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St. Mary’s University College

Faculty of Business

Department of Management

Entrepreneurship and Small Business Management

Starting and operating one’s own business has been becoming an interest area for individuals

from different stock of life. It may be a man or woman, someone from reach or poor family

background, a technologist or someone without sophisticated technological background, a

college graduate or high school dropout. It is a fact that entrepreneurship is the key to solve

what is known as dependency syndrome on salaried employment and unemployment. In

creating and growing a new business, any individual (entrepreneur) needs to understand how

to create and manage a new venture and its risk and efforts to overcome the inertia against

creating something new.

This material is designed to help you understand different concepts of entrepreneurship and

competencies in entrepreneurial development and small business management. It also

provides you the desired knowledge, skills, and competencies that would enable you to

become confident entrepreneurs who are capable to create and innovate important business

ideas.

The words entrepreneur and entrepreneurship have acquired special significance in the

context of economic growth in rapidly changing socio-economic and socio-cultural climates

both in developed and developing countries. The unpredictable ability of entrepreneurs to turn

leads into gold or coal into diamond, which governments have always been excited about the

possibility of creating more entrepreneurs in their societies, has made the field

entrepreneurship and small business promotion as one of the most consistently popular

interventions funded by donors and governments alike.

With unemployment frightening as the most challenging socio-economic problem of the next

century, a renewed focus has been placed on the major part which small business play in

employment creation. The dramatic change in the global political economy in the last decade

has also sharpened governments' interest in small enterprise and entrepreneurs. Seldom has

there been greater unanimity among countries on the need to use market forces in the

simulation of economic growth. Weather in developing, under developed or developed

nations, everyone recognizes the need to expand the private sector as the major instrument for

increasing income. Entrepreneurs are now held up to be role models and one of the fastest

growing business has become entrepreneurship education the art of starting and running a

business.

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Definition and Historical Background of Entrepreneurship or Entrepreneur

The concept of entrepreneurship varies from country to country as well as from period to

period and the level of economic' development thoughts and perceptions; a concise,

universally accepted definition has not yet emerged. Not only different people have different

views of what entrepreneurship is, but also the same people may use different definitions

when researching entrepreneurship in different economic and social context. The development

of the theory of entrepreneurship parallels to a great extent the development of the term itself.

So, let us discuss the concept of entrepreneurship given at different times by different writers

on the subject. The word entrepreneur is derived from the French verb enter prendre, which

means to undertake

Earliest period

At the earlier period an entrepreneur was viewed as a go-between, who attempted to establish

contracts with trade routes and signed money persons/forerunners of today's venture capitalist,

to sell goods. A common contract during this time provided a loan to the merchant-adventure

at a relatively greater interest rate, including insurance. While the capitalist was a passive risk

bearer, the merchant adventure took the active role in trading, bearing all the physical and

emotional risks. When the merchant-adventure successfully sold the goods and completed the

trip, the profits were divided with the capitalist taking most of them (up to 75 percent), while

the merchant-adventure settled for the remaining 25 percent through passage of time.

Middle Ages

In the middle ages, the term entrepreneur was used to describe a person managing large

production projects. In the case of large production projects, the person would not take any

risks but would merely manage the project using the resources provided. A typical

entrepreneur in the middle ages was the cleric - the person in charge of greater architectural

works, such as castles and fortifications, public buildings, abbeys and cathedrals.

17th Century

The concept of risk in the notion of entrepreneurship had developed in the 17th century, with

an entrepreneur being viewed as a person who entered into a contractual agreement with

government to perform a service or supply stipulated products. Since the contract price to

supply was fixed, any resulting profits or losses (since the price of raw materials and other

cost of production are uncertain) reflected that the entrepreneur was risk taker.

18th Century

An 18th century Irishman named Richard Cantillon who was living in France at the time, is

credited with being the first to use the term "entrepreneur" in a business context. He is also

regarded as the founder/the father of the term entrepreneurship. Cantillon viewed the

entrepreneur as a risk taker, seeing the merchants, farmers, crafts man and other sole

proprietors buy products at certain price and sell at uncertain price-therefore, operating at a

risk condition

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Further more, in the 18th century the entrepreneur role was distinguished from the capital-

providing role. A venture capitalist is a professional money manager who invests in a risky

investment from pool of equity capital to obtain a high rate of return on the investment.

Whereas, an entrepreneur is one who creates and manages his own enterprise as well as one

who assumes all risks related to running the venture.

In the late 19th and early 20th Centuries

In the late 19th and early 20th centuries, entrepreneurs were frequently not distinguished from

managers and were viewed mostly from an economic perspective. Hess and Ely defined the

term entrepreneur as the one who organizes and operates an enterprise for personal gain. The

entrepreneur contributes his/her own initiative, skill and integrity in planning, organizing and

administering the enterprise. He/she pays prices for the materials consumed in the business,

for the use of the land, for personal service he/ she employs, and for the capital he/ she

requires. He/ she also assume the chance of loss and gain consequent to unforeseen and

uncontrollable circumstances. Thus, an entrepreneur is both a risk taker and a manger.

In the Middle of 20th Century

According to Joseph Schumpeter, the function of an entrepreneur is to reform or revolutionize

the patter- of production by exploiting an invention, or more generally, an untried

technological possibility for producing a new commodity or producing an old one in a new

way, opening a new source of supply of materials or a new outlet for products, by organizing

a new industry. The concept of innovation and newness are integral part of entrepreneurship

in this definition. Briefly, an entrepreneur is one who innovates, raises money, assembles

inputs, chooses managers and sets the organization going with his ability. But the

entrepreneur differs from the mere innovator since he/she innovates something new and

converts into business by investing his/her money and devoting time and& energy.

According to this definition, innovation can occur through:

i. Introduction of new quality in a product,

ii. Development of a new product,

iii. Discovery of a fresh demand and a fresh source of supply and,

iv. Changes in the organization and management

The concept of entrepreneurship is further refined when principles and terms from a business,

managerial and personnel perspective are considered. In particular the concept of

entrepreneurship has been explored in this century.

Relatively Recent Definitions

� In almost all of the definitions of entrepreneurship, there is agreement that we are

talking about a kind of behavior that includes:

i. Initiative taking,

ii. The organizing and reorganizing of social/economic mechanisms to turn resources

to practical account, and

iii. The acceptance of risk or failure. ... Albert Shapero

� Karl Vesper has researched entrepreneurship and explained that its nature is a

matter of individual perception:

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� To an economist, an entrepreneur is one who brings resources, labor, materials

and other assets into combination that make their value greater than before and

also one who introduces changes, innovations and a new order.

� To a psychologist, such a person is typically driven by certain forces like need

to obtain, to attain, to experiment, to accomplish something or perhaps to

escape authority of others.

� To capitalist philosophers, an entrepreneur is one who creates wealth for others

as well, who finds better ways to utilize resources and reduce waste and who

produce jobs that others are glad to get.

� The commonly held view of the entrepreneur as a calculated risk taker areas also shared

by Knight. For Knight, the entrepreneur is an individual who is prepared to undertake risk

and the reward.

� "Entrepreneurship is the process of creating something different with value by devoting

the necessary time and effort, assuming the accompanying financial, psychic and social

risks, and receiving the resulting rewards of monetary and personal satisfaction." ...

Hisrich, and Peters.

This definition stresses on four basic aspects of being an entrepreneur.

i. Entrepreneurship involves creating something new value.

ii. Entrepreneurship requires the devotion of the necessary time and effort though only

those going through the entrepreneurial process appreciate the significant amount of

time and effort it takes to create something new and make it operational.

iii. Entrepreneurship assumes risk in the form of financial lose, psychological tension

and social problems.

iv. Entrepreneurship also involves rewards of independence, followed by personal

satisfaction and money.

Casson (1982), attempts to synthesize some of the attributes and concepts that have been

discussed with the major writers above. He recognizes that the entrepreneur will have

different skills from others. These skills enable the entrepreneur to make judgmental decisions

that involve the allocation or organization of resources.

Benefits and Limitation of Entrepreneurship

People start their own business for a variety of reasons. Some have a bright idea that they

think will make them rich; others find themselves unemployed and start their own business

to survive; some only themselves when they are their own bosses; others want to make a

particular contribution to their community and can see no other way of doing it except by

setting upon their own. The owners of small businesses believe they work harder, earn

more money, and are happier than if they worked for a large company. Generally as it is

stated above, even though people start business for various reasons, the following are

considered as the benefits of entrepreneurship.

1. Opportunity of gain control over your own destiny: owning a business provided

entrepreneurs with independence and the opportunity to achieve what is important to

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them. Entrepreneurs want to “call the shots” in their live, and they use their business to

bring this desire to life. They reap the intrinsic rewards of knowing they are driving

forces behind their businesses.

2. Opportunity to reach your full potential: Too many people find their work boring,

unchallenging, and unexciting. But to most entrepreneurs there is little difference

between work & play: the two are synonymous. Entrepreneurs’ businesses become the

instrument for self-expression and self-actualisation. That is, his/her talent, his/her own

energy—limits entrepreneur’s growth and that…means an entrepreneurial situation.

3. Opportunity to reap unlimited profits: The profits their businesses can earn are an

important motivating factor in the entrepreneur’s decisions to launch companies. One

venture capitalist that has financed many small companies says, “Starting your own

company has always been the best way to create wealth. And even if you don’t get rich

doing it, you will still have more fun.

4. Opportunity to contribute to society & be recognized for your effort. Often, small

business owners are among the most respected & most trusted members of their

communities. Business deals on trust and mutual respect are the hallmark of many

established small companies. These owners enjoy the trust and recognition they receive

from the customers whom they have served faithfully over the years. Playing a vital

role in their local business systems and knowing that their work has a significant impact

on how smoothly the nation’s economy functions in yet another reward for small

business managers.

5. Opportunity to do what you enjoy: A common sentiment among small business owners

is that their work is not work. Most successful entrepreneurs choose to enter their

particular business fields because they have an interest in them and enjoy those lines of

work. They have made their avocation (hobbies) their vocations (work) and are glad

they did! “Find a job doing what you love, and you will never have to work a day in

your life.”

Limitations of Entrepreneurship

Although owning a business has many benefits and provides many opportunities, any one

planning to enter the world of entrepreneurship should be aware of its potential drawbacks.

1. Uncertainty of income; opening & running a business provides no guarantees that an

entrepreneur will earn enough money to survive. Some small businesses barely earn

enough to provide the owner-manager with an adequate income. In a business’s early

days the owner often has trouble meeting financial obligations and may have to live on

savings. The steady income that comes with working for someone else is absent .The

owner is always the last one to be paid.

2. Risk: starting or buying a new business involves risk, and the higher rewards, the

greater the risk entrepreneurs usually face. This is why entrepreneurs tend to have

evaluated risk very carefully. It should be noted that that “people who successfully

innovate and start businesses comes in all shapes and sizes but they do have a few things

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others do not. In the deepest sense, they are willing to accept risk for what they believe

in. They have the ability to cope with a professional life riddled by ambiguity, a

consistent lack of clarity. Most have a drive to put their imprint on what ever they are

creating. And while unbridled ego can be a destructive thing, try to find an entrepreneur

whose ego isn’t wrapped up in the enterprise.

Entrepreneurs face a number of different types of risk. These can be grouped into four

basic areas.

A) Financial risk: in most new ventures the individual puts a significant portion of his or

her savings or other resources at stake. This money or these resources will, in all

likelihood, be lost if the venture fails. The entrepreneur also may be required to sign

personally on company obligations that far exceed his or her personal net worth the

entrepreneur is thus exposed to personal bankruptcy. Many people are unwilling to

risk their savings, house, property and salary to start a new business.

B) Career risk: a question frequently raised by would-be entrepreneurs is whether they

will be able to find a job or go back to their old job if their venture should fail. This is

a major concern to managers who have a secure organizational job with a high salary

and a good benefit package.

To reduce such risk, starting a part-time business is popular gateway to entrepreneurship.

Part-time entrepreneurs have the best of both worlds: they can ease into business for

themselves without sacrificing the security of a steady paycheck and benefits. A major

advantage of going into business part-time is the lower risk in case the venture flops. Many

part-timers are “testing the entrepreneurial waters” to see whether their business ideas will

work and whether they enjoy being self-employed. As they grow, many part-time

enterprises absorb more of the entrepreneur’s time until they become full-time businesses.

C) Family and social risk: starting a new venture uses much of the entrepreneur’s energy

and time. Consequently, his or her other commitments may suffer. Entrepreneurs, who

are married, and especially those with children, expose their families to risks of an

incomplete family experience and the possibility of permanent emotional scars. In

addition, old friends may vanish slowly because of missed get-togethers.

D) Psychic Risk: The greatest risk may to the well being of the entrepreneur. Money can

be replaced; a new house can be built; spouse, children, and friends can usually adapt.

But some entrepreneurs who have suffered financial catastrophes have been unable to

bounce back, at least not immediately. The psychological impact has proven to be too

severe for them.

3. Long hours & hard work: Business start-ups often demand that owners keep

nightmarish schedules. In many start-ups, six-or seven-day workweeks with no paid

vacations are that norm. When the business closes, the revenue stops coming in and the

customers go elsewhere. Even when you own your own business, you still always are

working for someone else—your customers and clients.

4. Lower quality of life until the business gets established; the long hours & handwork

needed to launch a business can take their toll on the rest of the entrepreneur’s life.

Business owners often find that their roles as husband or wives & fathers or mothers

take a back seat to their roles as business founders. Part of the problem is that most

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entrepreneurs launch their business between the ages of 25 and 39, just when they start

their families. It is very tough to give the amount of work that’s required to build a

company without slighting your family. As a result, marriages and friendships are too

often casualties of small business ownership.

5. High level of stress: Starting & managing a business can be an incredibly rewarding

experience, but it also can be a highly stressful. Entrepreneurs often have made

significant investments in their companies, have left behind the safety & security of a

steady paycheck and have mortgaged everything they own to get into business. Failure

may mean total financial ruin, and that creates intense levels of stress and anxiety!

6. Complete responsibility: It is great to be the boss, but many entrepreneurs find that

they must make decisions on issues about which they are not really knowledgeable.

When there is no one to ask, the pressure can build quickly. The realization that the

decisions they make are the cause of success or failure has a devastating effect on some

people. Small business owners discover quickly that they are the business.

Who is an entrepreneur?

Defn. 1: An entrepreneur is a person or one who wants to work for himself or herself.

Defn. 2: An entrepreneur is a person of very high aptitude (desire, interest or passion) who

pioneers change and passes characteristics found in a very small fraction of the

population.

Having the definitions of entrepreneurship or entrepreneurs, there is still a trouble in

identifying entrepreneurs, finding them, determining what they do. Is the owner of out nearby

shop an entrepreneur? The retailer, the wholesaler, the butcher, the computer maintenance

shop? Are there entrepreneurs in big organizations like, limited companies and corporations?

There are no short answers to these questions, and there are no formal guidelines for

classifying entrepreneurs. There is no entrepreneurial licensing procedure and no evidence of

professional status. There are entrepreneurs in different field of areas.

The other important issue related to the question “Who is an entrepreneur?” is traits versus

chrematistics of an entrepreneur. Is an entrepreneur “born” or “made”? The following

discussion is about this issue.

� Varieties of attributes or characteristics of entrepreneurs: are combinations of values,

abilities, and motivations.

� Entrepreneurial Characteristics-Are those specific observable behaviors associated

with successful entrepreneurship.

Several research studies have been carried out to identify the traits of true entrepreneurs. And

still there are certain controversial issues on what makes a person an entrepreneur: Are

entrepreneurs born or made? Are there any special qualities that distinguish entrepreneurs

from others?

At one extreme there is a view that advocates entrepreneurs are born-already endowed/ gifted

with the entrepreneurial qualities, i.e., entrepreneurs are born. At the other end there is a view

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that advocates any person can become an entrepreneur when he/ she is placed in a situation,

which provides the opportunity to practice entrepreneurship, i.e. entrepreneurs are made.

Experience and studies show that reality, however, the development of entrepreneurial traits

and behavior is somewhere in between these extremes, leading to widespread practices of

entrepreneurship education, training and development and creation of conducive and enabling

environment i.e. entrepreneurial traits are more of made. Different entrepreneurial

competencies are identified by different authors and researchers. The following are the major

ones:

McClelland came up with the following ten Personal Entrepreneurial Competencies

(PECs), which were found to be most useful for detecting and strengthening entrepreneurial

potentials.

I. Achievement Cluster:

1. Opportunity seeking and initiative

2. Risk taking

3. Demand for efficiency and quality

4. Persistence

5. Commitment to the work contract

II. Planning Cluster

6. Information seeking

7. Goal setting

8. Systematic planning and Monitoring

III. Power Cluster

9. Persuasion and networking

10. Independence and self-confidence

Other lines of authorities suggested the following qualities:

a) Motivation to achieve

b) The habit of hard work

c) Non-conformity ( sense of independence and desire to set own goals)

d) Strong leadership

e) Good intuitive judgment, common sense and instinct

f) Risk takers

g) Objective approaches

h) Emotional stability

i) Comprehensive awareness

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I::OVATIO: A:D THE E:TREPRE:EUR

THE CREATIVITY PROCESS

Do you think that you are creative?

It is important to recognize the role of creativity in the innovative process. Creativity is the

generation of ideas that result in the improved efficiency or effectiveness of a system.

Creativity is the process that can be developed and improved. Everyone is creative to some

degree however; as is the case with many abilities and talents (e.g. athletic, artistic) some

individuals have a greater aptitude for creativity than others. Also, some people have been

raised and educated in an environment that encouraged them to develop their creativity. They

have been taught to think and act creatively.

Many people incorrectly believe only a genius can be creative. Most people also assume

people are born creative and others are not, or only the gifted or highly intelligent person is

capable of generating creative ideas and insight. Yet, the real barriers to creative thinking are

sometimes the inadvertent “killer phrases” we use in our communication. The following are

the most common idea stoppers even though it is possible to say these are the only ones.

� Can't (said with a shake of the head and an air of finality.)

� That's the dumbest thing I've ever heard.

� Yeah, but if you did that...

� We already tried that--years ago.

� We have done all right so far; why do we need that?

� I don't see anything wrong with the way we're doing it now.

� That doesn't sound too practical

� We've never done anything like that before.

� Let's get back to reality

� We've got deadlines to meet--we don't have time to consider that.

� It's not in the budget.

� Are you kidding?

� Where do you get these weird ideas?

People may not intentionally stop a creative idea, but these simple negative phrases prohibit

people from thinking any further.

Creativity is not some mysterious and rare talent reserved for a select few. It is a distinct way

of looking at the world that is oftentimes illogical. The creative process involves seeing

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relation ships among others have not seen (e.g. modems-using telephones to transfer data

among computers.)

The creative climate

Creativity is most likely to occur when the business climate is right. No enterprise will have

creative owners and managers long if the right climate is not established and nurtured. Some

of the most important characteristics of this climate follow:

� A trustful management that does not over control the personnel

� Open channels of communication among all business members

� Considerable contacts and communication with outsiders

� A large variety of personality type

� A willingness to accept change

� An enjoyment in experimenting with new ideas

� Little fear of negative consequences for making a mistake

� The selection and promotion of employees on the basis of merit

� The use of techniques that encourage ideas, including suggestion systems and

brainstorming

� Sufficient financial, managerial, human, and time resources for accomplishing goals

I::OVATIO:

Innovation is the specific function of entrepreneurship. It is the means by which the

entrepreneur either creates new wealth-producing resources, or endows existing resources

with enhanced potential for creating wealth

Innovation is the process by which entrepreneurs convert opportunities into marketable ideas.

It is the means by which they become catalysts for change.

Entrepreneurs blend imaginative and creative thinking with systematic and logical process

ability. This combination is a key to success. In addition, potential entrepreneurs are always

looking for unique opportunities to fill needs or wants. They sense economic potential in

business problems by continually asking “What if----?” or” Why not---?” They develop an

ability to see, recognize, and create opportunity where others find only problems.

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1.1 Types of innovation

Four basic types of innovation exist. These extend from the totally new to modifications of

existing products or services. In order of originality, these are the four types:

� Invention: the creation of a new product, service, or process, often one that is novel or

untried. Such concepts tend to be "revolutionary"

� Extension: the expansion of a product, service, or process already in existence. Such

concepts make a different application of a current idea.

� Duplication: the replication of an already existing product, service, or process. The

duplication effort, however, is not simply copying but adding the entrepreneur's own creative

touch to enhance or improve the concept to beat the competition.

� Synthesis: the combination of existing concepts and factors into a new formulation.

This involves taking a number of ideas or items already invented and finding a way so

together they form a new application.

1.1.1 Sources of innovation

Innovation is a tool by which entrepreneurs typically exploit change rather than create

change. Although some inventions have created changes, these are rare. It is more common to

find innovations that take advantage of change. The internal and external areas that serve as

innovation sources are presented next.

� Unexpected occurrences. These are successes or failures that, because they were

unanticipated or unplanned, often end up providing to be a major innovative surprise to the

firm.

� Incongruities. These occur whenever a gap or difference exists between expectations

and reality. An incongruity existed between what an entrepreneur felt is needed and the way

business was currently conducted.

� Process need. These exist whenever a demand arises for the entrepreneur to

innovative and answer a particular need. The creation of health food and time saving devices

are examples.

� Industry and market change. Continual shifts in the market place occur, caused by

development such as consumer attitudes, advancements in technology, industry growth, and

the like. Industries and markets are always undergoing changes in structure, design, or

definition. An example is found where hospital care has undergone radical change and where

home health care and preventive medicine have replaced hospitalisation and surgery as

primary focus area. The entrepreneur needs to be aware of and seize these emerging

opportunities.

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� Demographic changes. These arise from trend changes in population, age, education,

occupations, geographic locations, and similar factors. Demographic shifts are important and

often provide new entrepreneurial opportunities.

� Perceptual changes. These changes occur in the people's interpretation of facts and

concepts. They are intangible yet meaningful. Perception can cause major shifts in ideas to

take place. The fitness craze, caused by the perceived need to be healthy and physically fit,

has created a demand for both health foods and health facilities throughout the country.

� Knowledge-based concepts. These are the basis for the creation or development of

something brand new, trying into our earlier discussion of invention as a type of innovation.

Invention are knowledge based; they are the product of new thinking, new methods, and knew

knowledge. Such innovations often require the longest time period between initiation and

market implementation because of the need for testing and modification.

Major Innovation Myths

Presented next is a list of the commonly accepted innovation myths, along with reasons why

these are myths and not facts.

Myth 1: innovation is planned and predictable: This myth is based on the old concept that

innovation should be left to the research and development (R&D) department under planned

format. In truth, innovation is unpredictable and may be introduced by any one.

Myth 2: technical specifications should be thoroughly prepared: Thorough preparation often

takes too long. Quite often it is more important to use a try/test/revise approach.

Myth 3: creativity relies on dreams and blue-sky ideas: Accomplished innovators are very

practical people and create from the opportunities left by reality--not daydreams.

Myth 4: big projects will develop better innovations than smaller ones: This myth has been

proven false time after time again. Larger firms are now encouraging their people to work in

smaller groups, where it often is easier to generate creative ideas.

Myth 5: technology is the driving force of innovation and success: Technology is certainly

one source for innovation, but it is not the only one. Moreover, the customer or market is the

driving force behind any innovation. Market-driven or customer-based innovations have the

highest probability of success. A good example is found in Polaroid's polar vision, a television

camera that allowed for instant playback of the film. Polaroid hit the market with this

technological advance at the same time videocassette recorders arrived. This result: Polaroid's

product was rejected, and the company lost millions of dollars.

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Principles of Innovation

Potential entrepreneurs need to realize innovation principles exist. These principles can be

learned and, when combined with opportunity, can enable individuals to innovative. The

major motivation principles follow:

� Be action oriented: Innovators always must be active and searching for new ideas,

opportunities, or sources of innovation.

� Make the product, process, or service simple and understandable: People must

readily understand how the innovation works.

� Make the product, process, or service customer base: Innovators always must keep

the customer in mind. The more an innovator has the end user in mind, the greater the chance

the concept will be accepted and used.

� Start small: Innovators should not attempt a project or development on a grandiose

scale. They should begin small and then build and develop, allowing for planned

growth and proper expansion in the right manner and at the right time.

� Aim high: Innovators should aim high for success by seeking a niche in

the marketplace.

� Try/test/revise: Innovators always should follow the rule of try, test, and revise. This

helps work out any flaws in the product, process, or service.

� Learn from failures: Innovation does not guarantee success. More important, failures

often give rise to innovations.

� Follow a milestone schedule: Every innovator should follow a schedule that indicates

milestone accomplishments. Although the project may run ahead or behind schedule, it still is

important to have the schedule in order to plan and evaluate the project.

� Reward heroic activity: This principle applies more to those involved in seeking and

motivating others to innovative. Innovative activity should be rewarded and given the proper

amount of respect. This also means tolerating and, to a limited degree, accepting failures as a

means of accomplishing innovation. Innovative work must be seen as heroic activity that will

reveal new horizon for the enterprise.

� Work, work, and work: This is a simple but accurate exhortation with which to

conclude the innovation principles. It takes work, not genius or mystery, to innovate

successfully.

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E:TREPRE:EURIAL DECISIO: A:D PROCESS

Introduction

Each day thousands of individuals ask the difficult question, “Should I start my own

business?” Most of the populace answer for themselves that they would like to be in business

for themselves. As we can see in “Chapter Two”, the driving forces behind this desire to start

a new venture is that the push or pull factors that motivate entrepreneurs toward to the

business world. Amongst others, the most important driving force behind this desire to start a

new venture is the desire to be one’s own boss, to be independent. Since there is no definitive

measurement developed that makes an entrepreneur successful, each individual need to

carefully evaluate his or her situation though several methods of self-assessment models and

develop the method or steps when he or she to start a new venture.

Entrepreneurial Background

Although a variety of backgrounds are very important for the success of entrepreneurs, only a

few backgrounds have differentiated the entrepreneur from the general populace or managers.

These backgrounds include childhood family environment, education, personal values, age

and work history. (Generalized Research Results)

1. Childhood Family Environment

a. Birth Order -Most female executives tend to be the firstborn. Because the first child

receiving special attention and thereby developing more self-confidence.

b. Parent’s Occupation-they tend to have self-employed or entrepreneurial fathers.

c. Relationship with Parents-from parents that are supportive and encourage

independence, achievement, and responsibility.

2. Education

Important in the upbringing of the entrepreneurs: (formal, informal, non-formal)

• Level of education.—helps to cope with problems confronted

• Type of training—correcting divinities in business training.

• Areas of finance, strategic planning, marketing, and management, and

Communication

3. Personal Values

It also can be used to differentiate entrepreneurs from managers, unsuccessful entrepreneurs,

or even from the general public.

Most entrepreneurs:

• Are effective leaders, this does not distinguish them from successful managers. While

personal value scales for leadership as well as support aggression, benevolence,

conformity, veracity (actuality), and resource seeking

• provide superior quality products, quality service to customers,

• are flexible-ability to adapt to changes in the marketplace,

• have high-caliber in management, and

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• Are honest and ethical in business practices.

• Are usually winners

4. Age

Important to differentiate between entrepreneurial age (the age of the entrepreneur reflected

in the experience) and chronological age

• Entrepreneurial experience is one of the best predictors of success, particularly when

the new venture is in same field as his/her business experience.

• Chronological age, most entrepreneurs initiate their entrepreneurial careers between

the ages of 22 and 55.

• earlier starts in an entrepreneurial career are better than later ones

5. Work History

Dissatisfaction with various aspects of one’s job - challenge, absence promotional

opportunities, frustration, and boredom

Exposures are “corridors” of new venture opportunities than individuals in other career paths.

But, it is generally easier to start a second, third, or fourth venture than it is to start the first

one.

The process of starting a new venture is embodied in the entrepreneurial process which

involves more than just problem solving in a typical management position. Once the

entrepreneur has been appraised his or situation, he or she will find, evaluate, and develop an

opportunity by overcoming the forces that resist the creation of something new. The process

has five distinct phases: (1) identifying conditions of business environment and developing

personal goals, (2) identification and evaluation of challenges to start a new venture (3)

development of the business plan, (4) determination of the required resources and (5)

management of the resulting enterprise

1 Setting Personal Goals

Before any strategic decision can be out lined, an individual must establish realistic and

specific goals. These goals must respond to the question; where do I want to go? What and

When I want to accomplish? Goals are the targets or ends that one wants to reach. A goal is

broad statement of the ultimate results of the change being undertaken. These goals must be

written. Goals that are not written down are not much better than wishes.

Goals versus objectives

There is no common understanding regarding the difference between goals and objectives.

There are three views regarding the similarities and difference of the two terms. The first view

argues that goals are more specific than objectives. Rather goals are operational (specific)

objectives. (Griffin, 2000)

The other category discussed that goals are broader than objectives. Goals - by definition are

"Outcome statements that define what an organization/individual is trying to accomplish

programmatically." Goals are usually a collection of related programs and a reflection of the

major action of the organization/individual. On the other hand, Objectives by definition are

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described as being very precise, time-based, and measurable actions that support the

completion of a goal. Objectives must:

• Relate directly to the goal

• Be clear, concise, and understandable

• Be stated in terms of results

• Begin with an action verb

• Specify a date for accomplishment

• Be measurable

• Must deal with a major subject

The third category noted that objectives and goals are one and the same, so we can use them

interchangeably. I prefer to use these terms interchangeably.

Characteristics of goals/objectives

1. Goals have hierarchies.

Individual or organizational goal can be arranged in hierarchy: Vision, mission, strategic

objectives, intermediate objectives and tactical/ operational or short-term objectives. In

chapter one, we have covered analysis of personal strength and weakness. With this

understanding as a foundation, the individual must then establish his own vision and mission.

i. Vision. A vision is a mental image of a possible and desirable future state of the individual.

The best visions are ideal and unique. If a vision conveys an ideal, it communicates standard

of excellence and a clear choice of positive values. If the vision is also unique, it

communicates and inspires pride in being different from other individuals.

ii. Mission statement- Are based on vision that outlines the individual's purpose, premises,

values and directions in a relatively specific manner.

iii. Strategic objectives. These are goals that:

• Reflect long -term needs (vision & mission)

• Specifies what you want to achieve within 5 years

• Require broad view analysis

iv. Tactical/intermediate goals- focus on how to operationally actions necessary to

Achieve strategic objectives. They are derived from strategic goal.

v. Operational objective. Their concern is with short-term issues associated with the tactical

goals. These goals more detail and are based on tactical goals.

2. Goals are multiple in numbers

Individuals may set different kind of goals at one time and sometimes can experience conflict

or contradiction among goals. Goals can be:

• Educational,

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• Financial-making and saving or borrowing money

• Spiritual- to help poor people and be religious person

• Personal development- achievement of highest degree in any field

• Physical- health and fitness,

• Social- interpersonal relationship outside home (cultural, social and professional

association)

• Career satisfaction- work and profession

• Hobbies-leisure and creation

3. Goals have priority.

Individuals must have the concept of prioritizing goals. Prioritizing goals (optimizing)

involves balancing and reconciling possible conflicts between or among goals. Goals conflict

with one another since there is limitation of resources (time, finance, and other recourses).

Hence, the individual must look for inconsistencies and decide whether to pursue one goal to

the exclusion of another or to find a midrange target between the extremes.

4. Goals should be SMART.

An effective expression of the important goal setting guidelines is that you should set

SMART goals. What the SMART goal setting guideline actually means is that your goals

should be Specific, Measurable, Attainable, Rewarding and Timely. Neglecting one of these

guidelines minimizes the probability of achieving the goals.

Specific- With specific goals you can clearly see what it is you want to achieve and have

specific standard for that achievement. In making your goals specific it is important that you

actually write them is crucial in all goal-setting guidelines. For example, when you set a goal

regarding scoring a mark on a subject, don't say just to score good mark, rather make specific

what good mark mean to you.

Measurable- For a goal to be measurable you need a way to measure the progress and some

specific criteria that will tell you when you can stop and when the goal is achieved. Feeling

the progress is important for you to stay motivated and enjoy the process of achieving the

goals.

Attainable- An attainable is a goal for which you see a realistic path to achievement and

reason that you get there. This does not mean that the lower you aim the more likely you

reach success. It is well known that goals that work best have a challenge in them. They are

chosen as ambitious as possible, but still attainable.

Rewarding - a goal is rewarding when you have clear reason why you want to reach the goal.

It is advisable to have your specific reason and expected rewards in writing. Imagine how you

are going to feel when the goal is finally achieved. This will ensure that the goal is really

worth achieving. Then, when every time you get stuck and do not feel motivated enough, read

your reasons. This is a known and very powerful practical technique of how to get through

difficult moments and not quit.

Time bound- The final requirement of goal setting guidelines is that your goal should have a

specific time limit. Time is the price you pay for the reward form achieving a goal. Setting the

deadline will protect you from paying higher price than the goal is worth. This is also your

protection from procrastination.

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Importance of setting SMART Goals

1. They provide guidance and a unified direction for people. Goals can help everyone

understand where the individual is going and why getting there is important.

2. Goal setting practice strongly affects other aspects of planning. Effective goal setting

promotes good planning and good planning facilities future goal setting. The strong

growth goal encourages individuals to plan for development by looking for

opportunities. Similarly, they must also be alert for competitive threats and new ideas

that will help facilitate future development.

3. Goals can serve as source of motivation. We need to decide what we want to achieve

so that we can plan how to get there. Once we know a desired outcome, we can gain

greater concentration, constantly focused on our desired future performance. Goals

that are specific and moderately difficult can motivate people to work harder,

especially if attaining the goal is likely to result in rewards.

4. Setting goals help minimize costs. Because objectives should be stated before we

begin to exert our resource, time and effort, they provide us the means to organize our

efforts toward accomplishing the desired objectives successfully.

5. Goals provide an effective mechanism of evaluation and control. The major purpose of

goal setting is to improve performance. By clearly stating the results we want to

accomplish, we can identify if we have gained the appropriate skills and knowledge.

This means that performance can be assessed in the future interest of how successful

today's goals are accomplished.

Modes of formulating goals

1. Doing -activities to be performed

I want to do or I will work on...

2. Owning- possession of some thing

I want to own... or I will to have...

Note: owning is very often just a means to reach certain goals like, to own a car can be

a means to transport something, to be mobile or to present a certain status.

3. Changing one- setting personal standards in position, experience and status.

I want to become. . .

I want to achieve

Goal setting process

Goal setting involves certain logical and interrelated tasks. Some of the procedures are noted

below. But you can use your own procedures

1. Describe long term and short goals.

2. Relate to what you want to achieve in life (vision and mission).

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3. Outline the action plan including activities, responsibilities and timeframe.

4. Identify resources required to accomplish the intended goals timely.

5. Set performance standards or measurement criteria.

6. Consider personal and environmental obstacles

Evaluating the Effect of Society/Culture on Entrepreneurs

Culture or sub-culture of a given country or region or ethnic group places a greater influence

on the emergence and development of entrepreneurs. Culture in its broadest sense definition

refers to that part of the total collection of human action and (its products) which is socially,

as opposed to genetically transmit. A very popular definition is that of Edward Burnet Tyler:

Culture of civilization is that complex whole which includes knowledge, belief, art, moral,

law, custom, and other capabilities and habits acquired by man as a number of societies.

Culture is also defined as a shared set of beliefs, values, and patterns of behavior common to

all groups of people. Most cultural lessons are learned by observing and initiating role models

as we go about our daily affairs. Often we are unaware that we are learning cultural lessons as

we observe our parents, friends and family.

When we enter a work environment, we are usually young adults, with most of our values

firmly ingrained. We will become socialized to the practice of our new work environment, but

that is only in the context of the culture in which we have grown up and lived. National

cultures differ mostly at the level of basic values and affect ways of management in those

countries, as well as way of managing individuals from those countries.

Since much of culture operates outside our awareness, frequently we do not even know what

we know. We consciously learn what to notice and what to not to notice, how to dived time

and space, how to walk and talk and use our bodies, how to behave, as men or women, how to

relate to others, how to handle responsibility, where experience is seen as whole or

fragmented.

Let us consider the following particular points in our cultural setting regarding

entrepreneurship.

1. The value given to businessmen.

Values represent the deepest level of culture. They are broad feeling, often unconscious about

what is good or bad, beautiful or ugly, normal or abnormal. Undoubtfully, the culture, which

gives greater value for those who create and manage their own business, promotes

entrepreneurship. But there could be a culture that leaves entrepreneurship for academic

misfits. So evaluate the value given to our businessmen. Compare the values given to an

ordinary merchant with that of an externally employed manger of any local firm.

2. Encouraging versus discouraging word .

Upon informal research conducted on 450 college students, it was found that there are about

II-words, which are used to disgrace the value of the businessmen by associating such

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people's strong motive to make money. Unfortunately, there were only 4-words used to praise

those who create their own business. Really these words are the manifestation of our culture

that discourages entrepreneurship.

3. The value given for time.

As frequently stated, creating and managing one's own business require devotion of time.

Time is limited and freely given resource to all equally. Japanese are very conscious of time

and expect people to be punctual for appointments. Let you think of something about time.

How do you value your time? Suppose you lost your ten Birr and missed a half-day in doing

nothing. Which event makes you to feel more? The attitude toward effective usage of time

affects venture creation.

4. Saving.

What do you feel if you find an instructor while using Anbessa City Bus? What nickname do

you give to a person who is exacting in saving? What will be his value if he is so generous/

charitable in covering some of your common costs?

5. Social life.

Do you think that your social life (the role that you have to play in the surrounding) affects

your future determination? Do not go far! Just consider greetings! Japanese greet each other

with a bow (bend over), the lower the bow the more respectful the greeting. They don't shake

hands normally, but in business circles, they will live with nations. Americans normally can

combine a bow and a handshake when meeting Japanese, the bow coming first, shaking hands

lightly, not firmly. Many Chinese prefer not to even shake hands and would rather give a

moderate bow.

How does that compare to our tradition of a strong handshake? Some time times our greeting

(though we will meet daily) extends to the extent of telling/ asking not only our story but also

our families or relatives.

6. Providing immediate feedback.

Our behavior of receiving and forward feedback is extremely influenced by our culture. What

do you feel if someone gives feedback on your weak side? What is your response when you

see individuals doing wrong regardless of your personal interest you have with the individual?

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Men versus women entrepreneurs

Study Generalizations about men and women entrepreneurs is the following:

Men entrepreneurs

Men make up the majority of people who start and own their own businesses.

Men are often motivated by the desire to control their own destinies to make things happen.

This drive often stems from disagreements with their bosses or a feeling that they can run

things better.

Males often list investor’s bank loans or personal loans in addition to personal funds as

sources of start-up capital

In the filed of their ventures, men more often are recognized specialists in their fields or have

attained competence in a variety of business skills. In addition, their experience is often in

manufacturing finance or technical areas.

Women entrepreneurs

Women tend to be more motivated by independence and achievement arising from job

frustration in not being.

Women often leave a previous occupation with only a high level of job frustration and

enthusiasm for the new venture rather than experience making the transition more difficult.

Women usually rely on personal assets or savings.

Most women usually have administrative experience which is limited to the middle-

management level usually in more service related areas such as education secretarial work, or

retail sales.

Women are more likely to start a business in a service related area-retail public relations

educational services where men are more likely to enter manufacturing construction, or high-

tech fields. The result is often smaller female-owned businesses with lower net earnings

:on - Entrepreneurial Qualities/Profiles

There are certain personality types, which can lead even the brightest entrepreneurs with the

best ideas into bankrupting. An entrepreneur with an excess of non-entrepreneurial

characteristics may need to modify it in order to have a higher probability in successfully

launching a new venture. Eight of these personality types are profiled as follows.

1. Simplicity sues - is an entrepreneurial type who always thinks everything a lot simpler

than it is to create a successful business through one or more easy solutions. This

entrepreneur can make even the most impossible deal seem possible.

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2. Shotgun some - is an entrepreneurial type who quickly identifies new promising

business opportunity but rarely he ever follow through on the opportunity to create a

successful new venture.

3. Prima Donna Paul-is an entrepreneurial type who is so in love with his own idea that

feels everyone is out to take his ideas and take advantage of him while the true

entrepreneur seeks out feedback from other actively.

4. Ralph the Rookie - is an entrepreneurial type who is well grounded in theory but

lacks real - world business. Yet successful entrepreneurs are opportunity and goal

oriented.

5. Meticulous Mary - is perfectionist entrepreneurial type who is used to having things

under control that he or she cannot manage during a catastrophe and cannot handle

periods of ambiguity and chaos.

6. Underdog Ed- is an entrepreneurial type who is not comfortable with actually

transforming the invention into tangible business success. He/she likes to attend

seminars and discuss problems but does not like putting things into actions so needs a

strong managerial team.

7. Hidden Agenda Harry - is one who does not have the right motives and objectives

for developing and expediting a new enterprise.

8. Inventor Irving- is one who is more concerned about the invention itself rather than

creating and expediting a business.

N. B All these non - entrepreneurial characteristics can be found in anyone but can be

modified into entrepreneurial characteristics, as the entrepreneurial qualities are more of

learned or acquired.

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Crafting a Business Plan

� The more concentrate and complete the plan, the more likely it is to earn the

respect of outsiders and their support in necessary financial matter. Jess Werner

� An objective without a plan is a dream. W.J. Reddin

� If you don't have the road map, you really are putting yourself at a serious

disadvantage. James A. Lowery

Business planning tends to get treated as an academic exercise by many writers and

consultants. They talk about such things as '' the planning process,'' ''deriving a strategy,’’

‘‘the organizational hierarchy,'' and ''modeling approaches.'' However, planning should not be

viewed as an academic exercise. Entrepreneurs can enhance their chance of success by taking

time to write a business plan. The process of thinking about your business venture and then

articulating it on paper will assist you in thinking through how you are going to accomplish

your goal. There are many successful entrepreneurs who will tell you their business plan was

instrumental in keeping them focused on their objectives. Entrepreneurs are not the only

business people who write and use business plans. Many large corporations engage in

planning. The anatomy of their plans resembles in many aspects the basic plan.

What is a business plan?

As basic as this question may seem, it is the most appropriate place to begin the planning

process. Having the right view of the business plan will help you develop the kind of plan that

will do you and your business the most good.

All kinds of definitions are thrown around about what a business plan is. The ''road map''

metaphor used by James Lowry is appropriate one. Others take account of tactics and strategy.

In this chapter we see three definitions of a business plan, partly for the sake of contrast. Both

are accurate.

Definition 1:

A business plan is a document that convincingly demonstrates that your business can sell

enough of its product or service to make a satisfactory profit and be attractive to potential

backers.

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Definition 2:

A business plan is a written summary of an entrepreneur proposed business venture, its

operational, its financial details, its marketing opportunities and strategy, and its managers’

skills and abilities.

Definition 3:

A business plan is a selling document. It sells your business and its executives to potential

backers of your business, from bankers to investors to partners to employees. A business plan

should be a selling document. It should sell the business to stake holders. The business plan

describes the direction the company is taking, what its goals are, where it wants to be and how

it is going to get there. Be aware that a business is not a document that you sit down and write

over a weekend. Invariably, it is the result of many weeks and months of research and

evaluation. A business runs without a plan is reactive instead of proactive. In today's changing

world, a businessperson must plan in order to succeed. Without a plan, it is difficult to know

when additional employees, materials, or machinery will be required to support growth, and

when products or services will be ready for release to the market. In short, the business plan is

the entrepreneur's best insurance against launching a business destined to fail or mismanaging

a potentially successful company.

Many entrepreneurs agonize about writing a business plan because they find it so difficult to

get started. As you go through the start-up process of evaluating ideas, considering

prospective employees, and calculating cash flow needs, you should take various points that

raised in this section.

The business plan allows the entrepreneurs to exploit the opportunities that arise in the life of

a business. A written business plan becomes entrepreneur's business representative, much as

a sales person or executive serves as its representative during sales and conference

presentations and meeting.

Why write a business plan?

Every entrepreneur has a business plan. The problem is that more often than not, it is in

his/her head and is not written down. The problem is, a plan that is in your head is a lot

different from one that is written down. It is less precise. It is more fluid. It is unknown to

others working with you.

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The difference between a mental plan and a written plan help explain why transferring the

plan from your head to paper is very challenging. If you talk to entrepreneurs who have gone

through the process of writing a complete business plan, you invariably learn that it was one

of the most difficult tasks they ever accomplished. This is understandable, when you stop to

think about it. Few of us really enjoy exerting the discipline required to turn into writing

something as demanding and complex as the workings of a business.

A plan is a reflection of its creator. It should demonstrate that the entrepreneur has thought

seriously about the venture and what will make it succeed. Preparing a solid plan demonstrates

that the entrepreneur has taken the time to commit the idea to paper. Building a plan also

forces the entrepreneur to consider both the positive and the negative aspects of the business.

A detailed and thoughtfully developed business plan makes a positive first impression on

those who read it. In most cases, potential lenders and investors read a business plan before

they ever meet with the entrepreneur behind it. Sophisticated investors will not take the time

to meet with an entrepreneur whose business plan fails to reflect a serious investment of time

and energy. They know that an entrepreneur who lacks the discipline to develop a good

business plan likely lacks the discipline to run a business.

An entrepreneur cannot allow others to prepare the business plan for him or her because

outsiders cannot understand the business nor envisioned the proposed company as well the

entrepreneur can. The entrepreneur is the driving force behind the business idea and is the one

who can best convey the vision and the enthusiasm he has for transforming that idea into a

successful business. Also, because the entrepreneur will make the presentation to potential

lenders and investors, he must understand every detail of the business plan. Otherwise, an

entrepreneur cannot present it convincingly, and in most cases the financial institution or

investors will reject it. But it is wise to seek the advice and assistance of outside professionals.

There are many extremely important reasons for writing a business plan.

1. Obtaining bank financing: For most banks, it is usually enough that an applicant provides

past and current financial statements to get a formal hearing of a loan. But in today’s world,

just getting a hearing is not enough. Because more businesses are seeking bank financing than

banks have money available, only those businesses that make the best case will receive funds.

A business plan helps get you apart from the crowd. Companies that submit plans

immeasurably improve their chances of getting the funds they seek.

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Keep in mind that bankers are nervous, averse to risk. A written business plan carries an

important message even before it is read; it says the company’s executives are serious enough

to do formal planning. That is an important message because bankers believe that those who

don’t and more deserving of bank funds.

2. Seeking investment funds: Venture capitalists and others investors require a business plan

from any company that wants to be taken seriously for funding. It is the first thing most ask

for, much as a personnel manger asks job applicants for a resume investors use business plans

as a screening device, looking to be turned on to a business with a significant growth potential

when something catches their eyes, they read more carefully and, not they are still intrigued,

they will come back the executives for further discussion.

3. Arranging strategic alliances. Strategic alliances are arrangements between large and

small companies to carryout joint research, marketing, and other activities. They have

become more common in the last few years. For small companies, arranging a strategic

alliance with a large company can mean gaining access to important financial, distribution

and other resources. But before a large company will even consider a strategic alliance, its

executives will want to examine a smaller company’s business plan.

4. Obtaining large contracts: Smaller companies seeking to obtain a large chunk of business

from a major corporation can encounter a common obstacle. It comes when the corporate

representative says something like: “everyone knows who we are, but very few people know

who you are. More important, we don’t know whether you will be around long enough to fill

all the obligations we expect for the big bucks we will be paying you.” At this point,

producing a business plan can go a long way toward reassuring a corporation. The business

plan demonstrates that you’ve thought well beyond next week and next month__ that you are

thinking ahead several years and have plans for what you will accomplish.

5. Attracting key employees: When a new or early-stage company goes to hire top managers,

it faces a difficulty unlike large companies. A prospective manager your company wants to

hire may be considering leaving a secure job with a larger business and wondering how long

your company is going to be around. If he or she gets too insecure, you may not convince that

persons to join your company.

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Once again, a business plan serves an important purpose in reassuring the prospect that you

are thinking ahead and have specific plans for the future. In the case of recruiting, it can also

save you much valuable time explaining all your plans and answering the many questions a

prospective manger is likely to ask. That is, a business plan can save a lot of conversation,

besides instilling the necessary confidence to snare that hot shots.

6. Completing mergers and acquisitions: Whether you want to sell your company or acquire

another one, a business plan can go a long way toward helping you stand out from the crowd.

And in today’s frenzied merger/acquisition world, that can be very important. When you go

to sell your company, potential buyers who are looking at many companies will scrutinize

you.

Similarly, not you are doing the acquiring; you will be looking at many companies before you

decide to plunge ahead. Should you be in competition to acquire a business, your business

plan can once again inspire the confidence essential to completing the deal.

7. Motivating your management team: One of the major problems confronting growing

companies is communicating company’s strategy and business approach with in the company

so everyone is working toward the same goals. When individuals in a small company have

different visions about the company’s strategy, customers may become confused about what

the company is trying to accomplish. A written business plan that is based on input from all

members of the company’s management team and distributed to all managers ensures that

everyone understands where the company is headed. In the process, the plan serves as a

motivational tool by laying out the company’s financial, marketing, and production goals.

Other benefits are derived from a business plan for both the entrepreneur and the financial

sources that read it and evaluate the venture. Specifically for the entrepreneur, the following

benefits are gained:

• The time, effort, research, and discipline needed to put together a formal business plan

force entrepreneur to view the venture critically and objectively.

• The competitive, economic, and financial analyses included in business plan subject

the entrepreneur to close scrutiny of his or her assumptions about the venture’s

success.

• Since all aspects of the business venture must be addressed in the plan, the

entrepreneur develops and examines operating strategies and expected results for

outside evaluators.

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• The business plan quantifies objectives, providing measurable benchmarks for

comparing forecasts with actual results.

• The completed business plan provides the entrepreneur with a communication tool for

outside financial sources as well as an operational tool for guiding the venture toward

success.

The financial sources that read the plan derive the following benefits from the business plan:

• The business plan provides for financial sources the details of the market potential and

plans for securing a share of that market.

• Through prospective financial statements, the business plan illustrates the venture’s

ability to service debt or provide an adequate return on equity.

• The plan identifies critical risks and crucial events with a discussion of contingency

plans that provide opportunity for the venture’s success.

• By providing a comprehensive overview of the entire operation, the business plan

gives financial sources a clear, concise document that contains the necessary

information for a thorough business and financial evaluation.

• For a financial source with no prior knowledge of the entrepreneur or the venture, the

business plan provides a useful guide for assessing the individual entrepreneur’s

planning and managerial ability.

Elements/Components of a Business Plan

There are no substitutes for a well-prepared business plan, and there are no short cuts to

creating one. Each business plan is unique and must be tailor made because each business is

unique. So the plans are not cast in stone: Entrepreneurs may want to make alterations to suit

the specifics of their business. The elements of a business plan may be standard, but how

entrepreneurs tell their story should be unique and reflect their personal excitement about the

new venture. Although building a business plan doesn’t guarantee success, it does raise an

entrepreneur’s chance of succeeding in business.

Example: if you were making a journey to a particular destination through unfamiliar,

harsh, and dangerous territory, would you rather ride with someone equipped with a road map

and a trip itinerary or with someone who didn’t believe in road maps or in planning trips,

destinations, and layovers?

A business plan typically ranges from 25 to 55 pages in length. Shorter plans typically are

too sketchy to be of any value and those much longer than this run the risk of never getting

used or read. However, entrepreneurs must recognize that, like every business venture, very

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business plan is unique. An entrepreneur should view the following elements as a starting

point for building a plan and should modify them as needed to better tell the story of his/her

new venture.

Cover page: The cover of the document is often the ‘’ First Impression’’ of a business for any

interested parties or investors. The purpose of a cover is to tell the reader (bankers, investor,

or other stakeholder) what the document is about. The cover page should say the words

‘’business plan,’’ and should include:

• Business name

• Company logo

• Address

• Telephone number

• Fax number

• E-mail address

• The founder’s/chief executive’s name

• Other contact information

The cover should be attractive and professional looking. Fonts used should be easily read, and

color contrasts should be pleasant to the eye.

The table of content: This should include a logical listing of all the business plan’s sections,

together with sections and page numbers. Be sure to list headings for the major sections as

well as for important subsections.

The executive summary: To summarize the presentation to each potential financial

institution or investor, the entrepreneur should write an executive summary. This is the single

most important section of the business plan. That is because most readers- especially lenders

and investors- turn to it first and decide whether to take the rest of the plan seriously. It should

be concise and should summarize all of the relevant points of the proposed deal. The

executive summary presents the essence of the plan in a capsulated form, i.e. it is the business

plan in miniature. It should explain the purpose of the financial request, the birr amount

requested, how the funds will be used, and how (and when) any loan will be repaid. It should

be logical, clear, interesting- and exciting.

The executive summary is designed to capture the reader’s attention and imaginations,

enticing them to read more and conveying the flavor of the rest of the plan. When readers

finish the executive summary, they should have a good sense of what you are trying to do in

your business.

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The executive summary should be no longer than two type written pages. Capturing an entire

business plan within two pages sounds like a difficult task. It is better entrepreneurs begin the

process of putting together their business plans by writing a draft of the executive summary,

then putting together the full plan, and finally revising the executive summary when

everything else has been completed.

Business description: In this section entrepreneurs provide a detailed description of their

business. An excellent question to ask yourself is: “what business am I in?” in answering this

question include your products, market and services as well as thorough description of what

makes your business unique. Remember, however, that as you develop your business plan,

you have to modify or revise your initial questions.

The business description section is divided in to three primary sections. Section 1 actually

describes your business, section 2 the product or service you will be offering and section 3 the

location of your business, and why this location is desirable?

• Business description: when describing your business, generally you should explain:

� Legalities—business forms: proprietorship, partnership, and corporation. The

licenses or permits you will need.

� Business types: merchandizing, manufacturing, or service.

� What your product or service is,

� Is it a new independent business, a takeover, an expansion, a franchise?

� Why your business will be profitable? What are the growth opportunities? Will

franchising impact on growth opportunities?

� When your business will be open (day, hour)?

� What you have learned about your kind of business from outside sources (trade

suppliers, bankers, other franchise owners, publications).

In the description of the business, describe the unique aspects and how they appeal to

consumers. Emphasize any special feature that you feel will appeal to customers and explain

how and why these features are appealing. The description of your business should clearly

identify goals and objectives and it should clarify why you are, or why you want to be, in

business.

• Product/service: the business owner should describe the company’s overall product

line, giving an overview of how customers use its goods or services. Drawings,

diagrams, and illustrations, may be required if the product is highly technical. It is best

to write product and service descriptions so that laypeople can understand them. The

entrepreneur should include a summary of any patent, trademarks, or copyrights

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protecting the product or service from infringement by competitors. Finally, the

owners should honestly compare the company’s product or service with those of

competitors, citing specific advantages or improvements that make his goods or

services unique and indicating plans for creating the next generation of goods and

services that will evolve from the present product line.

Try to describe the benefits of your goods or services from your customer’s perspective.

Successful business owners know or at least have an idea of what their customers want or

expect from them. This type of anticipation can be helpful in building customer

satisfaction and loyalty. And, it certainly is good strategy for beating the competition or

retaining your competitiveness. Describe

� What you are selling

� How your product or service will benefit the customer

� Which product/service is in demand?

� What is the different about the product or service your business is offering

The location: the location of your business can play a decisive role in its success or failure.

Your location should be built around your customers, it should be accessible and it should

provide a sense of security. Most authorities on small business would quickly agree that

failing to do your homework in searching for the best location is a serious mistake. Too many

entrepreneurs never look for a location beyond their own home cities or towns. When

entrepreneurs stay in this “comfort zone,” they often fail to discover locations that would be

far superior and contribute significantly to the success of their own venture. Consider these

questions when addressing this section of your business plan:

� What are your location needs

� What kind of space will you need

� What is the desirable? The building desirable?

� It is easily accessible? Is street lighting adequate?

� Are markets shift or demographic shifts occurring?

The marketing plan

Marketing plays a vital role in successful business ventures; hence it should be the crucial

concern of entrepreneurs. Every entrepreneur must, therefore, describe the company’s target

market and its characteristics. Defining the target market and its potential is one of the most

important _and most difficult _parts of building a business plan. Building a successful

business depends on an entrepreneur’s ability to attract real customers who are willing and

able to spend real money to buy its products or services. Perhaps the worst marketing error an

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entrepreneur can commit is failing to define his target market and trying to make his business

“everything to everybody.” The key element of a successful marketing is to know your

customers_ their likes, dislikes, expectations. By identifying these factors, you can develop a

marketing strategy that will allow you to arouse and fulfill their needs.

Identify your customers by age, sex, income/educational level and residence. At first, target

only those customers who are more likely to purchase your product or service. As your

customer base expands, you may need to consider modifying the market plan to include other

customers.

Your marketing plan should be included in your business plan and contain answers to the

questions outlined below.

� Who are my target customers (age, sex, income level, and other demographic

characteristics)?

� Where do they live, work, and shop?

� How many potential customers are in my company’s trading area?

� Why do they buy? What needs and wants drive their purchase decisions?

� What can my business do to meet those needs and wants better than my competitors?

� Knowing my customer’s needs, wants, and habits, what should be the basis for

differentiating in their minds?

Successful entrepreneurs know that a solid understanding of their target markets is the first

step in building an effective market strategy. Indeed, every other aspects of marketing depend

on having a clear picture of the customers and their unique needs and wants.

The marketing plan comprises the following:

1. Competition: competition is a way of life. We compete for jobs, promotions,

scholarships to institutes of higher learning, in sports and in almost every aspect of our

life. An entrepreneur should discuss the new venture’s competition. Failing to assess

competitors realistically makes entrepreneurs appear to be poorly prepared, naïve, or

dishonest. Gathering information on competitors’ market shares, products, and

strategies is usually not difficult. Trade associations, customers, industry journals,

marketing representatives, and sales literature are valuable sources of data. This

section of the plan should focus on demonstrating that entrepreneur’s business has an

advantage over its competitors.

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Questions like these can help you:

� Who are the company’s key competitors?

� What are their strengths and weaknesses?

� What are their strategies?

� What image do they have in the marketplace?

� How successful are they?

� What distinguishes the entrepreneur’s product or service from others already

on the market, and how will these differences produce a competitive edge?

This section of the plan should demonstrate that a firm’s strategies are clearly customer

focused.

2. Pricing: your pricing strategy is another marketing technique you can use to improve

your overall competitiveness. What does the product or service cost to produce or

deliver? What is the company’s overall pricing strategy? What image is the company

trying to create in the market? Will the planned price support the company’s strategy

and desired image? Can it produce a profit? How does the planned price compare to

those of similar products or services? Are customers willing to pay it? What price tiers

exist in the market? How sensitive are customers to price changes? Will the business

sell to customers on credit?

3. Advertising: Advertising is any sales presentation that is non personal in nature and

is paid for by an identified sponsor. Once an entrepreneur defines his company’s target

market, he can design a promotion and advertising campaign to reach those customers

most effectively and efficient. How you advertise and promote your goods and

services may make or break your business. Having a good product or service and not

advertising and promoting, like not having a business at all. Many business owners

operate under the mistaken concept that the business will promote itself, and channel

money that should be used for advertising and promotion to other areas of the

business. Advertising and promotions, however, is the lifeline of a business and

should be treated as such.

Develop short, descriptive copy (text material) that clearly identifies your goods or

services, its location and price. Use catchy phrases to arouse the interest of your readers,

listeners or viewers. Questions that might be raised in this section include:

� Which media are the most effective in reaching the target market?

� How will they be used?

� How much will the promotional campaign cost?

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� How can the company benefit from publicity?

Manufacturing: this section is only necessary, of course, if your company is making a

product. It should discuss your supply sources, equipment, capacity, and quality control. If

you are subcontracting certain components or processes, the subcontractors’ capacities should

be discussed. Can the subcontractors deliver on time? This section should also provide

information about manufacturing costs.

The management plan: managing a business requires more than just the desire to be your

own boss. It demands dedication, persistence, and the ability to manage both employees and

finances. Your management plan, along with your marketing and financial management plans,

sets the foundations for and facilitates the success of your business. Like plants and

equipment, people are resources they are the most valuable assets a business has.

It is imperative that you know what skills you posses and those you lack since you will have

to hire personnel to supply skills that you lack. Additionally, it is imperative that you know

how to manage and treat your employees. Make them a part of team. Keep of them informed

of, and get their feedback regarding changes. Employees oftentimes have excellent ideas that

can lead to new market areas, innovations to existing products or services or new product

lines or services which can improve your overall competitiveness.

This section should include: your company’s organizational structure; details about the

ownership of your company; profiles of your management team; and the qualification of the

board of directors.

Your management plan should answer questions such as:

� How does your background/business experience help you in this business?

� What are your weaknesses and how can you compensate fro them?

� Who will be on the management team?

� What are their strength/weaknesses?

� What are their duties?

� Are these duties clearly defined?

� What are your current personnel needs?

� What are your plans for hiring and training personnel?

� What salaries, benefits, vacations, and holidays will you offer?

The financial management plan: Sound financial management is one of the best ways for

your business to remain profitable and solvent. How well you manage the finances of your

business venture. Each year thousands of potentially successful businesses fail because of

poor financial management. The business plan needs to provide as clear and precise a picture

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possible of your company’s financial condition. You provide that picture primarily through a

presentation of three types of financial statements: cash flow, income statement, and balance

sheet. Your business plan should discuss the most important revelations and issues raised by

financial statements, such as when your business will reach break-even, when it is expected to

become profitable, and what the most significant expenses are. Based on the statements, this

section should also say something about the company’s financial requirements over the

coming five years; if you should state how much you need and the form in which you prefer it

(loan, sale of stock, combination of debt and equity, etc.).

These statements should go back as long as you have been in business (up to five years) and,

in the case of the cash flow and income statements, should also project three to five years

when I don’t know what tomorrow brings? You can’t do it with any precision, but you must

try any way. If your company has an operating history, you should be able to use your past

performance as guidance in looking ahead. Here is some detail about the three types of

financial statements:

Cash flow: Cash flow is the difference between the movements of money in and out of your

business over a certain period-typically measured on a monthly or quarterly basis. Too often,

cash flow is confused with sales and profits. Yet it is not an uncommon occurrence for a small

company to make a significant sale or operating on a profitable basis and go broke because of

insufficient cash flow.

A cash flow statement shows readers of the business plan how much money will be needed,

when it will be needed, and where the money will come from. In general terms, the cash flow

statement looks at cash and sources of revenue minus expenses and capital requirements to

derive a net cash flow figure. This is done with respect to a given time frame. Initial cash flow

statements should reflect the time frames of operation, whether weekly, monthly, or quarterly.

The time frame selected most often corresponds to a natural period of the businesses cycle.

For the purpose of your business plan, you should track cash flow historically and on a

monthly basis for the first year and quarterly for the next two to four years. The cash flow

statement helps show when and under what circumstances the break-even point will be

reached.

Income statement: Some times called the profit-and-loss statement. The income statement

reports the results of your business from an accounting point of view over the specific period

of time, typically quarterly or yearly. In addition to being considered essential information by

lenders and investors, it is used to calculate income taxes and should be prepared by your

accountant.

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The income statement asks, did we make any money__ not in terms of cash but in terms of

proper accounting rules? It reports net sales, less costs and expenses to arrive at income or

loss before taxes. Generally, sales and expenses are recorded when they occur, not when the

cash is actually received or paid out. There fore, in an income statement, revenue from sales is

not the same as revenue from sales in cash flow statement.

The income statement is where a planner makes a case for the business potential to generate

cash. This document is where the writer records revenue, expenses, capital, and cost of goods.

The outcome of the combination of these elements demonstrates how much money a business

made or will make, or lost or will lose, during the year. An income statement and a cash flow

statement differ in that an income statement does not include details of when revenue was

collected or expenses paid. Accrual accounting and cash basis accounting methods will

influence the "bottom line" shown.

An income statement projected for a business plan should be broken out by month the first

year. The second year can be broken down quarterly, and annually for each year after.

Analyze the results of the income statement briefly and include this analysis in the business

plan. If the business already exists, include income statements for up to five previous years.

As with all financial documents, having the income statement prepared or at least reviewed by

a reputable accountant is money well spent. Any exceptional data should be explained.

Balance sheet: While not particularly useful for start-up business, a balance sheet is required

by most lenders and some investors. The balance sheet is a status report. It states the

company’s financial condition at a specific time__ generally year-end.

Unlike other financial statements a balance sheet is created only once a year to calculate the

net worth of a business. If your business plan is for a start-up business, you will need to

include a personal balance sheet summarizing your personal assets and liabilities. A new

business almost always requires the strength of personal financial commitments. Proving that

the entrepreneur can keep commitments is important. If the business exists already, include

several of the past years balance sheets. Analyze the results of the balance sheet briefly and

include this analysis in the business plan. As with all financial documents, have the balance

sheet prepared or at least reviewed by a reputable accountant. Decisions about assets and

whether they should be classified as owner debt equity or capital investment will greatly

influence the perceived strength of the balance sheet

APPE:DIX: Because your business plan should be as concise as possible, there may be

certain material you want a reader to be aware of that doesn’t fit into the body of the plan. The

appendix is where related documents and support materials are included. This section should

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be provided to readers on an as-needed basis. In other words, it should not be included with

the main body of your business plan. Your business plan is your communication tool. As

such, it will be seen by a lot of people. Some of the information in the business section you

will not want everyone to see. However, specific individuals (such as creditors) may want

access to this information in order to make lending decisions. Therefore, it is important to

have the appendix within easy reach.

The appendix would include:

• Credit history (personal & business)

• Resumes of key managers

• Product pictures

• Letters of reference

• Details of market studies

• Relevant magazine articles or book references

• Licenses, permits, or patents

• Legal documents

• Copies of leases

• Building permits

• Contracts

• List of business consultants, including attorney and accountant

Any copies of your business plan should be controlled. Keep a distribution record of who has

a copy of your plan. This will allow you to update and maintain your business plan on an as-

needed basis. Remember, too, that you should include a private placement disclaimer with

your business plan if you plan to use it to raise capital.

Guidelines to remember

These guidelines are presented as tips for successful business plan development.

Entrepreneurs need to adhere to them in order to understand the importance of the various

segments of a business plan they are creating, which will be discussed in the next section.

Keep the plan respectably short: Readers of business plan are important people who refuse to

waste time. Therefore entrepreneurs should explain the venture not only carefully and clearly

but also concisely.

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Organize and package the plan appropriately: A table of contents, an executive summary, an

appendix, exhibits, graphs, proper grammar, a logical arrangement of segments, and overall

neatness are elements critical to the effective presentation of a business plan

Orient the plan toward the future: Entrepreneurship should attempt to create an air of

excitement in the plan by developing trends and forecasts that describe what the venture

intends to do and what the opportunities are for the use of the product or service.

Avoid exaggeration: Sales potential, revenue estimates, and the venture’s potential growth

should not be inflated. Many times a best-case, worst-case, and probable-case scenario should

be developed for the plan. Documentation and research are vital to the plan’s credibility.

Highlight critical risks: The critical-risks segment of the business plan is important in that it

demonstrates the entrepreneur’s ability to analyze potential problems and develop alternative

courses of action.

Give evidence of an effective entrepreneurial team: The management segment of the business

plan should clearly identify the skills of each key person as well as demonstrate how all such

persons can effectively work together as a team in managing the venture.

Do not over diversify: Focus the attention of the plan on one main opportunity for the venture.

A new business should not attempt to create multiple markets nor pursue multiple ventures

until it has successfully developed one main strength.

Identify the target market: Substantiate the marketability of the venture’s product or service

by identifying the particular customer niche being sought. This segment of the business plan is

pivotal to the success of the other parts. Market research has to be included to demonstrate

how this market segment has been finished.

Keep the plan written in the third person: Rather than continually stating “I” “we,” or “us,”

the entrepreneur should phrase everything as “he,” “they,” or “them.” In other words, avoid

personalizing the plan, and keep the writing objective.

Capture the reader’s attention: Because of the numerous business plans submitted to

investors and the small percentage of business plans funded, entrepreneurs need to capture the

reader’s interest right away by stating the uniqueness of the venture. Use the title page and the

executive summary as key tools for capturing the reader’s attention and creating a desire to

read more.