneur
B. A professional
C. A co-worker
D. A changeling
E. None of the above

3. One of the following is not considered as typical characteristic of entrepreneurs

A. Ability to seize opportunities
B. Persistent
C. Optimistic
D. The desire to be a winner
E. None of the above
4. All are economic/control definition of small business except
A. Market share
B. Independence
C. Personalized management
D. Number of employees
5. One of the following is Macro environment to be analyzed to develop business idea
A. Political environment
B. technological environment
C. social and legal environment
D. Economic environment
E. None of the above

6. All are true about Green entrepreneurship except

A. Signifies concerns for the environment
B. Has the least adverse impact on the environment
C. Has the serious adverse impact on the environment
144
 D. Concentrates on new ways of recycling usable materials
E. None of the above

7. ___________is mainly concerned with the identification, quantification, and evaluation

of input and process and output
A. Technical analysis
B. Finical analysis
C. Economic analysis
D. Legal analysis

8. All are factors to be considered in making a choice types of business ownership except?

A. The level of structure you are willing to deal with.

B. The business' vulnerability to lawsuits
C. Tax implications of the different ownership structures
D. Expected profit (or loss) of the business
E. None of the above

9. Which is odd for sole proprietorship?

A. Easiest and least expensive form of ownership to organize

B. Sole proprietors receive all income generated by the business to keep or reinvest.
C. Profits from the business flow directly to the owner's personal tax return.
D. The business usually will benefit from partners who have complementary skill
E. one of the above

10. Entrepreneurs may find benefit from the business they undertake:
A. If they are willing to invest millions of birr
B. If they hire large number of employees
C. If they invent low cost solution of the business
D. If they abuse the legal aspect of the business
E. If they do all of the above
11. ―What educational quality at BECO looks like!! The ―Smart Class‖ concept: the roof
fixed LCDs, canvas screens, air conditioning facilities, automatic and sound free
electricity generator, white boards, university wide computer net work; all these are
contributing to high quality class room learning and teaching.‖ which of the following
service quality indicators does this best describe?
A. Reliability
B. Tangibles(physical evidence)
C. Equipment - based service
D. People- based service

145
 E. None

12. While you routinely visit the cafes around, your satisfaction is often influenced by all
except
A. The waiters
B. Appearance of the café, both interior and exterior
C. Accountants, machine operators, kitchen personnel
D. The behavior and opinion of other customers
E. None
13. _________ protect individual creative expression.
A. Patents
B. Brands
C. Trade Marks
D. Copy rights
E. None
14. _______ apply indefinitely – they do not expire
A. Patents
B. Brands
C. Trade Marks
D. Copy rights
E. None
15. Which of the following is wrong about elasticity of demand with respect to pricing
decisions of a firm?
A. The theory of elasticity does not apply to Ethiopia
B. Customers generally respond less to price changes for necessities of life
C. The rich generally respond less to price changes
D. The poor are generally price elastic
E. None
16. All are the objectives of marketing research EXCEPT
A. To know the impact of promotion components on consumers
B. To know the position of the firm relative to competitors
C. To do a fully controlled experiments to know causes and effects
D. To know where customers prefer to buy and why
E. None
17. Data analysis is about
A. Editing the collected data to avoid omissions and false data
B. Classification of data into different classes and categories
C. Giving meaning to data by the application of statistical techniques
D. Coding responses that mechanical and computerized data processing is done
E. None

146
18. Marketing intelligence is used to determine all EXCEPT
A. Costs and revenues
B. Current customer needs
C. Future customer needs
D. Changes in technology
E. None
19. ______________ is a company‘s ability to perform in a unique way that competitors
cannot or will not imitate
A. Marketing intelligence
B. Competitive analysis
C. Competitive advantage
D. Comparative advantage
E. None
20. ―What customer needs and preferences are you competing to meet?‖ This question is best
addresses by
A. Marketing intelligence
B. Competitive analysis
C. Marketing research
D. Consumer analysis
E. None

21. Which of the following pricing approach is appropriate when demand is elastic?
A. Demand oriented pricing
B. Competition oriented pricing
C. Price Skimming
D. Penetration pricing
E. None

22. Which of the following is appropriate for the pricing of innovative products like LCD
televisions?
A. Competition oriented pricing
B. Price Skimming
C. Psychological pricing
D. Prestige pricing
E. None
23. Which of the following is not true of advertising?

147
 A. Mass communication
B. Reaches large number of audience
C. Expensive per audience
D. One-way communication, hence no feed-back
E. None
24. Which of the following is most appropriate to provide technical information about a
complex product to an organizational buyer
A. Personal selling
B. Sales promotion
C. Public relations
D. Advertising
E. None

25. ___________represents a single manufacturer and is responsible for the entire marketing
operation
A. Selling agent
B. Manufacturer‘s agent
C. Manufacturers‘ agent
D. Dealer
E. None
26. Which of the following channel of distribution is more appropriate in situations where the
manufacturer faces cash flow problems?
A. Manufacturer‘s branch
B. Manufacturers‘ agent
C. Retailer
D. Wholesaler
E. None
27. All of the following are the motives that drives business firms toward growth
except,

A. Survival

B. Expansion of markets

C. Technology

D. Economic of scale

E. None

28. Which one of the fallowing is true about expansion?

A. It can be financed from the firm‘s own funds

148
 B. It is form of external growth

C. It provides economies of large scale operations

D. A and C

E. All

29. Which one of the following includes the others

A. Horizontal integration

B. Conglomerate

C. Diversification

D. Vertical integration

E. None

30. The type of diversification that new products are added which are
complementary to the existing product line is termed as _______

A. Conglomerate

B. Vertical integration

C. Horizontal integration

D. Concentric diversification

E. Market penetration

Part: Workout Questions

Write the appropriate answers for the following questions in short and precise
(1.5 points each)

1. What contribution does entrepreneurship have for the economic development of the
country?
2. What are several characteristics essential for entrepreneurs that distinguish ordinary
entrepreneurs from the extraordinary ones?
3. How creativity, innovation, and entrepreneurship are related?
4. Which source of capital is needed for financing start-up, expansion and development
activities of small business
5. Vertical integration is a means to achieve internal and external economies. Discuss

149
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