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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

28
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.

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