Entrepreneurship

Course Title: ENTREPRENEURSHIP AND ENTERPRISE DEVELOPMENT

Credit Hours: 3
Prerequisite: No prerequisite

Course Description
Dear Learners, this interdisciplinary course is designed to introduce you to the concept of
sustainable entrepreneurship, a manageable process that can be applied across careers and work
settings. It focuses on building entrepreneurial attitudes and behaviors that will lead to creative
solution within community and organizational environments. Course topics include the history of
entrepreneurship, the role of entrepreneurs in the 21st century global economy, and the
identification of entrepreneurial opportunities. The elements of creative problem solving, the
development of a business concept/model, the examination of feasibility studies and the
social /moral/ethical implication of entrepreneurship will be incorporated. Issues related to
starting and financing a new venture is included.
Course Objective
At the end of this course Learners should be able to:
 Demonstrate an understanding of the impact of entrepreneurship on the economy.
 Recognize and overcome obstacles to creative problem-solving.
 Develop a concept for an innovative product or service in his or her own area of interest.
 Recognize that entrepreneurial success in the 21st century depends on teamwork and
diversity.
 Develop a personal framework for managing the ethical dilemmas and social
responsibilities facing entrepreneurs.
 Equipped with the basic knowledge and skills of starting and operating a business for
they will be the future managers (or even Owner-managers) of these firms.
 Identify traits/characteristics of an entrepreneur/ entrepreneurs as exhibited in behavior.
 Analyze elements of the entrepreneurial mind set and discuss the implications for
functioning as a successful entrepreneur.

CHAPTER ONE: ENTREPRENEURSHIP AND FREE ENTERPRISE

1
 Entrepreneurship

1.1. Learning Objectives

Dear Learner, Up on the completion of this chapter, you should be able to:
 Define the meaning and philosophy of Entrepreneurship.
 Discuss the History of Entrepreneurship.
 Identify the historical barriers to entrepreneurship.
 Understand the role within the economy.
 Demonstrate Entrepreneurship, creativity and Innovation

1.2. Introduction
Dear Learner, this is the first chapter of the course comprises the major contents: the
definitions and philosophy of Entrepreneurship, History of Entrepreneurship, the
historical barriers to entrepreneurship, the role within the economy, the role within the
economy and Entrepreneurship, creativity and Innovation. Finally, there are chapter
summary and check your progress included in it.

1.3. Definition and philosophy

Entrepreneurship is the process of starting a business, typically a startup company offering an
innovative product, process or service. The entrepreneur perceives an opportunity and often
exhibits biases in taking the decision to exploit the opportunity. The exploitation of
entrepreneurial opportunities includes design actions to develop a business plan, acquire the
human, financial and other required resources, and to be responsible for its success or failure.
Entrepreneurship may operate within an entrepreneurship ecosystem which includes government
programs and services that support entrepreneurs, entrepreneurship resources (e.g., business
incubators and seed accelerators), entrepreneurship education and training and financing (e.g.,
loans, venture capital financing, and grants).

2
 Entrepreneurship

Entrepreneur is defined as an individual who organizes or operates a business or businesses.

Credit for coining the term entrepreneur generally goes to the French economist Jean-Baptiste
Say, but in fact the Irish-French economist Richard Cantillon defined it first in his Essai sur la
Nature du Commerce en Général, or Essay on theNature of Trade in General, a book William
Stanley Jevons considered the "cradle of political economy" Cantillon used the term differently.
Biographer Anthony Breer noted that Cantillon saw the entrepreneur as a risk-taker while Say
considered the entrepreneur a "planner".
Cantillon defined the term as a person who pays a certain price for a product and resells it at an
uncertain price: "making decisions about obtaining and using the resources while consequently
admitting the risk of enterprise." The word first appeared in the French dictionary entitled
"Dictionnaire Universel de Commerce" compiled by Jacques des Bruslons and published in
1723. Successful entrepreneurs have the ability to lead a business in a positive direction by
proper planning, to adapt to changing environments and understand their own strengths and
weakness.

Free Enterprise

An economic system where few restrictions are placed on business activities and
ownership. In this system, governments generally have minimal ownership of enterprises
in the market place. This system aims for limited restrictions on trade and minimal
government intervention.

The free enterprise movement started in the 1700s, when many individuals were restricted
from starting and owning their own business without the permission of the government.
The movement looked to reduce ownership and other related restrictions, such as how one
should operate their business and who they were allowed to trade with.

Over time, the focus of this movement has shifted. A lot of its causes have been
incorporated in most free-market systems. In the U.S. free enterprise advocates continue to
fight for fewer restrictions along with fighting against any new developments that would
restrict free enterprise.

1.4.History

3
 Entrepreneurship

In recent years, "entrepreneurship" has been extended from its origins in for-profit
businesses to include social entrepreneurship and the concept of the political
entrepreneur. Entrepreneurship within an existing firm or large organization has been
referred to as entrepreneurship and may include corporate ventures where large entities
spin off subsidiary organizations. Entrepreneurs are leaders willing to take risk and
exercise initiative, taking advantage of market opportunities by planning, organizing, and
employing resources, often by innovating new or improving existing products. More
recently, the term entrepreneurship has been extended to include a specific mindset (see
also entrepreneurial mindset) resulting in entrepreneurial initiatives, e.g. in the form of
social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship.

According to Paul Reynolds, founder of the Global Entrepreneurship Monitor, "by the time
they reach their retirement years, half of all working men in the United States probably
have a period of self-employment of one or more years; one in four may have engaged in
self-employment for six or more years. Participating in a new business creation is a
common activity among U.S. workers over the course of their careers." In recent years,
entrepreneurship has been claimed as a major driver of economic growth in both the
United States and Western Europe.

Entrepreneurial activities differ substantially depending on the type of organization and

creativity involved. Entrepreneurship ranges in scale from solo, part-time projects to large-
scale undertakings that create many jobs. Many "high value" entrepreneurial ventures seek
venture capital or angel funding (seed money) in order to raise capital for building the
business. Many organizations exist to support would-be entrepreneurs, including
specialized government agencies, business incubators, science parks, and some NGOs.

Beginning in 2008, an annual "Global Entrepreneurship Week" event aimed at "exposing

people to the benefits of entrepreneurship" and getting them to "participate in
entrepreneurial-related activities".
Etymology and historical usage

Entrepreneur is a loanword from French. First used in 1723, today the term entrepreneur implies
qualities of leadership, initiative and innovation in new venture design. Economist Robert Reich
has called team-building, leadership, and management ability essential qualities for the
entrepreneur.

Historically the study of entrepreneurship reaches back to the work in the late 17th and early
18th centuries of Richard Cantillon and Adam Smith, which was foundational to classical
economics, and contemporarily, entrepreneurship is studied in the discipline of management.

Joseph Schumpeter

In the 20th century, entrepreneurship was studied by Joseph Schumpeter in the 1930s and other
Austrian economists such as Carl Menger, Ludwig von Mises and Friedrich von Hayek. The

4
 Entrepreneurship

term "entrepreneurship" was coined around the 1920s, while the loan from French of the word
entrepreneur dates to the 1850s.

According to Schumpeter, an entrepreneur is willing and able to convert a new idea or invention
into a successful innovation. Entrepreneurship employs what Schumpeter called "the gale of
creative destruction" to replace in whole or in part inferior offerings across markets and
industries, simultaneously creating new products and new business models. Thus, creative
destruction is largely responsible for long-term economic growth. The idea that entrepreneurship
leads to economic growth is an interpretation of the residual in endogenous growth theory and as
such continues to be debated in academic economics. An alternate description by Israel Kirzner
suggests that the majority of innovations may be incremental improvements such as the
replacement of paper with plastic in the construction of a drinking straw that require no special
qualities.

For Schumpeter, entrepreneurship resulted in new industries and in new combinations of

currently existing inputs. Schumpeter's initial example of this was the combination of a steam
engine and then current wagon making technologies to produce the horseless carriage. In this
case the innovation, the car, was transformational, but did not require the development of
dramatic new technology. It did not immediately replace the horse-drawn carriage, but in time,
incremental improvements reduced the cost and improved the technology, leading to the modern
auto industry.

Despite Schumpeter's early 20th-century contributions, traditional microeconomic theory did not
formally consider the entrepreneur in its theoretical frameworks (instead assuming that resources
would find each other through a price system). In this treatment the entrepreneur was an implied
but unspecified actor, consistent with the concept of the entrepreneur being the agent of x-
efficiency.

For Schumpeter, the entrepreneur did not bear risk: the capitalist did. Schumpeter believed that
the equilibrium ideal was imperfect Schumpeter (1934) demonstrated that changing environment
continuously provides new information about the optimum allocation of resources to enhance
profitability some individuals acquire the new information before others, recombine the
resources to gain an entrepreneurial profit. Schumpeter was of the opinion that entrepreneurs
shift the Production Possibility Curve to a higher level using innovations.

Initially, economists made the first attempt to study the entrepreneurship concept in depth
Richard Cantillon (1680-1734) considered the entrepreneur to be a risk taker who deliberately
allocates resources to exploit opportunities in order to maximize the financial return. Cantillon
emphasized the willingness of the entrepreneur to assume risk and to deal with uncertainty. Thus,
he draws attention to the function of the entrepreneur, and distinguishes clearly between the
function of the entrepreneur and the owner who provides the money. Alfred Marshall viewed the
entrepreneur as a multi-tasking capitalist. He observed that in the equilibrium of a completely
competitive market, there was no spot for "entrepreneurs" as an economic activity creator.

1.5. Historical barriers to entrepreneurship

5
 Entrepreneurship

This article may lend undue weight to certain ideas, incidents, or controversies.
Please help to create a more balanced presentation. Discuss and resolve this issue before
removing this message. (September 2015).

Dating back to the time of the medieval Guild in Germany, a craftsman required special
permission to operate as an entrepreneur was the small proof of competence (Kleiner
Befähigungsnachweis), which restricted training of apprentices to craftsmen who held a Meister
certificate. This institution was introduced in 1908 after a period of so-called freedom of trade
(Gewerbefreiheit, introduced in 1871) in the German Reich. However, the small proof of
competence was not required to start a business. In 1935 and in 1953, the greater proof of
competence was reintroduced (Großer Befähigungsnachweis Kuhlenbeck) and required that
craftsmen obtain a Meister certificate to train apprentices and before being permitted to set up a
new business.

The term "entrepreneur" is often conflated with the term "small business." While most
entrepreneurial ventures start out as a small business, not all small businesses are entrepreneurial
in the strict sense of the term. Many small businesses are sole proprietor operations consisting
solely of the owner, or they have a small number of employees, and many of these small
businesses offer an existing product, process or service, and they do not aim at growth. In
contrast, entrepreneurial ventures offer an innovative product, process or service, and the
entrepreneur typically aims to scale up the company by adding employees, seeking international
sales, and so on, a process which is financed by venture capital and angel investments.

1.6. Role within the economy

Entrepreneurs play a vital role in economic development as key contributors to technological

innovation and new job growth. Further, entrepreneurs help build communities in ways such as
providing jobs, conducting business locally, creating and participating in entrepreneurial
networks, investing in community projects, and giving to local charities. Realizing both the
economic and social impact of entrepreneurship, many states and local communities have
implemented aggressive strategies aimed at cultivating and nurturing entrepreneurs.

In order for governments to effectively develop policies that will foster entrepreneurship, they
must first understand the difference between entrepreneurs and small business owners, common
misconceptions about entrepreneurs, and where entrepreneurs are located. Using this
information, combined with entrepreneurial strategies outlined by the National Governors
Association (NGA) Center for Best Practices, state governments can develop specific and
effective measures to support entrepreneurs.

While cursory inspection shows entrepreneurial growth companies (EGCs) and small business
owners have a lot in common, there are certain distinct differences between the two. Controlled
growth and continued profitability are the goal for many small businesses while EGCs are
generally geared toward rapid growth and productivity gains. In addition, EGCs often have
significant economic effects on a community, accounting for a large portion of new job growth,
making the support of them essential.

6
 Entrepreneurship

To better understand entrepreneurs, several common myths must also be dispelled. Though there
are always exceptions, most of the common perceptions of entrepreneurs do not apply to most
EGCs. Common myths cite that entrepreneurs: take uncalculated risks; start companies with a
break-through invention; have years of experience in their industry; have detailed business plans
with extensive research; and start the company with ample financial resources. In fact, most of
these factors are rarely the entrepreneurial norm.

Since entrepreneurs provide significant economic and social benefits, and can be found in nearly
every industry sector in every Labor Market Region in the country, many states have
implemented entrepreneur-friendly policies in an effort to support local entrepreneurial efforts.
Leading states have specific entrepreneurial goals incorporated into their strategic plans. Several
entrepreneurial strategies for state's have emerged as best practices identified by the National
Governors Association Center for Best Practices.

 Securing capital is important to the success of entrepreneurs, particularly in the early

stages of development. States can assist entrepreneurs in finding seed capital through
direct investment, investments in venture capital limited partnerships and tax credits.

 Providing technical assistance with the creation of small business assistance centers,
science and technology corporations, and programs that provide financial and
management guidance are valuable services for entrepreneurs.

 Streamlining securities regulation eases the process entrepreneurs must go through in

the search for capital.

 Improving state regulations and licensing environments reduces the burden on

entrepreneurs seeking licenses and permits. One-stop business centers can serve as a
point of contact between entrepreneurs and all state regulatory agencies. Streamlining the
registration and license process can have benefits for both entrepreneurs and state
agencies by reducing the duplication of processes, paperwork, time and resources needed
to properly register a new business venture.

 Encouraging entrepreneurs in education builds a foundation for successful

entrepreneurial ventures. In higher education, building intellectual capital at state
universities fosters entrepreneurship while superior research centers aid universities in
attracting and retaining top-quality faculty, spur technological innovations, and aid in the
transfer of technology to the private sector. Education at the secondary level is important
as well to at least raise the awareness of entrepreneurship as a career option.

 Creating industry clusters and entrepreneurial networks are beneficial to economic

development strategies and entrepreneurs. Entrepreneurs can develop contacts and fill
specialized industry niches within clusters and networks.

 Targeting entrepreneurs through state economic development offices and business

development centers can help educate them on available services and programs.
Advertisements in trade publications, communications through local chambers of

7
 Entrepreneurship

commerce, industry associations, and public service announcements are just a few ways
governments can effectively get the message out.

1.7. Entrepreneurship, creativity and Innovation

Most of us would agree that innovation has something to do with the tangible manifestation of
novel ideas. But entrepreneurship is about the creation of tangible value. Ideas help for
entrepreneurs – hard work, ambition, resourcefulness, unconventional thinking, salesmanship,
and leadership – will usually bring brilliant ideas.

Innovation is executing new ideas to create value.

Here is one way to picture it:

Thinking of it visually emphasizes that all three parts of the definition. Everyone gets the “new
idea” part of it. But it’s not enough to have a great idea; you also have to execute it. And even
after you’ve done that, you’re not finished. It’s not innovation if you’re not creating value for
people.

So the people talking about creativity, entrepreneurship and innovation all make a distinction
between having ideas, and creating value with those ideas. And none of us want anything to do
with just the “having ideas” part of the whole thing.

Does that mean that we’re talking about the same thing?

Innovation, Entrepreneurs and Entrepreneurship

Strangely, this confusion didn’t exist 100 years ago. When Joseph Schumpeter wrote about
innovation, he was talking about the process of creating value from ideas. My definition of
innovation basically builds on his. The “entrepreneur” was the person that innovated. And
“entrepreneurship” didn’t exist.

8
 Entrepreneurship

Innovation is the most commonly used of the three words, and “entrepreneurship” as a concept
was basically born in the 1950s. Why? Because the nature of innovation changed.

When Schumpeter was writing, innovation basically happened in startups. So entrepreneurs

were people that created innovation by starting new firms. But the first half of the 20th century
saw the rise of corporate innovation – which meant that we had to be able to distinguish between
innovation taking place in large organizations and in startups.

That’s when we started to distinguish between innovation (which usually meant ideas executed
in established firms), and entrepreneurship (ideas executed in new firms).

So Where to Next?

To answer this question, we don’t think that we’re quite talking about the same thing when we
talk about creativity, entrepreneurship and innovation.

In his forthcoming book The Myths of Creativity, David Burkus says:

Although there is still no precise and agreed-on definition of creativity despite nearly one
hundred years of research on the subject, there appears to be at least a small consensus.
Creativity is seen by most experts in the field as the process of developing ideas that are both
novel and useful.

Again, there is an emphasis on use (value!) – but the main concern is the processes through
which we generate and execute these ideas.

This is obviously an issue of great importance in innovation, because better ideas lead to better
outcomes. Provided, of course, that we execute them!

Innovation, then, is this process of idea management. Entrepreneurs are still the people that
innovate, and entrepreneurship is doing this through the vehicle of a new venture.

If we accept all of this, there are a few important implications:

 Everyone focuses on idea execution for a reason. Why do all three fields want to own
idea execution? Because trying to improve your performance by simply generating more
ideas is one of the biggest mistakes that both people and organizations regularly make.
All of us focus on execution because this is where the gap is. The great news here is that
it means you don’t have to be a genius to be a creative entrepreneur. You can do this by
being really good at executing.
 We need to put entrepreneurs back into innovation. It’s too easy to forget that
innovation is driven by people. We need to put more focus on entrepreneurs – the people
that are creating value out of ideas – and less on tools. It’s people that create value. If
we’re in a big organization, we need to figure out how to liberate and support our
entrepreneurs. If we’re in a startup, we need to figure out how to build a business model
that creates value out of our great ideas. Both approaches are people-based.

9
 Entrepreneurship

 We need to be clear on our definitions. Creativity, entrepreneurs and innovation are all
important, and they all intersect. People that study or practice any of these fields should
be working together, rather than creating artificial distinctions between them. My
definitions might not be the best, but I do think that they have some historical weight to
them, as well as reflecting fairly common usage. But I’m definitely willing to have a
discussion about what’s what!

This important because while the three areas have slightly different meanings, they share the
same goal – to create value for people. This is what leads to longer life spans, higher standards
of living, and more interesting and fulfilling work.

Summary

Entrepreneurship is the process of starting a business, typically a startup company offering an

innovative product, process or service.
The free enterprise is an economic system where few restrictions are placed on business
activities and ownership.
Entrepreneurs are leaders willing to take risk and exercise initiative, taking advantage of market
opportunities by planning, organizing, and employing resources, often by innovating new or
improving existing products.

Entrepreneurs play a vital role in economic development as key contributors to technological

innovation and new job growth. Further, entrepreneurs help build communities in ways such as
providing jobs, conducting business locally, creating and participating in entrepreneurial
networks, investing in community projects, and giving to local charities. Realizing both the
economic and social impact of entrepreneurship, many states and local communities have
implemented aggressive strategies aimed at cultivating and nurturing entrepreneurs.

Check Your Progress

Give Answers
1. What is Entrepreneurship?
2. What are Entrepreneurs?
3. What is a free enterprise?

CHAPTER TWO: BUSINESS ENTERPRISE

2.1. Learning Objectives
Dear Learners, up on the completion of this chapter, you should be able to:
 Define and explain the importance of business enterprise.
 Explain the Economic social and political aspects of business enterprise.

10
 Entrepreneurship

 Identify the Business Enterprise Failure factors

 Identify the Problems in Ethiopia business Enterprise
 Set Business Enterprise.

2.2. Introduction
Dear Learner, this is the second chapter of the course which discusses the major topics:
Definition and importance of business enterprise, Economic social & political aspects of
business enterprise, Business Enterprise Failure factors, Problems in Ethiopia business Enterprise
and the Setting Business Enterprise. Along with, chapter summary and check your progress are
involved in it.

2.3. Definition and importance

Business enterprise is about the creation of wealth, the practice of creativity and resourcefulness
and the exploitation of change. It provides an antidote to traditional thinking and focuses on the
defining feature of entrepreneurship – its ability to challenge accepted ways of doing things and
disrupt established markets and organizations through new venture creation. It lies at the heart of
Scotland’s future economic and social prosperity and its ability to compete.

Business enterprise is not simply confined to the traditional world of business; it recognizes that
some of the most significant entrepreneurial challenges to be faced arise out of issues of social,
economic and environmental change. It is about leadership and making your own place in the
world. It is designed for businesses with three broad career interests – those who want to start a
new enterprise, those who wish to take over the management of an existing organization or
business and those who see themselves taking up leadership positions in a wide variety of
business settings, including:

 Small & Medium-sized Enterprises (SMEs)

 High-growth companies
 Family businesses
 Corporate institutions with an entrepreneurial mindset
 Consulting and advisory firms
 Economic and business development agencies
 Social and community enterprises

The Business Enterprise pathway sets out to equip you with real-world skills that are highly
valued in an increasingly competitive employment market, opening up new opportunities for
venture creation, business acquisition and the transformation of existing organizations and
enterprises. The link between theory and practice is an important element of the programme,
enabling you to gain an awareness of both academic and practitioner perspectives. Emphasis is
placed on developing an understanding of the specific sectors within which the realities of
business and organizational life take place, including knowledge, science and technology-based
venturing, corporate entrepreneurship and social and community enterprise.

11
 Entrepreneurship

Business Enterprise is an economics (or political economy) book by Thorstein Veblen published
in 1904 that looks at the growing corporate domination of culture and the economy.

At its heart The Theory of Business Enterprise is an analysis of two intertwined but clashing
motivations; that of business and that of industry. Business is the making of profits. Industry (or
the "machine process") is the making of goods. "The captains of industry" (capitalists or "Robber
Barons") curtailed production in order to keep prices and profits high. The worst fears of
businessmen were a "free run of production" which would essentially collapse all profits.

Veblen's book was published at a high point of American concern with business combinations
and trusts. Veblen employed his evolutionary analysis to explain these new forms.

Veblen placed the large business concerns in the context of the increasing industrialization of
American life. Veblen asserted that even though there is a commercial need for industry, the
machine process has outrun commercial needs and has penetrated every corner of mechanical
industries. This process is characterized by the obligation for standardization, certainty and
quantitative accuracy and precision.

The growth of industrial processes was certainly conquering the small business firms that had
evolved earlier to organize craft production on a disjointed and small scale. Prior to these
industrial concerns the only businesses that required significant investments were in shipping
across oceans. And the only organizations with a pure business motivation were banking and
merchant firms who dealt mainly with loaning, buying and selling.

The need for stability, certainty and uniformity of the industrial era, however, also clashed with
modern commercial interests. Where industrial processes are the concerns of engineers and their
quest for precision, businessmen are motivated solely by pecuniary gain through purchase and
sale. While businessmen certainly represent an older order, in the new order, businessmen are
able to leverage the machine process for pecuniary gain even if it means undermining the smooth
functioning of the machine process.

It is not true, claims Veblen, that business interests coincide with that of the community. In fact,
they may be opposites as business engages significantly in "competitive selling" through
advertising, buying, selling and charging what the market will bear. Businessmen pay the wages
of those engaged in competitive selling, such as salesmen, buyers, accountants and such, "not
because their work is productive of benefit to the community, but because it brings a gain to the
employers." This also holds true for the industrial workers engaged in the industrial process
under business management. The wages paid to these workmen are "competitively adjusted on
grounds of the vendibility of the product", which is determined not by the serviceability of the
product but by the aim to make a profitable sale.

Veblen claims that business instincts result in waste and "predation" that serve to enhance the
social status of those who could benefit from predatory claims to goods and services.

12
 Entrepreneurship

Work that is, on the whole, useless or detrimental to the community at large may be as gainful to
the business man and to the workmen whom he employs as work that contributes substantially to
the aggregate livelihood.

2.4. Economic social and political aspects of business enterprise

PEST analysis ('Political, Economic, Social and Technological analysis''') describes a

framework of macro-environmental factors used in the environmental scanning component of
strategic management. Some analysts added Legal and rearranged the mnemonic to SLEPT;
inserting Environmental factors expanded it to PESTEL or PESTLE, which is popular in the
United Kingdom; or, inserting Intercultural factors expanded SLEPT to SPELIT, which has
been popular in the United States since the mid-2000s. The model has recently been further
extended to STEEPLE and STEEPLED, adding Ethics and Demographic factors. It is a part
of the external analysis when conducting a strategic analysis or doing market research, and gives
an overview of the different macro-environmental factors that the company has to take into
consideration. It is a useful strategic tool for understanding market growth or decline, business
position, potential and direction for operations. The growing importance of environmental or
ecological factors in the first decade of the 21st century have given rise to green business and
encouraged widespread use of an updated version of the PEST framework. STEER analysis
systematically considers Socio-cultural, Technological, Economic, Ecological, and Regulatory
factors.

2.5. Business Enterprise Failure factors.

Failure is a topic most of us would rather avoid. But ignoring obvious (and subtle) warning signs
of business trouble is a surefire way to end up on the wrong side of business survival statistics.

What’s the survival rate of new businesses? Statistically, roughly 66 percent of new
businesses survive two years or more, 50 percent survive at least four years, and just 40 percent
survive six years or more. This is according to the study “Redefining Small Business Success”
by the U.S. Small Business Administration.

With this information as a backdrop, we’ve put together a list of 10 common reasons businesses
close their doors.

[1.] Failure to understand your market and customers. We often ask our clients, “Where
will you play and how will you win?”. In short, it’s vital to understand your competitive
market space and your customers’ buying habits. Answering questions about who your
customers are and how much they’re willing to spend is a huge step in putting your best
foot forward.
1.[2.] Opening a business in an industry that isn’t profitable. Sometimes, even the best
ideas can’t be turned into a high-profit business. It’s important to choose an industry
where you can achieve sustained growth. We all learned the dot-com lesson – to survive,
you must have positive cash flow. It takes more than a good idea and passion to stay in
business.

13
 Entrepreneurship

2.[3.] Failure to understand and communicate what you are selling. You must clearly
define your value proposition. What is the value I am providing to my customer? Once
you understand it, ask yourself if you are communicating it effectively. Does your market
connect with what you are saying?
3.[4.] Inadequate financing. Businesses need cash flow to float them through the sales
cycles and the natural ebb and flow of business. Running the bank accounts dry is
responsible for a good portion of business failure. Cash is king, and many quickly find
that borrowing money from lenders can be difficult.
4.[5.] Reactive attitudes. Failure to anticipate or react to competition, technology, or
marketplace changes can lead a business into the danger zone. Staying innovative and
aware will keep your business competitive.
5.[6.] Overdependence on a single customer. If your biggest customer walked out the door
and never returned, would your organization be ok? If that answer is no, you might
consider diversifying your customer base a strategic objective in your strategic plan.
6.[7.] No customer strategy. Be aware of how customers influence your business. Are you
in touch with them? Do you know what they like or dislike about you? Understanding
your customer forwards and backwards can play a big role in the development of your
strategy.
7.[8.] Not knowing when to say “No.” To serve your customers well, you have to focus on
quality, delivery, follow-through, and follow-up. Going after all the business you can get
drains your cash and actually reduces overall profitability. Sometimes it’s okay to say no
to projects or business so you can focus on quality, not quantity.
8.[9.] Poor management. Management of a business encompasses a number of activities:
planning, organizing, controlling, directing and communicating. The cardinal rule of
small business management is to know exactly where you stand at all times. A common
problem faced by successful companies is growing beyond management resources or
skills.
9.[10.] No planning. As the saying goes, failing to plan is planning to fail. If you don’t know
where you are going, you will never get there. Having a comprehensive and actionable
strategy allows you to create engagement, alignment, and ownership within your
organization. It’s a clear roadmap that shows where you’ve been, where you are, and
where you’re going next.

Running an organization is no easy task. Being aware of common downfalls in businesses can
help you proactively avoid them. It’s a constant challenge. We know, but it’s also a continuous
opportunity to avoid becoming one of the statistics.

2.6. Problems in Ethiopia business Enterprise

The private sector is expected to play a key role in Ethiopia’s journey to become a middle
income country in the next decade. However, Ethiopian firms face significant financial
constraints, because financial institutions do not accommodate their needs, a new World Bank
Group (WBG) study found.

14
 Entrepreneurship

The report, “SME Finance in Ethiopia: Addressing the Missing Middle Challenge,” reveals that
without adequate support from financial institutions, small and medium businesses are not able
to grow, or create more job opportunities.

“Firms in Ethiopia are much more likely to be fully credit constrained than firms elsewhere in
the world”.This gives origin to the so-called missing middle phenomenon whereby small
enterprises are more credit constrained than either micro or medium/large enterprises,” said
Francesco Strobbe, WBG senior financial economist.

The study used both supply and demand research to offer a complete picture of small and
medium enterprises’ finance practices in Ethiopia. While there was already anecdotal evidence
that small firms were lacking suitable access to finance, the study was able to provide empirical
evidence of the existence of a “missing middle phenomenon.” The study also offers
recommendations to help reduce financial challenges and promote the growth of small and
medium enterprises (SMEs). Those recommendations were discussed after the launch of the
study during a two-day forum with high-level policy makers and stakeholders. The forum also
enabled participants to learn from global best practices from Turkey, Nigeria and Ghana, which
were able to successfully implement financing activities for SMEs.

The WBG supports the Ethiopian government’s efforts to create jobs through analytical studies
and investment operations. The Ethiopian government has prepared a private sector development
strategy to improve the productivity and modernization of the agricultural sector, and boost the
technological sophistication and economic input of the industrial sector. It has also identified, the
development of micro, small and medium enterprises (MSMEs) as a key industrial policy
direction for creating employment opportunities for millions of Ethiopians. However, all this is
not sufficient and much more remains to be done to unleash the full potential of SMEs, said
Guang Zhe Chen, WBG country director for Ethiopia.

“To help fill in some of the gap through microfinance institutions, the World Bank Group, in
cooperation with DFID and CIDA is supporting the Women Entrepreneurship Development
Project,” Chen said. “In addition, through the $250 million Competitiveness and Job Creation
Project, the WBG is also helping to create dedicated industrial zones.”

The government’s second Growth and Transformation Plan (GTPII), currently under preparation,
will place even more emphasis on the importance of private sector development and therefore on
easing access to finance for SMEs. The government has put in place helpful public support
programs but much more is needed to properly address the missing middle challenge.

“By increasing the capacity of the financial sector to properly serve the segment of small
enterprises with adequate financial products, we hope to address lack of access to finance which
is a key obstacle that is currently preventing small enterprises from fully playing their role in the
industrialization process of Ethiopia and in contributing to the job creation agenda as envisaged
in the GTP I and GTP II” said H.E Ato Desalegn, state minister of Urban Development Housing
and Construction.

15
 Entrepreneurship

Taking into consideration the findings and recommendations of the study, the WBG will help
support the government in designing new initiatives to better serve the financial needs of SMEs
and create an “SME finance culture.” These interventions will complement the positive results
of ongoing operations such as the Women’s Entrepreneurship Development Project and the
Competitiveness and Job Creation Project by linking SMEs with larger enterprises in the
industrial zones and contributing to the creation of a “private sector ecosystem” around the
industrial zones.

“The SME finance study contains important policy recommendations that will need to be taken
into account in the design of a new SME Finance project,” Desalegn added. “I’m confident that
the inputs will help promote an SME finance culture in Ethiopia that will greatly contribute to
the industrial policy objectives of the GTP and ultimately to the well-being of our country.”

2.7. Setting Business Enterprise

If you're thinking of starting a business, our Start Your Own Business Programme will help us,
from developing and researching our ideas, learning basic business start-up skills and expanding
our potential with marketing and financial planning advice.

Our Start on our Own Business programme introduces us to thinking about running our business
and testing out our business ideas and plans along with like-minded people.

 Step 1: Test our Business Idea Our Start in our Own Business programme provides us
with an opportunity to assess the potential of our business idea. Have we got the right
business skills? Think about who will buy our product or service. What is the benefit to
them and how much will they pay?

Use our experience to realise your business idea.

 Step 2: What about Market Research? From the outset market research is essential in
helping us to identify our target market and customers. It will also help us to identify our
competitors and how to compete effectively. Research is also effective in assessing
demand for a new product or service.

Market research will establish the real potential for your product or service.

 Step 3: What are our Business Requirements? Have we considered the best location for
the business? Identify our basic equipment requirements and costs. How many staff will
we need to employ? Identify our overhead costs e.g. insurance. Can our business idea
benefit from new technologies? e.g. by online selling.

It gives us access to information and specialist expertise.

 Step 4: What are our Investment Requirements? Identify all start-up and running costs
associated with the business. Identify ways of financing our business venture. Seek
financial support and benefit from direct referral to Government agencies. Seek advice on

16
 Entrepreneurship

other sources of support e.g. Banks, Credit Unions, Microfinance Ireland, family support,
other non-bank finance.

It gives us advice on all financial sources that benefit us or our businesses

 Step 5: Developing our Marketing Strategy Marketing our business idea is a fundamental
aspect of starting up. Research the most cost effective methods of marketing our
business. Write you Marketing Plan.

Dear Learners, Learn from this how marketing works for you.

 Step 6: Developing your Sales Plan How will you promote your product or service? Who
and where is your target market (local, national, international)? What channels of
distribution will be used? Determine your selling price and break-even point.

Learn from us about how to plan, promote and grow your sales.

 Step 7: What is the best legal structure for you?

What type of company will allow you to make the best decisions for your business? You could
be a: Sole trader Partnership Limited Company.

We can help you decide the right structure from the beginning.

 Step 8: Managing the risks starting a business is a big step to take. A new business can be
exciting. However, it can also be risky. For some it means risking personal savings and
secure employment.

We help you to best manage the risks.

 Step 9: Avoiding Unnecessary Risks Register your business name with the Companies
Registration Office (CRO). Visit www.cro.ie be aware of your tax obligations and
register with your local revenue office. Visit www.revenue.ie be aware of other statutory
obligations such as trading licenses, planning permission, insurance, health & safety,
patents, etc. Be aware of your responsibilities under employment rights legislation.

We can steer you to make sure your business is fully compliant.

 Step 10: And finally......Write your Business Plan Business Planning is fundamental to
success in business - managing the company, generating sales and growing jobs. It is the
key to getting things done and making things happen. The finished business plan can be
used as an operating tool that will help you to make important decisions and manage your
business effectively.

Promotion of business is done by a Promoter or an Entrepreneur.

17
 Entrepreneurship

The Promoter has to take some steps to start a new business enterprise. Promotion of business is
not an easy job. One mistake will cause many difficulties for the new business. Therefore, the
promoter must be able to take good decisions. He must have technical knowledge about the
business. He must be a hard-working and energetic. After setting up the new business, the
promoter gives it to the owners or shareholders and directors. The promoter charges a
commission for his services. He is paid cash or in shares.

Promotion of business is necessary for industrial growth of the country.

The procedure of setting up of new business enterprise is very lengthy and time consuming. It
includes many steps and formalities. These are depicted in the following image. Click on it to get
a zoomed preview.

Steps in starting a new business enterprise are as follows:

1. First, the promoter must discover a good business opportunity.

2. Then he must decide on the size of the business unit.

18
 Entrepreneurship

3. This must be followed by determining the form of business ownership.

4. He must take proper care while selecting the location of business.
5. The amount of finance or capital (money) required to run the business must also be fixed.
6. Good selection and well-organization of the physical facilities is crucial.
7. He must have a good plant layout.
8. Organizational structure is needed to run business smoothly.
9. He must use scientific methods to fulfill the requirement (demand) of efficient
employees.
10. Before initiation, business shall be duly registered to avail a legal status and enjoy its all
rights.
11. After registration, business can start its operation in full swing.
12. Once under operation, tax liability of the business must be properly planned, managed
and cleared regularly to minimize taxes.

Generally; all this work is done by the Promoter.

Now let's discuss one by one important steps involved in setting up a new business enterprise.

1. Discover a business opportunity:

The Promoter first finds out a business opportunity. He can get this information from
newspapers, magazines, market surveys, research, etc.

A business opportunity may be to:

 Start a new business,

 Expand or diversify the existing (old) business,
 Purchase another company,
 Enter a joint venture or foreign collaboration, etc.

All business opportunities look very good in the beginning. However, the Promoter must
investigate the business opportunity very carefully. He must find out whether it is profitable or
not. He must study the competition, future prospectus of the business, demand and supply
position, availability of raw materials, etc. He must start the business only if he is fully satisfied.

2. Size of business:

The promoter has to decide about the size of the business unit. He has to decide whether the
business unit will be a small, medium-one or large size. The size of the business depends on
many factors such as economics of scale, future demand, finance, etc. He must see that there is
optimum utilization of resources and maximum profit.

3. Form of business ownership:

The promoter must decide about the form of business ownership. The forms of business
ownership are sole trader, partnership firm, private company, public company and co-operative

19
 Entrepreneurship

society. The form of ownership depends on many factors such as size of business, finance, tax,
extent of liability, etc.

4. Location of business:

The promoter must decide about the location of the business unit. He must consider factors like
availability of land, electricity, water, nearness to market, transportation, scope for expansion,
and so on. Unscientific location affects the efficiency of business. It increases the cost of
production and decreases the profitability. Therefore, immense care must be taken while
selecting the region, location and site for the business unit.

5. Capital needs:

Finance is the life-line of a business. As a result, the promoter has to decide about business
capital requirements and also find out different sources of finance.

While starting a new business the promoter has to decide on:

1. The financial needs of the business. That is, short-term and long-term capital
requirements.
2. Sources of finance like shares, debentures, loans from banks and other financial
institutions.
3. Cost of collecting finance and the returns on capital invested.
4. The capital structure and appropriate time for collecting finance.
5. Sources of working capital.

6. Organization of physical facilities:

Physical facilities mean the resources used to convert raw-materials into finished products.

Promoter has to decide about the machines and equipment to be used, the process of production
and the skilled and unskilled workers required to perform jobs. He must get the best-quality raw
materials, machines and workers. So that he can produce good quality goods.

7. Layout:

Layout means an arrangement of physical facilities like machines, equipment and workers that
are required for manufacturing goods.

Plant layout is a scientific and systematic arrangement of machines and equipment within the
factory.

20
 Entrepreneurship

A good layout ensures minimum wastage, better use of available space, minimize production
loss, safety and security of workers. It also increases the profits of the business. So the promoter
must have a good plant layout.

8. Organizational structure:

A proper organizational structure is needed to conduct business smoothly and efficiently. The
business is divided, according to functions, into departments. After making departments, the
employees are assigned their duties and shouldered important responsibilities. This results into a
superior-subordinate relationship between them. Organization structure is a pattern of
relationships, and it is necessary to fix responsibilities on the employees.

9. Manpower requirements:

Business enterprise requires skilled and semi-skilled workers to do factory and clerical jobs. The
success of any organization depends upon selecting a right man for the right job. The Promoter
must use scientific methods for selection and training manpower (personnel) and match the right
person with right job.

Summary

Business enterprise is the creation of wealth, the practice of creativity and resourcefulness and
the exploitation of change.

Business enterprise is not simply confined to the traditional world of business; it recognizes that
some of the most significant entrepreneurial challenges to be faced arise out of issues of social,
economic and environmental change. It is about leadership and making your own place in the
world.

PEST analysis ('Political, Economic, Social and Technological analysis''') describes a

framework of macro-environmental factors used in the environmental scanning component of
strategic management.

Common reasons businesses close their doors.

1. Failure to understand your market and customers.

2. Opening a business in an industry that isn’t profitable.
3. Failure to understand and communicate what you are selling.
4. Inadequate financing
5. Reactive attitudes.
6. Overdependence on a single customer.
7. No customer strategy.
8. Not knowing when to say “No.”
9. Poor management.
10. No planning.

21
 Entrepreneurship

Ethiopian firms face significant financial constraints, because financial institutions do not
accommodate their needs, a new World Bank Group (WBG) study found.“Firms in Ethiopia
are much more likely to be fully credit constrained than firms elsewhere in the world”.

The Ethiopian government has prepared a private sector development strategy to improve the
productivity and modernization of the agricultural sector, and boost the technological
sophistication and economic input of the industrial sector. It has also identified, the
development of micro, small and medium enterprises (MSMEs) as a key industrial policy
direction for creating employment opportunities for millions of Ethiopians. However, all this
is not sufficient and much more remains to be done to unleash the full potential of SMEs,
said Guang Zhe Chen, WBG country director for Ethiopia.

The government’s second Growth and Transformation Plan (GTPII), currently under preparation,
will place even more emphasis on the importance of private sector development and therefore on
easing access to finance for SMEs. The government has put in place helpful public support
programs but much more is needed to properly address the missing middle challenge.

“By increasing the capacity of the financial sector to properly serve the segment of small
enterprises with adequate financial products, we hope to address lack of access to finance
which is a key obstacle that is currently preventing small enterprises from fully playing their
role in the industrialization process of Ethiopia and in contributing to the job creation agenda
as envisaged in the GTP I and GTP II”.

Steps in starting a new business enterprise are as follows:

1. First, the promoter must discover a good business opportunity.

2. Then he must decide on the size of the business unit.
3. This must be followed by determining the form of business ownership.
4. He must take proper care while selecting the location of business.
5. The amount of finance or capital (money) required to run the business must also be fixed.
6. Good selection and well-organization of the physical facilities is crucial.
7. He must have a good plant layout.
8. Organizational structure is needed to run business smoothly.
9. He must use scientific methods to fulfill the requirement (demand) of efficient
employees.
10. Before initiation, business shall be duly registered to avail a legal status and enjoy its all
rights.
11. After registration, business can start its operation in full swing.
12. Once under operation, tax liability of the business must be properly planned, managed
and cleared regularly to minimize taxes.

A business opportunity may be to:

 Start a new business,

 Expand or diversify the existing (old) business,
 Purchase another company,

22
 Entrepreneurship

 Enter a joint venture or foreign collaboration, etc.

While starting a new business the promoter has to decide on:

1. The financial needs of the business. That is, short-term and long-term capital
requirements.
2. Sources of finance like shares, debentures, loans from banks and other financial
institutions.
3. Cost of collecting finance and the returns on capital invested.
4. The capital structure and appropriate time for collecting finance.
5. Sources of working capital.

Check Your Progress

Give Short Answers

1. What is a Business enterprise?

2.Mention some of the Common reasons businesses close their doors?

3. What has the promoter to decide on, while starting a new business?

23
 Entrepreneurship

CHAPTER THREE: BUSINESS PLANNING

3.1. Learning Objectives
Dear Learners, up on the completion of this chapter, you should be able to:
 Define the concept of business planning.
 Apply the Feasibility planning.
 Demonstrate the business plan.
 Develop a business plan.

3.2. Introduction
Dear Learner, this is the third chapter of the course which discusses about the concept of
business planning, Feasibility planning, the business plan, and Developing a business plan.
Besides, there are summary and check your progress included at the end of this chapter.

3.3. The concept of business planning

Business planning is important for businesses, but few take the time to plan using sound business
concepts. Effective business planning requires a focus on the organization's mission, vision and
values, along with careful consideration of the impacts on the organization from both internal
and external forces. Based on data gathered through a thorough situation analysis, a business
then establishes goals and objectives that they will plan to meet through effective strategies and
tactics.

Situation Analysis

A situation analysis is a concept of business planning that involves a thorough review of the
internal and external environment to provide a foundation for businesses to determine their goals
and objectives. Situation analysis encompasses considerations about existing and desired

24
 Entrepreneurship

customers, existing and impending competitors, as well as industry and environmental issues that
could impact the business. The collection of this data is used as an input into a SWOT analysis--
the consideration of the strengths, weaknesses, opportunities and threats that the business faces.

Mission, Vision and Value Alignment

Alignment is a critical concept of business planning. Whether or not a business has a stated
mission and vision, its owners certainly have an idea of why the business exists, what it offers
and who it serves. Values provide an indication of the company's beliefs in terms of how it
operates. In business planning, goals and objectives should be aligned with the mission, vision
and values of an organization. A not-for-profit health care organization, for instance, will not
plan to build a for-profit health club before investing in needed upgrades to hospital facilities.

Clear Goals and Objectives

Clear goals and objectives in business planning ensure that everyone involved in implementing
the plan know what they are attempting to achieve. In addition, clear goals and objectives
provide an indication of the resources that will be necessary for success. The resources required
to sell $1 million in products will be significantly more than what would be required to sell
$100,000 in products, for instance. Measurable goals and objectives provide the basis for
implementation of the plan and measurement of plan progress.

Focused Strategies and Tactics

Your strategies and tactics should be designed to achieve the goals and objectives you
established. Strategies are broad and are designed to either capitalize on your strengths and
weaknesses or overcome your weaknesses and threats. For instance, a strategy might be:
"Leverage high customer satisfaction scores to attract new business." Tactics are more specific
and indicate specific operational tasks that must be accomplished to achieve strategies. An
example of a tactic might be: "Tweet about customer service satisfaction scores."

3.4. Feasibility planning

A feasibility study is a brief formal analysis of a prospective business idea. The goal of a
feasibility study is to give the entrepreneur a clear evaluation of the potential for sales and profit
for a particular idea. Therefore, feasibility analyses focus on the market size and shares,
competing products or services, the pricing structure and, given the three of these, the likely sales
and profits of the prospective business.

These are designed to be done in a few days, and aim to provide "go-no go" decisions.
Fortunately, most of the feasibility analysis is used in the business plan.

25
 Entrepreneurship

In its simplest form, a Feasibility Study represents a definition of a problem or opportunity to be

studied, an analysis of the current mode of operation, a definition of requirements, an evaluation
of alternatives, and an agreed upon course of action. As such, the activities for preparing a
Feasibility Study are generic in nature and can be applied to any type of project, be it for systems
and software development, making an acquisition, or any other project.

There are basically six parts to any effective Feasibility Study:

1. The Project Scope which is used to define the business problem and/or opportunity to be
addressed. The old adage, "The problem well stated is half solved," is very apropos. The scope
should be definitive and to the point; rambling narrative serves no purpose and can actually
confuse project participants. It is also necessary to define the parts of the business affected either
directly or indirectly, including project participants and end-user areas affected by the project.
The project sponsor should be identified, particularly if he/she is footing the bill.

I have seen too many projects in the corporate world started without a well defined project scope.
Consequently, projects have wandered in and out of their boundaries causing them to produce
either far too much or far too little than what is truly needed.

2. The Current Analysis is used to define and understand the current method of
implementation, such as a system, a product, etc. From this analysis, it is not uncommon to
discover there is actually nothing wrong with the current system or product other than some
misunderstandings regarding it or perhaps it needs some simple modifications as opposed to a
major overhaul. Also, the strengths and weaknesses of the current approach are identified (pros
and cons). In addition, there may very well be elements of the current system or product that may
be used in its successor thus saving time and money later on. Without such analysis, this may
never be discovered.

Analysts are cautioned to avoid the temptation to stop and correct any problems encountered in
the current system at this time. Simply document your findings instead, otherwise you will spend
more time unnecessarily in this stage (aka "Analysis Paralysis").

3. Requirements and how requirements are defined depends on the object of the project's
attention. For example, how requirements are specified for a product are substantially different
than requirements for an edifice, a bridge, or an information system. Each exhibits totally
different properties and, as such, are defined differently. How you define requirements for
software is also substantially different than how you define them for systems.

4. The Approach represents the recommended solution or course of action to satisfy the
requirements. Here, various alternatives are considered along with an explanation as to why the
preferred solution was selected. In terms of design related projects, it is here where whole rough
designs (e.g., "renderings") are developed in order to determine viability. It is also at this point
where the use of existing structures and commercial alternatives are considered (e.g., "build
versus buy" decisions). The overriding considerations though are:

 Does the recommended approach satisfy the requirements?

26
 Entrepreneurship

 Is it also a practical and viable solution? (Will it "Play in Poughkeepsie?")

A thorough analysis here is needed in order to perform the next step…

5. Evaluation examines the cost effectiveness of the approach selected. This begins with an
analysis of the estimated total cost of the project. In addition to the recommended solution, other
alternatives are estimated in order to offer an economic comparison. For development projects,
an estimate of labour and out-of-pocket expenses is assembled along with a project schedule
showing the project path and start-and-end dates.

After the total cost of the project has been calculated, a cost and evaluation summary is prepared
which includes such things as a cost/benefit analysis, return on investment, etc.

6. Review that all of the preceding elements are then assembled into a Feasibility Study and a
formal review is conducted with all parties involved. The review serves two purposes: to
substantiate the thoroughness and accuracy of the Feasibility Study, and to make a project
decision; either approve it, reject it, or ask that it be revised before making a final decision. If
approved, it is very important that all parties sign the document which expresses their acceptance
and commitment to it; it may be a seemingly small gesture, but signatures carry a lot of weight
later on as the project progresses. If the Feasibility Study is rejected, the reasons for its rejection
should be explained and attached to the document.

Conclusion

It should be remembered that a Feasibility Study is more of a way of thinking as opposed to a

bureaucratic process. For example, what I have just described is essentially the same process we
all follow when purchasing a car or a home. As the scope of the project grows, it becomes more
important to document the Feasibility Study particularly if large amounts of money are involved
and/or the criticality of delivery. Not only should the Feasibility Study contain sufficient detail to
carry on to the next succeeding phase in the project, but it should also be used for comparative
analysis when preparing the final Project Audit which analyses what was delivered versus what
was proposed in the Feasibility Study.

Feasibility Studies represent a common sense approach to planning. Frankly, it is just plain good
business to conduct them. However, I have read where some people in the IT field, such as the
"Agile" methodology proponents, consider Feasibility Studies to be a colossal waste of time. If
this is true, I've got a good used car I want to sell them.

3.5. The business plan

A Business plan is Set of documents prepared by a firm's management to summarize its
operational and financial objectives for the near future (usually one to three years) and to show
how they will be achieved. It serves as a blueprint to guide the firm's policies and strategies, and
is continually modified as conditions change and new opportunities and/or threats emerge. When
prepared for external audience (lenders, prospective investors) it details the past, present, and
forecasted performance of the firm. And usually also contains pro-forma balance sheet, income

27
 Entrepreneurship

statement, and cash flow statement, to illustrate how the financing being sought will affect the
firm's financial position.

A business plan is an essential roadmap for business success. This living document generally
projects 3-5 years ahead and outlines the route a company intends to take to grow revenues.

3.6. Developing a business plan

Throughout the process of creating a plan, you need to keep in mind the objective of the plan.
Why are you writing the plan? Is it to manage the business? Or is it to raise money?

Annual plans are used to manage a business. Business plans are used to attract capital. But there
are exceptions, and often the difference between annual plans and business plans becomes
muddled. Banks and other lenders or investors may require a copy of each year’s annual plan.
And management may use the start-up business plan as a basis for operating the business.

Keeping a clear distinction between annual plans and business plans is not important. What is
important is keeping the primary objective of and the primary audience for the plan clear. As a
rule of thumb, if the plan will be used to attract investors or lenders, this is the primary objective
and outsiders are the primary audience. If the plan will help manage the business, this is the
primary objective and insiders are the primary audience.

The following elements of the business plan are used while developing the
business plan:
Executive Summary

Your executive summary is a snapshot of your business plan as a whole and touches on
your company profile and goals. Read these tips about what to include.

Company Description

Your company description provides information on what you do, what differentiates your
business from others, and the markets your business serves.

Market Analysis

Before launching your business, it is essential for you to research your business industry,
market and competitors.

Organization & Management

Every business is structured differently. Find out the best organization and management
structure for your business.

28
 Entrepreneurship

Service or Product Line

What do you sell? How does it benefit your customers? What is the product lifecycle?
Get tips on how to tell the story about your product or service.

Marketing & Sales

How do you plan to market your business? What is your sales strategy? Read more about
how to include this information in your plan.

 article

Funding Request

If you are seeking funding for your business, find out about the necessary information
you should include in your plan.

Financial Projections

If you need funding, providing financial projections to back up your request is critical.
Find out what information you need to include in your financial projections for your
small business.

Appendix

An appendix is optional, but a useful place to include information such as resumes,

permits and leases. Find additional information you should include in your appendix.

How to Make Your Business Plan Stand Out

What makes your business unique? Determining this could help you stand out from the
crowd and give you advantages over your competitors.

Start with a brief overview of your business strategy.

If your business will be based, at least initially, on a particular product or service, describe it in
the introductory paragraph.

In the next paragraph or two ex- plain why your strategy makes sense or why your product or
service has promise. Are you entering a fast- growing market or providing a unique product or
service that distinguishes your business from existing businesses?

Name the key people in your organization and describe, briefly, what special talents, expertise,
or connections they will bring to the business.

29
 Entrepreneurship

If your plan is being developed to raise capital, be clear about the amount of capital you are
seeking and how you plan to use investor or lender funding.

Describe the form of business organization you will take and where the company will be located.

Remember to keep your summary short and easy to understand. Avoid technical jargon and
details. Don’t try to summarize all of the different major elements of your plan. Just focus on the
key elements that you think will be of most interest to your audience. Skip the pie-in-the-sky
profit projections and outlook generalizations.

The concept is a clear explanation of your business strategy. It is not a definition of the business
or a summary of its markets but, instead, a quick summary of the one or two key factors that set
your business apart from the competition.

New business strategies are often closely tied to a particular product or service. If this is your
situation, include a clear and substantive description of your principal product or service. Follow
this with a focused discussion of what will make your product or service stand out from any
similar offerings in the marketplace. Focus, in depth, on just a few of the most competitive
attributes of your product or service.

You should also describe any other aspect of your business that is fundamental to your strategy.
Areas that might have significant impact on your strategy are marketing, research and
development, or strategic alliances with other firms. For example, if everyone else in your
industry is selling their product through retail channels but you feel that you can develop a strong
competitive advantage by selling via direct mail, then you should discuss this in the concept
section.

Market conditions and the competition should be included as points of reference only when
necessary. An in-depth analysis of these factors will be included later in the plan.

This chapter is most appropriate for plans being used to seek financing. Within this section you
will describe what stage of development your company is in and what the sought-after financing
will be used for.

There are three basic reasons for seeking outside financing: start-up financing, expansion
financing, and work-out financing.

If you are seeking start-up financing, you will need to list specific milestones that have been
achieved and emphasize all positive developments without being misleading. You should
anticipate the questions your lenders or investors may ask.

1. Has the market research been done?

2. Has a prototype product been developed?
3. Have facilities been leased?
4. Is the management team in place?
5. Has manufacturing been contracted?

30
 Entrepreneurship

6. Are marketing plans finalized?

Whether or not you receive financing and the terms of that financing will depend upon the stage
of development your company is in. The more fully developed your company is, the better your
financial arrangements will be.

If your business is already up and running and you are seeking expansion financing, you need to
give clear evidence that you are not, in reality, seeking financing as a way to solve existing
problems, or to cover losses or extraordinary expenses such as might be experienced during a
start-up.

Many investors and lenders do not like to offer work-out financing. Those who are willing to
consider it will want to see a plan that clearly identifies the reasons for current or previous
problems and provides a strong plan for corrective action.

No matter what type of financing you are seeking, financiers like to be apprised of the source and
amount of any capital that has already been secured. They will expect key executives to have
made substantial personal equity investments in the business. They will feel even more
comfortable if they recognize any other investors who may have participated in earlier stages of
the financing process.

The following questions are the Aspects of that plan need to be addressed in your business plan:

 How large is the potential market?

 How many people or businesses are currently using a competitor’s product that is the
same or similar to the one you are offering or plan to offer?
 How many prospects potentially have any possible use for the product?
 Is the market growing, flattening, or shrinking?

Almost every market has some major and distinctive segments. Even if it is not currently
segmented, the probability that it could or will be is great. This is particularly true if the
marketplace for your product or service is multi-regional or national. If this is the case,
segmentation is almost necessary, especially for a small firm, if you hope to be competitive.

You will need to discuss segmentation within your business category and how you intend to cope
with any positive or negative affects it may have on your particular business. Almost all markets
are segmented by price and quality issues. Generally, however, price and quality do not provide
the most clear or definitive market segmentation. Much stronger segmentation can usually be
found through an evaluation of product or service uses and importance to various consumers.

In your business plan you will need to evaluate the typical consumers within the market
segments you are targeting. There are countless variables to consider when analyzing consumer
behavior. Try to focus on those behavioral possibilities that best determine how viable your
product will be in your target markets. Look at :

 Which features will most appeal to consumers?

31
 Entrepreneurship

 How are choices made between competing products?

 Which marketing promotions or media avenues seem to offer the best vehicles for
reaching the consumer base?

And ask the following questions:

1. How much disposable income do target consumers have to spend on this product?
2. How do your target consumers reach purchasing decisions?

3. Are consumers presold on a particular brand before they visit a store or do they buy on
impulse?

4. What characteristics influence the purchase of one product or service over a competing
one?

Include an overview of those firms and their products and/or services that you will be in direct
competition with. Identify the market leader and define what makes it successful. Emphasize
those characteristics of the firm or offerings that are different than yours.

Don’t dismiss this section just because you don’t have any current competition. If there isn’t a
product or service similar to yours on the market, identity that firm that provide products or
services that perform essentially the same function. You should also make an attempt to identify
any firms that are likely to enter the market or are in the process of developing products or
services that will be competitive with those you are offering.

You briefly described the key features of your product or service in the concept section of the
plan. In this section you should explore features and benefits in depth. It is essential to be clear
not only about the distinguishing features of your product or service but also to delineate any
strong consumer benefits. What makes your product or service significantly better than
competitive offerings?

In this section you need to do an in-depth analysis of the competitive advantages and weaknesses
of your firm. When exploring weaknesses you should include information that will help allay
any concerns that may arise as to their ability to significantly hinder your success.

This section is important, especially if your company is a start-up, because you will, typically, be
competing with established companies that have inherent advantages such as financial strength,
name recognition, and established distribution channels.

Positioning can be thought of as a marketing strategy for your product or service. Positioning
defines how you are going to portray your product to your targeted marketplace.

Your first step is deciding who your target market will be. It will consist of those potential
customers toward whom you will direct most of your marketing efforts. Often this group will not
be the sole or even the largest market for your product, but it will be the market that based on
competitive factors and product benefits, you feel you can most effectively reach.

32
 Entrepreneurship

Start-ups are more likely to be successful if they focus on a highly specific, very narrow target
market. General markets are usually dominated by large, well-established firms.

Once you have determined who your target market is, you need to decide how you want
consumers to perceive your product.

 Is it the premium quality leader?

 Is it a low-cost substitute?
 Is it a full-service alternative?

If you have a one-product or service company, your marketing strategy may coincide with your
overall business strategy. This doesn’t necessarily have to be the case, however, but, it is
extremely important, in all cases, that your product strategy be in sync with your overall business
strategy.

Advertising and promotion is used to provide an overview of your general promotional plan.
Give a break-out of what methods and media you intend to use and why. If you have developed
an advertising slogan or unique selling proposition you may mention it, but it isn’t strictly
necessary. (A detailed explanation of unique selling propositions and their purpose can be found
in Chapter 2, “Marketing”.)

You should outline the proposed mix of your advertising media, use of publicity, and/or other
promotional programs.

• Explain how your choice of marketing vehicles will allow you to reach your target market.

• Explain how they will enable you to best convey your product features and benefits.

Be sure that your advertising, publicity, and promotional programs sound realistic, based upon
your proposed marketing budget. Effective advertising, generally, relies on message repetition in
order to motivate consumers to make a purchase. If you are on a limited budget, it is better to
reach fewer, more likely prospects, more often, than too many people occasionally.

Your sales strategy needs to be in harmony with your business strategy, marketing strategy, and
your company’s strengths and weaknesses. For example, if your start-up company is planning on
selling products to other businesses in a highly competitive marketplace, your market entry will
be easier if you rely on wholesalers or commissioned sales representatives who already have an
established presence and reputation in the marketplace. If your business will be selling high-tech
products with a range of customized options, your sales force needs to be extremely
knowledgeable and personable.

A discussion of research and development is, obviously, not germane to all companies. If it
applies, though, financiers are going to want to know that research and development projects are
aimed at specific, realistic objectives. And they will want to be assured that an undue portion of
the company’s resources is not plowed into this area. Remember that banks generally lend

33
 Entrepreneurship

money to businesses on a short-term basis, and venture capitalists and other first-round investors
generally want to cash out in just a few years.

An operation is a catch-all term used to describe any important aspects of the business not
described elsewhere. If the start-up is a manufacturing concern, discuss critical elements of the
manufacturing process. For retail businesses, discuss store operations. Wholesalers should
discuss warehouse operations.

In addition to discussing areas that are critical to operations, briefly summarize how major
business functions will be carried out, and how certain functions may run more effectively than
those of your competitors. But, don’t get into long descriptions of any business or operation
practices that will not sell your business plan to financiers.

The focus here is key people and positions. Primary attention should be on key people who have
already committed to joining the firm. Elaborate on their relevant past experience and successes
and explain what areas of responsibility they will have in the new company. Resumes should be
included here as part of an appendix or exhibits inclusion at the end of the plan.

If there are any important positions that have not been filled, describe position responsibilities
and the type of employment/experience background necessary to the position.

If there is a board of directors, present each member, and summarize that person’s background. If
they will have an active role in running their business, elaborate that role here.

If consultants have been engaged for key responsibilities, include a description of their
backgrounds and functions.

Fill as many of your key positions as possible before you seek funding. Many financiers reject
plans if the management team is incomplete.

Both debt and equity lenders will want to know how they can expect to receive their investment
back and realize interest or profit from the company.

Most private investors and venture capitalists will want to be able to exercise a cash-out option
within five years. They will be concerned that, even if the company becomes highly profitable, it
may be difficult for them to sell out their share at an attractive price. This concern is particularly
true in the case of minority stake holders. This is why you must provide an exit strategy for
investors.

Ideally, investors hope a firm will be so successful that it will be able to go public within five
years and their shares will become highly liquid investments, trading at a hefty multiple of
earnings. But, often, a more realistic goal is to make the company large and successful enough to
sell to a larger firm. State what your exit plan is and be sure it appears realistic.

In this chapter you need to show projected, or “pro forma,” income statements, balance sheets,
and cash flow. Existing businesses should also show historical financial statements. While how

34
 Entrepreneurship

far into the future you need to project and the number of possible scenarios you can anticipate
depends upon the complexity of the business, three to five years for financial projections and
three scenarios are average.

Scenarios should be based on the most likely course your business will take, a weak scenario
with sales coming in well under expectation, and a good scenario with projected sales well over
expectation.

Pro-forma income statements should show sales, cost of operation, and profits on both a monthly
and annual basis for each plan year. For all but the largest businesses, annual pro-forma balance
sheets are all that are necessary. Cash flow proformas should be presented in both monthly and
annual form. And, if your business is already established, past annual balance sheets and income
statements should also be included.

Include information that will assist potential lenders in understanding your projections. Lenders
will give as much credence to the assumptions your projections are based on as they do the
numbers themselves.

Summary

Based on data gathered through a thorough situation analysis, a business then establishes goals
and objectives that they will plan to meet through effective strategies and tactics.

A situation analysis is a concept of business planning that involves a thorough review of the
internal and external environment to provide a foundation for businesses to determine their goals
and objectives. Situation analysis encompasses considerations about existing and desired
customers, existing and impending competitors, as well as industry and environmental issues that
could impact the business.
Alignment is a critical concept of business planning. Whether or not a business has a stated
mission and vision, its owners certainly have an idea of why the business exists, what it offers
and who it serves.
Clear goals and objectives in business planning ensure that everyone involved in implementing
the plan know what they are attempting to achieve. In addition, clear goals and objectives
provide an indication of the resources that will be necessary for success.
Strategies are broad and are designed to either capitalize on your strengths and weaknesses or
overcome your weaknesses and threats.
A feasibility study is a brief formal analysis of a prospective business idea. The goal of a
feasibility study is to give the entrepreneur a clear evaluation of the potential for sales and profit
for a particular idea.
A Business plan is Set of documents prepared by a firm's management to summarize its
operational and financial objectives for the near future (usually one to three years) and to show
how they will be achieved. It serves as a blueprint to guide the firm's policies and strategies, and
is continually modified as conditions change and new opportunities and/or threats emerge.
A business plan is an essential roadmap for business success.

35
 Entrepreneurship

Check Your Progress

Give Short Answers

1. What are the elements of the business plan are used while developing the business plan?
2. Define a situation Analysis?
3. What is a business plan?
4. What is a feasibility study?
5. What is the goal of feasibility study?

CHAPTER FOUR: PRODUCT AND SERVICE CONCEPT

4.1. Learning Objectives
Dear Learners, up on the completion of this chapter, you should be able to:
 Define the Product and service concepts.
 Identify the Product technology.
 Demonstrate the Product development process.
 Distinguish the Product protection, Patents, Trademarks, and Copyrighting.

4.2. Introduction
Dear Learners, this is the fourth chapter of the course which comprises the major topics:
Product and service concept, Product technology, Product development process, Product
development process, Product protection, Patents, Trademarks, and Copyrighting. Besides,
there are chapter summary and check your progress involved in it.

4.3. Product and service concept

Products and services are two closely aligned concepts, and, in fact, most products have an
element of service in them. For example, a car buyer now buys a comprehensive bundle of
service benefits, in addition to the tangible components of the car 1. However, there is a distinct
difference between them and it is important to establish some working definitions. One way to
think of them is from the clients’ point of view. When a client asks "what can you make for me?"
they are asking about products; when a client asks "what can you do for me?" they are asking
about services. While a product is something that can be measured and counted, a service is less
concrete and is the result of the application of skills and expertise towards an identified need. A

36
 Entrepreneurship

product is something you can point at, whereas a service, as The Economist defines it, is any
activity "you can't drop on your foot" 2 although this definition doesn't hold up when the products
are digital in form – weightless objects that have no mass or material definition aside from the
physical media on which they exist. Nonetheless, even in file-based workflows, there is a
distinction between a product being produced and a service provided to fill a need. For the
purposes of the Digitization Services Branch Products and Services Project, these are the
definitions of each component:

Products

Products are tangible and discernible items that the organization produces, including digital file-
based output. Examples of products from the Digitization Services Branch:

 digital files sent to a network storage system (NAS/SAN)

 new prints of motion picture film elements
 prints for exhibit purposes
 reference copies on DVD/CDs for the Reading Rooms or other clients

Services

A service is the production of an essentially intangible benefit, either in its own right or as a
significant element of a tangible product, which through some form of exchange, satisfies an
identified need. Sometimes services are difficult to identify because they are closely associated
with a good; such as the combination of a diagnosis with the administration of a medicine.
Examples of services from the Digitization Services Branch:

 consulting with clients on appropriate products for specific purposes

 providing advice on risk assessment and priority setting
 working on standards committees
 conducting training and other educational outreach

What is the best way to launch a new product/service concept?

Best Answer: So you want to bring a new product or service to market. You've done your
homework and decided exactly what you plan to offer; now all you need to generate is sales.
Sounds simple enough, doesn't it? But every day, countless new product and service ideas are
conceived--never to be born because they're not properly brought to market. In fact, a large
percentage of the calls my company's coaches receive are from small-business owners who
want exactly this sort of help. And we carefully guide them through these seven important
steps that will help them successfully bring their new products and services to market.

1. Study your competition. Many business marketing classes teach participants how to
perform a SWOT (strengths, weaknesses, opportunities and threats) analysis. You have to
start by taking a serious look at your competitors. Make a list of the businesses that offer
products or services similar to the one you plan to launch. Even if you think your new
product or service is entirely unique and without existing competition, it's important to put

37
 Entrepreneurship

yourself in your prospective customers' shoes and imagine what they might buy in lieu of
what you plan to offer. Once you decide whom your competitors will be, review their
marketing materials, including their ads, brochures and websites. Evaluate how your new
product or service will stand up against what's already being offered, in what ways you'll
excel, and which companies or their offerings pose the greatest threats to your success.

2. Target the ideal customer. To successfully launch your new product or service with
minimum financial outlay, it's essential to focus exclusively on the prospects you believe are
most likely to purchase from you. These may be customers who are currently buying
something similar and will appreciate the additional features your new product or service
provides. Your best prospects have a perceived need for what you offer, can afford to buy it
and have demonstrated a willingness to do so--probably by purchasing from your
competition. Bear in mind, it's always easier to fill a need than to create one.

3. Create a unique value proposition. At this stage, you should have a clear understanding of
what you must offer in order to stand apart from your competition and who will want to take
advantage of your offer. But do you know why customers will want to buy from you vs. the
vast field of competitors out there? What benefits and features will you provide that your
prospective customers will value most? The bottom line is that your product or service
"bundle" should be unique and meet the needs and desires of your best prospects.

4. Define your marketing strategy and tactics. Next, choose your sales and marketing
channels. Will you market online, via catalog or through dealers, for example? Generally,
multichannel marketers achieve the greatest success because customers who can shop when
and however they like tend to spend more and shop more often. Suppose your strategy is to
market a low-cost workout device to people who can't afford gym memberships or high-
priced home equipment. You might choose traditional direct marketing plus online sales as
your primary channels, and employ tactics including direct-response TV spots and online ads
and e-mail solicitations that link to your website.

5. Test your concept and marketing approach. With all the money it takes to bring a new
product or service to market, it's foolhardy to rush headlong into the launch phase prior to
testing. What should you test? It's best to examine your product or service bundle plus your
marketing message and you're your marketing materials. Depending on what you plan to
market and your budget, you can use formal focus groups (or simply host roundtable
discussions with members of the target audience), employ online research or mall intercept
studies, or distribute your product to a select group of users for testing. Only after testing is
complete, should you proceed to the final creation of your marketing tools and materials.

6. Roll out your campaign. Public relations often play a vital role in the launch of a product
or service. You can use media relations tactics to place articles and win interviews, get
coverage by allowing key press to review your product, hold a launch event, or use grass
roots marketing to build buzz. But no matter what publicity route you choose, first make sure
your product or service is completely ready and available for purchase in order to maximize
returns from the coverage you receive. And your other marketing efforts should follow

38
 Entrepreneurship

closely on the heels of your press roll out. Monitor the results from all media, and in the first
weeks and months, be prepared to adjust your campaign to take advantage of what's working
best.

7. Know your product's lifecycle. The campaign you use during the introduction and
education phase of your product or service launch will need to be updated as your product or
service matures.

4.4. Product technology

The world is changing: values and attitudes, needs and demands for products, services and
technologies. And the speed of change has increased dramatically.

Listening to the consumer’s voice is more important than ever to ensure new products, services
and technologies meet customers’ needs. Co-Creation is more important than ever; customers
become marketers.

PsyLab, Psyma’s range of innovation and concept research solutions, integrates all stakeholders
(product managers, experts and customers/users). From the earliest stages of development,
Psyma supports clients to make the right decisions.

With qualitative and quantitative research methods, Psyma supports each step of development to
determine the study approach that best meets the client’s individual requirements. Our expertise
ensures valid and marketable findings.

For a new product or service to succeed, it must conform to existing or evolving trends, needs
and emotional benefits. PsyLab’s initial phase strives to identify unmet needs by uncovering and
understanding trends and changes in consumer behavior.

Possible approaches:

 Desk Research: analyze secondary data, user-generated web content, existing client
databases, e.g., complaints
 Evaluation by Psyma’s industry experts: utilize existing internal client knowledge and
interview relevant personnel, e.g., sales reps, product managers
 Ethnography: delve into target groups’ authentic and unbiased environment to gain
insights on how the product, service or technology is used in everyday life

These approaches offer insights into the usage and attitudes of consumers, their needs and their
awareness, as well as the opinions of experts.

Product management tools address the specific needs of product managers and product
teams to manage activities and information for ideation, customer discovery, product
design, requirements and roadmaps. Some of these tools can be used to supplement

39
 Entrepreneurship

applications already used within the organization, while others replace tools that
have been used by product management for something other than their original
purpose.

4.5. Product development process

Every entrepreneur knows that productivity is one of the key ingredients for successful product
development. One of the two key processes in Robert’s Rules of Innovation is the NEW
PRODUCT DEVELOPMENT PROCESS. A formalized, NPD process – also referred to and
best practice: the Stage Gate® Process – is a must, from simple to be sophisticated.

The New Product Development process is often referred to as The Stage-Gate innovation
process, developed by Dr. Robert G. Cooper as a result of comprehensive research on reasons
why products succeed and why they fail.

When teams collaborate in developing new innovations, having the following eight ingredients
mixed into your team’s new product developmental repertoire will ensure that it’s overall
marketability will happen relatively quick, and accurately – making everyone productive across
the board.

Step 1: Generating

Utilizing basic internal and external SWOT analyses, as well as current marketing trends, one
can distance themselves from the competition by generating ideologies which take affordability,
ROI, and widespread distribution costs into account.

Lean, mean and scalable are the key points to keep in mind. During the NPD process, keep the
system nimble and use flexible discretion over which activities are executed. You may want to
develop multiple versions of your road map scaled to suit different types and risk levels of
projects.

Step 2: Screening The Idea

Wichita, possessing more aviation industry than most other states, is seeing many new
innovations stop with Step 2 – screening. Do you go/no go? Set specific criteria for ideas that
should be continued or dropped. Stick to the agreed upon criteria so poor projects can be sent
back to the idea-hopper early on.

Because product development costs are being cut in areas like Wichita, “prescreening product
ideas,” means taking your Top 3 competitors’ new innovations into account, how much market
share they’re chomping up, what benefits end consumers could expect etc. An interesting
industry fact: Aviation industrialists will often compare growth with metals markets; therefore,
when Boeing is idle, never assume that all airplanes are grounded, per se.

40
 Entrepreneurship

Step 3: Testing the Concept

As Gaurav Akrani has said, “Concept testing is done after idea screening.” And it is important
to note, it is different from test marketing.

Aside from patent research, design due diligence, and other legalities involved with new product
development; knowing where the marketing messages will work best is often the biggest part of
testing the concept. Does the consumer understand, need, or want the product or service?

Step 4: Business Analytics

During the New Product Development process, build a system of metrics to monitor progress.
Include input metrics, such as average time in each stage, as well as output metrics that measure
the value of launched products, percentage of new product sales and other figures that provide
valuable feedback. It is important for an organization to be in agreement for these criteria and
metrics.

Even if an idea doesn’t turn into product, keep it in the hopper because it can prove to be a
valuable asset for future products and a basis for learning and growth.

Step 5: Beta / Marketability Tests

Arranging private tests groups, launching beta versions, and then forming test panels after the
product or products have been tested will provide you with valuable information allowing last
minute improvements and tweaks. Not to mention helping to generate a small amount of buzz.
Word Press is becoming synonymous with beta testing, and it’s effective; Thousands of
programmers contribute code, millions test it, and finally even more download the completed
end-product.

Step 6: Technicalities + Product Development

Provided the technical aspects can be perfected without alterations to post-beta products, heading
towards a smooth step 7 is imminent. According to Akrani, in this step, “The production
department will make plans to produce the product. The marketing department will make plans
to distribute the product. The finance department will provide the finance for introducing the
new product”.

As an example; In manufacturing, the process before sending technical specs to machinery

involves printing MSDS sheets, a requirement for retaining an ISO 9001 certification (the
organizational structure, procedures, processes and resources needed to implement quality
management.)

In internet jargon, honing the technicalities after beta testing involves final database preparations,
estimation of server resources, and planning automated logistics. Be sure to have your
technicalities in line when moving forward.

41
 Entrepreneurship

Step 7: Commercialize

At this stage, your new product developments have gone mainstream, consumers are purchasing
your good or service, and technical support is consistently monitoring progress. Keeping your
distribution pipelines loaded with products is an integral part of this process too, as one prefers
not to give physical (or perpetual) shelf space to competition. Refreshing advertisements during
this stage will keep your product’s name firmly supplanted into the minds of those in the
contemplation stages of purchase.

Step 8: Post Launch Review and Perfect Pricing

Review the NPD process efficiency and look for continues improvements. Most new products
are introduced with introductory pricing, in which final prices are nailed down after consumers
have ‘gotten in’. In this final stage, you’ll gauge overall value relevant to COGS (cost of goods
sold), making sure internal costs aren’t overshadowing new product profits. You continuously
differentiate consumer needs as your products age, forecast profits and improve delivery process
whether physical, or digital, products are being perpetuated.

Remember: The Process Is Loose

The entire new product development process is an ever evolving testing platform where errors
will be made, designs will get trashed, and loss could be recorded. Having your entire team
working in tight synchronicity will ensure the successful launch of goods or services, even if
reinventing your own wheel. Productivity during product development can be achieved if, and
only if, goals are clearly defined along the way and each process has contingencies clearly
outlined on paper.

For more tips and guidelines on developing the right implementation strategy, see Robert’s
Rules of Innovation: A 10-Step Program for Corporate Survival.

- See more at: http://www.innovationexcellence.com/blog/2013/05/27/8-step-process-perfects-

new-product-development/#sthash.670znTV0.dpuf.

4.6. Product protection, Patents, Trademarks, Copyrighting

Some people confuse patents, copyrights, and trademarks. Although there may be some
similarities among these kinds of intellectual property protection, they are different and serve
different purposes.

What Is a Copyright?

Copyright is a form of protection provided to the authors of "original works of authorship"

including literary, dramatic, musical, artistic, and certain other intellectual works, both published
and unpublished. The 1976 Copyright Act generally gives the owner of copyright the exclusive

42
 Entrepreneurship

right to reproduce the copyrighted work, to prepare derivative works, to distribute copies or
phone records of the copyrighted work, to perform the copyrighted work publicly, or to display
the copyrighted work publicly.

The copyright protects the form of expression rather than the subject matter of the writing. For
example, a description of a machine could be copyrighted, but this would only prevent others
from copying the description; it would not prevent others from writing a description of their own
or from making and using the machine. Copyrights are registered by the Copyright Office of the
Library of Congress.

What Is a Trademark or Service mark?

A trademark is a word, name, symbol or device which is used in trade with goods to indicate the
source of the goods and to distinguish them from the goods of others. A service mark is the same
as a trademark except that it identifies and distinguishes the source of a service rather than a
product. The terms "trademark" and "mark" are commonly used to refer to both trademarks and
service marks.

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

What Is a Patent?

A patent for an invention is the grant of a property right to the inventor, issued by the Patent and
Trademark Office. The term of a new patent is 20 years from the date on which the application
for the patent was filed in the United States or, in special cases, from the date an earlier related
application was filed, subject to the payment of maintenance fees. US patent grants are effective
only within the US, US territories, and US possessions.

The right conferred by the patent grant is, in the language of the statute and of the grant itself,
"the right to exclude others from making, using, offering for sale, or selling" the invention in the
United States or "importing" the invention into the United States. What is granted is not the right
to make, use, offer for sale, sell or import, but the right to exclude others from making, using,
offering for sale, selling or importing the invention.

43
 Entrepreneurship

Some additional differences between a copyright and a trademark are as follows:

1. The purpose of a copyright is to protect works of authorship as fixed in a tangible form of

expression. Thus, copyright covers: a) works of art (2 or 3 dimensional), b) photos, pictures,
graphic designs, drawings and other forms of images; c) songs, music and sound recordings of
all kinds; d) books, manuscripts, publications and other written works; and e) plays, movies,
shows, and other performance arts.

2. The purpose of a trademark is to protect words, phrases and logos used in federally regulated
commerce to identify the source of goods and/or services.

3. There may be occasions when both copyright and trademark protection are desired with
respect to the same business endeavor. For example, a marketing campaign for a new product
may introduce a new slogan for use with the product, which also appears in advertisements for
the product. However, copyright and trademark protection will cover different things. The
advertisement's text and graphics, as published in a particular vehicle, will be covered by
copyright - but this will not protect the slogan as such. The slogan may be protected by
trademark law, but this will not cover the rest of the advertisement. If you want both forms of
protection, you will have to perform both types of registration.

4. If you are interested in protecting a title, slogan, or other short word phrase, generally you
want a trademark. Copyright law does not protect a bare phrase, slogan, or trade name.

5. Whether an image should be protected by trademark or copyright law depends on whether its
use is intended to identify the source of goods or services. If an image is used temporarily in an
ad campaign, it generally is not the type of thing intended to be protected as a logo.

6. The registration processes of copyright and trademark are entirely different. For copyright,
the filing fee is small, the time to obtain registration is relatively short, and examination by the
Copyright Office is limited to ensuring that the registration application is properly completed and
suitable copies are attached. For trademark, the filing fee is more substantial, the time to obtain
registration is much longer, and examination by the Trademark Office includes a substantive
review of potentially conflicting marks which are found to be confusingly similar. While
copyright registration is primarily an administrative process, trademark registration is very much
an adversarial process.

7. Copyright law provides for compulsory licensing and royalty payments - there is no analogous
concept in trademark law. Plus, the tests and definition of infringement are considerably different
under copyright law and trademark law.

44
 Entrepreneurship

Clothing items

When it comes to copyright v. trademark, we get more questions about clothing than anything
else. Here are a few guidelines:

1. Anything you silk screen or otherwise display prominently on the front or back of a shirt, top,
cap or hat is generally considered artwork, and therefore covered by copyright. In fact, if you
send a photo of a clothing item to the U.S. Trademark Office showing your design, logo or
slogan prominently displayed on the front or back, they will refuse to register it as a trademark.

2. To qualify as a trademark, your logo or slogan must be used as the brand of the clothing item
itself. In other words, your logo or slogan must be used the way clothing brands are typically
used and displayed on clothing, namely, sewn into a waistband, collar, hem or pocket, or applied
to a label, sticker or tag, and NOT in a way that dominates the appearance of the clothing item.

3. The caveat, of course, is that when your design, logo or slogan is regarded as artwork - even
though it can be protected by copyright - the protection only extends to the artistic configuration
used. To put it more bluntly, if you have a slogan or name, copyright law can protect the artistic
way you display it, but the text itself is NOT protected. Copyright law does not cover names,
words or short phrases.

4. The only way to protect a name, word, short phrase or other text is to register it as a
trademark. But this means that you have to change the way you use the mark from an artistic
display to a brand name usage.

5. Yes, it is possible to register a design, logo, name or phrase under both copyright law and
trademark law, so long as you use it in two different ways and you do it consistently. Keeping
the two usages of the same design or text at the same time is not an easy task, and you can end
up compromising your rights under copyright or trademark, or both, very easily if you aren't
careful.

Protect your Invention or Product - Patents, Trademarks, and Copyright

Explained

Intellectual property protection is a critical part of a small business owner’s current and future
growth strategy.

If you are self-employed or are a small business owner, and need a command of the process of
intellectual property protection, below is a summary of the basics as well as links to other
resources that can help set you on your way.

Understanding the Difference between Patenting and Other Forms of Intellectual Property

45
 Entrepreneurship

There are essentially three forms of intellectual property: patents, trademarks, and copyrights.
Each has a distinct definition and relevance to the small business owner looking to protect
inventions, brand, or intellectual works:

 Patents - A patent for an invention is the grant of a property right to the inventor. Patents
are granted for new, useful and non-obvious inventions for a period of 20 years from the
filing date of a patent application, and provide the right to exclude others from exploiting
the invention during that period.
 Trademarks - A trademark is different to a patent since it only protects words, names,
symbols, sounds, or colors that distinguish goods and services. Trademarks, unlike
patents, can be renewed forever as long as they are being used in commerce.
 Copyright - The Library of Congress registers copyrights, which last for the life of the
author plus 70 years. Books, movies and musical recordings are all examples of
copyrighted works.

How to Apply for a Patent

There are three types of patents that you can apply for based on the nature of your invention -
utility patents, design patents, or plant (of the green variety) patents. A useful starting point is to
find out what can and cannot be patented.

To get a patent you will need to process an application with the U.S. Patent and Trademark
Office. This is a complex process, and almost all experts recommend that patent-seekers retain
the services of a registered patent attorney or patent agent to prepare and prosecute their
applications.

Patents, Trademarks and Overseas Markets

 Overseas Patents - Almost every country has its own patent law and you’ll need to
follow the patent application process within the country in which you wish to protect
your invention.
 International Trademarks - You can file for trademark registration, via a single
application, in certain countries only if you are already a qualified owner of a trademark
application pending before the U.S. Patent Office. If you want to protect your trademark
overseas you’ll need to file for international trademark protection.

Copyright Law

If you want to protect 'original works of authorship' such as music, books, screenplays, etc.
copyright law can protect published and unpublished works against illegal reproduction,
distribution, performance, etc.

Summary

Products are tangible and discernible items that the organization produces, including digital file-
based output.

46
 Entrepreneurship

A service is the production of an essentially intangible benefit, either in its own right or as a
significant element of a tangible product, which through some form of exchange, satisfies an
identified need. Sometimes services are difficult to identify because they are closely associated
with a good;
Some people confuse patents, copyrights, and trademarks. Although there may be some
similarities among these kinds of intellectual property protection, they are different and serve
different purposes.
Copyright is a form of protection provided to the authors of "original works of authorship"
including literary, dramatic, musical, artistic, and certain other intellectual works, both published
and unpublished.
The copyright protects the form of expression rather than the subject matter of the writing.
A trademark is a word, name, symbol or device which is used in trade with goods to indicate the
source of the goods and to distinguish them from the goods of others. A service mark is the same
as a trademark except that it identifies and distinguishes the source of a service rather than a
product.

Check Your Progress

True/False Items

1. A patent for an invention is the grant of a property right to the inventor.

2. Every entrepreneur knows that productivity is one of the key ingredients for successful
product development.
3. Products are tangible and discernible items that the organization produces, including
digital file-based output.
4. A service is the production of an essentially intangible benefit.
5. Copyright is a form of protection provided to the authors of "original works of
authorship".
6. A trademark is a word, name, symbol or device which is used in trade with goods to
indicate the source of the goods and to distinguish them from the goods of others.
7. A service mark is the same as a trademark except that it identifies and distinguishes the
source of a service rather than a product.

47
 Entrepreneurship

CHAPTER FIVE: MARKETING AND NEW VENTURE DEVELOPMENT

5.1. Learning Objectives
Dear Learners, up on the completion of this chapter, you should be able to:
 Conduct a marketing research.
 Have a marketing intelligence.
 Compute Competitive analysis.
 Identify the marketing strategies.
 Explain the International markets.

5.2. Introduction
Dear Learners, this is the fifth chapter of the course comprising the major contents:
Marketing research, Marketing intelligence, Competitive analysis, Marketing strategies, and
International markets. Finally, you will find summary and check your progress at the end of
this chapter.

5.3. Marketing research

Marketing research is "the process or set of processes that links the consumers, customers, and
end users to the marketer through information — information used to identify and define
marketing opportunities and problems; generate, refine, and evaluate marketing actions; monitor

48
 Entrepreneurship

marketing performance; and improve understanding of marketing as a process. Marketing

research specifies the information required to address these issues, designs the method for
collecting information, manages and implements the data collection process, analyzes the results,
and communicates the findings and their implications."[1]

It is the systematic gathering, recording, and analysis of qualitative and quantitative data about
issues relating to marketing products and services. The goal of marketing research is to identify
and assess how changing elements of the marketing mix impacts customer behavior. The term is
commonly interchanged with market research; however, expert practitioners may wish to draw a
distinction, in that market research is concerned specifically with markets, while marketing
research is concerned specifically about marketing processes.[2]

Marketing research is often partitioned into two sets of categorical pairs, either by target market:

 Consumer marketing research, and

 Business-to-business (B2B) marketing research

Or, alternatively, by methodological approach:

 Qualitative marketing research, and

 Quantitative marketing research

Consumer marketing research is a form of applied sociology that concentrates on understanding

the preferences, attitudes, and behaviors of consumers in a market-based economy, and it aims to
understand the effects and comparative success of marketing campaigns. The field of consumer
marketing research as a statistical science was pioneered by Arthur Nielsen with the founding of
the ACNielsen Company in 1923.

Thus, marketing research may also be described as 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.[4]

The task of marketing research (MR) is to provide management with relevant, accurate, reliable,
valid, and current information. Competitive marketing environment and the ever-increasing costs
attributed to poor decision making require that marketing research provide sound information.
Sound decisions are not based on gut feeling, intuition, or even pure judgment.

Marketing managers make numerous strategic and tactical decisions in the process of identifying
and satisfying customer needs. They make decisions about potential opportunities, target market
selection, market segmentation, planning and implementing marketing programs, marketing
performance, and control. These decisions are complicated by interactions between the
controllable marketing variables of product, pricing, promotion, and distribution. Further
complications are added by uncontrollable environmental factors such as general economic
conditions, technology, public policies and laws, political environment, competition, and social
and cultural changes. Another factor in this mix is the complexity of consumers. Marketing

49
 Entrepreneurship

research helps the marketing manager link the marketing variables with the environment and the
consumers. It helps remove some of the uncertainty by providing relevant information about the
marketing variables, environment, and consumers. In the absence of relevant information,
consumers' response to marketing programs cannot be predicted reliably or accurately. Ongoing
marketing research programs provide information on controllable and non-controllable factors
and consumers; this information enhances the effectiveness of decisions made by marketing
managers.[5]

Traditionally, marketing researchers were responsible for providing the relevant information and
marketing decisions were made by the managers. However, the roles are changing and marketing
researchers are becoming more involved in decision making, whereas marketing managers are
becoming more involved with research. The role of marketing research in managerial decision
making is explained further using the framework of the "DECIDE" model:

The DECIDE model conceptualizes managerial decision making as a series of six steps. The
decision process begins by precisely defining the problem or opportunity, along with the
objectives and constraints.[5] Next, the possible decision factors that make up the alternative
courses of action (controllable factors) and uncertainties (uncontrollable factors) are enumerated.
Then, relevant information on the alternatives and possible outcomes is collected. The next step
is to identify and select the best alternative based on chosen criteria or measures of success. Then
a detailed plan to develop and implement the alternative selected is developed and put into effect.
Last, the outcome of the decision and the decision process itself are evaluated.

5.4. Marketing intelligence

Marketing intelligence (MI) is the everyday information relevant to a company’s markets,

gathered and analyzed specifically for the purpose of accurate and confident decision-making in
determining market opportunity, market penetration strategy, and market development metrics.
Marketing intelligence is necessary when entering a foreign market.

Marketing intelligence determines the intelligence needed, collects it by searching environment

and delivers it to marketing managers who need it. Marketing intelligence software can be
deployed using an on-premises or software as a service (SaaS, or cloud-based) model. These
systems take data from disparate data sources, like web analytics, business intelligence, call
center and sales data, which often come separate reports, and put them into a single environment.
In order to collect marketing intelligence, marketing managers must be in constant touch with
relevant books, newspapers and trade publications. They must talk to various stakeholders like
customers, distributors and suppliers.In addition to this they must also monitor social media and
carry out online discussions. Marketing managers can design reports that correlate and visualize
data coming from a variety of departments and sources (even, in some cases, external data.) This
allows them to see current key performance indicators in real time (or as quickly as sources
provide data) and analyze trends, rather than wait for analysts to deliver periodic reports.

Marketing intelligence systems are designed to be used by marketing managers and often viewed
by employees throughout an organization. They may have user interfaces that closer resemble
consumer software than the software around individual data sources, which are designed for use

50
 Entrepreneurship

by analysts. Business intelligence for example, can collect highly accurate, timely, granular data,
but often requires IT support to build and edit custom reports.

Organizationally, marketing intelligence can be the name of the department that performs both
the market intelligence and competitor analysis roles. Business intelligence of any kind may also
be their responsibility, in tandem with (or solely performed by) the Finance department, for
measuring market share and setting growth targets, the mergers and acquisitions group for
exploring acquisition opportunities, the legal department to protect the organization's assets or
research and development for cross-company comparison of innovation trends and the discovery
of opportunities through innovative differentiation.

Steps to be taken by a Company to improve its Marketing Intelligence

(1) Train and Motivate Sales Force: A company's sales force can be an excellent source of
information about the current trends in the market. They are the "intelligence gatherers" for the
company. The acquired facts can be regarding the company's market offerings, whether any
improvements are required or not or is there any opportunity for new products, etc. It can also
provide credible source to know about competitor activities, consumers, distributors and
retailers.

(2) Motivate Distributors, retailers, and other intermediaries to pass along important intelligence:
Specialists are hired by companies to gather marketing intelligence. In order to measure the
quality of production, the way the employees are behaving with customers, quality of facilities
being provided; retailers and service providers send mystery shoppers. Firms can also assess the
quality of customer experience with the shops with the use of mystery shoppers.

(3) Network Externally: Every firm must keep a tab on its competitors. Competitive intelligence
describes the broader discipline of researching, analyzing and formulating data and information
from the entire competitive environment of any organization. This can be done by purchasing the
competitor's products, checking the advertising campaigns, the press media coverage, reading
their published reports, etc. Competitive intelligence must be legal and ethical.

(4) Set up a customer advisory panel: Companies can set up panels consisting of customers. They
can be the company's largest customers or representatives of customers or the most outspoken
customers. Many business schools set up panels consisting of alumni who provide their
knowledge and expertise and help in constituting the course curriculum.

(5) Optimal usage of Government data resources: Governments of almost all countries publish
reports regarding the population trends, demographic characteristics, agricultural production and
a lot of other such data. All this data must be or can be referred to as base data. It can help in
planning and formulating policies for the companies.

(6) Information bought from external suppliers: Certain agencies sell data that can be useful to
other companies. For example, television channels will require information on the number of
viewership, ratings of TV programs, etc. An agency which calculates this information and
generates this data will provide it to companies that need it.

51
 Entrepreneurship

(7) Collect Competitive Intelligence through online customer feedback: Customer's view about a
product is most essential for any company. Ultimately it's the customer who's buying the
product. Hence customer feedback must be taken. Online platforms like chat rooms, blogs,
discussion forums, customer review boards can be used to generate customer feedback. This
enables the firm to understand customer experiences and impressions. It becomes easier for
companies to apply a structured system to do so as it can then scan out the relevant messages
without much of a trouble.

With the above steps being applied, a company's marketing intelligence system will prove to be
beneficial to its effective functioning.

Primarily external data collected and analyzed by a business about markets that it anticipates
participating in with the intention of using it in making decisions. Marketing intelligence can be
used to assess market entry opportunities and to formulate market development plans and
penetration strategies.

5.5. Competitive analysis

Definition: Identifying your competitors and evaluating their strategies to determine their
strengths and weaknesses relative to those of your own product or service .

A competitive analysis is a critical part of your company marketing plan. With this evaluation,
you can establish what makes your product or service unique--and therefore what attributes you
play up in order to attract your target market.

Evaluate your competitors by placing them in strategic groups according to how directly they
compete for a share of the customer's dollar. For each competitor or strategic group, list their
product or service, its profitability, growth pattern, marketing objectives and assumptions,
current and past strategies, organizational and cost structure, strengths and weaknesses, and size
(in sales) of the competitor's business. Answer questions such as:

 Who are your competitors?

 What products or services do they sell?
 What is each competitor's market share?
 What are their past strategies?
 What are their current strategies?
 What types of media are used to market their products or services?
 How many hours per week do they purchase to advertise through the media used in this
market?
 What are each competitor's strengths and weaknesses?
 What potential threats do your competitors pose?
 What potential opportunities do they make available for you?

52
 Entrepreneurship

A quick and easy way to compare your product or service with similar ones on the market is to
make a competition grid. Down the left side of a piece of paper, write the names of four or five
products or services that compete with yours. To help you generate this list, think of what your
customers would buy if they didn't buy your product or service.

Across the top of the paper, list the main features and characteristics of each product or service.
Include such things as target market, price, size, method of distribution, and extent of customer
service for a product. For a service, list prospective buyers, where the service is available, price,
website, toll-free phone number, and other features that are relevant. A glance at the competition
grid will help you see where your product fits in the overall market.

5.6. Marketing strategies

Marketing strategy is the fundamental goal of increasing sales and achieving a sustainable
competitive advantage. Marketing strategy includes all basic, short-term, and long-term activities
in the field of marketing that deal with the analysis of the strategic initial situation of a company
and the formulation, evaluation and selection of market-oriented strategies and therefore
contribute to the goals of the company and its marketing objectives.

The process generally begins with a scan of the business environment, both internal and external,
which includes understanding strategic constraints.[3] It is generally necessary to try to grasp
many aspects of the external environment, including technological, economic, cultural, political
and legal aspects.[4] Goals are chosen. Then, a marketing strategy or marketing plan is an
explanation of what specific actions will be taken over time to achieve the objectives. Plans can
be extended to cover many years, with sub-plans for each year, although as the speed of change
in the merchandising environment quickens, time horizons are becoming shorter. [4] Ideally,
strategies are both dynamic and interactive, partially planned and partially unplanned, to enable a
firm to react to unforeseen developments while trying to keep focused on a specific pathway;
generally, a longer time frame is preferred. There are simulations such as customer lifetime value
models which can help marketers conduct "what-if" analyses to forecast what might happen
based on possible actions, and gauge how specific actions might affect such variables as the
revenue-per-customer and the churn rate. Strategies often specify how to adjust the marketing
mix; firms can use tools such as Marketing Mix Modeling to help them decide how to allocate
scarce resources for different media, as well as how to allocate funds across a portfolio of brands.
In addition, firms can conduct analyses of performance, customer analysis, competitor analysis,
and target market analysis. A key aspect of marketing strategy is often to keep marketing
consistent with a company's overarching mission statement.[5]

Marketing strategy should not be confused with a marketing objective or mission. For example, a
goal may be to become the market leader, perhaps in a specific niche; a mission may be
something along the lines of "to serve customers with honor and dignity"; in contrast, a
marketing strategy describes how a firm will achieve the stated goal in a way which is consistent
with the mission, perhaps by detailed plans for how it might build a referral network, for
example. Strategy varies by type of market. A well-established firm in a mature market will
likely have a different strategy than a start-up. Plans usually involve monitoring, to assess
progress, and prepare for contingencies if problems arise.

53
 Entrepreneurship

Further information: Strategy dynamics

Further information: Marketing Mix Modeling

Diversity of Strategies

Marketing strategies may differ depending on the unique situation of the individual business.
However, there are a number of ways of categorizing some generic strategies. A brief description
of the most common categorizing schemes is presented below:

Strategies based on market dominance - In this scheme, firms are classified based on their
market share or dominance of an industry. Typically there are four types of market dominance
strategies:

 Leader
 Challenger
 Follower
 Nicher

According to Shaw, Eric (2012). "Marketing Strategy: From the Origin of the Concept to the
Development of a Conceptual Framework". Journal of Historical Research in Marketing., there
is a framework for marketing strategies.

 Market introduction strategies

"At introduction, the marketing strategist has two principle strategies to choose from: penetration
or niche" .

 Market growth strategies

"In the early growth stage, the marketing manager may choose from two additional strategic
alternatives: segment expansion (Smith, Ansoff) or brand expansion (Borden, Ansoff, Kerin and
Peterson, 1978)".

 Market maturity strategies

"In maturity, sales growth slows, stabilizes and starts to decline. In early maturity, it is common
to employ a maintenance strategy (BCG), where the firm maintains or holds a stable marketing
mix".

 Market decline strategies

At some point the decline in sales approaches and then begins to exceed costs. And not just
accounting costs, there are hidden costs as well; as Kotler (1965, p. 109) observed: 'No financial
accounting can adequately convey all the hidden costs.' At some point, with declining sales and
rising costs, a harvesting strategy becomes unprofitable and a divesting strategy necessary.

54
 Entrepreneurship

Early marketing strategy concepts

 Borden's "marketing mix"

"In his classic Harvard Business Review (HBR) article of the marketing mix, Borden (1964)
credits James Culliton in 1948 with describing the marketing executive as a 'decider' and a 'mixer
of ingredients.' This led Borden, in the early 1950s, to the insight that what this mixer of
ingredients was deciding upon was a 'marketing mix'“.

 Smith's "differentiation and segmentation strategies"

"In product differentiation, according to Smith (1956, p. 5), a firm tries 'bending the will of
demand to the will of supply.' That is, distinguishing or differentiating some aspect(s) of its
marketing mix from those of competitors, in a mass market or large segment, where customer
preferences are relatively homogeneous (or heterogeneity is ignored, Hunt, 2011, p. 80), in an
attempt to shift its aggregate demand curve to the left (greater quantity sold for a given price)
and make it more inelastic (less amenable to substitutes). With segmentation, a firm recognizes
that it faces multiple demand curves, because customer preferences are heterogeneous, and
focuses on serving one or more specific target segments within the overall market”.

 "skimming and penetration strategies"

"With skimming, a firm introduces a product with a high price and after milking the least price
sensitive segment, gradually reduces price, in a stepwise fashion, tapping effective demand at
each price level. With penetration pricing a firm continues its initial low price from introduction
to rapidly capture sales and market share, but with lower profit margins than skimming" .

 Forrester's "product life cycle (PLC)"

"The PLC does not offer marketing strategies, per se; rather it provides an overarching
framework from which to choose among various strategic alternatives" .

Corporate strategy concepts

 Andrews' "SWOT analysis"

"Although widely used in marketing strategy, SWOT (also known as TOWS) Analysis
originated in corporate strategy. The SWOT concept, if not the acronym, is the work of Kenneth
R. Andrews who is credited with writing the text portion of the classic: Business Policy: Text
and Cases (Learned et al., 1965)" .

 Ansoff's "growth strategies"

"The most well-known, and least often attributed, aspect of Igor Ansoff's Growth Strategies in
the marketing literature is the term 'product-market.' The product-market concept results from

55
 Entrepreneurship

Ansoff juxtaposing new and existing products with new and existing markets in a two by two
matrix”.

Porter's "generic strategies"

Porter generic strategies – strategy on the dimensions of strategic scope and strategic strength.
Strategic scope refers to the market penetration while strategic strength refers to the firm's
sustainable competitive advantage. The generic strategy framework (porter 1984) comprises two
alternatives each with two alternative scopes. These are Differentiation and low-cost leadership
each with a dimension of Focus-broad or narrow.

 Product differentiation
 Cost leadership
 Market segmentation

Innovation strategies

Innovation strategies deal with the firm's rate of the new product development and business
model innovation. It asks whether the company is on the cutting edge of technology and business
innovation. There are three types:

 Pioneers
 Close followers
 Late followers

Growth strategies

In this scheme we ask the question, "How should the firm grow?” There are a number of
different ways of answering that question, but the most common gives four answers:

 Horizontal integration
 Vertical integration
 Diversification
 Intensification

These ways of growth are termed as organic growth. Horizontal growth is whereby a firm grows
towards acquiring other businesses that are in the same line of business for example a clothing
retail outlet acquiring a food outlet. The two are in the retail establishments and their integration
lead to expansion. Vertical integration can be forward or backward. Forward integration is
whereby a firm grows towards its customers for example a food manufacturing firm acquiring a
food outlet. Backward integration is whereby a firm grows towards its source of supply for
example a food outlet acquiring a food manufacturing outlet.

5.7. International markets

56
 Entrepreneurship

A market can be defined simply or rather complexly. In the simplest terms, a market is a system
of institutions, rules and procedures relating to the exchange of goods and services between
persons or organizations. Markets can be defined in different ways, including by geography,
customer, product or even the behavioral characteristics of consumers.

An international market is defined geographically as a market outside the international borders

of a company's country of citizenship. A company, to the extent that it is a legally distinct entity
from its owners like a corporation, is usually a citizen of the country where it is organized. IBM,
for example, was formed in the United States. Thus, any geographic area outside the territorial
boundaries of the United States where IBM conducts business is IBM's international market. The
conceptual opposite of an international market is the company's domestic market, which is the
geographic region within the national boundaries of company's home country.

Challenges of International Markets

International markets do provide distinct challenges to businesses. Let's take a look at some of
the primary challenges.

Cultural challenges. The preferences, needs, wants and desires of foreign consumers are often
different from those of the consumers in the company's domestic market. This means marketing
attributes ranging from product development, to advertisement, to distribution may have to vary
not only from the domestic market to the foreign market, but even from different foreign
markets. In many respects, you need to think of an international market as a group of foreign
markets consisting of one or more countries.

For example, some cultures do not do their shopping in supermarkets, so you'll have to place
your grocery products in numerous small grocery stores rather than two or three large grocery
store chains. You'll also need to be careful with product names. In the past, companies have
made embarrassing mistakes by not changing a product name that translates into a 'dirty' slang
word or phrase in the foreign tongue.

Summary
Marketing research is "the process or set of processes that links the consumers, customers, and
end users to the marketer through information — information used to identify and define
marketing opportunities and problems.
It is the systematic gathering, recording, and analysis of qualitative and quantitative data about
issues relating to marketing products and services. The goal of marketing research is to identify
and assess how changing elements of the marketing mix impacts customer behavior.

Marketing intelligence (MI) is the everyday information relevant to a company’s markets,

gathered and analyzed specifically for the purpose of accurate and confident decision-making in
determining market opportunity, market penetration strategy, and market development metrics.
Marketing intelligence is necessary when entering a foreign market.

A competitive analysis is a critical part of your company marketing plan.

57
 Entrepreneurship

Marketing strategy is the fundamental goal of increasing sales and achieving a sustainable
competitive advantage. Marketing strategy includes all basic, short-term, and long-term activities
in the field of marketing that deal with the analysis of the strategic initial situation of a company
and the formulation, evaluation and selection of market-oriented strategies and therefore
contribute to the goals of the company and its marketing objectives

Typically there are four types of market dominance strategies:

 Leader
 Challenger
 Follower
 Nicher

An international market is defined geographically as a market outside the international borders

of a company's country of citizenship.

Check Your Progress

Give Short Answers
1. Define Marketing research?
2. What is the goal of Marketing Research?
3. What is Marketing Strategy?
4. What does marketing strategy include?
5. Describe the four types of market dominance strategies?
6. What is an International Market?

58
 Entrepreneurship

CHAPTER SIX: ORGANIZING AND FINANCING THE NEW VENTURE

6.1. Learning Objectives

Dear Learners, up on the completion of this chapter, you should be able to provide:

 An introduction to the different sources of finance available to management, both

internal and external
 An overview of the advantages and disadvantages of the different sources of funds
 An understanding of the factors governing the choice between different sources of
funds.
 Entrepreneurial team and business formation.
6.2. Introduction
Dear Learner, this chapter discusses about Entrepreneurial team and business formation and
Sources of financing and by looking at the various forms of "shares" as a means to raise new
capital and retained earnings as another source. However, while these may be "traditional"
ways of raising funds, they are by no means the only ones. There are many more sources
available to companies who do not wish to become "public" by means of share issues. These
alternatives include bank borrowing, government assistance, venture capital and franchising.
All have their own advantages and disadvantages and degrees of risk attached. Along with,
chapter summary and check your progress are included in it.
6.3. Entrepreneurial team and business formation

59
 Entrepreneurship

Entrepreneurship is an important engine of growth in the economy. In this lesson, you'll learn
about what an entrepreneur is and the key characteristics and skills that a successful entrepreneur
possesses. Some examples of entrepreneurs will also be given.

Entrepreneurs - Risk Takers

Meet Eddie. He's an entrepreneur, which is a person who starts a business. Eddie recently
graduated from college with a degree in computer programming and has developed an app that
he believes will make him a small fortune. So, instead of working nine to five for a software
company in Silicon Valley, he decides to start his own. He wants to challenge himself and work
the way he wants to without answering to a boss. He's using a small inheritance to fund the start-
up. As an entrepreneur, Eddie is not only starting a business, but is risking his personal wealth to
establish it.

Eddie is also trying to convince some friends from school to form an entrepreneurial team with
him. An entrepreneurial team is a group of people that help spread out the risk of the new
venture and also bring in different talents and skill sets to it. Eddie has a friend who majored in
accounting and another who majored in marketing. He's hoping they may come along with him
and bring their skills and some cash. If he can build the right team, he can create a synergy,
where the group can achieve more together than they can apart.

Examples of Entrepreneurs

Eddie hopes that his entrepreneurial gamble will pay off as well as the gambles of other well-
known entrepreneurs, such as:

 Bill Gates, founder of Microsoft. There are probably not many people that have not been
touched by one of his products, such as Microsoft Windows, Microsoft Office and
Internet Explorer.
 Steve Jobs, co-founder of Apple computers, which produce Macs, iPods and iPhones, as
well as Apple TV.
 Mark Zuckerberg, the founder of Face book.
 Pierre Omidyar, founder of eBay.
 Arianna Huffington, founder of the Huffington Post, a well-known online news site.
 Caterina Fake, co-founder of Flikr, which hosts images and videos on the internet.

 Entrepreneurs are like gamblers, and like any gambler, their chances of winning increase
if they have the right cards. Let's look at some characteristics and skills that help an
entrepreneur succeed.
 A tolerance for risk-taking is a necessary attribute for entrepreneurs. You can think of
risk-taking as pursuing an activity even if there is a chance of a negative consequence.
Starting a business is risky, and even more so when you're using your own money.
Sometimes you can spread the risk by convincing investors to come along on your new
venture or by forming an entrepreneurial team, like Eddie is trying to do. But at the end
of the day, you can't avoid risk if you are going to start a new business and innovate.

60
 Entrepreneurship

 Entrepreneurs also need creativity. Think about Steve Jobs and Mark Zuckerberg; these
two entrepreneurs brought innovative products to the market that changed the way we
live. Successful entrepreneurs innovate in one of two ways. They can bring an entirely
new product or service to the market, like the first cellular phone. On the other hand, they
can radically improve upon something in a dramatic way, just like the iPhone changed
the world of smart phones.
 Initiative is also required. Entrepreneurs lead. If you are not willing to start without
being pushed, your new business will never get off the ground. For example, Eddie had
an idea fresh out of college and took the initiative to start his business venture. No one
had to convince him to act; he just acted.
 Independence is also a paramount attribute for entrepreneurs. Nobody holds an
entrepreneur's hand, and they don't want any hand-holding. Successful entrepreneurs
must be willing to go it alone and succeed or

Four Ways to Create More Entrepreneurial Teams

It's time to place less emphasis on job roles and titles. Use a more entrepreneurial approach with
your team to get results.

At the heart of every great organization is one or more effective teams. A cadre of consultants
employs many tools to get the most out of these teams, including books and training programs.

But what if the secret is to treat your employees like entrepreneurs? Eschew traditional roles and
job titles, and encourage your employees to seek opportunities that further the vision of your
company.

"The concept ties into the idea of creating an entrepreneurial type of culture instead of a
corporate hierarchical type of culture," says Terry Powell, founder of AdviCoach, a Southbury,
Connecticut coaching firm that works with teams at small to mid-sized businesses. "When you
do that, it tends to stifle creativity and takes away some of the key elements of power."

It’s a different way of thinking and may require a significant cultural shift, Powell says.
However, the payoff is an environment where people are thinking broadly, and spotting new
solutions and opportunities, he adds.

Here’s how to integrate more of this entrepreneurial approach into your teams:

1. Find A Rallying Cry

For teams to be motivated to move beyond their immediate roles, they need to get excited about
something. Jonathan B. Smith, an Arlington, Virginia business strategist and founder of
ChiefOptimizer, has seen different motivators work for various companies.

Teams at one of his clients are working hard to build the company large enough to have a Super
Bowl ad in 10 years. Other teams are motivated by creating a great working environment where
people like each other and are well-compensated, or by creating disruptive change in an industry.

61
 Entrepreneurship

"You can’t have an ‘us vs. them’ mentality between teams and leadership," Smith says. "You
have to find the thing that gets everyone excited and use that as the motivator."

Leaders should treat team members fairly, so everyone feels as if they have a voice, and the team
isn’t driven by favoritism or other unjust factors.

Emphasize roles rather than job titles, he suggests. At Powell’s own firm, he found sticking to
defined roles created groups of "quick starts"—people who have lots of ideas and charge forward
with them, and "fact-finders"—analytical types who are good at doing research and looking at
the details.

But what the company lacked was employees with other abilities, such as project development
and processing people who do the day-to-day work. When he started implementing diverse teams
of people and giving them responsibility for getting things done instead of coming up with ideas
or input, the company began to have more success.

"With a unique ability type of culture and teamwork it gives everybody an opportunity to work
on teams rather than having a department or a silo that they’re kind of boxed into, saying this is
your area," he says.

2. Expand Performance Areas

When Powell creates his teams, he assembles people who have backgrounds in different areas of
the company. They’re assigned broader objectives—like launching a new product or solving a
problem—so, they’re not just working in traditional sectors like accounting or marketing. People
still have roles and responsibilities to ensure basic operational functions like cutting checks and
placing advertising buys get done, but these teams are given responsibility for making bigger
picture things happen, too.

Like entrepreneurs, [team members] should also be given opportunities—such as public

recognition and financial rewards—to share in the success.

Let’s say the team is responsible for launching a new revenue stream. You may assemble about
seven people into a team comprised of representatives from information technology, marketing,
operations, and other areas. The team implements a method of accomplishing the objective that
includes conceptualizing, planning, and following through on the steps it will take to achieve
success. Powell says it removes the bureaucracy and allows members to focus on making things
happen.

3. Cultivate Healthy Team Dynamics

Smith says teams work best when a feeling of camaraderie exists among them, and when they
trust everyone is being treated fairly. Getting to that point requires good communication,
honesty, and transparency. Leaders should treat team members fairly, so everyone feels as if they
have a voice, and the team isn’t driven by favoritism or other unjust factors.

62
 Entrepreneurship

If conflict arises, deal with it immediately, and encourage team members to share their
challenges and frustrations in a productive way so it can be resolved. It’s tough to keep teams
motivated to achieve if they’re mired in resentment and other negative feelings, he says.

4. Incentivize Results Rather Than Process

Teams need to know what you expect for them to be considered successful. That includes
outcomes and measurements so that teams can achieve the desired results, Powell says.

Too many companies get hung up on roles and process which inhibits teams from taking risks
and being entrepreneurial within the organization, he says. Like entrepreneurs, they should also
be given opportunities—such as public recognition and financial rewards—to share in the
success.

"[This approach] creates an attitude among your team that they show up every day acting as if
they own the company," Powell says. "Their conversations together at the water cooler are a
whole lot different. Then what that evolves to is you set up a structure like we have where not
only do they act like they own the company, but then you give them incentives that allows them
to benefit from the results as they grow in the profitability."

Business Formation

Entrepreneurs must juggle countless tasks and competing priorities well before they open shop,
including the creation of a legal structure. Business formation is a necessary early step of starting
a business, whether you're registering a simple DBA, incorporating or forming a partnership. The
following checklists and articles will help you quickly get started with the process of creating a
legal structure for your new business.

Starting a Partnership:

 Checklist: Starting Your Partnership - Step-by-step list to help you form a partnership.
 Creating a Partnership Agreement - Overview of a partnership agreement, which
defines the business relationship.

Partnerships - Articles, checklists and various resources pertaining to business partnerships

Dear Learners, This is a question for which you need to have clear, upfront answers when an
entrepreneurial team decides to launch a venture.

 Distribute or share work?

What is better: to divvy up work among many entrepreneurs or for everyone to do a bit of
everything? Obviously, it is better for each individual to dedicate him or herself to the
areas for which they are better suited. However, they should also strive to maximize
information sharing so that every partner has a sufficient level of understanding about all of the
company’s different areas and could therefore competently participate in decision-making.

63
 Entrepreneurship

Often having the two or three partners together can help convey greater seriousness and
commitment and also to arrive at better solutions: an important sale, a financing agreement,
hiring of a key person, establishing an agreement or alliance with another company, etc.

 Conflict or collaboration?

If the new company is going to have many partners that need to collaborate with each other,
sooner or later conflict will be inevitable. One of them made a decision and the other partner
wishes he had been consulted; one thinks that he or she could have contributed in an area that the
other sees as exclusively his or hers.

Certainly the partners need to resolve conflict, or better yet, try to avoid it. The tension and
emotion that entrepreneurs work under can often obstruct cold and fast reasoning. The
entrepreneurial team’s productivity can improve with swift mediation that avoids or helps
to resolve conflict. The instrument to achieve this can be an advisory committee or an investor
with some time on his or her hands, with the mutual understanding that he or she continue to
develop the business.

 Business and personal development

As individuals we evolve at different speeds in our personal development. Starting a venture

requires effort, dedication and flexibility in many areas (compensation, travel, place of residence,
etc.).

Often not all entrepreneurs are willing to commit to the same extent in all areas. One team
member might be willing to travel on Sunday in order to meet an important client first thing
Monday morning, spend Monday night restructuring the proposal and have it signed by Tuesday.

He or she may return home only to find out that the other partner took Monday and Tuesday off
in order to “enjoy the snow.” Maybe this person believes that “you only live once” and that “the
company is running well” and that “we are earning enough.”

Meanwhile, the other is thinking “now is the time to create a great company” that “we can make
a lot of money” and that “it’s now or never.” From this scenario, it’s evident that there are
very different life objectives and therefore, it will be difficult to continue working together.
In cases such as this, the possibility of moving forward is untenable; it might be a good moment
for those partners who are less ambitious to exit the venture.

What you always need to keep in mind are the values that should always characterize the
entrepreneurial process in the interaction between partners, like generosity, humility and
respect.

6.4. Sources of financing

Sourcing money may be done for a variety of reasons. Traditional areas of need may be for
capital asset acquirement - new machinery or the construction of a new building or depot. The

64
 Entrepreneurship

development of new products can be enormously costly and here again capital may be required.
Normally, such developments are financed internally, whereas capital for the acquisition of
machinery may come from external sources. In this day and age of tight liquidity, many
organizations have to look for short term capital in the way of overdraft or loans in order to
provide a cash flow cushion. Interest rates can vary from organization to organization and also
according to purpose.

A company might raise new funds from the following sources:

 The capital markets:

i) New share issues, for example, by companies acquiring a stock market listing for the first time

ii) Rights issues

 Loan stock
 Retained earnings
 Bank borrowing
 Government sources
 Business expansion scheme funds
 Venture capital
 Franchising.

Ordinary (equity) shares

Ordinary shares are issued to the owners of a company. They have a nominal or 'face' value,
typically of $1 or 50 cents. The market value of a quoted company's shares bears no relationship
to their nominal value, except that when ordinary shares are issued for cash, the issue price must
be equal to or be more than the nominal value of the shares.

Deferred ordinary shares

They are a form of ordinary shares, which are entitled to a dividend only after a certain date or if
profits rise above a certain amount. Voting rights might also differ from those attached to other
ordinary shares.

Ordinary shareholders put funds into their company:

a) by paying for a new issue of shares

b) ) through retained profits.

Simply retaining profits, instead of paying them out in the form of dividends, offers an
important, simple low-cost source of finance, although this method may not provide enough
funds, for example, if the firm is seeking to grow.

65
 Entrepreneurship

A new issue of shares might be made in a variety of different circumstances:

a) The company might want to raise more cash. If it issues ordinary shares for cash, should the
shares be issued pro rata to existing shareholders, so that control or ownership of the company is
not affected? If, for example, a company with 200,000 ordinary shares in issue decides to issue
50,000 new shares to raise cash, should it offer the new shares to existing shareholders, or should
it sell them to new shareholders instead?
i) If a company sells the new shares to existing shareholders in proportion to their existing
shareholding in the company, we have a rights issue. In the example above, the 50,000 shares
would be issued as a one-in-four rights issue, by offering shareholders one new share for every
four shares they currently hold.

ii) If the number of new shares being issued is small compared to the number of shares already in
issue, it might be decided instead to sell them to new shareholders, since ownership of the
company would only be minimally affected.

b) The company might want to issue shares partly to raise cash, but more importantly to float' its
shares on a stick exchange.

c) The company might issue new shares to the shareholders of another company, in order to take
it over.

New shares issues

A company seeking to obtain additional equity funds may be:

a) an unquoted company wishing to obtain a Stock Exchange quotation

b) an unquoted company wishing to issue new shares, but without obtaining a Stock Exchange
quotation

c) a company which is already listed on the Stock Exchange wishing to issue additional new
shares.

The methods by which an unquoted company can obtain a quotation on the stock market are:

a) An offer for sale b) A prospectus issue c) A placing d) An introduction

Offers for sale:

An offer for sale is a means of selling the shares of a company to the public.

a) An unquoted company may issue shares, and then sell them on the Stock Exchange, to raise
cash for the company. All the shares in the company, not just the new ones, would then become
marketable.

66
 Entrepreneurship

b) Shareholders in an unquoted company may sell some of their existing shares to the general
public. When this occurs, the company is not raising any new funds, but just providing a wider
market for its existing shares (all of which would become marketable), and giving existing
shareholders the chance to cash in some or all of their investment in their company.

When companies 'go public' for the first time, a 'large' issue will probably take the form of an
offer for sale. A smaller issue is more likely to be a placing, since the amount to be raised can be
obtained more cheaply if the issuing house or other sponsoring firm approaches selected
institutional investors privately.

Rights issues

A rights issue provides a way of raising new share capital by means of an offer to existing
shareholders, inviting them to subscribe cash for new shares in proportion to their existing
holdings.

For example, a rights issue on a one-for-four basis at 280c per share would mean that a company
is inviting its existing shareholders to subscribe for one new share for every four shares they
hold, at a price of 280c per new share.

A company making a rights issue must set a price which is low enough to secure the acceptance
of shareholders, who are being asked to provide extra funds, but not too low, so as to avoid
excessive dilution of the earnings per share.

Preference shares

Preference shares have a fixed percentage dividend before any dividend is paid to the ordinary
shareholders. As with ordinary shares a preference dividend can only be paid if sufficient
distributable profits are available, although with 'cumulative' preference shares the right to an
unpaid dividend is carried forward to later years. The arrears of dividend on cumulative
preference shares must be paid before any dividend is paid to the ordinary shareholders.

From the company's point of view, preference shares are advantageous in that:

 Dividends do not have to be paid in a year in which profits are poor, while this is not the case
with interest payments on long term debt (loans or debentures).
 Since they do not carry voting rights, preference shares avoid diluting the control of existing
shareholders while an issue of equity shares would not.
 Unless they are redeemable, issuing preference shares will lower the company's gearing.
Redeemable preference shares are normally treated as debt when gearing is calculated.
 The issue of preference shares does not restrict the company's borrowing power, at least in the
sense that preference share capital is not secured against assets in the business.
 The non-payment of dividend does not give the preference shareholders the right to appoint a
receiver, a right which is normally given to debenture holders.

67
 Entrepreneurship

However, dividend payments on preference shares are not tax deductible in the way that interest
payments on debt are. Furthermore, for preference shares to be attractive to investors, the level of
payment needs to be higher than for interest on debt to compensate for the additional risks.

For the investor, preference shares are less attractive than loan stock because:

 they cannot be secured on the company's assets

 the dividend yield traditionally offered on preference dividends has been much too low to
provide an attractive investment compared with the interest yields on loan stock in view of the
additional risk involved.

Loan stock

Loan stock is long-term debt capital raised by a company for which interest is paid, usually half
yearly and at a fixed rate. Holders of loan stock are therefore long-term creditors of the company.

Loan stock has a nominal value, which is the debt owed by the company, and interest is paid at a
stated "coupon yield" on this amount. For example, if a company issues 10% loan stocky the
coupon yield will be 10% of the nominal value of the stock, so that $100 of stock will receive
$10 interest each year. The rate quoted is the gross rate, before tax.

Debentures are a form of loan stock, legally defined as the written acknowledgement of a debt
incurred by a company, normally containing provisions about the payment of interest and the
eventual repayment of capital.

Debentures with a floating rate of interest

These are debentures for which the coupon rate of interest can be changed by the issuer, in
accordance with changes in market rates of interest. They may be attractive to both lenders and
borrowers when interest rates are volatile.

Security

Loan stock and debentures will often be secured. Security may take the form of either a fixed
charge or a floating charge.

a) Fixed charge; Security would be related to a specific asset or group of assets, typically land
and buildings. The company would be unable to dispose of the asset without providing a
substitute asset for security, or without the lender's consent.

b) Floating charge; With a floating charge on certain assets of the company (for example, stocks
and debtors), the lender's security in the event of a default payment is whatever assets of the
appropriate class the company then owns (provided that another lender does not have a prior
charge on the assets). The company would be able, however, to dispose of its assets as it chose
until a default took place. In the event of a default, the lender would probably appoint a receiver
to run the company rather than lay claim to a particular asset.

68
 Entrepreneurship

The redemption of loan stock

Loan stock and debentures are usually redeemable. They are issued for a term of ten years or
more, and perhaps 25 to 30 years. At the end of this period, they will "mature" and become
redeemable (at par or possibly at a value above par).

Most redeemable stocks have an earliest and latest redemption date. For example, 18%
Debenture Stock 2007/09 is redeemable, at any time between the earliest specified date (in 2007)
and the latest date (in 2009). The issuing company can choose the date. The decision by a
company when to redeem a debt will depend on:

a)how much cash is available to the company to repay the debt,

b) the nominal rate of interest on the debt. If the debentures pay 18% nominal interest and the
current rate of interest is lower, say 10%, the company may try to raise a new loan at 10% to
redeem the debt which costs 18%. On the other hand, if current interest rates are 20%, the
company is unlikely to redeem the debt until the latest date possible, because the debentures
would be a cheap source of funds.

There is no guarantee that a company will be able to raise a new loan to pay off a maturing debt,
and one item to look for in a company's balance sheet is the redemption date of current loans, to
establish how much new finance is likely to be needed by the company, and when.

Mortgages are a specific type of secured loan. Companies place the title deeds of freehold or
long leasehold property as security with an insurance company or mortgage broker and receive
cash on loan, usually repayable over a specified period. Most organizations owning property
which is unencumbered by any charge should be able to obtain a mortgage up to two thirds of the
value of the property.

As far as companies are concerned, debt capital is a potentially attractive source of finance
because interest charges reduce the profits chargeable to corporation tax.

Retained earnings

For any company, the amount of earnings retained within the business has a direct impact on the
amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as
a dividend. The major reasons for using retained earnings to finance new investments, rather than
to pay higher dividends and then raise new equity for the new investments, are as follows:

a) The management of many companies believes that retained earnings are funds which do not
cost anything, although this is not true. However, it is true that the use of retained earnings as a
source of funds does not lead to a payment of cash.

b) The dividend policy of the company is in practice determined by the directors. From their
standpoint, retained earnings are an attractive source of finance because investment projects can
be undertaken without involving either the shareholders or any outsiders.

69
 Entrepreneurship

c) The use of retained earnings as opposed to new shares or debentures avoids issue costs.

d) The use of retained earnings avoids the possibility of a change in control resulting from an
issue of new shares.

Another factor that may be of importance is the financial and taxation position of the company's
shareholders. If, for example, because of taxation considerations, they would rather make a
capital profit (which will only be taxed when shares are sold) than receive current income, then
finance through retained earnings would be preferred to other methods.

A company must restrict its self-financing through retained profits because shareholders should
be paid a reasonable dividend, in line with realistic expectations, even if the directors would
rather keep the funds for re-investing. At the same time, a company that is looking for extra
funds will not be expected by investors (such as banks) to pay generous dividends, nor over-
generous salaries to owner-directors.

Bank lending

Borrowings from banks are an important source of finance to companies. Bank lending is still
mainly short term, although medium-term lending is quite common these days.

Short term lending may be in the form of:

a) an overdraft, which a company should keep within a limit set by the bank. Interest is charged
(at a variable rate) on the amount by which the company is overdrawn from day to day;

b) a short-term loan, for up to three years.

Medium-term loans are loans for a period of from three to ten years. The rate of interest charged
on medium-term bank lending to large companies will be a set margin, with the size of the
margin depending on the credit standing and riskiness of the borrower. A loan may have a fixed
rate of interest or a variable interest rate, so that the rate of interest charged will be adjusted
every three, six, nine or twelve months in line with recent movements in the Base Lending Rate.

Lending to smaller companies will be at a margin above the bank's base rate and at either a
variable or fixed rate of interest. Lending on overdraft is always at a variable rate. A loan at a
variable rate of interest is sometimes referred to as a floating rate loan. Longer-term bank loans
will sometimes be available, usually for the purchase of property, where the loan takes the form
of a mortgage. When a banker is asked by a business customer for a loan or overdraft facility, he
will consider several factors, known commonly by the mnemonic PARTS.

- Purpose

- Amount

- Repayment

70
 Entrepreneurship

- Term

- Security

The purpose of the loan is the loan request will be refused if the purpose of the loan is not
acceptable to the bank.
The amount of the loan. The customer must state exactly how much he wants to borrow. The
banker must verify, as far as he is able to do so, that the amount required to make the proposed
investment has been estimated correctly.
How will the loan be repaid? Will the customer be able to obtain sufficient income to make the
necessary repayments?
What would be the duration of the loan? Traditionally, banks have offered short-term loans and
overdrafts, although medium-term loans are now quite common.
Does the loan require security? If so, is the proposed security adequate?

Leasing

A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a
capital asset, but allows the lessee to use it. The lessee makes payments under the terms of the
lease to the lessor, for a specified period of time.

Leasing is, therefore, a form of rental. Leased assets have usually been plant and machinery, cars
and commercial vehicles, but might also be computers and office equipment. There are two basic
forms of lease: "operating leases" and "finance leases".

Operating leases

Operating leases are rental agreements between the lessor and the lessee whereby:

a) The lessor supplies the equipment to the lessee

b) The lessor is responsible for servicing and maintaining the leased equipment

c) The period of the lease is fairly short, less than the economic life of the asset.

i) lease the equipment to someone else, and obtain a good rent for it, or
ii) sell the equipment secondhand.

Finance leases

Finance leases are lease agreements between the user of the leased asset (the lessee) and a
provider of finance (the lessor) for most, or all, of the asset's expected useful life.

Suppose that a company decides to obtain a company car and finance the acquisition by means of
a finance lease. A car dealer will supply the car. A finance house will agree to act as lessor in a

71
 Entrepreneurship

finance leasing arrangement, and so will purchase the car from the dealer and lease it to the
company. The company will take possession of the car from the car dealer, and make regular
payments (monthly, quarterly, six monthly or annually) to the finance house under the terms of
the lease.

Other important characteristics of a finance lease:

a) The lessee is responsible for the upkeep, servicing and maintenance of the asset. The lessor is
not involved in this at all.

b) The lease has a primary period, which covers all or most of the economic life of the asset. At
the end of the lease, the lessor would not be able to lease the asset to someone else, as the asset
would be worn out. The lessor must, therefore, ensure that the lease payments during the primary
period pay for the full cost of the asset as well as providing the lessor with a suitable return on
his investment.

c) It is usual at the end of the primary lease period to allow the lessee to continue to lease the
asset for an indefinite secondary period, in return for a very low nominal rent. Alternatively, the
lessee might be allowed to sell the asset on the lessor's behalf (since the lessor is the owner) and
to keep most of the sale proceeds, paying only a small percentage (perhaps 10%) to the lessor.

Why might leasing be popular?

The attractions of leases to the supplier of the equipment, the lessee and the lessor are as follows:

 The supplier of the equipment is paid in full at the beginning. The equipment is sold to the
lessor, and apart from obligations under guarantees or warranties, the supplier has no further
financial concern about the asset.
 The lessor invests finance by purchasing assets from suppliers and makes a return out of the
lease payments from the lessee. Provided that a lessor can find lessees willing to pay the
amounts he wants to make his return, the lessor can make good profits. He will also get capital
allowances on his purchase of the equipment.
 Leasing might be attractive to the lessee:

i) if the lessee does not have enough cash to pay for the asset, and would have difficulty
obtaining a bank loan to buy it, and so has to rent it in one way or another if he is to have the use
of it at all; or

ii) if finance leasing is cheaper than a bank loan. The cost of payments under a loan might
exceed the cost of a lease.

Operating leases have further advantages:

 The leased equipment does not need to be shown in the lessee's published balance sheet, and
so the lessee's balance sheet shows no increase in its gearing ratio.

72
 Entrepreneurship

 The equipment is leased for a shorter period than its expected useful life. In the case of high-
technology equipment, if the equipment becomes out-of-date before the end of its expected
life, the lessee does not have to keep on using it, and it is the lessor who must bear the risk of
having to sell obsolete equipment secondhand.

The lessee will be able to deduct the lease payments in computing his taxable profits.

Hire purchase

Hire purchase is a form of instalment credit. Hire purchase is similar to leasing, with the
exception that ownership of the goods passes to the hire purchase customer on payment of the
final credit instalment, whereas a lessee never becomes the owner of the goods.

Hire purchase agreements usually involve a finance house.

i)The supplier sells the goods to the finance house.

ii) The supplier delivers the goods to the customer who will eventually purchase them.
iii) The hire purchase arrangement exists between the finance house and the customer.

The finance house will always insist that the hirer should pay a deposit towards the purchase
price. The size of the deposit will depend on the finance company's policy and its assessment of
the hirer. This is in contrast to a finance lease, where the lessee might not be required to make
any large initial payment.

An industrial or commercial business can use hire purchase as a source of finance. With
industrial hire purchase, a business customer obtains hire purchase finance from a finance house
in order to purchase the fixed asset. Goods bought by businesses on hire purchase include
company vehicles, plant and machinery, office equipment and farming machinery.

Government assistance

The government provides finance to companies in cash grants and other forms of direct
assistance, as part of its policy of helping to develop the national economy, especially in high
technology industries and in areas of high unemployment. For example, the Indigenous Business
Development Corporation of Zimbabwe (IBDC) was set up by the government to assist small
indigenous businesses in that country.

Venture capital

Venture capital is money put into an enterprise which may all be lost if the enterprise fails. A
businessman starting up a new business will invest venture capital of his own, but he will
probably need extra funding from a source other than his own pocket. However, the term
'venture capital' is more specifically associated with putting money, usually in return for an
equity stake, into a new business, a management buy-out or a major expansion scheme.

73
 Entrepreneurship

The institution that puts in the money recognizes the gamble inherent in the funding. There is a
serious risk of losing the entire investment, and it might take a long time before any profits and
returns materialize. But there is also the prospect of very high profits and a substantial return on
the investment. A venture capitalist will require a high expected rate of return on investments, to
compensate for the high risk.

A venture capital organization will not want to retain its investment in a business indefinitely,
and when it considers putting money into a business venture, it will also consider its "exit", that
is, how it will be able to pull out of the business eventually (after five to seven years, say) and
realize its profits. Examples of venture capital organizations are: Merchant Bank of Central
Africa Ltd and Anglo American Corporation Services Ltd.

When a company's directors look for help from a venture capital institution, they must recognize
that:

 the institution will want an equity stake in the company

 it will need convincing that the company can be successful
 it may want to have a representative appointed to the company's board, to look after its

interests.

The directors of the company must then contact venture capital organizations, to try and find one
or more which would be willing to offer finance. A venture capital organization will only give
funds to a company that it believes can succeed, and before it will make any definite offer, it will
want from the company management:

a) a business plan

b) details of how much finance is needed and how it will be used

c) the most recent trading figures of the company, a balance sheet, a cash flow forecast and a
profit forecast

d) details of the management team, with evidence of a wide range of management skills

e) details of major shareholders

f) details of the company's current banking arrangements and any other sources of finance

g) any sales literature or publicity material that the company has issued.

A high percentage of requests for venture capital are rejected on an initial screening, and only a
small percentage of all requests survive both this screening and further investigation and result in
actual investments.

Franchising

74
 Entrepreneurship

Franchising is a method of expanding business on less capital than would otherwise be needed.
For suitable businesses, it is an alternative to raising extra capital for growth.

Under a franchising arrangement, a franchisee pays a franchisor for the right to operate a local
business, under the franchisor's trade name. The franchisor must bear certain costs (possibly for
architect's work, establishment costs, legal costs, marketing costs and the cost of other support
services) and will charge the franchisee an initial franchise fee to cover set-up costs, relying on
the subsequent regular payments by the franchisee for an operating profit. These regular
payments will usually be a percentage of the franchisee's turnover.

Although the franchisor will probably pay a large part of the initial investment cost of a
franchisee's outlet, the franchisee will be expected to contribute a share of the investment
himself. The franchisor may well help the franchisee to obtain loan capital to provide his-share
of the investment cost.

The advantages of franchises to the franchisor are as follows:

 The capital outlay needed to expand the business is reduced substantially.

The image of the business is improved because the franchisees will be motivated to achieve
good results and will have the authority to take whatever action they think fit to improve the
results.
 The advantage of a franchise to a franchisee is that he obtains ownership of a business for an
agreed number of years (including stock and premises, although premises might be leased from
the franchisor) together with the backing of a large organization’s marketing effort and
experience. The franchisee is able to avoid some of the mistakes of many small businesses,
because the franchisor has already learned from its own past mistakes and developed a scheme
that works.

Sources of finance

Financing is needed to start a business and ramp it up to profitability. There are several sources
to consider when looking for start-up financing. But first you need to consider how much money
you need and when you will need it.

The financial needs of a business will vary according to the type and size of the business. For
example, processing businesses are usually capital intensive, requiring large amounts of capital.
Retail businesses usually require less capital.

Debt and equity are the two major sources of financing. Government grants to finance certain
aspects of a business may be an option. Also, incentives may be available to locate in certain
communities and/or encourage activities in particular industries.

Equity Financing

75
 Entrepreneurship

Equity financing means exchanging a portion of the ownership of the business for a financial
investment in the business. The ownership stake resulting from an equity investment allows the
investor to share in the company’s profits. Equity involves a permanent investment in a company
and is not repaid by the company at a later date.

The investment should be properly defined in a formally created business entity. An equity stake
in a company can be in the form of membership units, as in the case of a limited liability
company or in the form of common or preferred stock as in a corporation.
Companies may establish different classes of stock to control voting rights among shareholders.
Similarly, companies may use different types of preferred stock. For example, common
stockholders can vote while preferred stockholders generally cannot. But common stockholders
are last in line for the company’s assets in case of default or bankruptcy. Preferred stockholders
receive a predetermined dividend before common stockholders receive a dividend.

Personal Savings

The first place to look for money is your own savings or equity. Personal resources can include
profit-sharing or early retirement funds, real estate equity loans, or cash value insurance policies.

Life insurance policies - A standard feature of many life insurance policies is the owner’s ability
to borrow against the cash value of the policy. This does not include term insurance because it
has no cash value. The money can be used for business needs. It takes about two years for a
policy to accumulate sufficient cash value for borrowing. You may borrow most of the cash
value of the policy. The loan will reduce the face value of the policy and, in the case of death, the
loan has to be repaid before the beneficiaries of the policy receive any payment.

Home equity loans - A home equity loan is a loan backed by the value of the equity in your
home. If your home is paid for, it can be used to generate funds from the entire value of your
home. If your home has an existing mortgage, it can provide funds on the difference between the
value of the house and the unpaid mortgage amount. For example, if your house is worth
$150,000 with an outstanding mortgage of $60,000, you have $90,000 in equity you can use as
collateral for a home equity loan or line of credit. Some home equity loans are set up as a
revolving credit line from which you can draw the amount needed at any time. The interest on a
home equity loan is tax deductible.

Friends and Relatives

Founders of a start-up business may look to private financing sources such as parents or friends.
It may be in the form of equity financing in which the friend or relative receives an ownership
interest in the business. However, these investments should be made with the same formality that
would be used with outside investors.

Venture Capital

76
 Entrepreneurship

Venture capital refers to financing that comes from companies or individuals in the business of
investing in young, privately held businesses. They provide capital to young businesses in
exchange for an ownership share of the business. Venture capital firms usually don’t want to
participate in the initial financing of a business unless the company has management with a
proven track record. Generally, they prefer to invest in companies that have received significant
equity investments from the founders and are already profitable.

They also prefer businesses that have a competitive advantage or a strong value proposition in
the form of a patent, a proven demand for the product, or a very special (and protectable) idea.
Venture capital investors often take a hands-on approach to their investments, requiring
representation on the board of directors and sometimes the hiring of managers. Venture capital
investors can provide valuable guidance and business advice. However, they are looking for
substantial returns on their investments and their objectives may be at cross purposes with those
of the founders. They are often focused on short-term gain.

Venture capital firms are usually focused on creating an investment portfolio of businesses with
high-growth potential resulting in high rates of returns. These businesses are often high-risk
investments. They may look for annual returns of 25 to 30 percent on their overall investment
portfolio.

Because these are usually high-risk business investments, they want investments with expected
returns of 50 percent or more. Assuming that some business investments will return 50 percent or
more while others will fail, it is hoped that the overall portfolio will return 25 to 30 percent.

More specifically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means that
typically two investments will yield high returns, six will yield moderate returns (or just return
their original investment), and two will fail.

Angel Investors

Angel investors are individuals and businesses that are interested in helping small businesses
survive and grow. So their objective may be more than just focusing on economic returns.
Although angel investors often have somewhat of a mission focus, they are still interested in
profitability and security for their investment. So they may still make many of the same demands
as a venture capitalist.

Angel investors may be interested in the economic development of a specific geographic area in
which they are located. Angel investors may focus on earlier stage financing and smaller
financing amounts than venture capitalists.

Government Grants

77
 Entrepreneurship

Federal and state governments often have financial assistance in the form of grants and/or tax
credits for start-up or expanding businesses.

Equity Offerings

In this situation, the business sells stock directly to the public. Depending on the circumstances,
equity offerings can raise substantial amounts of funds. The structure of the offering can take
many forms and requires careful oversight by the company’s legal representative.

Initial Public Offerings

Initial Public Offerings (IPOs) are used when companies have profitable operations, management
stability, and strong demand for their products or services. This generally doesn’t happen until
companies have been in business for several years. To get to this point, they usually will raise
funds privately one or more times.

Warrants
Warrants are a special type of instrument used for long-term financing. They are useful for start-
up companies to encourage investment by minimizing downside risk while providing upside
potential. For example, warrants can be issued to management in a start-up company as part of
the reimbursement package.

A warrant is a security that grants the owner of the warrant the right to buy stock in the issuing
company at a pre-determined (exercise) price at a future date (before a specified expiration date).
Its value is the relationship of the market price of the stock to the purchase price (warrant price)
of the stock. If the market price of the stock rises above the warrant price, the holder can exercise
the warrant. This involves purchasing the stock at the warrant price. So, in this situation, the
warrant provides the opportunity to purchase the stock at a price below current market price.

If the current market price of the stock is below the warrant price, the warrant is worthless
because exercising the warrant would be the same as buying the stock at a price higher than the
current market price. So, the warrant is left to expire. Generally warrants contain a specific date
at which they expire if not exercised by that date.

Debt Financing

Debt financing involves borrowing funds from creditors with the stipulation of repaying the
borrowed funds plus interest at a specified future time. For the creditors (those lending the funds
to the business), the reward for providing the debt financing is the interest on the amount lent to
the borrower.

Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which
the lender can attach to satisfy the loan in case of default by the borrower). Conversely,

78
 Entrepreneurship

unsecured debt does not have collateral and places the lender in a less secure position relative to
repayment in case of default.

Debt financing (loans) may be short term or long term in their repayment schedules. Generally,
short-term debt is used to finance current activities such as operations while long-term debt is
used to finance assets such as buildings and equipment.

Friends and Relatives

Founders of start-up businesses may look to private sources such as family and friends when
starting a business. This may be in the form of debt capital at a low interest rate. However, if you
borrow from relatives or friends, it should be done with the same formality as if it were borrowed
from a commercial lender. This means creating and executing a formal loan document that
includes the amount borrowed, the interest rate, specific repayment terms (based on the projected
cash flow of the start-up business), and collateral in case of default.

Banks and Other Commercial Lenders

Banks and other commercial lenders are popular sources of business financing. Most lenders
require a solid business plan, positive track record, and plenty of collateral. These are usually
hard to come by for a start- up business. Once the business is underway and profit and loss
statements, cash flows budgets, and net worth statements are provided, the company may be able
to borrow additional funds.

Commercial Finance Companies

Commercial finance companies may be considered when the business is unable to secure
financing from other commercial sources. These companies may be more willing to rely on the
quality of the collateral to repay the loan than the track record or profit projections of your
business. If the business does not have substantial personal assets or collateral, a commercial
finance company may not be the best place to secure financing. Also, the cost of finance
company money is usually higher than other commercial lenders.

Government Programs

Federal, state, and local governments have programs designed to assist the financing of new
ventures and small businesses. The assistance is often in the form of a government guarantee of
the repayment of a loan from a conventional lender. The guarantee provides the lender
repayment assurance for a loan to a business that may have limited assets available for collateral.
The best known sources are the Small Business Administration and the USDA Rural
Development programs.

79
 Entrepreneurship

Bonds
Bonds may be used to raise financing for a specific activity. They are a special type of debt
financing because the debt instrument is issued by the company. Bonds are different from other
debt financing instruments because the company specifies the interest rate and when the
company will pay back the principal (maturity date). Also, the company does not have to make
any payments on the principal (and may not make any interest payments) until the specified
maturity date. The price paid for the bond at the time it is issued is called its face value.

When a company issues a bond it guarantees to pay back the principal (face value) plus interest.
From a financing perspective, issuing a bond offers the company the opportunity to access
financing without having to pay it back until it has successfully applied the funds. The risk for
the investor is that the company will default or go bankrupt before the maturity date. However,
because bonds are a debt instrument, they are ahead of equity holders for company assets.

Lease

A lease is a method of obtaining the use of assets for the business without using debt or equity
financing. It is a legal agreement between two parties that specifies the terms and conditions for
the rental use of a tangible resource such as a building and equipment. Lease payments are often
due annually. The agreement is usually between the company and a leasing or financing
organization and not directly between the company and the organization providing the assets.
When the lease ends, the asset is returned to the owner, the lease is renewed, or the asset is
purchased.

A lease may have an advantage because it does not tie up funds from purchasing an asset. It is
often compared to purchasing an asset with debt financing where the debt repayment is spread
over a period of years. However, lease payments often come at the beginning of the year where
debt payments come at the end of the year. So, the business may have more time to generate
funds for debt payments, although a down payment is usually required at the beginning of the
loan period.

Summary
An entrepreneurial team is a group of people that help spread out the risk of the new venture
and also bring in different talents and skill sets to it.
Sourcing money may be done for a variety of reasons. Traditional areas of need may be for
capital asset acquirement - new machinery or the construction of a new building or depot. The
development of new products can be enormously costly and here again capital may be required.

A company might raise new funds from the following sources:

 The capital markets:

i) New share issues, for example, by companies acquiring a stock market listing for the first time

ii) Rights issues

80
 Entrepreneurship

 Loan stock
 Retained earnings
 Bank borrowing
 Government sources
 Business expansion scheme funds
 Venture capital
 Franchising.

Ordinary shareholders put funds into their company:

a) by paying for a new issue of shares

b) through retained profits.

When a banker is asked by a business customer for a loan or overdraft facility, he will
consider several factors, known commonly by the mnemonic PARTS.

- Purpose

- Amount

- Repayment

- Term

- Security

Venture capital is money put into an enterprise which may all be lost if the enterprise fails.

When a company's directors look for help from a venture capital institution, they must recognize
that:

 the institution will want an equity stake in the company

 it will need convincing that the company can be successful
 it may want to have a representative appointed to the company's board, to look after its

interests.
Franchising is a method of expanding business on less capital than would otherwise be needed.
For suitable businesses, it is an alternative to raising extra capital for growth.
A lease is a method of obtaining the use of assets for the business without using debt or equity
financing. It is a legal agreement between two parties that specifies the terms and conditions for
the rental use of a tangible resource such as a building and equipment.
A lease may have an advantage because it does not tie up funds from purchasing an asset.

Check Your Progress

81
 Entrepreneurship

True/False Items
1. Venture capital is money put into an enterprise which may all be lost if the enterprise fails.
2. Franchising is a method of expanding business on less capital than would otherwise be
needed.
3. A lease may have an advantage because it does not tie up funds from purchasing an asset.
4. Ordinary shareholders put funds into their company by paying for a new issue of shares.
5. A company might raise new funds from the following sources the capital markets.
6. An entrepreneurial team is a group of people that help spread out the risk of the new venture
and also bring in different talents and skill sets to it.

CHAPTER SEVEN: MANAGING GROWTH AND

TRANSACTION
7.1. Learning Objectives
Dear Learners, up on the completion of this chapter, you should be able to:
 Prepare for the launch of the venture
 Identify the new venture expansion strategies and Issues (Mergers, Acquisitions,
licensing and franchising.
 Demonstrate the Ethical issues governing Entrepreneurship.

7.2. Introduction
Dear Learners, this is the last chapter of the course which discusses about preparing for the
launch of the venture, the new venture expansion strategies and Issues (Mergers,
Acquisitions, licensing and franchising, and the Ethical issues governing Entrepreneurship.
Along with, chapter summary and check your progress are involved in it.

7.3. Preparing for the launch of the venture

Preparing to launch your start-up means more than simply making sure you have a viable
product and potential customers. Here are five tips on how to prepare yourself to be a founder.

John Bradberry was fascinated by the idea of how someone may prepare to start a company.
Bradberry, himself an entrepreneur and venture capitalist, has worked for two decades as a
consultant to small business owners, and he found himself attracted to the story of one of his
clients, Decision One Mortgage founder JC Faulkner. “I wanted to understand why it worked so

82
 Entrepreneurship

well, how did he bring the pieces of the puzzle together, and how does that apply to start-ups of
other types,” Bradberry says.

For answers, he went first to academic research on the subject, and then thought back on his own
experience as an entrepreneur. “One of the concepts that crystallized for me was readiness,”
Bradberry says.

In his book 6 Secrets of Startup Success, Bradberry puts forward five steps that he says will help
a person prepare to start a company. While laying the foundation for a successful company
means making sure that one has a marketable product or service that will reach paying
customers, founders who have already achieved some measure of success say that a dose of
personal preparation may help a founder weather the early stages.

Here are Bradberry’s five steps, along with words of advice from entrepreneurs who have
learned the value of personal preparation.

Step 1: Clarify your reasons and your goals.

Dig Deeper: How to Set Business Goals

Step 2: Understand your entrepreneurial personality.

The most important quality any entrepreneur can have, Brinkhoff says, is the determination not
to fail. “The first thing when you look at the bottom line when you go into this is you have to
think one thing and one thing only, and that’s ‘I will not fail,’” Brinkhoff says. “And you have to
be careful that it is not ‘I will not fail’ while you’re going down the wrong path.”

Dig Deeper: Common Mistakes to Avoid When Starting Up

Step 3: Map your skills and experience.

Dig Deeper: The Young Entrepreneur's Survival Kit

Step 4: Leverage your relationships and resources.

When starting a company, “get counsel from different sources,” Pickel says.

For Pickel, that meant sitting his four children around the kitchen table and asking them for
suggestions for his new company’s name. “Their name was Pickel’s Mortgage,” Pickel says.
“That didn’t fly.” And if wisdom can come from the mouth of babies, why shouldn’t everyone
have an ounce of truth to dispense? Pickel felt he needed to get some advice from someone who
would tell him the truth, who would not be uncomfortable telling him his idea was a disaster. “I
don’t wear my religion on my sleeve, but I do go to Church,” Pickel says. “One of the guys I had

83
 Entrepreneurship

gotten to know was a guy named Joe Gray. He’s one of the least religious guys I know.” Because
of that, Pickel says, he felt that he could trust Gray to be skeptical. “I knew he would shoot
straight,” Pickel says.

Dig Deeper: How to build better business relationships

Step 5: Position yourself for high performance.

Founders have to be ready to deal with whatever challenge may arise, Bradberry says, because—
no matter how well-prepared the founder is—his or her company will almost certainly take an
unexpected turn. “I find that often the biggest and most healthy businesses look very different
from what the founders first envisioned,” Bradberry says. “They responded to what the market
was telling them and it was something they could execute on.”

MORE:

Traits of Great Company Names

To be ready for whatever challenge or opportunity may arise, founders should try to keep their
personal lives in order. If one is like Pickel that may mean finding time to retreat from the world.
“My wife says I am wildly entrepreneurial on the outside, but that I’ve cautiously thought
through all the options on the inside,” Pickel says. He sets aside time in the early mornings to
contemplate the day ahead. “What I do is in my mind I go out a year or two years, and then I
examine those consequences. You can’t think when everybody else is yelling at you. You have
to do it when no one else is around.”

It is necessary to have good records for effective control and for tax purposes. The entrepreneur
should be comfortable and able to understand what is going on in the business. With software
packages, much of the record keeping can be maintained on a personal computer. The goals of a
good record keeping system are to identify key incoming and outgoing revenues that can be
effectively controlled.

It is useful to have knowledge about sales by customer both in terms of units and dollars. The
entrepreneur of a retail store might try to identify the profile of the type of customer that
patronizes the store. Retailers also like to have information on specific customers. Credit card
purchases can be tracked for information on the type and amount of merchandise purchased. An
Internet venture can maintain purchase history data on the types of produces purchased.
Customers' e-mail addresses can be requested so the customer can be notified of sales. Some
Internet firms have established a free membership as a means of following up. In a service
venture, records would need to be maintained on when a customer paid their monthly fee. As
cash flow problems are the most significant cause of new venture failure, good payment records
are necessary.
Record keeping of payments can either be handled by a computer software package or a simple
card file system. If payments are late beyond a reasonable time, it may be necessary to hire a
collection agency, but only as a last resort.

84
 Entrepreneurship

Expenses/Costs (Outgoing Revenue

Records of expenses are easily maintained through the checking account. It is good business
practice for the entrepreneur to use checks as payment for all expenses in order to maintain
records for tax purposes.
Canceled checks provide proof of payment. In the early stage, it may be desirable to make all
payments on time to establish credibility with suppliers. The entrepreneur should maintain
information about employee either in a software program or in a card file. It may be necessary to
maintain records on all assets owned by the business.

Other Records
The entrepreneur should maintain information about employees either in a software program or
in a card file. Records on all assets owned may be needed. With a good record keeping system it
is easy to maintain controls over cash disbursements, inventory, and assets.

7.4. New venture expansion strategies and Issues (Mergers, Acquisitions, licensing
and franchising)

New Venture Strategies is a marketing consultancy focused on helping entrepreneurs and

executives ensure the success of any new venture or initiative. Areas of expertise include: in-
depth research, strategic business planning, segmentation and targeting, social media and
networking, public relations, e-marketing, media production and product launch.

Merger and acquisition strategies in the corporate world are needed when one company is aiming
to grow its asset base and also expand its shareholding in the stock market. When two equal
companies decide to come together, share resources and make one entity, we call it corporate
merge but where one stronger or bigger company absorbs another smaller company to form one
entity; this is referred to as acquisition.

There are some special steps that should be followed for a successful merger or acquisition
process so that the two companies involved may experience the benefits of whole exercise. The
process followed may greatly affect these expected benefits either positively or negatively. For a
positive impact, the two separate entities must carefully weigh their options in order to maximize
the benefits of that merger and acquisitions deal.

Successful Merger and Acquisition Strategies

The first step into a successful merger is preliminary business valuation. The interested company
must first consider and establish the market value of the target company before the acquisition
takes place. At this step, the target company is expecting to produce their audited current
financial performance plus their estimated value in the future should they continue with the deal.
You must do a thorough analysis of the target firm and know its market status, customer base,
trends and publicity among other history information about the company. In addition, you need
to know the products of the firm, capital needs, brand value and its organizational structure.
Study the company in a way that you can answer any question about them more than just their
bank statements.

85
 Entrepreneurship

After the interested company has fully satisfied every detail of the target company, they may
make the decision whether to go ahead with the deal or not. If as the acquisition company you
feel the company has potential to be merged, prepare merger and acquisition proposal to the
target company but the document has an offer that is non – binding. This means that, you can
withdraw from the deal or any other company with a better offer may overlook your proposal.
This is where merger strategies and needed to ensure that your proposal meets the eye of the
market and the target company.

The target company will receive the proposal, plus many other proposals from other interested
entities and then review them one by one. If they like your proposal, they may agree in writing
on the proposal and then they start and Exit Planning. This target firm having found a good
proposal will recollect and find the right time to exit and hand over the sale to the absorbing
company. They will consider all available options such as partial or full sale and then
communicate to the interested party accordingly, do tax planning and evaluate reinvestment
alternatives they may find.

The game ball is still in the target company’s hands and they will play it smart to achieve the
highest sale. They will do a marketing process and focus on structuring their exit deal. The
company can try as much as possible to find a good company with the best deal in the market
that can close down their sale; they also reorganize their merger and acquisition strategies to
ensure they get hold of a perfect deal out of the proposals.

A t this point, things are almost complete and the deal may be closed. The stage of integration
ensures that the new joining firm will carry or adopt the same kind or rules and regulations in the
new organization. It is expected that the joint venture does not affect either of the firms
operations. They are expected to run normally until the full absorption is completed, that is why
the same rules have to be applied strictly.

For a successful merger or acquisition, sound strategic planning is needed to ensure that the deal
does not break off. To get the best working strategies, the interested company must consider
what other mergers have gone through. Learn by example from previous mergers; see how they
succeeded or how they failed. Look through every step of the successful merger and try to
disintegrate their own strategies then you can see how to mend yours by avoid the mistakes those
who failed made.

You have to do a thorough market survey in order to get ideas and golden rules that may be used
as part of your merger strategies. Follow the steps of acquisition we have seen above and
remember market analysis is important. Do the company analysis carefully to know their market
performance and financial performance too of the target firm. Poorly performing firms may be a
risk but can be a good deal if you realize their potential in the future.

Merger and Acquisition Strategies Performance

To know of the future performance of a company, you need to analyze their recent market trends
to know of their future opportunities. A company with no future, even if it is performing well

86
 Entrepreneurship

now may not be a good deal. The management of both firms must work together at this point to
come up with proper integration strategies that will see them merge successfully.

The target firm will reciprocate the proposal and enter into a ‘tender offer’. Here, all its shares or
part of the shares are bought by the other company with a fixed price. This is done according to
the Securities and Exchange Commission rules and regulations about the limit of shares and
declaration of the number of shares on offer. The total price is worked out by any assigned
investment company and is agreed on by the company intending to buy them.

Negotiations are allowed especially on the terms and conditions offered by the company which
intends to buy them. Shareholders are given a chance to contribute over the share price and offer
their opinion. Lastly, the top management of both merging companies will work on the
modalities to ensure that no one loses their jobs after the merger and acquisition has been
completed and signed. In both cases, merger and acquisition strategies determine the success of
the deal.

Mergers And Acquisitions Necessarily project implementation specialists. Mergers often

encounter difficulties during implementation because this phase is not as Mergers and
acquisitions have a much better chance of being successful.

Licensing and Franchising Strategies

Every owner of a successful small business is, at one point or another, confronted with the
decision to invest more capital and grow, or fall back on their success and stay small. The
inherent risk and investment required to grow a small business often prompts many owners to
opt for the latter. Licensing and franchising however, are two ways through which owners can
rapidly grow their businesses while delegating much of the costs and risks to a third party.

Licensing

Much like the state government granting individuals a license to give them permission to drive,
businesses sometimes grant other organizations licenses to give them permission to use their
intellectual property. A license is a contract through which one party grants another permission
to use its patents, trademarks, copyrights, designs or trade secrets. The organization receiving the
license, or licensee, compensates the licensor by paying a flat fee, royalties or a combination of
the two. The agreement does not transfer ownership of the intellectual property. By licensing to
third parties, small business owners can expand their businesses' reach and grow sales without
having to invest in new locations or distribution networks, and risking failure.

Franchising

Franchising grows a business in a similar way but the franchising party or franchisor gives the
franchisee permission to not only use its intellectual property but also its operating system. In
addition to their trademarks, franchisees often use frachisors' distribution systems and marketing
campaigns to sell the franchisors' products or services. In return, the franchisee usually pays the
franchisor an upfront fee, royalties, and sometimes even a monthly or annual fee. Like licensing,

87
 Entrepreneurship

franchising can help a small business grow rapidly and, although it requires more set-up and
investment than a pure licensing deal, franchising remains considerably more affordable than
opening new locations.

Set-up

A licensing agreement can be drafted and completed in as little as a week.

Before offering a franchise however, a business must standardize its internal systems, operations,
marketing and distribution. A business must also complete extensive legal documentation and
draft franchising agreements before becoming a franchisor. Franchisees are also subjected to a
lengthy and thorough selection process. Franchising usually takes longer and costs more to set up
than licensing.

In a licensing agreement though, the licensor usually does not retain much control over how the
licensee may operate. Unless otherwise specified, licensees can use the licensed property in
whichever way they choose. Over the life of the agreement, which also tends to not last as long
as a franchising relationship, licensees operate virtually independent from their licensors.
Licensors in turn provide little if any support to licensees.

Franchisors on the other hand, maintain significant control over how a franchisee operates. How
its intellectual property is used and how its products or services are delivered is often dictated by
the franchisor. At times, franchisors even set requirements on price. In exchange, franchisors
also offer more support to franchisees in the way of training, site selection and marketing.

Licensors can sometimes license their intellectual property to two or more organizations
operating in the same geographic region or market forcing licensees to compete directly with one
another.

Franchisees however, are normally granted an exclusive territory in which to operate. In urban
areas, this territory can be as small as a city block but it, when coupled with the site-selection
assistance provided by the franchisor, limits direct competition between franchisees.

7.5. Ethical issues governing Entrepreneurship

88
 Entrepreneurship

Societies with higher levels of business ethics tend to be characterized by greater

certainty of actions and lower costs of regulation and policing.

It is hypothesized that entrepreneurs are more sensitive to the ethical aspects of decision
making.
The evidence supports the use of integrative theoretical approaches within the field of
business ethics. The integrative social contract theory reveals the relevant cultural and
economic norms that are predictive of the rank level of the ethical attitudes among
societies and at the same time points out more subtle impact of social institutions on
ethical attitudes of different groups within a society.

During the 1990's a discussion of negative aspects of corruption and some aspects of
unethical business behavior has become a worldwide phenomenon. International
organizations have discovered that some financial assistance has disappeared due to
ethically questionable practices and behavior.
Business ethics is a subject that can vary greatly from one business to the next as far as how it is
interpreted and implemented within the small business. What may seem ethical to one business is
not to the next–and the same goes for employees. That is why it is important to clearly
communicate the ethical stance of the business to all employees. Employees should not only be
expected to act in an ethical manner, they should also fully understand the ethical stance of the
small business.

89
 Entrepreneurship

Importance of Ethical Communication

In order for employees to effectively understand what the business considers to be ethical
practices, it has to be communicated effectively to employees. Ethical behavior should be
communicated daily to employees and that includes recognizing employees who have acted in an
ethical manner. This not only gives praise to those employees for a job well done, it helps to set
ethical standards for other employees in the business.
Ethics Policy
Every business should have a written ethics policy that details what is expected of employees
within the business. It should communicate what the business believes are its ethical standards
such as always being honest in communications, dealing with customers and other employees
fairly and reporting ethical violations that the employee witnesses. The policy should also outline
the consequences of acting unethically within the small business. This policy should be signed
by employees upon their acceptance of employment as well as reviewed and signed on an annual
basis.
Ethics Training

Because everyone’s idea of ethics can differ, it is important that the business conduct ethics
training for all employees. Some employees may see taking business supplies for personal
use as unethical whereas they don’t believe that taking a business pen home with them is
the same. The business should educate the employees about its own ethical standards
through role play as well as hypothetical scenarios. This can help employees recognize
what the business considers to be ethical and unethical.

Management Role

Management’s role in ethical practices for the business is to always demonstrate ethical
behavior in verbal and non-verbal form. Management should reinforce ethical behavior in
others with praise while using unethical behavior as a teaching tool for other employees. In
addition, management should realize they are role models for the business and must act
accordingly. If they expect employees to act in a certain way, they must also act in the same
way and lead by example.

Considerations

In monthly employee meetings, use stories from the news to reiterate the business stance
on ethics. Pass the story out to employees to read and review before the meeting. During
the meeting, discuss the article and have employees identify the ethical and unethical
behaviors demonstrated in the story. Also ask the employees what should have happened
and what they should do if they encounter the same or similar behavior in this business.

Summary

90
 Entrepreneurship

New Venture Strategies is a marketing consultancy focused on helping entrepreneurs and

executives ensure the success of any new venture or initiative.
Merger and acquisition strategies in the corporate world are needed when one company is aiming
to grow its asset base and also expand its shareholding in the stock market.
The first step into a successful merger is preliminary business valuation.
Ethical behavior should be communicated daily to employees and that includes recognizing
employees who have acted in an ethical manner. This not only gives praise to those employees
for a job well done, it helps to set ethical standards for other employees in the business.
Every business should have a written ethics policy that details what is expected of employees
within the business. It should communicate what the business believes are its ethical standards
such as always being honest in communications, dealing with customers and other employees
fairly and reporting ethical violations that the employee witnesses.
Because everyone’s idea of ethics can differ, it is important that the business conduct ethics
training for all employees.

Check Your Progress

True/False Items
1. The first step into a successful merger is preliminary business valuation.
2. Every business should have a written ethics policy that details what is expected of employees
within the business.
3. New Venture Strategies is a marketing consultancy focused on helping entrepreneurs and
executives ensure the success of any new venture or initiative.
4. Everyone’s idea of ethics can differ.
5. Merger and acquisition strategies in the corporate world are needed when one company is
aiming to grow its asset base and also expand its shareholding in the stock market.

91
 Entrepreneurship

Answer Key for All Chapters

Chapter One

Short Answers

1. Entrepreneurship is the process of starting a business, typically a startup company offering

an innovative product, process or service.
2. Entrepreneurs are leaders willing to take risk and exercise initiative, taking advantage of
market opportunities by planning, organizing, and employing resources, often by innovating new
or improving existing products.
3. A free enterprise is an economic system where few restrictions are placed on business
activities and ownership.

Chapter Two

Short Answers

1. Business enterprise is the creation of wealth, the practice of creativity and resourcefulness and
the exploitation of change.

2. The Common reasons businesses close their doors are:

1. Failure to understand your market and customers.

2. Opening a business in an industry that isn’t profitable.
3. Failure to understand and communicate what you are selling.
4. Inadequate financing
5. Reactive attitudes.
6. Overdependence on a single customer.
7. No customer strategy.
8. Not knowing when to say “No.”
9. Poor management.
10. No planning

3. While starting a new business the promoter has to decide on:

1. The financial needs of the business. That is, short-term and long-term capital
requirements.
2. Sources of finance like shares, debentures, loans from banks and other financial
institutions.
3. Cost of collecting finance and the returns on capital invested.
4. The capital structure and appropriate time for collecting finance.
5. Sources of working capital.

Chapter Three

92
 Entrepreneurship

Short Answers

1. The elements of the business plan are used while developing the business plan:

 Market Analysis

 Company Description

 Organization & Management

 Service or Product Line

 Marketing & Sales

 Funding Request

 Financial Projections

 Appendix

 How to Make Your Business Plan Stand Out

2. A situation analysis is a concept of business planning that involves a thorough review of the
internal and external environment to provide a foundation for businesses to determine their goals
and objectives.
3.A Business plan is Set of documents prepared by a firm's management to summarize its
operational and financial objectives for the near future (usually one to three years) and to show
how they will be achieved.
4. A feasibility study is a brief formal analysis of a prospective business idea.
5. The goal of a feasibility study is to give the entrepreneur a clear evaluation of the potential for
sales and profit for a particular idea.

Chapter Four

True/False Items

1. T
2. T
3. T
4. T

93
 Entrepreneurship

5. T
6. T
7. T

Chapter Five

Short Answers
1. Marketing research is "the process or set of processes that links the consumers, customers,
and end users to the marketer through information used to identify and define marketing
opportunities and problems.
2. The goal of marketing research is to identify and assess how changing elements of the
marketing mix impacts customer behavior.

3. Marketing strategy is the fundamental goal of increasing sales and achieving a sustainable
competitive advantage.
4. Marketing strategy includes all basic, short-term, and long-term activities in the field of
marketing that deal with the analysis of the strategic initial situation of a company and the
formulation, evaluation and selection of market-oriented strategies and therefore contribute to the
goals of the company and its marketing objectives.

5. The four types of market dominance strategies:

 Leader
 Challenger
 Follower
 Nicher

6. An international market is defined geographically as a market outside the international

borders of a company's country of citizenship.

Chapter Six

True/False Items
1. T
2. T
3. T
4. T
5. T
6.. T

Chapter Seven

94
 Entrepreneurship

True/False Items
1. T
2. T
3. T
4. T
5. T

95
 Entrepreneurship

References:
1. Hodgetts, Richard M. Kurakto, Donald F. “Entrepreneurship: A contemporary
approach “.
2. Fourth Edition, the Dryden Press, 1998.
3. Hirsh Robert D. and D. and Peters Michael P. “Entrepreneurship” Fifth Edition, Tata
4. McGraw Hill Edition, 2002.
5. Holt David H. “Entrepreneurship – New venture Creation “Eastern Economy Edition,
2000

96