Entrepreneurship

Chapter one: Entrepreneurship and Free Enterprise

Chapter Two: Small Business
Chapter Three: Business Plan
Chapter Four: Product and Service Concept
Chapter five: Marketing and new venture development
Chapter six: Organizing and financing the new venture

Chapter Seven: Growth Strategies for Small Firms

 
Chapter one: Entrepreneurship and Free Enterprise

•Definition of Entrepreneurship
1. Entrepreneurship is the process of creating incremental wealth
2. Entrepreneurship can also be defined as the process of creating something different and better with value to receive
monetary reward and personal satisfaction.
3. Definition views the term from four perspectives;
 To an economist an entrepreneur is one who brings resource, labor, materials, and other assets into combination that
makes their value greater than before and also one who introduces changes innovations.
 To a psychologist an entrepreneur is a person typically driven by certain forces need to obtain or attain something, to
experiment, to accomplish or perhaps to escape the authority of others.
 For a business man entrepreneur is either a threat (aggressive competitor) or an ally (source of supply, consumer, etc).
 For the capitalist philosopher an entrepreneur is one who creates wealth for others as well, who finds better way to
utilize resources and reduce waste and who produce job others are glad to get.
Process of entrepreneurship includes five critical elements.

1. The ability to perceive an opportunity.

2. The ability to commercialize the perceived opportunity i.e. innovation
3. The ability to pursue it on a sustainable basis.
4. The ability to pursue it through systematic means.
5. The acceptance of risk or failure.
Definition of an entrepreneur:
• “Entrepreneur is a person who always searches for change, responds to it and exploits it as an opportunity”,
Peter F Drucker.
• “Entrepreneur is a person who makes decision under alternative courses of action”, Clarence H Dantrof.
• “Entrepreneur is an individual who bears the risk of operating a business in the face of uncertainty about the
future conditions”, The New Encyclopedia Britannica.
Entrepreneurship – Historical Perspective

1. Schumpeter (1950), “an entrepreneur is a person who is willing and able to convert a new idea or invention into a
successful innovation”.
2. David McClelland (1961) described the entrepreneur as an individual primarily motivated by an overwhelming
need for achievement and strong urge to build.
3. Collins and Moore (1970) studied 150 entrepreneurs and concluded that they are tough, pragmatic people driven
by needs of independence and achievement.
4. Bird (1992) sees entrepreneurs as mercurial, that is, prone to insights, brainstorms, deceptions, ingeniousness and
resourcefulness.
5. The term entrepreneur was derived from the French verb “enterprendre” which means “to undertake”. The
colloquial meaning of enterprendre in French is music organizer or entertainment organizer.
6. Entrepreneurship can also be explained as a process of executing a work in a new and better way.
7. According to Joseph A Schumpeter, “an entrepreneur is an innovator, who introduces something new in the
economy”.
 Modern concept

 The term entrepreneur has been defined as one who detects and evaluates a new situation in his
environment and directs the making of such adjustments in the economic systems as he thinks
necessary. An entrepreneur performs:
 Perceives opportunities
 Explores the prospects of such opportunities
 Obtains necessary industrial licenses
 Arranges initial capital
 Provides personal guarantees to the financial institutions
 Promises to meet the short falls in the capital
 Supplies technical know how
Entrepreneurship and Economic Development

•Entrepreneurs initiate and sustain the process of economic development in the following ways:
• Capital formation
• Improvement in per capita income
• Improvement in living standards
• Economic independence
• Backward and forward linkages
• Generation of Employment
• Harnessing Locally Available Resources and Entrepreneurship
• Balanced Regional Growth
• Innovations in Enterprises
• Initiating change in the structure of business and society
Entrepreneurship – Creativity, invention and Innovation

 Creativity is the capability or act of conceive something original or unusual. Creativity emphasizes the
“ability” not the “activity” of bringing something new in to existence. Creativity occurs when an individual
visualizes new patterns in his mind.
 Invention is the creation of something that has never been made before and is recognized as the product of
some unique insight.
Innovation is the implementation of something new (invention).
Innovation is different from invention.
Innovation is the process of doing new things.
•An invention is discovery of new methods and new materials, where as innovation is utilization of inventions
to produce new and better quality of products that give greater satisfaction to the consumer and higher profits to
the entrepreneur.
•The innovator (entrepreneur) commercially exploits the invention produced by him or by any other person.
Classification and Types of Entrepreneurs

Danhof’s classification of entrepreneurs

 Innovative entrepreneurs- innovate something new
 Imitative entrepreneurs- imitates innovative entrepreneurs at the early stages
 Fabian entrepreneurs - considers customs, and social values. Reluctant to accept risk, so follows the initiative entrepreneurs after seeing their success.
 Drone entrepreneurs- Will follow the traditional business, even if they see opportunity
Skills of an Entrepreneur
 Vision & foreseeing skill
 Innovative ability
 Commitment & determination
 Decision-making ability
 Risk taking capacity
 Willingness to work hard
 Ability to organize resources
 Leadership & motivational skill
 Technical knowledge
 Goal setting skill
Developing entrepreneurial competencies

•Major Competencies Required for Successful Entrepreneurship

•There are three major competencies for successful entrepreneurs.
A. body of knowledge
•Knowledge consists of a set or body of information stored, which may be recalled at an appropriate
A. set of skills
•Skill is the ability to apply knowledge and can be acquired or developed through practice.
A. cluster of traits
• Trait is the total of peculiar qualities or characteristics that constitutes personal individuality.
 Chapter Two: Small Business

•Definition and importance

•The term covers a wide range of definitions and measures, varying from country to country and between the sources reporting
MSE statistics.
• Although there is no universally agreed definition of Small business some of the commonly used criteria are:
 Number of employees (more useful to define)
 Volume of assets/capital
 Volume of sales
 Investment turnover
•Based on the type of industry they involved small business are divided in to:
 Manufacturing
 Construction
 Transport
 Wholesale and retail(trade)
 Urban agriculture
 Service sectors
 As to EU, countries make improvement of the definition considering inflation and productivity level.
ctd

•In the case of Ethiopia, there is lack of uniform definition at the national level to have a common understanding
of small business. While the definition by ministry of trade and industry (MoTI) use capital investment whereas
the central statistics authority (CSA) uses employment and favored capital intensive technologies as yardstick.
•According to the MoTI (2004) small enterprises are those business enterprises with a paid up capital of above
Birr 20,000 and not exceeding Birr 500,000 and excluding high tech consultancy firms and other high
technological establishments.
• According to CSA (2004) establishments employing less than ten persons and using motor operated
equipment are considered as small scale manufacturing enterprises.
New Definition of Micro and Small Enterprise (MSEs):
According to the new Small & Micro Enterprises Development Strategy of Ethiopia (published 2011) the working definition of
MSEs is

based on capital and Labor .it consider the coming 5 years inflation and fluctuation/regularity of currency.

Key
 Industry sector (manufacturing, construction and mining)
 Service sector (retailer, transport, hotel and Tourism, ICT and maintenance service etc…)
Sr.no Enterprises level Sector Hired labor Capital

  Micro Industry ≤5 $6000 or £4500

  ≤ Birr 100,000
1

  Service ≤5 $3000or £2200

≤Birr 50,000

  Small Industry 6-30 $90,000 or £70,000

2 ≤ Birr 1,500,000

  Service 6-30 ≤ Birr 500,000

According to Bolton (1971), small business could be described as follows:

 Market Share – in economic terms, a small firm is one that has a relatively small share of its market. Not
enable it to influence the prices or national quantities of goods sold to any significant extent.
 Management (Personalized) – it is managed by its owner or part of owners in a personalized way, and not
through the medium of a formalized management structure. Personalized management implies that the
owner actively participates in all aspects of the management of the business, and in all major decision-
making processes.
 Control (No Outside) – it is independent in the sense that it does not form part of a larger enterprise and
that the owner/managers should be free from outside control in taking their principal decisions.
 Due to this they face severe limitation of resources both in terms of management and manpower, as well as
money.
Significance (Role) of Small Business to the Economy/Society

•Small businesses are vital to the soundness of many economies (too particularly in Ethiopian economy). Small
business is largely responsible for:
 Fueling job creation
 Innovation
 Contributions to Large Businesses
 Producing goods and services efficiently
 Stimulating economic competition
 Improved Standard of Living
Economic, social & political aspects(support) of small business enterprise

•They need strong support on the following socio-economic and political grounds from the government and the
society by the following ways.
•1. Equitable Income Distribution
•2. Balancing of inadequate Financial Resources and Human Resources
•3. Rectifying Regional Imbalance/ Rectifying Rural/Urban resources
2. Generation of Foreign (Hard) Currency
3. Removal of bureaucratic hurdles
4. Easy finance availability
5. Easy availability of machinery and raw materials
6. Removal or reduction of taxes etc
 Small Business Failure factors
•According to the Small Business Administration (SBA), 24 percent of all new businesses fail within two years,
and 63 percent fail within six years.
•Small businesses fail for many reasons such as:
 Undercapitalization
 Managerial Inexperience or Incompetence
 Poor Control Systems
 Poor business concept: start a business without identifying a real need for the goods or services.
 Burdens imposed by government regulation
 Insufficient funds to withstand slow sales
Problems of small business in Ethiopia

 
•Small businesses in Ethiopia face various problems:
•A, Product related problems
 Product similarity
 Lack of product diversity that lead similar products are over-crowding the market
 Certain small businesses lack the skill to modify their products
 Lack of sufficient range of product designs
• B, Price related problems
• Some small businesses sell at break-even or even below cost. Some of the reasons for selling at such a lower price can be attributed mainly due to:
 Lack of basic costing knowledge
 Overhead costs are mostly not calculated as expenses (salaries or wages of family members involved in production or sales are overlooked)
 Lack of knowledge exactly earnings from sales separately
 Family members spend the money earned from sales without recording
 Correctly unknown how much raw material and accessories are required to make one unit of a product.
 Do not know whether they actually make profit or not.
•C, Promotion
Shortage of promotion budget
use the promotion money for other urgent matters.
Problems correctly informed on how to join their prospective customers
ctd
•D, Competition
Some larger companies in relation to small business have advantages due to:
selling at reduced price without reducing product quality using economies of scale
Customer targeting capacity
Proper and intensified product/service advertising capacity
Good personal contacts and networks
Sound Industry reputation
They have sufficient information regarding existing market and capacity to exploit more market opportunities.
•E. Lack of Market related Knowledge
 Lack of information where the best market areas are located;
 Inability to analyze their respective market;
 Lack of skills to set competitive prices;
 Inability to effectively promote products
•F. Retailing
• Do not have the necessary retail outlets (strategic location).
•G. Finance
• Shortage of funds discourages the smooth operation and development of small businesses.
 Lack of proper fund utilization (do not use the money for the intended purpose).
 Fail to return the money back to the lender on time. This can result in a loss of credibility to get repeated loans when needed most.
Setting (starting) Small Business: Business Idea

 A business idea is the response of a person or persons, or an organization to solving an identified problem or
to meeting perceived needs in the environment (markets, community, etc.)
 A business idea is any clue or information about, new or improved products /services.
 Finding a good idea is the first step in transforming the entrepreneur’s desire and creativity into a business
opportunity.
•In contemplate your business; you must start with a great idea. A great product, an untapped market, and
good timing are essential ingredient in any recipe for success
•Profitable business idea is one of the basic factors that influence a successful business start-up.
•Failure rates for early stage businesses often exceed 50 percent, so take the time to test the validity of your
concept.
Characteristics of feasible business ideas:

 The product or service satisfies the needs of the prospective customer, not simply the desire of the business
owner.
 The product or service has an identifiable advantage over competitive sources.
 The quality of the product can be maintained to a level that encourages customers to make repeat purchases.
 Compatibility of product or service with existing beliefs, attitudes and buying habits of prospective
customers.
 Easily communicated product or service benefits to the target customers.
 Affordable range product& services price for the intended customers.
 Cost-efficient methods of targeted communication exist between the seller and the potential buyers.
 Sufficient projected sales to cover all expenses and generate profit.
Factors contributing for the success of Micro and Small Business

 Good Strategy
 Good Employees
 Outstanding Leaders
 Physical resources - Finances, facilities and equipment
 Healthy organization Culture
 Handle constant change
 Be proactive, not reactive
 Be Creative thinkers and innovators
 Access to information to make the best decisions at all levels
 Good Customer relations management
Decision to buy an existing business, start a new one, or seek a franchising agreement

Buying an Existing Business

•Buying an existing business offers a strong set of advantages. Because the entrepreneur can examine the
business’ historical records to determine the pattern of revenue and profit and the type of cash flow, much
guesswork about what to expect is eliminated. The entrepreneur also acquires existing supplier, distributor, and
customer networks. On the negative side, the entrepreneur inherits whatever problems the business may already
have and may be forced to accept contractual agreements.
•Starting a New Business

• Starting a new business from scratch allows the owner to solve the shortcomings of an existing business and
to put his or her personal stamp on the enterprise. The entrepreneur also has the opportunity to choose
suppliers, bankers, lawyers, and employees without worrying about existing agreements or contractual
agreements.
Franchising

• An alternative to buying an existing business or starting one from scratch is entering into a franchising
agreement.

• A license to sell another’s products or to use another’s name in business, or both, is a franchise.

• The entrepreneur pays to a parent company (the franchiser) a flat fee or a share of the income from the
business. In return, the entrepreneur (the franchisee) is allowed to use the company’s trademarks, products,
formulas, and business plan
ctd
•The project should have to consider the SWOT factors and should be designed accordingly.
•The SWOT approach compels individuals to think or reason out systematically and analytically strengths,
weaknesses, opportunities, and threats factors.
•It is an important strategic tool of analysis that helps entrepreneurs to compare internal organizational strengths
and weaknesses with external opportunities and threats.
•Strengths and weaknesses focus your business to look internally at what your business can do.
•Opportunities and threats are external factors and beyond the business.
Benefits of SWOT analysis can include:

 Insight into where your business can focus to grow

 Understand the industry structure by using a SWOT in your business plan.

 Focus your advertising and marketing on areas that give you a competitive advantage in the marketplace.

 The foresight to see looming threats and react proactively

• 
•Strengths
•They are the skills and capabilities that enable an organization to conceive and implement its strategies. Anything a
customer wants that you provide and your competitor doesn't, can be a possible strength.
 business location or product exclusivity
 patents or proprietary goods
 an established distribution channels
•Weaknesses
•It is an inherent limitation/constraint, which creates a strategic disadvantage
 Limited human resources and staff
 High cost of production
 Products or service similar to competitors'
 Overdependence on a single product line, which is potentially risky for a firm in times of crisis.
•Opportunity
•It is an area that may generate high performance for the organization if exploited. According to Peter F. Drucker, opportunities are of three types:
•1. Additive Opportunities: opportunities which enable the small business to better utilize the existing resources without, in any way, involving a change
in the character of business and involves minimum disturbance and hence a least risk.
•2. Complementary Opportunities: involve the introduction of new idea that lead to certain amount of change in the existing structure of the firm.
•3. Breakthrough Opportunities: they involve fundamental change in both structure and character of business.
• Opportunities or vice versa
 Government regulation softening
 Development of new technology
 Growing trend and customer base
•Threats
•These are factors that may limit or impede the small business firm in the pursuit of its goals. They are unfavorable condition in the organization’s
environment, which creates a risk for, or causes damages to the organization.
 New substitute products emerging
 Price competition
 Economic pressure
Characteristics of Small Enterprises

•Characteristics exhibited by small enterprises when compared to large enterprises:

1. Usually a one-person affair. Even if the enterprise is established as a partnership or corporation, the operations are
mostly carried out by one partner or director and the other partners/directors just contribute the required capital and
do not involve themselves in the business operations.
2. Close personal contact or supervision and directs all activities of the firm including purchase, production,
accounting, and marketing of products or services.
3. Small enterprises take less time in starting than large enterprises and running their operations. They have a lesser
gestation period.
4. Establishment of small enterprise does not much difficulty as that of a large enterprise. The small enterprise can be
located at any place provided there is an availability of raw materials, personnel, market, etc.
5. Small enterprises create more jobs for the same amount of capital when compared to the larger enterprises.
Because they are labour intensive.
6. Small enterprises require less capital to establish when compared to that of large enterprises.
 Chapter Three: Business Plan

• The business plan is a written document

• that sets out the basic idea underlying a business and related start-up considerations.
•Purpose of business plan
• To eliminate seat-of-the-pants planning
• To provide step-by-step instructions (necessary information) on how to prepare business plan, regardless of
whether you are starting a new business or expanding an existing one.
• To decide how best to operate the business (design strategies).
 Preparing feasibility study

•A feasibility study looks at the viability of an idea

•with an emphasis on identifying potential problems and attempts to answer one main question.
•Feasibility studies address things like
•where and how the business will operate.
•They provide in-depth details about the business to determine if and how it can succeed, and
•serve as a valuable tool for developing a winning business plan.
 Components of a Feasibility Study

 Description of the Business: The product or services to be offered and how they will be delivered.
 Market Feasibility: Includes a description of the industry, current market, anticipated future market
potential, competition, sales projections, potential buyers, etc.
 Technical Feasibility: Details how you will deliver a product or service (i.e., materials, labor,
transportation, where your business will be located, technology needed, etc.).
 Financial Feasibility: Projects how much start-up capital is needed, sources of capital, returns on
investment, etc.
 Organizational Feasibility: Defines the legal and corporate structure of the business (may also include
professional background information about the founders and what skills they can contribute to the business).
 Conclusions: Discusses how the business can succeed.
 Common elements of business plan

• A, Executive Summary
 What, where, to whom, and why?

• B, Business Summary
 Organizational Summary (Mission, vision, type of business & sector, etc.)

 Management Summary (legal structure, organizational chart, personnel plan,

 Project management methodology, etc.)

 Products & Services – What to offer, how to make, why this, patents, trademarks, etc.
ctd
• C, Market Analysis Summary
 Industry Background

 Market conditions

 Demand

 Supply

 Legal framework

 SWOT Analysis

• D, Strategy & Implementation Summary

 Evaluating the value of your supply

 Setting the objectives

 Elaborating a strategy – Marketing mix

ctd
 Product policy
 Pricing policy
 Distribution tactics
• Promotion & exploration policy
 Segmentation and position strategies
E, Financial Plan Summary
• Expansion & growth plans
G, Monitoring