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UNIVERSITY OF DAR ES SALAAM

COMPUTING CENTRE

Diploma in Computing and Information Technology

TECHNO- ENTREPRENEURSHIP AND


INNOVATION
DRAFT MANUAL_V1_OCTBER 18TH 2011

2008 University Computing Centre Ltd


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TABLE OF CONTENTS

TABLE OF CONTENTS...............................................................................................................3
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defined.
CHAPTER ONE: INTRODUCTION...........................................................................................4
1.3 1 Historical background.......................................................................................................5
1.3.2 Definition of Entrepreneur today......................................................................................7
1.3.3 Intrapreneurship................................................................................................................7
1.3.4 Is an entrepreneur born or made?.....................................................................................7
1.3.5 General Entreprising Tendencies/Traits [GETs]...............................................................8
1.3.6 How can GETs be developed?........................................................................................9
1.3.7 Types of skills required in Entrepreneruship....................................................................9
1.3.8: Comparison of Traditional Managers and Entrepreneurs..............................................10
1.3.9 Revision Questions for One................................................................................................10
4.5.2 Business consolidation process...............................................................................28
4.6.8 THE ORGANISATION PLAN......................................................................................35
4.6.9 OPERATIONAL (PRODUCTION) PLAN....................................................................36
- Describe your monthly labour requirements.............................................................................37
4.10 FINANCIAL PLAN.........................................................................................................38
5.2: Sources of Business Ideas.....................................................................................................vi
vi. Buy a Franchise or an Existing Business..............................................................................viii
5.3 Tips for Starting a Business that will succeed........................................................................ix
5.4. Assessing the Business Ideas.............................................................................................xi

CHAPTER ONE: INTRODUCTION


1.1: What is techno-entrepreneurship?
-

Techno-entrepreneurship can be defined as linking technology with entrepreneurship issues


particularly in the market.

The goal of Technology Entrepreneurship is to prepare students for the kinds of technicallylinked business challenges that are inherent to situations where the answer (a technical
innovation) is being developed in parallel with the problem (a market need).

1.2 What is innovation?


-

There is little consensus on exactly how to define innovation. Whilst it is widely understood
and accepted that innovation is a major source of an organizations competitive advantage.
Actual definitions of innovation vary often so as to better meet the requirements or
characteristics of a particular study.

What is common in most definitions of innovation is a focus on novelty and newness and
that it creates profit or adds economic value to the organization responsible for it.

In the 1930s Joseph Schumpter put forward five types of innovation definitions:
i.

Introduction of a new product or a qualitative change in an existing product

ii.

Process innovation new to an industry

iii.

Opening of a new market

iv.

Development of new sources of supply for raw material

v.

Other inputs and changes in the industrial organization

Generally innovation definitions are derived from one or a combination of the following
parameters:
a. The generation of a new idea: This is where new ideas are formed from old
ideas, or new relationships / perspectives are formed between entities or
subjects
b. The invention of something new: A new product or service
c. The diffusion of new ideas: The transfer of new ideas to new geographic
locations

d. Improving something: This can be improving a product or service for example


to make it commercially viable as [Thomas Edison] did with the electric light
bulb or it can be improving a system or process
e. Doing something different: Getting to the end result of a task or problem by
doing something radically different to what would be expected
f. Adopting something new to the social setting of which it is applied: This is
where something that has proven to be successful or useful elsewhere is used
to similar advantage in a new environment.
g. Market based: An innovation that is developed to meet the needs of a market.
h. New perspective: Seeing something from a new perspective
i. Incremental improvements: Making incremental improvements to a product or
service or implementing continuous improvement (kaizen) as can happen from
applying Lean techniques

1.3: Entrepreneurship concept


1.3 1 Historical background
During the past few decades, a considerable amount of research has been carried out on
entrepreneurship. One reason for a heightened interest in the subject has been the appreciation
of the role of entrepreneurship in fostering economic growth. Much of the research has
attempted to establish patterns for predicting incidence of entrepreneurship and/or identifying
success factors. Evidence from studies on entrepreneurship shows that entrepreneurs are not
randomly drawn from the population; they tend to share certain backgrounds and orientations.
The term, Entrepreneur is derived from French word which means Entreprendre, meaning to
undertake. An Entrepreneur is the one who undertake to organize, manage and assume the risks
of business. The term ' was used for the first time in economic theory by Richard Cantillon, a
Frenchman, in the late 18th century. He saw the entrepreneur as somebody who innovates,
invests and takes risks.
However, it is John Baptiste Say who, in the early 19th century, first made a clear distinction
between the capitalist and the entrepreneur. The usage of the term became increasingly regular
in the second half of the 19th century. This was because while many capitalists had liquidity
surpluses which they tried to invest, entrepreneurs provided interesting opportunities.
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In the early 20th century, Joseph Schumpeter presented what has been credited as the most
significant meaning of the term 'entrepreneur'. He saw the essence of entrepreneurship as
innovative behavior. According to Schumpeter, the essence of entrepreneurship lies in the
perception and exploitation of new opportunities...it always has to do with bringing about a
different use of national resources in that they withdraw from their traditional employ and
subject them to new combinations (Schumpeter, 1934).

1.3.2 Definition of Entrepreneur today


An Entrepreneur is defined broadly as a person who thinks, reasons, and acts in a way
that result in the creation, enhancement, realization, and renewal of value for an
individual, group, organization and the society at large.
Entrepreneurs always add values through efforts, Money or skills and he realizes the
rewards from these efforts.
An entrepreneur is different from a business man who buys and sells good and services
for profit. Not all business men are necessarily entrepreneurs.
Entrepreneurs are found in all professions-education, medicine, research, law,
architecture, engineering, social work, distribution and the government.
Entrepreneurship is a dynamic process of creating incremental wealth. The wealth is
created by individuals who assume the major risks in terms of equity, time and career
commitment or provide value for some products or services.
1.3.3 Intrapreneurship
Entrapreneurship is practicing entrepreneurship within an existing/established organization.
E.g.

Religious

institution,

Corporate

Organization,

Government

agencies,

NGO,

Home/family/relationship etc.
Intrapreneurs are highly valued in todays world, because it calls for constant improvement,
aggressiveness, vision, ability to assess risks and quickly take action, etc
Existing businesses have the financial resources, business skills and the marketing and
distribution system to commercialize innovation successfully.
1.3.4 Is an entrepreneur born or made?
Entrepreneurship researchers point to two major contentions. There are those who argue that
entrepreneurship is a function of individual personality traits (born with). That there exists a
number of recognizable behaviors, and attributes that are commonly associated with the
enterprising person, and which may further distinguish between entrepreneurs and nonentrepreneurs or between successful entrepreneurs and unsuccessful enterpreneurs. These are
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innovativeness, creativeness, proactive ness, need for achievement, risk taking independence.
Etc.
On the other hand, those in the second strand, argue that entrepreneurship is an
environmentally determined phenomenon (made). That the display of enterprising behaviors
and attitudes will be stimulated or otherwise, by different environments.
There is now an overwhelming literature, (including proponents of the trait approach) that
point to the common conclusion, and to which we also subscribe to, that entrepreneurship is not
a biological trait. More specifically, entrepreneurs can be developed and that even the much
advocated entrepreneurial traits and behaviors such as need for achievement and risk-taking can
be learnt. That the mix and degree of enterprising attributes will vary between persons, but
more importantly the enterprising behavior can be developed by exposure to stimuli and
therefore can be learned.
1.3.5 General Entreprising Tendencies/Traits [GETs]
Generally, an entrepreneur possess the following Traits/behaviors
i.

Creativity behavior

ii.

Initiative taking behavior

iii.

Innovative behavior

iv.

Strong sense of independence and autonomous behaviour

v.

Strong sense of ownership behaviour

vi.

Aggressive behaviour

vii.

Determined/Perseverance behavior

viii.

Hard working behavior

ix.

Pro-active behavior

x.

Strong action orientation behaviour

xi.

Ability to consolidate resources

xii.

Belief in self/ believe can make things happen

xiii.

Belief that rewards come with own effort and hard work brings its rewards

xiv.

Opportunistic behaviour

xv.

Networking behavior

xvi.

Behaviour to take reasonable risks

xvii.

Achievement orientation/urge to succeed/conquer

1.3.6 How can GETs be developed?


GETs can be developed by:
(i)

Always ask the question is there a better way?

(ii)

Challenge custom, routine and tradition

(iii)

See mistakes and failures as mere pit stops on the way to success

(iv)

Identify yourself with successful people.

(v)

Expose yourself to difficult and challenging situations

(vi)

Share information with others

(vii)

Add value to everything you do

(viii)

Be an achiever finish what you start

(ix)

Set long-term goals

(x)

Try to make things happen for yourself

(xi)

Solve your own problems before seeking help

(xii)

Be proud/feel good about yourself and your work

(xiii)

Observe others and copy but dont be a copycat

(xiv)

Experiment

(xv)

Realize that there may be more than one answer

1.3.7 Types of skills required in Entrepreneruship


The skills required by entrepreneurs can be classified into three main areas namely Technical
skills, Business management skills and Personal entrepreneurial skills
Technical skills
i. Writing

Business management skills Personal entrepreneurial skills


i. Planning and goal setting i. Inner control

ii. Oral communication

ii. Decision making

ii.

Risk taker

iii. Monitoring environment

iii.

iii.

Innovative

iv. Technical business mgmnt

iv.Marketing

iv.

Change oriented

v. Technology

v. Finance

v. Persistent

vi. Interpersonal

vi.

Accounting

vi.

Visionary leader

vii. Listening

vii.

Management

vii.

Ability to manage

viii.

viii.

Control

ix. Network building

ix.

Negotiation

x. Management style

x. Venture launch

xi. Coaching

xi.

Ability to organize

Human relations

change

Management growth

xii. Being a team player

1.3.8: Comparison of Traditional Managers and Entrepreneurs


BASIS
TRADITIONAL MANAGERS
1. Primary motives Promotion of traditional rewards e.g.

ENTREPRENEURS
Independence, opportunity to

2. Activity

Office, staff and power


Delegates and supervises more than

create and money.


Direct involvement

3. Risk
4. Status

direct involvement
Careful
Concerned about status symbols

Moderate risk taker


Not concerned about status

5. Decision

Usually agrees with those in upper

symbols
Follow dreams with

6. Failure and

management positions
Tries to avoid mistakes and surprises

decisions
Deals with mistakes and

mistakes

failures

1.3.9 Revision Questions for One


1. Define the term, entrepreneur
2. Differentiate the term, entrapreneuship from entrepreneuship
3. What do you understand by the term, copreneurs?
4. Mention any seven requirements for a copreneur to be successful.
5. Differentiate a business man from an entrepreneur.
6. Mention any eight General Entrepreneurship Tendencies (GETs) of an entrepreneur.
7. Outline any seven ways of developing/acquiring General Entrepreneurship Tendencies
8. Mention the three classes of skills required in entrepreneurship
9. Mention Requirements for a successful copreneurship
10. Compare a traditional manager and an entrepreneur.
11. What will you see to know that a student is enterprising?
12. Write T if the statement is TRUE or F if the statement is FALSE
i. An entrepreneur is a person who takes very serious business risks to maximize profit [ ]
ii. Entrepreneurship is a biological trait [ ]
iii. An entrepreneur is a small business trader [ ]
iv. Expose yourself to difficult situations can develop your General Enterprising
Tendencies[ ]
v. An entrepreneur is always more concerned about status symbols as compared to a
traditional manager [ ]
vi. Poor entrepreneurs see mistakes and failures as mere pit stops on the way to success [ ]

10

13. Suppose you are looking for a Manager to head your newly established business venture.
Describe at least 5 key criteria you would use to differentiate an entrepreneurial manager
you would like to employ, from a traditional manager.
14. a) List three categories/groups of skills required for an entrepreneur.
b) For any one category of skills of your choice, write short notes on any three specific skills.
15. With an example in each case, describe the following General Entrepreneurship Traits
(GETs)
i.

Proactive behaviour

ii.

Risk taking behaviour

iii.

Networking behaviour

iv.

Opportunistic behaviour

16. People are born with different levels of entrepreneurship traits. Describe at leas 5 ways by
which one can develop his/her General Entrepreneurship Traits.
17. People are born with different levels of entrepreneurship traits. With examples in each case,
describe how the following ways can assist you in developing your entrepreneurship traits
ii.

See mistakes and failures as mere pit stops on the way to success

iii.

Identify yourself with successful people.

iv.

Expose yourself to difficult and challenging situations

v.

Be an achiever finish what you start

vi.

Observe others and copy but dont be a copycat

vii.

Experiment

18. Choose the appropriate statement from section II and match it to the correct/ corresponding
items in section I (CHAPTER 1 AND CHAPTER 2) (10 marks)
SECTION I
SECTION II
i: A person with external locus of control [
]
a. Psychodynamic model
b. Writing skills
ii. Is a technical skill needed by an entrepreneur [ ]
c. An Entrepreneurial Manager
d. Creative behavior
iii. Mwajuma, a bank manager, scrutinizes everything e. Is unlikely to become a successful
proposed by her Executive Director before accepting [
entrepreneur
]
f. A carefree Manager
iv. A person perceives a strong level of incongruency
g. Decision making skills
between his personal attributes and the role he holds in h. Is likely to become a successful
society and hence motivated to change. [ ]
entrepreneur
i. Observe and copy.
v. A trait possessed by any good entrepreneur [ ]
j. Social-marginality theory
k. Traditional Manager
l. Aggregative behavior
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CHAPTER TWO
INFLUENCES ON ENTREPRENEURIAL BEHAVIOUR
Entrepreneurial behavior is considered a function of the individual motivations, ability and
environmental influences. A number of theories have been proposed to explain these
phenomenons. These are:
i.

Psychological explanations of entrepreneurial behavior

ii.

Sociological explanations of entrepreneurial behavior

iii.

Socio-economic background factors (demographic factors)

2.1 Psychological explanations of entrepreneurial behavior


Some psychologists have attempted to identify individual characteristics capable of successfully
predicting entrepreneur behavior. These efforts have culminated into models which are posited
as capable of accounting for differences between entrepreneurs and other members of society in
terms of a single trait or a constellation of traits. These are sometimes referred to as 'born'
models, in the sense that they tend to view entrepreneur behavior as a disposition of in-born
qualities.
2.1.1 Need for achievement (NArch)
McClelland (1961), the pioneer of trait models, suggested that individuals with high need for
achievement (nAch) were more likely to choose entrepreneurial careers than others. He
defined nAch as "the desire to do well for the sake of an inner feeling of personal
accomplishment". A person endowed with such a need will spend time considering how to do a
job better or how to accomplish something important to them.
High achievers are said to like situations where they can take personal responsibility for
finding solutions to problems.

They like rapid feedback on their performance so that they can judge whether they are
improving or not.

They avoid what they perceive as very easy or very difficult tasks as they dislike succeeding
by chance.

12

They prefer striving to achieve targets which present both a challenge and are not beyond
their capabilities. This ensures worthwhile effort and results in feelings of accomplishment
and satisfaction.
2.1.2 Locus of control
-

Rotter (1966) proposed a model to measure 'locus of control' - the extent to which people
believe that they control their own destinies. People with an internal locus of control are
those individuals who believe themselves to be in control of their destinies.

In contrast, those with an external locus of control sense that, fate, in the form of events
outside their control or powerful people, has a dominating influence over their lives.

Individuals with a strong internal locus of control are, according to this model, more likely
to engage in entrepreneurship. The reasoning behind this model is that people who believe
that they control their destinies would be more willing to venture into the uncertainties and
challenges involved in running a business compared to those that believe that most of what
happens to them is outside their control.

2.1.3 Psychodynamic model


-

The Psychodynamic model was proposed by Kets de Vries (1977). He posed


entrepreneurial behavior as an outcome of a family background often filled with images
of endured hardships.

Such experiences may leave the adult troubled by a burdensome psychological


inheritance centered around problems of self-esteem, insecurity and lack of confidence
and with repressed aggressive wishes towards persons in control.

The entrepreneur thus becomes a deviant, drifting from job to job unable to 'fit in' and
develops a non-conformist stand.

The refusal to accept authority structure and social norms results into an inability to
work smoothly with others which in turn leads to the setting up of an independent
economic unit as an act of " innovative rebelliousness".

2.1.4
-

Risk taking propensity


According to this theory, the level of risk preference low, moderate, high can influence
an individual's decision to start a business.
13

Risk taking propensity is defined as a generalized tendency to choose more risky


alternatives (Bird, 1989).

Reuss (1970) suggested that "venture spirit and willingness to take risks" is the major
trait of entrepreneurship.

Bird (1989) suggests that characteristics that dispose people to orientation towards risk
taking include optimism; tolerance to ambiguity; high need to achieve; fearlessness;
impulsiveness; a decision cognitive style; beliefs about ones control; a personal history
in which risk was rewarded; and having family conditions that support risk taking, such
as a working spouse or a social supportive system.

2.1.5
-

Innovation
Many social scientists have singled out innovation as the true mark of an entrepreneur
(Schumpeter, 1934; Stevenson and Sahlman, 1989; Stanworth et al, 1989). This is in
line with the view of the entrepreneur as an agent of change, bringing about new
resource combinations.

Stanworth and Gray, (1991) draw a distinction among the terms innovation, creativity
and change.
i. To create is to bring in something into existence...so a craftsman may be very
creative.
ii. To innovate is to bring novelties (derived from Latin word novus for "new), so
it is likely to be concerned with broader processes of change within an
organization.
iii.

While all innovations are concerned with change, not all changes are
innovations (Stanworth and Gray, 1989). Hence, buying new equipment
would be a change, but not an innovation referring the 'organized tour' of
business.

2.1.6 Psychological models: conclusion


The principle weaknesses of the trait approach have been summarised by a number of experts.
Chell (1985), a leading expert in the area of entrepreneurship, says that there would appear to
be a great deal which is equivocal and inconclusive about the trait approach to
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entrepreneurship. Later, she asserted that "there appears to be very low correlation between the
assessment of the trait and actual behaviour" (Chell, 1986).
Several observers have questioned the rationale for predicting entrepreneur behavior

using the specific traits discussed above. They contend that some of the more obvious and
possibly decisive attributes have been left out. Lynn (1969) suggested that one of the underlying
personality traits of the entrepreneur could be anxiety or neuroticism. Ray (1993) has added
physical appearance and likeability. He goes on to argue that other theories may be better
placed to explain entrepreneurial behavior than personal traits. Among these he mentions sports
psychology and activation theory of tourism. Of the latter, he says that entrepreneurs may be
high activation people, who prefer unstructured tours, while managers, small business owners
and franchisees are the low-activation people, preferring the 'organized tour' of business.
2.2 Sociological explanations of entrepreneurial behavior
While psychological models attempt to explain behavior in terms of qualities within an
individual, sociological theories suggest that entrepreneur behavior is a function of the
individual's interaction with society. That is, entrepreneurs are 'made' by society. This section
explores four main sociological models.
2.2.1 The social marginality model
-

This model is based on two premises. The first premise is that the meaning of any
economic action (including starting a business) is the satisfaction of wants. It follows
then that there would be no economic action if there were no needs to be satisfied.

The other premise is that it is society that shapes the desires we observe. Our choices are
therefore fenced by social habits and conventions (Schumpeter, 1934). Stanworth and
Curran (1976) used the above reasoning to explain the process of entry into
entrepreneurship.

Stanworth and Curran (1976) suggest that individuals who perceive a strong level of
incongruency between their personal attributes and the role they hold in society (eg.
teachers, policemen, nurses, lawyers, etc) will be motivated to change or reconstruct
their social reality. This can take many forms. Some people may reconstruct their reality
by joining political parties, religious organisations, charities, etc. Others may change
careers. Self employment offers another possibility.
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2.2.2

Inter-generational

inheritance

of

enterprise

culture

via

role

modeling

- This theory purports that entrepreneur practice is largely inherited. Accordingly,


offsprings of entrepreneurial families are more likely to be involved in businesses than
others.
-

Several explanations can be offered to support this theory. A person who grows up
around a family that runs a business is likely to benefit from the skills, accumulated
experiences and connections of the existing firm.

She or he is also likely to have better access to advice, credit, established markets,
sources of inputs, etc. The fact that these will make it easier to start a business may be a
big encouragement to those associated with businessmen.

Birley (1984) has suggested that a strong grounding in the business and ownership ethic
at an early age is a useful and powerful driving force for children as they begin to
choose future careers.

2.2.3 Small firms as role models


There has been a notion that those who form small businesses are likely to have previously
worked in small firms and to have used them as a role model (Chell, 1985). For one thing, it
may become easier for the potential entrepreneur to envision a role comparable to that of his
boss.
Also, the owner manager may sometimes act as a mentor, playing the role of convincing,
assuring, and sometimes instructing subordinates in the process of starting their own ventures
(Shapero and Sokol, 1982). In some cases, the existing business may assure some support to the
new one, say, as a market or a source of materials or credit.
2.2.3

Sociological models: conclusion

Although sociological models seem to be more closely related to entrepreneur behavior than are
psychological characteristics, they have their own share of criticisms. The most notable
weakness of these models is that each tends to explain a certain group of entrepreneurs, leaving
out the rest. Another weakness is that they do not tell us why people exposed to the same social
situation will choose careers differently, with some selecting self employment.

16

Related to this is the possibility that it helps to see someone lesser than oneself establish the
credibility for an act; an employee may be convinced that if the owner manager can do it, he
should be able to do it equally or even better.
2.3. Socio-economic background factors
The entrepreneurship research literature mentions a number of socio-economic background
factors that are considered to influence propensity to start a business. These factors include age,
ethnicity, marital status, education and experience. This section reviews these factors.
2.3. Socio-economic background factors (demographic factors)
The entrepreneurship research literature mentions a number of socio-economic background
factors that are considered to influence propensity to start a business. These factors include age,
ethnicity, marital status, education and experience. This section reviews these factors.
2.3.1 Age
Given the usual demands of the process of starting a new business, one would expect the
middle aged person to be better placed than young or old one to successfully enter into
entrepreneurship. Young people may have the energy required to launch new ventures, but lack
the financial means to do so.
Older people have money, but lack the energy to start independent ventures and willingness to
change their lifestyles. Middle aged people have some money, and energy and are more willing
to change their lifestyles. However, many of them are likely to be 'forced' into some form of self
employment after retirement.
2.3.2 Ethnicity
Ethnic origin of a person is said to influence the choice between paid employment and self
semployment. Shapero (1982) argues that ethnic groups that have produced high numbers of
entrepreneurs are also displaced groups. This argument is based on the social marginality thesis,
which contends that marginal groups have a higher propensity of becoming self employed.
2.3.3 Marital status
Studies in the UK have shown that the self-employment rate is much lower for single persons
than for those in other categories. Marital status is closely related to age and stages of life;
married people are likely to be middle or old aged, while single people will mostly be younger.
17

Even when age is controlled for, the rate of self-employment remains lower for singles
(Burrows, 1991). This appears to be in line with the social development model, which
recognized the influence of social support system in one's propensity to become an
entrepreneur.
2.3.4 Education
Two conflicting hypotheses have been proposed regarding the role of education in the
entrepreneurial process. The first is that formal education can operate as an impediment to
entrepreneurship because, rather than develop creative free thinkers, it fosters conformity and
low tolerance for ambiguity, leading to thought and behavior processes that refuse to admit
tolerance, and social values that preclude "getting one's hands dirty" (Ronstadt, 1984).
The alternative argument is that education develops competencies required in an entrepreneurial
venture as it fosters creativity, curiosity, open mindedness and good interpersonal skills. As
well, technical education is important to careers and ventures using or creating advanced
technology (Bird, 1989).
2.3.5 Socio-economic background factors: conclusion
Social economic background factors are fairly good in explaining the entry into
entrepreneurship. They however have the weakness of being closely related, to such an extent
that it may sometimes be difficult to know which factors are most important in determining
behavior. The factors are the easiest to research as they are merely classification variable, which
are found even in secondary sources of information. Like all other individual characteristics,
they cannot fully explain differences in behavior between entrepreneurs and those in other
careers or between successful and unsuccessful entrepreneurs.
2.4 Environmental factors

So far, our discussion has focused around individual characteristics that impact on the

propensity to become self employed. However, persons with similar characteristics may engage
in different occupations, depending on the type of environment they face. This is why the there
are significant spatial variations in the rate of formation of small businesses in various parts of
the world as well as within different countries

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2.4.1: Barriers to entry


-

The ease of entry as determined by the resources required to successfully launch a


venture depends on the types of industries in the localities, with an industrial climate
biased towards small, independent or autonomous units of employment being more
favorable.

Probability of establishing a small business in localities dominated by industries with


high barriers to entry, such as steel, ship building, chemicals and aircraft manufacturing
is expected to be lower, compared to those with less domination by heavy industries.

2.4.2: Plant size structure


The plant size structure is likely to influence the opportunities for passing over skills,
experiences and role modelling in a locality. Generally, workers in smaller firms have closer
contact with customers as well as the owner manager than ones in larger firms. As noted before,
workers in such an environment are more likely to be self-employed than their counterparts in
larger firms.
2.4.3 Occupational structure
As indicated in the discussion of social class influence, the majority of those who form small
businesses come from small employer, employee, manager and skilled worker backgrounds.
Regions with more people involved in these occupations are therefore more likely to form a
large number of businesses than those with different types of jobs.
-

Again, Storey (1994) notes that the evidence from empirical studies in UK on this
relationship is ambiguous. A positive relationship was found in studies in West Anglia,
but such association was not found either in East Midland or North East of England.

2.4.4 The Economy


Economic factors that are considered responsible for spatial variations in small firm formation
include availability of information, access to finance, availability of premises, ownership
structure, regional specialization and demand.

19

2.4.5 Access to information


According to Sweeny (1987), information tends to be local, and most regular contacts are
normally within 30 minutes of a person's travelling time. The implication of this is that the
amount and quality of information is mainly dependent on the wealth of stock of knowledge in
the locality. Knowledge comes in the form of conferences, exhibitions, contact with potential
customers, suppliers, small business owner managers and informal reading.
Localities rich in information are typically administrative centers, and regions with dynamic or
progressive industries. Regions dominated by mature technology, externally owned firms,
declining level of best practice as well as those relying predominantly on extractive industries
tend to have poor access to information and hence lower rates of small firm formation.
2.4.6: Demand
Most small businesses serve restricted geographical markets. As a result, there will be more
opportunities in more affluent or populous areas than others. A few firms may be sufficient to
exploit all opportunities in a rural locality. Therefore, the rate of small firm formation in rural
areas will be lower compared to urban ones.
2.4.7 Ownership structure
Areas dominated with subsidiaries of large companies are likely to have fewer opportunities for
new, small businesses than ones with single unit ones. This is because while small single unit
firms will source their products locally, subsidiaries have less freedom in choosing the source of
inputs.
Revision questions
1. List four major groups of theories/influences on entrepreneurship behavior.
2. With practical examples in each case, write short notes on the following psychological
influences on entrepreneurship behavior

3.

i)

Locus of control

ii)

Psychodynamic model

iii)

Risk taking propensity

iv)

Inter-generational inheritance theory of entrepreneurship traits

Under social-marginality theory of influences on Entrepreneurship behavior, Stanworth


and Curran (1976) suggest that individuals who perceive a strong level of
20

incongruency between their personal attributes and the role they hold in society will be
motivated to change or reconstruct their social reality.
i)

Elaborate the above suggestion

ii)

Do you agree with the above suggestion? Elaborate your answer.

21

CHAPTER THREE: THE ROLE OF NTREPRENEURIAL NETWORKS ON BUSINESS


DEVELOPMENT
Introduction

The role of networks in fostering business performance and economic growth has been
widely acknowledged by entrepreneurship scholars in the recent years. Networks are deemed to
have the potential to address challenges related to Smallness, Newness and Isolation of the
enterprises.

to manage a business well is to manage its future; to manage its future is to manage
information; and to manage information is to network (Barker, 2000).
How do we define networks? There are many definitions, Including the views that:

i.

Networks are organisational relationships: In its simplest form, the term network is
used to refer to two or more organisations involved in long-term relationships
(Thorelli, 1986).

ii.

Networks are social and economic relationships: a framework of individuals and


organisations, which form the stage upon which entrepreneurial performance is
played (Wickham, 1998).

iii.

Networks are ties: networking is an activity, which is differentiated from normal


business behaviour in terms of the nature of relationships strong ties, weak ties,
and one-off events (Birley and Muzyka, 1997).

iv.

Networks as linkages and means for flexible specialisation: institutional


arrangements, which facilitate flexible specialisation among firms operating together
in a given geographical milieu (Piore & Sabel, 1984).

v.

In general terms, therefore: Accordingly, networking activities are those social and
economic processes through which individuals and organisations develop long-term
relationships with particular sets of stakeholders for the purpose of accessing
support and facilitating exchange.

3.2 WHY BE CONCERNED ABOUT ENTREPRENEURIAL NETWORKS?


(THE RATIONALE FOR NETWORKING)
Relationships are vital in all spheres of life, here are a few facts about the importance of
social relationships:

i.
ii.

People with strong social support networks enjoy better physical and mental health
than those without such networks. Not only are people with good support networks
less likely to become ill, but when they do, they recover faster.
People with large personal networks tend to live longer than those with small
networks.

22

iii.

Personal happiness and satisfaction depend in large part on the quality of


relationships with other people.

iv.

Building good working relationships is the main cause of success for managers who
take charge of a new situation

v.

Close relationships with customers save money. It costs three to five times as much
to get a new customer as it does to keep an existing one!

vi.

Strong partnerships with suppliers yield lower costs and higher quality products and
services

vii.

Business effectiveness, in general, depends more on human-related activities, such


as building relationships, interpersonal skills, and communication, than on technical
skills and abilities

viii.

Managers with large personal networks get higher-paying positions than managers
with small networks

ix.

Managers with larger, well-diversified networks get promoted faster and at younger
ages compared with their peers with underdeveloped networks

x.

Professionals who find jobs through personal contacts (instead of classified


advertisements or other impersonal means) find better, more satisfying jobs that they
stay with longer

xi.

Relationships are fundamental human need

xii.

Repeated interactions encourage cooperation, trust, & ties

xiii.

Networks make the world small

xiv.

It supports accumulation, and deployment of physical and soft resources, which


entrepreneurs can not do without (Aldrich and Zimmer, 1986)

3.3 IMPLICATIONS ON TANZANIAN (SMALL AND MEDIUM ENTREPRISES) SMEs


ACTORS AND ENTREPRENEURS
Networks are instrumental towards overcoming SMEs challenges of Smallness, Newness and
Isolation:

They leverage resources

They broker information

They enhance capacities and capabilities

23

3.4 Building intelligence networks

Personal

Group

Inside

Superiors
Peers
Subordinates
Team members

Outside
Customers
Suppliers
Investors
Union leaders

Directors

Government officials

Work units
Teams
Departments
Divisions
Subsidiaries
Offices

Organizations of:
Clients
Suppliers
Investors
Communities
Etc

3.5 PILLARS OF EFFECTIVE NETWORKING


3.5.1 Mutual understanding:

Strive to have a clear understanding of what you intend to achieve from your
networking initiatives.

Strive to understand the expectations of the other parties you interact with:
- internal
- external
3.5.2 Mutual benefits
-

Both parties win in an authentic relationship.


Each part takes the others welfare into account
There is mutual exchange of:

Task-related benefits

Relationship-related benefits

Inspiration-related benefits

3.5.3 Relationship contract

Think of a relationship as an implicit contract, an unwritten agreement, wherein


reciprocity prevails
-

A psychological/interpersonal contract

- a tacit, but agreed upon, set of mutual expectations concerning performance, roles, trust,
and influence.
24

3.4 Revision questions


1. Define entrepreneurship networks.
2.

Name three pillars of networks.

3. For any business of your choice, discuss how can good networks promote the business.
4. The limited growth of business in Tanzania is at times associated with the lack of
supportive networks. Discuss.
5. Describe any four benefits of effective networking for a Business Manager

CHAPTER FOUR: BUSSINESS PLANNING


4.1: Basic facts about business planning
The purpose of a business enterprise is to make profit, which depends on the success with
which an operator pursues opportunities to do business and manages the business process. The
purpose of a business plan is to focus an operators attention and effort on the essential factors
that determine profit.
Every case, the combination of an operator, an enterprise, and the immediate context in which
they exist is unique and no one has discovered a universal formula for success. Teachers,
trainers and consultants can provide guidance but ultimately the operator must take full
responsibility for learning how to operate successfully and make a profit. The same principle
applies to business planning; an operator must take full responsibility for implementing a plan
successfully. This chapter provides guidelines to help structure first the concept of a business
project and then the planning of it. The plan you produce will be different from others because
you, your project and the circumstances are different, so the chapter should not be regarded as
providing specifications, only guidance.
Finally, planning is one of the important functions of managing an enterprise, for which, to reemphasise the point, you as owner and operator are responsible. Like running the business
generally, this is something you have to learn by doing!
4.2 Basic business processes
A business enterprise is a transformation process during which value is added to inputs and the
output distributed and exchanged for a money value

Input

Transformation
(Adding value)

Distribution
of output

Exchange
Transaction

25

Resources are introduced into the business at the input stage, the requirement for them
depending on the type and quantity of goods or services to be produced and the methods of
producing them. Resources needed by established enterprises include land or premises,
investment capital and working capital, technology and equipment, materials or goods for
resale, and labour. The transformation process is the core production or service activity and is
supported by others such as purchasing raw materials and selling finished goods. Business
enterprises are generally classified according to their core activity, such as extraction,
agriculture, manufacture, or business services. Output from the core transformation process is
distributed to sales points and exchanged at a price for money. The exchange process includes
market development, product promotion, retail and wholesale selling. All business activities can
be related to these basic processes.

4.3: BUSINESS PLANNING PROCESS MODEL

4.4: When is it useful to have a Business Plan?


a.

When starting a business, it is useful to have a plan of action and an estimate of


profit to show that the idea is feasible and to minimize mistakes and wastage of
time and resources

b.

When deciding a strategy to grow a business, a plan is useful for showing the
financial targets, the actions to be taken to attain them, the costs that will be
incurred, and how they will be paid.

c.

In order to monitor and control the performance of a business at any time, a


business plan is useful for showing budget for operations and overheads, showing
26

when cash is needed to pay bills becoming due, and to assure that the budget is not
exceeded and cash is always available
d.

When seeking financial assistance at any time from formal sources such as banks
and from equity investors such as partners and venture capitalists. Then a plan is
useful for demonstrating the viability of the business idea.

Remember
Borrowing money is expensive. Before you decide to borrow, check that your finances are
under tight control and there is no wastage of resources in any area of the business. Good cost
control can reduce your need for working capital, the amount of funds tied up in day to day
activities, and this may make the difference between having to borrow or not.
Wastage can result from:
i. Buying in poor quality materials
ii. Mistreating or mishandling materials
iii. Poor product designs that use more material than is necessary
iv. Stocks too high tying up funds
v. Stocks too low, stock outs causing excessive down-time
vi. Old stocks that dont move
vii. Poor stock control
viii. High level of production defects
ix. Poor production layout
x. Excessive staffing
4.5: Business development process
There are three types of enterprise development - business start-up, business consolidation and
business growth - each of which is a distinct stage in the process of developing a business:
4.5.1 Business start-up process
The business start-up process extends from the conception of an idea to putting it into practice
and evaluating its potential empirically:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Propose a business idea


Confirm the feasibility of the business idea*
Decide the level of entry into the market*
Produce a business start-up plan
Obtain and deploy the necessary resources
Start doing business
Monitor and evaluate the results

*Planning for start-up can only begin after the feasibility of the business idea has been
confirmed and after the level of entry into the market has been decided. This will depend on the
funds available for the start-up
4.5.2 Business consolidation process
Business consolidation can take place at any time after a period of development and change, the
aim being to stabilise an enterprise within its current markets:
(i)
Review profitability
27

(ii)
(iii)
(iv)
(v)
(vi)

Review production efficiency


Review the customer base
Set new performance targets and budgets
Make necessary operational changes
Monitor and evaluate the results

*Planning can only start after these reviews have been completed.
4.5.3 Business growth process
Business growth is of two types. Type 1 growth is an increase in sales derived from a more
productive use of existing resources and more effective exploitation of markets. Type 2 growth
is increased sales derived from an increase in production capacity and/or product range derived
from investment. The steps in the process are:
(i)
Review the current performance of the business (in the market, in its
production/service operations, in meeting financial targets
(ii)
Analyse the current capacity of the business to support growth (resource base,
experience base, control base, ideas base management/leadership base)*
(iii)
Develop a growth project
(iv)
Start and complete the project
(v)
Monitor and evaluate the results
*Planning for growth can only start after current performance and capacity have been
analysed and potential weaknesses addressed. A pre-growth consolidation project to deal
with weaknesses may be necessary.
4.6 An outline of a Business Plan
i.
Cover Sheet
ii.
Executive Summary
iii.
Table of Contents
iv.
Statement of Purpose
v.
Company History
vi.
Business Description
vii.
Products and Services
viii. Market Analysis
Industry analysis
Customer analysis
Competitor
Pricing strategy
Sales/Marketing Strategy
ix.
x.
xi.
xii.

Organizational Plan/Management
Operational Plan
Financial Plan
Appendices

4.6.1 Cover Sheet


This section narrates identity information. These are:
i. The words Business Plan
ii. Your name and business name
iii. Company logo
28

iv.
v.
vi.
vii.
viii.
ix.

Address
Telephone number
Fax Number
Email Address
Web Address (URL)
Submission date

4.6.2 Executive Summary


Executive Summary is among the most important parts of the business plan, because it
summaries all important features of the plan. Most people will read the executive summary
before deciding to read or not to read the whole document. It is normally written last. It
includes:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.

Name of business promoter and her brief background


Name of the business
Business start date
Location
Business objectives
Major activity of the business
Market prospects
Financial forecasts

4.6.3 Table of Contents


This section enables the reader to navigate through the document easily. The reader will now
which section of the plan is on which page. The table of content shows page numbers, sections
and subsections of the report.
4.6.4 Statement of Purpose
This section discusses briefly the major objectives of the business plan. It can be financing and
or operational. For financing objectives, the important issues to talk about are:

How much money is needed?


What will the money be used for?
How will the funds benefit the business?
Why does this loan or investment make business sense?
How will the funds be repaid?

In case of operational objectives key issues to address include:


Who will use it?
Will it layout strategy plans?
How will it be updated?

Sample: Statement of Purpose


This business plan is written to secure financing in the amount of $24,000, which will cover the
following costs:

$10,000 in equipment

$14,000 in operating capital


The loan will supplement the owners equity investment of $20,000, and will be repaid
beginning the month after disbursement according to lender terms. Funds will play a crucial
29

role in sustaining the business as the client base grows, and will allow the business to become
self-sufficient by the beginning of year two.

4.6.5 Company History


Company history (or even the history of the individual business promoter) is very important
since it enables the reader of the business plan document to get the company profile, track
record and achievement. This section narrates:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.

Mission Statement
Basic product description
Names of principals (owners, Management) and brief background on each
Legalities: business type
Company location
Number of employees
Customer highlights
Your niche and unique qualities
Strategic alliances
Awards and merits
Company milestones (business formation, opening date, hiring employees, revenue
levels/ growth)
xii.
1-3 year plan future milestones to reach (sales goals, hiring employees)
Sample: Company History
MAAKA Child Care strives to become the most-well known and reputable service provider in
the Tegeta Area, Dar es Salaam Tanzania, with a targeted focus on safety, enrichment, and
comfort. The Company was founded based on a growing trend: quality child care is a key issue
for working parents, and has now become a top priority for Dar es Salaam region.
The business is owned and operated by its co-founders, Masawe Associates and Kalimanzira
and Sons ltd. Each has had extensive experience working with children prior to opening this
project, in both a teaching and managing capacity. Since opening in March of 2005, MAAKA
Child Care has reached the following milestones:

Incorporated andregistered as a child care centre in Dar es Salaam and became licensed
in March, 2006

Renovated owned residence of principal to operate, at Nyirenda street, Tegeta.

Enlisted first 20 full-time clients/children in April 2006

Reached monthly break even June 2010

Hired 3 full-time staff teacher June 2008

Tshs 50,000,000 in revenue by September 2011


MAAKA plans to reach its capacity of 120 children by the end of December 2013, where
projected monthly income will be Tshs 100,000,000. By June of the following year, the
MAAKA will look to expand the centre, to a capacity of up to 200 children.

4.6.6 Business Description, products and services


Describe briefly the business you are planning to undertake/develop including basic products or
services offered, business type-new, takeover, expansion, franchise, etc. Also include the
following
30

General strategy plan


List of planned milestones (business formation, opening date, hiring employees,
reaching certain revenue goals)
Planned strategic alliances
Work already done
Experience in the business
Detailed description of products or services
Indicate stage of development: in-process, prototypes, samples
Patents or trademarks, legal contracts, licensing agreements, regulations, certifications
Sample: Products and Services
At MAAKA Child Care, we continually work to provide the most well-balanced day care
schedule possible for the children. Every day is a mix of lesson time and free play with a
weekly theme, generally a number or letter. Most children arrive between 7:30 and 9:30am. The
early arrivals eat breakfast at the facility and then engage in free play as the other children
arrive and join them. At 9:30, all of the children sit down for a snack. Each day, the program
begins with the pledge of commitment and then moves to activities related to the calendar.
The program includes discussion of the months of the year, days of the week, seasons, holidays,
and the weather. During the lesson, two-to-four worksheets (made up in advance) on the topic
of the week are used. The sheets include tracing of the letter or number the children are
learning, coloring pictures of the related objects, matching games, etc. At least once each week,
the children use paints, glue, and scissors to complete a project or craft pertaining to the
scheduled theme.
After lessons, the children read a book, or are taught a new song. This is followed by free play
prior to lunch. It is a goal of the center to bring the children outdoors, weather permitting, each
day. At noon, lunch is served, and is generally a hot meal, consisting of a meat, vegetable, fruit,
and grain (such as pasta, rice, or bread) as per the New York State guidelines.
After lunch, the morning program is repeated and expanded. This is followed by afternoon
snack at 2:30pm. Since parents begin pickups at 3:30pm, the children are allowed free play with
developmental toys such as puzzles, blocks, and Legos, all of which are kept within their reach.
Diapers are changed as needed throughout the day and records are kept of the changes. The
younger children are put down to nap either in porta-cribs or on mats during the morning or
afternoon hours as dictated by their individual schedules and the parents wishes. Hands-on
computer training is planned once the center moves to its new location and space permits a
computer center.

4.6.7 Market Analysis/Marketing Plan


This is one of the most important parts of the business plan. The following subsections must be
analyzed properly for the overall project to become successful:
4.6.7.1 Industry analysis
- Describe the size of the industry in which your proposed business belongs
Which industry does your proposed business belong to? Example: a grocery
shop/bar belongs to the food and beverages retailing industry: a Dala Dala
business belongs to the transport industry.
31

What is the size of the industry in your proposed community? (Give the total
number of firms in the industry)
-

Describe the key characteristics of the industry to which your proposed business belongs
What are the sizes of firms in the industry? (Indicate small, medium or large)
What technology generally used do your competitors indicate the following:
e.g Labour-intensive or capital-intensive; Modern or outdated.
What is the average number of employees in other firms?
How competitive is the industry? E.g. Very or not very
What is the general level of sales/profitability for firms operating in the
industry?
What seasonal factors are experienced in the industry? Describe the industrial
trends and prospects
What are the trends and prospects of sales in the industry? (Indicate signs of
growth, stability or decline)
What are the trends and prospects of technological development in the industry?
What are the competitive trends in the industry? (Example, product innovations)
4.6.7.2 Customer analysis

Who are your potential customers? Classify them individual customers , corporate
customers

What are the most relevant characteristics of your customers? Consider: age, income, sex
education, occupation, and religion or ethnic group where
applicable)

How will customers judge your products or services? (Consider performance, economy,
convenience, comfort, safety or durability of each product or service)

When will customers purchase your products(s) or service (s)? (Consider: time, day of
week, month)

What sort of buying pattern does this indicate?

Volume of purchases: Indicate quantities of product or service likely to be purchased at a


given

Time, the frequency of purchases and the desired mode of payment

Describe the market size for your products or services


32

Can you estimate the number of potential customers (firms consumers) that need your
products or services?

4.6.7.3 Competitor analysis


-

Describe you potential competitors.

Where are your potential competitors in relation to your proposed business location?

How will the location of your competitors affect your business?

Where are your potential competitors in relation to your proposed business location?

How will the location of your competitors affect your business? (State the advantages and
disadvantages of your location in relation to theirs)

What size are your competitors? Are they small medium, or large in relation to you
business? (Consider assets, sales volumes, number of employees, and number of brands

What are the advantages and disadvantages of the size of your business compared with
competitors?

Compare your proposed products or services with those of your competitors How do your
products or services compare with those offered by your competitors? For each area of
comparison, give an assessment (very low), (low), (moderate), (high) and (very high).
(Consider performance, quality, reputation, after-sales service, and other areas specific to
your business)

What competitive advantages (s) will your products or services have over those of your
Competitors?

Describe the overall strengths and weakness of you potential competitors For each area of
comparison allocate score on a scale from; very low, low, moderate, high. (Consider
benefits to customers, technology, location, management, and distribution channels, and
other areas specific to your business)

With reference to your competitors overall strengths and weaknesses, in what ways will it
be easy/difficult to compete with them?

4.6.7.4 Pricing strategies


- Describe your pricing strategy
How will you calculate the selling price of your products or services?
What factors will you consider in setting your selling prices? (Consider
government price controls, competitors selling prices, positioning, cost
of production and distribution
What will be the selling prices for each of your products or services?
What credit terms will suit your products or services?
33

4.6.7.5 Sales/Marketing Strategy


- Describe the methods you will use to make sales.
What selling methods will you employ? (Consider, personal selling, selling
through an agent)

What criteria will you use for deciding who gets credit?
When will you consider giving customers a discount?
Will you provide an after-sales service? If so, what will it cost you?
If you intend to sell directly to customers, how will you recruit, retain, and
remunerate your Sales force?

If you intend to use distributors or agents, how will you select and motivate
them?
Which geographical areas will you sales arrangements cover?
-

Describe the methods you will use to advertises your products or services to your customers
Which advertising media will you use?
Describe the kind of image you would like your business and products or service
to have.
How often will you advertise and how much will each advertisement cost?
How will you measure the effectiveness of your advertisements?

Describe the methods you will employ to promote your products or services
What promotional incentives will you use?
Which promotional methods will you employ on a regular basis? (Consider
using trade shows, sponsorship or competitions)
How much will each method of promotion cost?
How will you measure the effectiveness of your promotional campaigns?

4.6.7.6 Distribution strategy


- Describe the channels of distribution that you will use
How will you get your products or services to your customers? (Consider
using sales representatives, wholesales, franchises or distributors)
What modes of transport will you use? (Consider road, rail or air)
How much will the chosen means of transport cost you per month?
What specific distribution problems do you anticipate?
How do you plan to solve these problems
4.6.8 THE ORGANISATION PLAN
In the organization plan for the business, you will show policies for staff development and
human resource management for achieving an efficient production and distribution of goods
and services. You will present descriptions and training and staff compensation plans. You will
also indicate the support and services required for your business.
34

4.6.8.1 Organization
What type and numbers of members will be in the organisation?
Directors
Managers
Employee types
4.6.8.2 Management Team
Will you manage the business yourself?
What exactly are your duties and responsibilities?
How much monthly salary will you draw from the business?
Describe the duties and responsibilities of your proposed management team.
What will be the exact duties and responsibilities of each member of your proposed
Management team? (Indicate their salaries, in relation to the duties and
responsibilities)
o What performance incentives will you provide to members of the management team?
o
o
o
o
o

4.6.8.3 Employees

Identify the other personnel you will require


How many employees will you require in total?
What are their job titles and salary?
Note that job descriptions for each type of employee showing details of their functions,
responsibilities and the skills they will need.
Where will you obtain qualified employees?
Describe how you will evaluate the performance of each of your employees (Specify a
variety of methods for evaluation the performance of employees, as they are likely to be
involve in differing functions)
What is your training plan for your employees?
How will you remunerate/reward your employees
What performance incentives will you provide to your employees?
What arrangements have you made for an event when you lose a key worker to a
competitor, illness, or other causes?

4.6.9 OPERATIONAL (PRODUCTION) PLAN


In the operational section of business planning, you will describe the facilities, labour and
overheads required to produce your proposed products and services. If you are in the
manufacturing business, you will explain the manufacturing process for making your product.
For a service business, you will describe the key process of offering your services. In both
manufacturing and service industries, you should indicate any regulations, compliances and
approvals that will affect your operations.
4.6.9.1 Product/service design and development
- Describe the proposed design and development of your products or services.
35

Explain your approach to the designs of your proposed products or services?


How do you intend to develop your proposed products or services?
What cost will you incur in designing and developing your products or services?
What kind of technology will you use to manufacture your products or offer you
services
What level of technology will you apply in producing your products or offering your
services?
Is your choice of technology the best available?
If not, why have you chosen not to use an alternative technology?
How appropriate is your choice of technology? (Consider simplicity in utilisation, costeffectiveness, flexibility in adoption, efficiency n production, extent of local availability
or frequency or maintenance)
How do you plan to cope with changes in technology, which affect your proposed
business?

4.6.9.2 Production facilities and capacity


- Describe the machinery and equipment you will require for your production
What machinery and equipment will you need?
Who will supply the critical items?
Will you buy, line or lease equipment? At what cost?
- Explain your plans for maintaining and repairing machinery and equipment
Who will maintain and repair the machinery and equipment?
Will spare parts for major items be available locally? If they are, who will be
your suppliers?
If spare parts are not available locally, what importation arrangements will you
need to make?
- Describe the features of your proposed workshop/shed/factory/labour.
Where will you install machinery and equipment?
Will the workshop space allow for future expansions? If not, what are your
plans for expansion?
- Describe the other equipment that you will require for your business
What other equipment will you need? (Example: telephones, office computers,
etc. Specify item, quality required, date needed and cost)
- Describe your monthly raw material requirements
What raw materials will you need for production? (Give details of type, source,
quantities and costs frequency required)
Will the materials be readily available throughout the year?
If not, what are your plans to deal with possible shortages?
Will raw materials be transported to your business? How much will this cost per
month?
4.6.9.3 Production strategies
- Describe your monthly labour requirements
o How many direct and indirect workers will you need? Direct workers are
production and sales
o What level of skills do you require of your workers? (List employees skills needs
according to their various functions, where appropriate
o What will be the total cost of production labour per month?
36

o What preliminary production expenses will you incur?


o What will be your monthly production overheads? Example: rent electricity,
telephone and water etc.
o What will be the production cost per unit?
o What will be the total cost of production in a given period? (Example: per week,
month, quarter or year)
4.6.9.4 Production process/service and government regulations
- Describe the production process

Transformation
(Adding value)

Input

Distribution
of output

Exchange
Transaction

What external factors are likely to affect your production/service process?


How do you intend to minimize the impact of these external factors?
- Identify the government regulations that will affect your business.
What permits and licenses will you require before you start your project, from whom, at
what cost and how long do they take to get?
What approvals and compliances are regularly renewable and at what cost?
Which other regulations are likely to affect your particular business?
4.10 FINANCIAL PLAN
In the financial plan, you will deal with the financial aspects of your proposed business. To
gauge your future financial potential, you will prepare pro-forma balance sheets, pro- forma
profit and loss accounts/Income statement and a projected cash flow statement. You will also
determine the break-even level of sales and calculate the expected profitability ratios of your
business. Finally, you will indicate your financial requirements and proposed capitalisation.
4.10.1 Methods of Financing (Sources of funds)
a.
b.
c.
d.
e.
f.
g.

Personal funds
Family/ friend loans and gifts
Angel investor
Venture capital
Grants
Personal loan
Business loan

4.10.2: Profit and loss projections (Income statement)

37

- An income Statement is a financial statement that measures a company's financial


performance over a specific accounting period. Financial performance is assessed by giving a
summary of how the business incurs its revenues and expenses through both operating and nonoperating activities. It also shows the net profit or loss incurred over a specific accounting
period, typically over a fiscal quarter or year. Also known as the "profit and loss statement" or
"statement of revenue and expense"
- A summary of a management's performance as reflected in the profitability (or lack of it) of an
organization over a certain period. It itemizes the revenues and expenses of past that led to the
current profit or loss, and indicates what may be done to improve the results..
Major items on the Income statement are revenues/sales and costs incurred. Specifically, it
shows:
i. Cash sales
ii. Credit sales
iii. Other income
iv. Total sales
v. Direct costs (raw materials, labour, salaries, etc)
vi. General expenses and overheads (rent, electricity, water, etc)
vii. Total direct costs
viii. Gross profit/loss
ix. Net profit/loss
AN EXAMPLE OF AN INCOME STATEMENT.
PROFIT AND LOSS YEAR COMMENCING
Sales income
Cash sales
Credit sales
Other
Total sales
A
Less direct costs (cost of goods sold)
Materials or stocks
Labour
Promotion
Sales wages and commissions
Transport
Other
Total direct cost B
GROSS PROFIT A-B=C
GROSS PROFIT % OF SALES
General expenses and overheads
General marketing
General administration
Communications
Office consumables
Rent
Water
Electricity
Repairs/decoration
Insurance

Y1

Y2

Y3

38

Interest on loans
Leasing/hire purchase expenses
Depreciation
Other
Total expenses and overheads
D
NET PROFIT BEFORE TAX
C-D=E
Provision for tax
F
Net profit after tax
E-F=G

4.10.2: Balance sheet projections


-

A condensed statement that shows the financial position of an entity/Organization on a


specified date (usually the last day of an accounting period).

Major items shown by the balance sheet are assets and liabilities. Specifically, it shows
i.

Current assets ( cash, bank deposits, Inventory, finished goods, debtors, etc)

ii.

Fixed Assets ( Premises, Plant and equipment, vehicles, furniture and fittings, etc)

iii. Current liabilities ( trade creditors, tax and insurance, hire purchase creditors, etc)
iv.

Long term loans

AN EAMPLE OF A BALANCE SHEET:


BALANCE SHEET
Fixed assets
Premises
Plant &equipment cost
Vehicles at cost
Furniture & fittings at cost
Other
Accumulated depreciation
Total fixed assets
A
Current assets
Raw materials
Finished goods
Debtors
Bank deposit
Cash
Other
Total current assets
B
TOTAL ASSETS
A+B=C
Less current liabilities:
Trade creditors
Tax and insurance
Hire purchase creditors
Directors loans to the business
Other
Total current liabilities =D
NET ASSETS

At start-up

Year 1

Year 2

C-D=E

39

Represented by:
Capital introduced
Long term borrowing
Profit brought from P & L account
TOTAL CAPITAL EMPLOYED

4.10.3: Cash Flow Statement


Cash flow statements and projections express a business's results or plans in terms of cash in
and out of the business, without adjusting for accrued revenues and expenses. The cash flow
statement doesn't show whether the business will be profitable, but it does show the cash
position of the business at any given point in time by measuring revenue against
outlays/expenses The following items are listed in the order they need to appear on your cash
flow statement:
i.

Cash refers to cash on hand in the business.

ii.

Cash sales are income from sales paid for by cash.

iii.

Receivables is income from the collection of money owed to the business resulting
from sales.

iv.

Other income is income from investments, interest on loans that have been extended,
and the liquidation of any assets.

v.

Total income is the sum of total cash, cash sales, receivables and other income.

vi.

Material/merchandise is the raw material used in the manufacture of a product (for


manufacturing operations only), the cash outlay for merchandise inventory (for
merchandisers such as wholesalers and retailers), or the supplies used in the
performance of a service.

vii.

Direct labor is the labor required to manufacture a product (for manufacturing


operations only) or to perform a service.

viii.

Overhead is all fixed and variable expenses required for the operations of the
business.

ix.

Marketing/sales is all salaries, commissions and other direct costs associated with

x.

Taxes are all taxes, except payroll, paid to the appropriate government institutions.

xi.

Loan payments are the total of all payments made to reduce any long-term debts.

xii.

Total expenses are the sum of material, direct labor, overhead expenses, marketing,
sales, R&D, G&A, taxes, capital and loan payments.
40

41

UDEC

CASH FLOW STATEMENT


JAN

FEB

MAR

APR

JUN

JUL

AUG

SEP

OCT

Revenue
Cash sales
Credit sales collected
Capital introduction
Other income
Total revenue A
Direct costs
Materials or stocks
Labour
Promotion
Sales wages and
Commissions
Transport
Total direct costs B
General overheads
General marketing
General
Administration
Communication
Office consumables
Establishment
Expenses
Rent
Water
Electricity
Repairs/decoration
Insurance
Interest on loans
Leasing/hire purchase
Capital assets
Vehicle costs
Owners drawings
Total O/H Costs
C
Other payments
Repayment of loans
VAT
Income tax
Total other payments D
TOTAL PAYMENTS
B+C+D=E
Monthly surplus/deficit AE=F
Opening cash
Cumulative surplus/deficit

4.11: Revision questions


1. Choose the correct answer about a financial plan of a business plan (10 marks)
ii.
Why is balance sheet prepared?
a. to show debtors and creditors at a certain time
b. to show how much profit a business makes
c. to show the financial position of a business at a certain time
[c]
Business plan pre-plan checklist & feasibility assessment

NOV

DEC

TT

d. to show total debit equals total credit


e. None of the above
iii. Which of the following information does the balance sheet show?
a. gross profit
[b]
b. capital
c. sales
d. expenses
e. both A and B are correct
iv.
a.
b.
c.
d.
e.

Which of the following is a use of fund in running a business venture?


Purchase of equipment
Sale of company assets
Inventory procurement
[d]
both A and C are correct
Cash income

v.
a.
b.
c.
d.
e.

Which of the following does not appear on a cash flow statement?


Sales
Revenues/collections
direct costs
General overhead cost
[a]
A, B and C are correct

vi. Which one of the following is one of the functions of a cash flow
statement?
a. to show amount of cash at bank
b. to show sales and expenses at a certain time
c. to show the financial position of a business at a certain time
[a]
d. C and D are correct
e. None of the above
vii.Which of the following information does not appear on the income
statement?
a. Sales
b. Capital
c. gross profit
[b ]
d. expenses
e. None of the above
viii.

On which part of the financial statement can we find Plant and


equipment?
a. Balance sheet
b. Income statement
c. Cash flow statement
[a]
ii

d. On balance sheet and cash flow statement


e. None of the above
ix. viii. Which of the following is a source of fund for starting a business
venture?
a. Bank loan
[d]
b. Balance sheet
c. Personal savings
d. A and C are correct
e. Income statement
x. Which of the following is a function of Income statement?
a. To show gross income
b. To show net income
c. To show total expenditure
d. All A, B and C are correct
e. To show assets and liabilities

[d ]

xi. Which of the following is not a liability item on the balance sheet?
a. Bank loan
[c ]
b. Hired machinery
c. Equity
d. Personal loan
e. None of the above
2. Briefly outline any five components of customer analysis of the business plan
document
3. Describe briefly the main importance of having a well written executive summary of
the Business Plan document
4. Describe briefly the main importance of having a well written table of contents of
the Business Plan document
5. Briefly outline any five components of market

analysis of the business plan

document

iii

CHAPTER FIVE: STARTING A NEW BUSINESS VENTURE


5.1: Environmental Assessment:
-

The environment is the most comprehensive component in the venture creation


process. It includes all the factors that affect the decision to start a business, for
example, government regulation, competitiveness, and life cycle stage.

Within specific industries and in specific geographic regions, environmental variables


and the degree of their impact will differ. The new venture process begins with an
idea for a product, service, or business.

In order to succeed in business undertaking, an entrepreneur should scan the


environmental concerned before entering the venture.

An environmental assessment is synonymously used along with the term


environmental scanning. This is very vital for any business undertaking venture.
When entrepreneur performs an environmental assessment she/he will use the tool
termed as SWOT Analysis.

5.1.1: External Environment Analysis (Opportunities and Threats)


-

Once the business undertaking has identified its customer tend to be, important values
it holds, type of products/services it produces renders, and entrepreneur, it should
know the part of the environment it needs to monitor to achieve her goals. Business
entity has to monitor the external macro environmental forces. When these macro
environmental forces are supportive to the business ideas, they are categorized as
opportunities. But when they are potentially hindering the implementation of the
business ideas, they categorized as threats. Examples of external environment
factors/forces are:

OPPORTUNITIES
A: Political forces i. Presence of stable political stability

THREAT S
Presence of unstable political

ii. Presence of favorable employment

stability
Absence of favorable

legislation
iii. Presence of good government

employment legislation
Presence of poor government

orientation and stability


iii. Presence of good foreign trade

orientation and instability


Presence of poor foreign trade

policies

policies
iv

B:

iv. Presence of good tax laws and

Presence of poor tax laws and

policies
iii. Presence of fair competition laws

policies
Absence of fair competition

and policies

laws and policies

OPPORTUNITIES
Economic i. It is relatively easy to access fund

forces

THREAT S
Unavailability of capital to

and capital for starting business


ii. Raw materials and commodities are

finance business startups


Raw materials and commodities

readily available and cheap

are hardly available, at very high

iii. Energy costs are relatively low


and supply is reliable

prices
Energy costs are very high and
supply erratic and unreliable

iv. Stable Exchange rates

Fluctuating Exchange rates

Low unemployment rate, and high

High unemployment rate, and

C:

workforce skill levels.


ii. Rare occurrences of natural

low workforce skill levels.


high occurrences of natural

Natural/environme

disasters like floods, earthquakes, and

disasters like floods,

ntal forces
volcanoes
D: Demographic i. Huge total population is a potential
forces

earthquakes, and volcanoes


Sparse total population

market
ii. Favorable population distribution

unfavorable population

iii. Favorable population density


iv. Favorable age group distribution

distribution
unfavorable population density
unfavorable age group

v. Favorable birth and death rate


vi Favorable life expectancy at birth

distribution
unfavorable birth and death rate
unfavorable life expectancy at
birth

5.1:2 Internal factors analysis (Strength and weakness)


When the following factors are present in the business enterprise, we call them strengths.
But when they are absent/ lacking, we call them weaknesses. Some of the common
internal strengths and or weakness are
v

Sn
1
2
3
4.
5
6
7
8
9

Strengths
Availability of distinctive competences
Adequate internal financial resources
Availability good competitive skills
Availability of proprietary technology
Presence clear strategic direction
Presence of managerial depth and
talents
Resilience to competitive pressure
Access to economies of scale
Presence of competitive advantage

Weakness
Absence of distinctive competences
Inadequate internal financial resources
Absence of competitive skills
Lack of proprietary technology
No clear strategic direction
Lack of managerial depth and talents
Vulnerable to competitive pressure
Lack of access to economies of scale
Presence of competitive disadvantage

5.2: Sources of Business Ideas


Business ideas are all around you. Some business ideas come from a careful analysis of
market trends and consumer needs; others come from chance/coincidence. If you are
interested in starting a business, but don't know what product or service you might sell,
exploring these ways of getting business ideas flowing will help you choose.
i. Examine your own skills set for business ideas.
Do you have a talent or proven track record that could become the basis of a profitable
business?
The other day I spoke to a man who had spent years managing cleaning services at a
hospital. Today he runs his own successful domestic and business cleaning service. An
ex-logger I know is now making his living as an artist; he creates "chainsaw sculptures"
out of wood. And the examples of professionals who have started their own agencies or
consulting service businesses are legion.
To find a viable business idea, ask yourself, "What have I done? What can I do? Will
people be willing to pay for my products or services?"
ii. Keep up with current events and be ready to take advantage of business opportunities.

vi

If you read or watch the news regularly with the conscious intent of finding business
ideas, you'll be amazed at how many business opportunities your brain generates.
Keeping up with current events will help you identify market trends, new fads, industry
news - and sometimes just new ideas that have business possibilities.
iii. Invent a new product or service.
Think back 30 years ago. Was there a huge demand for anti-virus software, Internet
Service Providers, or desktop computers? No! The key to coming up with business ideas
for a new product or service is to identify a market need that's not being met..
Look around and ask yourself, "How could this situation be improved?" Ask people about
additional services that they'd like to see. Focus on a particular target market and
brainstorm business ideas for services that that group would be interested in.
iv. Add value to an existing product.
The difference between raw wood and finished lumber is a good example of putting a
product through an additional process which increases its value, but additional processes
are not the only way value can be added. You might also add services, or combine the
product with other products. For instance, a local farm which sells produce also offers a
vegetable delivery service; for a fee, consumers can have a box of fresh vegetables
delivered to their door each week.
What business ideas can you develop along these lines? Focus on what products you
might buy and what you might do to them or with them to create a profitable business.

v. Investigate other markets.


Some business ideas aren't suited to local consumption - but appeal greatly to a foreign
market. My own little town is surrounded by acres of wild blueberries. For years the
bushes produced berries that mainly fed bears and birds; B.C. has a thriving blueberry
vii

industry that doesn't leave room for a wild blueberry market. But one entrepreneur
realized that there is a high demand for products such as these in Japan - and those same
wild blueberries are now being harvested and shipped. Finding out about other cultures
and investigating other market opportunities is an excellent way to find business ideas.
vi. Buy a Franchise or an Existing Business
Many times, the fastest and easiest way to start a business is to simply buy an existing
business or franchise. Franchises are attractive because theyve already proven successful
and you are simply buying into their system. Existing businesses are attractive because
you can pick and choose the right business and most of the legwork has already been
done.
vii. Get on the bandwagon.
Sometimes markets surge for no apparent reason; masses of people suddenly "want"
something, and the resulting demand can't be immediately met. For example, during the
SARS epidemic, there was an insatiable demand for facial masks in several countries and many entrepreneurs capitalized on this business idea.
A "bandwagon effect" is also created by larger social trends. There is much more of a
demand for home-care services for the elderly than is currently being supplied. And the
trend for pets to be treated as family members continues, creating demand for all kinds of
pet-related services that didn't exist even ten years ago.

5.3 Tips for Starting a Business that will succeed


i. Do what you love.
You're going to devote a lot of time and energy to starting a business and building it into a
successful enterprise, so it's really important that you truly deeply enjoy what you do,
whether it be running fishing charters, creating pottery or providing financial advice.

viii

ii. Start your business while you're still employed/ (other foundations/base)
How long can most people live without money? Not long. And it may be a long time
before your new business actually makes any profits. Being employed while you're
starting a business means money in your pocket while you're going through the starting a
business process.
iii. Don't do it alone.
You need a support system while you're starting a business (and afterwards). A family
member or friend that you can bounce ideas off and who will listen sympathetically to the
latest business start up crisis is invaluable. Even better, find a mentor or, if you qualify,
apply for a business start up program such as The Self-Employment Program. When
you're starting a business experienced guidance is the best support sytem of all.
iv. Get clients or customers first.
Don't wait until you've officially started your business to line these up, because your
business can't survive without them. Do the networking. Make the contacts. Sell or even
give away your products or services. You can't start marketing too soon. (See Attracting
New Business on a Shoestring Budget and Just Do These Two Things to Get More
Clients for tips.)
v. Write a business plan.
The main reason for doing a business plan first when you're thinking of starting a
business is that it can help you avoid sinking your time and money into starting a
business that will not succeed.
Remember, you don't have to work through a full scale business plan for each new
business idea you come up with; my Quick-Start Business Plan, for instance, will let you
test the potential of your business idea much more quickly.
vi. Do the research.
You'll do a lot of research writing a business plan, but that's just a start. When you're

ix

starting a business, you need to become an expert on your industry, products and services,
if you're not already. Joining related industry or professional associations before you start
your business is a great idea.
vii. Get professional help.
On the other hand, just because you're starting a business, doesn't mean you have to be an
expert on everything. If you're not an accountant or bookkeeper, hire one (or both).(These
Tips for Finding a Good Accountant may be useful.) If you need to write up a contract,
and you're not a lawyer, hire one. You will waste more time and possibly money in the
long run trying to do things yourself that you are not qualifed to do.
viii. Get the money lined up.
Save up if you have to. Approach potential investors and lenders. Figure our your
financial fall-back plan. Don't expect to start a business and then walk into a bank and get
money. Traditional lenders don't like new ideas and don't like businesses without proven
track records.
ix. Be professional from the get-go.
Everything about you and the way you do business needs to let people know that you are
a professional running a serious business. That means getting all the accoutrements such
as professional business cards, a business phone and a business email address, and
treating people in a professional, courteous manner.
x. Get the legal and tax issues right the first time.
It's much more difficult and expensive to unsnarl a mess afterwards. Will you have to
have Workers' Compensation Insurance or deal with payroll taxes? How will the form of
business you choose affect your income tax situation? Learn what your legal and tax
responsibilities are before you start your business and operate accordingly.
Following the advice on starting a business above will make starting a business both a
smoother, less stressful process and go a long way towards ensuring the busines you start
lasts and thrives.

5.4. Assessing the Business Ideas


Having built up a moderate list of ideas, these must be evaluated so that a short-list of
preferred options with the greatest potential and lowest risk can be assessed in greater
depth.
One way of evaluating ideas would be to use a simple scoring system using gut-feel with
a limited number of criteria as shown below.
Factor

Score (1-10)

Personal fit

??

Degree of risk

??

Funding needed

??

Ease of start-up

??

Short-term potential

??

Level; of preparation

??

Competitive threats

??

Etc. etc.

??
Total

xx

Before scoring individual ideas, run through the criteria and set what you feel should be
minimum desirable scores for each. The resultant total could be used as your overall
minimum threshold. If some ideas don't achieve satisfactory scores, drop them and look
for better ones.
Once your short-list has been developed, you will need to start devoting substantial time
to assessment, research, development and planning. For a start, you could pursue the
following tasks:
5.6 Common reasons for business failures
When you're starting a new business, the last thing you want to focus on is failure. But if
you address the common reasons for failure up front, you'll be much less likely to fall
victim to them yourself. Here are the top 7 reasons why businesses fail and tips for
avoiding them.
i. You start your business for the wrong reasons.
Would the sole reason you would be starting your own business be that you would want
xi

to make a lot of money? Do you think that if you had your own business that you'd have
more time with your family? Or maybe that you wouldn't have to be answerable to
anyone else? If so, you'd better think again. On the other hand, if you start your business
for these reasons, you'll have a better chance at entrepreneurial success:

You have a passion and love for what you'll be doing, and strongly believe -based on educated study and investigation -- that your product or service would
fulfill a real need in the marketplace.

You are physically fit and possess the needed mental stamina to withstand
potential challenges. Often overlooked, less-than-robust health has been
responsible for more than a few bankruptcies.

You have drive, determination, patience and a positive attitude. When others
throw in the towel, you are more determined than ever.

Failures don't defeat you. You learn from your mistakes, and use these lessons to
succeed the next time around. Head, SBA economist, noted that studies of
successful business owners showed they attributed much of their success to
"building on earlier failures;" on using failures as a "learning process."

You thrive on independence, and are skilled at taking charge when a creative or
intelligent solution is needed. This is especially important when under strict time
constraints.

You like -- if not love -- your fellow man, and show this in your honesty, integrity,
and interactions with others. You get along with and can deal with all different
types of individuals.

ii. Poor Management


Many a report on business failures cites poor management as the number one reason for
failure. New business owners frequently lack relevant business and management
expertise in areas such as finance, purchasing, selling, production, and hiring and
managing employees. Unless they recognize what they don't do well, and seek help,
business owners may soon face disaster. They must also be educated and alert to fraud,
and put into place measures to avoid it.

xii

Neglect of a business can also be its downfall. Care must be taken to regularly study,
organize, plan and control all activities of its operations. This includes the continuing
study of market research and customer data, an area which may be more prone to
disregard once a business has been established.
A successful manager is also a good leader who creates a work climate that encourages
productivity. He or she has a skill at hiring competent people, training them and is able to
delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality,
and able to confront change, make transitions, and envision new possibilities for the
future.
iii. Insufficient Capital
A common fatal mistake for many failed businesses is having insufficient operating
funds. Business owners underestimate how much money is needed and they are forced to
close before they even have had a fair chance to succeed. They also may have an
unrealistic expectation of incoming revenues from sales.
It is imperative to ascertain how much money your business will require; not only the
costs of starting, but the costs of staying in business. It is important to take into
consideration that many businesses take a year or two to get going. This means you will
need enough funds to cover all costs until sales can eventually pay for these costs. This
business startup calculator will help you predict how much money you'll need to launch
your business.
iv. Location, Location, Location
Your college professor was right -- location is critical to the success of your business.
Whereas a good location may enable a struggling business to ultimately survive and
thrive, a bad location could spell disaster to even the best-managed enterprise.
Some factors to consider:

Where your customers are

Traffic, accessibility, parking and lighting


xiii

Location of competitors

Condition and safety of building

Local incentive programs for business start-ups in specific targeted areas

The history, community flavor and receptiveness to a new business at a


prospective site

v. Lack of Planning
Anyone who has ever been in charge of a successful major event knows that were it not
for their careful, methodical, strategic planning -- and hard work -- success would not
have followed. The same could be said of most business successes.
It is critical for all businesses to have a business plan. Many small businesses fail because
of fundamental shortcomings in their business planning. It must be realistic and based on
accurate, current information and educated projections for the future.
Components may include:

Description of the business, vision, goals, and keys to success

Work force needs

Potential problems and solutions

Financial: capital equipment and supply list, balance sheet, income statement and
cash flow analysis, sales and expense forecast

Analysis of competition

Marketing, advertising and promotional activities

Budgeting and managing company growth

vi. Overexpansion
A leading cause of business failure, overexpansion often happens when business owners
confuse success with how fast they can expand their business. A focus on slow and steady
growth is optimum. Many a bankruptcy has been caused by rapidly expanding
companies.

xiv

At the same time, you do not want to repress growth. Once you have an established solid
customer base and a good cash flow, let your success help you set the right measured
pace. Some indications that an expansion may be warranted include the inability to fill
customer needs in a timely basis, and employees having difficulty keeping up with
production demands.
If expansion is warranted after careful review, research and analysis, identify what and
who you need to add in order for your business to grow. Then with the right systems and
people in place, you can focus on the growth of your business, not on doing everything in
it yourself.
vii. No Website
Simply put, if you have a business today, you need a website. In the U.S. alone, the
number of internet users (approximately 77 percent of the population) and e-commerce
sales ($165.4 billion in 2010, according to the US Department of Commerce) continue to
rise and are expected to increase with each passing year.
At the very least, every business should have a professional looking and well-designed
website that enables users to easily find out about their business and how to avail
themselves of their products and services. Later, additional ways to generate revenue on
the website can be added; i.e., selling ad space, drop-shipping products, or recommending
affiliate products.
Remember, if you don't have a website, you'll most likely be losing business to those that
do. And make sure that website makes your business look good, not bad -- you want to
increase revenues, not decrease them.
When it comes to the success of any new business, you -- the business owner -- are
ultimately the "secret" to your success. For many successful business owners, failure was
never an option. Armed with drive, determination, and a positive mindset, these
individuals view any setback as only an opportunity to learn and grow. Most self-made
millionaires possess average intelligence. What sets them apart is their openness to new
knowledge and their willingness to learn whatever it takes to succeed.
xv

CHAPTER SIX:
FORMS OF BUSINESS OWNERSHIPS
6.1 The Sole Proprietorship
A sole proprietorship is a business that is owned and operated by one person.

The enterprises has no existence apart from its owners

The individuals have a right to all of the profits and bear all of the liability
for debts and obligations of the business.

The individuals also has unlimited liability i.e. his/her business and
personal assets stand behind the operation. If the company cannot meets
its financial obligations the owner can be forced to sell the family house,
and whatever assets there are in order to satisfy the creditors.

To establish a sole proprietorship, a person needs merely to obtain whatever local and
state licences are necessary to begin operations .If the proprietor should choose a
fictitious or assumed name ,he/she must also file a certificate of assumed business
name with the country . Because of its ease of formation, the sole proprietorship is the
most widely used legal form of organization.
6.1.1 Advantage of Sole Proprietorship
i.

Easy to form - There is less formality and fever restrictions associated with
established a sole proprietorship than with any other legal form .The proprietor
needs little or no governmental approval ,and it usually is less expensive than
a partnership or corporation.

ii.

Sole ownership of profits - The proprietor is not required to share profits with
anyone.

iii. Decisionmaking and control vested in one owner .the are no co-owners or
partners who must consulted in the running of the operations
iv.

Flexibility - Management is able to respond quickly to business needs in the


form of day to day management decisions as governed by various laws and
goods sense.

v.

Related freedom from government control - Except for obtaining necessary


licences, there is very little governmental interference in the operation.

vi. Freedom corporate business taxes - Proprietors are fixed as individual taxpayers
and not as businesses.

6.1.2 Disadvantages of Sole Proprietorship


xvi

i.

Limited capital - In a sole proprietorship business, the owner arranges for the
required capital for the business. It is difficult for a single individual to raise
a huge amount of capital. The owners own funds as well as borrowed funds
sometimes become insufficient to meet the requirement of the businesss
growth and expansion. Venture capitalists and banks generally do not lend
money to sole proprietorships.

ii.

Unlimited liability - In case the sole proprietor fails to pay the expenses
arising out of business activities, his personal properties may have to be used
to pay for those. This generally discourages the sole proprietor from taking
risks. He thinks cautiously while deciding to start or expand the business
activities.

iii. Lack of continuity - The existence of a sole proprietorship business is


dependent on the life of the proprietor. Illness, death etc. of the owner brings
an end to the business. The continuity of business operation is therefore
uncertain.
iv.

Limited size - There is a limit beyond which it becomes difficult for a sole
proprietor to expand the business activities. It is not possible for a single
person to supervise and manage the affairs of the business if it grows beyond
a certain limit.

v.

Lack of managerial expertise - A sole proprietor may not be an expert in


every aspect of management. He/she may be an expert in administration,
planning, etc., but may be weak in marketing. Again, because of limited
financial resources it is also not possible to employ a professional manager.
Thus, the business lacks benefits of professional management.

6.2 The Partnership


A partnership is an unincorporated business that is carried on by two or more people
who intend to share the business profits. Partnerships have at least five important
features
A partnership can be created by an express agreement or it can be created if
the
people are simply acting in a way that seems like a partnership.
The partners can be held responsible for the actions and business debts of
the
other partners.
All the assets of the business are personally owned by the partners.

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There are two main types of partnerships: general partnerships, where all
the
partners share the profits and losses of the business; and limited
partnerships,
where the limited partners are not involved in the daily operations and
are
only
responsible for losses up to the amount they contributed to the business.
Partners are not considered employees of the business. Because of this,
partners
are not eligible for employment insurance if the business fails
Each partner contributes
Property
Money
Labour, and or
Skills
6.2.1

Advantages of Partnership
i.

Partnership allows two or more people to work together and bring different
skills and resources to the business.

ii.

A partnership is fairly easy to establish. The actual registration of a


partnership is not expensive or complicated. However, it is a good idea to
decide how the partnership will be run and put it into a partnership
agreement

iii. If the partnership suffers a loss but the partners have other employment
income, the loss can be used to reduce their taxable income, thereby
lowering the income tax payable by the partner.
6.2.2

Disadvantages of Partnership
i.

The partnership is not considered to be separate from its owners; the partners
are personally responsible for liabilities of the partnership. If the business
fails, the partners will be personally responsible to pay all of the debts and
obligations of the partnership

ii.

Each partner is an agent for the business and for the other partners; each
partner is personally responsible for the actions of the other partners. If one
of the partners makes a bad business decision, or acts negligently which
results in the partnership owing a debt, all of the other partners are personally
responsible to pay it back.
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iii. A partnership is based on the individual partners, and it is not a separate legal
entity, if one of the partners dies, the partnership ends. This means that the
remaining partners have to re-establish the partnership

6.2.3

iv.

Partnership is not a separate legal entity, it is difficult to buy or sell a


partnership interest. Buying or selling a partnership interest will involve
rewriting the partnership agreement and determining exactly how the
partnership will change

v.

Although the resolution of disagreements amongst partners is generally


covered under a partnership agreement or case law, it usually is very
difficult. There is no Act that exists which sets out rules for settling
partnership disputes. If the disagreements are not resolved by the partners
themselves, they will usually have to turn to outside help which can be time
consuming and costly

Partnership agreements

A partnership agreement establishes rules about how the business is going to be run.
It usually includes such things as who the partners are, what bank the business will
use, how the profits or losses of the business are to be divided among the partners,
what the capital contribution of each partner will be, what the role and
responsibilities of each partner will be, and how the partnership can be dissolved.
Establishing these business details at the beginning of a business relationship can
help avoid disagreements in the future.
A standard partnership agreement contains the following information:
i.

Name and purpose of the partnership

ii.

Partners characteristics ,as they can be active ,or not active

iii. Division of income


iv.

Division of expenditure

v.

Employee management

vi. Business Handling Methods


vii. Terms and Rights of continuing partnership
viii. Regulations and Methods and accounting
ix. Duration of agreement
x.

Required and prohibited acts

6.2.4 Types of partners


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6.3.

a.

General Partner - A person who joins with at least one other to own and
operate a business for profit -- and who (unlike a corporation's owners), is
personally liable for all the business's debts and obligations. A general
partner's actions can legally bind the entire business

b.

Active Partner - is the one who is active in business

c.

Secret Partner - someone who is active in the business but not known or
disclosed

d.

Dormant Partner - A person who is inactive in the business and is not or


disclosed as partner

e.

Silent Partner - A partner who is inactive in the business but may be


known to be a partner

f.

Nominal Partner - A person who discloses himself or herself as partner, or


permits others to make such representation by the use of his/her name or
by other means.

g.

Sub Partner - A person who is not member of the partnership but who
contacts with one of the partner to participate in the interest of that in the
firms operation.

h.

Limited Partner - A partner who risks his/her agreed investment in the


business. As the long as this does not participate in the management and
control of the enterprise

Corporations

Corporations are one of the three main forms of business.


The other two main forms of business are sole proprietorships and partnerships.
The main feature that makes corporations different from sole proprietorships and
partnerships is that corporations are legal entities separate from their owners.

As a result, the corporation is responsible for its own debts, assets, and lawsuits.

The legal responsibility of the shareholders, directors, officers and employees of the
corporation is limited, which means that, with few exceptions, these people cannot
be held personally responsible for the debts and obligations of the corporation.
This is the reason that one of the words Limited, Incorporated, Corporation, or one
of their abbreviations must be included in the full legal name of the corporation.
These words give notice to the public that the business is a corporation and
therefore its owners, directors, officers and employees have limited liability.
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Corporations are owned by shareholders, who own a percentage of the entire


corporation through their shares. Shares can generally be bought and sold fairly
easily, unless restrictions have been placed on the transfer of shares
6.3.1

Advantages of Corporations
i.

The advantage of limited personal liability for the people who own and run
the corporation. This means that the shareholders of the corporation cannot
be held responsible for the debts and obligations of the corporation unless
they provided a personal guarantee. By comparison, in a sole proprietorship
or a partnership, the owner or partner is personally liable for all of the
obligations of the business. This means that the owner's personal assets,
including their home, car, and personal savings can be taken to pay for the
debts of the business.

ii.

A corporation has an unlimited life. Because the corporation is a separate


legal entity, the corporation will continue to exist even if the shareholders die
or leave the business, or if the ownership of the business changes.

iii. The corporate form of business makes it easier for a business to grow and
expand. Through the issuance of shares, corporations may be able to access
the money they will need for expansion. This makes the corporate form of
business more suitable for large business ventures than sole proprietorships
or partnerships.

6.3.2

iv.

There may be tax advantages to running your business as a corporation.


Examples of corporate tax advantages are tax deferral strategies and income
splitting. Corporate taxation is a complicated matter and it is important that
you talk to an accountant or a tax lawyer to determine which tax advantages
apply to your situation and how best to structure your business.

v.

A corporation may appear more stable and sophisticated to the public. This
may help you acquire new business

Disadvantages of Corporations
i.

First, you will have to file two tax returns, one for the business and one for
your personal income. Unlike sole proprietorships and partnerships, any
losses from the corporation cannot be deducted from the personal income of
the owner.

ii.

Second, the registration and set up fees for a corporation are higher than the
set up fees for a sole proprietorship or a partnership. Incorporating a business
is also a more complicated process than starting a sole proprietorship or
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partnership. You should contact a lawyer to help you incorporate your


business.
iii. Third, the Government requires corporations to maintain proper corporate
records, called a minute book. A minute book contains the corporate bylaws
and minutes from annual meetings.
To determine whether you should incorporate your business, you should consult a
lawyer who can help you evaluate your specific situation.

6.4 Legal Matters pertaining business ownership


In any new venture there will be some legal terms which will be guiding the whole
process of the venture operation. Concentration will be made on copyrights,
trademarks law and patent documents
Why legal issues?
Gives fair competition and conducive atmosphere for those parties involved
in business competitive environment.
Provides a room for compensation if the other party infringes their legal
rights.
Legal issues are important to settle any litigation involved in conduct of the
business and thus provides a confidence for their entrepreneur to involve
themselves into the business with no doubt at all.
Protect the rights ( Legal rights ) of the owner of an intellectual property
against infringement of the same on the other party
6.4.1

Intellectual Property Rights

Include Patents, copyrights and trademarks, as well as trade secrets and related rights.
These rights are usually collectively called "intellectual property" or IP.
6.4.1.1 Patents
A patent is a legal right to keep others from making, using or selling an invention. This
legal right is granted by a government for a limited period of time.
Types of Patents
i.

Patents of Invention

These are probably the most important type of patent.

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Such patents are commonly referred to as simply "patents," but they are referred to
as Patents of Invention in this article to differentiate them from the other types of
patent discussed below.
Patents of Invention protect new technology and how new technology works.
For example, if you make an improvement to an internal combustion engine, a
computer, or a can opener, you would most likely seek a Patent of Invention.
Patents of Invention can protect such diverse things as articles of manufacture, new
chemical compounds and methods of making things.
ii.

Design Patents

These protect how things look.


For example, if you design a new case for a handheld computer and want to protect
that new design, then you would seek a Design Patent.
Design Patents protect the appearance of articles, while Patents of Invention tend to
protect how the articles function or how they are made.
iii. Utility Model Patents
These are similar to Patents of Invention and in some countries they are called Petty
Patents.
Utility Model Patents protect functional aspects of products.
Utility Model Patents have historically been unavailable for the protection of the
processes of making product.
They differ from Patents of Invention in a number of ways and there is no general
rule for distinguishing Utility Model Patents from Patents of Invention other than
by the fact that the period of patent monopoly for a Patent of Invention is longer
than for a Utility Model Patent.
In some countries, Utility Model Patents have a lower standard of inventiveness
associated with them. In yet other countries, Utility Model Patents have more
lenient novelty rules.
The long and the short of it is that Utility Model Patents tend to protect the same
sort of technology as Patents of Invention, but generally offer a shorter period of
protection for one reason or another.
In some countries you can get both a Utility Model and a regular patent on the same
invention, and the Utility Model can then be important since it often goes to grant
faster than a Patent of Invention.

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6.4.1.2 Copyright
- Copyright is a form of intellectual property that gives the author of an original work
exclusive right for a certain time period in relation to that work, including its publication,
distribution and adaptation, after which time the work is said to enter the public domain.

- Copyright applies to any expressible form of an idea or information that is substantive


and discrete and fixed in a medium. Some jurisdictions also recognize "moral rights" of
the creator of a work, such as the right to be credited for the work. Copyright is described
under the umbrella term intellectual property along with patents and trademarks.
- Copyright has been internationally standardized, lasting between fifty to a hundred
years from the author's death, or a shorter period for anonymous or corporate authorship.
Some jurisdictions have required formalities to establish copyright, but most recognize
copyright in any completed work, without formal registration. Generally, copyright is
enforced as a civil matter, though some jurisdictions do apply criminal sanctions.

6.4.1.3 Trade Marks


- A trademark or trade mark[1] is a distinctive sign or indicator used by an individual,
business organization, or other legal entity to identify that the products or services to
consumers with which the trademark appears originate from a unique source, and to
distinguish its products or services from those of other entities. A trademark is designated
by the following symbols:
i.

(for an unregistered trademark, that is, a mark used to promote or brand


goods);

ii.

SM

(for an unregistered service mark, that is, a mark used to promote or brand
services); and

iii. (for a registered trademark).


A trademark is a type of intellectual property, and typically a name, word, phrase,
logo, symbol, design, image, or a combination of these elements. There is also a
range of non-conventional trademarks comprising marks which do not fall into
these standard categories.
The owner of a registered trademark may commence legal proceedings for
trademark infringement to prevent unauthorized use of that trademark. However,
registration is not required. The owner of a common law trademark may also file
suit, but an unregistered mark may be protectable only within the geographical area
within which it has been used or in geographical areas into which it may be
reasonably expected to expand.
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The term trademark is also used informally to refer to any distinguishing attribute
by which an individual is readily identified, such as the well known characteristics
of celebrities. When a trademark is used in relation to services rather than products,
it may sometimes be called a service mark, particularly in the United States.

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