what is Entrepreneurship
Entrepreneurship
Contents
Introduction ................................................................................................................................1 chapter 1: The Nature of Entrepreneurship ..................................................................................2 1.1 INTRODUCTION.............................................................................................................2 1.2 Historical Origin of Entrepreneurship ................................................................................2 1.3 Definitions of Entrepreneurship and Entrepreneur .............................................................3 1.4 Types of Entrepreneurs......................................................................................................5 1.5 Role of Entrepreneurs in Economic Development..............................................................6 1.6 Entrepreneurial Competence and Environment ..................................................................8 1.6.1 Entrepreneurial Mindset.........................................................................................8 1.6.2 Entrepreneurship and Environment ...........................................................................22 1.7 Creativity, Innovation and Entrepreneurship....................................................................26 1.7.1 Creativity..................................................................................................................26 1.7. 2 Innovation ...............................................................................................................27 1.7.3 From Creativity to Entrepreneurship .........................................................................29 1.8 Summary.........................................................................................................................29 1.9 Review Questions............................................................................................................30 Chapter 2: Business Planning ....................................................................................................32 2.1 INTRODUCTION ......................................................................................................32 2.2 Opportunity Identification and Evaluation .......................................................................32 2.3 Business Idea Development.............................................................................................35 2.4 Business Idea Identification.............................................................................................37 2.4.1 The Need will Your Business Fulfill for the Customers.............................................37 2.4.2 Good or Service will your Business Sell ...................................................................38 2.4.3 Identifies Potential Customer....................................................................................39
2.4.4 Strategy for Selling Goods or Services/ How is Your Business Going to Sell Good or Services? ...........................................................................................................................40
2.4.5 Relation between Business and Environment ............................................................40 2.5 Methods for Generating Business Ideas...........................................................................41 2.6 Business Idea Screening..............................................................................................51 2.7 Concept of Business Plan ................................................................................................53 2.8 Developing a Business Plan.............................................................................................54 2.8.1 Business Planning Process........................................................................................54
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2.8.2 Essential Components of Business Plan ....................................................................56 2.9 Sample Business plan Format ..........................................................................................58 2.10 Summary.......................................................................................................................63 2.11 Review Questions..........................................................................................................64
CHAPTER 3: BUSINESS FORMATION.................................................................................65 3.1 INTRODUCTION ......................................................................................................65 3.2 The Concept of Small Business Development..................................................................65 3.3 Forms of Business (A Short Explanation) ........................................................................66 3.4 Definition and Role/Importance of MSEs in Developing Countries .................................68
3.4.1 Definition of MSEs...................................................................................................68 3.4.2 Role/Importance of MSEs in Developing Countries..................................................70 3.5 Setting up Small Scale Business ......................................................................................75 3.6 Small Business Failure and Success Factors ....................................................................79 3.6.1 Small Business Failure Factors .................................................................................79 3.6.2 Small Business Success Factors................................................................................82 3.7 Classification of Enterprises in Ethiopian Context ...........................................................73 3.8 Main Supporting Packages for MSEs Development in Ethiopia .......................................85 3.9 Problems of Small Scale Business in Ethiopia .................................................................85 3.10 Organizational Structure and Entrepreneurial Team Formation......................................86 3.10.1 Introduction ............................................................................................................86 3.10.2 Designing the Organization.....................................................................................86 3.10.3 Building the Management Team and a Successful Organization Culture .................88 3.11 Chapter Summary..........................................................................................................90 3.12 Questions for Review and Discussions...........................................................................91 CHAPTER 4: PRODUCT/SERVICE DEVELOPMENT...........................................................92 4.1 INTRODUCTION...........................................................................................................92 4.2 The Concept of Product/Service Technology ...................................................................92 4.3 Product/Service Development Process.............................................................................93 4.4 Legal and Regulatory Frameworks for Entrepreneurs ......................................................98 4.5 Intellectual Property Protection/Product/Service Protection .............................................98 4.5.1 What is Intellectual Property? ...................................................................................98 4.5.2 Patents......................................................................................................................98 4.5.3 Trademarks...............................................................................................................99 4.5.4 Copyrights..............................................................................................................100
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4.6 The Intellectual Property System in Ethiopia .................................................................100 4.7 Chapter Summary..........................................................................................................103 4.8 Questions for Review and Discussions ..........................................................................104
CHAPTER 5: MARKETING..................................................................................................105 5.1 INTRODUCTION.........................................................................................................105 5.2 Meaning and Definitions of Marketing ........................................................................106 5.3 Core Concepts of Marketing ..........................................................................................107
5.3.1 Needs, Wants and Demand .....................................................................................107 5.4 Importance of Marketing ...............................................................................................108 5.5 Marketing Philosophies .................................................................................................110 5.6 Marketing Information Systems.....................................................................................113
5.6.1 Marketing Research ................................................................................................114 5.6.2 Marketing Intelligence ............................................................................................117 5.6.3 Competitive Analysis..............................................................................................118
5.7 The Marketing Mix Strategy..........................................................................................120 5.7.1 The 4 P’s Of Marketing/The Marketing Mix ...........................................................120 5.7.2 What Is Marketing Strategy?.................................................................................121
5.8 Selling and of Customer Service............................................................................125 5.8.1 The Concept of Service....................................................................................125 5.8.2 The Concept of Customer................................................................................126 5.8.3 Strategic Activities needed for Quality Customer Service Delivery ........126 5.8.4 Customer Handling and Satisfaction..............................................................126
5.9 Chapter Summary.....................................................................................................129 5.10 Review Questions........................................................................................................130 CHAPTER 6: BUSINESS FINANCING.................................................................................132 6.1 INTRODUCTION.........................................................................................................132 6.2 Financial Requirements.................................................................................................132 6.3 Sources of Financing .....................................................................................................134 6.3.1 Internal Sources (Equity capital).............................................................................134 6.3.2 External Sources (Debt capital)...............................................................................136 6.4 Lease Financing.............................................................................................................141 6.4.1 Types of Lease........................................................................................................141 6.5 Traditional Financing in Ethiopian (Equib/Edir, Etc.) ....................................................143 6.6 Crowd Funding..............................................................................................................145
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6.6.1 How is Crowd Funding Different? ..........................................................................145 6.6.2 The Benefits of Crowd funding...............................................................................146 6.6.3 Types of Crowd Funding ........................................................................................147
6.7 Micro Finances..............................................................................................................147 6.7.1 What is Micro Finance? ..........................................................................................147 6.7.2 Importance of MFIs................................................................................................148 6.7.3 Micro Finances in Ethiopia .....................................................................................149
6.8 Chapter Summary..........................................................................................................150 6.9 Review Questions..........................................................................................................151 CHAPTER 7 MANAGING GROWTH AND TRANSITION..................................................153 7.1 INTRODUCTION.........................................................................................................153 7.2 Timmons Model of Entrepreneurship ............................................................................153 7.3 New Venture Expansion Strategies................................................................................156 7.3.1 Introduction ............................................................................................................156 7.3.2 Methods of Growth.................................................................................................157 7.3.3 The Ansoff Matrix – Growth Strategy.....................................................................158 7.3.3.1 Selecting a Product-Market Growth Strategy ..................................................159 7.3.4 Expansion Issues.....................................................................................................161 7.3.5 Choosing not to Grow.............................................................................................164 7.4 Business Ethics and Social Responsibility .....................................................................164 7.4.1 Introduction ............................................................................................................164 7.4.2 Three Approaches to Corporate Responsibility .......................................................165 7.4.3 Business Ethics Principles.......................................................................................172 7.5 Summary.......................................................................................................................174 7.6 Review Questions..........................................................................................................175
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INTRODUCTION
The course, Entrepreneurship, has been offered to Ethiopian students of higher education in limited departments, such as management, Accounting, Agriculture and Engineering. However, as part of high education reform, it was decided the course, Entrepreneurship, to be one of the common courses for all freshman students. It aims to bring behavioral changes among students and support them develop self-employment mindset in their personal and professional lives. Among other things, it was also decided to prepare common teaching material for the course so that students may learn and instructors teach the course using the same material.
For the task of preparing this teaching material, four subject matter experts have been drawn from Addis Ababa, Gondar, Haramaya and Wollo Universities. The team members prepared this teaching material by working severally and in-group both for writing and editing. Course instructors are also expected to prepare additional cases, get access to videos and make the teaching process as learner centered. Such efforts may create entrepreneurial generation in Ethiopian economy in this digital age.
This teaching material consists of seven chapters as prepared by more than 25 subject matter experts drawn from many universities. Chapter one deals with nature of entrepreneurship. Chapter two addresses the concept of business planning. Chapter three discusses about business formation in terms of ownership. Chapter four is about product development using systematic and procedural approach. Chapter five treats basics of marketing. Chapter six, tries to identify the sources of financing for startup and when decided to grow. Chapter seven gives basics of business ethics and corporate social responsibility including the transition from start up to growth.
The time given for the subject matter experts for the preparation of the material was very limited. The members feel that the teaching material may not be complete in all aspects. Comments are welcome from students and instructors for making improvements in the quality of the material in the years to come.
The team
CHAPTER 1: THE NATURE OF ENTREPRENEURSHIP
1.1 INTRODUCTION
The word ‘entrepreneur’ is widely used, both in everyday conversation and as a technical term in management and economics. Its origin from a French word, entreprender, where an entrepreneur was an individual commissioned to undertake a particular commercial project. A number of concepts have been derived from the idea of the entrepreneur such as entrepreneurial, entrepreneurship and entrepreneurial process. The idea that the entrepreneur is someone who undertakes certain projects offers an opening to developing an understanding of the nature of entrepreneurship. Undertaking particular projects demands that particular tasks be engaged in with the objective of achieving specific outcomes and that an individual take charge of the project. Entrepreneurship is then what the entrepreneur does. Entrepreneurial is an adjective describing how the entrepreneur undertakes what he or she does. The entrepreneurial process in which the entrepreneur engages is the means through which new value is created as a result of the project: the entrepreneurial venture.
Chapter Objectives
This chapter is concerned with developing a predominant and integrated perspective of the entrepreneur and entrepreneurship. It reviews the great variety of definitions given for the word entrepreneurship and also the different activities performed by the entrepreneur.
After completing this chapter, students will be able to:
▪ Define the term entrepreneurship and entrepreneur
▪ Identify types of entrepreneur
▪ Recognize the role of entrepreneurship in the economy
▪ Analyze the entrepreneurial competences
▪ Understand creativity and innovation
1.2 Historical Origin of Entrepreneurship
What is entrepreneurship? And who is an entrepreneur? These two questions are asked more frequently reflecting the increasing demand in the field of entrepreneurship. Offering a specific and unambiguous definition of the term entrepreneurship /entrepreneur presents a challenge. This
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is not because definitions are not available, but because there are so money. Here let us took in to the historical development of entrepreneurship so as to grasp the meaning of the word entrepreneurship.
During the ancient period the word entrepreneur was used to refer to a person managing large commercial projects through the resources provided to him.
In the 17th Century a person who has signed a contractual agreement with the government to provide stipulated products or to perform service was considered as entrepreneur. In this case the contract price is fixed so any resulting profit or loss reflects the effort of the entrepreneur. In the 18th Century the first theory of entrepreneur has been developed by Richard Cantillon. He said that an entrepreneur is a risk taker. If we consider the merchant, farmers and /or the professionals
they all operate at risk. For example, the merchants buy products at a known price and sell it at unknown price and this shows that they are operating at risk. The other development during the 18th Century is the differentiation of the entrepreneurial role from capital providing role. The later role is the base for today’s venture capitalist.
In the late 19th and early 20th Century an entrepreneur was viewed from economic perspectives. The entrepreneur organizes and operates an enterprise for personal gain. In the middle of the 20th Century the notion of an entrepreneur as an inventor as established. “The function of the entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or more generally untried technological possibility for producing new commodities or producing an old one in a new way or opening a new outlet for products by reorganizing a new industry.”
The concept of innovation and newness are at the heart of the above definition. From the historical development it is possible to understand the fact that the perception of the word entrepreneur was evolved from managing commercial project to the application of innovation (creativity) in the business idea.
1.3 Definitions of Entrepreneurship and Entrepreneur
Here we will see some definitions of entrepreneurship and entrepreneur. Intuitively, it is know that entrepreneurship is the process and entrepreneur is the person undertaking entrepreneurial activity such as undertaking own business. Finally we will see the common attributes of the definitions of entrepreneurship and entrepreneur.
1. Entrepreneurship is the process of identifying opportunities in the market place, arranging the resources required to pursue these opportunities and investing the resources to exploit the
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opportunities for long term gains. It involves creating incremental wealth by bringing together resources in new ways to start and operate an enterprise.
2. Entrepreneurship is the processes through which individuals become aware of business ownership then develop ideas for, and initiate a business.
3. Entrepreneurship can also be defined as the process of creating something different and better with value by devoting the necessary time and effort by assuming the accompanying financial, psychic and social risks and receiving the resulting monetary reward and personal satisfaction. In this case an individual should come up with something different and better in order to the named as entrepreneur.
4. Entrepreneurship is the art of identifying viable business opportunities and mobilizing resources to convert those opportunities into a successful enterprise through creativity, innovation, risk taking and progressive imagination.
Entrepreneurship is a practice and a process that results in creativity, innovation and enterprise development and growth. It refers to an individual’s ability to turn ideas into action involving and engaging in socially-useful wealth creation through application of innovative thinking and execution to meet consumer needs, using one’s own labor, time and ideas. Engaging in entrepreneurship shifts people from being “job seekers” to “job creators”, which is critical in countries that have high levels of unemployment. It requires a lot of creativity which is the driving force behind innovation.
In general, the process of entrepreneurship includes five critical elements. These are: 1) The ability to perceive an opportunity.
2) The ability to commercialize the perceived opportunity i.e. innovation 3) The ability to pursue it on a sustainable basis.
4) The ability to pursue it through systematic means.
5) The acceptance of risk or failure.
Based on the above concepts of entrepreneurship, an entrepreneur can be defined as follows: 1) An entrepreneur is any person who creates and develops a business idea and takes the risk of setting up an enterprise to produce a product or service which satisfies customer needs. 2) An entrepreneur can also be defined as a professional who discovers a business opportunity to produce improved or new goods and services and identifies a way in which resources required can be mobilized.
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3) An entrepreneur is an individual who: has the ability to identify and pursue a business opportunity; undertakes a business venture; raises the capital to finance it; gathers the necessary physical, financial and human resources needed to operate the business venture; sets goals for him/herself and others; initiates appropriate action to ensure success; and assumes all or a major portion of the risk!
4) An entrepreneur is a person who: create the job not a job-seeker; has a dream, has a vision; willing to take the risk and makes something out of nothing
5) Other definition, views the term entrepreneur from three perspectives; i.e. from the economist, psychologist and capitalist philosopher’s point of view.
i) To an economist an entrepreneur is one who brings resource, labor, materials, and other assets into combination that makes their value greater than before and also one who introduces changes innovations.
ii) To a psychologist an entrepreneur is a person typically driven by certain forces need to obtain or attain something, to experiment, to accomplish or perhaps to escape the authority of others.
iii) For the capitalist philosopher an entrepreneur is one who creates wealth for others as well, who finds better way to utilize resources and reduce waste and who produce job others are glad to get.
In general, entrepreneur refers to the person and entrepreneurship defines the process. Both men and women can be successful entrepreneurs; it has nothing to do with gender. All entrepreneurs are business persons, but not all business persons are entrepreneurs.
1.4 Types of Entrepreneurs
Entrepreneurship can take three different forms. They are:
1. The individual entrepreneur: An individual entrepreneur is someone who started; acquired or franchised his/her own independent organization. The major portion of this module is also devoted to describe the basic features and activities of the individual entrepreneur.
2. Intrapreneur: An Intrapreneur is a person who does entrepreneurial work within large organization. The process by which an intrapreneur affects change is called Intrapreneurship.
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There are two facts about intrapreneurship
a. The Intrapreneur’s context is often large and bureaucratic organization whereas the individual entrepreneur operates in the broader, more flexible economic market place. b. Intrapreneurs are individuals who often engage in the entrepreneurial actions in large organizations without the blessing of their organizations.
3. The Entrepreneurial Organization: The entrepreneurial function need not be embodied in a physical person. Every social environment has its own way of filling the entrepreneurial function.
Individuals working in organizations have the potential for being, as do those working independently to start their own business. An organization can create an environment in which all of its members can contribute in some function to the entrepreneurial function. An organization that creates such an internal environment is defined as entrepreneurial organization.
1.5 Role of Entrepreneurs in Economic Development
Entrepreneurial development is the most important input in the economic development of any country. The objectives of industrial development, balanced regional growth, and generation of employment opportunities are achievable through entrepreneurial development. Entrepreneurs are at the core of industrial development which results in greater employment opportunities to the unemployed youth, increase in per capita income, higher standard of living and increased revenue to the government in the form of income, sales tax, export duties, import duties etc. The entrepreneurs serve as a key to the creation of new enterprises, thereby rejuvenating economy and sustaining the process of economic development in the following ways:
1) Improvement in per capita Income/Wealth Generation: Entrepreneurs play a vital in the economic development of a region. From the fall of Rome (AD 476) to the eighteenth century, there was virtually no increase in per capita wealth generation in the West. With the advent of entrepreneurship, however, per capita wealth generation and income in the west grew exponentially by 20 Percent in the 1700s, 200 percent in the 1800s, 740 percent in the 1900 (Drayton, 2004).
2) Generation of Employment Opportunities: By creating a new business enterprise, entrepreneurs generate employment opportunities for others. Unemployment is a major issue, especially in the context of developing economies like Ethiopia. Educated youth often
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are unable to get to get a suitable employment themselves. Thus, entrepreneurs not only self employ themselves, but also create jobs for others.
3) Inspire others Towards Entrepreneurship: The team created by an entrepreneur for his new undertaking often provides the opportunity for the employees to have a first-hand experience of getting involved in an entrepreneurial Venture. An existing venture provides a number of entrepreneurial opportunities through forward and backward linkages, to these employees even to become entrepreneurs themselves. Thus, this process helps in forming a chain reaction of entrepreneurial activity which directly contributes to the health of the economy.
4) Balanced Regional Development: Entrepreneurs help to remove regional disparities in economic development. They set up the industries in the backward areas to avail various subsidies and incentives offered by the Central and State Governments, thereby balancing the economic growth in different regions in the country.
5) Enhance the Number of Enterprise: When new firms are created by entrepreneurs, the number of enterprises based upon new ideas/ concepts/ products in a region increases. Not only does an increase in the number of firms enhance the competition for new ideas, but greater competition across firms also facilitates the entry of new firms specializing in a particular new product or service. This is because the necessary complementary inputs are more likely available from small specialist niche firms than from large vertically integrated products (Jacobs, 1969).
6) Provide Diversity in Firms: Entrepreneurial activity often results into creation of a variety of firms in a region. These firms operate into diverse activities and it has been found that it is this diversity in firms which fosters economic development and growth rather than homogeneity. According to Jacobs (1969), it is the exchange of complementary knowledge across diverse firms and economic agents that yield an important return on new economic knowledge.
7) Economic Independence: Entrepreneurship is essential for self-reliance for a country. Entrepreneurs create industries that manufacture indigenous substitutes, thereby reducing the dependence on imports. Also, the goods are exported to other countries to earn foreign exchange. This import substitution and export promotion results in more economic independence to the country
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8) Combine Economic factors: All the products bought and sold in an economy are a mix of three primary economic factors (the raw materials, nature offers up, the physical and mental labor people provide and capital (money). Now value is created by combing these three things together in a way which satisfies human needs.
9) Provide Market efficiency: Efficient means resources are distributed in an optimal way that is the satisfaction that people can gain from them is maximized. An economic system can only reach this state if there is competition between different suppliers. If a supplier is not using competition then they will tend to demand profit in excess of what the market would allow and reduce the overall efficiency of the system
10) Accepting Risk: Risk is the potential variation in terms of future outcomes. We do not know exactly what the future will bring. This lack of knowledge creates uncertainty. No matter how we plan there is always a possibility of adverse deviation from what we expect or hoped for. Here the primary function of the entrepreneur is to accept risk on behalf of other people.
11) Maximize Investor’s Return: Entrepreneurs create and run organizations which maximize long-term profit on behalf of the investors which in turn generates overall economic efficiency.
1.6 Entrepreneurial Competence and Environment
Under this topic entrepreneurial mindset (that will address subtopics such as, who become an entrepreneur; qualities of successful entrepreneurs; entrepreneurial skills; the entrepreneur’s task and wealth of the entrepreneur), and Entrepreneurship and Environment.
1.6.1 Entrepreneurial Mindset
1.6.1.1 Who Becomes an Entrepreneur?
Anyone with the following characteristics can be an entrepreneur.
1) The Young Professional: Increasingly young highly educated people often with entrepreneurial qualifications are skipping the experience of working for an established organization and moving directly to work on establishing their own ventures.
2) The Inventor: The inventor is someone who has developed an innovation and who has decided to make a career out of presenting that innovation to the market. It may be a new product or it may be an idea for a new service. It may be a high-tech or it may be based on a traditional technology.
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3) The Excluded: Some people turn to an entrepreneurial career because nothing is open to them. Displaced communities and ethnic and religious minorities have not been invited to join the wider economic community due to a variety of social, cultural and political and historical reasons. As a result they may form their own internal networks, trading among themselves and, perhaps, with their ancestral countries.
1.6.1.2 Qualities of an Entrepreneur
In order to be successful, an entrepreneur should have the following qualities: ☞ Opportunity-seeking
☞ Persevering
☞ Risk Taking
☞ Demanding for efficiency and quality
☞ Information-seeking
☞ Goal Setting
☞ Planning
☞ Persuasion and networking
☞ Building self-confidence
☞ Listening to others
☞ Demonstrating leadership
1) Opportunity-seeking: An opportunity is a favorable set of circumstances that creates a need for a new product, service or business. It includes access to credit, working premises, education, trainings etc. An entrepreneur always seeks out and identifies opportunities. He/she seizes an opportunity and converts it into a realistic and achievable goal or plan.
2) Persevering: An entrepreneur always makes concerted efforts towards the successful completion of a goal. An entrepreneur perseveres and is undeterred by uncertainties, risks, obstacles, or difficulties which could challenge the achievement of the ultimate goal. Activity 1.1: Understanding perseverance
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3) Risk Taking: The best entrepreneurs tend to:-
☞ Set their own objectives where there is moderate risk of failure and take calculated risks
☞ Gain satisfaction from completing a job well
☞ Not be afraid of public opinion, skepticism
☞ Take responsibility for their own actions
Importance of Risk-taking
☞ Build self confidence
☞ Create a feeling of leadership
☞ Create strong motivation to complete a job well
4) Demanding for Efficiency and Quality
Efficiency: Being efficient means producing results with little wasted effort. Quality refers to:
1. The ongoing process of education, communication, evaluation and constant improvement of goods/services to meet the customer’s need in a way that exceeds the customer’s expectations;
2. A characteristic of the product or service that makes it fit to use. It makes a product, process, or service desirable.
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3. The ability of a product or service to meet a customer’s expectations for that product or service.
The importance of quality management in entrepreneurship is reflected in the income statement of the business. There is always a demand for quality products and efficient services. Quality plays an important role in this new era of globalization because it confers certain benefits which include:
☞ Reduction of waste: Striving to maintain quality means examining all processes that contribute to the creation of a product, to remove non-productive processes and waste. If businesses keep to their standard of maintaining the quality of the product, the number of defective products will be reduced. Consumers prefer to buy quality products. Hence the quality products/services help in increasing the share in market and ensure that they will not be returned.
☞ Cost-effectiveness: Striving to ensure quality helps businesses to minimize the chances that they will make mistakes. As a result, the costs of re-doing work or changing the product after it has been sold are greatly reduced.
☞ An increase in market share: Customers prefer to buy the same product again and again if they are satisfied with the quality. If they are satisfied with the quality of a product, then they will not only purchase the product/services more than once, but they will also recommend it to their friends. As a result, this contributes to an increase in the company’s market share.
☞ Better profitability: Better quality of product satisfies customers. Increased customers means increase sales, increased shares in market and consequently increased profits. ☞ Social responsibility: By providing quality products and services, a company is more likely to be able to fulfill its responsibility to the community and meet standards set by government.
☞ Reputation: Quality of goods and services improves the reputation of the business for competition in the market and growth.
5) Information-seeking: Successful entrepreneurs do not rely on guesswork and do not rely on others for information. Instead, they spend time collecting information about their customers, competitors, suppliers, relevant technology and markets. Gathering relevant information is important to ensure that the entrepreneur makes well informed decisions. Information on the
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area of market, supply, operations, finance, legislation, and infrastructure are important for entrepreneurs.
6) Goal Setting
A Goal - is a general direction, or long-term aim that you want to accomplish. It is not specific enough to be measured. It is large in scope, not necessarily time-bound, and is something that people strive for by meeting certain objectives which will hopefully add up to eventually achieving the goal.
Objectives - are specific and measurable. They are concise and specific. Think of the word “object.” You can touch it, it’s there, it’s actual, and it’s finite.
An entrepreneur must have a goal and an objective which is specific, measurable, attainable relevant, and time bound (SMART).
☞ Specific: Great goals are well-defined and focused. The moment you focus on a goal, your goal becomes a magnet, pulling you and your resources toward it. The more focused your energies, the more power you generate.
☞ Measurable: A goal without a measurable outcome is like a sports competition without a scoreboard or scorekeeper. Numbers are an essential part of business. Put concrete numbers in your goals to know if you’re on track.
☞ Attainable: Far too often, entrepreneurs can set goals which are beyond their reach. Dream big and aim for the stars but keep one foot firmly based in reality.
☞ Relevant: Achievable business goals are based on the current conditions and realities of the business climate. For example, you may desire to have your best year in business or increase revenue by 50%, but if a national economic crisis is looming and three new competitors just opened in your market, then your goals are not relevant to the realities of the market.
☞ Time-Based: Business goals and objectives just don’t get done when there’s no time frame tied to the goal-setting process. Whether your business goal is to increase revenue by 20% or to find two new clients, it is important to choose a time-frame to accomplish your goal.
7) Planning: Planning is making a decision about the future in terms of what to do, when to do, where to do, how to do, by whom to do and using what resources. An effective entrepreneur therefore usually plans his/her activities and accounts as best as they can for unexpected eventualities.
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8) Persuasion and Networking
Persuasion is a way of convincing someone to get something or make a decision in your favor. It is inducing or taking a course of action or embracing a point of view by means of argument, reasoning, or entreaty; to convince; to succeed in causing a person to do or consent to something; to win someone over, as by reasoning or personal forcefulness; to cause to believe; to induce, urge, or prevail upon successfully.
Importance of Persuasion in Business
☞ We purchase goods from people
☞ We sell goods to people
☞ We need support from people
☞ We work with people.
Without people, be they are suppliers, workers, and most importantly customers, there is no business.
Networking is an extended group of people with similar interests or concerns who interact and remain in informal contact for mutual assistance or support. In a business environment where we are in, we network with customers, suppliers, competitors, various firms, different organizations, government offices and family, etc.
Factors that Affect Persuasion and Networking
☞ Socio-cultural background and perceptions
☞ Communication skills (both verbal and non-verbal).
☞ Negotiation skills
9) Building Self-confidence: Self-confidence is the state of being certain that a chosen course of action is the best or most effective given the circumstances. Confidence can be described as a subjective, emotional state of mind, but is also represented statistically as a confidence level within which one may be certain that a hypothesis will either be rejected or deemed plausible. Self-confidence is having confidence in oneself when considering a capability. Overconfidence is having unmerited confidence-believing something or someone is capable when they are not.
Characteristics of a Self-confident Person
A person with self-confidence may exhibit some of the following characteristics:
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☞ Risk-taking: willing to take risks and go the extra mile to achieve better things. ☞ Independent: entrepreneurs like to be their own masters and want to be responsible for their own decisions.
☞ Perseverance: Ability to endure and survive setbacks and continue to build confidence in whatever you do in your business.
☞ Able to learn to live with failure. Entrepreneurs are going to make mistakes. They are human. But they learn from these mistakes and then move on.
☞ Ability to find happiness and contentment in work.
☞ Doing what you believe to be right, even if others mock or criticize you for it. ☞ Admitting mistakes and learning from them
Activity 1.2:
1) Think about your life so far, and list the five major achievements in personal life. 1.___________________________________2.__________________________________ 3.___________________________________4.__________________________________ 5.___________________________________
2) Think about your strengths in running your personal life. Write four of them which you are most proud of?
1.___________________________________3.________________________________________ 2.___________________________________4.________________________________________ 3) Think about what’s important to you, and where you envision your business in the future. What is the goal of your business?
______________________________________________________________________________ ______________________________________________________________________________ 4) Build the knowledge and skills that you need to succeed. What do you need to know, do or learn in order to accomplish the business goal stated above?
______________________________________________________________________________ ______________________________________________________________________________ 5) How do you think you can acquire this knowledge and these skills so that you will be able to move forward confidently?
______________________________________________________________________________ ______________________________________________________________________________
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6) When you are starting, do not try to do anything clever or elaborate. There is no need to be perfect – just enjoy doing simple things successfully and well. Focus on the basics, set small goals and achieve them, and you will find yourself accelerating towards success! So, what basics or initial steps will you take towards reaching your goal?
______________________________________________________________________________ ______________________________________________________________________________ 10) Listening to Others: An entrepreneur does not simply impose his/her idea on others.
Rather, he/she listens to other people in their sphere of influence, analyses their input in line with his/her own thinking and makes an informed decision.
11) Demonstrating Leadership: An entrepreneur does not only do things by him/herself, but also gets things done through others. Entrepreneurs inspire, encourage and lead others to undertake the given duties in time.
Self-assessment
Activity 3: Complete a self-assessment of your entrepreneurial qualities
Go through the statements below and score yourself to the best of your ability and as honestly as possible. Do not take too long thinking about any one answer, your first guess is probably the most accurate. Use the scoring key below.
Scoring:
5 – Always 4 – Often 3 – Sometimes 2 – Rarely 1 – Never
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Analysis of the Result
Analysis one: Each statement is focused on different entrepreneurial qualities as stated below. ▪ Question 1+ Question 6 = Opportunity-seeking
▪ Question 2+ Question 7 = Perseverance
▪ Question 3+ Question 8 = Risk-taking
▪ Question 4+ Question 10 = Demand for efficiency and quality
▪ Question 5+ Question 9 = Commitment to work contract
▪ Question 11+ Question 16 = Information-seeking
▪ Question 12+ Question 17 = Goal-setting
▪ Question 13+ Question 19 = Planning
▪ Question 14+ Question 18 = Persuasion & Networking
▪ Question 15+ Question 20 = Self Confidence
Now evaluate how you ranked yourself for that characteristic (based on your score for each of the questions). For example, if you rated yourself a “5” for both questions 1 and 6, then according to the key above, you have a strong opportunity seeking trait. If you rated yourself a “1” or a “2” for questions 14 and 18, then perhaps persuasion and networking are not among your strengths right now – and could be skills for you to work on.
Analysis two: Add up your total score from all the numbers you wrote in each row. Write your total sum here, and then interpret it below:
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Total Sum = _____________
Result Interpretation:
1.6.1.3 Entrepreneurial Skills
A skill is simply knowledge which is demonstrated by action. It is an ability to perform in a certain way. An entrepreneur is someone who has a good business idea and can turn that idea into reality. To be successful, an entrepreneur must not only identify an opportunity but also understand it in great depth. He or she must be able to spot a gap in the market and recognize what new products or services fill the gap. He or she must know what features it will have and why they will appeal to the customer. The entrepreneur must also know how to inform the customer about it and how to deliver the new offerings. All this calls for an intimate knowledge of a particular sector of industry. Turning an idea into reality calls upon two sorts of skills, these are:
I. General management skills and
II. People management skills
I) General Management Skills: These are skills required to organize the physical and financial resources needed to run the venture. Some of the most important general management business skills are:
☞ 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.
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☞ 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 needs to demonstrative a wide variety of skills in the way he/she deals with other peoples. Some of the more important skills we might include under this heading are:
🖙 Communication Skills – An ability to use spoken and written language to express ideas and inform others.
🖙 Leadership Skills – An ability to inspire people to work in a specific way and to undertake the tasks that are necessary for the success of the venture.
🖙 Motivation Skills – An ability to enthuse people and get them to give their full commitment to the tasks in hand. Being able to motivate demands an understanding of what drives people and what they expect from their jobs.
🖙 Delegation Skills – An ability to allocate tasks to different people. Effective delegation involves more than instructing. It demands a full understanding of the skills that people possess how they use them and how they might be developed to fulfill future needs.
🖙 Negotiation Skills – An ability to understand what is wanted from a siturations, what is motivating others in that situation and recognize the possibilities of maximizing the outcomes for all parties.
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All these different people skills are interrelated. Here entrepreneurial performance results from a combination of industry knowledge, general management skills; people skills and personal motivation (see the figure shown below). The successful entrepreneur must not only use these skills but learn to use them and to learn from using them. Entrepreneurs should constantly avoid their abilities in these areas, recognize their strengths and weaknesses, and plan how to develop these skills in the future.
Fig1.1: entrepreneurial skills
1.6.1.4 The Entrepreneurial Tasks
We recognize entrepreneurs, first and foremost, by what they actually do – by the tasks they undertake. A number of tasks have been associated with the entrepreneur. Some of the more important are:
1) Owning Organizations: Ownership lies with those who invest in the business and own its stock – the principals, while the actual running is delegated to professional agents or managers. Therefore, if an entrepreneur actually owns the business then he is in fact undertaking two roles at the same time that of an investor and that of a manager. Here we can also recognize many people as entrepreneur even if they do not own the venture they are managing.
2) Founding New Organizations: The entrepreneur is recognized as the person who undertakes the task of bringing together the different elements of the organization (people, property, productive resource, etc.) and giving them a separate legal entity. The entrepreneur makes major changes in their organizational word.
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3) Bringing Innovations to Market: The idea of innovation encompasses any new way of doing something so that value is created. Innovation can mean a new product or service but it can also include a new way of delivering an existing product or service, new methods of informing the consumer about the product or new ways of organizing the company.
4) Identification of Market Opportunity: An opportunity is the gap in a market where the potential exists to do something better and create value. New opportunities exist all the time but they do not necessarily present themselves. If they are to be exploited they must be actively sought out. Note that opportunity always takes priority over innovation.
5) Application of Expertise: A slight more technical notion is that they have a special ability in deciding how to allocate scarce resources in situations where information is limited. It is their expertise in doing this that makes entrepreneurs valuable to investors.
6) Provision of leadership: Entrepreneurs can rarely drive their innovation to market on their own. They need the support of other people both from their organizations and from people outside such as investor customer and supplier.
7) The entrepreneur as manager: At the end of the day the entrepreneur is a manager. The distinction between an entrepreneur and ordinary manager may lie on what the entrepreneur manager manages, how they manage, their effectiveness and the effect they have as a manager not by the particular tasks they undertake.
1.6.1.5 Wealth of the Entrepreneur
Wealth is money and anything that money can buy. It includes money, knowledge and assets of the entrepreneur.
Who Benefits from the entrepreneur’s Wealth?
No entrepreneur works in a vacuum. The venture they create touches the lives of many other people. To drive his/her venture forward, the entrepreneur calls up on the support of a number of different groups. In return for their support these groups expect to be rewarded from the success of the venture. Peoples who have a part to play in the entrepreneurial venture generally are called stakeholder. The stakeholder groups are; employees, investor, supplier, customer, the local community and government. Let us look at the benefits of each stakeholder.
1) Employees: They contribute physical and mental labor to the business. Success of the entrepreneurial venture depends on their effort and motivation. Therefore, they are rewarded with:
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⮚ Money – their wage or salary
⮚ The possibility of owning a part of the firm through share schemes.
⮚ A stage of which they can develop social relationships.
⮚ The possibility of personal development.
2) Investors: These are the peoples who provide the entrepreneur with the necessary money to start the venture and keep it running. There are two main sorts of investors: stockholders and lenders. Stockholders are those who buy the stock of the company and are true owners of the firm. The actual return of the stockholders varies depending on how the business performs. Lenders, on the other hand, are people who offer money to the venture on the basis of it being a loan. They do not actually own a part of the firm and their return is independent of the businesses performance. They also take priority for payment over shareholders and face lower level of risk than the stockholders.
3) Supplier: They are the individuals and organizations who provide the business with the materials, productive assets and information it needs to produce its output. They are paid for providing these inputs.
4) Customers: Customers may need to make an investment in using a particular supplier. Changing supplier may involve switching costs and supplier, risk of quality and expenses incurred in changing over to new inputs. The entrepreneur may reward customers by offering quality products, fair prices, regular and consistency of supply, loan arrangement etc.
5) The local community: Business has physical locations. The way they operate may affect the people who live and other businesses which operate nearby.
A business has a number of responsibilities, which may be defined or not in national laws, to this local community. Such as:
🖙 Not polluting their shared environment
🖙 Contributing and sponsoring local development activities
🖙 Contribution for political and cultural stabilities and economic improvements 🖙 Acting in an ethical way.
6) Government: The responsibility of government is to ensure that businesses can operate in an environment which has political and economic stability. In addition, it provides central services such as education and health-care. These activities cost money to provide.
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Therefore, government should be rewarded for its services. Hence, government taxes individuals and businesses.
1.6.2 Entrepreneurship and Environment
Business environment refers to the factors external to a business enterprise which influence its operations and determine its effectiveness. Business environment may be healthy or unhealthy. Healthy business environment means the conditions are favorable to the growth of business whereas unhealthy environment implies conditions hostile or unfavorable to business operations. Business and its environment interact with each other. Economic system and other conditions in the environment determine the success of business enterprises. The firm and its management have to adjust to the conditions prevalent around it. However, business enterprises try to influence and shape the environment. Successful working of business concerns improves the economic and social conditions in the country.
No business concern can ignore the environment around it except at its own peril. “The penalty of environ mental disregard is heavy. It not only reduces profit margins and makes opportunities for expansion slip, but it also arouses social hostility and makes social environment growingly inhospitable to business operations.”
A study of business environment offers the following benefits:
1) It provides information about environment which is essential for successful operation of business firms.
2) It opens up fresh avenues for the expansion of new entrepreneurial operations. The entrepreneurs may come forward with new ideas and with new ventures when they find environment suitable to their enterprises.
3) Knowledge about changing environment enables businessmen to adopt a dynamic approach and maintain harmony of business operations with the environment. 4) By studying the environment entrepreneurs can make it hospitable to the growth of business and thereby earn popular support.
Thus, the entrepreneur should continuously study the nature of environment and its influence on business. However, mere study is not enough. Attempts must be made to influence the environment in order to make it congenial and favorable to entrepreneurial activities. The most successful entrepreneur is one who not only adjusts to the environment but also modifies the
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environment to suit his requirements through the direct and indirect influences he can exercise over the system.
1.6.2.1 Phases of Business Environment
Business environment may be classified into two broad categories; namely external; and internal environment
A) External Environment
It is the environment which is external to the business and hardly to influence independently. The following are the components of external environment:
i) Economic Environment
Economic environment is of multidimensional nature. It consists of the structure of the economy, the industrial, agricultural, trade and transport policies of the country, the growth and pattern of national income and its distribution, the conditions prevailing in industrial, agricultural and other sectors, the position relating to balance of trade and balance of payments, and other miscellaneous conditions of the economy. There is a close relationship between a business firm and the economic environment around it. The success of a business enterprise depends considerably upon the State and growth of the economy.
ii) Legal Environment
Business must function within the framework of legal structure. Therefore, an adequate knowledge of laws and rules is necessary for efficient managerial performance. When new laws are made and controls exercised through legal enactments, the first reaction of the business community is to oppose them and disobey them. Management should try to understand what should be the right laws and strictly obey them when so made. In addition, it can influence the government to change and improve the law and make it useful to the business community.
There are several business laws in our country. A working knowledge of these laws is very helpful for the entrepreneur. Such knowledge will keep them away from innocent breaches and resultant penalties. Some laws differ from region to region and amendments arc made from time to time. Therefore, the entrepreneur must always keep in touch with those who know the latest position in law. In addition, an entrepreneur should:
b) Read the books that enlighten on the legal side of business
c) Consult government agencies concerned with the implementation of business laws. d) Retain labor law consultants.
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iii) Political Environment
In a democratic country, politics cannot be ignored. Managers and entrepreneurs should understand the working of the political system. Such understanding and concern for national problems will help them in the long run in discharging their responsibilities to the satisfaction of the public.
Public opinion is very important and today's public opinion becomes tomorrow's legislation. Businessmen should, therefore, learn to take public opinion into account in the decision-making process. If business does not learn how to deal adequately with public opinion, it will face a disaster. This does not mean that business should surrender itself to public opinion. Rather, it implies intelligent response in order to change wherever necessary and a constructive approach to problems.
iv) Socio-Cultural Environment
It consist the social and cultural norms of a society in a given period of time. The variables that are appraised are values, beliefs, norms, fashions and fads of a particular society. It can help in understanding the level of rigidity/flexibility of a given society towards a new product/service/concept. Traditional culture should be protected in so far as it is not a hindrance to innovation, motivation, and development.
v) Demographic Environment
It assesses the overall population pattern of a given geographical region. It includes variables like age profile, distribution, sex, education profile, income distribution etc. The demographic appraisal can help in identifying the size of target customers.
B) Internal Environment
Internal environment is the environment which is under the control of a given organization. Following are the components of internal environment of a business:
ii) Raw Material: It assesses the availability of raw material now and in the near future. If the availability of raw material is less now or would be less in future then the entrepreneur should give a serious thought to establishing a venture as the entire system can come to a standstill due to shortage of raw material.
iii) Production/Operation: It assesses the availability of various machineries, equipment, tools and techniques that would be required for production/operation.
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iv) Finance: It assesses the total requirements of finance in terms start-up expenses, fixed expenses and running expenses. It also indicates the sources of finance that can be approached for funding.
v) Human Resource: It assesses the kind of human resources required and its demand and supply in the market. This further helps in estimating the cost and level of competition in hiring and retaining the human resources.
As stated above, the objective of environmental scanning should be to gather information from as many sources as possible and to maximize this information for enhanced probability of success in the business.
1.6.2.2 Environmental Factors Affecting Entrepreneurship
A complex and varying combination of financial, institutional, cultural and personality factors determines the nature and degree of entrepreneurial activity at any time. The personal backgrounds of the entrepreneurs are determined mainly by the environment in which they are born and brought up and work. A multitude of environmental factors determine the entrepreneurial spirit among people. The entrepreneurs in turn create impact on the environment. The interaction between the entrepreneur and his environment is an ongoing process. At any given point of time, the entrepreneurs derive meanings from the environment prevailing at that time and try to adapt and/or change the environment to suit their needs.
Some of the environmental factors which hinder entrepreneurial growth are given below: 🖙 Sudden changes in Government policy.
🖙 Sudden political upsurge.
🖙 Outbreak of war or regional conflicts.
🖙 Political instability or hostile Government attitude towards industry.
🖙 Excessive red-tapism and corruption among Government agencies.
🖙 Ideological and social conflicts.
🖙 Unreliable supply of power, materials, finance, labor and other inputs. 🖙 Rise in the cost of inputs.
🖙 Unfavorable market fluctuations.
🖙 Non-cooperative attitude of banks and financial institutions.
Entrepreneurship is environmentally determined. The most important essential for entrepreneurial growth is the presence of a favorable business environment. A healthy business
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environment requires active social and cultural behavior of the people, efficient economic conditions, helpful motivating Government policies, etc. When environment mitigates entrepreneurship it must be modified.
1.7 Creativity, Innovation and Entrepreneurship
Creativity, innovation and entrepreneurship, have been recognized as important contributors to a nation’s economic growth. These three terminologies are chronologically interrelated and it is very important to look in to them to get their full picture.
1.7.1 Creativity
Creativity is defined as the tendency to generate or recognize ideas, alternatives, or possibilities that may be useful in solving problems, communicating with others, and entertaining ourselves and others.
Creativity is the ability to come up with new idea and to identify new and different ways of looking at a problem and opportunities.
It is a process of assembling ideas by recombining elements already known but wrongly assumed to be unrelated to each other. This definition has several key elements that are worth considering: ☞ Process: creativity is a process (implying among other things, that it is more like a skill than an attitude, and that you can get better at it with practice)
☞ Ideas: creativity results in ideas that have potential value.
☞ Recombining: the creative process is one of putting things together in unexpected ways. In order to be creative, you need to be able to view things in new ways of from a different perspective. Among other things, you need to be able to generate new possibilities or new alternatives. Tests of creativity measure not only the number of alternatives that people can generate but the uniqueness of those alternatives. The ability to generate alternatives or to see things uniquely does not occur by change; it is linked to other, more fundamental qualities of thinking, such as flexibility, tolerance of ambiguity or unpredictability, and the enjoyment of things heretofore unknown.
Thus, creativity is the development of ideas about products, practices, services, or procedures that are novel and potentially useful to the organization.
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1.7.1.1 Steps in the Creative Process
Step1: Opportunity or problem Recognition: A person discovers that a new opportunity exists or a problem needs resolution.
Step2: Immersion: the individual concentrates on the problem and becomes immersed in it. He or she will recall and collect information that seems relevant, dreaming up alternatives without refining or evaluating them.
Step 3: Incubation: the person keeps the assembled information in mind for a while. He or she does not appear to be working on the problem actively; however, the subconscious mind is still engaged. While the information is simmering it is being arranged into meaningful new patterns. Step 4: Insight: the problem-conquering solution flashes into the person’s mind at an unexpected time, such as on the verge of sleep, during a shower, or while running. Insight is also called the Aha! Experience.
Step 5: Verification and Application: the individual sets out to prove that the creative solution has merit. Verification procedures include gathering supporting evidence, using logical persuasion, and experimenting with new ideas.
1.7.1.2 Barriers to Creativity
Be aware that there are numerous barriers to creativity, including:
1. searching for the one ‘right’ answer
2. focusing on being logical
3. blindly following the rules
4. constantly being practical
5. viewing play as frivolous
6. becoming overly specialized
7. avoiding ambiguity
8. fearing looking foolish
9. fearing mistakes and failure
10. believing that ‘I’m not creative
1.7. 2 Innovation
Innovation lies at the heart of the entrepreneurial process and is a means to the exploitation of opportunity. It is the implementation of new idea at the individual, group or organizational level.
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Innovation is a process of intentional change made to rate value by meeting opportunity and seeking advantage.
There are four distinct types of innovation, these are as follows:
⮚ Invention - described as the creation of a new product, service or process ⮚ Extension - the expansion of a product, service or process
⮚ Duplication - defined as replication of an already existing product, service or process ⮚ Synthesis - the combination of existing concepts and factors into a new formulation
1.7.2.1 The Innovation Process
1. Analytical planning: carefully identifying the product or service features, design as well as the resources that will be needed.
2. Resources organization: obtaining the required resources, materials, technology, human or capital resources
3. Implementation: applying the resources in order to accomplish the plans 4. Commercial application: the provision of values to customers, reward employees and satisfy the stakeholders.
1.7.2.2 Areas of Innovation
The following are some of the major areas in which valuable innovation might be made. A. New product: A new product can be developed through new or existing technology. The new product may offer a radically new way of doing something or it may simply be an improvement on an existing item. The new product must offer the customer an advantage if it is to be successful.
B. New Services: A service is an act which is offered to undertake a particular task or solve a particular problem.
C. New Production Techniques: Innovation can be made in the way in which a product is to be manufactured. A new production technique should allow the end user to obtain the product at a lower cost, or a product of higher quality or better service in the supply of the product.
D. New Way of Delivering the Product or Service to the Customer: Customer can only use product/service they can access. A common innovation is to take a more direct routine by cutting out distributors or middlemen.
E. New Operating Practices: As with innovations in the production of physical products, innovation in service delivery must address customers need and offer them improved
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benefits, for example easier access to the service, a higher quality service, a more consistent service, a faster or less time consuming service etc.
F. New Means of Informing the Customer about the Product: People will only use a product or service if they know about it. Demand will not exist if the offering is not properly promoted to them. Promotion consists of two parts; a message what is said and a means – the route by which that message is delivered.
G. New Means of Managing Relationship within the Organization: Any organization has a wide variety of communication channels running through it. The performance of the organization will depend to a great extent on the effectiveness of its internal communication channels. These communication channels are guided by the organization’s structure.
H. New Ways of Managing Relationships between Organizations: Organizations sit in a complex web of relationships to each other. The way they communicate and relate to each other is very important.
1.7.3 From Creativity to Entrepreneurship
Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities. Innovation is the ability to apply creative solution to those problems and opportunities in order to enhance people’s lives or to enrich society.
Entrepreneurship = creativity + innovation.
Fig 1.2: Flow of Creativity, Innovation and Entrepreneurship
1.8 Summary
In this chapter a brief discussion is made on the term entrepreneurship and entrepreneur. The different roles and tasks of the entrepreneurs are also part of the discussion. The word entrepreneurship is defined as a process that involves creation of something different and better
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with values to target customers. Here the entrepreneur is someone who will undertake the activities of creating something different and commercialize it in a given business environment. The three forms of entrepreneurship are also distinguished as individual entrepreneurship, intrapreneurship and organizational entrepreneurship. A person to become an entrepreneur needs to possess entrepreneurial mindset through having qualities of successful entrepreneurs and entrepreneurial skills, and he/she also to understand and scan entrepreneurial environment. Now when the entrepreneur carries out the entrepreneurial process he/she will be able and expected to create wealth for him/herself and for others as well. For this the entrepreneurial should have general management and people management skills. Finally, the entrepreneur should play active role in the economic development through improving in per capita income, generating of employment opportunities, inspiring others towards entrepreneurship, balancing regional development, enhancing the number of enterprise, providing diversity in firms, assuring economic independence, combining of economic factors, providing market efficiency, by accepting risk and maximizing investors return.
1.9 Review Questions
1. Give at least two definitions for entrepreneurship and two for entrepreneur. ………………………………………………………………………………………………… ………………………………………………………………………………………………… 2. Who are the potential candidates for entrepreneurship?
………………………………………………………………………………………………… …………………………………………………………………………………………………
3. Identify any five qualities of a successful entrepreneur
………………………………………………………………………………………………… ………………………………………………………………………………………………… 4. Some people argue that “the only beneficiary of the entrepreneurial wealth is the entrepreneur him/herself” Do you agree? Why or why not?
………………………………………………………………………………………………… ………………………………………………………………………………………………… 5. How do you define creativity, innovation? Relate it with entrepreneurship.
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……………………………………………………………………………………………… ……………………………………………………………………………………………… 6. Discus any four possible areas for innovation
……………………………………………………………………………………………… ……………………………………………………………………………………………… 7. How do you relate entrepreneurship and environment?
………………………………………………………………………………………………… …………………………………………………………………………………………………
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CHAPTER 2: BUSINESS PLANNING
2.1 INTRODUCTION
In the previous chapter, we dealt with the concept of Entrepreneurship. This unit will help you to understand the concept of opportunity identification and evaluation, business idea development and how to prepare a business plan. Virtually to start any type of business or expand the existing one needs to work on opportunity identification and evaluation, business idea development and then prepare business plan. Lack of proper opportunity identification and evaluation, idea development process and business planning are the most often cited reasons for business failure. The various sections and sub-sections of this chapter will also summarize opportunity identifying and evaluating processes, business idea development process, and the feasibility study, importance and preparation of a business plan.
Chapter Objectives
After completing this chapter, students will be able to:
▪ Identify opportunity in the environment,
▪ Evaluate the opportunities in the environment,
▪ Generate business idea,
▪ Explain the concept of business planning,
▪ Identify components of business plan,
▪ Develop business plan,
2.2 Opportunity Identification and Evaluation
Most authors agree that the initial stage in the entrepreneurial process is the identification and refinement of a viable economic opportunity that exists in the market. Without the recognition of an opportunity the entrepreneurial process is likely to result in failure.
Opportunity recognition corresponds to the principal activities that take place before a business is formed or structured. The opportunity identification and evaluation stage can be divided into five main steps namely; getting the idea/scanning the environment, identifying the opportunity, developing the opportunity, evaluating the opportunity and evaluating the team.
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1) Scanning the Environment/ Getting the Idea
While scanning the environment it may be provide you with idea and business opportunities. Idea is a thought or suggestion about a possible course of action. Synonymous with “idea” are the terms thought, intention, scheme, suggestion, proposal, initiative, spur, impulse, brainwave, insight, concept and connotation. Whereas, opportunity is a favorable time or set of circumstances for doing something. Synonymous with opportunity are chance, opening and prospect. A business opportunity is a gap left in a market by those who currently serve it, giving a chance to others to add unrealized value by performing differently from and better than competitors in order to create new possibilities.
Business opportunities are distinguished from ideas; an idea is not synonymous with opportunity. The difference between an idea and an opportunity is that an opportunity is the possibility of occupying the market with a specific innovative product that will satisfy a real need and for which customers are willing to pay but idea is all about opinion about anything we can have. Successful venturing may well rest upon the ability of an individual to recognize or distinguish an opportunity from an idea.
2) Opportunity Identification
Opportunity identification is ability to see, to discover and exploit opportunities that others miss. It is the process of seeking out better ways of competing. It includes scanning the informational environment, being able to capture, recognize and make effective use of abstract, implicit and changing information from the changing external environments.
It is important for the entrepreneur to understand the cause of the opportunity. Is it technological change, market shift, government regulation, or competition? These factors and the resulting opportunity have a different market size and time dimension. The market size and the length of the window of opportunity form the primary basis for determining risks and rewards which serves for opportunity evaluation.
Opportunity identification is a very difficult task, as most opportunities do not just appear but rather result from an entrepreneur’s alertness to possibilities. In developing countries, problems may be changed to business opportunities.
3) Opportunity Development
Having recognized the opportunity, timely adaptation of that opportunity to suit actual market need is key to new venture success. Opportunity development is the process of combining
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resources to pursue a market opportunity identified. This involves systematic research to refine the idea to the most promising high potential opportunity that can be transformed into marketable items.
4) Opportunity Evaluation
Opportunity screening and evaluation is a critical element of the entrepreneurial process. A professional executed evaluation can tell whether the specific product or service has the returns needed to justify the investment and the risk to be taken.
Opportunity screening and evaluation is perhaps the most critical element of the entrepreneurial process, as it allows the entrepreneur to assess whether the specific product or service has the returns needed for the resources required. This evaluation process involves looking at the creation and length of the opportunity, its real and perceived value, its risks and returns, its fit with the personal skills and goals of the entrepreneur, and its differential advantage in its competitive environment. According to experts, evaluating the opportunity must answer the questions listed in table 2.1 below:
Table 2.1: Business factors and questions for opportunity evaluation
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5) Assessment of the Entrepreneurial Team
Regardless of how right the opportunity may seem to be, it will not make a successful business unless it is developed by a team with strong skills. Gartner et al (1999:230) advices that once the opportunity has been evaluated, the next step is to ask pertinent questions about the people who would run the company. Such questions are illustrated in table 2.2:
Table 2.2: Team factors and questions for opportunity evaluation
2.3 Business Idea Development
Brainstorming Cases on business Idea and Business Idea Identification is given as follow:
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A business idea is a short and precise description of the basic operation of an intended business. There are three types of business ideas. They are:
1. Old Idea – Here an individual copies an existing business idea from someone. 2. Old Idea with Modification – In this case the person accepts an old idea from someone and then modifies it in some way to fit a potential customer’s demand.
3. A New Idea – This one involves the invention of something new for the first time
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2.4 Business Idea Identification
Before you start a business, you need to have a clear idea of the sort of business you want to run. Your business idea will tell you:
☞ 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?
☞ How is your business going to sell its goods or services?
☞ How much will your business depend upon and impact the environment? A good business idea will be compatible with the sustainable use of natural resources and will respect the social and natural environment on which it depends.
All business ideas are not equally worth. Therefore, to identify promising business idea among others, it is important to answer the above raised questions. Let we see the explanation for the questions raised above.
2.4.1 The Need will Your Business Fulfill for the Customers
Your business idea should always have customers and their needs in mind.
It might be a good idea to start a day care center in the commercial area as many other parents may have the same need.
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It might be a good idea to start a waste collection and recycling service in this area. Not only would the owner of this restaurant need the service, but many other residents in the area might need it as well.
Refer to the Cases of Janet and Lily Narrated in this Chapter:
2.4.2 Good or Service will your Business Sell
Depending on your skills and the needs of the customers, you should decide which good or service your business will sell. Also, keep in mind that they must be goods or services that people are willing to pay for and at a price that will allow you to make a profit. A good is an item that people pay for and use. It may be something you make yourself or it may be something you buy to resell. Tools, baked goods, clothes and retail items are all products. A service is something you do for people that they then pay you for. For example, delivering
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goods, banking, babysitting, repairing items, collecting recyclable waste from apartment buildings, operating tours, etc. are all services.
Refer to the Cases of Janet and Lily Narrated in this Chapter:
2.4.3 Identifies Potential Customer
Any business cannot succeed without customers. Therefore, it is essential that you know who your customers will be. Will you sell to a specific type of customer or to everyone in an area? There must be enough people who are able and willing to pay for your goods and services or the business will not survive.
Refer to the Cases of Janet and Lily Narrated in this Chapter:
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2.4.4 Strategy for Selling Goods or Services/ How is Your Business Going to Sell Good or Services?
How are you going to sell your goods or services? If you plan to open a shop, you know how you will sell your product, but manufacturers or service operators can sell their products in many different ways. A manufacturer, for example, can sell either directly to customers, to retailers or to wholesalers.
Refer to the Cases of Janet and Lily Narrated in this Chapter:
2.4.5 Relation between Business and Environment
Your business can only be sustainable in the long run if it works in harmony with the social and natural environment. How much does your business depend on the environment? Does it rely on the weather, soil or other natural resources? Does it need any specific type of labor from the local community? Does it need the local community to support it? What should you do to make sure that your business nurtures the natural environment and helps the local community? Will your business nurture the natural environment or will it have a detrimental impact? How would you minimize or reverse any negative effect that your business might have? This is discussed in detail in Chapter one of this module.
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Activity 1: Now if you already have a business idea, describe your idea using the following form:
2.5 Methods for Generating Business Ideas
Brainstorming Cases on business idea generation is given as follow:
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Hamisi does not just focus on one idea:
▪ He looks around to find different business ideas that may be suitable to his areas of interest and will benefit from his knowledge and his working experience.
▪ He describes each of the different ideas clearly.
▪ While researching the different ideas, he found that some would not work because there is not sufficient need, there are not enough customers or the competition is fierce. ▪ While describing the idea, he also identified resources that he could leverage, such as his friend’s knowledge, his aunt’s customer base or a reliable transportation provider that he knows.
Every business idea should be based on knowledge of the market and its needs. The market refers to people who might want to buy a good or service; i.e. the customers. The market differs from place to place, depending on who lives in the area, how they live and for what goods or services they spend their money. When you understand the market in your area, you might recognize many business ideas that you may have previously ignored.
When generating business ideas, it is best to try to keep your mind open to everything. Your first goal is to think of as many ideas as possible and make a list of all the possible business opportunities. With a list, you will have more choices! You then can scan the list and nail down the idea(s) that sound most feasible to you and that you think will be most profitable.
There are many ways to come up with business ideas, such as surveying local businesses or asking existing business owners. The information gained from one approach may supplement another and help you to clearly describe your business ideas. Below, we will examine a few different approaches to generating business ideas.
1. Learn from successful business owners
You can learn a lot from people in your area who have already gone through the process of establishing a business. You should try to get the following information from them: ▪ What kind of idea did these businesses start with?
▪ Where did the ideas come from?
▪ How did they develop their ideas into successful businesses?
▪ How does the business profit and fit into the local environment?
▪ Where did they get the money to start their business?
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When to meet successful business owners, use the Business Ideas Analysis Form shown below, to write down their answers to the above listed questions.
2. Draw From Experience
2.1 Your own Experience
Look at the list of your interests, your experiences and your networks. Are there any possible business ideas that you can derive from your own past experience? Think about each type of experience.
Start with yourself. What has your experience been as a customer in the market place? Have you ever searched all day for some items that you could not find in any store in your area? Think
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about the goods and services you have wanted at different times and that you have had difficulty finding.
2.2 Other People’s Experience
The people around you are potential customers. It is important to understand their experience trying to find goods and services that are unavailable or not exactly what they need. Listen carefully to what these people say about their shopping experience.
Ask your family and friends about the things they would like to find that are not locally available. Expand your social knowledge by talking to people from different age groups, social classes, etc. You can also visit community groups, colleges, etc. for a greater understanding of the market.
Here are some examples of comments that would help with your search for a business idea: ☞ “I cannot find a lunch box that keeps the food warm.”
☞ “The choice of cooking pots in the shops is very limited.”
☞ “There is no reliable way of sending gift packages to my friends and relatives living in the villages.”
☞ “There is not enough entertainment in this town and the weekends are so boring.” ☞ “I really need to buy some marketing textbooks, but there are no good bookstores in this town.”
☞ “There is so much garbage on the streets. Somebody should do something about it.” 3. Survey Your Local Business Area
Another way of discovering business ideas is to look around your local community. Find out what type of businesses are already operating in your area and see if you can identify any gaps in the market.
If you live in a village or small town, you may be able to identify all the fields of business in the whole town. Otherwise, you may need to focus on the preferred business fields and business types that you identified. This is an activity that will be much easier to do with a business partner or friend. Visit the closest industrial area, markets and shopping centers in your area.
4. Scanning Your Environment
You can use your creativity to find more business ideas in your area. Look at the list of existing local businesses. If the list has included most of the local markets, you may be able to learn about the industries or service providers on which the local economy relies.
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It may be useful to think about business ideas by considering all the resources and institutions in your area. For example think about:
☞ Natural resources,
☞ Characteristics and skills of people in the local community,
☞ Import substitution,
☞ Waste products,
☞ Publications,
☞ Trade fairs and exhibitions ,
4.1 Natural Resources
Think of what is abundantly available in your area that could be made into useful products without harming the environment. Natural resources include materials from soil, agriculture, forest, mineral, water, etc.
Perhaps there is good clay soil in the area that can be used for making bricks. It may be used for other business ventures such as making plates, cups or tiles.
Think about a way to use this resource that would enable you to continue working with it for many years. In other words, make sure that your business idea will not exhaust the natural resource that would be the foundation of your business.
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4.2 Characteristics and Skills of People in the Local Community
Consider whether the people in your area have some special characteristics or skills that could be useful for a business:
o Are there people in your community who are good artisans, tailors or carpenters or who have specific skills creating items unique to your area?
o Are there recent graduates looking for jobs who you could employ?
o Are there caregivers, nurses or people who could offer services to children, the elderly or the sick?
o Is your community digitally connected?
o Is the infrastructure in your community well developed?
4.3 Waste Products
Business opportunities can also be generated by using materials that have been previously used by both homeowners and businesses. Think about the possible use of waste materials for the production of other useful and marketable items. Recyclable waste products can be identified by analyzing certain items to see how they are discarded. Man-made waste has a detrimental effect on the environment. In most cases, companies are keen to work with entrepreneurs who can turn their waste products into valuable and marketable items.
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Usually there is something that can be reused in things that we throw away. Recycling may be done with waste products that come from agricultural processing, household garbage, used machinery and appliances or industrial waste. People throw away food that could be used to make compost or animal feed. They also throw away paper, glass and aluminum that can be recycled. Think of things that can be made from what others thought was garbage.
Many industries dispose of useful materials. A clothing company might throw out small pieces of cloth that could be used to make something else. Plastics factories usually have materials left over that might be useful for insulation, stuffing for pillows or a new kind of fuel. Is there a possibility that you could recycle something that is found in abundance in your neighborhood? Is there a way of using resources more efficiently? May be you could offer a service to help individuals or institutions dispose of their waste in a way that is environmentally friendly or maybe you can make something new out of the waste.
4.4 Import Substitution
Can you think of anything that is imported that might be made locally? Some imported goods have high import duties, making them very expensive. You could investigate the possibility of operating a business that can easily make the imported goods locally.
4.5 Publications
Publications from the internet and other printed material may help you find ideas. There are many sites on the internet that you can visit to find out about business ideas as well as franchise
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businesses for sale. There are also web-based businesses that you can search from home if you have internet connection.
Newspapers are a great source of ideas. They often describe types of businesses that you could start or products that you could provide in your area. The classified advertisements may give your ideas, as well as articles about business trends in other places.
4.6 Trade Fairs and Exhibitions
Organizations hold trade fairs for different goods or services. Attending these fairs may give you exposure to a number of new business ideas that you had not previously considered. Be sure to attend any trade fair for fields of business in which you may be interested. 5. Brainstorming
Brainstorming means opening up your mind and thinking about many different ideas. You start with a word or a topic and then write down everything that comes to mind relating to that subject. You continue writing for as long as possible, putting down things that you think of, even if they seem irrelevant or odd. Good ideas can come from concepts that initially seem strange.
Brainstorming works best in a group. Get your family, friends or classmate together and ask them to help by writing down ideas they have when they hear the word or subject matter. 6. Structured Brainstorming
Structured brainstorming is when you think of the different processes that are involved in the operation of a particular business and the goods/services that can be offered with respect to those processes. This is different from thinking about random items related to a particular business field and type.
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Try to think of all the businesses that are related to different aspects of a product: Those involved in production,
Those involved in the selling process,
Those involved in recycling or re-using materials,
Those indirectly related (spin-offs),
Those involved in servicing,
For example, you can think of different processes within each line. You continue until you have run out of ideas. Again, whatever comes to mind should be written down. Decide later if it is worthwhile or correct. Let’s take the example of cotton T-shirts:
As far as all brainstorming exercises are concerned, it is essential to recall the basic rules of brainstorming: no criticizing or censoring of ideas, wild and turbulent sessions allowing the uninterrupted flow of ideas, no interruption once the basic idea of the exercise has been introduced, no shyness and no limitations.
7. Focus Group
Focus group is a group of individuals providing information on a structured format which is led by moderators. It is characterized by an open and in depth discussion: rather than simply asking questions to solicit student response. The moderator focuses the discussion in either Directive or
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non-directive manner. It is useful for both getting new idea on existing product or screening idea/concepts.
8. Problem Inventory Analysis
It is similar to focus group to generate new product ideas. The difference is rather than generating new idea themselves, consumers are provided with a list of problems in general product category. It is a method of obtaining “New Idea” and solutions by focusing on problems. 9. Free Association
One of the simplest methods that entrepreneurs can use to generate new ideas is free association. This technique is particularly helpful in developing an entirely new slant to a problem. First, a word or phrase related to the problem is written down, then another and another, with each new word attempting to add something new to the ongoing thought processes, thereby creating a chain of ideas ending with a new product/service idea emerging.
10. Forced Relationships
Forced relationships- as the name implies- is the process of forcing relationships among some product combinations. It is a technique that asks questions about objects or ideas in an effort to develop a new idea.
11. Attribute Listing
Attribute listing is an idea-finding technique that has the entrepreneur list the attributes of an item or problem and then look at each from a variety of viewpoints. Through this process, originally unrelated objects can be brought together to form a new combination and possibly a new product/service that better satisfies a need.
2.6 Business Idea Screening
Idea screening is the process to spot good ideas and eliminate poor one. To screen the business idea generated, three approaches are discussed as follow:
1) Macro screening: is aimed screening down ideas to 10. And the common criteria are: ▪ Are my own competencies (see strength detector) sufficient?
▪ Can I finance it to a large extent with my own equity?
▪ Will people buy my product/service (i.e. is it needed and can people afford it)? 2) Micro Screening: is aimed screening down ideas into 3. The common criteria used for screening are:
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▪ Solvent demand
▪ Availability of raw materials
▪ Availability of personal skills
▪ Availability of financial resources
3) Scoring the Suitability of Business Idea:
This approach is most appropriate when deciding on starting a business. When there are more than one possible business ideas and one needs to decide which one to follow, we use score business ideas (e.g., BI1, BI2, BI3) by assigning a rating from 1 to 3 for each question, with 3 being the strongest. After we score the ideas we sum the total and select the idea with the highest score.
Notes: while to answer the above listed questions it is important to conduct survey. Collecting information on your business idea gives you an opportunity to promote your business idea and to present yourself as a potential entrepreneur. While to answer the above questions, there are four important groups that you should talk to:
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☞ Potential customers: Their views are essential to your understanding of whether or not your proposed product is important to them and if you need to modify your idea to meet their needs.
☞ Competitors, suppliers and entities with financial resources: Their views will reveal the challenges of competition that you would face, as well as other issues related to your potential business.
☞ Financial institutions: Find out the lending requirements to determine whether borrowing for a new business is possible.
☞ Key informants and opinion leaders: These are people who would know a lot about the type and field of business you want to go into and/or a lot about your potential customers. Their views would give you a lot to think about and could also give you a better insight into the feasibility of your business idea.
When you have completed the summary of your business idea, you can go on to the next step to start your own business: Prepare a business plan for the proposed business.
2.7 Concept of Business Plan
Planning is the first and the most crucial step for starting a business. A carefully charted and meticulously designed business plan can convert a simple idea/innovation into a successful business venture.
A business plan is a road map for starting and running a business. A well-crafted business plan identifies opportunities, scans the external and internal environment to assess the feasibility of business and allocates resources in the best possible way, which finally leads to the success of the plan. It provides information to all concerned people like the venture capitalist and other financial institutions, the investors, the employees. It provides information about the various functional requirements (marketing, finance, operations and human resources) for running a business.
A business plan is the blueprint of the step-by-step procedure that would be followed to convert a business idea into a successful business venture. A business plan first of all identifies an innovative idea, researches the external environment to list the opportunities and threats, identifies internal strengths and weakness, assesses the feasibility of the idea and then allocates
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resources (production/operation, finance, human resources ) in the best possible manner to make the plan successful:.
The objectives of a business plan are to:
☞ Give directions to the vision formulated by entrepreneur.
☞ Objectively evaluate the prospects of business.
☞ Monitor the progress after implementing the plan.
☞ Persuade others to join the business.
☞ Seek loans from financial institutions.
☞ Visualize the concept in terms of market availability, organizational, operational and financial feasibility.
☞ Guide the entrepreneur in the actual implementation of the plan.
☞ Identify the strengths and weakness of the plan.
☞ Identify challenges in terms of opportunities and threats
☞ Clarify ideas and identify gaps in management information about their business, competitors and the market.
☞ Identify the resources that would be required to implement the plan.
☞ Document ownership arrangements, future prospects and projected growths of the business venture.
2.8 Developing a Business Plan
2.8.1 Business Planning Process
A plan, which looks very feasible at the first instance, might actually not be when the details are drawn. Hence documenting the business plan is one of the early steps that an entrepreneur should take. As discussed above, the successful entrepreneur lays down a step-by-step plan that she/he follows in starting a new business. This business plan acts as a guiding tool to the entrepreneur and is dynamic in nature – it needs continuous review and updating so that the plan remains viable even in changing business situations. The various steps involved in business planning process are discussed here below:
1) Preliminary Investigation
Before preparing the plan entrepreneur should:
☞ Review available business plans (if any).
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☞ Draw key business assumptions on which the plans will be based (e.g. inflation, exchange rates, market growth, competitive pressures, etc.).
☞ Scan the external environment and internal environment to assess the strengths, weakness, opportunities and threats.
☞ Seek professional advice from a friend/relative or a person who is already into similar business (if any).
2) Opportunity Identification and Idea Generation
Entrepreneurship is not just limited to innovation (generation of an entirely new concept, product or service, but it also encompasses incremental value addition to the concept/product/ services offered to the consumer, shareholder and employee).
Opportunity identification and business idea generation is the first stage of business planning process. It involves generation of new concepts, ideas, products or services to satisfy demand.
3) Environmental Scanning
Once a promising idea emerges through idea generation phase the next step is environmental scanning, which is carried out to analyze the prospective strengths, weakness, opportunities and threats of the business enterprise. Hence before getting into the finer details of setting up business it is advisable to scan the environment both external and internal and collect the information about the possible opportunities, threats from the external environment and strengths
and weaknesses from the internal environment (the detail has been addressed in chapter one). 4) Feasibility Analysis
Feasibility study is done to find whether the proposed project (considering the above environmental scanning) would be feasible or not. It is important to demarcate environmental scanning and feasibility study at this point. Environmental scanning is carried out to assess the external and internal environment of the geographical area/areas where, entrepreneur intends to set up his business enterprise, whereas feasibility study is carried out to assess the feasibility of the project itself in a particular environment in greater detail.
5) Report Preparation
After environmental scanning and feasibility analysis, a business plan report is prepared. It is a written document that describes step-by- step, the strategies involved in starting and running a business.
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2.8.2 Essential Components of Business Plan
I) Cover Sheet: Cover sheet is like the cover page of the book. It mentions the name of the project, address of the headquarters (if any) and name and address of the promoters. II) Executive Summary: Executive summary is the first impression about the business proposal. As the saying goes, the first impression is the last impression. A careful presentation of information should be done to attract the attention of the evaluators. It should be in brief (not more than two or three pages) yet it should have all the factual details about the project that can improve its marketability. It should briefly describe the company; mention some financial figures and some salient features of the project. Generating interest in the minds of the readers is the prime motive of the executive summary.
III) The Business: This will give details about the business concept. It will discuss the objective of the business, a brief history about the past performance of the company (if it is an old company), what would be the form of ownership (whether it would be a single proprietor, partnership, cooperative society or a company under company law). It would also label the address of the proposed headquarters.
IV) Funding Requirement: Since the investors and financial institutions are one of the key bodies examining the business plan report and it is one of the primary objectives of preparing the business plan report, a careful, well-planned funding requirement should be documented. It is also necessary to project how these requirements would be fulfilled. Debt equity ratio should be prepared, which can give an indication about how much finance would the company require and how it would like to fund the project.
V)The Product or Services: A brief description of product/services is given in this subsection. It includes the key features of the product, the product range that would be provided to the customers and the advantages that the product holds over and above the similar products/ substitute products available in the market. It also gives details about the patents, trademarks, copyrights, franchises, and licensing agreements.
VI)The Plan: Now the functional plans for marketing, finance, human resources and operations are to be drawn.
1) Marketing Plan: Marketing mix strategies are to be drawn, based on the market research.
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2) Operational Plan: The operational plan would give information about (i) Plant location: why was a particular location chosen? Is it in the vicinity of the market, suppliers, labor or does it have an advantage of government subsidies for that particular location or are there any other specific reasons for choosing the particular location?, (ii) Plan for material requirements, inventory management and quality control are also drawn for identifying further costs and intricacies of the business. Finally, the budget for operational plan is also drawn.
3) Organizational Plan: The organizational plan indicates the pattern of flow of responsibilities and duties amongst people in the organization, it provides details about the manpower plan that would be required to put life into the business and it would also enlist the details about the laws that would be governed in managing the employees of the organization. In the end the organizational plan is also budgeted.
4) Financial Plan: The financial plan is usually drawn for two to five years for an existing company. For a new organization the following projections are drawn:
a) Projected Sales
b) Projected Income and Expenditure Statement
c) Projected Break Even Point
d) Projected Profit and Loss Statement
e) Projected Balance Sheet
f) Projected Cash Flows
g) Projected Funds Flow
h) Projected Ratios
VII) Critical Risks: The investors are interested in knowing the tentative risks to evaluate the viability of the business and to measure the risks involved in the business. This can further give confidence to the investors as they can calculate the risks involved in the business from their perspectives as well.
VIII) Exit Strategy: The exit strategies would provide details about how the organization would be dissolved, what would be the share of each stakeholder in case of winding-up of the organization. It further helps in measuring the risks involved in investing.
IX) Appendix: The appendix can provide information about the Curriculum Vitae of the owners, Ownership Agreement and the like.
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2.9 Sample Business plan Format
The business plan outlined below presents all necessary chapters in detail, including all necessary explanations in the context of Ethiopia.
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8. Equipment to be purchased by the operator
9. Yearly raw material requirement:
Source of raw material.................................................................................................................. ...................................................................................................................................................... 10. Other yearly operating expenses (e.g. labor expense, sales expense, depreciation expense, tax expense etc..)
11. Yearly production/service plan:
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2.10 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 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.
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2.11 Review Questions
1. List and discuss opportunity Identification steps.
………………………………………………………………………………………………… ………………………………………………………………………………………………… 2. Discuss the business idea Identification processes.
………………………………………………………………………………………………… ………………………………………………………………………………………………… 3. List at least three approaches of business idea generation and discuss them. ………………………………………………………………………………………………… ………………………………………………………………………………………………… 4. Discuss steps involved in business planning process.
………………………………………………………………………………………………… ………………………………………………………………………………………………… 5. Discuss the Components of Business Plan.
………………………………………………………………………………………………… …………………………………………………………………………………………………
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CHAPTER 3: BUSINESS FORMATION
3.1 INTRODUCTION
A business formation deals with the formalization and actual implementation of business ideas in to practice. In today’s economic development/transformation, small businesses are creating new jobs even as large businesses continue eliminating jobs and they are more flexible than large ones in the products and services they offer. This chapter discusses the issues of business development and the different legal forms of business. In addition, the concept of MSEs in the Ethiopian and international context are discussed. The importance/roles of MSEs and a business formation deal with the formalization and actual implementation of business ideas in to practice. This chapter discusses the issues of business development and the different legal forms of business. In addition the concept of MSEs in the Ethiopian and international context are discussed. The importance/roles and set up of MSEs are discussed very well. Besides the success and failure factors of MSEs and the common problems of MSEs in Ethiopia are discussed. Furthermore, the chapter highlights the reality in the era of entrepreneurship environment as, not only are the skills and abilities important, but the entrepreneur also will need to consider the personality and character of each individual to create a viable organization culture.
Chapter Objectives
After completing this chapter, students will be able to:
∙ Explain the Concept of Business Development;
∙ Identify the Forms of Business Ownership;
∙ Analyze the Importance/Role of MSEs;
∙ Set Up Small Scale Business;
∙ Distinguish the Failure and Success Factors of MSEs;
∙ Identify the Problems of Small Scale Business in Ethiopia; and
∙ Develop Organizational Culture.
3.2 The Concept of Small Business Development
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
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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.
Micro and small enterprises (MSEs) cover a wider spectrum of industries and play an important role in both developed and developing economies. Ethiopia is no exception and MSEs 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(change) of the market, they have to face many problems like lack of finance, 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.
3.3 Forms of Business (A Short Explanation)
There are three basic legal forms of business formation with some variations available depending on the entrepreneurs’ needs.
The three basic legal forms are:-
1) Proprietorship,
2) Partnership, and
3) Corporation, with variations particularly in partnerships and corporations.
Legal Forms of Business Description
1) Proprietorship Form of business with single owner who has unlimited liability, controls all decisions, and receives all
profits.
2) Partnership Two or more individuals having unlimited liability who have pooled resources to own a business
3) Corporation Separate legal entity that is run by stockholders having limited liability
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These three basic legal forms are compared with regard to ownership, liability, start-up costs, continuity, transferability of interest, capital requirements, management control, distribution of profits, and attractiveness for raising capital.
It is very important that the entrepreneur carefully evaluate the pros and cons of the various legal forms of organizing the new venture. This decision should be made before the submission of a business plan and request for venture capital.
The comparison for the three basic legal forms against the aforementioned factors is briefly presented in the table below:-
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LLP- Limited Liability Partnership
3.4 Definition and Role/Importance of MSEs in Developing Countries 3.4.1 Definition of MSEs
Small businesses are playing an important role in the industrial economy of the world. These are particularly important in the developing economies. Small business is predominant even in developed countries such as USA, Japan etc.
There is a difference between small business owners and entrepreneurial ventures as well. An entrepreneurial venture often is a growth-oriented innovative company with product or service offerings that are new to the market. Small businesses could be entrepreneurial ventures. Most entrepreneurial ventures start as a small business.
However, some discernible characteristics still differ them. Most small businesses’ owners work with known products and services aimed at incremental growth, and their innovation is focused on sales, marketing, and market expansion. Entrepreneurial ventures incorporate a different set of strategies. These entities are aimed at rapid growth and apply innovation and creativity at every node of the business process. They work with new offerings, and they face a lot more uncertainties; hence, their strategy calls for continuous work on mitigating uncertainty and risk reduction.
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
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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.
1. Size Criteria
Even the criteria used to measure the size of businesses vary; size refers to the scale of operation. Some criteria are applicable to all industrial areas, while others are relevant only to certain types of business. For instance, some of the criteria used to measure size are: number of employees; volume, and value of sales turnover, asset size, and volume of deposits, total capital investment, volume/value of production, and a combination of the stated factors.
Even though the number of employees-is the most widely used yardstick, the best criterion in any given case depends upon the user’s purpose. To provide a clearer image of the small firms, the following general criteria for defining a small business are suggested by Small Business Administration (SBA).
∙ Financing of the business is supplied by one individual or a small group. Only in a rare case would the business have more than 15 or 20 owners.
∙ Except for its marketing function, the firm’s operations are geographically localized. ∙ Compared to the biggest firms in the industry, the business is small.
∙ The number of employees in the business is usually fewer than 100.
This size criteria based definition of MSEs varies from country to country. All over the world, number of employees or capital investment or both has been used as the basis for defining MSEs. 2. Economic/Control Criteria.
Size does not always reflect the true nature of an enterprise. In addition, qualitative characteristics may be used to differentiate small business from other business. The economic/control definition covers:
▪ Market Share,
▪ Independence, and
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▪ Personalized Management.
▪ Geographical Area of Operation.
All four of these characteristics must be satisfied if the business is to rank as a small business. I) Market Share: - The characteristic of a small firm’s share of the market is that it is not large enough to enable it to influence the prices of national quantities of goods sold to any significant extent.
II) Independence: - Independence means that the owner has control of the business himself/herself. It, therefore, rules out those small subsidiaries which though in many ways fairly autonomous, nevertheless have to refer to major decisions (e.g., on capital investment) to a higher level of authority.
III) Personalized Management: - It is the most characteristics factor of all. It implies that the owner actively participates in all aspects of the management of the business, and in all major decision-making process. There is little delegation of authority and one person is involved when anything material is involved.
IV)Technology: - Small business is generally labor intensive and only few are technology intensive.
V) Geographical Area of Operation: - The area of operation of a small firm is often local. Generally, small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales.
3.4.2 Role/Importance of MSEs in Developing Countries
Micro and Small Enterprises (MSEs) cover a wider spectrum of industries and play an important role in both developed and developing economies. Ethiopia is no exception and MSEs occupy a prominent position in the development of the Ethiopian economy. Over the years, the number of MSEs is growing from time to time and they need a strong support on Scio- economic and political ground. Some of the contributions are hereunder.
1) Large Employment Opportunities: MSEs are generally labor-intensive. For every fixed amount of investment, MSE sector provides employment for more persons as against few persons in the large scale sector. Thus in a country like Ethiopia where capital is scarce and labor is abundant, MSEs are especially important.
2) Economical Use of Capital: MSEs need relatively small amount of capital. Hence it is suitable to a country like Ethiopia where capital is deficient.
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3) Balanced Regional Development/ Removing Regional Imbalance/: Generally small enterprises are located in village and small towns. Therefore it is possible to have a balanced regional growth of industries. Ethiopia is a land of villages.
Another problem is the continuous shifting of people from rural to urban areas which causes over-crowding in cities with slum conditions due to lack of social and medical amenities which require heavy investments. This problem can be solved by inducing people to set up micro and small firms in rural areas.
Large scale industries have the tendency to concentrate in big cities. As a result, semi urban and rural areas remain deprived of the benefits of industrialization. Moreover, undue concentration of large industries in urban areas creates several problems, e.g., pollution, shortage of civic facilities, etc. Due to lack of employment opportunities in the country side, people migrate in large numbers to big cities. Micro and small-scale units can be located in rural and semi urban areas to reduce regional disparities.
4) Equitable Distribution of Wealth and Decentralization of Economic Power: It removes the drawbacks of capitalism, abnormal profiteering, concentration of wealth and economic power in the hands of few etc.
5) Unregulated Growth of Large-scale industries results in concentration of economic· power in the hands of a few; and consequently, gross inequalities in the distribution of income and wealth will occur. On the other hand; income generated in a large number of small enterprises is dispersed more widely and its benefit is derived by the large segments of the society. This is due to wide spread ownership and decentralized location of small scale enterprises. In this way, small & medium scale enterprises bring about greater equality of income distribution. It is also argued that most of the micro and small scale units are either proprietary or partnership concerns. As a result, relations between workers and employers are more harmonious in micro and small enterprises than in large enterprises. Micro and small enterprises also encourage competitive spirit and generate the impetus to self-development.
6) Dispersal over Wide Areas- MSEs has a tendency to disperse over wider areas and they play a key role in the industrialization of a developing country.
7) Higher Standard of Living: MSEs bring higher national income, higher purchasing power of people in rural and semi-urban areas.
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8) Mobilization of Locals Resources/Symbols of National Identity: The spreading of industries even in small towns and villages would encourage the habit of thrift and investment among the people of rural areas.
Small scale businesses are locally owned and controlled, and can strengthen family and other social systems and cultural traditions. They are perceived as valuable in their own right as well as symbols of national identity.
9) Innovative and Productive /Simple Technology: New but simple techniques of production can be adopted more easily by MSEs without much investment. Small businesses are highly innovative though they do not maintain their own research and development.
10) Less Dependence on Foreign Capital/ Export Promotion: MSEs use relatively low proportion of imported equipment and materials. The machinery needed for these industries can be manufactured within the country. Micro and small scale enterprises are opening up fresh avenues in the export market in our world. Realizing the importance of the small and medium- scale sectors in the economy; the Ethiopian government has adopted several measures to speed up the growth of micro and small size enterprises.
11) Promotion of Self Employment: MSEs foster individual skill and initiative and promote self-employment particularly among the educated and professional class.
12) Protection of Environment: MSEs help to protect the environment by reducing the problem of pollution.
13) Shorter Gestation Period: In these enterprises the time-lag between the execution of the investment project and the start of flow of consumable goods is relatively short. 14) Facilitate Development of Large Scale Enterprises: MSEs support the development of large enterprises by meeting their requirements of inputs of raw materials, intermediate goods, spare parts etc. and by utilizing their output for further production. 15)Individual Tastes, Fashions, and Personalized Services: Small businesses have the flexibility to adapt quickly to changes in the business or technological environment. 16) More Employment Creation Capacity: Economic planners have realized the necessity of encouraging micro and small enterprises because they require less capital but generate more employment. The micro and small scale sectors have the capacity to generate a much higher degree of employment than the large-scale sector. This is because micro and small
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scale enterprises are labor intensive and thus create more employment with a given level of capital. More production needs more capital in such a situation. The micro and small firms will stand in good position because they are less capital intensive and more labor intensive.
3.5 Classification of Micro and Small Enterprises
1. In Case of Manufacturing Enterprise (Manufacturing, Construction and Mining): a) A Micro Enterprise is one in which the investment in plant and machinery (total asset) does not exceed birr100, 000 (one hundred thousand); and operates with 5 people including the owner.
b) Small Enterprises is one in which the investment in plant and machinery (a paid up capital of total asset) of birr100, 000 (one hundred thousand) and not more than Birr 1.5 million; and operates with 6-30 persons.
2. In Case of Service Enterprise (Retailing, Transport, Hotel and Tourism, ICT and Maintenance):
a) A micro enterprise is one with the values of total asset is not exceeding Birr 50,000(fifty thousands); and operates with 5 persons including the owner of the enterprise. b) Small Enterprises is one in which the total asset value or a paid up capital of birr100, 000 (one hundred thousand) and not more than Birr 1.5 million; and operates with 6-30 persons.
More clearly, the improved definition of MSE is presented in the table below.73
When ambiguity is encountered between manpower and total assets as explained above, total asset is taken as primary yardstick.
Priority Sectors and Sub-Sectors for MSEs Engagement In Ethiopia
1. Manufacturing Sector- This is the one which comprises textile and garment; leather and leather products; food processing and beverage; metal works and engineering wood works including furniture and ornaments service; and agro-processing.
2. Construction Sectors- This is the one which comprises sub-contracting; building materials; traditional mining works; cobble stone; infrastructure sub-contract; and prestigious goods 3. Trade Sectors- This is the one which comprises whole sale of domestic products; retail sale of domestic products and raw materials supply.
4. Service Sectors- This is the one which comprises small and rural transport service; café and restaurants; store service; tourism service; canning/packing service; management service; municipality service; project engineering service; product design & development service; maintenance service; beauty salon; and electronics software development; decoration and internet café.
5. Agriculture Sector (Urban Agriculture) - This is the one which comprises modern livestock raring; bee production; poultry; modern forest development; vegetables and fruits; modern irrigation; and animal food processing.
∙ Levels of MSEs in Ethiopia
Start-up:- Start up level refers to enterprises that incorporate people who are interested to establish MSE and those who completed the required profession/skill from various institutions and innovated by legally either in the form of association or private. It is a level where an enterprise begins production and service under legal framework or legal entity.
Growth Level: - An enterprise is said to be at growth level when an enterprise become competent in price, quality and supply and profitable using the support provided. At this level, the enterprise man power and total asset is larger than at startup level; and use book keeping system.
Maturity Level: - Maturity level means when an enterprise able to be profitable and invest further by fulfilling the definition given to the sector and using the support provided.
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Growth- Medium Level:- An enterprise is said to be transformed from small to medium level of growth is when it enabled to be competent in price, quality and supply using the support given to the level.
3.6 Setting up Small Scale Business
Steps for Setting up the Entrepreneurial Venture
Once an individual decides to take up entrepreneurship as a career path, to be a job provider instead of a job seeker, s/he has to establish an enterprise. However, setting up of a small new enterprise is a very challenging as well as a rewarding task. Several problems are involved in this task. It is extremely important to take utmost care in identifying the product or service to be launched by the entrepreneur; otherwise it might prove to be a costly mistake. After tentatively identifying four to five ideas, s/he should go in for detailed assessment and feasibility study. This will help the entrepreneur to crystallize one idea in an objective and systematic manner, which will greatly enhance his/ her chances of success.
The entrepreneurial process of launching a new venture can be divided into three key stages of: Discovery; Evaluation; and Implementation. These can be further sub-divided into seven steps as shown below:
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