Horizon

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Entrepreneurship

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Contents
Introduction ................................................................................................................................ 1
chapter 1: The Nature of Entrepreneurship .................................................................................. 2
1.1 INTRODUCTION............................................................................................................. 2
1.2 Historical Origin of Entrepreneurship ................................................................................ 2
1.3 Definitions of Entrepreneurship and Entrepreneur ............................................................. 3
1.4 Types of Entrepreneurs ...................................................................................................... 5
1.5 Role of Entrepreneurs in Economic Development .............................................................. 6
1.6 Entrepreneurial Competence and Environment .................................................................. 8
1.6.1 Entrepreneurial Mindset ......................................................................................... 8
1.6.2 Entrepreneurship and Environment ........................................................................... 22
1.7 Creativity, Innovation and Entrepreneurship .................................................................... 26
1.7.1 Creativity .................................................................................................................. 26
1.7. 2 Innovation ............................................................................................................... 27
1.7.3 From Creativity to Entrepreneurship ......................................................................... 29
1.8 Summary ......................................................................................................................... 29
1.9 Review Questions ............................................................................................................ 30
Chapter 2: Business Planning .................................................................................................... 32
2.1 INTRODUCTION ...................................................................................................... 32
2.2 Opportunity Identification and Evaluation ....................................................................... 32
2.3 Business Idea Development ............................................................................................. 35
2.4 Business Idea Identification ............................................................................................. 37
2.4.1 The Need will Your Business Fulfill for the Customers............................................. 37
2.4.2 Good or Service will your Business Sell ................................................................... 38
2.4.3 Identifies Potential Customer .................................................................................... 39
2.4.4 Strategy for Selling Goods or Services/ How is Your Business Going to Sell Good or
Services? ........................................................................................................................... 40
2.4.5 Relation between Business and Environment ............................................................ 40
2.5 Methods for Generating Business Ideas ........................................................................... 41
2.6 Business Idea Screening .............................................................................................. 51
2.7 Concept of Business Plan ................................................................................................ 53
2.8 Developing a Business Plan ............................................................................................. 54
2.8.1 Business Planning Process ........................................................................................ 54

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 2.8.2 Essential Components of Business Plan .................................................................... 56
2.9 Sample Business plan Format .......................................................................................... 58
2.10 Summary ....................................................................................................................... 63
2.11 Review Questions .......................................................................................................... 64
CHAPTER 3: BUSINESS FORMATION................................................................................. 65
3.1 INTRODUCTION ...................................................................................................... 65
3.2 The Concept of Small Business Development .................................................................. 65
3.3 Forms of Business (A Short Explanation) ........................................................................ 66
3.4 Definition and Role/Importance of MSEs in Developing Countries ................................. 68
3.4.1 Definition of MSEs ................................................................................................... 68
3.4.2 Role/Importance of MSEs in Developing Countries .................................................. 70
3.5 Setting up Small Scale Business ...................................................................................... 75
3.6 Small Business Failure and Success Factors .................................................................... 79
3.6.1 Small Business Failure Factors ................................................................................. 79
3.6.2 Small Business Success Factors ................................................................................ 82
3.7 Classification of Enterprises in Ethiopian Context ........................................................... 73
3.8 Main Supporting Packages for MSEs Development in Ethiopia ....................................... 85
3.9 Problems of Small Scale Business in Ethiopia ................................................................. 85
3.10 Organizational Structure and Entrepreneurial Team Formation ...................................... 86
3.10.1 Introduction ............................................................................................................ 86
3.10.2 Designing the Organization ..................................................................................... 86
3.10.3 Building the Management Team and a Successful Organization Culture ................. 88
3.11 Chapter Summary .......................................................................................................... 90
3.12 Questions for Review and Discussions........................................................................... 91
CHAPTER 4: PRODUCT/SERVICE DEVELOPMENT........................................................... 92
4.1 INTRODUCTION........................................................................................................... 92
4.2 The Concept of Product/Service Technology ................................................................... 92
4.3 Product/Service Development Process ............................................................................. 93
4.4 Legal and Regulatory Frameworks for Entrepreneurs ...................................................... 98
4.5 Intellectual Property Protection/Product/Service Protection ............................................. 98
4.5.1 What is Intellectual Property? ................................................................................... 98
4.5.2 Patents ...................................................................................................................... 98
4.5.3 Trademarks ............................................................................................................... 99
4.5.4 Copyrights .............................................................................................................. 100

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4.6 The Intellectual Property System in Ethiopia ................................................................. 100
4.7 Chapter Summary .......................................................................................................... 103
4.8 Questions for Review and Discussions .......................................................................... 104
CHAPTER 5: MARKETING.................................................................................................. 105
5.1 INTRODUCTION......................................................................................................... 105
5.2 Meaning and Definitions of Marketing ........................................................................ 106
5.3 Core Concepts of Marketing .......................................................................................... 107
5.3.1 Needs, Wants and Demand ..................................................................................... 107
5.4 Importance of Marketing ............................................................................................... 108
5.5 Marketing Philosophies ................................................................................................. 110
5.6 Marketing Information Systems ..................................................................................... 113
5.6.1 Marketing Research ................................................................................................ 114
5.6.2 Marketing Intelligence ............................................................................................ 117
5.6.3 Competitive Analysis .............................................................................................. 118
5.7 The Marketing Mix Strategy .......................................................................................... 120
5.7.1 The 4 P‘s Of Marketing/The Marketing Mix ........................................................... 120
5.7.2 What Is Marketing Strategy? ................................................................................. 121
5.8 Selling and of Customer Service............................................................................ 125
5.8.1 The Concept of Service .................................................................................... 125
5.8.2 The Concept of Customer ................................................................................ 126
5.8.3 Strategic Activities needed for Quality Customer Service Delivery ........ 126
5.8.4 Customer Handling and Satisfaction .............................................................. 126
5.9 Chapter Summary ..................................................................................................... 129
5.10 Review Questions ........................................................................................................ 130
CHAPTER 6: BUSINESS FINANCING................................................................................. 132
6.1 INTRODUCTION......................................................................................................... 132
6.2 Financial Requirements ................................................................................................. 132
6.3 Sources of Financing ..................................................................................................... 134
6.3.1 Internal Sources (Equity capital) ............................................................................. 134
6.3.2 External Sources (Debt capital) ............................................................................... 136
6.4 Lease Financing............................................................................................................. 141
6.4.1 Types of Lease ........................................................................................................ 141
6.5 Traditional Financing in Ethiopian (Equib/Edir, Etc.) .................................................... 143
6.6 Crowd Funding .............................................................................................................. 145

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6.6.1 How is Crowd Funding Different? .......................................................................... 145
6.6.2 The Benefits of Crowd funding ............................................................................... 146
6.6.3 Types of Crowd Funding ........................................................................................ 147

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6.7 Micro Finances .............................................................................................................. 147
6.7.1 What is Micro Finance? .......................................................................................... 147
6.7.2 Importance of MFIs ................................................................................................ 148
6.7.3 Micro Finances in Ethiopia ..................................................................................... 149
6.8 Chapter Summary .......................................................................................................... 150
6.9 Review Questions .......................................................................................................... 151

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CHAPTER 1: THE NATURE OF ENTREPRENEURSHIP

1. Definitions of Entrepreneurship and Entrepreneur

Here we will see some definitions of entrepreneurship and entrepreneur. Intuitively, it is know that
entrepreneurship is the process and entrepreneur is the person undertaking entrepreneurial activity such as
undertaking own business. Finally we will see the common attributes of the definitions of entrepreneurship
and entrepreneur.
Entrepreneurship is the process of identifying opportunities in the market place, arranging the resources
required to pursue these opportunities and investing the resources to exploit the
opportunities for long term gains. It involves creating incremental wealth by bringing together resources in
new ways to start and operate an enterprise.

Entrepreneurship is the processes through which individuals become aware of business ownership then
develop ideas for, and initiate a business.
Entrepreneurship can also be defined as the process of creating something different and better with value
by devoting the necessary time and effort by assuming the accompanying financial, psychic and social
risks and receiving the resulting monetary reward and personal satisfaction. In this case an individual
should come up with something different and better in order to the named as entrepreneur.

Entrepreneurship is the art of identifying viable business opportunities and mobilizing resources to
convert those opportunities into a successful enterprise through creativity,
innovation, risk taking and progressive imagination.

Entrepreneurship is a practice and a process that results in creativity, innovation and enterprise development
and growth. It refers to an individual‘s ability to turn ideas into action involving and engaging in socially-
useful wealth creation through application of innovative thinking and execution to meet consumer needs,
using one‘s own labor, time and ideas. Engaging in entrepreneurship shifts people from being ―job seekers‖
to ―job creators‖, which is critical in countries that have high levels of unemployment. It requires a lot of
creativity which is the driving force behind innovation.

In general, the process of entrepreneurship includes five critical elements. These are:

The ability to perceive an opportunity.

The ability to commercialize the perceived opportunity i.e. innovation

The ability to pursue it on a sustainable basis.

The ability to pursue it through systematic means.

The acceptance of risk or failure.

Based on the above concepts of entrepreneurship, an entrepreneur can be defined as follows:An entrepreneur
is any person who creates and develops a business idea and takes the risk of setting up an enterprise to
produce a product or service which satisfies customer needs.
An entrepreneur can also be defined as a professional who discovers a business opportunity to produce
improved or new goods and services and identifies a way in which resources required can be mobilized.
An entrepreneur is an individual who: has the ability to identify and pursue a business opportunity;
undertakes a business venture; raises the capital to finance it; gathers the necessary physical, financial

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 and human resources needed to operate the business venture; sets goals for him/herself and others;
initiates appropriate action to ensure success; and assumes all or a major portion of the risk!

An entrepreneur is a person who: create the job not a job-seeker; has a dream, has a vision; willing to
take the risk and makes something out of nothing
Other definition, views the term entrepreneur from three perspectives; i.e. from the economist,
psychologist and capitalist philosopher‘s point of view.

To an economist an entrepreneur is one who brings resource, labor, materials, and other assets
into combination that makes their value greater than before and also one who introduces
changes innovations.

To a psychologist an entrepreneur is a person typically driven by certain forces need to obtain

or attain something, to experiment, to accomplish or perhaps to escape the authority of others.

For the capitalist philosopher an entrepreneur is one who creates wealth for others as well,
who finds better way to utilize resources and reduce waste and who

produce job others are glad to get.

In general, entrepreneur refers to the person and entrepreneurship defines the process. Both men and women
can be successful entrepreneurs; it has nothing to do with gender. All entrepreneurs are business persons, but
not all business persons are entrepreneurs.

1.4 Types of Entrepreneurs

Entrepreneurship can take three different forms. They are:

The individual entrepreneur: An individual entrepreneur is someone who started; acquired or

franchised his/her own independent organization. The major portion of this module is also devoted to
describe the basic features and activities of the individual entrepreneur.
Intrapreneur: An Intrapreneur is a person who does entrepreneurial work within large organization.
The process by which an intrapreneur affects change is called Intrapreneurship.
There are two facts about intrapreneurship

The Intrapreneur‘s context is often large and bureaucratic organization whereas the individual
entrepreneur operates in the broader, more flexible economic market place.
Intrapreneurs are individuals who often engage in the entrepreneurial actions in large
organizations without the blessing of their organizations.
The Entrepreneurial Organization: The entrepreneurial function need not be embodied in a physical
person. Every social environment has its own way of filling the entrepreneurial function.

Individuals working in organizations have the potential for being, as do those working independently to start
their own business. An organization can create an environment in which all of its members can contribute in
some function to the entrepreneurial function.

An organization that creates such an internal environment is defined as entrepreneurial organization.

1.5 Role of Entrepreneurs in Economic Development

Entrepreneurial development is the most important input in the economic development of any country. The
objectives of industrial development, balanced regional growth, and generation of employment opportunities
are achievable through entrepreneurial development. Entrepreneurs are at the core of industrial development
which results in greater employment opportunities to the unemployed youth, increase in per capita income,

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higher standard of living and increased revenue to the government in the form of income, sales tax, export
duties, import duties etc. The entrepreneurs serve as a key to the creation of new enterprises, thereby
rejuvenating economy and sustaining the process of economic development in the following ways:

Improvement in per capita Income/Wealth Generation: Entrepreneurs play a vital in the economic
development of a region. From the fall of Rome (AD 476) to the eighteenth century, there was virtually
no increase in per capita wealth generation in the West. With the advent of entrepreneurship, however,
per capita wealth generation and income in the west grew exponentially by 20 Percent in the 1700s, 200
percent in the 1800s, 740 percent in the 1900 (Drayton, 2004).

Generation of Employment Opportunities: By creating a new business enterprise, entrepreneurs

generate employment opportunities for others. Unemployment is a major issue, especially in the context
of developing economies like Ethiopia. Educated youth often

are unable to get to get a suitable employment themselves. Thus, entrepreneurs not only self-employ
themselves, but also create jobs for others.
3) Inspire others Towards Entrepreneurship: The team created by an entrepreneur for his new
undertaking often provides the opportunity for the employees to have a first-hand experience of getting
involved in an entrepreneurial Venture. An existing venture provides a number of entrepreneurial
opportunities through forward and backward linkages, to these employees even to become entrepreneurs
themselves. Thus, this process helps in forming

a chain reaction of entrepreneurial activity which directly contributes to the health of the economy.
Balanced Regional Development: Entrepreneurs help to remove regional disparities in economic
development. They set up the industries in the backward areas to avail various subsidies and incentives
offered by the Central and State Governments, thereby balancing the economic growth in different
regions in the country.
Enhance the Number of Enterprise: When new firms are created by entrepreneurs, the number of
enterprises based upon new ideas/ concepts/ products in a region increases. Not only does an increase in
the number of firms enhance the competition for new ideas, but greater competition across firms also
facilitates the entry of new firms specializing in a particular new product or service. This is because the
necessary complementary inputs are more likely available from small specialist niche firms than from
large vertically integrated products (Jacobs, 1969).

Provide Diversity in Firms: Entrepreneurial activity often results into creation of a variety of firms in a
region. These firms operate into diverse activities and it has been found that it is this diversity in firms
which fosters economic development and growth rather than homogeneity. According to Jacobs (1969), it
is the exchange of complementary knowledge across diverse firms and economic agents that yield an
important return on new economic knowledge.

Economic Independence: Entrepreneurship is essential for self-reliance for a country. Entrepreneurs

create industries that manufacture indigenous substitutes, thereby reducing the dependence on imports.
Also, the goods are exported to other countries to earn foreign exchange. This import substitution and
export promotion results in more economic independence to the country

8) Combine Economic factors: All the products bought and sold in an economy
are a mix of three primary economic factors (the raw materials, nature offers up, the physical
and mental labor people provide and capital (money). Now value is created by combing these
three things together in a way which satisfies human needs.
9) Provide Market efficiency: Efficient means resources are distributed in an
optimal way that is the satisfaction that people can gain from them is maximized. An

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 economic system can only reach this state if there is competition between different suppliers.
If a supplier is not using competition then they will tend to demand profit in excess of what
the market would allow and reduce the overall efficiency of the system
10) Accepting Risk: Risk is the potential variation in terms of future outcomes.
We do not know exactly what the future will bring. This lack of knowledge creates
uncertainty. No matter how we plan there is always a possibility of adverse deviation from
what we expect or hoped for. Here the primary function of the entrepreneur is to accept risk
on behalf of other people.
11) Maximize Investor’s Return: Entrepreneurs create and run organizations
which maximize long-term profit on behalf of the investors which in turn generates overall
economic efficiency.

1.6 Entrepreneurial Competence and Environment

Under this topic entrepreneurial mindset (that will address subtopics such as, who become an entrepreneur;
qualities of successful entrepreneurs; entrepreneurial skills; the entrepreneur‘s task and wealth of the
entrepreneur), and Entrepreneurship and Environment..

1.6.1 Entrepreneurial Mindset

1.6.1.1 Who Becomes an Entrepreneur?

Anyone with the following characteristics can be an entrepreneur.

The Young Professional: Increasingly young highly educated people often with entrepreneurial
qualifications are skipping the experience of working for an established organization and moving directly
to work on establishing their own ventures.

The Inventor: The inventor is someone who has developed an innovation and who has decided to make
a career out of presenting that innovation to the market. It may be a new product or it may be an idea for
a new service. It may be a high-tech or it may be based on a traditional technology.

The Excluded: Some people turn to an entrepreneurial career because nothing is open to them.
Displaced communities and ethnic and religious minorities have not been invited to join the wider
economic community due to a variety of social, cultural and political and historical reasons. As a result
they may form their own internal networks, trading among themselves and, perhaps, with their ancestral
countries.

1.6.1.2 Qualities of an Entrepreneur

In order to be successful, an entrepreneur should have the following qualities:

Opportunity-seeking

Persevering

Risk Taking
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
Demanding for efficiency and quality

Information-seeking

Goal Setting

Planning

Persuasion and networking

Building self-confidence

Listening to others

Demonstrating leadership

Opportunity-seeking: An opportunity is a favorable set of circumstances that creates a need for a new
product, service or business. It includes access to credit, working premises, education, trainings etc. An
entrepreneur always seeks out and identifies opportunities. He/she seizes an opportunity and converts it
into a realistic and achievable goal or plan.
Persevering: An entrepreneur always makes concerted efforts towards the successful completion of a
goal. An entrepreneur perseveres and is undeterred by uncertainties, risks, obstacles, or difficulties which
could challenge the achievement of the ultimate goal.

Risk Taking: The best entrepreneurs tend to:-

Set their own objectives where there is moderate risk of failure and take calculated risks

Gain satisfaction from completing a job well

Not be afraid of public opinion, skepticism

Take responsibility for their own actions

Importance of Risk-taking

Build self confidence


Create a feeling of leadership

Create strong motivation to complete a job well

Demanding for Efficiency and Quality

Efficiency: Being efficient means producing results with little wasted effort.

Quality refers to:

The ongoing process of education, communication, evaluation and constant improvement of

goods/services to meet the customer‘s need in a way that exceeds the customer‘s expectations;

A characteristic of the product or service that makes it fit to use. It makes a product, process, or
service desirable.

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 3. The ability of a product or service to meet a customer‘s expectations for that product or
service.

The importance of quality management in entrepreneurship is reflected in the income statement of the
business. There is always a demand for quality products and efficient services. Quality plays an important
role in this new era of globalization because it confers certain benefits which include:

Reduction of waste: Striving to maintain quality means examining all processes that contribute to the
creation of a product, to remove non-productive processes and waste. If businesses keep to their
standard of maintaining the quality of the product, the number of defective products will be reduced.
Consumers prefer to buy quality products. Hence the quality products/services help in increasing the
share in market and ensure that they will not be returned.

Cost-effectiveness: Striving to ensure quality helps businesses to minimize the chances that they will
make mistakes. As a result, the costs of re-doing work or changing the product after it has been sold
are greatly reduced.

An increase in market share: Customers prefer to buy the same product again and again if they are
satisfied with the quality. If they are satisfied with the quality of a product, then they will not only
purchase the product/services more than once, but they will also recommend it to their friends. As a
result, this contributes to an increase in the company‘s market share.

Better profitability: Better quality of product satisfies customers. Increased customers means
increase sales, increased shares in market and consequently increased profits.

Social responsibility: By providing quality products and services, a company is more likely to be
able to fulfill its responsibility to the community and meet standards set by government.

Reputation: Quality of goods and services improves the reputation of the business for competition in
the market and growth.
Information-seeking: Successful entrepreneurs do not rely on guesswork and do not rely on others for
information. Instead, they spend time collecting information about their customers, competitors,
suppliers, relevant technology and markets. Gathering relevant information is important to ensure that the
entrepreneur makes well informed decisions. Information on the

area of market, supply, operations, finance, legislation, and infrastructure are important for entrepreneurs.

Goal Setting

A Goal - is a general direction, or long-term aim that you want to accomplish. It is not specific enough to be
measured. It is large in scope, not necessarily time-bound, and is something that people strive for by meeting
certain objectives which will hopefully add up to eventually achieving the goal.
Objectives - are specific and measurable. They are concise and specific. Think of the word ―object.” You can
touch it, it‘s there, it‘s actual, and it‘s finite.

An entrepreneur must have a goal and an objective which is specific, measurable, attainable relevant, and time
bound (SMART).
Specific: Great goals are well-defined and focused. The moment you focus on a goal, your goal
becomes a magnet, pulling you and your resources toward it. The more focused your energies, the
more power you generate.

Measurable: A goal without a measurable outcome is like a sports competition without a scoreboard or
scorekeeper. Numbers are an essential part of business. Put concrete numbers in your goals to know if
you‘re on track.

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
Attainable: Far too often, entrepreneurs can set goals which are beyond their reach. Dream big and aim
for the stars but keep one foot firmly based in reality.
Relevant: Achievable business goals are based on the current conditions and realities of the business
climate. For example, you may desire to have your best year in business or increase revenue by 50%,
but if a national economic crisis is looming and three new competitors just opened in your market,
then your goals are not relevant to the realities of the market.

Time-Based: Business goals and objectives just don‘t get done when there‘s no time frame tied to the
goal-setting process. Whether your business goal is to increase revenue by 20% or to find two new
clients, it is important to choose a time-frame to accomplish your goal.
Planning: Planning is making a decision about the future in terms of what to do, when to do, where to
do, how to do, by whom to do and using what resources. An effective entrepreneur therefore usually
plans his/her activities and accounts as best as they can for unexpected eventualities.

8) Persuasion and Networking

Persuasion is a way of convincing someone to get something or make a decision in your favor. It is inducing
or taking a course of action or embracing a point of view by means of argument, reasoning, or entreaty; to
convince; to succeed in causing a person to do or consent to something; to win someone over, as by
reasoning or personal forcefulness; to cause to believe; to induce, urge, or prevail upon successfully.

Importance of Persuasion in Business

We purchase goods from people


We sell goods to people

We need support from people

We work with people.

Without people, be they are suppliers, workers, and most importantly customers, there is no business.
Networking is an extended group of people with similar interests or concerns who interact and remain in
informal contact for mutual assistance or support. In a business environment where we are in, we network
with customers, suppliers, competitors, various firms, different organizations, government offices and family,
etc.
Factors that Affect Persuasion and Networking

Socio-cultural background and perceptions


Communication skills (both verbal and non-verbal).

Negotiation skills

Building Self-confidence: Self-confidence is the state of being certain that a chosen course of action is
the best or most effective given the circumstances. Confidence can be described as a subjective,
emotional state of mind, but is also represented statistically as a confidence level within which one may
be certain that a hypothesis will either be rejected or deemed plausible. Self-confidence is having
confidence in oneself when considering a capability. Overconfidence is having unmerited confidence-
believing something or someone is capable when they are not.

Characteristics of a Self-confident Person

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A person with self-confidence may exhibit some of the following characteristics:

1.6.1.3 Entrepreneurial Skills

A skill is simply knowledge which is demonstrated by action. It is an ability to perform in a certain way. An
entrepreneur is someone who has a good business idea and can turn that idea into reality. To be successful,
an entrepreneur must not only identify an opportunity but also understand it in great depth. He or she must
be able to spot a gap in the market and recognize what new products or services fill the gap. He or she must
know what features it will have and why they will appeal to the customer. The entrepreneur must also know
how to inform the customer about it and how to deliver the new offerings. All this calls for an intimate
knowledge of a particular sector of industry. Turning an idea into reality calls upon two sorts of skills, these
are:

General management skills and II. People management skills

General Management Skills: These are skills required to organize the physical and financial resources
needed to run the venture. Some of the most important general management business skills are:
Strategy Skills – An ability to consider the business as a whole, to understand how it fits within
its market place, how it can organize itself to deliver value to its customers, and the ways in
which it does this better than its competitors.
Planning Skills – An ability to consider what the future might offer, how it will impact on the
business and what needs to be done to prepare for it now.

Marketing Skills – An ability to see past the firm‘s offerings and their features, to be able to see
how they satisfy the customer‘s needs and why the customer finds them attractive.

Financial Skills – An ability to manage money; to be able to keep track of expenditure and to
monitor cash-flow, but also an ability to assess investments in terms of their potential and their
risks.

Project Management Skills – An ability to organize projects, to set specific objectives, to set
schedules and to ensure that the necessary resources are in the right plat of the right time.

Time Management Skills – An ability to use time productively, to be able to priorities important
jobs and to get things done to schedule.
People Management Skills: Businesses are made by people. A business can only be successful if the
peoples who make it up are properly directed and are committed to make an effort on its behalf. An
entrepreneurial venture also needs the support of people from outside the organization such as customers,
suppliers and investors. To be effective, an entrepreneur needs to demonstrative a wide variety of skills in
the way he/she deals with other peoples. Some of the more important skills we might include under this
heading are:

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

Fig1.1: entrepreneurial skills

1.6.1.4 The Entrepreneurial Tasks

We recognize entrepreneurs, first and foremost, by what they actually do – by the tasks they undertake. A
number of tasks have been associated with the entrepreneur. Some of the more important are:

Owning Organizations: Ownership lies with those who invest in the business and own its stock – the
principals, while the actual running is delegated to professional agents or managers. Therefore, if an
entrepreneur actually owns the business then he is in fact undertaking two roles at the same time that of
an investor and that of a manager. Here we can also recognize many people as entrepreneur even if they
do not own the venture they are managing.

Founding New Organizations: The entrepreneur is recognized as the person who undertakes the task of
bringing together the different elements of the organization (people, property, productive resource, etc.)
and giving them a separate legal entity. The entrepreneur makes major changes in their organizational
word.

Bringing Innovations to Market: The idea of innovation encompasses any new way of doing something
so that value is created. Innovation can mean a new product or service but it can also include a new way
of delivering an existing product or service, new methods of informing the consumer about the product or
new ways of organizing the company.
Identification of Market Opportunity: An opportunity is the gap in a market where the potential exists
to do something better and create value. New opportunities exist all the time but they do not necessarily
present themselves. If they are to be exploited they must be actively sought out. Note that opportunity
always takes priority over innovation.

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 Application of Expertise: A slight more technical notion is that they have a special ability in deciding
how to allocate scarce resources in situations where information is limited. It is their expertise in doing
this that makes entrepreneurs valuable to investors.

Provision of leadership: Entrepreneurs can rarely drive their innovation to market on their own. They
need the support of other people both from their organizations and from people outside such as investor
customer and supplier.

The entrepreneur as manager: At the end of the day the entrepreneur is a manager. The

distinction between an entrepreneur and ordinary manager may lie on what the entrepreneur manager
manages, how they manage, their effectiveness and the effect they have as a manager not by the
particular tasks they undertake.

1.6.1.5 Wealth of the Entrepreneur

Wealth is money and anything that money can buy. It includes money, knowledge and assets of the
entrepreneur.

Who Benefits from the entrepreneur’s Wealth?

No entrepreneur works in a vacuum. The venture they create touches the lives of many other people. To drive
his/her venture forward, the entrepreneur calls up on the support of a number of different groups. In return
for their support these groups expect to be rewarded from the success of the venture. Peoples who have a part
to play in the entrepreneurial venture generally are called stakeholder. The stakeholder groups are;
employees, investor, supplier, customer, the local community and government. Let us look at the benefits of
each stakeholder.

Employees: They contribute physical and mental labor to the business. Success of the entrepreneurial
venture depends on their effort and motivation. Therefore, they are rewarded with:

Money – their wage or salary


The possibility of owning a part of the firm through share schemes.

A stage of which they can develop social relationships.

The possibility of personal development.

Investors: These are the peoples who provide the entrepreneur with the necessary money to

start the venture and keep it running. There are two main sorts of investors: stockholders and lenders.
Stockholders are those who buy the stock of the company and are true owners of the firm. The actual
return of the stockholders varies depending on how the business performs. Lenders, on the other hand,
are people who offer money to the venture on the basis of it being a loan. They do not actually own a part
of the firm and their return is independent of the businesses performance. They also take priority for
payment over shareholders and face lower level of risk than the stockholders.

Supplier: They are the individuals and organizations who provide the business with the materials,
productive assets and information it needs to produce its output. They are paid for providing these inputs.

Customers: Customers may need to make an investment in using a particular supplier. Changing
supplier may involve switching costs and supplier, risk of quality and expenses incurred in changing over

pg. 14
 to new inputs. The entrepreneur may reward customers by offering quality products, fair prices, regular
and consistency of supply, loan arrangement etc.
The local community: Business has physical locations. The way they operate may affect the people who
live and other businesses which operate nearby.

A business has a number of responsibilities, which may be defined or not in national laws, to this local
community. Such as:
Not polluting their shared environment

Contributing and sponsoring local development activities

Contribution for political and cultural stabilities and economic improvements

Acting in an ethical way.

Government: The responsibility of government is to ensure that businesses can operate in an
environment which has political and economic stability. In addition, it provides central services such as
education and health-care. These activities cost money to provide.

Therefore, government should be rewarded for its services. Hence, government taxes individuals and
businesses.

1.6.2 Entrepreneurship and Environment

Business environment refers to the factors external to a business enterprise which influence its operations and
determine its effectiveness. Business environment may be healthy or unhealthy. Healthy business
environment means the conditions are favorable to the growth of business whereas unhealthy environment
implies conditions hostile or unfavorable to business operations. Business and its environment interact with
each other. Economic system and other conditions in the environment determine the success of business
enterprises. The firm and its management have to adjust to the conditions prevalent around it. However,
business enterprises try to influence and shape the environment. Successful working of business concerns
improves the economic and social conditions in the country.

No business concern can ignore the environment around it except at its own peril. ―The penalty of environ
mental disregard is heavy. It not only reduces profit margins and makes opportunities for expansion slip, but
it also arouses social hostility and makes social environment growingly inhospitable to business operations.‖
A study of business environment offers the following benefits:

It provides information about environment which is essential for successful operation of business
firms.
It opens up fresh avenues for the expansion of new entrepreneurial operations. The entrepreneurs may
come forward with new ideas and with new ventures when they find environment suitable to their
enterprises.

Knowledge about changing environment enables businessmen to adopt a dynamic approach and
maintain harmony of business operations with the environment.

By studying the environment entrepreneurs can make it hospitable to the growth of business and
thereby earn popular support.
Thus, the entrepreneur should continuously study the nature of environment and its influence on business.
However, mere study is not enough. Attempts must be made to influence the environment in order to make it
congenial and favorable to entrepreneurial activities. The most successful entrepreneur is one who not only
adjusts to the environment but also modifies the

pg. 15
environment to suit his requirements through the direct and indirect influences he can exercise over the
system.

1.6.2.1 Phases of Business Environment

Business environment may be classified into two broad categories; namely external; and internal environment

A) External Environment

It is the environment which is external to the business and hardly to influence independently.

The following are the components of external environment:

i) Economic Environment

Economic environment is of multidimensional nature. It consists of the structure of the economy, the
industrial, agricultural, trade and transport policies of the country, the growth and pattern of national income
and its distribution, the conditions prevailing in industrial, agricultural and other sectors, the position relating
to balance of trade and balance of payments, and other miscellaneous conditions of the economy. There is a
close relationship between a business firm and the economic environment around it. The success of a
business enterprise depends considerably upon the State and growth of the economy.

ii) Legal Environment

Business must function within the framework of legal structure. Therefore, an adequate knowledge of laws
and rules is necessary for efficient managerial performance. When new laws are made and controls exercised
through legal enactments, the first reaction of the business community is to oppose them and disobey them.
Management should try to understand what should be the right laws and strictly obey them when so made. In
addition, it can influence the government to change and improve the law and make it useful to the business
community.

There are several business laws in our country. A working knowledge of these laws is very helpful for the
entrepreneur. Such knowledge will keep them away from innocent breaches and resultant penalties. Some
laws differ from region to region and amendments arc made from time to time. Therefore, the entrepreneur
must always keep in touch with those who know the latest position in law. In addition, an entrepreneur
should:

Read the books that enlighten on the legal side of business

Consult government agencies concerned with the implementation of business laws.

Retain labor law consultants.

iii) Political Environment

In a democratic country, politics cannot be ignored. Managers and entrepreneurs should understand the
working of the political system. Such understanding and concern for national problems will help them in the
long run in discharging their responsibilities to the satisfaction of the public.
Public opinion is very important and today's public opinion becomes tomorrow's legislation. Businessmen
should, therefore, learn to take public opinion into account in the decision-making process. If business does
not learn how to deal adequately with public opinion, it will face a disaster. This does not mean that business
should surrender itself to public opinion. Rather, it implies intelligent response in order to change wherever
necessary and a constructive approach to problems.

iv) Socio-Cultural Environment

pg. 16
It consist the social and cultural norms of a society in a given period of time. The variables that are appraised
are values, beliefs, norms, fashions and fads of a particular society. It can help in understanding the level of
rigidity/flexibility of a given society towards a new product/service/concept. Traditional culture should be
protected in so far as it is not a hindrance to innovation, motivation, and development.

Demographic Environment

It assesses the overall population pattern of a given geographical region. It includes variables like age profile,
distribution, sex, education profile, income distribution etc. The demographic appraisal can help in
identifying the size of target customers.

B) Internal Environment

Internal environment is the environment which is under the control of a given organization.

Following are the components of internal environment of a business:

Raw Material: It assesses the availability of raw material now and in the near future. If the availability
of raw material is less now or would be less in future then the entrepreneur should give a serious thought
to establishing a venture as the entire system can come to a standstill due to shortage of raw material.
Production/Operation: It assesses the availability of various machineries, equipment, tools and
techniques that would be required for production/operation.
Finance: It assesses the total requirements of finance in terms start-up expenses, fixed expenses and
running expenses. It also indicates the sources of finance that can be approached for funding.

Human Resource: It assesses the kind of human resources required and its demand and supply in the
market. This further helps in estimating the cost and level of competition in hiring and retaining the
human resources.

As stated above, the objective of environmental scanning should be to gather information from as many
sources as possible and to maximize this information for enhanced probability of success in the business.

1.6.2.2 Environmental Factors Affecting Entrepreneurship

A complex and varying combination of financial, institutional, cultural and personality factors determines the
nature and degree of entrepreneurial activity at any time. The personal backgrounds of the entrepreneurs are
determined mainly by the environment in which they are born and brought up and work. A multitude of
environmental factors determine the entrepreneurial spirit among people. The entrepreneurs in turn create
impact on the environment. The interaction between the entrepreneur and his environment is an ongoing
process. At any given point of time, the entrepreneurs derive meanings from the environment prevailing at
that time and try to adapt and/or change the environment to suit their needs.
Some of the environmental factors which hinder entrepreneurial growth are given below:

Sudden changes in Government policy.


Sudden political upsurge.

Outbreak of war or regional conflicts.

Political instability or hostile Government attitude towards industry.

Excessive red-tapism and corruption among Government agencies.

Ideological and social conflicts.

pg. 17

Unreliable supply of power, materials, finance, labor and other inputs.

Rise in the cost of inputs.

Unfavorable market fluctuations.

Non-cooperative attitude of banks and financial institutions.

Entrepreneurship is environmentally determined. The most important essential for entrepreneurial growth is
the presence of a favorable business environment. A healthy business

environment requires active social and cultural behavior of the people, efficient economic conditions, helpful
motivating Government policies, etc. When environment mitigates entrepreneurship it must be modified.

1.7 Creativity, Innovation and Entrepreneurship

Creativity, innovation and entrepreneurship, have been recognized as important contributors to a nation‘s
economic growth. These three terminologies are chronologically interrelated and it is very important to look
in to them to get their full picture.

1.7.1 Creativity

Creativity is defined as the tendency to generate or recognize ideas, alternatives, or possibilities that may be
useful in solving problems, communicating with others, and entertaining ourselves and others.

Creativity is the ability to come up with new idea and to identify new and different ways of looking at a
problem and opportunities.
It is a process of assembling ideas by recombining elements already known but wrongly assumed to be unrelated to
each other. This definition has several key elements that are worth considering:

Process: creativity is a process (implying among other things, that it is more like a skill than an
attitude, and that you can get better at it with practice)

Ideas: creativity results in ideas that have potential value.

Recombining: the creative process is one of putting things together in unexpected ways. In order to be
creative, you need to be able to view things in new ways of from a different perspective. Among other things,
you need to be able to generate new possibilities or new alternatives. Tests of creativity measure not only the
number of alternatives that people can generate but the uniqueness of those alternatives. The ability to
generate alternatives or to see things uniquely does not occur by change; it is linked to other, more
fundamental qualities of thinking, such as flexibility, tolerance of ambiguity or unpredictability, and the
enjoyment of things heretofore unknown.
Thus, creativity is the development of ideas about products, practices, services, or procedures that are novel
and potentially useful to the organization.
1.7.1.1 Steps in the Creative Process

Step1: Opportunity or problem Recognition: A person discovers that a new opportunity exists or a problem
needs resolution.
Step2: Immersion: the individual concentrates on the problem and becomes immersed in it. He or she will
recall and collect information that seems relevant, dreaming up alternatives without refining or evaluating
them.

pg. 18
Step 3: Incubation: the person keeps the assembled information in mind for a while. He or she does not
appear to be working on the problem actively; however, the subconscious mind is still engaged. While the
information is simmering it is being arranged into meaningful new patterns.

Step 4: Insight: the problem-conquering solution flashes into the person‘s mind at an unexpected time, such
as on the verge of sleep, during a shower, or while running. Insight is also called the Aha! Experience.

Step 5: Verification and Application: the individual sets out to prove that the creative solution has merit.
Verification procedures include gathering supporting evidence, using logical persuasion, and experimenting
with new ideas.

1.7.1.2 Barriers to Creativity

Be aware that there are numerous barriers to creativity, including:

searching for the one ‗right‘ answer

focusing on being logical

blindly following the rules

constantly being practical

viewing play as frivolous

becoming overly specialized

avoiding ambiguity

fearing looking foolish

fearing mistakes and failure

believing that ‗I‘m not creative

1.7. 2 Innovation

Innovation lies at the heart of the entrepreneurial process and is a means to the exploitation of opportunity. It
is the implementation of new idea at the individual, group or organizational level.

Innovation is a process of intentional change made to rate value by meeting opportunity and seeking
advantage.

There are four distinct types of innovation, these are as follows:

Invention - described as the creation of a new product, service or process


Extension - the expansion of a product, service or process

Duplication - defined as replication of an already existing product, service or process

Synthesis - the combination of existing concepts and factors into a new formulation

1.7.2.1 The Innovation Process

pg. 19
 Analytical planning: carefully identifying the product or service features, design as well as the
resources that will be needed.
Resources organization: obtaining the required resources, materials, technology, human or
capital resources

Implementation: applying the resources in order to accomplish the plans

Commercial application: the provision of values to customers, reward employees and satisfy the
stakeholders.

1.7.2.2 Areas of Innovation

The following are some of the major areas in which valuable innovation might be made.

New product: A new product can be developed through new or existing technology. The new product
may offer a radically new way of doing something or it may simply be an improvement on an existing
item. The new product must offer the customer an advantage if it is to be successful.
New Services: A service is an act which is offered to undertake a particular task or solve a particular
problem.

New Production Techniques: Innovation can be made in the way in which a product is to be
manufactured. A new production technique should allow the end user to obtain the product at a lower
cost, or a product of higher quality or better service in the supply of the product.

New Way of Delivering the Product or Service to the Customer: Customer can only use
product/service they can access. A common innovation is to take a more direct routine by cutting out
distributors or middlemen.

New Operating Practices: As with innovations in the production of physical products, innovation in
service delivery must address customers need and offer them improved

benefits, for example easier access to the service, a higher quality service, a more consistent service, a
faster or less time consuming service etc.
New Means of Informing the Customer about the Product: People will only use a product or service
if they know about it. Demand will not exist if the offering is not properly promoted to them. Promotion
consists of two parts; a message what is said and a means – the route by which that message is delivered.
New Means of Managing Relationship within the Organization: Any organization has a wide variety
of communication channels running through it. The performance of the organization will depend to a
great extent on the effectiveness of its internal communication channels. These communication channels
are guided by the organization‘s structure.
New Ways of Managing Relationships between Organizations: Organizations sit in a

complex web of relationships to each other. The way they communicate and relate to each other is very
important.

1.7.3 From Creativity to Entrepreneurship

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

Entrepreneurship = creativity + innovation.

pg. 20
Fig 1.2: Flow of Creativity, Innovation and Entrepreneurship

CHAPTER 2: BUSINESS PLANNING

2.1 INTRODUCTION
In the previous chapter, we dealt with the concept of Entrepreneurship. This unit will help you to understand
the concept of opportunity identification and evaluation, business idea development and how to prepare a
business plan. Virtually to start any type of business or expand the existing one needs to work on opportunity
identification and evaluation, business idea development and then prepare business plan. Lack of proper
opportunity identification and evaluation, idea development process and business planning are the most often
cited reasons for business failure. The various sections and sub-sections of this chapter will also summarize
opportunity identifying and evaluating processes, business idea development process, and the feasibility
study, importance and preparation of a business plan.

Chapter Objectives

After completing this chapter, students will be able to:

Identify opportunity in the environment,


Evaluate the opportunities in the environment,

Generate business idea,

Explain the concept of business planning,

Identify components of business plan,

Develop business plan,

2.2 Opportunity Identification and Evaluation

Most authors agree that the initial stage in the entrepreneurial process is the identification and refinement of a
viable economic opportunity that exists in the market. Without the recognition of an opportunity the
entrepreneurial process is likely to result in failure.

Opportunity recognition corresponds to the principal activities that take place before a business is formed or
structured. The opportunity identification and evaluation stage can be divided into five main steps namely;
getting the idea/scanning the environment, identifying the opportunity, developing the opportunity,
evaluating the opportunity and evaluating the team.

1) Scanning the Environment/ Getting the Idea

pg. 21
While scanning the environment it may be provide you with idea and business opportunities. Idea is a thought
or suggestion about a possible course of action. Synonymous with ―idea‖ are the terms thought, intention,
scheme, suggestion, proposal, initiative, spur, impulse, brainwave, insight, concept and connotation.
Whereas, opportunity is a favorable time or set of circumstances for doing something. Synonymous with
opportunity are chance, opening and prospect. A business opportunity is a gap left in a market by those who
currently serve it, giving a chance to others to add unrealized value by performing differently from and better
than competitors in order to create new possibilities.
Business opportunities are distinguished from ideas; an idea is not synonymous with opportunity. The
difference between an idea and an opportunity is that an opportunity is the possibility of occupying the
market with a specific innovative product that will satisfy a real need and for which customers are willing to
pay but idea is all about opinion about anything we can have. Successful venturing may well rest upon the
ability of an individual to recognize or distinguish an opportunity from an idea.

2) Opportunity Identification

Opportunity identification is ability to see, to discover and exploit opportunities that others miss. It is the
process of seeking out better ways of competing. It includes scanning the informational environment, being
able to capture, recognize and make effective use of abstract, implicit and changing information from the
changing external environments.
It is important for the entrepreneur to understand the cause of the opportunity. Is it technological change,
market shift, government regulation, or competition? These factors and the resulting opportunity have a
different market size and time dimension. The market size and the length of the window of opportunity form
the primary basis for determining risks and rewards which serves for opportunity evaluation.

Opportunity identification is a very difficult task, as most opportunities do not just appear but rather result
from an entrepreneur‘s alertness to possibilities. In developing countries, problems may be changed to
business opportunities.

3) Opportunity Development

Having recognized the opportunity, timely adaptation of that opportunity to suit actual market need is key to
new venture success. Opportunity development is the process of combining
resources to pursue a market opportunity identified. This involves systematic research to refine the idea to
the most promising high potential opportunity that can be transformed into marketable items.

4) Opportunity Evaluation

Opportunity screening and evaluation is a critical element of the entrepreneurial process. A professional
executed evaluation can tell whether the specific product or service has the returns needed to justify the
investment and the risk to be taken.

Opportunity screening and evaluation is perhaps the most critical element of the entrepreneurial process, as it
allows the entrepreneur to assess whether the specific product or service has the returns needed for the
resources required. This evaluation process involves looking at the creation and length of the opportunity,
its real and perceived value, its risks and returns, its fit with the personal skills and goals of the
entrepreneur, and its differential advantage in its competitive environment. According to experts, evaluating
the opportunity must answer the questions listed in table 2.1 below:

Table 2.1: Business factors and questions for opportunity evaluation

Business factor Questions for evaluation

Product or Description of the product or service, its differentiator, purpose and the need it fills
Service o What competitive advantage / benefits does the product have?
o What is the required customer care support for this product/service?
pg. 22
 o Is the company able to produce product and supply required aftercare support?

Market o Where is the market demand? What is the target market? Is it generic or a
Opportunity niche?
o Industry characteristics (growth rates, change, entry barriers).
o What market share can the product reasonably expect today? In 2, 5 or 10
years?
o Timing and length of the window of opportunity?
o What competition exists in this market? Substitutes? How big is their turnover?
o How accessible are the desired distribution channels?
Costing and o How much will it cost to develop the product and commercialize it?
Pricing o Where will the funds come from?
o How do the pricing, costs and economies of scale compare with competitors?
o How easy is it to acquire equipment, skills and other inputs required?
Profitability o Where is the money to be made in this activity? What are the gross margins?
o Would the return on investment be acceptable? What is the payback period?
o What are the cash flow patterns and the source of working capital?
Capital o How much capital (people, operating expense and assets) is required to start?
Requirements o What are the long-term capital needs?
o How much of the required capital is secured and where will the rest come
from?
o What securities are available to guarantee the required funds?

usiness factor Questions for evaluation

o Is there a list of potential funders? In case the funders withdraw their capital?
Issues and risks o What risks (real and perceived) are inherent with the product/service?
o Industry based risks e.g. is the market on a decline?

Are there plans for surviving the death of the lead entrepreneur? o Unreliable forecasts?
Inadequate cash flow?

o Inability to grow with the demand or cope with shrinking sales? o Supplier and value chain
management?

Assessment of the Entrepreneurial Team

Regardless of how right the opportunity may seem to be, it will not make a successful business unless it is
developed by a team with strong skills. Gartner et al (1999:230) advices that once the opportunity has been
evaluated, the next step is to ask pertinent questions about the people who would run the company. Such
questions are illustrated in table 2.2:
Table 2.2: Team factors and questions for opportunity evaluation

Team factor Questions for evaluation

Focus: o Is the founder really an entrepreneur, bent on building a company?
o Does the entrepreneur (or his team) have some experience (work or
industry)?
o Do they really like this product/sector? Do they really want this?
o Can the team create products to suit that market need?
o How stressful is the opportunity for the team?
Selling: o Does the team have the necessary selling and closing skills?
Management: o Who will work full time? Do your managers represent competitive
advantage?
o Does the team have the necessary management and technical skills?
pg. 23
 o If the required skills are not available, can they be acquired at competitive
rates?
o How is their relationship with the entrepreneur, commitment and
motivation?
Ownership: o Have the critical decisions about ownership and equity splits been resolved?
o Are the members committed to these?
o Does the owners have enough financial capital for required own
contributions?

2.3 Business Idea Development

Brainstorming Cases on business Idea and Business Idea Identification is given as follow:
Case 1: Janet’s Experience
Janet has a small farm and her husband works in a nearby mine, but even though both of them have jobs, they do not
earn enough money to pay for their children‘s education. Janet decides to try and start her own business by rearing
chickens to sell. She knows how to do it and her uncle gives her a loan of $400 to start the business. However, before
she buys the chicks, someone tells her that there is a huge demand

for sunflower oil because of its lack of availability in the market. Traders are knocking on the doors of local farmers
asking them to produce it. Thinking she can earn a lot more money from pressing sunflower seeds for oil, Janet
changes her business idea and starts an oil pressing venture.

Janet has never grown a large quantity of sunflowers. She spends all the money from the loan to buy seeds, fertilizer and
the oil pressing equipment. Since she uses most of the family farmland to grow sunflowers, there is less land to grow
maize and vegetables for the family to eat. The chemicals from the fertilizer begin to make her children sick. She now
has to buy more food for the family. It takes a lot of time and effort to process the oil, so, Janet has to employ someone
to help her. A lot of other farmers have started growing sunflower seeds too. Therefore, by the time her oil is ready to
sell, the market is already saturated with the good and Janet cannot find a buyer. To reduce her losses, Janet has to sell
the oil at a very low price to a local shop. As a result, Janet makes very little money and she is not able to pay back the
loan.

Reflection question: What is wrong with Janet’s business idea? Why?

Case 2: Lily’s Experience

Lily had been working in the assembly line of a garment factory for more than five years. Her salary was low and she
was often required to work overtime. Lily‘s sister-in-law came to visit her and complained to Lily that she was unable
to find any good clothes for her 12 year-old daughter. She said that the clothes in the stores all seem to be either made
for younger children or for adults. After the visit, Lily decided to go around to the clothing shops in her town. She saw
young teenage girls shopping in the stores, but she noticed that the number and variety of clothes geared to that age
group was limited. She had already been thinking of quitting her job and opening her own business. Therefore, Lily
decides to design some pretty clothes and dresses for young teenage girls. She makes some drawings of clothing that
would appeal to that age group. She then takes her drawings to the local clothing shops, asking the owners if they
would buy the dresses in the drawings, how much they would pay for them and how many they would buy. The shop
owners seemed to be quite happy with her designs and said they would display her clothes. Lily then uses her savings
to buy a sewing machine and some material to make her first batch. She works in the evening after getting off from
work at the garment factory. All of the dresses she makes sell very well and the shops are willing to pay her in cash
upon delivery. Lily then decides to quit her job to focus on her own business. Within six months, Lily starts receiving
regular orders from the shops. She plans to buy one more sewing machine and hire one of her friends to work for her.

Reflection question: Why is Lily successful in her own business? What did she do that made her successful?

A business idea is a short and precise description of the basic operation of an intended business.
There are three types of business ideas. They are:
Old Idea – Here an individual copies an existing business idea from someone.
Old Idea with Modification – In this case the person accepts an old idea from someone and then
modifies it in some way to fit a potential customer‘s demand.
pg. 24
 A New Idea – This one involves the invention of something new for the first time
2.4 Business Idea Identification
Before you start a business, you need to have a clear idea of the sort of business you want to run.
Your business idea will tell you:
Which need will your business fulfill for the customers and what kind of customers will you attract?
What good or service will your business sell?
Who will your business sell to?
How is your business going to sell its goods or services?
How much will your business depend upon and impact the environment? A good
business idea will be compatible with the sustainable use of natural resources and will respect the
social and natural environment on which it depends.
All business ideas are not equally worth. Therefore, to identify promising business idea among others, it is
important to answer the above raised questions. Let we see the explanation for the questions raised above.
2.4.1 The Need will Your Business Fulfill for the Customers
Your business idea should always have customers and their needs in mind.

It might be a good idea to start a day care center in the commercial area as many other parents may have the
same need.

It might be a good idea to start a waste collection and recycling service in this area. Not only would the owner
of this restaurant need the service, but many other residents in the area might need it as well.

Refer to the Cases of Janet and Lily Narrated in this Chapter:

Janet produced sunflower oil without knowing:

Is there a need for oil?


Who needs it?

Why do they need sunflower oil and not another type of cooking oil?

She, therefore, had no idea how big the demand for sunflower oil would be. Consequently, she could not find customers
as the need had been fulfilled by the time she was able to supply her good.

Since Lily did her market research, she knows that pre-teens and teenage girls in her area have limited choice and
access to clothing specifically designed for their age group. What they wear is either designed for younger children or
for adults. Lily aims to fill the need by producing fashionable clothes that are suitable for their age group.

pg. 25
2.4.2 Good or Service will your Business Sell
Depending on your skills and the needs of the customers, you should decide which good or service your
business will sell. Also, keep in mind that they must be goods or services that people are willing to pay for
and at a price that will allow you to make a profit.

A good is an item that people pay for and use. It may be something you make yourself or it may be something
you buy to resell. Tools, baked goods, clothes and retail items are all products. A service is something you do
for people that they then pay you for. For example, delivering

goods, banking, babysitting, repairing items, collecting recyclable waste from apartment buildings, operating
tours, etc. are all services.
Refer to the Cases of Janet and Lily Narrated in this Chapter:

Janet grew sunflowers and produced sunflower oil Lily had significant experience in making
without having any prior knowledge and clothes. She knew about sewing. However,
experience. She was not aware of the challenges of she had no experience designing clothes, so
the business, such as the toxics from fertilizers or she tested her competency by making some
the long processing time. Janet had no advantage designs and showing them to the clothing
that she could use in her sunflower business and store owners. She only opened her business
she faced too many problems, so she was unable to after the first batch of dresses were
make a profit. accepted for display in the shops and then
sold.

2.4.3 Identifies Potential Customer

Any business cannot succeed without customers. Therefore, it is essential that you know who your customers
will be. Will you sell to a specific type of customer or to everyone in an area? There must be enough people
who are able and willing to pay for your goods and services or the business will not survive.

Refer to the Cases of Janet and Lily Narrated in this Chapter:

Janet had no idea who the end customers of her Lily knew that her customers will be
sunflower oil might be. She just focused on teenage girls in her area. She researched
producing the oil and thought that the shops will the market by observing the clothes shops
pg. 26
 buy it from her. Therefore, she did not know how and the target customers to make sure that
big the need was for her good. She also did not there was a real need that she could fulfill.
know if there were any competitors who were She also knew that there was no competitor
going to fulfill the same needs of the customers. currently filling that need.

2.4.4 Strategy for Selling Goods or Services/ How is Your Business Going to Sell Good

or Services?
How are you going to sell your goods or services? If you plan to open a shop, you know how you will sell
your product, but manufacturers or service operators can sell their products in many different ways. A
manufacturer, for example, can sell either directly to customers, to retailers or to wholesalers.

Refer to the Cases of Janet and Lily Narrated in this Chapter:

Janet did not plan how to sell her product. When she made the oil, she just went around and tried to sell to retail
shops.
From the beginning, Lily decided to sell her goods through clothes shops. She talked to the owners of these shops even
before she started her business, to make sure they would sell her goods.
2.4.5 Relation between Business and Environment
Your business can only be sustainable in the long run if it works in harmony with the social and natural
environment. How much does your business depend on the environment? Does it rely on the weather, soil
or other natural resources? Does it need any specific type of labor from the local community? Does it need
the local community to support it? What should you do to make sure that your business nurtures the natural
environment and helps the local community? Will your business nurture the natural environment or will it
have a detrimental impact? How would you minimize or reverse any negative effect that your business
might have? This is discussed in detail in Chapter one of this module.
Hamisi does not just focus on one idea:

He looks around to find different business ideas that may be suitable to his areas of interest and will benefit
from his knowledge and his working experience.
He describes each of the different ideas clearly.
While researching the different ideas, he found that some would not work because there is not sufficient
need, there are not enough customers or the competition is fierce.
While describing the idea, he also identified resources that he could leverage, such as his friend‘s
knowledge, his aunt‘s customer base or a reliable transportation provider that he knows.
Every business idea should be based on knowledge of the market and its needs. The market refers to people
who might want to buy a good or service; i.e. the customers. The market differs from place to place,
depending on who lives in the area, how they live and for what goods or services they spend their money.
When you understand the market in your area, you might recognize many business ideas that you may have
previously ignored.
When generating business ideas, it is best to try to keep your mind open to everything. Your first goal is to
think of as many ideas as possible and make a list of all the possible business opportunities. With a list, you
will have more choices! You then can scan the list and nail down the idea(s) that sound most feasible to you
and that you think will be most profitable.
There are many ways to come up with business ideas, such as surveying local businesses or asking existing
business owners. The information gained from one approach may supplement another and help you to clearly
describe your business ideas. Below, we will examine a few different approaches to generating business
ideas.

1. Learn from successful business owners

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You can learn a lot from people in your area who have already gone through the process of establishing a
business. You should try to get the following information from them:
What kind of idea did these businesses start with?
Where did the ideas come from?
How did they develop their ideas into successful businesses?
How does the business profit and fit into the local environment?
Where did they get the money to start their business?
When to meet successful business owners; use the Business Ideas Analysis Form shown below, to write down
their answers to the above listed questions.
Draw From Experience
1 Your own Experience
Look at the list of your interests, your experiences and your networks. Are there any possible business ideas
that you can derive from your own past experience? Think about each type of experience.
Start with yourself. What has your experience been as a customer in the market place? Have you ever
searched all day for some items that you could not find in any store in your area? Think
About the goods and services you have wanted at different times and that you have had difficulty finding.
2.2 Other People’s Experience
The people around you are potential customers. It is important to understand their experience trying to find
goods and services that are unavailable or not exactly what they need. Listen carefully to what these people
say about their shopping experience.
Ask your family and friends about the things they would like to find that are not locally available. Expand
your social knowledge by talking to people from different age groups, social classes, etc. You can also visit
community groups, colleges, etc. for a greater understanding of the market.
Here are some examples of comments that would help with your search for a business idea:
―I cannot find a lunch box that keeps the food warm.‖
―The choice of cooking pots in the shops is very limited.‖
―There is no reliable way of sending gift packages to my friends and relatives living in the villages.‖
―There is not enough entertainment in this town and the weekends are so boring.‖
―I really need to buy some marketing textbooks, but there are no good bookstores in this town.‖
―There is so much garbage on the streets. Somebody should do something about it.‖
Survey Your Local Business Area
Another way of discovering business ideas is to look around your local community. Find out what type of
businesses are already operating in your area and see if you can identify any gaps in the market.
If you live in a village or small town, you may be able to identify all the fields of business in the whole town.
Otherwise, you may need to focus on the preferred business fields and business types that you identified.
This is an activity that will be much easier to do with a business partner or friend. Visit the closest industrial
area, markets and shopping centers in your area.
4. Scanning Your Environment
You can use your creativity to find more business ideas in your area. Look at the list of existing local
businesses. If the list has included most of the local markets, you may be able to learn about the industries or
service providers on which the local economy relies.
It may be useful to think about business ideas by considering all the resources and institutions in your area.
For example think about:
Natural resources,
Characteristics and skills of people in the local community,
Import substitution,
Waste products,
Publications,
Trade fairs and exhibitions ,

4.1 Natural Resources

Think of what is abundantly available in your area that could be made into useful products without harming
the environment. Natural resources include materials from soil, agriculture, forest, mineral, water, etc.

pg. 28
Perhaps there is good clay soil in the area that can be used for making bricks. It may be used for other
business ventures such as making plates, cups or tiles.
Think about a way to use this resource that would enable you to continue working with it for many years. In
other words, make sure that your business idea will not exhaust the natural resource that would be the
foundation of your business.
4.2 Characteristics and Skills of People in the Local Community

Consider whether the people in your area have some special characteristics or skills that could be useful for a
business:
Are there people in your community who are good artisans, tailors or carpenters or who have
specific skills creating items unique to your area?
Are there recent graduates looking for jobs who you could employ?
are there caregivers, nurses or people who could offer services to children, the
elderly or the sick?
Is your community digitally connected?
Is the infrastructure in your community well developed?

4.3 Waste Products

Business opportunities can also be generated by using materials that have been previously used by both
homeowners and businesses. Think about the possible use of waste materials for the production of other
useful and marketable items. Recyclable waste products can be identified by analyzing certain items to see
how they are discarded. Man-made waste has a detrimental effect on the environment. In most cases,
companies are keen to work with entrepreneurs who can turn their waste products into valuable and
marketable items.

Usually there is something that can be reused in things that we throw away. Recycling may be done with
waste products that come from agricultural processing, household garbage, used machinery and appliances or
industrial waste. People throw away food that could be used to make compost or animal feed. They also
throw away paper, glass and aluminum that can be recycled. Think of things that can be made from what
others thought was garbage.

Many industries dispose of useful materials. A clothing company might throw out small pieces of cloth that
could be used to make something else. Plastics factories usually have materials left over that might be useful
for insulation, stuffing for pillows or a new kind of fuel.
Is there a possibility that you could recycle something that is found in abundance in your neighborhood? Is
there a way of using resources more efficiently? May be you could offer a service to help individuals or
institutions dispose of their waste in a way that is environmentally-friendly or maybe you can make
something new out of the waste.
4.4 Import Substitution
Can you think of anything that is imported that might be made locally? Some imported goods have high
import duties, making them very expensive. You could investigate the possibility of operating a business that
can easily make the imported goods locally.
4.5 Publications
Publications from the internet and other printed material may help you find ideas. There are many sites on the
internet that you can visit to find out about business ideas as well as franchise
businesses for sale. There are also web-based businesses that you can search from home if you have internet
connection.
Newspapers are a great source of ideas. They often describe types of businesses that you could start or
products that you could provide in your area. The classified advertisements may give your ideas, as well as
articles about business trends in other places.
4.6 Trade Fairs and Exhibitions

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Organizations hold trade fairs for different goods or services. Attending these fairs may give you exposure to
a number of new business ideas that you had not previously considered. Be sure to attend any trade fair for
fields of business in which you may be interested.
5. Brainstorming
Brainstorming means opening up your mind and thinking about many different ideas. You start with a word or
a topic and then write down everything that comes to mind relating to that subject. You continue writing for
as long as possible, putting down things that you think of, even if they seem irrelevant or odd. Good ideas
can come from concepts that initially seem strange.
Brainstorming works best in a group. Get your family, friends or classmate together and ask them to help by
writing down ideas they have when they hear the word or subject matter.

6. Structured Brainstorming
Structured brainstorming is when you think of the different processes that are involved in the operation of a
particular business and the goods/services that can be offered with respect to those processes. This is
different from thinking about random items related to a particular business field and type.
Try to think of all the businesses that are related to different aspects of a product:

Those involved in production,

Those involved in the selling process,
Those involved in recycling or re-using materials,
Those indirectly related (spin-offs),
Those involved in servicing,
For example, you can think of different processes within each line. You continue until you have run out of
ideas. Again, whatever comes to mind should be written down. Decide later if it is worthwhile or correct.
Let‘s take the example of cotton T-shirts:

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 As far as all brainstorming exercises are concerned, it is essential to recall the basic rules of brainstorming:
no criticizing or censoring of ideas, wild and turbulent sessions allowing the uninterrupted flow of ideas, no
interruption once the basic idea of the exercise has been introduced, no shyness and no limitations.
7. Focus Group
Focus group is a group of individuals providing information on a structured format which is led by
moderators. It is characterized by an open and in depth discussion: rather than simply asking questions to
solicit student response. The moderator focuses the discussion in either Directive or
non-directive manner. It is useful for both getting new idea on existing product or screening idea/concepts.

8. Problem Inventory Analysis

It is similar to focus group to generate new product ideas. The difference is rather than generating new idea
themselves, consumers are provided with a list of problems in general product category. It is a method of
obtaining ―New Idea‖ and solutions by focusing on problems.

Free Association
One of the simplest methods that entrepreneurs can use to generate new ideas is free association. This
technique is particularly helpful in developing an entirely new slant to a problem. First, a word or phrase
related to the problem is written down, then another and another, with each new word attempting to add
something new to the ongoing thought processes, thereby creating a chain of ideas ending with a new
product/service idea emerging.

Forced Relationships
Forced relationships- as the name implies- is the process of forcing relationships among some product
combinations. It is a technique that asks questions about objects or ideas in an effort to develop a new idea.

11. Attribute Listing

Attribute listing is an idea-finding technique that has the entrepreneur list the attributes of an item or problem
and then look at each from a variety of viewpoints. Through this process, originally unrelated objects can be
brought together to form a new combination and possibly a new product/service that better satisfies a need.

2.6 Business Idea Screening

Idea screening is the process to spot good ideas and eliminate poor one. To screen the business idea generated,
three approaches are discussed as follow:
Macro screening: is aimed screening down ideas to 10. And the common criteria are:
Are my own competencies (see strength detector) sufficient?
Can I finance it to a large extent with my own equity?
Will people buy my product/service (i.e. is it needed and can people afford it)?
Micro Screening: is aimed screening down ideas into 3. The common criteria used for screening are:
Solvent demand
Availability of raw materials
Availability of personal skills
Availability of financial resources
Scoring the Suitability of Business Idea:
This approach is most appropriate when deciding on starting a business. When there are more than one
possible business ideas and one needs to decide which one to follow, we use score business ideas (e.g., BI1,
BI2, BI3) by assigning a rating from 1 to 3 for each question, with 3 being the strongest. After we score the
ideas we sum the total and select the idea with the highest score.

S. No Questions BI1 BI2 BI3

1. Are you familiar with the operations of this type of business?
2. Does the business meet your investment goals?

pg. 31
 3. Does the business meet your income goals?
4. Does the business generate sufficient profits?
5. Do you feel comfortable with the business?
6. Does your family feel comfortable with the business?
7. Does the business satisfy your sense of status?
8. Is the business compatible with your people skills?
9. Is there good growth projected for the overall industry of the business?
10. Is the risk factor acceptable?
11. Does the business require long hours?
12. Is the business location-sensitive?
13. Does the business fit your personal goals and objectives?
14. Does this business fit your professional skills?
Totals

Notes: while to answer the above listed questions it is important to conduct survey. Collecting information
on your business idea gives you an opportunity to promote your business idea and to present yourself as a
potential entrepreneur. While to answer the above questions, there are four important groups that you
should talk to:
Potential customers: Their views are essential to your understanding of whether or not your proposed
product is important to them and if you need to modify your idea to meet their needs.
Competitors, suppliers and entities with financial resources: Their views will reveal the challenges of
competition that you would face, as well as other issues related to your potential business.
Financial institutions: Find out the lending requirements to determine whether borrowing for a new
business is possible.
Key informants and opinion leaders: These are people who would know a lot about the type and field of
business you want to go into and/or a lot about your potential customers. Their views would give you a lot to
think about and could also give you a better insightinto the feasibility of your business idea.
When you have completed the summary of your business idea, you can go on to the next step to start your
own business: Prepare a business plan for the proposed business.

2.7 Concept of Business Plan

Planning is the first and the most crucial step for starting a business. A carefully charted and meticulously
designed business plan can convert a simple idea/innovation into a successful business venture.
A business plan is a road map for starting and running a business. A well-crafted business plan identifies
opportunities, scans the external and internal environment to assess the feasibility of business and allocates
resources in the best possible way, which finally leads to the success of the plan. It provides information to
all concerned people like the venture capitalist and other financial institutions, the investors, the employees.
It provides information about the various functional requirements (marketing, finance, operations and human
resources) for running a business.
A business plan is the blueprint of the step-by-step procedure that would be followed to convert a business
idea into a successful business venture. A business plan first of all identifies an innovative idea, researches
the external environment to list the opportunities and threats, identifies internal strengths and weakness,
assesses the feasibility of the idea and then allocates
resources (production/operation, finance, human resources ) in the best possible manner to make the plan
successful:.
The objectives of a business plan are to:
Give directions to the vision formulated by entrepreneur.
Objectively evaluate the prospects of business.
pg. 32
 Monitor the progress after implementing the plan.
Persuade others to join the business.
Seek loans from financial institutions.
Visualize the concept in terms of market availability, organizational, operational and financial feasibility.
Guide the entrepreneur in the actual implementation of the plan.
Identify the strengths and weakness of the plan.
Identify challenges in terms of opportunities and threats
Clarify ideas and identify gaps in management information about their business, competitors and the market.
Identify the resources that would be required to implement the plan.
Document ownership arrangements, future prospects and projected growths of the business venture.
2.8 Developing a Business Plan
2.8.1 Business Planning Process
A plan, which looks very feasible at the first instance, might actually not be when the details are drawn.
Hence documenting the business plan is one of the early steps that an entrepreneur should take. As discussed
above, the successful entrepreneur lays down a step-by-step plan that she/he follows in starting a new
business. This business plan acts as a guiding tool to the entrepreneur and is dynamic in nature – it needs
continuous review and updating so that the plan remains viable even in changing business situations. The
various steps involved in business planning process are discussed here below:
1) Preliminary Investigation
Before preparing the plan entrepreneur should:
Review available business plans (if any).
Draw key business assumptions on which the plans will be based (e.g. inflation, exchange rates, market
growth, competitive pressures, etc.).
Scan the external environment and internal environment to assess the strengths, weakness, opportunities and
threats.
Seek professional advice from a friend/relative or a person who is already into similar business (if any).
Opportunity Identification and Idea Generation
Entrepreneurship is not just limited to innovation (generation of an entirely new concept, product or service,
but it also encompasses incremental value addition to the concept/product/ services offered to the consumer,
shareholder and employee).
Opportunity identification and business idea generation is the first stage of business planning process. It
involves generation of new concepts, ideas, products or services to satisfy demand.
3) Environmental Scanning
Once a promising idea emerges through idea generation phase the next step is environmental scanning, which
is carried out to analyze the prospective strengths, weakness, opportunities and threats of the business
enterprise. Hence before getting into the finer details of setting up business it is advisable to scan the
environment both external and internal and collect the information about the possible opportunities, threats
from the external environment and strengths and weaknesses from the internal environment (the detail has
been addressed in chapter one).
4) Feasibility Analysis
Feasibility study is done to find whether the proposed project (considering the above environmental scanning)
would be feasible or not. It is important to demarcate environmental scanning and feasibility study at this
point. Environmental scanning is carried out to assess the external and internal environment of the
geographical area/areas where, entrepreneur intends to set up his business enterprise, whereas feasibility
study is carried out to assess the feasibility of the project itself in a particular environment in greater detail.
5) Report Preparation
After environmental scanning and feasibility analysis, a business plan report is prepared. It is a written
document that describes step-by- step, the strategies involved in starting and running a business.
2.8.2 Essential Components of Business Plan
Cover Sheet: Cover sheet is like the cover page of the book. It mentions the name of the
project, address of the headquarters (if any) and name and address of the promoters.
Executive Summary: Executive summary is the first impression about the business proposal. As the saying
goes, the first impression is the last impression. A careful presentation of information should be done to
pg. 33
attract the attention of the evaluators. It should be in brief (not more than two or three pages) yet it should
have all the factual details about the project that can improve its marketability. It should briefly describe the
company; mention some financial figures and some salient features of the project. Generating interest in the
minds of the readers is the prime motive of the executivesummary.
The Business: This will give details about the business concept. It will discuss the objective of the business,
a brief history about the past performance of the company (if it is an old company), what would be the form
of ownership (whether it would be a single proprietor, partnership, cooperative society or a company under
company law). It wouldalso label the address of the proposed headquarters.

IV) Funding Requirement: Since the investors and financial institutions are one of the key bodies
examining the business plan report and it is one of the primary objectives of preparing the business plan
report, a careful, well-planned funding requirement should be documented. It is also necessary to project how
these requirements would be fulfilled. Debt equity ratio should be prepared, which can give an indication
about how much finance would the company require and how it would like to fund the project.
The Product or Services: A brief description of product/services is given in this subsection. It includes the
key features of the product, the product range that would be provided to the customers and the advantages
that the product holds over and above the similar products/ substitute products available in the market. It also
gives details about the patents, trademarks, copyrights, franchises, and licensing agreements.
VI) The Plan: Now the functional plans for marketing, finance, human resources and operations are to be
drawn.
Marketing Plan: Marketing mix strategies are to be drawn, based on the market research.
Operational Plan: The operational plan would give information about (i) Plant location: why was a
particular location chosen? Is it in the vicinity of the market, suppliers, labor or does it have an advantage of
government subsidies for that particular location or are there any other specific reasons for choosing the
particular location?, (ii) Plan for material requirements, inventory management and quality control are also
drawn for identifying further costs and intricacies of the business. Finally, the budget for operational plan is
also drawn.
Organizational Plan: The organizational plan indicates the pattern of flow of responsibilities and duties
amongst people in the organization, it provides details about the manpower plan that would be required to
put life into the business and it would also enlist the details about the laws that would be governed in
managing the employees of the organization. In the end the organizational plan is also budgeted.
Financial Plan: The financial plan is usually drawn for two to five years for an existing company. For a new
organization the following projections are drawn:

Projected Sales
Projected Income and Expenditure Statement
Projected Break Even Point
Projected Profit and Loss Statement
Projected Balance Sheet
Projected Cash Flows
Projected Funds Flow
Projected Ratios
VII) Critical Risks: The investors are interested in knowing the tentative risks to evaluate the
viability of the business and to measure the risks involved in the business. This can
further give confidence to the investors as they can calculate the risks involved in the
business from their perspectives as well.
VIII) Exit Strategy: The exit strategies would provide details about how the organization
would be dissolved, what would be the share of each stakeholder in case of winding-up of
the organization. It further helps in measuring the risks involved in investing.
IX) Appendix: The appendix can provide information about the Curriculum Vitae of the
owners, Ownership Agreement and the like.
2.9 Sample Business plan Format

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The business plan outlined below presents all necessary chapters in detail, including all necessary
explanations in the context of Ethiopia.
Business plan outline
for micro-enterprises - Ethiopian application
Business Plan
1. Full name of the business operator ...................................
2. Address: Woreda.......................... Town...................
Kebele........................... House no..............

Type of the plan/work/business in which the operator is to be engaged.

........................................................................................
4. Year of the plan: From............................... to....................

Work premises at the disposal of the operator..................

..........................................................................................
..........................................................................................
Specify, if there is any problem:
..............................................................................................

6. Yearly sales plan:

Product/service to
Ser. no. be sold, marketed /Unit Qua. Unit price Total price Remark
year

Total sales
Months during which sales are expected to be high

........................................................................................................................................................

........................................................................................................................................................

........................................................................................................................................................

Equipment currently owned by the operator:

Type of Unit of Unit Total

Ser. no. Qua. Remark
equipment measure cost cost

Total cost of
equipment

8. Equipment to be purchased by the operator

pg. 35
 Type of Unit of Unit Total
Ser. no. Qua. Remark
equipment measure cost cost

Total cost of
equipment

9. Yearly raw material requirement:

Type of raw Total
Ser. no. Unit Unit price Remark
material Qua. price

Total yearly raw

material cost

Source of raw material..................................................................................................................

......................................................................................................................................................

Other yearly operating expenses (e.g. labor expense, sales expense, depreciation

expense, tax expense etc..)

Amount of expense
Ser. no. Types of expense Remark
in Birr

Total expense

11. Yearly production/service plan:

59

pg. 36
 Types of
Unit Total
Ser. no. production/service to be Qua. Remark
Unit cost cost
produced or rendered

Total cost

12. Financial plan:

Capital requirements Equity Loan Total

Investment capital:
Machinery + equipment
Furniture + fixture
Business premises
Any other initial and significant outlay

Working capital:
· Salary/wage
· Raw material and/or supplies
· Rent
· Maintenance
· Business promotion
· Other cash outlay to meet
short-term and recurrent expenditure

Total
13. Yearly profit and loss plan
Profit + Loss Statement Format: Accounting

pg. 37
CHAPTER 3: BUSINESS FORMATION

3.1 INTRODUCTION

A business formation deals with the formalization and actual implementation of business ideas in to practice. In
today‘s economic development/transformation, small businesses are creating new jobs even as large businesses
continue eliminating jobs and they are more flexible than large ones in the products and services they offer.
This chapter discusses the issues of business development and the different legal forms of business. In
addition, the concept of MSEs in the Ethiopian and international context are discussed. The importance/roles
of MSEs and a business formation deal with the formalization and actual implementation of business ideas in
to practice. This chapter discusses the issues of business development and the different legal forms of business.
In addition the concept of MSEs in the Ethiopian and international context are discussed. The importance/roles
and set up of MSEs are discussed very well. Besides the success and failure factors of MSEs and the common
problems of MSEs in Ethiopia are discussed. Furthermore, the chapter highlights the reality in the era of
entrepreneurship environment as, not only are the skills and abilities important, but the entrepreneur also will
need to consider the personality and character of each individual to create a viable organization culture.

Chapter Objectives

After completing this chapter, students will be able to:

Explain the Concept of Business Development;

Identify the Forms of Business Ownership;

Analyze the Importance/Role of MSEs;

Set Up Small Scale Business;

Distinguish the Failure and Success Factors of MSEs;

Identify the Problems of Small Scale Business in Ethiopia; and

Develop Organizational Culture.

3.2 The Concept of Small Business Development

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

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

pg. 38
 good opportunity is a difficult task and involves scanning the environment and the use of creativity and
innovation.

3.3 Forms of Business (A Short Explanation)

There are three basic legal forms of business formation with some variations available depending on the
entrepreneurs‘ needs.

The three basic legal forms are:-

Proprietorship,

Partnership, and

Corporation, with variations particularly in partnerships and corporations.

Legal Forms of Business Description

1) Proprietorship Form of business with single owner who has

unlimited liability, controls all decisions, and receives all
profits.
2) Partnership Two or more individuals having unlimited liability who have
pooled resources to own a business
3) Corporation Separate legal entity that is run by stockholders having limited
liability

These three basic legal forms are compared with regard to ownership, liability, start-up costs,
continuity, transferability of interest, capital requirements, management control, distribution
of profits, and attractiveness for raising capital.
It is very important that the entrepreneur carefully evaluate the pros and cons of the various legal forms of
organizing the new venture. This decision should be made before the submission of a business plan and request
for venture capital.
The comparison for the three basic legal forms against the aforementioned factors is briefly presented in the
table below:-

pg. 39
LLP- Limited Liability Partnership
3.4 Definition and Role/Importance of MSEs in Developing Countries
3.4.1 Definition of MSEs
Small businesses are playing an important role in the industrial economy of the world. These are particularly
important in the developing economies. Small business is predominant even in developed countries such as
USA, Japan etc.
There is a difference between small business owners and entrepreneurial ventures as well. An entrepreneurial
venture often is a growth-oriented innovative company with product or service offerings that are new to the
market. Small businesses could be entrepreneurial ventures. Most entrepreneurial ventures start as a small
business.
However, some discernible characteristics still differ them. Most small businesses‘ owners work with known
products and services aimed at incremental growth, and their innovation is focused on sales, marketing, and
market expansion. Entrepreneurial ventures incorporate a different set of strategies. These entities are aimed at
rapid growth and apply innovation and creativity at every node of the business process. They work with new
offerings, and they face a lot more uncertainties; hence, their strategy calls for continuous work on mitigating
uncertainty and risk reduction.

Specifying size and standard to define small business is necessary because people adopt different standards for
different purposes. For example, legislators may exclude small firms from certain regulations and specify ten
employees as the cut-off point. Moreover, a business may be described as ―small‖ when compared to larger
firms, but ―large‖ when compared to smaller ones. For example, most people would classify independently
owned gasoline stations, neighborhood restaurants, and locally owned retail stores as small business.
Similarly, most would agree that the major automobile manufacturers are big businesses. And firms of in-
between sizes would be classified as medium on the basis of individual viewpoints. There are two approaches
to define small business. They are: Size Criteria, and Economic/control criteria.
Size Criteria
Even the criteria used to measure the size of businesses vary; size refers to the scale of operation. Some criteria
are applicable to all industrial areas, while others are relevant only to certain types of business. For instance,
some of the criteria used to measure size are: number of employees; volume, and value of sales turnover, asset
size, and volume of deposits, total capital investment, volume/value of production, and a combination of the
stated factors.

Even though the number of employees-is the most widely used yardstick, the best criterion in any given case
depends upon the user‘s purpose. To provide a clearer image of the small firms, the following general criteria
for defining a small business are suggested by Small Business Administration (SBA).

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Financing of the business is supplied by one individual or a small group. Only in a rare case would the
business have more than 15 or 20 owners.
Except for its marketing function, the firm‘s operations are geographically localized. Compared to the biggest
firms in the industry, the business is small.
The number of employees in the business is usually fewer than 100.

This size criteria based definition of MSEs varies from country to country. All over the world, number of employees
or capital investment or both has been used as the basis for defining MSEs.

Economic/Control Criteria.
Size does not always reflect the true nature of an enterprise. In addition, qualitative characteristics may be used
to differentiate small business from other business. The economic/control definition covers:
Market Share,
Independence, and
Personalized Management.
Geographical Area of Operation.
All four of these characteristics must be satisfied if the business is to rank as a small business.
Market Share: - The characteristic of a small firm‘s share of the market is that it is not large enough to enable
it to influence the prices of national quantities of goods sold to any significant extent.
Independence: - Independence means that the owner has control of the business himself/herself. It, therefore,
rules out those small subsidiaries which though in many ways fairly autonomous, nevertheless have to refer to
major decisions (e.g., on capital investment) to a higher level of authority.
Personalized Management: - It is the most characteristics factor of all. It implies that the owner actively
participates in all aspects of the management of the business, and in all major
decision-making process. There is little delegation of authority and one person is involved when anything
material is involved.
IV) Technology: - Small business is generally labor intensive and only few are technology intensive.
Geographical Area of Operation: - The area of operation of a small firm is often local. Generally, small
business is a business that is privately owned and operated, with a small number of employees and relatively
low volume of sales.
3.4.2 Role/Importance of MSEs in Developing Countries
Micro and Small Enterprises (MSEs) cover a wider spectrum of industries and play an important role in both
developed and developing economies. Ethiopia is no exception and MSEs occupy a prominent position in the
development of the Ethiopian economy. Over the years, the number of MSEs is growing from time to time and
they need a strong support on Scio- economic and political ground. Some of the contributions are hereunder.
Large Employment Opportunities: MSEs are generally labor-intensive. For every fixed amount of
investment, MSE sector provides employment for more persons as against few persons in the large scale
sector. Thus in a country like Ethiopia where capital is scarce and labor is abundant, MSEs are especially
important.
Economical Use of Capital: MSEs need relatively small amount of capital. Hence it is suitable to a country
like Ethiopia where capital is deficient.
Balanced Regional Development/ Removing Regional Imbalance/: Generally small enterprises are located
in village and small towns. Therefore it is possible to have a balanced regional growth of industries. Ethiopia is
a land of villages.

Another problem is the continuous shifting of people from rural to urban areas which causes over-crowding in
cities with slum conditions due to lack of social and medical amenities which require heavy investments. This
problem can be solved by inducing people to set up micro and small firms in rural areas.
Large scale industries have the tendency to concentrate in big cities. As a result, semi urban and rural areas
remain deprived of the benefits of industrialization. Moreover, undue concentration of large industries in urban
areas creates several problems, e.g., pollution, shortage of civic facilities, etc. Due to lack of employment
opportunities in the country side, people migrate in large numbers to big cities. Micro and small-scale units can
be located in rural and semi urban areas to reduce regional disparities.

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 Equitable Distribution of Wealth and Decentralization of Economic Power: It removes the drawbacks of
capitalism, abnormal profiteering, concentration of wealth and economic power in the hands of few etc.
Unregulated Growth of Large-scale industries results in concentration of economic· power in the hands of a
few; and consequently, gross inequalities in the distribution of income and wealth will occur. On the other
hand; income generated in a large number of small enterprises is dispersed more widely and its benefit is
derived by the large segments of the society. This is due to wide spread ownership and decentralized location
of small scale enterprises. In this way, small & medium scale enterprises bring about greater equality of
income distribution. It is also argued that most of the micro and small scale units are either proprietary or
partnership concerns. As a result, relations between workers and employers are more harmonious in micro and
small enterprises than in large enterprises. Micro and small enterprises also encourage competitive spirit and
generate the impetus to self-development.
Dispersal over Wide Areas- MSEs has a tendency to disperse over wider areas and they play a key role in the
industrialization of a developing country.
Higher Standard of Living: MSEs bring higher national income, higher purchasing power of people in rural
and semi-urban areas.
Mobilization of Locals Resources/Symbols of National Identity: The spreading of industries even in small
towns and villages would encourage the habit of thrift and investment among the people of rural areas.
Small scale businesses are locally owned and controlled, and can strengthen family and other social systems and
cultural traditions. They are perceived as valuable in their own right as well as symbols of national identity.
9) Innovative and Productive /Simple Technology: New but simple techniques of production can be
adopted more easily by MSEs without much investment.
Small businesses are highly innovative though they do not maintain their own research and development.
Less Dependence on Foreign Capital/ Export Promotion: MSEs use relatively low proportion of imported
equipment and materials. The machinery needed for these industries can be manufactured within the country.
Micro and small scale enterprises are opening up fresh avenues in the export market in our world. Realizing the
importance of the small and medium- scale sectors in the economy; the Ethiopian government has adopted
several measures to speed up the growth of micro and small size enterprises.
Promotion of Self Employment: MSEs foster individual skill and initiative and promote self-employment
particularly among the educated and professional class.
Protection of Environment: MSEs help to protect the environment by reducing the problem of pollution.
Shorter Gestation Period: In these enterprises the time-lag between the execution of the investment project
and the start of flow of consumable goods is relatively short.
Facilitate Development of Large Scale Enterprises: MSEs support the development of large enterprises by
meeting their requirements of inputs of raw materials, intermediate goods, spare parts etc. and by utilizing their
output for further production.
Individual Tastes, Fashions, and Personalized Services: Small businesses have the flexibility to adapt
quickly to changes in the business or technological environment.
More Employment Creation Capacity: Economic planners have realized the necessity of encouraging micro
and small enterprises because they require less capital but generate more employment. The micro and small
scale sectors have the capacity to generate a much higher degree of employment than the large-scale sector.
This is because micro and small scale enterprises are labor intensive and thus create more employment with a
given level of capital. More production needs more capital in such a situation. The micro and small firms will
stand in good position because they are less capital intensive and more labor intensive.
3.5 Classification of Micro and Small Enterprises
In Case of Manufacturing Enterprise (Manufacturing, Construction and Mining):
A Micro Enterprise is one in which the investment in plant and machinery (total asset) does not exceed
birr100, 000 (one hundred thousand); and operates with 5 people including the owner.
Small Enterprises is one in which the investment in plant and machinery (a paid up capital of total asset) of
birr100, 000 (one hundred thousand) and not more than Birr 1.5 million; and operates with 6-30 persons.
In Case of Service Enterprise (Retailing, Transport, Hotel and Tourism, ICT and Maintenance):
A micro enterprise is one with the values of total asset is not exceeding Birr 50,000(fifty thousands); and
operates with 5 persons including the owner of the enterprise.

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Small Enterprises is one in which the total asset value or a paid up capital of birr100, 000 (one hundred
thousand) and not more than Birr 1.5 million; and operates with 6-30
persons.

More clearly, the improved definition of MSE is presented in the table below.

When ambiguity is encountered between manpower and total assets as explained above, total asset is taken as
primary yardstick.
Priority Sectors and Sub-Sectors for MSEs Engagement In Ethiopia
Manufacturing Sector- This is the one which comprises textile and garment; leather and leather products;
food processing and beverage; metal works and engineering wood works including furniture and ornaments
service; and agro-processing.
Construction Sectors- This is the one which comprises sub-contracting; building materials; traditional mining
works; cobble stone; infrastructure sub-contract; and prestigious goods
Trade Sectors- This is the one which comprises whole sale of domestic products; retail sale of domestic
products and raw materials supply.
Service Sectors- This is the one which comprises small and rural transport service; café and restaurants; store
service; tourism service; canning/packing service; management service; municipality service; project
engineering service; product design & development service; maintenance service; beauty salon; and electronics
software development; decoration and internet café.
Agriculture Sector (Urban Agriculture) - This is the one which comprises modern livestock raring; bee
production; poultry; modern forest development; vegetables and fruits; modern irrigation; and animal food
processing.
Levels of MSEs in Ethiopia
Start-up:- Start up level refers to enterprises that incorporate people who are interested to establish MSE and
those who completed the required profession/skill from various institutions and innovated by legally either in
the form of association or private. It is a level where an enterprise begins production and service under legal
framework or legal entity.

Growth Level: - An enterprise is said to be at growth level when an enterprise become competent in price,
quality and supply and profitable using the support provided. At this level, the enterprise man power and total
asset is larger than at startup level; and use book keeping system.
Maturity Level: - Maturity level means when an enterprise able to be profitable and invest further by fulfilling
the definition given to the sector and using the support provided.
Growth- Medium Level:- An enterprise is said to be transformed from small to medium level of growth is
when it enabled to be competent in price, quality and supply using the support given to the level.

3.6 Setting up Small Scale Business

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Steps for Setting up the Entrepreneurial Venture

Once an individual decides to take up entrepreneurship as a career path, to be a job provider instead of a job
seeker, s/he has to establish an enterprise. However, setting up of a small new enterprise is a very challenging
as well as a rewarding task. Several problems are involved in this task. It is extremely important to take utmost
care in identifying the product or service to be launched by the entrepreneur; otherwise it might prove to be a
costly mistake. After tentatively identifying four to five ideas, s/he should go in for detailed assessment and
feasibility study. This will help the entrepreneur to crystallize one idea in an objective and systematic manner,
which will greatly enhance his/ her chances of success.
The entrepreneurial process of launching a new venture can be divided into three key stages of: Discovery;
Evaluation; and Implementation. These can be further sub-divided into seven steps as shown below:
Discovery: The first stage of discovery is to identify opportunities that may form the basis of an entrepreneurial
venture. It requires creative thinking to indentify issues that can benefit from an entrepreneurial vision. This
stage can be divided into two steps:

Step 1 Discovering your entrepreneurial potential - the first step is to know more about

your personal resources and attributes through some self-evaluation– what will

you bring to the venture? What are your strengths and challenges? These will

affect the type of venture you choose.

Step 2 Identifying a problem and potential solution – a new venture has to solve a

problem and meet a genuine need.

Evaluation: By the end of first stage of discovery, you should have selected an idea worthy of further detailed
investigation. The next stage evaluates if this all adds up to a feasible business in two further steps:

Step 3 Evaluating the idea as a business opportunity– find out information about the

market need. Is the solution to this problem really wanted by enough customers?

Investigate the feasibility of the proposed solution (technically, economically,

socially, and legally).

Step 4 Investigating and gathering the resources – How will the product/service get to

market? How will it make money? What resources are required?

Exploitation: By the end of the second stage of evaluation, you should have identified an opportunity that has
reasonable prospects of success, and analyzed what is required to launch it. The next stage is to make the final
preparations and launch it into the market. It can be developed in three further steps:

Step 5 Forming the enterprise to create value – set up a business entity and protect any
intellectual property. Get ready to launch the venture in a way that minimizes risk
and maximizes returns.
Step 6 Implementing the entrepreneurial strategy – activate the marketing, operating, and
financial plans.
Step 7 Planning the future – look ahead and visualize where you want to go.
Environmental Analysis: Entrepreneurship does not exist in a vacuum. It is affected by and affects the
environment. Relationship between entrepreneurship and environment is shown in the figure below.

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As the economies are getting internationally integrated, for an analysis of the environment of entrepreneurship
you would be required to develop an understanding of macroeconomic, and industry/sector specific factors.
a) Macro Environment
The macro environment of an entrepreneur consists of the political, technological, social, legal and economic
environments. All of these are not immediate part of the entrepreneur‘s venture yet they have an impact on
his/her enterprise.

b) Sectoral Analysis
After having understood the general environment in which the business has to take birth, it is important to study
the sector or industry conditions in which the entrepreneur proposes to launch a venture. This will help to put
the proposed venture in the proper context. The purpose of industry analysis is to determine what makes an
industry attractive- this is usually indicated either by above normal profits or high growth rates. For such
analysis one should study the history of the industry, the future trends, new products developed in the industry,
forecasts made by the government or the industry. It is also advisable to study the existing or potential
competition, threat of substitutes and entry barriers. Sometimes there might be bilateral agreements between
countries regarding some sectors or government policy that is sector specific or some event that throw up
challenges.

There might be certain constraints regarding availability of technology, manpower or raw materials, which are
industry specific. Similarly, there might be certain strengths of a particular sector, which might outweigh some
negative general trends. For instance, currently the cement and steel sector are on an upward swing with a
favorable climate in the housing sector as well as government‘s thrust on the construction sector.

SWOT Analysis
At this stage, conducting a SWOT analysis will help the entrepreneur to clearly identify his/her own strengths
and weaknesses as well as the opportunities and threats in the environment. Strengths are positive internal
factors that contribute to an individual‘s ability to accomplish his/her mission, goals and objectives.
Weaknesses are negative internal factors that inhibit an individual‘s ability to accomplish his/her mission, goals
and objectives. An entrepreneur should try to magnify his strengths and overcome or compensate for his/her
weaknesses.

Opportunities are positive external options that an individual could exploit to accomplish his/her mission, goals
and objectives. Threats are negative external forces that hinder an individual from accomplishing his/her
mission, goals and objectives. These could arise due to competition, change in government policy, economic
recession, technological advances etc. Threats in the environment can arise from competition, technological
breakthroughs, change in government policies etc. S/he might possess certain unique skills or abilities, which
along with his/ her knowledge and experience can provide him/ her cutting edge.

An analysis of the above can give the entrepreneur a more realistic perspective of the business, pointing out
foundations on which s/he can build future strengths and remove obstacles. The hierarchical approach to the
development of business idea is given below.

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The entrepreneur has to use the opportunities provided by the environment, combine these with his/her unique
strengths in terms of knowledge, skills, experience etc. and then take a decision to launch a particular product
or service. The proposed product / service should be compatible with the capability of the entrepreneur,
resources available in the environment and the need of the society.
3.7 Small Business Failure and Success Factors
3.7.1 Small Business Failure Factors
What Is Business Failure?
Even though business owners launch their ventures with the best of intentions and work long, hard hours, some
businesses inevitably fail. Dun & Bradstreet, a financial research firm, defines a business failure as a business
that closes as a result of either (1) actions such as bankruptcy, foreclosure, or voluntary withdrawal from the
business with a financial loss to a creditor; or (2) a court action such as receivership (taken over involuntarily)
or reorganization (receiving protection from creditors).

Causes of Business Failure

The rates of business failure vary greatly by industry and are affected by factors such as type of ownership, size
of the business, and expertise of the owner. The causes of business failure are many and complex; however, the
most common causes are inadequate management and financing.
Although financial problems are listed as the most common cause of business failure, consider management‘s
role in controlling them. Could business failure due to industry weakness be linked to poor management? Yes,
if the owner tried to enter an industry or market with no room for another competitor or responded only slowly
to industry changes. High operating expenses and insufficient profit margins also reflect ineffective
management. Finally, business failure due to insufficient capital suggests inexperienced management.

Inadequate Management: - Business management is the efficient and effective use of resources. For small
business owners, management skills are especially desirable—and often especially difficult to obtain. Lack of
experience is one of their most pressing problems. Small business owners must be generalists; they do not have
the luxury of specialized management. On the one hand, they may not be able to afford to hire the full-time
experts who could help avert costly mistakes. On the other hand, their limited resources will not permit them to
make many mistakes and stay in business. As a small business manager, you will probably have to make
decisions in areas in which you have little expertise.
Entrepreneurs are generally correct in pointing to internal factors as the reason for the failure of their
businesses; these factors are the cause of 89 percent of such failures. Internal problems are
those more directly under the control of the manager, such as adequate capital, cash flow, facilities/equipment
inventory control, human resources, leadership, organizational structure, and accounting systems.

The manager of a small business must be a leader, a planner, and a worker. You may be a ―top gun‖ in sales,
but that skill could work against you. You might be tempted to concentrate on sales while ignoring other
equally important areas of the business, such as record keeping, inventory, and customer service.
Inadequate Financing: - Business failure due to inadequate financing can be caused by improper managerial
control as well as shortage of capital. On the one hand, if you don‘t have adequate funds to begin with, you
will not be able to afford the facilities or personnel you need to start up the business correctly. On the other
hand, if you do possess adequate capital but do not manage your resources wisely, you may be unable to
maintain adequate inventory or keep the balance needed to run the business.

There are a lot of ways to fail in business. You can extend too much credit. You can fail to plan for the future or
not have strategic direction. You can overinvest in fixed assets or hire the wrong people. Identifying mistakes
that can be made is merely one component of the problem. Figuring out how to avoid them is the hard part.
Other common causes of business failure include Neglect, Fraud, and Disaster.

pg. 46
 Neglect occurs whenever an owner does not pay a due attention to the enterprise. The owner who has
someone else managing the business while s/he goes fishing often finds the business failing because of
neglect.

Fraud involves intentional misrepresentation or deception. If one of the people responsible for keeping
the business‘s books begins purchasing materials or goods for himself or herself using the business's
money, the business might find itself bankrupt before too long.
Disaster refers to some unforeseen happening. If a hurricane hits the area and destroys the property in
the company's yard, the loss may require the firm to declare bankruptcy. The same is true for fires,
burglaries, robberies, or extended strikes.
Business Termination versus Failure

There is a difference between a business termination and a business failure. A termination occurs when a
business no longer exists for any reason. A failure occurs when a business closes with a financial loss to a
creditor.

Reasons for a termination abound. The owner may have an opportunity to sell her business to someone else for
a healthy profit, or be ready to move on to a new business or to retire, or s/he may have simply lost interest in
the business. The market for the business‘s product may have changed or become saturated. Perhaps the owner
has decided it would be more appealing to work for someone else. In other cases, businesses may change form.
A partnership may be restructured as a corporation, or a business may move to a new location. Businesses that
undergo such changes are considered terminated even though they continue in another form.

Mistakes Leading to Business Failure

No one likes to think about failing, yet many small business owners invite failure by ignoring basic rules for
success. One of the most common mistakes is to neglect to plan for the future because planning seems too hard
or time-consuming. Planning what you want to do with your business, where you want it to go, and how you‘re
going to get there are prerequisites for a sound business. Of course, that doesn‘t mean you can‘t change your
plans as circumstances dictate. Your plan should provide a road map for your business, showing you both the
expressways and the scenic routes and the detours.

Another common mistake is failing to understand the commitment and hard work that are required for turning a
business into a success. Having to work long hours and do things you don‘t enjoy because no one else is
available to do them are part and parcel of owning a small business. Yet, when you have the freedom of being
your own boss, the hard work and long hours often don‘t seem so demanding!

Still another mistake that small business owners make, particularly with rapidly growing businesses, is not
hiring additional employees soon enough or not using existing employees effectively. There comes a point in
the growth of a business when it is no longer possible for the manager to do it all, but s/he resists delegation in
the belief that it means s/he is giving up control. It is important to recognize that delegating tasks to others isn‘t
giving up control—it‘s giving up the execution of details.

The last type of mistake involves with finances. Inaccurate estimates of cash flow and capital requirements can
swamp a business quickly. Figuring the correct amount of money needed for starting a business is a tough
balancing act: Asking for too little may hinder growth and actually jeopardize survival, whereas asking for too
much might cause lenders or investors to hesitate. An important rule to remember in terms of arranging
financing or calculating cash-flow projections is to figure the unexpected into your financial plans. In this way,
you can have more of a cushion to fall back on if things don‘t go exactly according to plan. After all, without
the right amount of capital, it‘s impossible to succeed.
Business failure, then, is a serious reality. How can a small business owner avoid it? Difficult changes may be
needed, and change requires leaders to overcome all sorts of human dynamics, like inertia, tradition, and head-
in-the-sand hoping that things will get better. Strategic moments require courage, or at least a lack of
sentimentality, which is rare.

pg. 47
It is in these moments that the best leaders find a mirror and ask themselves the defining question that the late,
great Peter drucker posed nearly 40 years ago: ―If you weren‘t already in your business, would you enter it
today?‖ If the answer is no, Drucker said, you need to face a second tough question: ―What are you going to do
about it?‖ Every leader should heed this good advice and, if need be, follow it through to its conclusion,
whether that will be to fix, sell, or close the business.

Reflection: For instance, starting a business does involve risk, but the assumption of risk is part of life. An Economic
consultant, David Birch, conducted his research on 2007 and found the divorce rate was 3.7 per 1,000. Of every 10,000
students who start college, about 52 percent fail to graduate. Would you decide not to get married because the divorce
rate is too high? Were you afraid to go to college because of the dropout rate? The point to remember is that if you have a
clear vision, know your product and your market, and devote the time and effort needed, your small business, like many
others, can succeed.

3.7.2 Small Business Success Factors

When large and small businesses compete directly against one another, it might seem that large businesses
would always have a better chance of winning. In reality, small businesses have certain inherent factors that
work in their favor. You will improve your chances of achieving success in running a small business if you
identify your competitive advantage, remain flexible and innovative, cultivate a close relationship with your
customers, and strive for quality.

It may come as a surprise, but big businesses need small businesses a symbiotic relationship exists between
them. For instance, John Deere relies on hundreds of vendors, many of which are small, to produce component
parts for its farm equipment. Deere‘s extensive network of 3,400 independent dealers comprising small
businesses provides sales and service for its equipment. These relationships enable Deere, the world‘s largest
manufacturer of farm equipment, to focus on what it does best, while at the same time creating economic
opportunity for hundreds of individual entrepreneurs.
Small businesses perform more efficiently than larger ones in several areas. For example, although large
manufacturers tend to enjoy a higher profit margin due to their economies of scale, small businesses are often
better at distribution. Most wholesale and retail businesses are small, which serves to link large manufacturers
more efficiently with millions of consumers spread all over the world.
Small business success factors can be seen the same as the efforts exerted in reversing the factors of failure.
There are several positive steps in addition to planning that business owners can take to improve a firm‘s
chance for success.
From the discussion about factors of failure, we can conclude that a proper attitude is important to ensure a
customer orientation for quality and service; the owner must have a purpose for being in business and want to
provide customers with value for their money; and having a variety of basic business skill is important (such as
the ability to keep accounting records.) So, by understanding why business fail, entrepreneurs can discover
ways to tilt the scales towards success. These success factors are categorized as:-

Conducive Environment;
Adequate Credit Assistance;
Markets and Marketing Support.
Conducive Environment
Successful small enterprises do not emerge, and thereafter survive and grow unless the environment is
conductive. Political, economic, technological and socio-cultural factors in the environment impinge upon the
life of the small enterprises and generate much of the needs required for their existence.
Political Climate: - The overall political climate in a country is important for the small scale entrepreneur to
consider. Small scale entrepreneur will need positive and encouraging measures
by government and political constituencies to establish private investment. Such measures could include liberal
or nonrestrictive investment policy, creation of promotional agencies, creation of industrial estates and free
trade zones and availability of low-cost loan capital for private investors.

pg. 48
The Economic Environment: - An analysis of the economic environment is particularly helpful in investment
decision, market measurement and in forecasting.
The general state of the economy dictates what the small enterprise will need especially since it is handicapped
in obtaining capital and credit owning to greater unit costs of small transactions, greater risks involved, etc. .
Technology: - Technological advances in the environment create new needs for the small entrepreneur as far as
adaptation and adjustment is concerned.
Small scale entrepreneur needs to learn how to adjust to the new technological environment surrounding
him/her, or needs to take a set of advance technologies and bring these to his/her own level in the small
enterprise. Either way, constant reexamination is needed for possible utilization and improvement of existing
technologies.
Socio-Cultural Environment: - Finally, the socio-cultural environment also creates a very important climate
for the survival of the enterprises.
Adequate Credit Assistance
Small enterprise development cannot be ensured without arrangement for financing. Adequate and timely
supply of credit is critical for new entrepreneurs to emerge especially from a wide base. A great majority of
micro and smalbusiness activities have come about because of special financing programs offered to them.
Thus, requirements are less strict in terms of lower interest rates than the prevailing commercial rates; less
collateral requirements and lower equity ratio; various assistance schemes such as preparing the project study;
etc.
Markets and Marketing Support
Market for a small enterprise in a developing country can be quite a problem. The small business entrepreneur
will be in competition not only with locally mass-produced goods but even imports. Small enterprises can
brand together and sell their products as one body through closely-knit associations or organizations. The
government too can take an active part in marketing specific products or assisting small groups of
entrepreneurs in selling their products.
3.8 Main Supporting Packages for MSEs Development in Ethiopia
When entrepreneurs are deciding to involve and develop MSEs in Ethiopia, they are more likely entitled with
some supporting packages which include awareness creation about the sector; provision of legal services, to
form legal business enterprises; providing Technical and business management training; financial support
based on personal saving, 20/80 (the beneficiaries are save 20% and the MFIs provide Loan 80% of the
projects); facilitate working premises; industry extinction services and BDS provision; bookkeeping and audit
services.
3.9 Problems of Small Scale Business in Ethiopia
Small-scale businesses have not been able to contribute substantially to the economic development, particularly
because of financial, production, and marketing problems. These problems are still major handicaps to their
development. Lack of adequate finance and credit has always been a major problem of the Ethiopian small
business.
Small-scale units do not have easy access to the capital because they mostly organized on proprietary and
partnership basis and are of very small size. They do not have easy access to industrial sources of finance
partly because of their size and partly because of the fact that their surpluses which can be utilized to repay
loans are relatively small. Because of their size and partly because of the limited profit, they search for funds
for investment purposes. Consequently, they approach traditional money lenders who charge extra high rate of
interest hence small enterprise continue to be financially weak.
Small scale enterprises find it difficult to get raw materials of good quality at reasonable prices in the field of
production. Furthermore, the techniques of production, which the enterprises have adopted, are usually
outdated. Because of their poor financial position they are not able to buy new equipment, consequently their
productivity suffers.
Small business‘s owner can avoid some of the common pitfalls that lead to business failure by knowing the
business in depth; developing a solid business plan; managing financial resources; understanding financial
statements; and learning to manage people effectively.

3.9 Organizational Structure and Entrepreneurial Team Formation

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3.9.1 Introduction
We can perceive from the experiences of companies the importance of employees and their loyalty and
commitment to the organization. Also significant to potential investors is the management team and its ability
and commitment to the new venture.
Investors will usually demand that the management team not attempt to operate the business as a sideline or
part-time venture while employed full time elsewhere. It is assumed that the management team is prepared to
operate the business full time and at a modest salary. It is unacceptable for the entrepreneurs to try to draw a
large salary out of the new venture, and investors may perceive any attempt to do so as a lack of psychological
commitment to the business.

3.9.2 Designing the Organization

Generally, the design of the initial organization will be simple. In fact, the entrepreneur may find that he or she
performs all the functions of the organization alone. This is a common problem and a significant reason for
many failures.
The entrepreneur sometimes thinks that he or she can do everything and is unwilling to give up responsibility to
others or even include others in the management team. In most cases when this occurs, the entrepreneur will
have difficulty making the transition from a start-up to a growing, well-managed business that maintains its
success over a long period of time.
Regardless of whether one or more individuals are involved in the start-up, as the workload increases, the
organizational structure will need to expand to include additional employees with defined roles in the
organization. Effective interviewing and hiring procedures will need to be implemented to ensure that new
employees will effectively grow and mature with the new venture.

All the design decisions involving personnel and their roles and responsibilities reflect the formal structure of
the organization. In addition to this formal structure, there is an informal structure or organization culture that
evolves over time that also needs to be addressed by the entrepreneur.

For many new ventures, predominantly part-time employees may be hired, raising important issues of
commitment and loyalty. However, regardless of the number of actual personnel
involved in running the venture, the organization must identify the major activities required to operate it
effectively.

The design of the organization will be the entrepreneur‘s formal and explicit indication to the members of the
organization as to what is expected of them. Typically, these expectations can be grouped into the following
five areas:-

Organization structure- This defines members‘ jobs and the communication and relationship these jobs have
with each other. These relationships are depicted in an organization chart.

Planning, measurement, and evaluation schemes- All organization activities should reflect the goals and
objectives that underlie the venture‘s existence. The entrepreneur must spell out how these goals will be
achieved (plans), how they will be measured, and how they will be evaluated.
Rewards- Members of an organization will require rewards in the form of promotions, bonuses, praise, and so
on. The entrepreneur or other key managers will need to be responsible for these rewards.

Selection criteria- The entrepreneur will need to determine a set of guidelines for selecting individuals for each
position.
Training- Training, on or off the job, must be specified. This training may be in the form of formal education
or learning skills.
In a nutshell, the organization‘s design can be very simple-that is, one in which the entrepreneur performs all the
tasks (usually indicative of a start-up) -or more complex, in which other employees are hired to perform
specific tasks. As the organization becomes larger and more complex, the preceding areas of expectation
become more relevant and necessary.

pg. 50
As the organization evolves, the manager or entrepreneur‘s decision roles also become critical for an effective
organization. As an entrepreneur, the manager‘s primary concern is to adapt to changes in the environment and
seek new ideas. When a new idea is found, the entrepreneur will need to initiate development either under his
or her own supervision or by delegating the responsibility to someone else in the organization. In addition to
the role of adaptor, the manager will also need to respond to pressures such as an unsatisfied customer, a
supplier reneging on a contract, or a key employee threatening to quit. Much of the entrepreneur‘s time in the
start-up will be spent ―putting out fires.‖
Another role for the entrepreneur is that of allocator of resources. The manager must decide who gets what. This
involves the delegation of budgets and responsibilities. The allocation of resources can be a very complex and
difficult process for the entrepreneur since one decision can significantly affect other decisions. The final
decision role is that of negotiator. Negotiations of contracts, salaries, prices of raw materials, and so on are an
integral part of the manager‘s job, and since he or she can be the only person with the appropriate authority, it
is a necessary area of decision making.

3.9.3 Building the Management Team and a Successful Organization Culture

In conjunction with the design of the organization, the entrepreneur will need to assemble the right mix of
people to assume the responsibilities outlined in the organization structure.
Some of the issues identified in the organization design will be revisited here since they are not only critical to
the building of the team but are just as important in establishing a positive and successful organization culture.

This strategy must be maintained through the stages of start-up and growth of the enterprise. There are some
important issues to address before assembling and building the management team. In essence, the team must be
able to accomplish three functions:-
Execute the business plan;
Identify fundamental changes in the business as they occur; and
Make adjustments to the plan based on changes in the environment and market that will Maintain profitability.

Although these functions may seem simple and easy to achieve, the people engaged and the culture promoted
by the entrepreneur are critical in accomplishing these functions. As we underscored in the organization design
section, the entrepreneur will first need to assume the responsibility of determining what skills and abilities are
needed to meet the goals in the business plan. Not only are the skills and abilities important, but the
entrepreneur also will need to consider the personality and character of each individual to create a viable
organization culture.

The organization culture will be a blend of attitudes, behaviors, dress, and communication styles that make one
business different from another. There is no specific technique for accomplishing this since every organization
will be different. One thing that is important is that the
entrepreneur(s) need to be able to delegate responsibility in order to create a vibrant organizational culture.

Let us explore some of the important considerations and strategies in recruiting and assembling an effective
team and hence in creating an effective and positive organization culture.

First, the entrepreneur‘s desired culture must match the business strategy outlined in the business plan.
It can be done by working with his/her staff to develop the Core Family Values that represent the key
elements of the firm‘s culture and strategy. In other words, takes a hands-on approach to leadership but
then steps away to let everyone make their own decisions regarding company strategy.
Second, the leader of the organization must create a workplace where employees are motivated and
rewarded for good work.
Third, the entrepreneur should be flexible enough to try different things. This is not always possible in a
very small organization but has been the successful strategy in the growth of Google. The leadership of
this company has an abundance of talent, and the attitude of management is that this talent needs to be
given enough flexibility to make decisions, as long as they do so within the model established by the
company.
pg. 51
 Fourth, it is necessary to spend extra time in the hiring process. There is sometimes a tendency to want
to hurry the process of finding the appropriate skills to fill the organization‘s needs. As always
happened, there is more to a person than his or her skills. Character is also an important factor in
building an effective organization culture.
Next, the entrepreneur needs to understand the significance of leadership in the organization. Leadership
should help establish core values and provide the appropriate tools so that employees can effectively
complete their jobs.

An approach such as, ―We‘re all in this together, no one is bigger than anyone else, and here are the rules
we live by,‖ can lead to greater challenges and job satisfaction.

A reward system can play an important role in providing consistent and positive behavior patterns.

All in all, finding the most effective team and creating a positive organization culture is a challenge for the
entrepreneur but is just as critical as having an innovative, marketable product. It is an important ingredient
in an organization’s success.

CHAPTER 4: PRODUCT/SERVICE DEVELOPMENT

4.1 INTRODUCTION
In Entrepreneur‘s business, product/service development is the term used to describe the complete process of
bringing a new product or service in the market and it's an ongoing practice in which the entire business is
looking for opportunities as new products provide growth promise to businesses that allow them to strengthen
their market position. The new product development process involves the idea generation, product design, and
detail engineering; and also involves market research and marketing analysis. Intense global competition, short
product and technology lifecycles, unpredictable consumer buying patterns and possible market stagnation
makes new product development a critical activity in most businesses. Hence, this chapter explores the new
product development process and at the same time sketch outs the product development procedure in reality
where consideration of real life situation and consumer insight are the main concern. Besides, the chapter;
considering (often entrepreneur), because of their lack of understanding of intellectual property, ignore
important steps that they should have taken to protect these asset; will describe all the important types of
intellectual property which have become unique problems to the Patent and Trademark Office.

Chapter Objectives

After completing this chapter, students will be able to:

Describe the Concept of Product and Services;

List Product/Service Development Process; and

Discuss the Intellectual Property Protection.

4.2 The Concept of Product/Service

Many entrepreneurs find it difficult to identify a new product/service or a new market opportunity. To start and
expand a small venture, an entrepreneur needs to identify opportunities for domestic and/or international
expansion. As the new venture grows and matures a need for different management skills can occur as well as
for a new infusion of the entrepreneurial spirit (corporate entrepreneurship). Entrepreneurs like Richard China
or Mal Mixon, CEO of Invacare, understands this axiom and effectively manages change by continually
adapting organizational

pg. 52
culture, structure, procedures, strategic direction, and products in both a domestic and an international
orientation.

Organization's success is dependent on customer satisfaction and delight. Customer satisfaction is achieved
through the development of product and service, which have all attributes required by the customer. A success
product or services do not only have an attractive package design but should be also able to provide robust
performance. Thus, product design must be practical enough for production and powerful enough to provide a
competitive advantage.

The essence of product design is to satisfy customer and maximizes the value for the customer at minimum
cost. The merchandise or service should also be able to meet primary needs and desire of the customer. This
may not require development of new merchandise, but an enhancement to existing merchandise or service.
Most companies apparently are introducing a wide variety of smaller, more efficient, and more intelligent
products, coupled with a leaner, more efficient approach to operation. The goal is to create products and
services by identifying an emerging trend and to match that trend with the right technology and understanding
of the purchasing dynamics.
A successful startup depends on its distinctive and compelling proposition. This is how merchandise or services
stand out from the competition and are compelling to the young company‗s customers.

The merchandise or service will succeed most if it either eliminates an existing pain or adds significant tangible
benefits. It is easier to sell/deliver a new merchandise/service that eliminates a well-known existing pain, as
opposed to sell an item or service that doesn‘t clearly solve a potential client‘s pain.
There also seems to be a popular myth that anyone can be successful by simply working on any given idea or
opportunity. This isn‘t true! You can‘t. Most businessmen are very knowledgeable about the merchandise
before they start, since even experienced operators will run into unexpected troubles when they start their new
business. Novices generally introduce more problems than they can deal with, which only undercuts their
ability to be lean, fast or effective.

4.3 Product/Service Development Process

Once the opportunity is selected, and a business model has been designed, the next step is to develop a
commercial version of the opportunity which in most cases is either a product or a
service. One of the essential characteristics of a successful business is exemplified by its ability to continuously
and rapidly develop new or improved versions of existing products that deliver values more than customers
expect (Palgrave, 2019.)

Product development is the process through which companies react to market signals, respond to changes in
customer demand, adopt new technologies, foray into new areas, and ensure continuous growth. It is a core
process in achieving strategic objectives, renewal of the company business model and deterring competition
from displacing the company from its market position. Product/service development process is part of the
overall new-venture creation process. Even though there are many models that advocate what the
product/service generation process should look like, for this purpose we shall adopt four distinct stages. These
stages can be referred to as:
Idea Generation
Incubation
Implementation
Diffusion

pg. 53
The various stages of new product development process are explained next:

New Idea Generation

The new product development process starts with search for ideas. Companies have to encourage any new idea
coming. The key to successful domestic and international entrepreneurship is to develop an idea that has a
market for the new product/service idea conceived.
Some of the more fruitful sources of ideas for entrepreneurs include consumers, existing products and services,
distribution channels, the federal government, and research and development.

Idea Screening
nd
In the 2 stage, the purpose is to lessen the number of ideas to few vital/valuable ideas. The ideas should be
written down and reviewed each week by an idea committee who should sort the ideas into three groups-
Promising Ideas, Marginal Ideas, and Rejects: Each promising idea should be researched by committee
member.
Concept Development and Testing
Attractive ideas must be refined into fast able product concepts since people do not purchase ideas but they buy
concepts. Any product idea can be turned into several product concepts. The questions asked probably
include:-
Who will use the product?
What benefits should the product provide?
When will people consume the produced?
Concept Testing: - calls for testing product concepts with an appropriate group of target consumers/customers,
and then getting the consumers‘ reactions. At this stage, the concepts can be in words or picture description.
Marketing Strategy Development
After testing the new product the concerned body must develop a preliminary marketing strategy plan for
introducing the new product into the market. The marketing strategy will undergo further refinement in
subsequent stages.
The marketing strategy plan consists of three parts: (1) Market size, structure, behavior ;( 2) Planned price,
st
distribution strategy, and marketing budget of the 1 year; and (3) Long run sales and profit goals, marketing
mix strategy.

Business Analysis
After management develops product concept and marketing strategy, it can evaluate the proposals‘ business
attractiveness. Management needs to prepare sales, cost and profit projections to determine whether they
satisfy the company's objective or not.

Estimated Total Sales: - Management needs to estimate whether sales will be high enough to yield satisfactory
profit.
Estimating Cost and Profits: - After sales forecast the management should estimate the expected cost and profit
at various levels of sales volume.

The company can use other financial measure to evaluate the merit of a new product proposal.

pg. 54
The simplest is breakeven analysis.

Product Development
If product concept passes the business test, it moves to R&D or engineering to be developed to one or more
physical version of the product concept. Its goal is to find a proto type that the consumers/customers see as
embodying the key attribute described in the product concept statement,
Scientists must not only design the products‘ required functional characteristics but also know how to
communicate its psychological aspects through physical cues and how will the consumer/customer react to
different colors, sizes, weight & other physical cues.

When the prototypes are ready, they must be put through regroups functions and consumer/customer tests.
Functional tests are conducted under laboratory & field conditions to make sure that the product performs
safely and effectively (Durability, Speed, Cost, etc) Consumer testing can take variety of forms, from bringing
consumers/customers into laboratory to giving them samples to use in their homes.

Market Testing

After management is satisfied with the products‘ functional and psychological performance, the product is
ready to be dressed up with the brand name.

The goals are to test the new product is more authentic consumer/customer settings and to learn how large the
market is and how consumers/customers and dealers react to handling, using and repurchasing the actual
product.

Most companies know that market testing can yield valuable information about buyers, dealers, marketing
program effectiveness, market potential & other matters.
Test Marketing yields several benefits include more reliable forecast of future sale, and pretesting of alternative
of future sale.
Commercialization

When (Timing):- In commercializing, market entry timing is critical. If the company hears about a competitor
st
nearing the end of its development work, it will face three choices. The 1 choice is First Entry. Under this
category, the firm usually enjoys the "first mover advantage" of locking up key distributors & gaining
nd
reputation. The 2 choice goes with Late Entry Strategy- which has three advantages include:-

The competition will have borne the cost of educating the market;

The competing product may reveal fault that the late entrant can avoid; and

The company can learn the size of the market.

rd
The 3 strategy- Parallel Entry- can be also chosen by the company to get in the market. The strategy to work,
a prospective businessman can take the advantage of opting for the latest technology and production process
and operate at higher volume of operation. This leads to reduced production cost and production of quality
goods and services. A new businessman can thus provide improved quality goods and services at lower cost
and further tap the market with an innovative marketing approach.

Where (Geographical Strategy):- The company must decide whether to launch the new product in a single
locality, a region/several regions, in the national/international market.
To Whom (Target-Market-Prospect):- Within the rollout markets, the company must target its distribution and
promotion to the best prospect group. Prime prospects for a new consumer/customer‘s product would ideally
have the following characteristics:

They would be early adapters; They would be heavy users;

pg. 55
 They would be Opinion leaders; and Could be reached at low cost.

How (Introductory Markets Strategy):- To sequence and coordinate many actives involved in launching a new
product may/can use network-planning techniques such as Critical Path Scheduling (CPS).
Activity:

Please read on Critical Path Scheduling technique and try to relate it with the how strategy.

4.4 Legal and Regulatory Frameworks for Entrepreneurs

Since there are many options that an entrepreneur can choose in setting up an organization, it will be necessary
to understand all the advantages and disadvantages of each regarding such issues as liability, taxes, continuity,
transferability of interest, costs of setting up, and attractiveness for raising capital. Legal advice for these
agreements is necessary to ensure that the most appropriate decisions have been made.

One of the challenges the novice entrepreneur will face as she goes into business understands the regulatory
environment which is made up of numerous laws and regulations. To operate as a legal businessperson and
protect the business from unnecessary suits and liabilities, the entrepreneur needs to understand the various
laws that govern his/her business. Following are the key legal issues for the entrepreneur.

4.5 Intellectual Property Protection/Product/Service Protection

4.5.1 What is Intellectual Property?
Intellectual Property which includes patents, trademarks, copyrights, and trade secrets represents important
assets to the entrepreneur and should be understood even before engaging the services of an attorney. Too
often entrepreneurs, because of their lack of understanding of intellectual property, ignore important steps that
they should have taken to protect these assets.

Intellectual property is a legal definition of ideas, inventions, artistic works and other commercially viable
products created out of one's own mental processes. In the same sense that real estate titles establish ownership
of tangible items, intellectual property is protected by such legal means as patents, copyrights, and trademark
registrations. In order to enjoy the benefits arising from the exclusive ownership of these properties, the
entrepreneur needs to protect these assets by the relevant law. This is the reason why‘ experts strongly
recommend that those in creative fields seek protection through official registration of their intellectual
properties.

4.5.2 Patents
An entrepreneur who invents a new thing or improves an existing invention needs to get legal protection for her
invention through a patent right. A patent is a contract between an inventor and the government in which the
government, in exchange for disclosure of the invention, grants the inventor the exclusive right to enjoy the
benefits resulting' from the possession of the patent.

Utility Patent: A utility patent protects any new invention or functional improvements on existing
inventions.

Design Patent: This patent protects the appearance of an object and covers new, original, ornamental, and
unobvious designs for articles of manufacture. Like utility patents, design patents provide the inventor with-
exclusive right to make, use and/or sell an item having the ornamental appearance protected by the patent. This
patent is appropriate when the basic product already exists in the marketplace and is not being improved in
function but only in style. These patents are particularly important to companies such as shoe producers and
product package design firms that need to protect their ornamental designs.
pg. 56
A patent provides the owner with exclusive rights to hold, transfer, and license the production and sale of a
product/process. It is an intellectual property right and It is issued by government to the inventor. This
exclusive property right can be granted for a number of years depending on the countries laws and type of
property. Patents are property rights that can be sold and transferred, willed as well as licensed and at times
used as collateral.

What Can Be Patented Then?

Processes: Methods of production, research, testing, analysis, technologies with new applications.
Machines: Products, instruments, physical objects.

Manufactures: Combinations of physical matter not naturally found.

Composition of matter: Chemical compounds, medicines, etc.

4.5.3 Trademarks
A trademark may be a word, symbol, design, or some combination of such, or it could be a slogan or even a
particular sound that identifies the source or sponsorship of certain goods or services.

These are distinctive names, marks, symbols or motto identified with a company‘s product or service and
registered by government offices. Unlike the patent, a trademark can last indefinitely, as long as the mark
continues to perform its indicated function. Trademarks unlike patents are periodically renewed unless
invalidated by cancellations, abandonment, or other technical registration/renewal issues.
Benefits of a Registered Trademark

It provides notice to everyone that you have exclusive rights to the use of the mark throughout the territorial
limits of the country.
It entitles you to sue in federal court for trademark infringement, which can result in recovery of profits,
damages, and costs.
It establishes incontestable rights regarding the commercial use of the mark.
It establishes the right to deposit registration with customs to prevent importation of goods with a similar mark.
It entitles you to use the notice of registration (®).
It provides a basis for filing trademark application in foreign countries.
4.5.4 Copyrights
Copyright is a right given to prevent others from printing, copying, or publishing any original works of
authorship.
Copyrights provide exclusive rights to creative individuals for the protection of literary or artistic productions. It
protects original works of authorship including literary, dramatic, musical, and artistic works, such as poetry,
novels, movies, songs, computer software, and architecture. They pertain to intellectual property. Usually
copyrights are valid for the life of the inventor plus a few decades.

4.6 The Intellectual Property System in Ethiopia

Ethiopia became a party to the convention establishing the world Intellectual Property Organization (WIPO) in
February 1998 right after some time the Country had joined the Nairobi Treaty on the Protection of the
Olympic Symbol in 1981. It is a member of the Treaty establishing the Common Market for Eastern and
Southern Africa (COMESA) which was formed in 1994, the Partnership Agreement between members of the
African, Caribbean and Pacific (ACP) Group of States and the European Union (EU).

The Ethiopian Government established the Ethiopian Intellectual Property Office in the year 2003 containing
the understated Objectives:-

pg. 57
To facilitate the provision of adequate legal protection for and exploitation of intellectual property in the
country;
To collect, organize and disseminate technological information contained in patent documents and encourage its
utilization;
To study, analyze and recommend policies and legislation on intellectual property to the government; and
To promote knowledge and understanding of intellectual property among the general public;

The existing laws and directives in Ethiopia in the field of Intellectual Property (IP) are the Patent Proclamation
and the Implementing Regulation, the Copyright and Related Rights Proclamation and The Trademark
Registration Directive.
According to the proclamation in order to be granted a patent, an invention must fulfill three conditions- (1) it
must be new- It should never have been published or publicly used before; (2) It should be capable of
industrial application- It must be something which can be industrially manufactured or used; and (3) It must be
"non-obvious‖- It should not be an invention which would have occurred to any specialist working in the
relevant field. The proclamation excludes the following from patentability:-
Inventions contrary to public order or morality;
Plant or animal varieties or essentially biological processes for the production of plants or animals; and
Schemes, rules or methods for playing games or performing commercial and industrial activities and computer
programs;
Discoveries, scientific theories and mathematical methods; and
Methods for treatment of the human or animal body by surgery or therapy as well as diagnostic methods
practiced on the human or animal body.

Rights of a patentee include making, using and exploiting the patented invention in any other way. Any person
who wants to use the patented invention has to get the authorization of the owner/inventor. The patentee does
not have import monopoly right over the products of the patented invention in Ethiopia.
There are certain limitations of rights of the patentee included in the proclamation such acts done for non-
commercial purposes; the use of the patented invention solely for the purposes of scientific research and
experimentation; the use of patented articles on aircraft, land vehicles or vessels of other countries which
temporarily or accidentally enter in to the air space, territory or

waters of Ethiopia; acts in respect of patented articles which have been put on the market in Ethiopia by the
owner of the patent or with his/her consent; the use of the patented invention for national security, nutrition,
health or for the development of vital sectors of the economy, subject to payment of an equitable remuneration
to the patentee; the duration of a patent is 15 years which may be extended for a further period of five years if
proof is furnished that the invention is properly worked in Ethiopia.
Trademark Directive is issued in the country in 1986 with the following objectives in that it
helps:-
To centrally deposit trademarks which are used by local and foreign enterprises to distinguish their goods or services;
To distinguish the products or services of one enterprise from those of other enterprises and prevent
consumers from being victims of unfair trade practices;
To provide information on trademark ownership and right of use when disputes arise between parties;
To provide required information on trademarks to government and individuals; and Protection is granted after
publication of cautionary notice;
Copyright is protected on the basis of the copyright and related rights proclamation issued in 2004. The
proclamation gives protection to literary, artistic and scientific works which include books, pamphlets, articles,
computer programs and other writings; speeches, lectures, addresses, sermons, and other oral works; dramatic,
dramatic-musical works, pantomimes, choreographic works, and other works created for stage production;
musical works, with or without accompanying words; audiovisual works and sound recordings works of
architecture; works of drawing, painting, sculpture, engraving, lithography, tapestry, and other works of fine
arts; photographic and cinematographic works; illustrations, maps, plans, sketches, and three dimensional
works related to geography, topography, architecture or science; derivative works; and collection of works,
collection of mere data (databases) whether readable by machine or other form.
works of authors who are nationals of or have their habitual residence in Ethiopia;
pg. 58
Works first published in Ethiopia; or works first published in another country and published within thirty days
in Ethiopia;
Audio-visual works whose producer has his headquarter or habitual residence in Ethiopia; and
Works of architecture erected in Ethiopia and other artistic works incorporated in abuilding or other structure
located in Ethiopia.

The author of a work shall be entitled to protection, for his work upon creation where it is an original work; and
written down, recorded, fixed or otherwise reduced to any material form. Quality of the work and the purpose
for which the work may have been created is not taken in to consideration.
The rights of performers, producers of phonograms and broadcasting organizations are also protected by law.
Copyright is protected for the life of the author plus fifty years. Fifty years for the rights of performers and
producers of sound Recordings and 20 years for the rights of broadcasting organizations.
CHAPTER 5: MARKETING
5.1 INTRODUCTION
Business firms and non-profit organizations engage in marketing. Products marketed include goods as well as
services, ideas, people, & places. Marketing activities are targeted at market consisting of product purchasers
who may be individuals and groups that influence the success of an organization.
The foundation of marketing is exchange. In which one party provides to another party something of value in
return for something else of value. In a broad sense, marketing consists of all activities designed to generate or
facilitate an exchange intended to satisfy human needs. The concept of market is very important in marketing.
The American marketing Association defines a market as ―The aggregate demand of the potential buyers for
product or a product or services ―. Philip Kotler defines ―A market as an area of potential exchanges‖. Thus, a
market is a group of buyers and sellers interested in negotiating the terms of purchase/sale for goods or
services. The negotiation work may be conducted face-to-face at a certain place or it may be done through
other means of communication, such as correspondence, phone, cable, or it may be done through business
middlemen, e.g., brokers and commission agents. This chapter discusses about marketing and its basic
components.
5.2 Meaning and Definitions of Marketing
Marketing can occur any time with one social unit (person or organization) who strives to exchange something
of values with another social unit. Thus, the essence of marketing is a transaction or exchange. In this broad
sense, marketing consists of activities designed to generate and facilitate exchange intended to satisfy human
needs or wants.
Business firms and non-profit organization engaged in marketing. Products marketed include goods as well as
services, ideas, people and places. Marketing activities are targeted at market consisting of product purchasers
and also individuals and groups that influence the success of an organization. Marketing has been defined in
various ways. The definitions that serve our purpose best are as follows:
Marketing is a social and managerial process by which an individual or group obtain what they need and want
through creating, offering and exchanging of product of values with others (Philip Kotler,2012).
Marketing is the total business activity designed to plan, price, promote and distribute want satisfying products
to target market to achieve organizational goal (William J.Stanton, 1984).
Marketing is the creation and delivery of standard of living to society (Paul. Mazor, 2005).
Marketing management is the process of planning and executing, the conception, pricing, promoting and
distributing of ideas, goods and services to create an exchange that satisfy individual or group objectives
(American marketing Association, 2015).

Marketing is the effort to identify and satisfy customers‘ needs and wants. It involves finding out who your customers
are, what they need and want, the prices, the level of
competition. It involves the knowledge and all the processes you undertake to sell your product.

pg. 59
The above definitions of marketing reset on the following core concepts: needs, wants and demands; products
(Goods, Services and Idea), value, cost and satisfaction: exchange and transaction; Relationship and Networks;
market; and marketers and prospects. Marketing answers the following questions:
Who are my customers?
What are my customer‘s needs and wants?
How can I satisfy my customers‘?
How do I make a profit as I satisfy my customers?
Who are your customers?
Your customers are the people or other businesses that want your products/ services and are willing to pay for
them. They include;
People who are buying from you now.
People you hope will buy from you in the future.
People who stopped buying from you but you hope to get them back.
What are my customer’s needs and wants?
An important point to note is that customers want to look at different products so that they can choose what they
like best. Some customers want a different design and others want high quality and are willing to pay extra for
that.
How can I satisfy my customers’?
You need to do everything to find out who your customers are and what they need and want in order to satisfy
them improve your sales and make a profit. You need to find out;
Products/services your customers want.
Price your customers are willing to pay.
Location of your business in-order to reach your customers (Place).
Promotion to use to inform your customers and attract them to buy your products or services. 5.3 Core
Concepts of Marketing
5.3.1 Needs, Wants and Demand
A person at any given time has a need. This need arises out of physical or psychological imbalances. Marketing
starts with human needs and wants. People need food, air, water, clothing and shelter to survive. Beyond this,
people have a strong desire for recreation, education and other services. Let see terms related with this as
follow:
Need: - Human Need is a state of deprivation of some basic satisfaction. People require food, clothing, shelter, safety and
belonging and esteem.
Product: - is anything that can be offered to satisfy a need or want. Products broadly classify as tangibility and
intangibility features.
Value: - is the consumer‘s estimate of the products overall capacity to satisfy his or her needs.
According to DeRose, value is ―the satisfaction of customer requirement at the lowest cost of acquisition, ownership
and use‖.
Cost: - is the amount of money that are going to be expended or already incurred to acquire a product.
Exchange: - is the act of obtaining a desired product from someone by offering something in return.
Transaction: - is the trade of values between two parties.
Market: - consists of all the potential customers sharing a particular need or want who might be willing and
able to engage in exchange to satisfy their need or want.
5.4 Importance of Marketing
On the average, about 50 cents of each dollar we spend as consumers goes to cover marketing costs. The money
pays for designing the products to meet our needs, making products readily available when and where we want
them, and informing us about producers. These activities add want satisfying ability or what is called utility, to
products.
A customer purchases a product because it provides satisfaction. That something that makes a product capable
of satisfying want is its utility. And it is through marketing that much of a products utility is created. Then
potential buyers must be informed about the products existence and the benefits it offers through various forms
of promotion. The kinds of utility that marketing provides in the process are as follows:
Form Utility: Form utility is associated primarily with production- the physical or chemical changes that
make a product more valuable. When timber is made into furniture, form utility is created. This is production,
pg. 60
not marketing. However, marketing research may aid in decision making regarding product design, color,
quantities produced, or some other aspect of a product. All of these things contribute to the product‘s form
utility.

Place Utility: Place utility exists when a product is readily accessible to potential customers. So physically
moving the products to a store near the customers add to its value.
Time Utility: Time utility means having a product available when you want it. Having a product available
when we want it is very convenient but it means that the retailer must anticipate our desires and maintain an
inventory. Thus, there are costs involved in providing time utility.
Information Utility: Information utility is created by informing prospective buyers that a product exists.
Unless you know a product exists and where you can get it, the product has no value. Advertising that
describes a sales person answering a customer questions about the durability of a product creates information
utility. Image utility is a special type of information utility. It is the emotional or psychological values that a
person attaches to a product or brand because of its reputation or social standing.
Possession Utility: Possession utility is created when a customer buys the product-that is, ownership is
transferred to the buyer. Thus, for a person to consume and enjoy the product, a transaction must take place.
This occurs when you exchange your money for a product.

5.5 Marketing Philosophies

Large-scale marketing activities in the world did not take shape until the industrial revolution is the latter part
of the 1800s. Clearly, marketing activities should be carried out under a well-thought out philosophy of
efficient, effective and socially responsible marketing. There are five competing concepts under which
organizations can choose to conduct their marketing activities: namely, the production concepts, the product
concept, the selling/sales concept, the marketing concept, the societal marketing concept and the Relationship
Marketing Concept.
The Production Concept
The production concept is one of the oldest concepts in business. The production concept holds that consumers
will favor products that are widely available and low in cost. Managers of production-oriented organization
concentrate on achieving high production efficiency and wide distribution. The assumption that consumers are
primarily interested in product availability and low price holds in at least two situations. The first is where the
demand for a product exceeds supply, as in many developing countries. Here consumers are more interested in
obtaining the product that in its fine points, and supplies will concentrate on finding ways to increase
production. The second situation is where the product‘s cost is high and has to decrease to expand the market.

The Product Concept

Other businesses are guided by the product concept. The product concept holds that consumers will favor those
products that offer the most quality, performance or innovative features. Managers in product oriented
organization focus their energy on making superior products and improving them over time. Under the
concept, mangers assume that buyers admire well-made products and can appraise product quality and
performance. In such situation, customers are ready to pay high prices for product extra features. Product-
oriented companies often design their products with little or no customer input. They trust that their engineers
will know how to design or improve the product.

The Selling Concept/Sales Concept

The selling concept (or sales concept) is another common approach. The selling concept holds that consumers,
if left alone, will ordinarily not buy enough of the organization product. The organization must therefore
undertake an aggressive selling and promotion effort. This concept

assumes that consumers typically show buying inertia or resistance and must be coaxed into buying. It also
assumes that the company has made available a whole battery of effective selling and promotion tools to
stimulate more buying.

pg. 61
 The selling concept is practiced more aggressively with unsought goods, those goods that buyers normally do
not think of buying, such as insurance, encyclopedia, and funeral plots. Most firms practice the selling
concept when they have over capacity. Their aim is to sell what they make rather than make what the market
wants. Therefore, people are surprised what they are told that the most important part of marketing is not
selling; selling is only the tip of marketing iceberg.

The Marketing Concept

The marketing concept is a business philosophy that challenges the three concepts we just discussed. Its
central tents crystallized in the mid-1950s.
The marketing concept holds that the key to achieving organizational goals consists of being more effective
than competitors in integrating marketing activities toward determining and satisfying the needs and wants of
target markets.

The marketing concept has been expressed in many colorful ways:

―Meeting needs profitably‖

―Find wants and fills them‖

―Love the customers, not the product etc.‖

Table 5.1 Selling and Marketing Concept Contrasted

Point of Difference Selling Marketing

Starting point Factory Market place
Focus Existing product Customer need
Means Selling and promotion Integrated marketing
End Profit through Volume Profit through satisfaction

The Societal Marketing Concept

The societal marketing concept holds that the organization should determine the needs, wants and interests of
target markets. It should then deliver the desired satisfactions more effectively and efficiently than
competitors in a way that maintains or improves the consumers and the society‘s well-being. The societal
marketing concept holds that the organization‘s task is to determine the needs, want, and interests of target
markets and to deliver the desired satisfactions
more effectively and efficiently than competitors in a way that preserves or enhances the consumers and the
society‘s wellbeing.

The societal marketing concept questions whether the pure marketing concept is adequate in an age of
environmental problems, resource shortages, rapid population growth, worldwide economic problems, and
neglected social services. It asks if the firm that senses, serves and satisfies individual wants is always doing
what‘s best for consumers and society in the long run. According to the societal marketing concept, the pure
marketing concept overlooks possible conflicts between short-run consumer wants and long run consumer
welfare.
Table 5.2: Summary of the Evolution of Marketing
Production Consumers favor products that are available and highly affordable
Improve production and distribution
‗Availability and affordability is what the customer wants‘
Product Consumers favor products that offer the most quality, performance and

pg. 62
 innovative features
‗A good product will sell itself‘
Sales Consumers will buy products only if the company promotes/ sells these products

‗Creative advertising and selling will overcome consumers‘ resistance

and convince them to buy‘
Marketing Focuses on needs/ wants of target markets and delivering satisfaction
better than competitors
‗The consumer is king! Find a need and fill it‘
Relationship Focuses on needs/ wants of target markets and delivering superior value
marketing
‗Long-term relationships with customers and other partners lead to
success‘
Relationship Marketing
Relationship marketing is the practice of building long term satisfying relations with key parties-customers,
suppliers, distributors- in order to retain their long term preferences and business. The ultimate outcome of
relationship marketing is the building of a unique company asset called a marketing network. In this case,
customer experience rather than customer satisfaction is the most critical component in relationship
marketing.
Activity 5.2
Make a statement to describe each of the stages in the evolution of marketing. You may consider the given examples
before coming up with your own statements.
1. Production era

‗Cut costs. Profits will take care of themselves‘

Product era

‗A good product will sell itself‘

Sales era

‗Selling is laying the bait for the customer‘

Marketing era
‗The customer is King!‘
Relationship marketing era
‗Relationship with customers determine our firm‘s future‘
Customer Relationship marketing
Create networking with customers and develop the relationship to the highest level.

5.6 Marketing Information Systems

Every firm must organize the flow of information to its marketing managers. Companies are studying their
manager‘s information needs and designing marketing information system to meet these needs.

A marketing information system consists of people, equipment and procedure to gather, sort, analyze, evaluate
and distribute needed timely and accurate information to marketing decision makers. The marketing
information system is illustrated as fig 5.1 below:

pg. 63
The marketing managers to carry-out their analysis, planning, implementation, and control responsibilities, they
need information about development in the marketing environment. The role of the information system is to
assess the manager‘s information needs, develop the needed information, and distribute the information is a
timely fashion to the marketing managers. The needed information is developed through internal company
records, marketing intelligence activities, marketing research, and marketing decision support analysis.
5.6.1 Marketing Research
Marketing research is the systematic and objective identification, collection, analysis, and dissemination of
information for the purpose of assisting management in decision making related to the identification and
solution of problems and opportunities in marketing. Thus, systematic planning is required at all the stages of
the marketing research process. The procedures followed at each stage are methodologically sound, well
documented, and, as much as possible, planned in advance. It uses the scientific method in that data are
collected and analyzed to test prior thinking or hypotheses.

Marketing research is objective. It attempts to provide accurate, impartial information. Accordingly, marketing
research involves the identification, collection, analysis, and dissemination of information.

5.6.1.1 The Role (Significance) Of Marketing Research In Decision Making There are three Functional
Roles of Marketing Research. These are:

Descriptive Function - the gathering and presentation of statements of fact. Diagnostic (analytical)
Function - The explanation of data.

Predictive Function - Specification of how to use the descriptive and diagnostic research to predict the
result of a planned marketing decision.

5.6.1.2 Marketing Research Components

Marketing researchers deal with many aspects of a market including the following:

Market size: this deals with the number or value of units sold to a market in a given period.
Market Share: this one is about a specific corporation‘s share of the market size out of the whole market of a
product or products of the same purpose.
Market penetration: this is a marketing strategy which is used to know when a company enters/penetrates a
market with current products to get better market share by lowering the price of a product.
Brand equity research – this research is conducted to know how favorably consumers view the brand.
Buyer decision processes research – this part of marketing research activity is used to determine what
motivates people to buy and what decision-making process they use.
5.6.1.3 Customer Satisfaction Research

In this type of research there are different types of research that are used to assess about customers.
Distribution channel audits - to assess distributors‘ and retailers‘ attitudes toward a product, brand, or
company.
Marketing effectiveness and analytics - Building models and measuring results to determine the
effectiveness of individual marketing activities.
Mystery Consumer or Mystery shopping – here the researcher acts as a shopper. This is often used for
quality control or for researching competitors' products.
Positioning research – this research is mostly conducted to answer questions like
How does the target market see the brand relative to competitors?

pg. 64
 What does the brand stand for
Price elasticity testing – here the objective of the research is to determine how sensitive customers
are to price changes
Sales forecasting - to determine the expected level of sales given the level of demand with respect to other
factors like advertising expenditure, sales promotion etc.
Segmentation research – this type of research helps to determine the demographic, psychographic, and
behavioral characteristics of potential buyers.
Test marketing – this is a small-scale product launch used to determine the likely acceptance of the product
when it is introduced into a wider market.
5.6.1.4 Marketing Research Process

Since research is a process which consists of a number of steps to be accomplished in a logical and systematic
manner marketing research consists of the following related phases:

Step 1: Define the research purpose or objectives

The following questions help to establish objectives:

Where potential customers buy the product?


Why they purchase there?

What is the size of the market? How much of it can your business capture?

How does your business compare with competitors?

The impact of promotion on customers.

What types of products are desired by potential customers?
Step 2: Research Design Formulation

The research design is a blueprint for conducting the marketing research. More formally, formulating the
research design involves the following steps:
Study period and place determination.

Qualitative data collection methods.

Methods of collecting quantitative data (survey, observation, and experimentation).

Definition of the information needed.

Questionnaire design.

Measurement and scaling procedures.

Sampling process and sample size.

Plan of data analysis.

Step 3: Gather at this stage secondary data,

A data which is originally collected by others for their own purpose, but such data can be used by the researcher
when it is relevant to the current study. Secondary data:

Is less expensive.
pg. 65
 
Can be acquired within or outside the venture.

But, may be out-dated and less valid.

Step 4.Gather Primary Data

Primary data collection techniques can be categorized as;

Observational techniques-do not involve contact with respondents.


Focus groups.

Experimentation-investigates cause and effect relationships.

Survey techniques- generate data by asking people questions and recording their

responses.

The following are examples of survey techniques.

A. Mail questionnaires: The researcher may send the questionnaires to research

Telephone interviews: Using the telephone numbers from telephone directory, the researcher may ask
research participant via the telephone.

Personal interviews. The researcher may go to the research participants‘ address and may drop and pick the
questionnaire or may interview the research participants.
Step 5: Data Processing and Analysis

Data processing includes the editing, coding, transcription, and verification of data. And data analysis, guided
by the plan of data analysis, gives meaning to the data that have been collected. Research results should be
evaluated and interpreted in response to the research objectives.

Step 6: Report Preparations and Presentation

At the end the research results will be written in a report form and presented to the concerned parties. The report
includes:
The specific research questions identified,

Describes the research approach,

The research design,

The data collection methods, and sampling procedures,

The data processing and analysis procedures,

The major findings and suggestions for actions.

In addition, an oral presentation should be made to management using tables, figures, and graphs to
enhance clarity and impact.

5.6.2 Marketing Intelligence

pg. 66
Market intelligence is the systematic process of gathering, analyzing, supplying and applying information (both
qualitative and quantitative) about the external market environment. Intelligence is evaluated information.
Marketing intelligence is used to determine:

Current and future market needs,

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

5.6.2.1 The Importance of Marketing Intelligence

Marketing intelligence provides the following benefits;

Market and customer orientation – promote external focus.


Identification of new opportunities.

Smart segmentation.

Early warning of competitor moves.

Minimizing investment risks.

Quicker, more efficient and cost-effective information.
5.6.2.2 Ways to Undertake Marketing Intelligence

Unfocused scanning: Any information that may be useful is gathered without any specific purpose in mind.
Semi-focused scanning: no specific purpose. The manager is not in search of particular pieces of
information that he/she is actively searching but does narrow the range of media that is scanned. For
instance, the manager may focus more on economic and business publications, broadcasts etc. and pay
less attention to political, scientific or technological media.
Informal search: - limited and unstructured attempt to obtain information for a specific purpose. For example,
entering the business of importing frozen fish from a neighbouring country may make informal inquiries as to
prices and demand levels of frozen and fresh fish.
Formal search: - this is a purposeful search for information in some systematic way. Marketing intelligence is
carried out by the manager him/herself rather than a professional researcher. Scope of the search in this case
is likely to be narrow and far less intensive (less rigorous) than marketing research.

5.6.3 Competitive Analysis

Competitive analysis refers to determining the strengths and weaknesses of competitors and designing ways to
take opportunities or tackle threats posed by competitors.

5.6.3.1 Uses of Competitive Analysis

Competitive analysis is important for businesses since it has the advantages stated as follow:

It helps management understand its competitive advantages/ disadvantages relative to competitors.


It generates understanding of competitors‘ past, present (and most importantly) futurestrategies.
 It provides an informed basis to develop strategies to achieve competitive advantage in the
future (e.g. how will competitors respond to a new product or pricing strategy?)

It helps forecast the returns that may be made from future investments.

Competitive analysis is a method of gathering data about competitors from different sources. It should answer
the following questions:
pg. 67
 Who are your competitors?

What customer needs and preferences are you competing to meet?

What are the similarities and differences between their products/services and yours?
What are the strengths and weaknesses of each of their products and services?

How do their prices compared to yours? How are they doing overall?

How do you plan to compete? Offer better quality services? Lower prices? More

support? Easier access to services? How are you uniquely suited to compete with them?
5.6.3.3 Steps of Competitive Analysis

Every business owner should have a complete understanding of the competitive landscape in the market.
Competition is defined as any business that provides a similar service or product in the same market, region or
industry. A strategic business owner not only knows who its competitor is but also understands the best way to
position ahead of its competitor. The following provides a step-by-step process in creating your competitive
analysis.

Identify your competitors: Determine both local and international competitors. Be sure to define the
competitive landscape broadly. Your competitor includes anything that could draw customers away from your
business.
Gather information about competitors: At this stage you need to know; what markets or market segments
your competitors serve; what benefits your competitors offer; why customers buy from them; and as much as
possible about their products and/or services, pricing, and promotion strategies.
4) Gathering Information on Competitors

To gather information about your competitor you can go either to your competitors‘ company site or to the
company's Web site (if any) using which you can learn about; promotion strategies by visiting their business
site; prices; your competitors‘ customers; vendors or suppliers, and their employees; trade shows; and publicly
available information - from Newspapers, magazines, press releases and online publications.

5) Analyzing the Competition

After studying the information you have gathered about each of your competitors, ask yourself these primary
questions:
How are you going to compete with that company?

Is there a particular segment of the market that your competitor has overlooked?

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

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

The goal of your competitive analysis is to identify and expand upon your competitive advantage. To make your
competitive analysis effective, transfer the weaknesses of your competitors into potential strengths for your
business.
5.7 The Marketing Mix and Marketing Strategies
pg. 68
 5.7.1 The 4 P’s Of Marketing/The Marketing Mix
These are marketing variables that the marketing manager can manipulate as controllable variables. They include
product, pricing, place (channel) and promotion.

Product: refers to goods/services produced for sale, the product /service should relate to the needs and
wants of the customers. Some important questions you need to ask yourself include:

What products/services do I sell?

Why did I decide to sell these products?

Do I have the products customers want?

Do any of my products not sell well?

119

Do I stock products that do not sell well?

Always listen to what your customers like and don‘t like. When their needs change, change your
products and services to satisfy the new needs.

Do more market research in order to provide those products or services and increase your sales.
If your product is not selling well, think of new ideas like finding new customers.
Pricing: refers to the process of setting a price for a product/service. Your prices must be low enough to
attract customers to buy and high enough to earn your business a profit. To set your price you need to:

Know your costs.


Know how much customers are willing to pay.

Know your competitors price.

Know how to make your prices more attractive

Place: means the different ways of getting your products or services to your customers. It is also referred to
as distribution. If your business is not located near your customers, you must find ways to get your
products/services to where it is easy for customers to buy. You can distribute your products to your customers
through:

Selling directly to the consumers of the products.

Retail distribution and wholesale distribution.

Promotion: Refers informing your customers of your products and services and attracting them to buy
them. Promotion includes advertising, sales promotion, publicity (non-paid promotion) and personal selling.
Use advertising to make customers more interested in buying your products or services. Some useful ways of
advertising include signs, boards, posters, handouts, business cards, pricelists, photos and newspapers.
You can use sales promotion (short term incentives) to make customers buy more when they come to your
business, you could also:
Ensure you maintain attractive displays.Let customers try new products.
Have competitions.Giveemonstrations.
Sell complementary products (products that go together)

pg. 69
 5.7.2 What Is Marketing Strategy?
A marketing strategy is a process that can allow an organization to concentrate its limited resources on the
greatest opportunities to increase sales and achieve a sustainable competitive advantage.
Marketing strategy is a method of focusing an organization's energies and resources on a course of action which
can lead to increased sales and dominance of a targeted market.
A marketing strategy combines product development, promotion, distribution, pricing, relationship management
and other elements; identifies the firm's marketing goals, and explains how they will be achieved, ideally
within a stated timeframe. Marketing strategy determines the choice of target market segments, positioning,
marketing mix, and allocation of resources. It is effective when it is an integral component of the overall firm
strategy, defining how the organization will successfully engage customers, prospects, and competitors in the
market arena.
Pricing Strategy
Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction and utility,
includes tangible (functional) and intangible (prestige) factors. It can even be barter. Price is often the only
element the marketer can change quickly in response to demand shifts.

It relates directly to total revenue TR = Price * Quantity Profit = TR – TC

Where, TR=Total Revenue, TC=Total Cost
Pricing strategies are subject to incredibly complex environmental and competitive forces. A company sets no
single price, but rather a pricing structure that covers different items in its line. This pricing structure changes
through time as products pass through their life cycles.

To come up with this situations marketers use dynamic pricing strategies. The following are some of pricing
strategies mostly applicable in the real world scenario.

Price Skimming: this is a type of marketing strategy that firms use by charging the highest possible price that
buyers who most desire the product will pay. It attracts a market segment that is more interested in quality,
status, uniqueness etc. In this case, consumers‘ demand must be inelastic.
Penetration Pricing: In this strategy, prices of products are reduced compared to competitors‘ price for the
same product to penetrate into markets and to increase sales. However, the quality of the product should not be
lower as compared to other competitors‘ product. It should be again noted that the cost of production should be
lower to the extent that can enable the firm to get the desired profit. This is appropriate when the demand is
elastic.
Cost-plus pricing: Any amount that is above unit cost may be considered.
Mark-up pricing: A certain percentage of the selling price is added to unit cost.

Competition Oriented Pricing: Considers competitors prices primarily; but the market type matters.
Odd-even pricing: This is Psychological pricing method based on the belief that certain prices or price ranges
are more appealing to buyers. This method involves setting a price in odd numbers (just under round even
numbers) such as $49.95 instead of $50.00. Although not supported by any research findings, its proponents
claim that the consumers see a $49.95 price as 'just in the price range of $40‘rather than in the $50.

2. Promotion Strategies
Promotion is the communication of the company and its products to customers. Promotional strategy is
choosing a target market and formulating the most appropriate promotion mix to influence it. An
organization‘s promotional strategy can consist:

Advertising: It is any paid form of non-personal, one-way, mass communication about an organization,
good, service, or idea by an identified sponsor.
Personal selling: This is the two-way flow of communication between a buyer and seller, often in a face
to face encounter, designed to influence a person‘s or group‘s purchase decision.

Public relations: Public relation is a form of communication that seeks to change the perceptions of
customers, shareholders, suppliers, employees and other publics about a company and its products.
pg. 70
 Sales promotion: This promotion type involves short term incentives of value such as discounts, free
samples, and prizes to be offered to arouse interest of customers in buying the good/service. Businesses
may use one of the above promotional mix elements to arouse the interest of customers and make them
take action by informing, persuading and reminding about the goods and services that they provide to the
market.
3. Distribution Strategies
A successful product or service means nothing unless the benefit of such a service can be communicated clearly
to the target market. For product-focused companies, establishing the most appropriate distribution strategies is
a major key to success, defined as maximizing sales

and profits. Unfortunately, many of these companies often fail to establish or maintain the most effective
distribution strategies. Problems that researchers identified include:

Unwillingness to establish different distribution channels for different products,

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

As can be noted from the above points marketing channels are the most important actors for the effective and
efficient distribution of products.

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

Direct channels: In this type of channel, producers and end users directly interact.

Indirect channels: In this type of channel intermediaries are inserted between seller

and buyer. Intermediaries include Merchant Wholesalers, retailers, dealers, agents, brokers; and
manufacturer‘s branches and offices.

Decisions about marketing channels, which help producers deliver goods and services to their target markets,
are among the most critical tasks facing management-because the channels that are chosen intimately affect all
of the other marketing decisions. For example, the company‘s pricing depends on whether it uses a direct
channel, discount merchants, or high-quality boutiques. Also, the firm‘s sales force and advertising decisions
depend on how much training and motivation its dealers need.

The following factors should be considered to select the best channel under the condition of using best
distribution strategy.
Company Factors: financial, human and technological capabilities of a company to do its business activities.
Market Characteristics: Geography, market density, market size, target market
Product Attributes: perishability, value and sophistication of the product
Environmental Forces: those forces that affect the business like competition, technology and culture.
5.8 Selling and of Customer Service
Many employees have unclear understanding of what customer service really is. There are indications
everywhere that there are customer service problems that demand solutions. How service providers do their
jobs, how fast and accurately they process paper works, how successfully they pursue accounts, and how

pg. 71
effective they are in taking the next step to develop customer loyalty, will determine an organization's success
in serving customers. It is because of these reasons that customer service delivery improvement programs fail
in some instances.

Customer service is what happens between the customer determining his/her needs and receiving the desired
benefits. However, most service providers do not appropriately understand what service delivery really means.
For this reason, many organizations fail to improve the level of their customer service delivery.

5.8.1 The Concept of Service

Service refers to any activity undertaken to fulfil customer‘s needs. It is any act or performance that one party
can offer to another that is essentially intangible and does not result in the ownership of anything. Its
production may or may not be tied to a physical product. Distinctive features of services include intangibility,
inseparability, variability, and perishability as opposed to goods.

The feature of intangibility shows that pure services cannot be defined in terms of the physical dimensions; or
the customer cannot see or feel them before purchase. The concept of inseparability, on the other hand, refers
that production and consumption of services are inseparable; the 'sale' occurs just before both.
There are also features of variability and perishability associated in service. Services are highly variable,
because they depend on who provides them, and when and where they are provided. In addition to this,
services are produced and consumed at the same point, and are totally perishable right after use. Service cannot
be reproduced as a concert object and it can vary from one moment to the next. Based on this concept, service
is characterized as; situational, difficult to measure, subjective and influenced by the service provider.

Service is situational in the sense that what is good for one customer one day may be perceived differently by
the same customer another day. There is also difficulty associated in measurement of service
This is because the higher one sets expectation by delivering service, the more the customers expect the next
time they deal with the service provider.

Service is also subjective in the sense that an acceptable service for one customer may not be equally or totally
acceptable by another customer. Finally, service is influenced by the service provider. If the service provider
sets expectations effectively, the customer will probably be satisfied.
5.8.2 The Concept of Customer
Customer is a person or organization that buys a product or service either for use or for resale. Customers can
be internal (e.g. member of the organization) or external (customers coming from outside). A thorough
understanding of the concept of customer service enables organizations to provide quality service by using
proper service management approaches.

5.8.3 Strategic Activities needed for Quality Customer Service Delivery

Organizations should identify important strategic activities to ensure consistent, efficient and excellent customer
service delivery using continuous improvement philosophy. Especially, the following specific areas should be
considered:

Establishing a clear customer service strategy.

Ensuring that correct people are in place, with the correct skills to deliver outstanding personal service.
Establishing clear material service delivery processes.
Improving in terms of process improvement, quality monitoring and recovery continuously.
Participatory Management.

5.8.4 Customer Handling and Satisfaction

Customer handling and satisfaction is a key for successful organizations. Managers and employees should work
hand-in-hand to improve their service delivery programs. Existing customers must be satisfied with the

pg. 72
 existing service. Existing customers are also means of potential customers. What is expected from successful
service providers in this regard are the following.
Poor service/defective service is the causes of loss and bankruptcy for many organizations. Many organizations,
especially business organizations worried about the reduction of sales or profitability due to lost customers/ or
gradual reduction of customers. Organizations invest huge cost to increase market share by using
advertisement or different sales promotion techniques. But the first most important principle here is not losing
a single customer.
Retaining existing customers, however, requires systematic handling. You have to make customer satisfaction your
religion. Understand the importance of satisfying existing customers. Usually, organizations tried to increase sales by a
much larger percentage than what they had planned, because of sales lost due to defecting customers.
In addition to retaining existing customers, originations should also strive to increase the number of customers.
Organizations could possibly increase their market share by getting new customers. Attracting new customers
is directly related to keeping existing customers satisfied.

The consequence of poor customer handling, therefore, is losing existing customers. Again, organizations invest
huge resources to acquire new customers, who are later lost, resulting in a total loss of investment. There is
unnecessarily spending money on advertising and marketing to get customers. Customer retention and
satisfaction comes not from words, but from putting time, effort, and money to satisfy customers. Establish an
information system to track lost customers and record your day-to-day progress. Also take into account that the
major reasons to lose customers are:
Poor service,
Poor quality and
Rude behaviour.
There are organizations that tend to lose a very high percentage of their customers every year. The majority of
these customers are not even aware of this phenomenon. But we have to consider the fact that when we lose a
customer, we don‘t loose revenue and profits for just one year, but for a number of years, that is for the lifetime
of the customer. Organizations should make the effort to retain every single customer. It is understandable
when you lose a customer because of reasons that are beyond your control, but unpardonable when you lose
one for poor service and an uncaring attitude towards the customer.

5.8.4.1 Considering Customers as an Invaluable Asset

The value of one customer is infinite, and you cannot possibly calculate it. This includes, sales to him in his
lifetime as well as to customers he generates for you through word of mouth. This means, your most precious
asset is your customer. We think of the immediate profit and ignore the future profits expected over the
lifetime of the customer.
5.8.4.2 Reducing Customer Complaints

Every single complaint should be treated as an opportunity to improve the quality of your products and services.
A complaining customer is a very fair person. Turn customer discontent to your advantage. Consider also the
following research findings about customer satisfaction:
91% of customers who have major complaints decide they will never come back. But if the complaint is
resolved quickly, 82% of them will return.
Quick complaint resolution drops customer defection rate from 91% to 18%. It is better to have a complaining
customer than no customer at all. It pays to resolve complaints quickly.
There is no investment like investment in customer satisfaction.

Treat the cost of satisfying a customer as an investment rather than as an expense. You will get unmatched
returns through referrals, repeat purchases decreased operational costs and increased profits.
In the customer‘s benefit lies our benefit.

Therefore, organizations should start tracking the cost of customer dissatisfaction to convince employees and
management about the importance of keeping customers satisfied. Your competitive advantage will lie in

pg. 73
 retaining the customer longer than your competition. Because of a few disloyal customers, you cannot lose
your faith in all your customers.

5.8.4.3 Place Yourself in The Customer’s Shoes

You have the right to choose your customers but not the luxury to compromise on your level of service. Get rid of the
unwanted customer but do it with tact. Part with the unwanted customer with a smile and a handshake. Place yourself in
the customer‘s shoes. ‗Do unto your customer as you would have done unto you‘.

CHAPTER 6: BUSINESS FINANCING

6.1 INTRODUCTION

Sourcing money may be done for a variety of reasons. Traditional areas of need may be for capital asset
acquisition- new machinery or the construction of a new building. The development of new products can be
costly but capital may be required. Such developments are financed internally, whereas capital for the
acquisition of machinery may come from external sources. In this day and age of light liquidity, many
organizations have to look for short term capital in the way of loans, working capital etc., in order to provide a
cash flow cushion. This chapter of the module discusses about financing of firms.

Chapter Objectives:
By the end of this module, trainees will be able to:

Learn about the cost of starting an enterprise.

Know the different sources of finance to start a business venture.

Understand lease financing.

Learn micro finances.

Understand crowd funding.

Know micro financing.

Learn about traditional financing in Ethiopia.

6.2 Financial Requirements
All businesses need money to finance a host of different requirements. In looking at the types and adequacy of funds available, it is
important to match the use of the funds with appropriate funding methods.

1) Permanent Capital
The permanent capital base of a small firm usually comes from equity investment in shares in a limited company or share company, or
personal loans to form partners or to invest in sole proprietorship. It is used to finance the start - up costs of an enterprise, or major
developments and expansions in its life - cycle. It may be required for a significant innovation, such as a new product development.
Equity from private investors may also be sought to take a small firm into the medium or large size category or
as an exit route for the original investors. Ideally, permanent capital is only serviced when the firm can afford
it; investment in equity is rewarded by dividends from profits, or a capital gain when shares are sold. It is not
therefore a continual drain from the cash flow of a company, such as a loan, which needs interest and capital
repayments on a regular basis. Equity capital usually provides a stake in the ownership of the business, and
therefore the investor accepts some element of risk in that returns are not automatic, but only made when the
small firm has generated surpluses.

2) Working Capital
It is short-term finance. Most small firms need working capital to bridge the gap between when they get paid,
and when they have to pay their suppliers and their overhead costs. Requirements for this kind of short-term
finance will vary considerably by business type. For example, a manufacturer or small firm selling to other

pg. 74
businesses will have to offer credit terms, and the resulting debtors will need to be financed; the faster the
growth, the more the debtors, and the larger the financial requirement.

A retailer, a restaurant, a public house, or other types of outlet selling directly to the public will often collect
cash with the sale, however, earns the cash flow will be advantageous. In some cases, this will be sufficient to
finance the start - up of a small firm, so that suppliers are effectively financing the business.
However, even these types of business may need working capital to fund temporary loses, caused by seasonal
fluctuations, or to cope with prepayment of expenses such as rent payable in advance. Although short-term
finance is normally used to fund the trading of a business, it is also sometimes needed to purchase assets,
which are short-lived such as company vehicles, which may be changed every 4 or 5 years.

3) Asset Finance

It is medium to long term finance. The purchase of tangible assets is usually financed on a longer-term basis,
from 3 to 10 years, or more depending on the useful life of the asset. Plant, machinery, equipment, fixtures,
and fittings, company vehicles and buildings may all be financed by medium or long-term loans from a variety
of lending bodies.
6.3 Sources of Financing
Financial resources are essential for business, but particular requirements change as an enterprise grows.
Obtaining those resources in the amount needed and at the time needed can be difficult for entrepreneurial
ventures because they are generally considered more risky than established enterprises. As we shall see,
financing means more than merely obtaining money; it is very much a process of managing assets wisely to
use capital efficiently.

Managing assets effectively is crucial because underwriting assets creates liabilities that, if uncontrolled, can
devastate a business. Cash is the most important asset to manage, and to generate cash, business must generate
sales. In order to generate sales, most businesses must have inventory and facilities. Service enterprises need
offices and staff, and manufacturers face more extensive requirements, including plant and equipment. Assets
management for the start-up entrepreneur is a matter of determining what is needed to support sales, and then
gaining access to those assets at the optimum cost. The term ―gaining access‖ is used because there are
alternatives other than a cash purchase of assets. Equipment can be leased, for example, and office furniture
can be rented. Manufactured products initially can be subcontracted rather than made, thereby avoiding the
expense of procuring materials, equipment, and plant facilities. Entrepreneurs, therefore, have choices about
what assets to obtain, when they must be obtained, and how to gain access to them.
The critical issue in financing is to assure sufficient cash flow for operations, as well as to plan financing that
coincides with changes in the enterprise. Businesses obtain cash through two general sources, equity or debt,
and both can be obtained from literally hundreds of different sources. The various sources of finance may be
broadly be classified as follows:

6.3.1 Internal Sources (Equity capital)

Owner‘s capital or owner‘s equity represents the personal investment of the owner(s) in a business and it is
sometimes called risk capital because these investors assume the primary risk of losing their funds if the
business fails. However, if the venture succeeds, they also share in the benefit.
Sources of Equity Capital

Personal saving: The first place entrepreneurs should take for startup money is in their own pockets. As a general
rule, entrepreneurs should provide at least half of the start- up funds in the form of equity capital.

Friends and relatives: After emptying their own pockets, entrepreneurs should turn to friends and relatives who
might be willing to invest in the business. The entrepreneur is expected to describe the opportunities and threats of
the business.

Partners: An entrepreneur can choose to take on a partner to expand the capital formation of the proposed business.

pg. 75
 Public stock sale (going public): In some case, entrepreneurs can go public by selling share of stock in their
corporation to outsiders. This is an effective method of raising large amounts of capital.

Angels: These are private investors (or angles) who are wealthy individuals, often entrepreneurs, who invest in the
startup business in exchange for equity stake in these businesses.
Venture capital companies: Are private, for profit organizations that purchase equity positions in young business
expecting high return and high growth potential opportunity. They provide start -up capital, development funds or
expansion funds
Comparison of Angles and Venture Capitalist

Angels Venture Capitalists (VCs)

• Individuals who wish to assist others in their • Finance, small scale new technology and any
business venture, risky idea.
• Usually found through networks, • Funds are more specialized versus
• Reasonable expectations on equity position and homogeneous
ROI, • High expectations of equity position and ROI,
• Often passive, but realistic perspective about
business venture,
Exit strategy is important,

ADDITIONAL REMARKS ON SAVING

WHAT ARE SAVINGS?
Savings are money or other assets kept over a period of time, usually not to be consumed immediately but in
the future. Savings can be kept in a bank or any other safe place where there is no risk of loss, spending, or
making profit.

Savings can be done through

Small but regular deposits – this happen when someone has decided to sacrifice current consumption
(use of assets, e.g. of money and goods) in order to increase the availability of assets for future
consumption. It therefore involves postponing expenditures in order to accumulate a sizeable amount
of resources for future use.

Automatic deductions from salaries, wages or income - this type of saving is not voluntary. It is a
system used by most employers under the labour law.

Advantage of saving

To provide for specific needs in the future

To have access to monetary or other assets whenever needed To ensure financial independence

To make one‘s own resources inaccessible for others without one‘s approval To safely store surplus

To acquire skills for proper money management and self-discipline To qualify for certain types of
loans

Investments

These are monetary assets purchased in the hope that they will generate income, reduce costs, or appreciate
in the future. In short, investment means the use of money to make more profit in the future.

Personal Budget

pg. 76
 A personal budget is a finance plan that allocates future personal income towards expenses, Savings and
debt repayment.
How to prepare a personal budget for saving purposes?

Identify your sources of income and how much you earn from each source

Add up to get total income per month.

Track all your expenses daily, weekly or monthly Then divide them by categories

For daily expenses, multiply each by four to get monthly expenses and add them to get a monthly
total for daily expenses
Take the total income per month and subtract the monthly total for daily expenses. The difference
can be taken as savings. If the difference is negative or the expenses exceed the income then:

o Cut back your expenses o Adjust your expenses

6.3.2 External Sources (Debt capital)

Borrowed capital or debt capital is the external financing that small business owner has borrowed and must
repay with interest. There are different sources as discussed here below:

Commercial banks: Commercial banks are by far the most frequently used source for short term debt by
the entrepreneur. In most cases, commercial banks give short term loans (repayable within one year or less)
and medium term loan (maturing in above one year but

less than five years), long term loans (maturing in more than five years).

To secure a bank loan, an entrepreneur typically will have to answer a number of questions, together with
descriptive commentaries.

What do you plan to do with the money?


When do you need it?

How much do you need?

For how long do you need it?

How will you repay the loan?

Bank Lending Decision:-The small business owner needs to be aware of the criteria bankers use in evaluating
the credit worthiness of loan applications. Most bankers refer to the five C‘s of credit in making lending
decision. The five C‘s are capital, capacity, collateral, character, and conditions.

Capital: A small business must have a stable capital base before a bank will grant a loan.

Capacity: The bank must be convinced of the firm‘s ability to meet its regular financial obligations and
to repay the bank loan.

Collateral: The collateral includes any assets the owner pledges to the bank as security for repayment of
the loan.

pg. 77
 Character: Before approving a loan to a small business, the banker must be satisfied with the owner‘s
character. The evaluation of character frequently is based on intangible factors such as honesty,
competence, willingness to negotiate with the bank.

Conditions: The conditions surrounding a loan request also affect the owner‘s chance of receiving
funds. Banks consider the factors relating to the business operation such as potential growth in the
market, competition, location, and loan purpose. Another important condition influencing the banker‘s
decision is the shape of the overall economy including
interest rate levels, inflation rate, and demand for money.

The higher a small business scores on these five Cs, the greater its chance will be of receiving a loan. In the
Ethiopian context, collateral is very critical.
Micro Finances: provide financial services mainly to the poor ,micro and small

enterprises(detail to be discussed later in part 6.7)

Trade Credit: It is credit given by suppliers who sell goods on account. This credit is

reflected on the entrepreneur‘s balance sheet as account payable and in most cases it must be paid in 30 to
90 or more days.
IV) Equipment Suppliers: Most equipment vendors encourage business owners to purchase their
equipment by offering to finance the purchase.
Account receivable financing: It is a short term financing that involves either the pledge of

receivables as collateral for a loan.

VI) Credit unions: Credit unions are non-profit cooperatives that promote savings and provide credit to
their members. But credit unions do not make loans to just any one; to qualify for a loan an entrepreneur
must be a member.

VII) Bonds: A bond is a long term contract in which the issuer, who is the borrower, agrees to make
principal and interest payments on specific date to the holder of the bond. Bonds have always been a
popular source of debt financing for large companies in the western world.

VIII) Traditional Sources of Finance: ―Idir‖, ―equib‖ (detail to be discussed later in 6.5)

6.4 Lease Financing

Lease financing is one of the important sources of medium- and long-term financing where the

owner of an asset gives another person, the right to use that asset against periodical payments.

The owner of the asset is known as lessor and the user is called lessee. The periodical payment

made by the lessee to the lessor is known as lease rental. Under lease financing, lessee is given

the right to use the asset but the ownership lies with the lessor and at the end of the lease contract, the asset is
returned to the lessor or an option is given to the lessee either to purchase the asset or to renew the lease
agreement.

6.4.1 Types of Lease

Depending upon the transfer of risk and rewards to the lessee, the period of lease and the number

of parties to the transaction, lease financing can be classified into two categories. Finance lease

and operating lease.

pg. 78
1) Finance Lease

It is the lease where the lessor transfers substantially all the risks and rewards of ownership of
assets to the lessee for lease rentals. In other words, it puts the lessee in the same condition as he/she would
have been if he/she had purchased the asset. Finance lease has two phases: The first one is called primary
period. This is non-cancellable period and in this period, the lessor recovers his total investment through lease
rental. The primary period may last for indefinite period of time. The lease rental for the secondary period is
much smaller than that of primary period.

From the above discussion, following features can be derived for finance lease:

A finance lease is a device that gives the lessee a right to use an asset.

The lease rental charged by the lessor during the primary period of lease is sufficient to recover his/her
investment.

The lease rental for the secondary period is much smaller. This is often known as peppercorn rental.
Lessee is responsible for the maintenance of asset.

No asset-based risk and rewards are taken by lessor.

Such type of lease is non-cancellable; the lessor‘s investment is assured.

Operating Lease

Lease other than finance lease is called operating lease. Here risks and rewards incidental to the ownership of
asset are not transferred by the lessor to the lessee. The term of such lease is much less than the economic life
of the asset and thus the total investment of the lessor is not recovered through lease rental during the primary
period of lease. In case of operating lease, the lessor usually provides advice to the lessee for repair,
maintenance and technical knowhow of the leased asset and that is why this type of lease is also known as
service lease. Operating lease has the following features:

The lease term is much lower than the economic life of the asset.

The lessee has the right to terminate the lease by giving a short notice and no penalty is charged for
that.

The lessor provides the technical knowhow of the leased asset to the lessee.

Risks and rewards incidental to the ownership of asset are borne by the lessor.

Lessor has to depend on leasing of an asset to different lessee for recovery of his/her investment.
Advantages and Disadvantages of Lease Financing

At present leasing activity shows an increasing trend. Leasing appears to be a cost-effective alternative for using
an asset. However, it has certain advantages as well as disadvantages.

The advantages of lease financing from the point of view of lessor are summarized below:

Assured Regular Income: Lessor gets lease rental by leasing an asset during the period of lease which
is an assured and regular income.
Preservation of Ownership: In case of finance lease, the lessor transfers all the risk and rewards
incidental to ownership to the lessee without the transfer of ownership of asset. Hence the ownership
lies with the lessor.
pg. 79

Benefit of Tax: As ownership lies with the lessor, tax benefit is enjoyed by the lessor by way of
depreciation in respect of leased asset.
High Profitability: The business of leasing is highly profitable since the rate of return based on lease
rental, is much higher than the interest payable on financing the asset.

High Potentiality of Growth: The demand for leasing is steadily increasing because it is one of the
cost efficient forms of financing. Economic growth can be maintained even during the period of
depression. Thus, the growth potentiality of leasing is much higher as compared to other forms of
business.
Recovery of Investment: In case of finance lease, the lessor can recover the total

investment through lease rentals.

Unprofitable in Case of Inflation: Lessor gets fixed amount of lease rental every year and they cannot
increase this even if the cost of asset goes up.
Double Taxation: Sales tax may be charged twice. First at the time of purchase of asset and second at
the time of leasing the asset.

Greater Chance of Damage of Asset: As ownership is not transferred, the lessee uses the asset
carelessly and there is a great chance that asset cannot be useable after the expiry of primary period of
lease.

6.5 Traditional Financing in Ethiopian (Equib/Edir, Etc.)

While Ethiopia has one of the least-developed formal financial sectors in the world, it possessed a rich tradition
in indigenous, community-based groups such as savings and credit associations and insurance like societies.
These "iqub" and "idir" groups provide a source of

credit and insurance outside the formal sector but much rooted in Ethiopian society. The contributions of these
groups, especially iqub, to economic growth is difficult to quantify but can be assumed to play an important
role. Iqub is a traditional means of saving in Ethiopia and exists completely outside the formal financial system.
An iqub is a form of savings.
People voluntarily join a group and make a mandatory contribution (every week, pay period or month or
example). The "pot" is distributed on a rotating basis determined by a drawing at the beginning of the iqub.
Amounts contributed vary according to the ability of the participants. Iqub is widespread, especially in urban
areas. Iqub offers a savings mechanism for the "unbanked" group in Ethiopia, both urban dwellers who do not
have access to a traditional bank within a reasonable distance from their dwelling. Ethiopia has one of the
lowest bank penetration rates in the world, with less than one bank branch for every 100,000 residents.
Currently, real interest rates are significantly negative -- at least negative 12% so iqub has advantages over the
formal financial system for participants. Ethiopian banks have been paying negative real interest rate for more
than 25 years.

Additionally, the social and communal aspects of iqub give participants a confidence that they may not have in
Ethiopia's shaky financial system. Most formal banks require a high level of collateral and/or a guarantor for
loans, which discourages start-up borrowers and does not allow for borrowing for personal needs. In the
absence of loans from formal banks, Ethiopians also turn to loan sharks (Arata Abedari in Amharic) who
require guarantors and charge

as much as 120% per year interest.

Iqub can be a driver of economic growth and development. At lower levels, a study by Tegegne Gebre
Egziabher and Mulat Demeke (year) of the Institute for Development Research at Addis Ababa University
examined small business owners in rural towns. The study found that the group surveyed most frequently used
their payout for expanding their business (41% of participants). At higher levels, a prominent local
pg. 80
businessman described iqubs in Addis Ababa with payouts in excess of 15 million birr (over $500,000). They
stated that much of the construction boom in Addis is being financed with iqub rather than through the formal
banking system. The central bank governor has told researchers that only 5% of the country's total loan
portfolio is in construction loans, Iqub is filling a vital role in providing capital for physical infrastructure
expansion.

While ‗Iqub‘ is a means of savings and may be substitute for formal banking credit, "Idirs" are
burial societies that provide a traditional form of insurance. Idir contributions are used to pay for expenses in
the event of the death of a family member. Idir is the only means, other than personal savings, to pay for these
expenses. Idir contributions are generally small compared to Iqub, usually around Br.10-25 per month. Some
idirs provide additional coverage, for example, in cases of illness, destruction of a member's house or death of
livestock. Due to their ubiquity and influence in their communities, Idir associations are also forming the basis
for some foreign assistance programs, particularly those focused on HIV/AIDS treatment and prevention.

Ethiopia's formal financial system is extremely underdeveloped and for the most part confined to cities and
larger towns. The traditional systems of Iqub and Idir are perhaps centuries old, yet continue to play a vital role
in Ethiopia's finance. Quantifying the magnitude of funds held in these systems, particularly in iqub, is
difficult. However, based on both the formal studies and anecdotal information sources, iqub provides an
alternative savings and loan structure rooted in tradition, practicality and availability that acts as an engine for
a portion of Ethiopia's economic growth.

6.6 Crowd Funding

Crowd funding is a method of raising capital through the collective effort of friends, family, customers, and
individual investors or even from the general public. This approach taps into the collective efforts of a large
pool of individuals primarily online via social media and crowd funding platforms and leverages their
networks for greater reach and exposure.

6.6.1 How is Crowd Funding Different?

Crowd funding is essentially the opposite of the mainstream approach to business finance. Traditionally, if you
want to raise capital to start a business or launch a new product, you would need to pack up your business plan,
market research, and prototypes, and then shop your idea around to a limited pool or wealthy individuals or
institutions. These funding sources included banks, angel investors, and venture capital firms, really limiting
your options to a few key players. You can think of this fundraising approach as a funnel, with you and your
pitch at the wide end and your audience of investors at the closed end. Fail to point that funnel at the right
investor or firm at the right time, and that‘s your time and money lost.
Crowd funding platforms, on the other hand, turns that funnels on-end. By giving you, the entrepreneur, a
dramatically streamlines the traditional model. Traditionally, you‘d spend months sifting through your personal
network, vetting potential investors, and spending your own time and money to get in front of them. With
crowd funding, it‘s much easier for you to get your opportunity in front of more interested parties and give
them more ways to help grow your business, from investing thousands in exchange for equity to contributing
Br.500 in exchange for a first-run product or other reward.

6.6.2 The Benefits of Crowd funding

From tapping into a wider investor pool to enjoying more flexible fund raising options, there are a number of
benefits to crowd funding over traditional methods. Here are just a few of the many possible advantages:

Reach: By using a crowd funding platform like Fundable, you have access to thousands of accredited investors
who can see, interact with, and share your fund raising campaign. Presentation: By creating a crowd funding
campaign, you go through the invaluable process of looking at your business from the top level its history,
traction, offerings, addressable market, value proposition, and more and boiling it down into a polished, easily
digestible package.

pg. 81
PR & Marketing: From launch to close, you can share and promote your campaign through social media, email
newsletters, and other online marketing tactics. As you and other media outlets cover the progress of your fund
raise, you can double down by steering traffic to your website and other company resources.
Validation of Concept: Presenting your concept or business to the masses affords an excellent opportunity to
validate and refine your offering. As potential investors begin to express interest and ask questions, you‘ll
quickly see if there‘s something missing that would make them more likely to buy in.
Efficiency: One of the best things about online crowd funding is its ability to centralize and streamline your
fund raising efforts. By building a single, comprehensive profile to which you can funnel all your prospects
and potential investors, you eliminate the need to pursue each of them individually. So instead of duplicating
efforts by printing documents, compiling binders, and manually updating each one when there‘s an update, you
can present everything online in a much more accessible format, leaving you with more time to run your
business instead of single platform to build, showcase, and share your pitch resources, this approach
6.6.3 Types of Crowd Funding
Just like there are many different kinds of capital round raises for businesses in all stages of growth, there are a
variety of crowd funding types. Which crowd funding method you select depends on the type of product or
service you offer and your goals for growth. The 3 primary types are donation-based, rewards-based, and
equity crow funding.

Donation-Based Crowd Funding

Broadly speaking, you can think of any crowd funding campaign in which there is no financial return to the
investors or contributors as donation-based crowd funding. Common donation-based crowd funding initiatives
include fund raising for disaster relief, charities, nonprofits, and medical bills.

Rewards-Based Crowd Funding

Rewards-based crowd funding involves individuals contributing to your business in exchange for a ―reward,‖
typically a form of the product or service your company offers. Even though this method offers backers a
reward, it‘s still generally considered a subset of donation-based crowd funding since there is no financial or
equity return.

Equity-Based Crowd Funding

Unlike the donation-based and rewards-based methods, equity-based crowd funding allows contributors to
become part-owners of your company by trading capital for equity shares. As equity owners, your contributors
receive a financial return on their investment and ultimately receive a share of the profits in the form of a
dividend or distribution.
6.7 Micro Finances
6.7.1 What is Micro Finance?
Microfinance is a term used to describe financial services, such as loans, savings, insurance and fund transfers
to entrepreneurs, small businesses and individuals who lack access to banking services with high collateral
requirements. Essentially, it is providing loans, credit, access to savings accounts – even insurance policies and
money transfers to small business owners, entrepreneurs (many of whom live in the developing world), and
those who would otherwise not
6.7.2 Importance of MFIs
finance is important because it provides resources and access to capital to the financially underserved, such as
those who are unable to get checking accounts, lines of credit, or loans from traditional banks. Without
microfinance, these groups may have to resort to using loans or payday advances with extremely high interest
rates or even borrow money from family and friends. Microfinance helps them invest in their businesses, and
as a result, invest in themselves. While microfinance can certainly benefit those stateside, it can also serve as
an important resource for those in the developing world. For example, cell phones are being used as a way to
bring financial services such as micro lending to those living in Kenya. In fact, women are major microfinance
borrowers, making up 84 percent of loans in 2016, according to the 2017 Microfinance Barometer. Most of
these women – around 60 percent – live in rural areas.

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The microfinance industry is also growing rapidly. In 2016, there were 123 million microfinance borrowers, for
a total of $102 billion in loans. India accounted for most of these borrows, followed by Vietnam, Bangladesh,
and Peru.

While some have lauded microfinance as a way to end the cycle of poverty, decrease unemployment, increase
earning power, and aid the financially marginalized, some experts say that it may not work as well as it should,
even going so far as to say it‘s lost its mission. Others argue that microfinance simply makes poverty worse
since many borrowers use microloans to pay for basic necessities, or their businesses fail, which only plunges
them further into debt.

For example, in South Africa, 94 percent of all microfinance loans are used for consumption, meaning, the
funds are used to pay for basic necessities. This means borrowers aren‘t generating new income with the initial
loan, which means they have to take out another loan to pay off that

loan, and so forth and so forth. This translates into a lot more debt. However, other experts say that
microfinance can serve as a valuable tool for the financially underserved when used it properly. They also cite
the industry‘s high repayment rate as proof of its effectiveness. Either way, microfinance is an important topic
in the financial realm, and if done correctly, could be a powerful tool for many.

6.7.3 Micro Finances in Ethiopia

Micro-finance in Ethiopia has its origin in traditional informal method used to accumulate saving and access
credit by people who lacked access to formal financial institutions. Ethiopia has also more 38 MFIs (in 2018)
and practice is one of the success stories in Africa even though there are certain limitations.
The history of formal establishment of Ethiopia Micro finance institution is limited to about less than twenty
years (since 2000). The first groups of few MFIs were established in early 1997 following the issuance of
Proclamation No. 40/1996 in July 1996. The objective of the MFIs is basically poverty alleviation through the
provision of sustainable financial services to the poor who actually do not have access to the financial support
services of other formal financial institutions.

The microfinance industry is growing in terms of number and size. The MFIs in Ethiopia have been able to
serve the productive poor people mainly with savings, credit, money transfer, micro-insurance and other
related services. Governmental and other developmental organizations have played a vital role for impressive
performance the microfinance sector in the country.
The known micro finance institutions in different regions of Ethiopia with more than 90%

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