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LECTURE NOTES FOR ENTREPRENUERSHIP

MASTERS STUDENTS

By
Patrick Mutisya

2011
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LECTURE ONE
INTRODUCTION TO ENTREPRENEURSHIP
Contents

Introduction
Nature and importance of Entrepreneurship
Historical development of Entrepreneurship
Personal characteristic of Entrepreneurship
Function of Entrepreneurship
Distinction between an Entrepreneur and a Manager
Role of Entrepreneurship in eco development
Summary
References

LECTURE TWO
EMERGING ISSUES IN ENTREPRENEURSHIP
Contents

Introduction
Entrepreneurship myths
The case of Kenya
Theories of Entrepreneurship
Culture of Entrepreneurship
Gender and Entrepreneurship
Summary
References

LECTURE THREE

FORMS OF ENTREPRENEURSHIP
Contents

Small Business Entrepreneurship


Types of Business Ownership
Classification of family business
Partnership business
Cooperatives
Limited company
Franchise
Types of franchise methods
Corporate Entrepreneurship
Summary
References

LECTURE FOUR
MICRO & SMALL SCALE ENTERPRISES
Contents

Classification of Business firms


The role of SME in Eco development
Advantages and disadvantages of SME
Challenges facing the development of SME in developing countries
The role of government in the development of SMEs in Kenya
Summary
References

LECTURE FIVE
CREATING & STARTING THE VENTURE
Contents

Definition of creativity and innovation


Some of new ideas
Methods of generating ideas
Summary
References
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LECTURE SIX
FINANCING NEW VENTURES
Contents

Introduction
Financing means and some of finance
Venture capital
Summary
References

LECTURE SEVEN
ANALYSIS AND INTERPRETATION OF FINANCIAL ACCOUNTING STATEMENTS
Contents

Introduction
Significance of using Ratio
Types of Ratios
Capital structure Ratios (Gearing Ratios)
Limitation of Accounting statements

LECTURE EIGHT
THE BUSINESS PLAN
Contents

Introduction
Essentials of a good Business Plan
Scope and value of the Business plan
Elements of a business plan
Business plan format
Summary
References

LECTURE NINE
THE MARKETING PLAN
Contents

Introduction
Importance of marketing
Function of marketing
Marketing budget
Steps in preparing the market budget
Why some marketing plans fail
Summary
References

LECTURE TEN
MANAGING GROWTH OF A VENTURE
Contents

Introduction
Growth strategies
Implication of growth for the firm
Going public
Summary
References

LECTURE ELEVEN
THE ENTREPRENEUR AND THE LAW
Contents

Introduction
Intellectual property rights
Legal protection
Patents
Designs
Trademarks
Copyright
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Summary
References

LECTURE TWELVE
INTERNATIONAL MARKETS
Contents

Introduction
Importance of international business to the firm
Summary
References

LECTURE ONE : INTRODUCTION TO ENTREPRENUERSHIP


Lecture Content
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Introduction

Objectives

1.2The nature and importance of Entrepreneurship


1.3Historical Development of Entrepreneurship
1.4Personal characteristics of Entrepreneurship
1.5Functions of Entrepreneurship
1.6Distinction between an entrepreneur and a manager
1.7Role of entrepreneurship in Economic Development
1.8Introduction
1.9References
This is to welcome you to the study of Entrepreneurship and Business Management. This lecture
will introduce you to the concept of entrepreneurship evolution of entrepreneurship and the role
of entrepreneurship to economic development.
1.2 Objectives or Aim
At the end of this Lecture you should be able to:

Explain the nature and importance of entrepreneurship

Explain the historical Development of entrepreneurship

Examine the personal characteristics of entrepreneurship

Explain the major functions of entrepreneurship

To distinguish an entrepreneur from manager

To analyze the role of entrepreneurship to an economy

1.3
THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP
1.3.1

Nature of Entrepreneurship
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Entrepreneurship, generally speaking, refers to the overall course of action undertaken by an


owner in starting and managing his/her enterprise for profit. However, the term entrepreneurship
continues to be used in different ways. One usage relates entrepreneurship to the process,
leading to the creation and running of any new business regardless of its size, product, service,
potential, a firm of ownership. Another view point sees entrepreneurship as being essentially
concerned with developing a new idea, based at which a risk bearing unique product, service or
method is marketed by means of setting up a new independent unit or by using a directly existing
unit.
The latter notion views entrepreneurship as the complete process involving conceptualization of
an idea, of which a new thing should be, and eventually, starting and running a venture ceiling
the unique product or proving a service never seen or known before. Both usages, however, give
prominence to the role of a devoted business person played by one who plans, owns, organizes
and manages a concern and bears risks in expectation of good earnings.

Essential features of entrepreneurship:

Entrepreneurship, in fact is much more than simply starting and running an ordinary business.
To know more about the nature of entrepreneurship, we will now discuss some of the essential
features that make entrepreneurship fundamentally different from any other ordinary business.
These include:

Identification of Opportunity. In any entrepreneurial endeavor, a thorough analysis of


market potential is the foremost prerequisite. This is followed by analysis of consumer
wants and needs, innovation of something unconventional and useful, assemblage of
resources, strategy to face competition, and subsequently starting and running an enterprise.
This is why, it is often said that entrepreneurship is a process by which people tap
unutilized opportunities and fulfill much and wants through innovations. One inclined to
embark in an entrepreneurial venture for profit must first recognize a potential market
opportunity.

Innovation
In the opinion of the famous economist and theorist Joseph Schumpeter, entrepreneurship is
primarily concerned with the broad process through which new products or methods are
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created and introduced replacing conventional things or practices. As contrasted with


ordinary business activity, another distinguishing feature of entrepreneurship is innovation.
Innovation as observes Schumpeters analyses may occur in any of the following ways:

Introduction of new product/service

Us of a new method of production

Opening up of a new market

Use of a newly found raw material; or

Restructuring of an organization

However, in modern times the concept of innovation stands expanded to a much wider
perspective:

Novel changes are being introduced in business financing, human resource

management, inventory control, marketing, packaging, personal banking and various other areas,
thus, mobile banking i.e. M-PESA service s are now described as innovations.

Entrepreneurial Attitude

Development of entrepreneurship is essentially dependent on the entrepreneurial


attitude, that is to say a special frame of mind marked by an independent energetic spirit
to assume risks and of course, coverage to undertake something new. Such individuals
visualize new opportunities; risk their own money and fortune and combine resources
in unusual ways to innovate new products, production techniques, production devices
or services.

These enterprising people who as change agents play the role of

innovators, mobile resources, establish new industries, create employment opportunities


and contribute to national wealth are entrepreneurs.
Role in Development

Entrepreneurship contributes immensely to the economic growth and thereby plays a


vital role in the development process. It sows the seeds of development and that, in
turn, facilities the growth and spread of entrepreneurship. As society moves
gradually from under development to the phase of development, market opportunities
widen and individuals acquire more finance, purchasing power, skills, abilities
and

motives. As a result, the social and economic environments tend to become

more

conducive to the growth as well as further expansion of entrepreneurship.

Leadership
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Ordinary business deals with directing production, sales and day-to-day operation in
line with the conventional practices. Generally speaking, an ordinary business person
playing the role of a capitalist provides finance for the sake of ownership and control,
but does not assume the innovatory role to the extent an entrepreneur would do.
Contrarily, entrepreneurship primarily cares about the introduction of something new
and of course remunerative. In this task, unlike an ordinary business person, the
entrepreneur assumes the dual role of innovation-cum-capitalist.

The essence of

entrepreneurship is to utilize an enterprises capability to pursue the goal-oriented


change for something unconventional but rewarding. And it is in this context that
entrepreneurial mission requires a cunning leadership to direct effective use of the
available resources.
Small Business and Family Business
Many determined individuals embrace entrepreneurship as the means to make a selfemployed profitable career. Through entrepreneurship, they pursue their unique ideas
and personal goals to achieve success, wealth, power and fame independently. This is
why very often people equate entrepreneurship with the conduct of small business
enterprises and family businesses.
Conducive Environment
At times market conditions may be more or less helpful to ordinary business, yet
normally a variety of complex problems, including high risks, uncertain earnings,
unavailable capital, high interest rates, and endless rules and regulations of ten leas to
lack of interest in independent small businesses. In such situations, it becomes quite
necessary to encourage enterprising individuals to take active interest in
entrepreneurial efforts so as to maintain the growth of entrepreneurship. This calls
for a conducive environment and purposeful inducements to entrepreneurs. Some of
the crucial factors that may create an environment favorable for sustained growth of
private entrepreneurship include:

An inspiring national policy or innovation

Incentives for creative ideas

Intellectual property rights

Ample technical and communication infrastructure


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Organizational framework for creativity

Non-expensive loan capital

Large product market

Cordial employer-employee relations

Business-oriented educational systems

Social order, rule of law and political stability among others


Activity
Can you now be able to explain the essential features of
entrepreneurship?

1.4.3
Definitions
The Entrepreneur
The word entrepreneur in English originated from the French word entreprendre,
meaning to undertake. According to the
is one who organizes, managers
Oxford English Dictionary

and assumes the risks of a business enterprise. The

(1978) describes entrepreneur as one who undertakes; a

manager, controller; champion.


entrepreneur to a

Websters dictionary (1971) an entrepreneur

The BBC English Dictionary (1993) refers an

person who sets up a business.

Richard Contillon (1620 1734) defines an entrepreneur as someone who takes the risks
of running an enterprise by paying certain price for securing and using resources for a
product and resetting it at an uncertain price. Joseph Schumpeter (1883-1950) defines an
entrepreneur as an innovators? David Holt (2203) defines an entrepreneur as a person
who incubates new ideas, starts enterprises based on those ideas and provide added value
to society based as their independent initiative.
Obviously, a comprehensive and unanimously acceptable definition of the word
entrepreneur is yet to be adapted.

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However, combining some of the salient characteristics or traits, it may be said that he
term entrepreneur specifies precisely a dynamic individual who has creative talents, takes
initiatives, assembles necessary resources, risks own money and fortune, undertakes a
new venture, introduces something new ad useful, and who is eventually rewarded with a
profit or loss, monetary benefits, personal satisfaction and independence.

Entrepreneurship
This is the act or process of identifying business opportunities, assembling the necessary
resources, taking calculated risks to initiate a successful business activity.
Activity
Can you be able to think about some of the factors that one considers
when making the decision to becoming self-employed?

Historical Development of Entrepreneurship


One way of tracing the development of entrepreneurship is to trace the evolution of the
definition for an entrepreneur.

1.4.1

Earliest Period

An early example of the earliest definition of an entrepreneur as a go-between is Marco Polo,


who attempted to establish trade routes to the Far East. As a go-between, Marco Polo would sign
a contract with a money person (forerunner of todays venture capitalist) to sell his goods. A
common contract during this time provided a loan to the merchant-adventurer at a 22.5 percent
rate, including insurance. While the capitalist was a passive risk bearer, the merchant-adventurer
too the active role in trading, bearing all the physical and emotional risks. When the merchantadventurer successfully sold the goods and completed the trip, the profits were divided with the
capitalist taking most of them (up to 75 per cent), while the merchant-adventurer settled for the
remaining 25 percent.
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1.4.2

Middle Ages

In the middle Ages, the term entrepreneur was used to describe both an actor and a person who
managed large production projects. In such large production projects, this individual did not take
any risks but merely managed the projects using the resources provided, usually by the
government of the country. A typical entrepreneur in the Middle Ages was the cleric the person
in charge of great architectural works, such as castles and fortifications, public buildings, abbeys
and cathedrals.
1.4.3. 17th Century
The re-emergent connection of risk with entrepreurship development in the 17 th century, with an
entrepreneur being a person who entered into contractual arrangement with the government to
perform a service or to supply stipulated products. Since the contract price was fixed, any
resulting profits or losses were the entrepreneurs. One entrepreneur in this period was John Law,
a Frenchman, who was allowed to establish a royal bank. The bank eventually evolved into an
exclusive franchise to form a trading company in the New World the Mississippi Company.
Unfortunately, this monopoly on French trade led to Laws downfall when he attempted to push
the companys stock price higher than the value of its assets, leading to the collapse of the
company.
Richard Cantillon, a noted economist and author in the 1700s understood Laws mistake.
Cantillon developed one of the early theories of the entrepreneur and is regarded by some as the
founder of the term. He viewed the entrepreneur as a risk talker, observing that merchants,
farmers, craftsmen and other sole proprietors buy at a certain price and sell at an uncertain
process, therefore operating at a risk.

1.4.4

18th Century

In the century, the person with capital was differentiated from the one who needed capital. In
other words, the entrepreneur was distinguished from the capital provider (the present-day
venture capitalist).Thus the capitalist was differentiated from the entrepreneur. Entrepreneurs
were regarded as capital users as opposed to capitalist who were seen as capital providers. One
reason for this differentiation was the industrialization occurring throughout the world. Many of
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the inventions developed during this time were reactions to the changing world. Both Whitney
and Edison were developing new technologies and were developing new technologies and were
able to finance their inventions themselves. Whereas Whitney financed his cotton gin with
expropriated British crown property. Edison raised capital from private sources to develop and
experiment in the fields of electricity and chemistry. Doth Edison and Whitney were capital users
(entrepreneurs), not providers (venture capitalists). A venture capitalist is a professional money
manager who makes risk investments from a pool of equity capital to obtain a high rate of return
on the investments.
1.4.5.

19th and 20th Centuries

In the 19th and early 20th centuries, entrepreneurs were frequently not distinguished from
managers and were viewed mostly from an economic perspective:
Briefly stated, the entrepreneur organizes and operates an enterprise for personal gain. He pays
current prices for the materials consumed in the business, for the use of the land, for the personal
services he employs, and for the capital he requires. He contributes his own initiatives, skills and
ingenuity in planning, organizing and administering the enterprise. He also assumes the chance
of loss and gain consequent to unforeseen and uncontrollable circumstances. The net residue of
the annual receipts of the enterprise after all costs have been paid, he retains for himself.
Andrew Carnegie is one of the best examples of this definition. Carnegie invented nothing, but
rather adapted and developed new technology in the creation of products to achieve economic
vitality. Carnegie who descended from a poor Scottish family, made the American steel industry
one of the wonders of the industrial world, primarily through his unremitting competitiveness
rather than his inventiveness or creativity. In the middle of the 20th century, the notion of an
entrepreneur as an innovator was established.
The function of the entrepreneur is to reform or revolutionize the pattern of production by
exploiting an invention or more generally an untried technological method of producing a new
commodity or producing an old one in a new way, opening a new source of supply of materials
or new outlet for products, by organizing a new industry.

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The concept of innovation and newness is an integral part of entrepreneurship in this definition.
Indeed, innovation the act of introducing something new is one of the most difficult tasks for the
entrepreneur. It takes not only the ability to create and conceptualize but also the ability to
understand all the forces at work in the environment. The newness can consist of anything from a
new product to a new distribution system to a method for developing a new organizational
structure. Edward Harriman, who recognized the Ontario and Southern railroad through the
Northern Pacific Trust, and John Pierpont Morgan, who developed his large banking house by
reorganizing and financing the nations industries, are examples of entrepreneurs fitting this
definition. These organizational innovations are frequently as difficult to develop successfully as
the more traditional technological innovations (transistors, computers, and laser) that are usually
associated with being an entrepreneur.
This ability to innovate can be observed throughout history, from the Egyptians who designed
and built great pyramids out of stone blocks weighing many tone each, to the Apollo lunar
module, to laser surgery, to wireless communication. Although the tools have changed with
advances in science and technology, the ability to innovate has been present in every civilization.
The dominant notion of entrepreneurship in this era is creativity and innovation.
1.5

CHARACTERISTICS OF A SUCCESSFUL ENTREPRENEUR

Who actually is an entrepreneur and what are his/her qualities and characteristics?
No universally accepted answer exists for this question. Some people think that an entrepreneur
is an individual who takes the risk of starting and running an own business for the principal
purpose for making profit and growing in the business. This would mean that one who
establishes a business and manages it only for profit without a vision for growth is more of a
business person than an entrepreneur. In other words all entrepreneurs are business people and
not all business people are entrepreneurs.
The following are some of the characteristics of an entrepreneur:

RISK TAKER

Entrepreneurs are often thought of in terms of the risk they assume. Even the dictionary
describes an entrepreneur as one who assumes business risks. However, like all prudent
business people, entrepreneurs know that taking high risks is a gamble. Entrepreneurs are
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neither high nor low risk takers. They prefer situations in which they can influence the
outcome, and they like challenges if they believe the odds are in their favour.
They seldom act until they have assessed all the risks associated with an endeavour, and they
have an innate ability to make sense out of complexity. These are traits that carry them on to
success where others fail.

DESIRE TO ACHIEVE

Any successful entrepreneur will tell you that starting a business is not a get-rich-quick
alternative. New businesses usually take from one to three years to turn a profit. In the
meantime, you will do well to break even. During the business start-up stage, entrepreneurs
do not buy anything they do not need, such as fancy cars. Most drive junk cars and use their
surplus money to pay off debt or reinvest it in the business. Their focus is on creating a
company with a strong financial base for future expansion. A strong enough dream and desire
will always point towards success and provide the fuel to get there.

PERSONAL LIFE

All successful entrepreneurs work long hours, which cuts into their personal life. However,
long working hours are not unique to entrepreneurs. Many corporate managers and
executives work well beyond the average forty-hour work week. The primary difference
between the entrepreneur and his or her corporate counterpart is schedule control. In the
corporate world, you may not have control over your schedule. If some higher-level manager
calls a Saturday meeting, youve got no choice but to be there. Entrepreneurs dont mind
working sixty to seventy hour weeks, but they will do everything they can to preserve their
private time. They schedule important meetings, during the week so that they can have
weekends off for their personal life, which is very important to them.

HIGH-TECH WIZARDS

We are all aware of a few high-tech entrepreneur wizards, such as Microsofts Bill Gates
who have made it. Media attention overplays the success of these few high-tech
entrepreneurs. Only a small percentage of todays personal businesses are considered high
tech just a few years ago is not considered high tech by todays standards.
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It takes high profits margins, not high tech, to make it as an entrepreneur. One has only to
look at the recent problems that have plagued the computer industry to understand this basic
principle. High-tech personal computers did very well when they made high profit margins.
The industry went into a nose dive when profits fell.

ABILITY TO WORK WITH OTHERS

Initially, entrepreneurs might work alone on a business idea by tinkering in the solitude of
their garage or den. However, the astute entrepreneur knows that he or she must draw on the
experience and ideas of others in order to succeed. Entrepreneurs will actively seek the
advice of others and will make many business contacts to validate their business ideas. The
entrepreneur who is a loner and will not talk to anybody will never start a successful
business.

VERSATILE KNOWLEDGE

A recent study of successful entrepreneurs showed that most of them worked for a large
corporation for a number of years before they started their own business. In every instance,
they used the corporate structure to learn everything they could about the business they
intended to establish, before they started.

VENTURE CAPITAL USERS

Entrepreneurs know that venture capital money is one of the most expensive forms of
funding they can get. Consequently, they will avoid venture capitalist, using them only as a
last resort. Most entrepreneurs fund their business from personal savings or by borrowing
from friends or lending institutions.

DEDICATION

That entrepreneurs are not dedicated to any one thing is a myth. Dedication is an attribute
that all successful entrepreneurs exhibit. They are dedicated to becoming their own boss. To
this end, they will conduct extensive research campaigns into the advantages and
disadvantages of their business ideas in their dedicated drive to start a business.
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ACTION ORIENTED

This is exhibited by their motivation to take action when and where necessary.

SELF-CONFIDENCE

An entrepreneur is confident of achieving realistic and challenging goals, coupled with a


sense of effectiveness, will ultimately contribute to the success of the venture. They also have
the ability to solve problems and make decisions which involves striving with determination.

FLEXIBLE AND ABLE TO ADAPT

Albert Shapero (1985) concluded that individuals often become entrepreneurs by being
thrown into situations that force them to fashion their own means of economic livelihood.
Immigrants fit in this model. Circumstances afford few options for these individuals, who
frequently are able to adapt and overcome many barriers to start their own ventures.

INDEPENDENCE

Many individual become economically displaced (unemployed) or finds themselves


disillusioned with faltering careers. For these individuals, starting a new venture can be
exhilarating, a breath of fresh air into an otherwise stale life-style.

INITIATIVE AND POSITIVE THINKER

They have the ability to generate new ideas and implement them ahead of the others to be able to
create a competitive edge. Entrepreneurs are resourceful and creative. Entrepreneurs believe in
themselves; see half a glass as full not half way or half empty. They are able to endure great
difficulties and stay focused for long.
In consideration of the foregoing discussion, however, some of the inherent characteristics that
make up or identify entrepreneurs as a distinctive class are listed in table 1.
Table 1: Some of the Major Characteristics of Entrepreneurs.

Energetic and diligent

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Keen to assume responsibility

Self-confident and optimistic

Single minded

Able to take calculated risk

Hardworking

Inquisitive

Good health

Foresighted

Dynamic leader

Alert to grab opportunity

Responsive to suggestions

Strong desire for independence

Responsive to criticism

Persevering

Strong desire for money

Ambitious

Versatile knowledge

Activity
Can you now attempt your own characterization of successful entrepreneurs?

FUNCTIONS OF ENTREPRENEURS

The general function of an entrepreneur is to achieve one or more of the following objectives.

Entry of a new venture into an existing system

Survival or expansion of existing ventures

Achieve operation efficiency

Achieve higher productivity

Use non-conational resources

Make optimum use of unutilized or underutilized resources

Add value to existing goods or services

Savings in costs of inputs

For success of an entrepreneur; innovatory attitude is fundamental. The complex tasks that the
successful entrepreneurs usually perform may be classified under the following major functional
areas.

Understanding own capability; This involves examining dominant aspect of the


business environment that influence survival and growth of an enterprise,
identifying and comparing own personal abilities and skills vis--vis those
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particularly essential to entrepreneurial success and to establish own strength,


weaknesses and the overall capability to translate a creative ideas into a business
reality.

Planning a new venture; This function entails preparation of project report;


estimating technical know-how; plant machinery and supporting services needed
and knows their suppliers. The function also involved establishing legal
requirements for setting up a new unit, understanding layout of production
operation and space requirement as well as estimating both permanent and
working capital needed to start up a venture and immediate future requirement.

Organizing a new venture; This function involves among others determining


organizational structure of an organization choosing the form of ownership of the
proposed firm. Ensuring proper maintenance of office records, initiating steps for
observance of related statutory and non-statutory requirements.

Identifying a new venture opportunity; This entails identifying market needs


and establishing need for a change. Carrying out market research and analyzing
techno-economic feasibility of an idea conceived in mind. To establish answers to
internal and external risk. Factors as well as ascertaining the workable new
venture opportunity.

Managing finance; This function entails arranging own and borrowed capital,
availing grants and subsidies obtainable from government where appropriate,
outlining business credit policy and collection procedure. In addition the function
also entails preparation and review from time to time sectional and master budgets
in addition to period funds flow that need to be prepared.

Managing production operation; This function basically involves formulation


of purchasing policy and inventory central system; formulation of framework for
total quality control and guidelines for production schedule and ensuring that
every component/raw material procured is of right quality from right source at
right price in right quantity and is delivered at right place and in right time.
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Managing work force; This function involves among other systematic


manpower planning, preparation of job descriptions for all positions at all level,
determining pay and perquisites for each position, selecting and recruiting
personnel for each position and assigning responsibility. The function also
involves delegation of authority to the personnel concerned; supervising training
and motivating employees as appropriate as well as evaluating performance of
each employee.

Managing market; This is a function that entails collecting and analyzing


regularly data on customer needs with special references to product quality;
function of the product, pricing and after sale service.

The entrepreneurs also work out and adopt a comprehensive marketing mix approach involving
usable marketing strategy. The function also involves putting into effect and monitoring the
course of action on new product development, determining its basic design packaging and
labeling as well as determining and conducting period review of pricing policy considering the
actual cost and market image of the product or service; the need to achieve marketing target or
the compulsion to effectively meet challenges from competitors. In addition, the above, the
function also involves reviewing and where necessary take corrective steps in advertising,
publicity personal selling and other promotional strategies and motivating sales and servicing
personnel as well as closely studying their market assessment.
Activity
At this juncture you are in a position to explain the major functions of
entrepreneurs. Explain at least five functions of Entrepreneurs
1.7
DISTINCTION BETWEEN AN ENTREPRENUER AND A MANAGER
Many people believe that there is no difference between a manager and an entrepreneur.
However, there is a significant difference between a manager and an entrepreneur thus majority
are not always correct.

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A manager can be defined as the individual who oversees the day to day operations and
efficiency of a continuous process. The tasks of a manager include availing required personnel
machinery and raw materials which are combined in appropriate proportions to produce outputs,
minimize wastages, maximize resources, and execute contracts and marketing. A manager is
therefore responsible for the achievement of vision, mission, and objectives of the venture using
the minimum resource possible.
The entrepreneur on the other hand is responsible for combining resources, locating new ideas,
and converting them into products and services. Drucker is of the opinion that the entrepreneur
has the responsibility of establishing new products and new markets. Managers on the other hand
are viewed as people who ensure operations are functioning effectively and efficiently. The
entrepreneur must coordinate, direct others to direct the business to a new development.
An entrepreneur is a person who organizes and manages a business undertaking assuming the
risk for the sake of profits. An entrepreneur requires communication skills; the ability to make
one understood. To be successful one requires technical skills to understand his product and
market.
A successful entrepreneur must have strategic management skills to consider both long and
short-term implication of decisions made; strength and weaknesses as well as competition. The
role of the entrepreneur has evolved with time and professional entrepreneurs rely more on
intellect and or gut instincts. In the past, entrepreneur was viewed as a boss but of recent he is
viewed as a leader. Many entrepreneurs were self reliant but now they are inquisitive and net
workers. They need to take quick decisions but now they take time to build consensus. A
manager can be said to be one who does not own the venture while as an entrepreneur owns the
venture and manager of the venture who maximizes opportunities. A manager may be employed
by Entrepreneur to manage the business on behalf of the entrepreneurs and adhere to policies
formulated by the entrepreneur for which he/she had no direct role when they were made.

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Activity
Close your book now and write down features between a Manager and
entrepreneur.

Most entrepreneurs are also managers. To what extent do you agree with
the above statement?

You can now confirm your answer to activity 1 by looking at the following table:
Comparison of entrepreneurs and traditional managers
TRADITIONAL
ENTREPRENUERS
MANAGERS
Primary motive
Promotion and other
Independence and ability to
traditional corporate rewards advance in the corporate
rewards
Time orientation
Short term meeting quotas
Survival and achieving 5 -10
and budgets
years growth
Activity
Delegates and supervisors
Direct involvement
more than direct involvement
Risk
Careful
Moderate risk taker
FEATURE

Status
Failure and mistakes
Decisions
Who serves
Relationship with others

1.8

Concerned about status


symbols
Tries to avoid mistakes and
surprises
Usually agrees with those in
higher management
Others

No concern about status

Hierarchy as basic
relationship

Transactions and deal making


as basic relationship

Deals with mistake and


failures
Follow dreams with decision
Self and customers

ROLE OF ENTREPRENUERSHIP IN ECONOMIC DEVELOPMENT

Entrepreneurship plays other roles in economic development other than increasing per capita
output and income; it involves initiating and constituting change in the structure of business and
society. This exchange is accompanied by growth and increased output, which allows more
growth and increased output, which allows more wealth to be divided by the various participants.
The theory of economic growth depicts innovation as the key not only in developing of new
products (or services) for the market but also in stimulating investment interest in the new
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ventures being created. The new investment work on both the demand and the (supply side) and
the resultant new spending utilizes the new capacity and output (demand side).
The process through which innovation develops and commercializes through entrepreneurship
activity stimulates economic growth. In specific entrepreneurs contribution to National
Development include the following:

Creation of employment for themselves as well as others who are involved in the
entrepreneurship.

Activities. These activities generate income that is taxable by the government thus
assisting government to pay public servants

Providing training grounds to other people who boost their knowledge and gain
experience in many areas of life by working for the entrepreneurship.

Decentralizing economic activities This is achieved through location of business in


different parts of the country.

Entrepreneur through various activities help to conserve and utilize local resources. A few
of such activities includes: recycling of paper; metal and plastics.

Foreign exchange earnings. Entrepreneurs through participation in international trade


earn foreign exchange for the country.

Through contribution to the development of social amenities, infrastructure and provision


of goods and services entrepreneurs help to raise the living stewards of society.

1.9 Summary
In this lecture, we have attempted to look at the nature of
entrepreneurship and heighted the essential features of entrepreneurship.
We have looked at the historical developments of entrepreneurship and
attempted a definition of entrepreneurship and at the same time outlined
some of the characteristics of a successful entrepreneur. We have
explained the functions of entrepreneurs and attempted a distinction
between an entrepreneur and a manager and completed by looking at the
role of entrepreneurship in economic development.
24

In this lecture, we have attempted to look at the nature of entrepreneurship and heighted the
essential features of entrepreneurship. We have looked at the historical developments of
entrepreneurship and attempted a definition of entrepreneurship and at the same time outlined
some of the characteristics of a successful entrepreneur. We have explained the functions of
entrepreneurs and attempted a distinction between an entrepreneur and a manager and
completed by looking at the role of entrepreneurship in economic development.
Activity

Activity what impact does entrepreneurship have on your local province


and national economies

Discuss the common characteristics of a successful entrepreneur

Discuss the common characteristics of a successful entrepreneur

What are the major entrepreneurial functions

Attempt a trace of the historical development of entrepreneurship

LECTURE TWO: EMERGING ISSUES IN ENTREPRENEURSHIP


2.1 Introduction
This lecture is going to cover some of the emerging and controversial issues in entrepreneurship.
One of the key controversies is whether entrepreneurs are born or are self made individuals and
also reviewing some theories explaining entrepreneurship.

We will attempt to look at the

relationship between culture and entrepreneurial development, gender and entrepreneurship,


ethical and social responsibilities of entrepreneurs, and entrepreneurial careers and education.

25

2.2 Objectives
At the end of this lecture you should be able to:

Discuss various entrepreneur myths that exist.

Examine theories of entrepreneurship.

Explore the relationship between culture and entrepreneurship.

Examine the relationship between gender and entrepreneurship.

Examine ethical and social responsibilities surrounding entrepreneurs.

Examine the Entrepreneurship careers and education in Kenya.

2.3 Entrepreneurship Myths


In Lecture one, we noted that there are many interpretations and definitions of entrepreneurship.
According to intellectuals and business experts, the definition of entrepreneurship is simply the
combining of ideas, hard work and adjustment to the changing business market. It also entails
meeting market demands. More importantly, it describes the key directive of any business
innovation. Innovation is by far the primary factor that governs the very creation of a small
business or entrepreneurship. When a person chooses to become an entrepreneur, they choose to
be an organizer. However, not everyone is suited to being an entrepreneur and not everyone
has the necessary skills to do so successfully.

The National commission of Entrepreneurship (NCE), of America has highlighted six (6) myths
about entrepreneurs. These include:

The Risk-Taking Myth: Most successful entrepreneurs take wild, uncalculated risks
in starting their companies.
Risk is an intrinsic part of any business venture. It is only later on in the development of
the company, when the business has created some real value, that entrepreneurs risk
losing it all if they are to continue growing.

26

The High-Tech Invention Myth:

Most successful entrepreneurs start their

companies with a breakthrough invention usually technological in nature.


Having a breakthrough invention, a unique product or a radically new process is not a
necessary element at the beginning of most successful growth companies.

There are exceptions, like Federal Express, which was started in the 1970s on the thenunheard of idea of creating a worldwide system of transportation dedicated to providing
overnight delivery of packages.

But far more common are entrepreneurial growth

companies like Jiffy Lube, which brought moderate change and certainly marketable
distinctions but not revolution to the way we change our oil.

The Expert Myth: Most successful entrepreneurs have strong track records and
years of experience in their industries.
While founders of successful companies may become knowledgeable and prominent in
their field later on, early-stage growth companies are just as likely to be started by
relative amateurs with little background experience in the field. A full 40 percent of inc.
500 founders had no prior experience in the industry they were entering, NCOE research,
2008.

For example, Jann Wenner started Rolling Stone magazine when he was just 21 and just
out of college.

Steve Wozniak, who helped found Apple computers, was an

undistinguished engineer at Hewlett-Packard when he built the first Apple computer.


John Katzman was a part-time tutor at Hunter College in New York when he founded the
Princeton Review, a test-preparation and tutoring company.

The Strategic Vision Myth: Most successful entrepreneurs have a well-considered


business plan and have researched and developed their ideas before taking action.
27

Strategic planning and research are in fact hallmarks of the later stages of development,
rather than a necessary initial ingredient. For many start-ups, extensive research and
planning are often both unnecessary and financially impossible. At this early stage,
adaptiveness is much more important than a thorough, rationalized decision making
process.

The Venture Capital Myth: Most successful entrepreneurs start their companies
with millions in venture capital to develop their idea, buy supplies, and hire
employees.
Venture capital is dominant in some industry sectors biotech, some high-tech start-ups,
Internet where capital requirements force companies to skip the early growth stages.
But it or any other type of formal financial support is surprisingly uncommon among
most successful entrepreneurial growth companies at their early stages of development.
In 1999, for example, fewer than 4,000 of the roughly 700,000 new businesses created
were venture capital funded. That means that less than 1 percent of all new businesses
were backed by venture capital.
Even Bill Gates and Paul Allen, founders of Microsoft, failed to secure venture capital
when they started their company in 1975 and networking giant Cisco Systems was
initially financed from the personal savings and borrowing of its two founders.

Entrepreneurs are Born


Many people believe that entrepreneurs possess inmate, genetic, talents.

However,

experts generally agree that most entrepreneurs were not born; they learned to become
entrepreneurs. The recent proliferation of college and university courses on the subject
supports this point. Entrepreneurship is currently being successfully taught.

28

Activity 2.1
Can you identify any other myths about the entrepreneurs?

2.3.1

Entrepreneurship Development in Africa

According to an article in the African Executive magazine (2008) some people such as the Igbos
and Ijebus of Nigeria, the Kikuyu of Kenya and the Baganda are well known within their nations
as born entrepreneurs. This is because these tribes have cultures which instill entrepreneurial
values on their people right from a tender age.

These values encourage savings, capital

accumulation and investment for entrepreneurial ventures.


However it is difficult to develop entrepreneurial tendencies especially among young people in
many other communities that do not encourage entrepreneurial cultures as they view small
businesses as an occupation for the uneducated. It is further argued that due to high poverty
levels Ugandans go into business just for survival.
Nonetheless, many painstakingly built up fortunes are recklessly squandered by those who
inherit businesses due to inadequacy of entrepreneurial values. According to Wamumo Gordon
in the story of an Entrepreneur, this behavior is a disease in Uganda. Traditional approaches to
education fall short of imparting some of the values entrepreneurs posses. It is also true that
many people in Uganda go to business without clear goals. They have either been forced into it
by economic conditions, or they are ignorant of what it means to run a business.
2.3.2

The case of Kenya

Entrepreneurs are widely recognized as the prime movers of economic development; the people
who translate ideas into action. An interesting thought not widely accepted definition of an
entrepreneur is a person who has the ability to scan and identify opportunities in his or her
environment, gather the resources necessary to take advantage of the opportunities and
implement successful action to utilize the opportunities.
Recognizing the prime-mover status of business entrepreneurs, the Kenya Government has
implemented a wide-ranging set of strategies to encourage youth to initiate their own small
29

businesses. The major focus for this effort is small enterprise development (SED). Small
enterprise development in Kenya has traditionally involved establishing an enabling environment
for small enterprise growth including analysis and adjustments to the regulatory environment that
has been a hindrance to prospective small business owners.

Formal small enterprise

development policy encompasses entrepreneurship development programs under a heading


Non-financial Promotional Programs (NFPP). The other two aspects in SED policy are the
provision of responsive small enterprise credit facilities and an examination of gender issues.
Furthermore, the Kenyan Government has been in the forefront in promoting and encouraging
entrepreneurial culture through various legislation and support mechanisms such as Sessional
paper No. 1 of 1986 on Economic management for Renewed growth, Sessional paper No. 2 of
1992 on small enterprise and Jua Kali Development in Kenya, and Sessional paper of 1996 on
Industrial transformation to the year 2020.
Entrepreneurship development is primarily aimed at youth in technical training institutions but is
now being expanded to include the Universities.

It involves introducing youth to

entrepreneurship and the role of business entrepreneurs in economic development. They also get
an opportunity to analyze the difficult employment situation in Kenya and are encouraged to
consider self-employment as a career choice. Stacked up against such a choice are many
examples of business failures in the community, negative attitudes towards business, and
misconceptions about what makes a business succeed (the common view is that all you need to
succeed is capital).
One major task of entrepreneurship education trainers is to counter these negative influences
with positive ones such as presentation of successful role models and case studies of successful
small enterprises.

One major problem is how to integrate entrepreneurship concepts and

practices into the teaching of technical subjects. Students are encouraged to initiate microbusinesses while still in college as a way to enable them to acquire an insight into the operation
of a business. They are also required to identify a potential business as well as prepare and
present a complete Business Plan as their final-year evaluation in the subject. It is estimated that
as many as 75% of small enterprises started in Kenya fall within three years of their birth.
30

Indeed an enterprise that is more than three years old is regarded as having achieved some
measure of success.
Most dynamic societies are those that have the most entrepreneurs plus the economic and legal
structure to encourage and motivate entrepreneurs. According to Bwisa (1997), most research on
entrepreneurship in Africa (including Kenya) has tended to look at it unfavorably due to low
level of efficiency in the operation. This was said to be due to lack of relevant entrepreneurial
culture and skills.
The question of what factors lead individuals to become entrepreneurs is an old one. It is also
common knowledge that although the propensity to entrepreneurship varies from one society to
another, a universal constant is that no matter how many entrepreneurs emerge, most do not
succeed in creating lasting organizations.
In Kenya, we are looking at self-employment as one way of creating employment for youth.
Approximately 500,000 graduates from various tertiary academic institutions enter the job
market annually. However, due to low economic growth, rampant corruption, nepotism and
demand for experience by potential employees, a majority of youth remain unemployed
(National Youth Policy 2002). We must therefore work hard to understand how and why
entrepreneurs succeed, as this is the key in ensuring youth employment.
2.4

Theories of Entrepreneurship

Entrepreneurial characteristics are not universal.

There are no specific laws or set of

characteristics that are seen to be independent across situations to guide the entrepreneur to
success. That is why differences in entrepreneurial characteristics are evident between nations
and also different ethnic groups in various nations. The differences in entrepreneurship can also
be explained by four theories that include;

Psychological

Sociological

Economical and

Anthropological.
31

It is important to note however, that the field of entrepreneurship has no unified theory to explain
who an entrepreneur is, rather it presents a body of independent theories which are supported by
research evidence. The difficulty in achieving and building a universal theory has to do with the
evasive nature of the entrepreneurs behavior and cultural differences. Cultural practices vary
from country to country, continent to continent and thus make it difficult to use any of the
theories to sufficiently answer the question, What makes an entrepreneur?
2.4.1

Psychological Entrepreneurship Theories

The psychological entrepreneurship theory is based on five psychological factors. They are
traits, motives, incentives, need for achievement and locus of control. This view states that
people with high need for achievement have a tendency to strive for success. High achievement
is associated with better performance of tasks hence entrepreneurs are those who exhibit qualities
of leadership in solving persistent professional problems and demonstrate an eagerness to seize
unusual opportunities. According to the psychological view of entrepreneurship, an entrepreneur
is goal oriented, rather than means oriented. An entrepreneur must not only have a high capacity
for risk sustaining, which is a function of high confidence.

Personality Traits
Dennis Coon in his book introduction to Psychology defines Personality traits as stable
qualities that a person shows in most situations. To the traits theorists there are enduring
inborn qualities or potentials of the individual that naturally makes him an entrepreneur.
The obvious or logical question on your mind may be what are the exact traits/inborn
qualities? The answer is not a straight forward one; this means that no particular or
specific traits can be traced or pointed out. However, some insights into these traits or
inborn qualities can be evident by identifying the characteristics associated with the
entrepreneur. The characteristics give a clue or an understanding of these traits or inborn
potentials.

Some of the characteristics or behavior associated with entrepreneurs is that; they tend to
be more opportunity driven they nose around, demonstrate high level of creativity and
innovation, and show high level of management skills and business know-how. They are
optimistic and they see the cup a half full than a half empty, they are emotionally resilient
32

and have mental energy, they are hard workers, they also show intense commitment and
perseverance, they thrive on competitive desire to excel and win, they tend to be
dissatisfied with the status quo and desire improvement, they are transformational in
nature, to them failure is a tool and springboard and they are lifelong learners. They also
believe that they can personally make a difference, they are individuals of integrity (i.e.
trustworthiness, honesty and principled) and above all visionary.

The trait model is still not supported by research evidence. Our only way to explain or
claim that it exists is to look through the lenses of ones characteristics/behavior and
conclude that one has the inborn quality to become an entrepreneur.
(ii)

Need for Achievement


While the traits focus on enduring inborn qualities the need for achievement theory put
forward by McClelland (1961), one of the influential motivation theorists say that human
beings have a need to succeed, accomplish, excel or achieve. Hence that person or
individual will do all there is to move from the bottom of the ladder to the top. Studies
provide

evidence

for

the

relationship

entrepreneurship (Johnson, 1990).

between

achievement

Similarly, Shaver & Scott

motivation

and

(1991) believe that

achievement motivation may be the only convincing personological factor related to new
venture creation.
(iii)

Locus of Control
Locus of Control is an important aspect of personality. The concept was first introduced
by Julian Rotter in the 1950s. Rotter (1966) refers to Locus of Control as an individuals
perception about the underlying main causes of events in his/her life. In other words, a
locus of control orientation is a belief about whether the outcomes of ones actions are
contingent on what one does (internal control orientation) or an event outside ones
personal control (external control orientation).

2.4.2 Sociological Entrepreneurship Theory

33

The sociological theory is the second of the major entrepreneurship theories. Sociological
enterprise focuses on the social context. This theory includes social networks, life course stage
context, ethnic identification and population ecology.

Although entrepreneurial activities

originate from individuals, entrepreneurs are neither independent to their immediate environment
nor omnipotent to carry out all business related tasks single handedly for long periods of time.
To an economists view, entrepreneurship is synonymous with the business accomplishments of
an individual. But as business grows, the role of the organization i.e. collective behavior of
people in the organization becomes critical to its success.
Reynolds (1991) has identified four social contexts that are related to entrepreneurial
opportunity. The first one is social networks, here; the focus is on building social relationships
and bonds that promotes trust and not opportunism. In other words, the entrepreneur should not
take undue advantage of people to be successful rather success comes as a result of keeping faith
with the people.
The second he called the life course stage context which involves analyzing the life situations
and characteristic of individuals who have decided to become entrepreneurs. The experiences of
people could influence their thought and action thereby wanting to do something meaningful
with their lives.
The third context is ethnic identification; this is where ones sociological background is one of
the decisive push factors to become an entrepreneur. For example, the social background of a
person determines how far he/she can go. Marginalized groups may violate all obstacles and
strive for success.

Their disadvantaged background spurs them to make life better for

themselves.
The fourth social context is called population ecology. The idea is that environmental factors
play an important role in the survival of businesses.

The political system, government

legislation, customers, employees, competition are some of the environmental factors that may
have impact on survival of new venture or the success of the entrepreneur.

34

2.4.3

Anthropological Entrepreneurship Theory

Anthropology is the study of the origin, development, customs and beliefs of a community. In
other words, the culture (how we are programmed or socialized to behave in society) of the
people in the community. The anthropological theory says that for someone to successfully
initiate a venture the social and cultural context should be examined or considered. Here
emphasis is on the culture entrepreneurship model or what has been referred to as indigenous
entrepreneurship. The model says that new venture is created by the influence of ones culture.
Cultural practices lead to entrepreneurial attitudes (innovation e.t.c.) and that also lead to venture
creation behavior.

For example, a culture that frowns on the celebration of success and

achievement may not develop positive attitudes about success and that may stifle innovation and
creativity. In other words, the attitudes required to affect behaviors or venture creation is
essentially embedded in the cultural practices of the community.
2.4.4

Economic Entrepreneurship Theory

John Alois Schumpeter (1934) is credited as the father of economic entrepreneurship theory.
Central to this theory is the creation of something new as an important function of an enterprise
and that the new creation processes serve as impulses for the motion of market economy
(capitalist engine). The economic entrepreneurship view starts by the acquisition of the means of
production and continually reviewing these factors, methods and processes used by the
entrepreneur.

The economic end is justified by the creativity and innovativeness of the

entrepreneur. The main incentive to entrepreneurship here is the promises of wealth.


The above theories offer no comprehensive and universal model as the theories in their current
state are independent and narrow.

There is therefore the need to build an integrated

entrepreneurship model that will take cognizance of all the four independent perspectives.
The factors influencing the establishment of an ethnic enterprise are multifaceted and include
education, generation, the local population, the economic situation, job opportunities, location,
cultural and religious differences, and the origin. These factors describe why ethnic groups differ
in terms of approaching and developing enterprises.
35

2.5
2.5.1

Culture and Entrepreneurship


Ethnic Entrepreneurship

Understanding the differences in entrepreneurship behavior of various ethnic groups in the


context of the environment and economic opportunities (or lack of thereof) available in the
societal context has been a great challenge.
Ethnic entrepreneurship is a set of connections and regular patterns of interaction among people
sharing common national background or migration experiences (Waldinger et al., 1990a:3).
Since the emphasis for theoretical explanations of this phenomenon is based upon those patterns
of interaction, the focus of the majority of studies in this area is the ethnic group. Various
definitions for the term ethnic group have been suggested.
According to Yinger (1985:27) for example, an ethnic group is a segment of a larger society
whose members are thought, by themselves or others, to have common origin and to share
important segments of a common culture and who, in addition, participate in shared activities in
which the common origin and culture are significant ingredients. An alternative term used to
ethnic is immigrant entrepreneurs, which in turn would only include the individuals who have
actually immigrated over the past few decades. This definition excludes, however, members of
ethnic minority groups who have been living in the country for several centuries such as AfroAmerican in the USA, Jews in Europe or aborigines in general. Ethnic on the contrary, does
not exclude immigrant or minority groups.
Light and Gold (2000:3) for their part speak of ethnic economy, which they define as any
ethnic or immigrants self-employed group, its employers, their co-ethnic employees, and their
unpaid family workers. They further introduce the concept of ethnic ownership economy to
distinguish between an ethnic economy that is based on property right and ownership and an
ethnic economy whose basis is de facto control based on numbers, clustering, and organization,
the ethnic-controlled economy.
Whereas ethnic ownership economy consists of small and medium-size businesses owned by
ethnic or immigrant entrepreneurs and their co-ethnic helpers and workers, ethnic control
36

economy refers to industries, occupations, and organization of the general labor market in which
co-ethnic employees (not owners) exert appreciable and persistent economic power. This power
usually results from their numerical clustering, their numerical preponderance, their organization,
government mandates, or all four.
The ethnic controlled economy is completely independent of the ethnic ownership economy.
The participants in the ethnic controlled economy exert control rather than ownership authority.
2.5.2 Culture and Business
As an entrepreneur, you will come into contact with all kinds of people. Many of these people
will be from cultures different from yours whether your business operates only in Kenya or all
over the world, you will need to become familiar with and learn to respect other cultures.
Culture is a set of customs, beliefs, and social attitudes that characterize a particular group of
people. Every society has its own culture, and even culture and its own characteristics. Arab
culture emphasizes traditional religious belief and family values. Chinese culture emphasizes
respect for older people and commitment to family.

Traditional nature American culture

emphasizes respect for nature.


Kenya is a multicultural society. People from different cultures live here. As an entrepreneur,
you need to appreciate different cultures because:

You need to be comfortable with your customers. If you are open to other cultures you
can attract more customers.

People from different cultures may have different needs and wants. Understanding these
can help you market your business more efficiently with locally and internationally.

As an entrepreneur, you may have to work with people from different cultures. Hence, there are
at least five things that you can do to develop these relationships.

Avoid stereotyping people. Do not assume that all people form a particular ethnic or
cultural group behave the same way or like the same thing.

37

Focus on similarities rather than differences. Most people, regardless of their culture,
want the same things in life.

Learn about different cultures. Learning about different cultures will make you more
comfortable around people from that culture.

Make friends with someone from a different culture.

This can help you begin to

appreciate different cultures.

Try to understand and identify with other peoples feelings. Try to understand cultural
views that are different from your own.

If you do business approach, you will need to learn about cultures of the countries in which you
plan to operate. Hence,

Familiarize yourself with other cultures.

Speak the language.

Research different cultures.

Understand cultural practices.

Develop cultural sensitivity.

2.6 Gender and Entrepreneurship


Women constitute around half of the total world population. In traditional societies, they were
confined to performing household activities.
participate in all sorts of activities.

In modern societies, they have come out to

The global evidence buttress that women have been

performing exceedingly well in different sphere of activities like academics, politics


administration social work and so a Khanka (199). Now, they have started plunging into
industry and also running their enterprises successfully. Therefore, it is fitting to explore how
gender and entrepreneurship are related.
Women entrepreneurs may be defined as a woman or a group of women who initiate, organize
and run a business enterprise. In terms of Schumpeterian concept of innovative entrepreneurs,
women who innovate imitate or adopt a business activity are called women entrepreneurs ? In a
nutshell women entrepreneurs are those women who think of a business enterprise, initiate it,
organize and combine the factors of production, operate the enterprise and undertake risks and
handle economic uncertainty involved in running a business enterprise.
38

Women are the backbone of economic development in many developing countries. Global
entrepreneurship monitor (GEM) reports that women entrepreneurs create jobs, wealth and
innovation across 37 countries surveyed. In many of these countries the rate of growth of
women creating new business is greater than the rate of growth for men entrepreneurs.
(Reynolds, et al 2002).
Women entrepreneurs in Kenya are creating employment and contributing to general economic
growth 48% of all micro-small and medium sized enterprises (MSMES) which contribute 20%
of Kenyas GDP have created 462,00 jobs annually since 2000.
In spite of their contribution to the economic development, their freedom to lead and make
strategic business decisions is greatly hampered by among other things culture, financial status
and lack of education.
A growing amount of research shows that countries that fail to address gender are losing out on
significant economic growth. (World Bank)
The Gender and Economic Assessment in Kenya demonstrates that addressing gender barriers in
Kenya could generate significant economic gender based inequalities in education and access to
agriculture inputs in Kenya could result in a one off increase in as much as 4.3 % in GDP growth
if this gender barriers are tackled.
Needless to say, such trend in the field of entrepreneurship has attracted queries as to what drives
and motivates women to start up businesses of their own despite the many challenges they face.
2.6.1 What would Motivate Women to Become Entrepreneurs?
Most women entrepreneurs have similar motivational drives as that of their male counterparts
i.e.

Being ones own boss

Opportunity to make more money


39

Belief that running ones own business is more compatible with balancing ones familiar
role.

The fact that corporate worlds have opened up more opportunities for women. It also
appears that women who set up their own business.
Had become frustrated with demanding but unsatisfying work environment

Had a need to earn a reasonable living

The inflexibility and unaccommodating nature of the corporate world t


womens situations

The problem of discrimination and the glass ceiling effect that deprives

women to achieve more senior executive positions.


Since the family affects aspects of personal development. Goal orientation, personality and
motivation, it is thus an early and overriding source of influence on career choice. In particular,
it is proposed that when a child of an entrepreneurial mother perceives his/her parent (the role
model) as positive and successful, then the child is most likely to imitate the entrepreneurial
mother.
The probability of someone becoming an entrepreneur can be increased by exposing the
individual either vividly or through formal learning experiences to tasks associated with owning
a business.

2.6.2 Challenges/Barriers that Prevent Women Entrepreneurs from Reaching their full
Potential (Negative influencing factors to women entrepreneurs in Kenya)

Unequal access to property and land


In Kenya only 1% of land titles are owned by women, while 5 to 6% held in joint names.
Unequal access to land and property means that women are unable to secure loans for
their businesses.

Without financing, women are unable to grow their businesses, and

they remain stuck at the micro-enterprise level.

40

As noted by Roseanne Ndiga, owner of Green Corner Caf in Nairobi


I have approached several banks but they would not give us loans because of collateral
Source: Voice of Women Entrepreneurs in Kenya.

Taxes and customs


In a recent World Bank survey, over 60% of women perceived taxes and customers as
constrains to their business growth, compared to only 40% of men.

This negative

perception makes women less likely to register their businesses and it deprives the
government of tax revenue.

Culture
These are the customs and beliefs, art, way of life and social organization of a particular
group (Oxford advanced learners dictionary).
Most Kenyan cultures look down upon women, and they emphasize that their main role is
to take care of their husbands and children. Women who deviate from these expected
norms are considered to be deviants.
In fact it is a common trend in Kenya to find that most success women are either single or
are divorced.

Lack of decision making authority


Women have always been subjected to dependence on significant men in their lifes when
it comes to decision making. Even when they run their own businesses, men always feels
like they have an upper hand in deciding what goes regardless of how much they
understand the business.

Limited mobility
Unlike men, women mobility in Kenya is highly limited due to various reasons.
Cumbersome exercise involved in starting an enterprise coupled with the officials
humiliating attitude towards women compels them to give up the idea of starting an
enterprise.

Competition from well established male dominated enterprises


Men have their own way of running their businesses. They also have other advantages
that women do not have that make them offer women stiff competition. Some of this
includes issues like, men can take greater risks, and they are more capable of using
uncouth means e.g. bribery, corruption among other which women shy from.
41

Lack of accurate information


Relative lack of exposure to the external world and poor networking were seen as
impediments to Kenya women entrepreneurs.

Lack of finance for expansion


Women experience in negotiating with banks and their lack of financial confidence to
argue for what they are entitled to are some of the challenges faced by women
entrepreneurs in obtaining loans.

Lack of risk take propensity


Lack of confidence, strong individual involvement and willingness to take risks prevent
women entrepreneurs in sustaining successful entrepreneurship. (Richard, Howarth and
Finnegan, 2004)

Domestic commitments (balancing a womans role in the home and enterprise


expectations). Socio-cultural expectations.

Lower education levels


This puts Kenyan women entrepreneurs at a disadvantage compared to men. While the
gender gap in primary education has decreased in the recent years, the gap remains large
at the tertiary education levels.
A curriculum that does not emphasize entrepreneurship skills decreases the chances that
women will have the knowledge needed to excel in business.

Stereotyping
Societies view are largely negative about women entrepreneurs and many are pessimistic
about the capabilities and think that they are doomed to fail in a male dominated
environment.

Poor access to justice


Although this is seen to affect both men and women, access to justice is essential for
ensuring smooth business operations, and it spans to issues such as enforcing contracts
and employment disputes. Women in Kenya have difficulties when accessing justice.
Using formal courts in Kenya ca be costly, complex and time consuming. When a
women entrepreneur finds herself in court, the process can have potentially destructive

42

consequences as noted by Esther Passaris of Adopt A Light. This could be because of the
dubious judiciary system, which seeks to serve their interests, apart from solving the case.
2.6.3 Positive Influencing Factors to Women entrepreneurs in Kenya
1. Characteristic traits
2. Government policies
3. Characteristics traits
Studies have shown that women have certain characteristics that could propel them out of
poverty if harnessed.

Jailbert (2000) suggested that women entrepreneurs have common

characteristics

Sharp communication skills

Intuitive people skills

Consensus building competencies

Multi-tasking

2. Government policies
(a) Recent policy trends in Kenya
The government is looking into increasing representation of women in all key decisions making
organs.
There may be greater benefits for encouraging leadership and strategic decision making by
women entrepreneurs in the future that in the past. This includes the emergence of greater
democratic space for women coupled with change in profiles of women transition economies,
increasing gender mainstreaming (UNDP, 1998).
However, despite the above, Lapidus (1993), delineated three features that deserve emphasis for
their role in shaping womens economic position.

Women must overcome sexual stereotyping of occupation which is sustained by


government policies and societal attitudes.
43

Female occupational choices are profoundly influenced by mens authority.

Women entrepreneurs who pursue demanding careers encounter societal prejudices,


because women are expected culturally to assume household responsibilities.

b) Government initiative to support women.


Through the women enterprise fund, the Kenya government has put plans in place to enable
women assess funds to start and also expand their business. This fund is designed to address
the perennial challenges women face in their desire to venture in enterprise development.
The fund has so far been able to support over 10,000 women entrepreneurs (Ministry of
Gender & Social Services).
c) Banks and Loan Services
The banking sector has also improved greatly in its support towards womens development
issues. In the past, it was impossible for a woman to acquire a bank loan without the husband
consent. This greatly limited a womans ability to start or expand any development idea she
had.
Nowadays, women can easily get loans for as long as they can show that they are capable of
paying and if they have collateral.

This has greatly contributed to success in many

businesses run by women.


The women enterprise fund is a bit limiting because it mainly targets women who have micro
enterprise. Those who need huge capital to begin large businesses can only seek help from
the banks.
2.6.4
1.

Differences between men and women entrepreneurs


Decision making

Men make more independent decisions compared to women. Women and especially those
who are married have to depend on a large extent on their husbands when making decisions.
When women make decisions without consulting men, conflicts are about to arise.
Many women agree that their enterprises would do much better if they were able to make
independent decisions.
On the contrary, men are known to make major decisions without consulting their wives.

44

2.6.4 Differences between men and women entrepreneurs


1. Decision making
Men make more independent decisions compared to women. Women and especially those
who are married have to depend on a large extent on their husbands when making decisions.
When women make decisions without consulting men, conflicts are bound to arise. Many
women agree that their enterprises would do much better if they were able to make
independent decisions.
2.

Strategy and leadership

Even though there are many pieces of policy documents on gender mainstreaming and
empowerment, the changes are yet to take effect. This has greatly curtailed womens
efforts to succeed as they should in their enterprises.
3.

Risk taking

Men take more and bigger risks compared to women. The belief that the bigger the
risk the greater the gain can be seen when the men reap their benefits.
Recommendations

Recognition

Women entrepreneurs need to be recognized of their existence.

They need to be recognized as a group contributing towards economic growth and


development of the country.

As long as these entrepreneurs are not recognized and given priority, their potential and
entrepreneurial capacity will remain undermined.

Reduce domestic burdens of women


Young non schooling children can pose a great challenge to a woman entrepreneur. If
day care centers could be set up to take care of young ones, then this burden could be
eased.

Access to education
Poor access to education and training programs which are imperative in helping women
in their entrepreneurship, managerial and technical skills should be thoroughly addressed.
In Kenya, there are several NGOs that support women entrepreneurs. They include:
45

Kenya Women Finance Trust.

Equity bank in conjunction with a UN agency.

African Networks and Associations of People living with HIV.

Abantu for Development.

Kenya Eco Village Program. (Transforming Rural Lives and Settlements)

Any others.

Social and Ethical responsibilities of the Entrepreneur

Entrepreneurs have responsibilities to the people they work and deal with. They also have
responsibilities to the communities in which they are located. They even have a responsibility to
the environment. An owner of your own business, you will also be forced to deal with what is
right or wrong. In other words you will have to make ethical decisions about the way you want
to run your business.

Hence, in this section, we will explore the social and ethical

responsibilities of the entrepreneur.

Social Responsibilities

As an individual, you have personal responsibilities to yourself, to your family, and to your
friends. As an entrepreneur, you have responsibilities to your customers, your suppliers, your
investors, your creditors, and your community.

Responsibilities to customers
Your customers are your most important assets. You will need to treat them correctly, or
they will no longer use your services or buy your products.

When dealing with

customers, you should:

Treat all customers with respect

Be honest.

Never take unfair advantage of customers who do not know

everything about the product or service they want to buy. Help your customer make
good purchasing decisions.

Avoid exaggerating the merits of your products or services. Remember that


customers who are not happy with what they purchase will not do business with you
again.

46

Inform customers of possible dangers of the products you well. Remember that
this is also a legal requirement.

Handle all disputes fairly. Try to see both sides of an issue when there is a
disagreement with a customer.

Responsibilities to Suppliers
You depend on your suppliers to provide you with the goods you need to manufacture or
sell your products. Hence, to ensure that you maintain good relationship with them, you
need to:

Treat all suppliers with respect

Refuse to participate in dishonest schemes your suppliers may suggest; especially


schemes to conceal payments from Revenue Authorities.

Give suppliers time to fill your order. Try not to wait until the last minute to ask
for supplies.

Handle all disputes fairly.

Let your current supplier know the reason for your decision if you change
suppliers.

Responsibilities to Creditors and Investors


Creditors and Investors have shown faith in your ability to succeed. To repay their
confidence in you, you should run your business as carefully as possible. Never conceal
losses and things negative about the business from them.

Responsibilities to your Community


Business owner have a special responsibility to their communities.

They can get

involved in Community issues by:

Contributing money to charities, cultural institutions, and causes in which they


believe.

Not all businesses can make large contributions, but any donation is

welcomed.

Donate products or services used. Used clothing stores donate unsold clothes to
charities.

Get involved in issues affecting local authorities i.e. cleaning parks, or get
involved with charitable organizations, volunteering both time and money.

Responsibilities to your Employees


47

Whenever society changes, businesses have to respond. In order to attract and retain
good employees, you will have to become sensitive to the needs of the people who work
for you by:

Accommodating your employees family needs.

Considering flexible working hours e.t.c.

Respect the Environment


Damage to the environment comes from different sources. Businesses have a major
impact on the environment. As an entrepreneur, you will have an obligation to do as little
harm as possible to your surroundings. To meet your environmental responsibilities, you
should:

Protect the environment from pollutants.

Dont knowingly dump hazardous

materials on the ground or in lakes and rivers.

Conserve non-renewable resources, such as coal and oil, by using them


efficiently.

Reduce waste and dispose of waste responsibly. Recycle materials such as paper,
plastic, glass, steel e.t.c.

Use environmentally safe and sustainable energy sources to meet your business
needs.

Sell products that cause as little damage to the environment as possible for
example, do not sell a car wash solution that kills plants.

2.7.2

Ethical Issues

Ethics is the study of moral choices and values. Ethics involve choosing between right and
wrong. Behaving ethically means behaving in an honest manner. Different cultures define
ethical behavior differently. In some countries, it is considered unethical to take bribes; in others
paying bribes may be an accepted business practice. Even within the same culture, individuals
develop different standards, or codes of ethics. A code of ethics is the level of ethical behavior
demanded by an individual, a business, or a culture. Some individuals have very high standards
of ethics while others do not develop a standard of ethics at all. They act without thinking
whether their actions are right or wrong.
48

Business ethics have to do with the application of the principles of right and wrong to issues that
come up in the work place. Some people believe that entrepreneurs need not concern themselves
with ethical issues. They might think that acting ethically can hurt their profits. In fact, using
ethics in business can help you avoid disasters. It also can make customers and suppliers more
willing to do business with you.
As the owner of your business, it will be up to you to inspire your employees to behave ethically.
You will want to establish an ethical workplace for several reasons:

You want to do the right thing

You want to serve as a role model to others

You want to be proud of the way you conduct yourself, and you want others to be proud
of you

Ethical behavior is good for business because it gains the trust of customers

Employees are more likely to act ethically if they see the business owner acting in an
ethical manner

Acting ethically reduces the possibility of being sued.

One way that you can communicate your ethical beliefs to the people who work for you is by
creating a written code of ethics. Such guidelines will help you and your employees make
ethical decisions.

Entrepreneurship Career and Education in Kenya

An entrepreneurial activity stimulates innovation upon which economic growth and development
depend. The high degree of correlation between entrepreneurship and economic growth warrants
it being taught. Entrepreneurship is practical economics. It is therefore important to teach the
practice of economic theory. There may be some genetic and environmental inclinations that
tend to destiny some people forward entrepreneurial careers. But there is some evidence to
suggest that many more people have entrepreneurial potential but never become entrepreneurs.
Education therefore has a central responsibility in identifying and nurturing those who can be the

49

change agents in the decades to come, and can make a profound differences in the future supply
of entrepreneurs.
Activity 2.2
What should Entrepreneur Education focus on?

Ideally, it should focus on:

Equipping the learner with characteristics and skills that make them eager to become
venture initiators.

Focus on the historical context and descriptions of the role of the entrepreneur and
entrepreneurship in economic history.

Focus on developing innovation, risk taking, imagination, problem solving and decisionmaking skills.

Aim at changing the attitudes.

Summary

In this Lecture, we have looked at various myths that have been advanced
about entrepreneurship, with the major theme being the argument whether
entrepreneurs are born or taught. We have also looked at four theories of
entrepreneurship, i.e. psychological, sociological, economically and
anthropological. We have also explored the relationship between
entrepreneurship and culture, and also gender. We have examined the
Challenges affecting women entrepreneurs in Kenya, and the efforts being
made to promote up and coming female entrepreneurs. This lecture has also
examined the social and ethical responsibilities of the entrepreneur and
looked at the reasons why it is important for the entrepreneur to have
business ethics and also show some social responsibility toward various
important stakeholders. We have concluded by briefly looking at
entrepreneurial education and what it entails and the career path of an
50

entrepreneur

Activity

Give an account of growth of women entrepreneurs in Kenya

It is important for entrepreneurs always to act in an ethical


manner? Why or why not?

Explain the concept of social responsibility

Why are some communities more entrepreneurial than others

Advance the view that Western Nations (especially Americas) are


more entrepreneurial than developing countries (i.e. Kenyans)

Advance the view that certain ethnic communities are more


entrepreneurial than others.

What career paths are available for entrepreneurs in Kenya.

Activity
Give an account of growth of women entrepreneurs in Kenya

It is important for entrepreneurs always to act in an ethical


manner? Why or why not?

Explain the concept of social responsibility

Why are some communities more entrepreneurial than others

Advance the view that Western Nations (especially Americas) are


more entrepreneurial than developing countries (i.e. Kenyans)

Advance the view that certain ethnic communities are more


entrepreneurial than others.

What career paths are available for entrepreneurs in Kenya?

51

References
Drucker, Peter. F (199) Innovation and Entrepreneurship.
Eno Maurel, Motivations and performance conditions for ethnic
entrepreneurship.
M.G. Visram, 1987; Red soils of Tsavo, Q Hunter Limited
Peter Njenga; 2008, Emerging Kenyan Entrepreneurs; Comlit
Communications
Robert D. Hisrich & Michael P. Peters; 2002 Entrepreneurship;
Tata
MacGraw Hill.
Drucker, Peter. F (199) Innovation and Entrepreneurship.

Eno Maurel, Motivations and performance conditions for ethnic


entrepreneurship.
M.G. Visram, 1987; Red soils of Tsavo; Q Hunter Limited
Peter Njenga; 2008, Emerging Kenyan Entrepreneurs; Comlit
Communications
Robert D. Hisrich & Michael P. Peters; 2002 Entrepreneurship; Tata
MacGraw Hill.
Oands Ogachi, 1999, Economic reform political liberalization and
Economic ethnic conflict in Kenya, Afrique et development
http:/joe, sagepub.com, journal of entrepreneurship
World Bank 2005. Youth Development in Kenya: Report on Economic
and Sector work Nairobi
Reynolds, P.D. (2002), Global Entrepreneurship Monitor (GEM)
Report on Women and Entrepreneurship London Business School
UNDP (1998), Gender and Poverty, social development and poverty
elimination division
Bitange N. and fides W.M. (2006). Women entrepreneurs and strategic
decision, UoN Kenya
http://www.morebusiness.com/business-entrepreneurship.

Drucker, Peter. F (199) Innovation and Entrepreneurship.

Eno Maurel, Motivations and performance conditions for ethnic


entrepreneurship.

M.G. Visram, 1987; Red soils of Tsavo, Q Hunter Limited

Peter Njenga; 2008, Emerging Kenyan Entrepreneurs;


Comlit Communications

Robert D. Hisrich & Michael P. Peters; 2002 Entrepreneurship. Tata


MacGraw Hill.

Oands Ogachi, 1999, Economic reform political liberalization and


52

economic ethnic conflict in Kenya, Afrique et development

http:/joe, sagepub.com, journal of entrepreneurship

World Bank 2005. Youth Development in Kenya: Report on Economic


and Sector work Nairobi

Reynolds, P.D. (2002), Global Entrepreneurship Monitor (GEM)


Report on Women and Entrepreneurship London Business School

UNDP (1998), Gender and Poverty, social development and poverty


elimination division.

Bitange N. and fides W.M. (2006). Women entrepreneurs and strategic


decision, UoN Kenya

http://www.morebusiness.com/business-entrepreneurship.

LECTURE THREE: FORMS OF ENTERPRENEURSHIP


SMALL BUSINESS ENTREPRENEURSHIP
The interpretation of small business varies across countries and continents. Different countries
identify small business by different rules, principles and standards. Regardless of these rules,
principles and standards, the expression small business is widely applicable to private trading
commercial or industrial enterprises characterized by small investment, assets, operation, output,
sales, number of employees and scope. In simple words, small business generally refers to
private enterprises managed on a small scale. These include workshops, wholesale or retail
stores, advertising agencies, professional and personal service firms, tailoring shops, hotels and
restaurants and many more of diverse description that are owned and run independently by
private individuals.

53

Activity
Attempt your own classification of business in Kenya

Individuals who fail to find suitable salaried jobs or who want to be their own bosses make their
living from self-employed occupations independently running small; trading, manufacturing or
service enterprises. Traditionally small enterprises, as owner-operators, take personal initiatives,
mobilize and invest own resources to start any suitable business requiring small capital and risk
their money and fortunes. For many of them it is not possible to begin with on a large scale.
Small enterprises, especially in developing countries, cut best capable of starting on a small scale
may not have access to ample finance, advance technology and also superior managerial
expertise to undertake improved operation.

As economic history describes in most cases

proprietor-operators of small establishments who take up their self-employed occupation on


economic necessities engage themselves in routine activities. Their meager resources, limited
specialization in small trade, economic ignorance, insensitivities to potential market
opportunities and inability to take bigger risks also add to the lack of entrepreneurship in their
operations. This explains why small business is mainly engaged in doing things in line with
conventional practices or techniques.
Nevertheless, as some writers point out, it is neither essential nor practical for every small
business person to possess all the entrepreneurial qualities. Even the qualities that high achievers
among successful innovators are not exactly similar in term of nature, constitution and degree.
The distinction between entrepreneurs and small business persons, therefore, is somewhat hazy
and contradictory.

There is no unanimity on this the question whether the concept of

entrepreneurship is applicable to large undertakings only or to small business ventures as well.


The importance of small enterprises in Kenyas socio-economic development has long been
recognized. The Kenyan government has attempted to come up with various policy guidelines in
support of the growth of small businesses. The principle reasons being those small businesses:
1.

Provide large scale direct and indirect employment to literature as well as illiterate people;
54

2. Help in the mobilization of resources, including small savings;


3.

Prevent concentration of wealth and means of production in the hands of a few;

4. Create equality of opportunity to all;


5.

Play prominent roles in the development of the national economy; and

6.

Bring about balanced regional development.

Advantages of Small Business


1.

Uses affordable machinery and other capital equipment

2.

It involves much lesser risk in terms of capital outlay

3.

An individual may invest own modest resources and start any suitable business requiring
little capital.

4.

It can be started within a short period and without much difficulty, especially where the
licensing regime is flexible.

5.

An ancillary unit may get financial and material support from large establishments.

6.

Much of wasteful expenditure on purchase, inventory advertisement and marketing can


be avoided.

7.
8.
9.

Its products or services may be offered at cheaper prices.


It provides employment to more illiterate and unskilled people.
It provides goods and services according to the specific needs and wants of the
customers.

10.

Attract numerous support and inducements from government.

Disadvantages of Small Business


1.

Inadequacy of capital hinders technological ingratiation, expansion, diversification or


4even replacement of old and absolute machinery.

2.

Absence of skilled personnel, modern technology and equipment and professional


management often weaken the competitiveness of a unit.

3.

Want of stringent quality control mechanism renders its products or services unacceptable
to customers.

4.

Power shortages, labour unrest, frequent increases in the costs of power and fuel, and
unrestricted entry of cheaper foreign goods add to the sickness of small units.
55

5.

Money lenders and middlemen frequently exploit owner-operators


who do not know practical marketing strategies.
Activity
Can you identity other advantages and disadvantages of small business?

TYPES OF OWNERSHIP
Many businesses are initially started by one person often with the help of the family members.
Others are started by one person then change to partnerships or limited companies straight away.
The different types of ownership may include:
SOLE PROPRIETOR
This is a one person business and is quite common all over the world. Such a firm is registered
in the name of the entrepreneur, though it can carry a trade name. The sole proprietor invests
own and borrowed funds and uses own skills and abilities in the management of affairs of the
firm. The abilities (or lack of them) of the entrepreneur determine success or failure of the
business. The proprietor is the only person who has the legal right or exclusive title to all the
assets of his/her business and is solely responsible for its operations control of the business
depends on the owner who has to work long hours and hardly takes leave since there is nobody
to relieve him/her. In case of proprietor decides to withdraw from all business activities and in
the event of there being none to succeed him/her, more often the business is sold to someone or
closed.
ADVANTAGES OF SOLE PROPRIETORSHIP
1.

Easy to start or to close

2.

Negligible restrictions

3.

Owners exclusive control

4.

Immediate decision and speedy action

5.

Direct supervision of employees

6.

Direct dealings with customers

7.

Low establishment expenses


56

8.

Owner enjoys all the profits

9.

Flexibility of operations

DISADVANTAGES OF SOLE PROPRIETORSHIP


1.

Inadequacy of resources

2.

Limited manpower

3.

Owners unlimited ability

4.

Dearth of managerial skills

5.

Excessive burden on owner

6. Growth and stability of business depend on owners health, initiative, and business
Acumen and innovational mentality.
FAMILY BUSINESS
Family members start a major portion of new businesses launched in the world every year. It is
estimated that 60% of businesses in the world start as family ventures and researchers estimate
that at least 90% of businesses in the United States of America are family owned and controlled.
Whatever the family ties, however, starting a business with a spouse, parents, siblings, children
or other family members presents unique challenges over and above the usual problems a startup
faces. Thats why only one in three family businesses survives to the next generation.
In the startup stage, the dangers can be especially acute. This is because busine4ss management
in family-owned companies is conditioned, as in any other company, by economic and
organizational factors, but also by emotional issues. Mixing business, personal and home life
will eventually produce a volatile brew. Family members sometimes join the excitement of a
business startup without a clear idea of their role once the business is underway. If the family is
involved in the startup venture, one should be clear up front about compensation, exit plans,
succession plans and other details before they become a problem in later stages of business
growth.

57

A family business may be defined in terms of ownership, authority and responsibility. One or
more family members have authority and responsibility while employees may or may not be
family members. Broadly, a family business can be defined as a business that is owned and
managed by one or more family members. It can also be define as an organization whose
direction is influenced through the exercise of kinship ties, management roles, or ownership
rights.
In summary, a family business is a unique synthesis of the following:

Ownership control (15 percent or higher) by two or more members of a family or a


partnership of families.

Strategic influence by family members on the management of the firm, whether by being
active in management, by continuing to shape the culture, or by serving as advisors or
board members.

Concern for family relationship

The dream (or possibility) of continuity across generations.

The following characteristics define the essence of the distinctiveness of family businesses:
1.

The presence of the family

2.

The owners dream of keeping the business in the family (the objective of business
continuity from generation to generation)

3.

The overlap of family, management, and ownership, with its zero-sum (win-lose)
propensities, which render family business particularly vulnerable during succession.

4.

The unique sources of competitive advantage derived from the interaction of family,
management, and ownership, especially when family unity is high.

5.

Generally stay together and basically have a common goal.

6.

Great cohesiveness due to shared background and values of the family members.

7.

Great potential for taking risks, developing human resources, access to capital and
provision of continuity particularly in comparison with public sector or large privatelyheld entities.

58

8.

Charitable services are visibly linked to specific family enterprises which have incentive
to ensure that programs actually work, providing needy groups and individuals with
better opportunities for development and autonomy.

9.

Capacity to make long term investments and more inclined to reinvest in itself to support
and perpetuate wealth for future generations.

10.

Operating philosophy of a family firm is typically guided by personalized mission to


whom employees can bond and rely upon for their sense of autonomy and personal
security.

11.

Founders and their successors in family firms tend to be highly accountable to them and
to maintain both a strong sense of family and responsibility.

CLASSIFICATION OF FAMILY BUSINESS


Family businesses in Kenya can be classified into three (3) categories:

Owner-managed business (OM) the entrepreneur or the one who started the business.

The sibling partnership (SP) after the entrepreneur, mom and dad die, the siblings try to
work in the family business.

The cousin syndicate (CS) when the siblings die, the cousins try to manage the family
business.

Succession planning in family businesses is one of the issues that have not been
adequately addressed and it is at this stage when the venture fails to carry on after the
second generation takes over. It is worth noting that succession planning in family
business is an important component that should be thought of as early as when the
venture is being initiated. But often, this does not happen. People start thinking of a
succession plan as late as when the founder is aged or even immediately after his or her
death. For those with a son or a daughter who is working in the family business, it is
natural to want to pass the business on to them. Sometimes, this works out great for
everyone. But all too often the second generation simply doesnt have the mindset to
continue the business effectively. For instance in the US, in Beating the Midas Curse,
Estate attorneys Rod Zeeb and Perry Cochell reference studies that show 65% of secondgeneration family businesses fail and a mind-boggling 90% of third-generation
59

businesses fail (Harris 1990).


Not much of the studies have been carried out in Kenya amount the reasons why family
businesses fail, but reading findings from such similar studies in the US and elsewhere
present generalizeable notions that cut across all family-owned businesses the world over.
For instance, accounting firm Kreischer Miller surveyed 3,000 family-owned businesses
in the US and found that almost all expect to keep ownership and management within the
family through the generations. However, only half have a formal plan in place to
identify and train family members to take the reins once founders retire. Many families
neglect to train mentor and groom future family executives. According to Mario Vicari, a
director at Kreischer Miller, familial bonds often discourage owners and family members
from disciplining relatives or holding them accountable for their performance. As a
result, Vicari finds that family companies are negatively affected because the second
generation of leaders was never fully prepared.
No matter how big a family gets, if they just depend on their won gene-pool, they are
bound to fail. In the larger scheme of things, families even good ones can and do
produce morons. They fail, because they disregard everyones advice and put those
morons in places of authority just because they are family members. Family businesses
ill fail because they stuff heir kith and kin in their boards so much that they dilute their
boards effectively, resulting in weak infrastructure that directly affects decision making.
Those who survive, on the other hand, are inevitably led by those who have the required
cajoles to stand up to familial and peer pressures and follow their longer term vision
resolutely, without succumbing to mediocre decisions made for momentary or egotistical
gains (Daniel, 2005) This is true for most family businesses in Kenya and the situation
becomes even cumbersome and complex when compounded with the strong cultural
beliefs and practices that are inherent in most African societies.
The founder as the most influential person in family business sets the tone for
management succession. The founders acceptance of the reality that the business will
sooner or later have a different generation of managers or it will no longer exist after
60

his/her exit fosters management succession planning while rejection of this reality stifles
the planning. Ideally, the founder integrates management concerns into strategic
planning and because family issues ultimately shape the business strategy, the
founder, in the succession planning has to have family commitment rather than just a
founder commitment.
Activity
Can you identify some of the reasons why family business in Kenya die
after the founder dies?

The following can be summarized as reasons why family businesses in


Kenya fail after the founder dies.
1.

Type of Family The success of a family business after the founders death can largely
rely on the type of family, i.e. whether a family is monogamous or polygamous.
Succession disputes are more likely to be rampant in a polygamous family set-up than a
monogamous set-up.

2.

Technical Reasons Many founders do not adequately prepare the second and third
generations with required technical skills to run the business. Families do not invest in
training their sons and daughters in management and other technical aspects required in
the business. There is a misguided connotation that because they are my sons or
daughters, they have the genes that will lead them to cussed like I have been. Also for
example if the founder was like a witch doctor or carpenter the family members may not
be able or interested to easily acquire such skills for the business to continue after the
founder dies.

3.

Legality of the Business The second generation may not be interested to carry on with
the business their parents did because of its legal status. A good example is the Akasha
family that denounced the lucrative narcotics business after the founders death.

4.

Social Network Enjoyed by the Founder The second generation may not enjoy a
well business connected network that boosted the founders ability to succeed in
business. Many business partners may shy off working with the second generation for
61

lack of trust or merely because of the age gap. Initiating a new social network in the
industry will of cause shocks for the business.
5.

Debts and Other Liabilities left by the Founder Often, when the founder dies, that
business is obligated to clear all debts and liabilities entered into by the deceased. This
means digging into the business savings and sometimes working capital as well as assets
to clear such pending issues. This can greatly affect a venture and may even cause its
collapse.

6.

The Founder Syndrome many business founders have a pattern of clinging to the
business empire they created from scratch and are not willing to let out any information
or control over the business they founded. This effectively keeps off the family members
off the business affairs. The natural scenario in such a case is that the business dies when
the founder dies.

7.

Culture The African traditional culture states that only sons should inherit property,
family businesses included. This means that even if the family has a very capable
daughter, the sons, who may not be as competent as the daughter take over the business.

8.

Lack of Interest The sons and daughters may not be interested in pursuing family
business as a career. This means they opt to take up other careers at the expense of the
family business.

9.

Lack of proper documentation and Record Keeping Founders may not keep
adequate records of all business transactions. Most of the information is stored in their
own memories, thus, the second and third generations do not have a chance to learn from
past business experiences.

10.

Founders Short Term Vision Some family business founders only initiate businesses
as a means to earn a livelihood to feed family. The argument here is once the children are
grown up; they will set up their own businesses or look for other means of earning a
livelihood.

11.

Lack of Specialization The founder changing from one business to another thus the
family feel they have no business they can promote.

12.

Favoritism by founder thus the rest rebel against the favored ones once the founder
dies.

13.

No name to protect by Family members, for example, Kamau and sons enterprises.
62

14.

The Government has not put up any strategies to ensure family businesses can move
peacefully after the founders death.

15.

Business vision lacking and where available not shared among family members thus the
founder dies with the vision thus the remaining family members nay not know where it
was heading.

16.

Panic by suppliers, customers, creditors and other players in the business lading to some
shifting loyalties while others want all debts and liabilities cleared instantly thus
destabilizing the business.

Fig. 3.1 Possible Changes in New Venture Status

Family business may or may not fail as indicated in the model above
Activity
How in your opinion may children be prepared to take over the family
business?

Preparing children to take over a family business is an initiative that should start as early
as when the business is being formed. This means planning for succession of the
business by family members is a major issue if a business has to survive after the
founders death. But a fundamental question here is should it be a must that a business
started as a family venture should always be run through generations of the same family
members? This notwithstanding, the following steps can be undertaken to prepare
children to take over the family business after the founders exit.

Involvement of children in running business Children should be treated as partners


and part and parcel of the family business. They should be kept within the loop and
actively participate in all business processes of the family venture. This creates a sense
of recognition and ownership among the children and increase their commitment to
success of the business even after the parents die.

Vision, mission and goals shared among all family members More often, the family
venture is a brain child of the founder who may not be interested in sharing his/her vision
and mission with the rest of the family members. This creates an isolation where children
63

and other family members feel left out. In order to motivate children to take the business,
the vision and mission of the family business should be shared across all family
members.

Ensure family members accrue benefits Some family business are solely run and
managed by the founder. All benefits are under his/her custody and will be utilized after
his/her authorization. It is important to let the family members; children included benefit
from the venture so that they can see and feel its value, thereby committing to drive it to
success many years later.

Appropriate training in relevant technical fields Taking the example of many Asian
family businesses, we see that different family members are trained in different
professional fields like accounting, management, information technology and so on. This
makes the family business self sufficient in terms of technical expertise.

Branding of family business When citing the name of the business, choose a brand
name that is all inclusive and shows recognition and concern of the family lineage. A
good example is the way Asian family businesses are branded. For example, A.O.
Bayusuf and Sons. This gives the children some security and protection in terms of
owning the business after the parents die.

Develop a succession plan. A family business without a formal succession plan is


asking for trouble. The plan should spell out the details of how and when the torch will be
passed to a younger generation. It needs to be a financially sound plan for the business,
as well as retiring family members. Outside professional advice to draw up a plan is
essential.

Require outside experience first. If your children will be joining the business, make
sure they get at least three to five years business experience elsewhere first. Preferably in
an unrelated industry. This will give them valuable perspective on how the business
world works outside of a family setting.

Divide roles and responsibilities. While various family members may be qualified for
similar tasks, duties should be divided up to avoid conflicts. Big decisions can be made
together, but a debate over each little move will bog the family business down.

Treat family members fairly.

While some experts advise against hiring family

members at all, that sacrifices one of the great benefits of a family business. Countless
64

small companies would never have survived without the hard work and energy of
dedicated family members. Qualified family members can be a great asset to your
business. But avoid favoritism. Pay scales, promotions, work schedules, criticism and
praise should be evenhanded between family and non-family employees. Dont set
standards higher or lower for family members that for others.
3.4.3

Partnership Business

This is formed when two or more people team up to do business together. In simple
words, when by means of a contractual agreement several individuals associate with
common ownership and management of a venture, such a business relationship is termed
as partnership. Partnerships are governed in Kenya by the Partnership Act (Cap 29).
Some of the significant features of partnership are:
1.

The primary objective of partnership is to share profit or losses.

2.

A relation without profit motive is not regarded as partnership.

3.

A partnership venture must be managed by all partners or by anyone among them acting
for all.

Types of Partnership
Partnership is broadly classified in two groups:
1.

General or ordinary; and

2.

Limited partnership

General partnership is again divided into two subgroups:


(a)

Partnership at-will and

(b)

Joint venture or particular partnership

General or ordinary partnership refers to an arrangement, which makes all


the partners jointly and severally responsible for all the debts and liabilities
of a business. Simply defined, all partners will have to hear the risks or
unlimited liabilities.
In limited partnership:
65

(i)

There must be one or more general partners whose liabilities for all the debts and
obligations of the firm shall remain unlimited; and

(ii)

there must be one or more limited (also known as special) partners who will be liable for
an amount to the extent of ones capital contribution.

Partnership-at-will refers to a business formed for an indefinite period, i.e. without any
specific agreement about the continuance of partnership.
Partnership-at-will can be dissolved at any time as and when a notice to that effect is
served by a partner. Particular partnership, who known as joint venture, or period and it
comes to an end on soon on the specific purpose or period is over.
Formation of Partnership
A partnership may be formed by oral or by written agreement or inferred from the
conduct of parties. However, in the event of disagreement occurring in future among
partners, for proper adjudication of disputes, it is the normal practice that the terms and
conditions as agreed upon by partners are written in detail? These terms and conditions
are incorporated in a document known as a partnership deed.
The particulars that are of major significance and incorporated in a
partnership deed relate to:
(i)

Name and address of the firm;

(ii)

Nature of business and its duration, if any;

(iii)

Names and addresses of partners;

(iv)

The date of commencement and the duration of partnership.

(v)

The amount of capital to be contributed by each partner and methods of raising finance in
future if so required.

(vi)

The ratios of sharing profits and losses

(vii)

Salaries, commissions etc., payable to partner (if any).

(viii)

The duties, powers and obligations of all partners.

66

(ix)

The procedures to be followed in case of retirement, death and admission clause of


partners.

(x)

Arbitration in case of disputes among the partners.

(xi)

Criteria for introduction and expulsion of partners.

(xii)

Causes for dissolution and method of settlement of accounts.

(xiii)

Rights of remaining partners to buy in shares is a retiring partner.

(xiv)

Method of valuation of goodwill and other assets and liabilities in care of addition or
retirement or death of a partner.

Advantages of Partnership
1.

Not much of statutory formalities are involved for setting up a unit.

2.

Partners mobilize own resources and thus facilitate inflow of required funds.

3.

Partners take personal attention for better management and profitability.

4.

Units having sound financial position may secure loans from financial institutions.

5.

It is possible to take quick actions as the circumstances may demand.

6.

Partners cooperation and proper supervision of workers ensures higher productivity and
better services to customers.

Disadvantages of partnership
1.

Every partner is liable for business debts to an unlimited extent.

2.

All partners will be held responsible for mistakes or misdeeds committed by any one of
them.

3.

Disagreement or lack of cooperation among partners, or dishonesty of anyone may


disturb the very existence of the business.

4.

Ownership right is not freely transferable because a partner cannot sell his/her share
without the consent of others.

3.3.4

Cooperative

A cooperative society is a voluntary association of ten or more individuals who come


together for the benefit of their common economic interests. It is a joint enterprise where
all the members contribute capital and labour and who manage its affairs with an
67

understanding to primarily distribute among themselves equally the profits earned or


benefits derived out of that venture.
Cooperative activities are widely practical in various areas of economic life.
Some of the major areas of operation include:

Individual or producers cooperatives organized and managed by small producers who


join human to effectively meet the competition form large producers.

Agricultural cooperatives formed by to obtain necessary inputs and assistance (seeds,


fertilizers, implements, finance etc), for production as well as marketing purposes.

Credit cooperatives are formed to collect and accumulate members own small savings
that they distribute among members, requiring immediate financial aid on loans.

Service cooperatives are run with a view to rendering varied service facilities to own
members at no-profit-no-loss basis.

Advantages of Cooperative
1.

It is relatively easy and simple to form and establish

2.

Ordinarily talented individuals lacking much of material possessions may benefit by


becoming its member

3.

Liability to each member is limited to the extent of ones investment in it.

4.

Retirement, death or insolvency of any member does not in any way affect its continuity.

5.

It is managed by a committee directly elected by its members.

6.

Members are entitled to get quality goods or services at fair prices or loans at
concessional interests and on affordable terms of security and repayment.

7.

Generally members render voluntary services for daily operations and as a result its
productivity may be better and establishment expenses much less.

8.

Shares held by members are easily transferable.

9.

Members are assured of prompt marketability of their products affording quick and
reasonable returns.

10.

Moneyless members are freed from being exploited by middlemen and financers.

68

Disadvantages of Cooperative
1.

Generally people having technical skills or managerial expertise are not admitted as
members or appointed as employees.

2.

Want of skilled personnel or absence of coordination among members adversely affects


operational efficiency.

3.

Groupism, rivalry and mismanagement by vested interests often lead to inefficiencies or


closure 0f a unit.

3.4.5

Limited Company

This is an association of many individuals, who contribute to a common capital to


conduct a business for gain. The common capital is divided into equal parts, each of a
certain fixed uniform value, know as shares and the individuals so contributing are
members commonly known as share holders.
Important Features of Limited Companys.
1.

A limited company has a separate and independent legal entity as if an artificial person.

2.

Its existence continues indefinitely so much so that it is not to be dissolved due to the
retirement, death or insolvency of any member.

3.

Any of its shareholders can freely sell and transfer own shares without the consent of
others.

4.

Its management is controlled by a Board of Directors elected by and from the


shareholders.

5.

Its shareholders have no right to participate in the general conduct and management of
business and affairs of the company.

6.

It has a right to acquire and transfer property in its own name.

7.

It can sue others and be sued by others in its own name.

8.

It can admit equity as well as preferential shareholders. Preference shareholders will


have preferential rights to profits and also to refund of capital, in the event of its
dissolution, but will not have any voting right. The right of equity shareholders to profits
and refund of capital will come next to that of preference shareholders, but they will have
the voting rights.
69

9.

It can take up any risky venture, because its liability is limited to the aggregate face value
of its total number of shares.

10.

Its shareholders are not responsible for the acts of the company.

Advantages of limited company


1.

Liability of every shareholder is limited.

2.

Shares are transferable freely

3.

Continuity of existence is certain

4.

Sufficient capitable is obtainable

5.

Technical and managerial experts may be employed

6.

Advance technology may be introduced to improve operational efficiency.

7.

Risky ventures having higher profit possibilities may be undertaken.

8.

Significant economies of large scale production is achievable.

9.

Significant economies of large scale production is achievable.

Disadvantages of Limited Company


1.

Burden some procedure to be completed for formation and registration.

2.

Numerous statutory requirements make the operation difficult and expensive.

3.

Few shareholders control the management and enjoy most of the benefits.

4.

Majority of shareholders do not have any control over the general conduct of business.

5.

Large workforce, confrontation with management and labour unrest become unavoidable.

3.5

FRANCHISE

A franchise is a right granted to an individual or group to market a companys goods


or services within a certain territory or location. The franchisor (the company owner)
sells the rights to the franchisee and then typically receives a fee for ongoing support,
therefore having a vested interest in the success of each franchise. In other words it is an
agreement or license between two parties which gives a person or group of people the
right to market a product or service using the trademark of another business.
Franchising began back in the 1850s when Isaac Singer invented the sewing machine.
70

In order to distribute his machines outside of his geographical area, and also provide
training to customers on the use of the machines, singer began selling licenses to
entrepreneurs in different parts of the country. Today many such franchise opportunities
are advertised via the web and other media. Examples of franchises include carvel,
Tutoring club and liberty tax service.
In short, franchise implies a contractual arrangement between a principal and its Agent or
Agents for mutual benefits from a business established by the Principal in exchange for
certain payments. In franchise system, a Principal (usually an individual or an enterprise)
is commonly known as a franchisor or licensor and its agent (also an Individual or an
Enterprise) as a franchisee or licensee.
3.5.1

Important Features of Franchise

1.

Franchisee manages own affairs with autonomy, selling or providing franchise product or
services, and assumes all risks generally associated with any business.

2.

Franchisor plays the role of entrepreneur, starts a new venture in the face of competition,
undertakes business in line with worn innovatory idea and explores untapped market
opportunity.

3.

Franchisor requires that every would-be franchisee must have:

The requisite funds for non-refundable license (entry) fee and refundable
security deposit, with payable to franchisor to start with

(b)

The capacity to arrange for own use of the necessary business accommodation,
manpower, office equipment and furniture; and

(c)
4.

The will and determination to achieve high business turnover.

Franchisee is appointed for a specified location keeping in view the business possibility
that can be developed in that area.

5.

Reputable franchisor attracts customers because of the general belief that the quality of
the products or services belonging to a well-known name would be as good as that of
similar products or services bearing the same name marketed elsewhere and for which
one does not have to travel to faraway places.
71

6.

Franchisor usually provides franchisee with necessary expertise, implements, materials as


well as sales promotional supports.

7.

Franchisee pays from time to time a predetermined share of the profit, termed as loyalty,
to franchisor.

8.

Franchisees success is very much dependent on franchisors business integrity and above
all customers confidence in franchisors products or services.

3.5.2

Advantages for Franchisee

1.

There is a higher likelihood of success since a proven business formula is in place. The
products, services, and business operations have already been established.

2.

Bankers usually look at successful franchise chains as having a lower risk of repayment
default and are more likely to loan money based on that premise.

3.

The corporate image and brand awareness is already recognized. Consumers are
generally more comfortable purchasing items they are familiar with and working with
companies they know and trust.

4.

Franchise companies usually provide extensive training and support to their franchisees
in effort to help them succeed.

5.

Many times products and services are advertised at a local and national level by the main
franchise companies. This practice helps boost sales for all franchisees, but individual
franchisees dont absorb the cost.

6.

A franchise is a duplicate of a successful business concept. The franchisee owns the


outlet, therefore, he hires his own employees and oversees the management its day-to-day
operations. He has high stakes in the business because his money is involved.

7.

When one buys a franchise, he is buying an established concept that has a good record of
accomplishment. The franchise is allowed the use of the companys trademark and brand
name. Because of this, the company is, in effect, giving the franchisee a license to
market its products carrying a brand that is already familiar with the consumers. Many
popular franchises have instant brand-name recognition and have created a loyal
following among consumers. Therefore, the franchisee is getting into a business that
already has a ready market.

72

8.

Although running his own business, the franchisee can tap the services of the parent
company anytime he needs assistance. The services of the head office organization are
available to him, too, whenever he needs help. Furthermore, many companies have field
operations personnel whom the franchisor can call on to help him deal with any problem
he may encounter in the operation of the business.

Most franchises being offered

nowadays are turnkey operations.


Upon the signing of the franchise agreement and payment of the franchise fee, the
franchisee receives the equipment and supplies required in running the business.
Furthermore, the franchisor provides assistance in identifying a good business location
for the new outlet.
The company assists the franchisee in negotiating his lease, preparing plans for outlet
layout, shop fitting, and furnishing his store. It also provides assistance in determining
the appropriate stock inventory for the opening of the business. This kind of support and
the other benefits under the franchise agreement is what sets franchising apart.
9.

The franchisee is given the necessary training to start his business and eventually run it
smoothly. The franchisees as well as his employees are taught all the business systems of
the company covering product preparation, quality standards, business controls,
recruitment of personnel and marketing. A good franchisor will provide training to the
franchise staff on a continuous basis.

10.

Compared to a non-franchise business, less capital is needed in a franchised business


since the experience and tested system of operations of the parent company would
already have eliminated the unnecessary expense incurred through trial and error.

11.

The franchisee is able to procure all necessary supplies at lower costs because the prices
are negotiated by the company with the suppliers in behalf of all the franchise units.
Because of the size and projected regularity of orders, the franchisor is able to get huge
discounts.
Buying wholesale for the whole network means big savings for the individual franchises.
This gives the franchises a big advantage over their competitors because they are able to
73

reduce expenditures on a continuous basis. This procurement set-up is definitely more


advantageous to the franchisee as against procuring supplies independently.
12.

A franchise is the beneficiary of an extensive marketing campaign made possible by the


sharing of the costs by the franchises. Many franchisees are required to shell out and
advertisement royalty to the company as their share in the cost of promotional campaigns
of the company, effectively spreading the cost among all the franchises.
This accounts for the large marketing resources of the franchisor enabling the company to
avail of the services of top-caliber advertising agencies.
Being situated in highly visible locations and benefiting from a huge promotions budget
is a potent combination that is difficult for competitors to overcome.

13.

The Company conducts continuous research and development programs so that the
business can improve the existing products and develop new ones to offer to the
consumer. The marketplace changes rapidly and business persons have to keep up with
the pace.
The chance to seize the opportunity of leading in the market is available for only a very
short while. This stiff competition necessitates continuous research and development
programs for the company and the franchise network to succeed.

14.

As a franchise network expands, its stature is business becomes bigger. Mall owners
prefer to have popular franchises in their malls because they want to present their
shopping centers as a one-stop-shop where everything that customers want can be
bought. Therefore, a franchisee will encounter very little difficulty in obtaining a lease in
ideal locations.
Because a franchisee becomes part of the giant image of the parent company, he will
probably find that running a franchised business is not only so much easier than being on
your own, it can also be the best decision a franchisee has ever made.

15.

Because the franchisee is buying a proven business concept, the business risks involved
are largely minimized. The parent company has already resolved most, if not all, of the
74

problem areas in its systems and procedures. What the franchisee is getting is a refined
package of technical expertise, marketing strategies, and operational systems.
16.

All franchise units are required to maintain a single set of quality standards in so far as
product, customer care, and service are concerned. Here, the company will ensure that
these standards are strictly adhered to and maintained in all its franchise units so that the
whole network presents an image of providing quality products and services.

Advantages for Franchisor

Franchising is a business concept that benefits the two parties involved.

For that

franchisor, franchising is advantageous because rapid growth can be more feasible even
with minimum capital expenditures. When franchisees pay the franchisor for the chance
to copy a proven business strategy, franchisors receive a steady flow of cash from
royalties, which can be used to expand further.

Franchising a business can be like hitting two birds with the same stone: a franchise is
being paid to expand it. Moreover, because others operate individual retail stores of the
business that the franchisor originally established, direct managing responsibilities
become the obligation of the franchisee. Hence, the franchisor will have more time in his
hands to explored ways to further develop and promote the business.

The only way to develop as quickly is through franchising. Expansion is the only
way a company can realize maximum profits.

In franchising, there are not many

obstacles to stunt the expansion of a company, therefore, there is a big possibility of


really expanding the franchise network not only in the country but also even overseas. At
present, franchising is the only business concept that can make that possible.
4.

Franchised businesses grow rapidly, sometimes having several outlets in a certain area,
pushing the competition out.

All these benefits for the franchisor are, in turn,

advantageous to the franchisees since the franchises are largely dependent on the success
and stature of the parent company.
No other business concept can offer such as attractive and beneficial arrangement.
5.5.4

Disadvantages for Franchisee


75

1.

Franchises can be costly to implement. Also, many franchises charge ongoing royalties
cutting into the profits of franchisees.

2.

Franchisors usually require franchisees top follow their operations manual to a tee in
order to ensure consistency. This limits any creativity on the part of the franchisee.

3.

Franchisees must be very good at following directions in order to maintain the image and
level of service already established. If the franchisee is not capable of running a quality
business or does not have proper funding, this could curtail success.

4.

Exceedingly high initial payments on account of license (entry) fee and security deposit.

5.

Substantial block capital needed for our business accommodation, office decoration,
furniture and equipment, etc.

6.

Sizable amount of working capital required for staff and day-to-day operation.

7.

Sometimes franchisors may be lax on their commitment to support the franchisee. Also,
they may make poor decisions that would have an ill effect on the franchisee. Therefore,
it is important to research any franchise concept thoroughly before signing any
agreements.

8.

Sharing of cost extravagant centralized publicity sponsored by franchisor.

9.

Uncertainty of adequate return on investment in the long run.

10.

Considerable portion of the profit payable to franchisor.

11.

Risk of dishonest franchisor taking over business of an unwatchful; franchise.

12.

Probability of being deceived by false promise of franchisor.

5.5.6

Types of Franchise Methods

There are two types of Franchisee methods. There is business format


Franchising product and trade name franchising. These maybe explained in detail as
follows:
1.

Business Format Franchising


Business format franchising offers a variety of services to the franchisees. They provide
the franchisee use of trademarks and logos, as well as a complete system of doing
business. They will assist the franchisee with site, selection, interior layout and design,
hiring and training, advertising and marketing, product supply and more. The franchisee
76

pays an upfront franchisee fee and agrees to pay continuing royalties to the franchiser that
help the franchiser provide research, development and support for entire system.
The type involves three characteristics
1.

The franchisee sells goods or services which meet the franchisors quality standards (in
cases where the franchisee operates under the franchisors trade mark, service mark, trade
name, advertising or other commercial symbol designating the franchisor (mark") or
which are identified by the franchisors mark;

2.

The franchisor exercise significant assistance in, the franchisees method of operation;
and

3.

The franchisee is required to make a payment to the franchisor or a person affiliated with
the franchisor at any time before to within six months after the business opens.

2.

Product and Trade Name Franchising


Product and trade name franchising generally is associated with industries such as
automotive, petroleum and soft drink. This type of franchising does not include royalty
fees. The franchiser provides trademarks and logos, national advertising campaigns, but
most importantly, product.
This type, also offers three characteristics:

1.

The franchisee sells goods or services which are supplied by the franchisor or a person
affiliated with the franchisor;

2.

The franchisor assists the franchisee in any way with respect to securing accounts for the
franchisee, or securing locations or sites for vending machines or rack displays, or
providing the services of a person able to do either; and

3.

The franchisee is required to make a payment to the franchisor or a person affiliated with
the franchisor at any time before or within six months after the business opens.
Franchising may seem like an easy way to start ones own business and many times it is
just that. However, investing in a franchise is no guarantee that you will be
successful.

77

Your success in franchising will depend on three key factors; your ability to raise the
cash to buy the franchise and open it for business, the care with which you select
the franchise, and most importantly your drive and ambition to make your franchise a
success.
Activity
Are you now in a position to explain franchising and outline its advantages
and disadvantages for the Franchisee and Franchisor?

3.6

CORPORATE ENTREPRENEURSHIP

It refers to an intense entrepreneurship culture in a corporate set-up or limited company


where special emphasis is placed on systematic innovatory activities financed by the
company and undertaken on a continuing process by several individuals specifically
engaged for that purpose. In a corporate entrepreneurship, salaried employees, supported
with organizational resources, carry out activities for achievement of innovations
on an ongoing process. Limited companies spend huge amounts on research and
development, invent new technologies and develop large scale innovations for new
products or services. Large companies, employing persons having management
specialization, recognize unmet market needs and wants and act quickly to exploit profit
opportunities that escape the notice of individual entrepreneurs or small firms.
Accordingly, the process of innovation and factor creation, which adds to the productive
growth and competitive strength for an enterprise, has become a routine function in large
business. This is because large companies better equipped with apple financial resources,
managerial; skills and creative talents, can take advantage of economies of large-scale
production, apportionment of high research and development costs over large volume of
production; access to foreign technological know-how; joint collaboration; import of
capital goods, components and basic raw materials; vast marketing and distribution
network, and mass publicity campaign through print and electronic media.

78

Summary
In this lecture, we have explored the different forms of enterprises,
looking and their advantages and disadvantages. We saw that in
individual ownership, we have the sole proprietorship and family business
in collective ownership, we examine family businesses, partnerships,
cooperators, and limited companies.
Finally, we looked at corporate entrepreneurship, where the efforts of an
individual or several individuals can perform the tasks of innovations
within a corporate set-up.

Activity
1.

Are small business owners entrepreneurs? Discuss

2.

Discuss briefly government incentives offered to promote small


business in Kenya

3. What is a family business? Explain its features and its advantages


and disadvantages.
4.

Discuss the characteristics of corporate entrepreneurship.

5.

What is a franchise, and what are its advantages and


disadvantages?

References
1.

Dave, Lavinsky (2008) Entrepreneurship; Untold Reasons Why


Business Fail. Harper publishers. New York.

2.

Davis, Holmers (1988) Essentials for Striking the Right Balance


in a Family Business, New York, USA

3.

Rober Ditt, Peter P.M. and Sheppard, D.A., (2005)


Entrepreneurship. Mc Ground Hill.

4.

H. Nandan (2007). Fundamentals of Entrepreneurship. Prentice


Hull. New Delhi.

79

LECTURE FOUR
MICRO AND SMALL SCALE ENTERPRISES
4.2

CLASSIFICATION OF BUSINESS FIRMS

Business firms are classified as micro scale, small scale and medium-sized. It is important to
note that there are no standard criteria or classification on businesses because some author tends
to consider statutory regulatory measures, statistical records and numbers of volumes of
employees or sales turnover and amount of capital invested. Particular classification are used for
establishing eligibility for government or donors and are based on the financial characteristics for
instance management services, goods ownership, gender specialization technique and market
orientation all of which are used to determine performance.
In Kenya some scholars classify businesses into 4 categories. Those that employ six or fewer
employees are considered to be micro, those employing 7 to 10 workers are considered small,
while those employing 11 to 50 workers are classified as medium. Those that employ more than
50 workers are classified as large scale organizations.

Table 4.1 Classification of businesses in Kenya


S/N
1.

CLASSIFICATION
Micro Scale Business

NUMBER OF EMPLOYEES
6

2.

Small Enterprises

7 to 10

3.

Medium size firm

11 to 50

4.

Large Scale Organization

50

Turning to developed countries the situation is not different. EU members states traditionally
have their own definition of what constitutes an SME for instance the traditional definition in
Germany had a limit of 250 employees. Other countries may be having a different limit. EU has
started to standardize the concepts its current definition categorizes companies with fewer
employees as micro those with fewer than 50 employees as small and those with fewer than
80

250 as medium. Table number 4.2 shows business classification in terms of number of
employees, turnover, and total balance sheet.
Table 4.2 BUSINESS CLASSIFICATION IN EUROPE
Enterprise Category
Medium-sized
Small
Micro

Head Count
<250
<50
<10

Turnover
50 million
10 million
2 million

Balance Sheet
43 m
10 m
2 m

In US when businesses are categorized by the number of employees SME often refers to those
with fewer than 100 employees, while medium-sized business often refers to those with fewer
than 500 employees. As seen in our discussion above, it is apparent that there is no universally
accepted classification of businesses however lets look at major distinguishing factors between
SMEs and large organization.
4.3.1

DIFFERENCE BETWEEN SMES AND LARGE SCALE PRODUCTION


ENTERPRISES
Market for SMEs is small and unstable. Large scale businesses require large
and stable market to be profitable. They are also not flexible while SME agents
operate in an imperfect knowledge;

SMEs are alert to price discrepancies and to previously unnoticed changes;

SMEs are quick to adopt innovations in other industries and localities

Large enterprises have human resource development sections and invest in their
human resources

Large scale firms require high managerial qualifications with some being
highly specialized and enterprise specific whereas SMEs are lowly skilled
and for some smaller enterprises it is a learning process.

The link between research and industry in SMEs is weak

SMEs are tailored to meet specific customer needs. Thus, production is not large scale.

Large scale production requires standardization that leads to mass


production while goods and services in some SMEs are not tailored to meet
customer needs

SMEs are semi -subsistence producers


81

The SMEs are frequently harassed by municipal and central government authorities
while large scale enterprises are favoured by government and banks in the provision of
infrastructural services and credit

SMEs are able to exploit sources of capital which would otherwise not be
available for development purposes.

Small scale enterprises and informal apprenticeships offer low quality training thus, they
cannot survive present day liberalization

SMEs are a learning process

Large scale enterprises have access to financing and credit facilities whereas SMEs are
self financed by loans from family or other informal sectors or micro financing while
SMEs would not survive slack periods if they were to pay high interest loans.

4.4

THE ROLE OF MSE IN ECONOMIC DEVELOPMENT

Definitional issues and paucity of data in some areas make any analysis of SME impacts
difficult.

However evidence exists showing how important this sector is for sustainable

development in emerging economies. Some of the role of SME in economic development


includes:

Creation of employment: - Entrepreneurs create employment for themselves and others


by starting business all over the country. They also pay taxes that are used by the
government in provision of essential services to the public.

NB

Most of them are labor intensive providing more employment opportunities to low
skilled

workers.

Providing services and product: - MSES produce goods and services that they avail to
the public.

(c) MSES provide training ground for new entrepreneurs:- Entrepreneurs help
others boost their knowledge and get experience in many areas of life.

Increase the gross domestic product (GDP) through:

Paying taxes to the government

Creation of employment
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Multiplier effect.

SME is important for agriculture:- Dependent nations transitioning to an industrial


and service oriented economy.

SMES are correlated with lower income distribution inequality:- Other roles include
the following:

Entrepreneurship promotes capital formation by mobilizing the idle savings of the


public

It provides immediate large-scale employment thus reducing unemployment


which is considered by many as the root of all socio-economic problems.

It promotes balanced regional development.

It helps reduce the concentration of economic power.

It stimulates the equitable distribution of wealth, income, and even political power
in the interest of the country.

It encourages effective resource mobilization of capital and skills which might


otherwise remain idle.

It induces backward and forward linkages which stimulates the process of


economic development in the country.

Small scale enterprises promote countrys export trade which is ingredient to


economic development.

4.5

Advantages and Disadvantages of MSE,

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4.6 CHALLENGES FACING THE DEVELOPMENT OF MSES IN DEVELOPING


COUNTRIES
There are several challenges facing MSES in developing countries. These include: Mismatch
between personal characteristics and characteristic of a good entrepreneurs, lack of resources and
unfavorable environments (internal and external environment). Mismatch between personal
characteristics and characteristics of a good or successful entrepreneur. For one to start up and
succeed in business on entrepreneur must be willing to work hard, pursue his/her goals
persistently, be innovative and must be motivated and determined to succeed. In addition to
personal characteristics mentioned above, an entrepreneur requires skills which are acquired
through training and experience in the proposed line of business. Adequate knowledge about the
product or service and managerial skills are important to success of a business.

Some

entrepreneurs lack such skills. For an entrepreneur to be successful the entrepreneur needs to be
in good physical and mental condition.
The second challenge facing MSES is lack of necessary resources.

These may include

financial resources, relevant personnel, and machinery and raw materials. Finance money is
the kingpin of starting a business.

It may be got from personal savings, borrowed from

individuals and institutions like bank, finance houses, building societies, and cooperatives. It has
been observed however that MSES as a segment in the economy are ignored. Reports show that
entrepreneurs with access to credit or financial assistance are likely to perform well in their
venture than those who lack support. For the entrepreneurs to expand their operation, it is
imperative that funds are available MSES are hampered by lack of access to credit. This forms a
major constraint to growth. Female entrepreneurs are badly affected due to lack of tangible
security. In a situation where credit is available it is often unaffordable to the informal sector of
MSES thus most MSES do not take advantage of economies of scale. The other problem
facing MSES is the problem of marketing. Small scale enterprises do not posses
any

marketing

organization.

In

consequences

their

products

compare

unfavourably with the quality of the products of the large scale units.
The problem of under-utilization of capacity is the next problem. There are
studies that clearly indicate the gross under-utilization of installed capacities in
small-scale

enterprises.

According

to
84

Arun

Ghosh(1988),the

percentage

utilization of capacity was only 47 in mechanical engineering industries,50 in


electrical equipment ,58 in automobile ancillary industries,55 in leather products
and only 29 in plastic products .This translate to an average of between 50 to 40
percent of capacity not being utilized.
The very integral to the problems of Under-utilization of capacity is power
problem faced by small-scale industries. There are two aspects to the problem
one the power supply is not available and two when it is available it is rationed
out unlike large industries they do not afford alternative sources of power like
thermal.
In addition to the problems enumerated above, the small-scale enterprises have
been constrained by a number of other problems. These include technological
obsolescence, inadequate and irregular supply of raw materials, lack of
organized

markets

channels,

imperfect

knowledge

of

market

conditions,

unorganized nature of operations, inadequate availability of credit facility,


constraint of infrastructure facilities and deficient managerial and technical skills.
Now let us consider some of these constraints in more details.
4.6.1

UNFAVOURABLE POLICY ENVIRONMENT

The major shortcomings in the MSE sector development in Kenya have been inappropriate
policy design, weak implementation framework and failure to institute and effectively monitor
policy implementation. In the past the policy formulation process and design has not been
consultative and has mainly been driven by the Government. As a result the policies failed to
address the specific needs of the target groups and lacked ownership by the entrepreneurs.
At the operational level poor coordination has led to duplication of efforts and sub-optimal
utilization of scarce resources. There is no mechanism for coordinating all the stakeholders and
facilitating their participation in policy development and implementation. This was according to
Session paper no.2 of 2005.

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4.6.2 INHIBITIVE LEGAL AND REGULATORY ENVIRONMENT


An enabling and regulatory environment is imperative for MSE sector to play an effective role as
an engine for economic growth, poverty eradication and employment creation. Some laws that
are in existence are cumbersome, out of step with current realities and hostile to the growth of
MSE sector. Specifically the bylaws applied by many Local authorities are not standardized and
appear in most cases, punitive instead of facilitative. At the same time, the role of provincial
administration in the enforcement of regulations and in jurisdiction over land utilities tends to
overlap and conflict with local authorities. Further the bureaucratic and lengthy process of
transacting business with the Government agencies adversely impacts on the operations of the
MSEs by diverting the scarce resources from production to sheer housekeeping.
Coupled with the above majority of MSEs have no title deeds for the sites on which they operate
and they cannot therefore invest in the work sites. The absence of security of tenure denies them
access to credit in addition to in accessibility to power, roads and water
4.6.3 UNFAVORABLE TAXATION REGIME
The existing tax regime is not only cumbersome but is also a deterrent factor in the growth of
MSEs The tax regime does not encourage MSEs to either register or pay taxes. Instead, it serves
as a formidable barrier to the graduation of informal enterprises into the formal sector. It also
increases compliance costs and restricts upward mobility of MSEs. Value Added Tax which is
applicable to most products and services is costly for businesses to administer, increases
transaction costs and inhibits cash flow for all categories of enterprises.
There is lack of vigilance by custom administrators against the dumping of subsidized imported
goods. This poses unfair competition to MSEs products. Cost and delays in clearing imports and
exports through customs pose a threat to the productivity and market outreach of most MSEs as
well as deterring domestic investment.
4.6.4 ENTRY BARRIERS (FORMAL AND INFORMAL)
Formal barriers are well understood, informal barriers are not are not well known but a few
example exist. In matatu business self regulatory bodies (cartels) control this industry and greatly
86

hinder entry of new entrepreneurs into the market. Insecurity also poses a major challenge to the
sector as it afflicts all the business sectors including the MSEs. While the legal framework can
effectively deal with the barriers, it may not effectively deal with cartels and informal trade
practices which are not clearly visible and documented.
4.6.5 HEALTH AND SAFETY IN WORKPLACE
Occupational health and safety is critical for enhanced productivity, enterprise growth and
expansion. Currently the MSE sector is adversely affected by limited access and adherence to the
health and safety regulations. The Factories and Other Places of work act cap 514 does not cover
the sector, yet it is in this sector that workers are so exposed to all sorts of occupational hazards
and other forms of work related accidents.

4.6.6 HIV/AIDS
In addition to the above HIV/AIDS pandemic has great economic impact on all sectors of
production in terms of productivity, skilled man power, and increased cost of labour as a result of
high absenteeism.
Activity
1. Describe in brief atleast four (4) major contributions of
MSEs to the economic development of your country.
2. Discuss the challenges facing MSEs.
Now lets look at what was expected of you.
I expected among others

Generation of employment opportunities with relatively low capital/investment

Promotes more equitable distribution of national income

Makes effective mobilization of untapped capital and human skills

Promotes balanced regional development

Leads to generation of foreign income through exportation of their produce

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4.5

ROLE OF GOVERNMENT IN THE DEVELOPMENT OF MSES IN


KENYA

As noted elsewhere MSES contribute greatly to economic development of an economy.


However several constraints which affect successful operation of these MSES have been
reported.

These increased competition and lack of markets, lack of credit facilities, poor

infrastructure (transport network), raw materials, shortages dishonored workers and lack of
essential facilities including lack of power (electricity) e.g. frequent blackouts as well power
rationing.
The government plays on important role in supporting MSES in their operations. This is done
through:

Monitoring potent applications. This reduces unnecessary competition from competitors.


The government also provides technical services to the MSES concerning specific
products.

Through licensing the government is able to determine the number of a

particular type of business operating in a particular region at a time.

New product ideas can come in response to government regulations. For example the
requirement by the government for public service vehicles to be fitted with speed
governors led to the production and distribution of speed governors gadgets in the
country.

Sometimes the government has been seen to be influencing the start up and growth of
MSES negatively. Through planning department the government determines the location
and operation of MSES. The frequent police sweeps in wrong places is a common
problem in many developing countries, Kenya included. The aim of the government to
keep order could be genuine but the outcome affects adversely the growth of MSES.

The government also regulates and controls economic activities leaving no room for
MSES to operate successfully. Scholars have identified bulldozing and harassment as
common problem to MSES.

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Lack of capital has also been raised as a major problem facing MSES in Kenya.
Government policies make it difficult for MSES to obtain funds. It takes a long time
(procedures) to obtain a license and to meet all obligations required to be compliant.

The government also influences MSES operations through taxation. The component of
taxation has impacted negatively MSES it is suspected that one stop approach to taxes
will precipitate growth of MSES.

It is noted that MSES are ignored by commercial banks due to regulatory or taxes that business
have to meet first. It is evident that some laws are a hindrance to MSES. Some of these are
cumbersome for example local authority by-laws and lengthy processes of dealing with
government agencies.
Summary
We have now defined MSSEs in terms of number of
employee employed and capital invested.
We have also looked at the contribution of MSSEs to the
economic development of a country which include
among others.

Encouraging balanced regional development

Stimulation of equitable distribution of wealth

Generation of foreign exchange through


exportation of their products

Creation employment

Promotes capital formation by mobilization of


idle savings of the public

Finally we considered major challenges facing


development of MSEs in developing countries which
included

Lack of required personality with necessary


characteristics

Lack of necessary resources


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Unfriendly government policies

Lack of access to power

Technological obsolescence

Lack of organized market channels and

Imperfect knowledge of market conditions.

References
Arun Ghosh(1988)Government Policies Concerning Small-Scale Industries
An Appraisal; Small-scale enterprises in

Industrial Development: The

Indian Experience,Sage Publication, New Delhi.

LECTURE FIVE: CRATING AND STARTING THE VENTURE


5.3

Definition of Creativity and Innovation

Creativity and innovation are often used to mean the same thing, but has a unique connotation.
Creativity is the ability to bring something new into existence. There is emphasis on the ability
and not the activity of bringing something new into existence. A person may therefore conceive
of something new and envision how it will be useful, but not necessarily take the necessary
action to make it a reality. Innovation is the process of doing new things. Ideas have little value
until they are converted into new products, services, or processes. Innovation, therefore, is the
transformation of creative ideas into useful applications, but creativity is a prerequisite to
innovation.
Creativity is the generation of ideas that results in the improved efficiency or effectiveness of a
system. Two important aspects of creativity exist: process and people. The process is goal
oriented; it is designed to attain a solution to a problem. The people are the resources that
determine the solution. The process remains the same but the approach that the people will use
will vary.
5.4

Sources of New ideas


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Potential entrepreneurs must always be alert to the opportunities that lie in the external and
internal environments in which they live. This alertness will allow an entrepreneur to create an
idea from what others simply cannot recognize. The sources may be discussed as follows:
1. Trends
Trends signal shifts in the current paradigm or thinking of the major population. Observing
trends will grant an entrepreneur the ability to recognize a potential opportunity. Trends need to
be observed in society (health, senior living, and demographics), technology (mobile technology,
e-commerce, and internet), economy (higher disposable income, performance pressures) and
government (increased regulations, petroleum prices, terrorism).
2.

Unexpected Occurrences

These are successes or failures that, because they are unanticipated or unplanned, often prove to
be a major innovative surprise to everyone. The infamous 9/11 terrorist attack on the United
States is a good example of an unexpected occurrence; it produced an influx of innovative
solutions to the newly created challenge of homeland security.
3.

Incongruities

These occur when a gap or difference exists between expectations and reality. For example,
when Fred Smith proposed overnight mail delivery, he was told, if it were that profitable, the
US post office would be doing it. It turned out that Fred Smith was right. An incongruity existed
between what Fred Smith felt was needed and the way business was currently conducted, thus,
he created FedEx.
4.

Process needs

These occur when an answer to a particular need is required. Venture capitalists often refer to
these needs as pain that exists in the marketplace the entrepreneur must recognize an
innovative solution, or painkiller.
5.

Industry and market changes

Continual shifts in the marketplace are caused by developments such as consumer attitudes,
advancements in technology and industry growth. Industries and markets always undergo
91

changes in structure, design or definition. The entrepreneur needs to be aware and seize these
emerging opportunities.
6.

Demographic Changes

These arise from trend changes in population, age, education, occupation, geographic location
and similar factors. Demographic shifts are important and often provide new entrepreneurial
opportunities. For example, as the average population age in Florida has increased, land
development, recreational and health care industries all have profited.

7.

Perceptual Changes

These are changes that cur in peoples interpretation of facts and concepts. Perceptual changes are
intangible but 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.
8.

Knowledge based concepts

These are the basis for the creation or development of something brand new. Inventions are
knowledge based; they are product of new thinking, new methods, and new knowledge. Such
innovations often require the longest time period between initiation and market implementation
because of the need for testing and modification. For example, todays cell phone technology has
advanced to include not just phone service but cameras, internet access and music. This has
revolutionized the way we use different technologies today.

9.

Consumers

This is the final focal point of the idea for a new product or service. This attention can take the
form of informally monitoring potential ideas and needs or formally arranging for consumers to
have an opportunity to express their opinions. Care needs to be taken to ensure that the idea or
need represents a large enough market to support a new venture.

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10.

Existing companies

Potential entrepreneurs and entrepreneurs should also establish a formal method for monitoring
and evaluating competitive products and services on the market. Frequently, this analysis
uncovers ways to improve on these offerings that may result in a new product that has more
market appeal.

11.

Distribution channels

Members of the distribution channels are also excellent sources for new ideas because of their
familiarity with the needs of the market. Not only do channel members frequently have
suggestions for completely new products, but they can also help in marketing the entrepreneurs
newly developed products. One entrepreneur found out from the salesclerks that the reason his
hosiery was not selling was due to its color. By heeding the suggestion and making the
appropriate color changes, his company became the leading supplier of non brand hosiery in that
region of the United States.
12.

Federal Government

The federal government can be a source of new product ideas in two ways. First the files of the
patent office contain numerous new product possibilities. Although the patents themselves may
not be feasible, new product introductions, they can frequently suggest other more marketable
product ideas. Several government agencies and publications are helpful in monitoring patent
applications. The official gazette, published weekly by the U.S Patent office, summarizes each
patent granted and lists all patents available for license or sale. Also the Governments Patents
Board publishes lists of abstracts of thousands of government-owned patents; a good resource of
such information is the Government-Owned Inventories Available for License. Other government
agencies, such as the office of technical services assist entrepreneurs in obtaining specific
product information.
Second, new product ideas can come in response to government regulations. For example the
occupational safety and health act (OSHA), aimed at eliminating unsafe working conditions in
industry, mandated that first-aid kits be made available in business establishments employing
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more than three people. The kit had to contain specific items that varied according to the
company and the industry. The weather proofed first-aid kit needed for a construction company
had to be different from the one needed by a company manufacturing facial cream or a company
in retail trade. In response to OSHA, both established and newly formed ventures marketed a
wide variety of first-aid kits. One newly formed company, R&H safety sales company, was
successful in developing and selling first-aid kits that allowed companies to comply with the act.
13.

Research and Development

The largest source of new ideas is the entrepreneurs own research and development, efforts
that may be a formal endeavor connected with ones current employment or an informal lab in
the basement or garage. A more formal research and development department is often better
equipped and enables the entrepreneur to conceptualize and develop successful new product
ideas. One research scientist in a Fortune 500 company developed a new plastic resin that
became the basis of a new product, a plastic molded modular cup pallet, as well as a new venture
the Arnolite Pallet Company, Inc.- when the Fortune 500 company was not interested in
developing the idea.

Activity
You can now think of those unfulfilled needs that are dominant in your
locality or anywhere and think of how to fulfill them.
METHODS OF GENERATING IDEAS
1. Focus Groups. Involves a group of 8 to 14 participants who are involved in an in-depth
discussion led by a moderator. The group is stimulated by comments from other group members
in creatively conceptualizing and developing a new product idea to fulfill a market need. One
company interested in the womens slipper market received its new product concept for a warm
and comfortable slipper that fits like an old shoe from a focus group of 12 women from various
socioeconomic backgrounds in the Boston area. The concept was developed into a new product
that was a market success. The basis of the advertising message was formed by comments of
focus group members. In addition to generating new ideas, the focus group is an excellent
method for initially screening ideas and concepts. Using one of several procedures available, the
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results can be analyzed more quantitatively, making the focus group a useful method for
generating new product ideas.
2. Brainstorming. It is a group method for obtaining new ideas and solution. Freewheeling is
encouraged here where the wilder the idea the better, Quantity of ideas is also desired where the
greater the number of ideas, the greater the likelihood of the emergence of useful ideas,
combinations and improvements of ideas are encouraged; ideas of others can be used to produce
still another new idea criticism is not allowed by anyone in the group. The brainstorming session
should be fun, with no one dominating or inhibiting the discussion.
3. Problem Inventory Analysis. This uses individuals in a manner that is analogous to focus
groups to generate new product ideas. However, instead of generating new ideas themselves,
consumers are provided with a list of problems in a general product category. They are then
asked to identify and discuss products in this category that have the particular problem. This
method is often effective since it is easier to relate known products to suggested problems and
arrive at a new product idea than to generate an entirely new product idea by itself. Problem
inventory analysis can also be used to test a new product idea. Results of this method must be
carefully evaluated as they may not actually reflect a new business opportunity, for example
general foods introduction of a compact cereal box in response to the problem that the available
boxes did not fit well on the shelf was not successful. The perceived problem of package size had
little effect on actual purchasing behavior. To ensure the best results, problem inventory analysis
should be used primarily to identify product ideas for further evaluation.

5.6

The nature of the Creative process. People assume that some people are born

creative and others are not, or that only the gifted or highly intelligent person is capable of
generating creative ideas and insights. 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 often illogical. The creative
process involves seeing relationships among things that others have not seen.
Creativity is a process that can be developed and improved. Everyone is creative to some degree.
However, as is the case with many abilities and talents (athletics, artistic) some individuals have
a greater aptitude for creativity than others. Also, some people have been raised and educated in
95

an environment that encouraged them to develop their creativity. For others, the process is more
difficult because they have not been positively reinforced; if they are to be creative, they must
learn how to implement the creative process.

5.6.1

The creative process

Action by itself has no meaning; it is of little value to simply do things without having
inspiration and direction. Entrepreneurs need ideas to pursue, and ideas seldom materialize
accidentally. Isaac Newton may have been hit on the head by a falling apple, but he discovered
gravity through a lifetime of scientific investigation. Ideas usually evolve through a creative
process whereby imaginative people germinate idea, nurture them, and develop them
successfully.
The creative process has four commonly agreed on steps.
Phase 1: Background or Knowledge Accumulation
Successful creations are generally preceded by investigation and information gathering. This
usually involves extensive reading, conversations with others working in the filed, attendance at
professional meetings and workshops and a general absorption of information relative to the
problem or issue under study. Additional investigation in both related and unrelated fields is
sometimes involved. This exploration provides the individual with a variety of perspectives on
the problem, and it is particularly important to the entrepreneur, who needs a basic understanding
of all aspects of the development of a new product, service, or business venture.
People practice the creative search for background knowledge in a number of ways. Some of the
most helpful are to:

read in a variety of fields

join professional groups and associations

attend professional meetings and seminars

travel to new places

talk to anyone and everyone about your subjects

scan magazines, newspapers and journals for articles related to the subject
96

develop a subject library for future references

carry a small notebook and record useful information

Devote time to pursue natural curiosities.

Phase 2: The Incubation Process


Creative individuals allow their subconscious to mull over the tremendous amounts of
information they gather during the preparation phase. This incubation process often occurs while
they are engaged in activities totally unrelated to the subject or problem. It happens even when
they are sleeping. Getting away from the problem from a problem and letting the subconscious
mind work on it allows creativity to spring forth. Some of the most helpful steps to induce
incubation are:

engage in routine, mindless activities

exercise regularly

play sports, puzzles

think about the project or problem before falling asleep

meditate

Sit back and relax on a regular basis.

Phase 3: The Idea Experience


This phase of the creative process is often the most exciting, because it is when the idea or
solution the individual is seeking is discovered. Sometimes referred to as the Eureka factor, this
phase is also the one the average person incorrectly perceives as the only component of
creativity.
As with the incubation process, new and innovative ideas often emerge while the person is busy
doing something unrelated to the enterprise, venture or investigation. Sometimes the idea appears
as a bolt out of the blue. In most cases, however, the answer comes to the individual
incrementally. Slowly but surely, the person begins to formulate the solution. Because it is
97

difficult to determine when the incubation process ends and the idea experience phase begins,
many people are unaware of moving from phase 2 to phase 3.
Following are ways to speed up the idea experience:

daydream and fantasize about your project

practice your hobbies

work in a leisurely environment

put the problem on the back burner

keep a notebook at bedside to record late night or early morning ideas

Take breaks while working.

Phase 4: Evaluation and Implementation


This is the most difficult step of a creative endeavor and requires a great deal of courage, selfdiscipline and perseverance. Successful entrepreneurs can identify ideas that are workable and
that they have the skills to implement. More importantly, they do not give up when they run into
temporary obstacles. Often they will fail several times before they successfully develop their best
ideas. In most cases, entrepreneurs will take the idea in an entirely different direction or will
discover a new and more workable idea while struggling to implement the original one.
Another important part of this phase is the reworking of ideas to put them into final form.
Frequently an idea emerges from phase 3 in rough form, so it needs to be modified or tested to
achieve its final shape. Some of the most useful suggestions for carrying out this phase are to:

Increase your energy level with proper exercise, diet and rest

Educate yourself in the business planning process and all facets of business

Test your ideas with knowledgeable people

Take notice of your intuitive hunches and feelings

Educate yourself in the selling process

Learn about organizational policies and practices

Seek advice from others

View the problems you encounter while implementing your ideas as challenges.

98

Activity
Now are you in a position to explain the creative process

Figure 5.1: The four phases of the creative thinking process.


This figure illustrates the four phases of the creative thinking process. If a person encounters a
major problem while moving the process, it is sometimes helpful to go back to a previous phase
and try again. If an individual is unable to formulate am idea or solution (phase 3) a return to
phase 1 often helps. By immersing himself in the data, the individual allows the unconscious
mind to begin anew processing the data, establishing cause and effect relationships and
formulating potential solutions.
Innovation
Innovation is a key function in the entrepreneurial process.
Innovation according to can be defined as the process by which entrepreneurs convert
opportunities (ideas) into marketable solutions. It is the means by which they become catalysts
for change. It is the combination of the vision to create a good idea and the perseverance and
dedication to remain with the concept through implementation.
Innovation process
If creativity is the seed that inspires entrepreneurship, innovation is the process of
entrepreneurship. It implies action, not just conceiving new ideas. Inventers are not necessarily
innovators; Invention is the creation of something new that results in new knowledge while
Innovation is the transformation of an idea or resources into useful applications. This results in
new products, services or processes.
For an idea to have value, it must be proven useful or be marketable, and to achieve either status,
the idea must be developed. Innovation is the development process; it is the translation of an idea
into an application. It requires persistence in analytically working out the details of product
design or service, to develop marketing, obtains finances and plan operations.
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Most innovations result from a conscious, purposeful search for new opportunities. Most
successful innovations are simple and focused. They are directed towards a specific, clear and
carefully designed application.
Figure 5.2

Elements in the Innovation Process

Source (pg. 37
5.6.3

Business Practices that Create Innovative Cultures:

Leaders who want to create an innovative business culture must understand the steps of the
creative process, but that alone is not enough. To promote business innovation, executive leaders
should commit to the following business practices, and institutionalize them in the culture - by
training managers in these practices and then doling out promotions and rewards to those who
employ them successfully.

Select the most promising innovators, but encourage unexpected surprises: To build
innovative hothouses in an organization, executives may want to cull out the most
promising idea-generators and provide them with extra resources. Those are the people who
can benefit most from the buffer zones in step two. But the other practices listed in this
section should be generalized throughout the organization, if possible, so that innovators in
unexpected places will have the room to produce ideas and results. Leaders should train other
managers to understand the stages of the creative process, and evaluate managers based on
their ability to promote and shepherd through to completion new ideas that they encounter.

Create buffer zones for the most innovative people: Creating buffer zones means
building a kind of protective cocoon around creative people or around the innovative teams
within an organization. That means eliminating the ways that policies or other work
pressures get in the way or discourage the information gathering involved in the preparation
stage. It also means being sure that the tools and resources are available when creative people
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go looking around for data or answers to questions. The executive leader for such a group
should do the advance work and run the interference necessary to let creative people go
through the preparation stage without interference or harassment.

Give innovators room to play: For innovators, anything they can do to mess around with
the kinds of data or projects that they see as helpful - will be helpful. That can be hard to
remember when they seem to have lost their minds, or to have lost their focus! But during
the incubation stage, activities that may look like useless diversions - that may not even look
like work - are all necessary to allow the deeper parts of the brain to solve a problem and
make new connections. For typical results-oriented executives, this can be hard to do especially when the creative team happens to be a team of executives working to create a
new business process. The senior executive who may have assigned the task may be hard
pressed to let his innovative team have the time and space to produce truly transformative
solutions. The key to letting people have room to play is to refrain from judgment of their
activities or methods.

Resist the temptation to look for immediate results: Any team can develop incremental
solutions or recommendations. There is no business or technological process that cannot be
improved through study and modification. But to build a culture that truly encourages
innovation, the pressure to get immediate results will yield only incremental improvements,
and the need to meet deadlines can sometimes kill the creative process before the
illumination stage. While it is true that deadlines can focus creative teams and encourage
timely ultimate illumination, setting deadlines should not be overused because they often will
interfere with the creative process. Close communication with creative people working on a
project can help leaders develop a feel for when setting a deadline will help, rather than
hinder

the

process.

Commit to driving the best ideas through to implementation: Innovators are seldom the best
salespeople for their ideas. They are, by nature, more likely to work in isolation, play with
their ideas, or generally rub others who are less creative the wrong way. The business leaders
who want to encourage innovation must act as the first-line filter to test the best ideas and
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solutions, choosing which ones are the right ones to see through to fruition. Then the
executive advocate must commit to the internal sales and marketing project to build
coalitions that will bring the new idea into a reality. This takes courage and persistence, and
an ability to work the political and social process involved in getting others to adapt to
innovation. This is important, not only to reap the rewards of innovation in practice, but to
encourage other innovators by showing them that their best efforts will actually be adopted
and see the light of day - in your organization, and not your competitors!
Leaders who want to encourage business creativity must be sure also to build talent driven,
positive cultures that place a value on learning.
EXAMPLES OF ENTREPRENEURS
Williams Henry Gates III
At 34, Bill Gates became the youngest individual billionaire in the world in 1989. He taught
himself computer programming at the age of 13, dropped out of Harvard University at 19 to start
Microsoft Corporation with his friend Allen and at 31 took his company public, cracking the
billion-dollar mark for his personal net assets. Microsoft is the power behind MS-DOS computer
operating systems, dozens of computer applications and innovative computer systems
technology. Gates wrote a program for the Altair computer, the BASIC interpreter. This software
was the breakthrough and beginning of Microsoft. The software Gates created for the Altair was
soon to be one of his greatest contributions and beginning in the history of computer science.
Peter Munga
Peter

Munga

is

the

Chairman

of

Equity

Banks

board

of

directors.

Mr. Munga is a Certified Public Secretary with vast experience in both public and private sector
management. He holds a diploma in Human Resources and Financial Management. Mr. Munga
is a retired Deputy Secretary. He is an accomplished African business leader and entrepreneur
who started Equity Bank in 1984. He felt the need to enable the smallholder farmers access
affordable savings and credit facilities so that they could break out of the poverty cycle and build
better lives
From a small village-based building society (1984) to a fully listed commercial bank that is listed
in the Nairobi Stock Exchange, Equity Bank is home to over half of all bank accounts in Kenya.
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Mr. Munga and Equity Bank pioneered a range of innovative financing arrangements to increase
farmers' access to credit facilities; mobile rural banking services, innovative electronic banking,
post harvest warehouse receipting schemes and widespread agro dealer financing facilities.
Esther Passaris
Esther Passaris is the founder of Adopt-a-light, Business concept devised during a trip to South
Africa in 2002. Esther states that the whole concept was to provide lighting and improve security
in Nairobi. Nairobi was downgraded in 2000 because of insecurity. Ms Passaris felt that Adopt-alight would help replace Nairobi to its former glory.
Adopt a Light, a private-public partnership project to light-up the streets and slums of Nairobi,
Kenya. It allows the financing of installation and maintenance of efficient public lighting
infrastructure in slums, streets and other public areas to reduce crime, enhance road safety and
improve the urban environment.
Adopt a Light generates income through the provision of materials to upgrade and repair existing
street light poles and install new poles within the city.
Kiichiro Toyoda:
Kiichiro Toyoda was the son of famed inventor and entrepreneur Sakichi Toyoda, and the driving
force behind establishment of Toyota Motor Corporation.
Kiichiro Toyoda made the decision for Toyoda Loom Works, the family business then that
specialized in making looms, to branch into automobiles, considered a risky business at the time.
Shortly before Sakichi Toyoda died, he encouraged his son to follow his dream and pursue
automobile manufacturing. After his father's death, he convinced Toyoda Industries' new
president, his adoptive brother Risaburo Toyoda, to fund research into auto-making. By 1934
Toyoda and his team had designed and built their first gasoline-powered engine, and convinced
stockholders to fully fund his new division. In 1935 Toyoda built the prototype for its first car,
combining Japanese components with Ford and Chevy parts under a Chrysler body to construct
what they called Model A1. In 1936 the spelling of the nameplate was altered from Toyoda to
Toyota, as Toyoda himself believed the new name was easier to pronounce. The auto division
was quickly successful and was spun off as a separate business, the Toyota Motor Corporation, in
1937, with Toyoda as Vice President.
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He resigned from the company in 1948 due to flagging sales and profitability, passing away four
years later. In 1957, his cousin and confidant Eiji Toyoda became head of Toyota Motor
Corporation, overseeing its successful expansion worldwide and the launch of Japan's most
prominent luxury vehicle brand, Lexus.

Activity
Describe how innovation is important as a dimension of entrepreneurship.

5.6.5

Windows and Corridors

A window is a time horizon during which opportunities exist before something else happens to
eliminate them. A unique opportunity, once shown to produce wealth, will attract competitors,
and if the business is easy to enter, the industry will attract competitors, and if the business is
easily to enter, the industry will become rapidly saturated. Bicycles did not become viable
commercial products until people needed them as transportation. When the need occurred,
hundreds of bicycle manufacturers rushed to take advantage of the window of opportunity?
Literally every successful product and service has had an optimal period of time for
commercialization. Those introduced too early have usually failed, and those introduced too late
suffered from crowded markets.
Another aspect of many successful ventures is called the corridor principle. This principle
suggests that opportunities evolve from entrepreneurs being positioned in similar work or having
had experience with related ventures so that when a window opens it is easy for them to move
quickly into a new venture.
William Gates of Microsoft, for example, was first approached by IBM in 1980 to program an
operating system for the PC. He turned down the offer. He had a fledgling software company
and working with minor programs he helped to sell. The idea of a major software effort was
inconceivable. However, he and several friends realized the opportunity and began working
independently to create the MS Dos system. His early efforts probably would have kept Gates
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in an obscure part of the software industry, but the brief opportunity to create the new operating
system led to enormous success.
This does not mean that entrepreneurs must first work aimlessly and wait for twist of fate to
create opportunities. It means that entrepreneurs who are active and watching for changes are
more likely to recognize opportunities.
5.7

E-commerce is stat up businesses

The changing world of technology offers new opportunities for entrepreneurs to be belt o access
information for many business activities efficiently i.e. expediently and at very low cost.
The internet can serve as an important source of information in the preparation of the business
plan for such segments as the industry analysis, competitor analysis and measurement of market
potential and others. Internet is also useful resource for planning and decision making. It can
therefore be said that internet is a business intelligence resource which also provides
opportunities for marketing strategy. Through website a company can provide information on
the company, its products and services as well as ordering instructions.
An entrepreneur should access competitors websites to gain more knowledge about their
strategy is the market place. One advantage of internet services is that it is cheap and act as a
vehicle for the entrepreneur to gather information about the market competition and customers as
well as to distribute advertise and sell company products and services.
In addition to websites, the entrepreneur can also investigate new groups to gather information
anomaly from experts and customers and competitors and market needs using the internet
which represent the newsgroups on the internet. The entrepreneur can use key words to identify
the most appropriate newsgroup. These newsgroups represent potential customers who can be
asked specific questions on their needs, competitive products and potential interest in the new
ventures products and services members of the news group respond to such questions providing
valuable information to the entrepreneur internet services is cheap comparatively since one need
to interest in hardware and software, with some improvements and modifications is the internet,
the opportunities for the entrepreneur in planning the start up or the growth of a venture will be
invariable.

Summary
In this lecturer, we have defined the concepts of creativity and innovation,
which are importance for starting up new ventures for entrepreneurs. We
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have also examined various sources of new ideas to an entrepreneur and


looked at methods that entrepreneurs may use to generate new ideas. We
have explored the nature of the creative process and innovation and lastly
we have examined the role E-commerce in starting up new ventures.

Activity
Explain the Process of Creativity.

Identify and describe major changes that create opportunities for


entrepreneurs.

Explain the concepts of windows and corridors for new


ventures.

Describe the main factors that lead to success for new ventures.

Describe how innovation is important as a dimension of


entrepreneurship and identify major changes that crate opportunities
for entrepreneurs with special reference to developing countries.

Examine source of the sources of new ideas for entrepreneurs.

Examine source of the sources of new ideas for entrepreneurs.

Discuss various methods of generating new ideas for entrepreneurs.

Discuss the influence of E-commerce in new ventures creating.

References

Web page: Schuler A. J, Business Creativity and Innovation: How to


Build an Innovative Culture, Copyright (c) 2002 A. J. Schuler, Psy. D.

Hisrich R. D, Peters M.P, Shepherd D. A, Entrepreneurship 6th ed,


2005, McGraw Hill/ Irwin

Enterprising women: the magazine for women business owners,


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women magazine Vol9 No5 (www.womenable.com)

Kuratko D.F, Entrepreneurship: Theory, Process, Practice 8ed, 2009,


South-western, Cengage learning

www.equitybank.co.ke

Holt H.D. (2003) Entrepreneurship: New Delhi.

Hisrich D.R., Petr P.m., and shepherd AD (2008) Entrepreneurship 6th


Edition. McGraw-Hill New Delhi.

LECTURE SIX: FINANCING NEW VENTURES


6.0

INTRODUCTION

Becoming a successful entrepreneur requires one to become a skilled fund-raiser; this requires a
lot of time and energy. In start-up companies or businesses, raising capital can easily consume as
much as one-half of the entrepreneurs time and can take many months to complete. Capital is
any form of wealth employed to produce more wealth. It exists in many forms, in a typical
business they include, cash, inventory, plant and equipment. Entrepreneurs need three different
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types of capital depending on the use, this include fixed capital, working capital and finally
growth capital these types will be discussed in much details at a later stage.
6.1 Investment Decision
For one to make investment decision one need to consider the following factors:

Type of capital required for example fixed capital working capital or growth capital.

Sources of capital available such as equity or debt source or internal or external source.

Cost involved.

Implications such as loss of control.

Risks involved.

As mentioned earlier Capital may be classified according to the use as follows use:

Fixed capital.

Working capital.

Growth capital.

Fixed Capital
Fixed capital is needed to purchase a companys permanent assets such as building, Land,
Computers and equipment. Money invested in these fixed assets tends to be frozen because it
cannot be used for other purposes. The money involved in purchase of fixed assets is normally
substantial and credit terms usually are lengthy. Lenders of fixed capital expect the assets
purchased to improve the efficiency and thus the profitability of the business and to create
improved cash flow that ensures payment.
Working Capital
To borrow a leaf from accountants we shall define working capital as current assets less current
liabilities. Current assets refer to the resources of the business that represent cash or can be
converted into cash easily or are cash. While as current liabilities refers to debts that ought to be
cleared in the near future normally one year. The need for working capital arises because of the
uneven flow of cash into and out of the business due to normal seasonal fluctuations these may
include, credit sales, seasonal sales swings or unforeseeable changes in demand.
Lets now look at how working capital can be used in an organization:

Buy inventory

Pay bills
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Finance credit sales

Pay wages and salaries

Take care of unexpected emergencies.

Lenders of working capital expect it to produce higher cash flows to ensure repayment at the end
of the production or sales cycle.
Growth Capital
What is the difference between working capital and growth capital?
Unlike working capital growth capital is not related to the seasonal fluctuations of a business.
Growth capital is meant for expanding or for changing the primary direction of a business.
Lenders of fixed capital or growth capital expect the funds to improve a companys profitability
and cash flow position thus ensuring repayment.
Question
What are the major sources of finance to a business?
6.2 FINANCING MEANS AND SOURCES OF FINANCE
Sources of finance can be classified into two major ways.

a) Equity source
b) Debt source

(ii)

a) internal source
b) External source

Lets look at the two sources in details starting with the first classification.
EQUITY CAPITAL VERSUS DEBT CAPITAL
Debts financing is a financing method involving an interest bearing instrument usually a loan.
Most of such loans require fixed assets such as vehicles land machines and others to be used as
collateral security.
Debt financing requires entrepreneur to pay back the amount borrowed well as interest.

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Equity financing on the other hand does not require collateral security and it offers the investor
some form of ownership position in the venture. The investors shares in the profits of the
venture as well as any disposition of its assets as per the percentage of business owned. Factors
that may be considered in making decision on whether to go for debt financing or equity
financing includes the following:

Availability of funds

The assets of the venture

The rate of interest

Repayment period

The use of the finance e.g. to finance fixed assets, to finance working capital
activities or to finance growth activities of an organization.

Internal versus External source of finance


Internal source of funds refers to internally generated funds or generated within the business
Activity
Give some example of internal source of finance to an organization

I know you must have mentioned among others


- Profits ploughed back
- Sale of assets
- Reduction in working capital
- Collection of account receivable more quickly
- Reduction of repayment period.
Activity
Having mentioned some examples of internal source of fund/finance you
can now look at finance generated from outside the organization.
External sources of finance include the following:

Self

Family friends

Commercial bank

Government loan programmers


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Private and public placements

The source to be considered need to consider the following factors

The length of time the funds are available

The cost involved.

The amount of company control lost

Lets now discuss the external sources of finance mentioned above

Personal saving There are very few ventures started up without the personal funds of
the entrepreneur. These sources of fund are considered to be the least expensive source
both in terms of cost as well as in terms of control. These sources also are essential in
attracting other finances such as commercial banks, private investors and others. Lenders
and investors expect entrepreneurs to put their own money into a business start up. If an
entrepreneur is not willing to risk their own money, potential investors are not likely to
risk their money in the business either. No wonder that investors argue that put your
money where other money is or finance is like a river which flow towards where much
water accumulates for instance lakes or oceans. Failure to invest enough in ones business
leads to excessive borrowing or giving up a significant portion of ownership to outsiders.
This is likely to result to intense pressure on the business cash-flow or reducing the
founders enthusiasm for making a business successful.

After the entrepreneur, family and friends are a common source of capital for a new
venture. They are most likely to invest due to their relationship with the entrepreneur.

Finance from friends and relatives results to equity financing. This source may result to some
conflict however the following measure should be taken to avoid such conflicts.

Ensure the business arrangements are strictly business.

Loans or investment from this source should be treated in the same way as the
finance from other sources.

Any loan should specify the rate of interest and the proposed repayment schedule
as well as the principal amount

The entrepreneur should settle everything up front and in writing.

All the details of financing must be agreed upon before the money is put into
venture.

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These include the amount involved, the terms of money, the rights and responsibilities of the
investors and what happens if the agreement is not adhered to and this has to be in writing.

Partners

Entrepreneurs can take on partners to expand the capital foundations of a business. Before
entering into any partnership arrangement entrepreneurs must consider the impact of giving up
some personal control over operations and of sharing profits with others. When one invites
partners into their business they risk losing control over the business.
Activity
Discuss the various types of partnership that exist in business world on the
basis of time and types partners.
(d) Commercial banks are by far the source of finance used by entrepreneurs when collateral
security is available. The collateral acceptable to the banks could be informed of land,
equipment building, vehicles, stock or bonds. There are several types of bank loan available,
these depends on the collateral available. Such as Accounts receivable, inventory, equipment
or real estate.
At this juncture you are advised to read Hirsch R.D. et. Al (2008) page 328-329 for more details.
Now we need to consider basis of lending decisions by the commercial banks.

Lending

decisions are made on the basis of the following 5Cs. These include character, capacity capital,
collateral and conditions.
Past financial statement such as balance sheets income and expenditure statements need to be
analyzed considering profitability and credit ratios inventory turnover, aging of accounts
receivable capital invested and commitment to the business to make lending decisions. Future
projections such as market size, sales and profitability are also evaluated to back up lending
decisions.

In addition to these intuitive factors such as the character and capacity of the

entrepreneur need to be factored in the lending decisions.

Public and Private offering.

In entrepreneur one source finance through sale of stock either to the public or to some specific
private individuals referred to as going public or going private respectively. The difference

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between private offering and public offering is mainly the procedures involved and the target
investors.
Now lets explore the disadvantage and disadvantages of going public.
Advantages

The business is able to obtain equity capital

Enhanced ability to borrow

Ability to attract and retain key employees

The owners can dispose of their shares easily and it is prestigious to own shares in large
companies and list companies have an advantage over others. Lets now look at external source
disadvantages

Public companies leads to public exposure and there is potential of loss of control

Public companies are inflexible and take a lot of time to make decision as well as
implementing them. Time and expense in addressing queries from shareholders
as well as to pay the press and financial analysts in compliance with companies
Act requirement. Other expenses; involved include, Accounting fees legal fee,
underwriters fees, registration fees as well as printing fees.

Reports companies are required to prepare annual reports or statement for their
operations.

Private placing on the other hand is one way to obtain the needed funds with less public
disclosure. These funds are frequently in the form of intermediate or long term debt with a float
interest rate or preferred stock with specific dividend requirements. For a company to qualify for
private placement.

The company needs a limited number of investors, the investors have

available all the material information about the company that would be included in a public
registration statement, the investors must be ready to hold securities for a specified period
following the purchase.

Government grants are another alternative source of finance available to businesses. This
source varies in terms and types from country to count

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Activity
You are required to identify some government agencies that provide
finance for business development to entrepreneurs in Kenya.

Now confirm whether you included the following agencies in your list.
Industrial and commercial development corporations (ICDC)
Kenya industrial estates (KIE)
Small enterprise finance company (SEFCO)
Joint loans board schemes (JLBS)
Agriculture finance corporations (AFC)
6.5 VENTURE CAPITAL
This is also an alternative form of equity discussed earlier .This involve corporations and large
companies assembling pools of capital and then use them to purchase equity positions in young
businesses they believe have high growth and high profit potential producing high return
percentage. These companies in addition benefit small and upcoming companies and businesses
in technical expertise, distribution channels and marketing knowhow, as well as providing
introductions to important customers and suppliers. In addition to the above advantages
upcoming businesses benefit from large companies since they acquire credibility, such that doors
that would otherwise be closed to upcoming businesses magically is open when the right
company is involved.
Summary
We have covered the following main points in this lecture

Types of capital or finance needed by a business organization


which include Fixed capital, working capital and growth capital.

Capital is classified into two major ways


a) Equity finance
b)Debt finance and or

(ii) a)Internal source of finance


b)External source of finance
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Activity
(1)Why is it so difficult for most business to raise the capital needed to
start; operate or expand their ventures?
(2)What is the most common source of equity funds in a typical small
business? If an owner lacks sufficient equity capital to invest in the
firm what options are available for raising it.

LECTURE SEVEN: ANALYSIS AND INTERPRETATION OF FINANCIAL


ACCOUNTING STATEMENTS
Objectives
At the end of this lecture you should be able to:

Explain how the use of ratios can help to analyze, the profitability, liquidity, efficiency
and capital structure of businesses.

Compute the main accounting ratios.

Interpret the results of calculating accounting ratios.

Explain the advantages and disadvantages of the gearing of an organization fairy high or
low.

Explain limitations of accounting statements.

Introduction
Lets first define the term ratio but before we define together first execute the following.
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Activity
You are required to give your definition of the term ratios
Explain at least two users of the ratios in business analysis

Now check if your answer concurs with the one given here.
Ratio is the mathematical relationship between two quantities in the form of a fraction or
percentages.
Users of ratios: There are several parties interested in analyzing fractional statements.
These include:

Lenders

Customers.

Suppliers

Employees

Government agencies

Competitors and others.

All these will be interested in different things therefore there is no single ratio that would meet
their needs but a series of ratios may provide something that they will find relevant and from
which they can investigate further if necessary.
Ratio analysis is the first step in assessing an entity and pinpoint items that many require further
investigation.
Ratio analysis is essentially concerned with calculation of relationships, which after proper
identification and interpretation may provide information about the operations and state of affairs
of business enterprise. The analysis is made to provide indicators of past performance in terms
of critical success factors of a business. This enables one to make sound judgment without
relying on guess work and intuition
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Different business require different situation. e.g. capital requirement this differs from one type
of business to another.
SIGNIFICANCE OF USING RATIO

It is compared with other ratios in the same set of financial statements.

It is compared with the same ratio in previous financial statements. (trade


analysis)

It is compared with a standard of performance (industry average). Such a standard


must be either the ratio which represents the typical performance of the trade or industry,
or the ratio which represents the target set by management as desirable for the business.

TYPES OF RATIOS
Ratios may be classified as follows:

Liquidity ratios

Profitability ratios

Efficiency ratios

Shareholders ratios

Capital structure ratios

Lets consider each one of the ratios mentioned in more details.


Liquidity ratios This ratio measures the ability of the firm to meet its short term financial
obligations when and as they fall due. Failure to clear short term debts result to the failure of the
business as it would be forced into liquidation. There are two main ratios in liquidity ratio.
These include:

Current ratio

Quick ratio also known as acid test ratio.

These may further be explained as follows:117

Current ratio
The current ratio expresses the relationship between the firms current assets and its current
liabilities.

Current assets normally increase cash, marketable services, account receivable

(debtors) and inventories. Current liabilities consist of accounts payable (creditors) short term
notes payable, short term loans, current materials of long term debt, accrued taxes and other
accrued expenses e.g. rent, wages etc
Current ratio is given by

Current assets

Current liabilities
Generally a ratio of 2:1 is acceptable
A ratio of 0.85: 1

0.92:1 indicates that the current assets are lower than the current liabilities

and that the business is unable to support its short-term debt.


Though businesses are set to earn profits, profitability is not enough evidence of successful
business. It is important to pay creditors, expenses, loans falling due at the correct times.
Failure to meet this obligation would mean closure of the business despite the profits that may
have been reported.
Quick ratio / Acid test ratio
This ratios measures assets that are quickly converted into cash and they are compared with
current liabilities. There are some assets that are not easily conversable into cash. e.g. stock.
Acid test examines the ability of the business to cover its short term obligations from its quick
assets only.
Acid test ratio is given by = Current asset stock
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Current liabilities
Profitability ratios
There are several ratios that fall under profitability ratio. These include the following:

Gross profits as percentage of sales.(gross profit margin)

Net profit as a percentage of sales (net profit margin)

Return on capital employed ratio

Profitability is the ability of a business to earn profit over a period of time. Although the profit
figure is the starting point for any calculation of cash flow, profitable companies can still fail for
lack of cash. Nevertheless, without profit there is no cash and therefore profitability must be set
as a critical success.
A company should earn profits to survive and grow over a long period of time.
Gross profit margin
Normally the gross profit has to rise proportionally with sales.
It can also be useful to compare the gross profit margin across similar businesses although there
will often be good reasons for any disparity.
Gross profit margin is given by

Gross profit
Sales
It is important to note that gross profit is given by sales cost of sales.

x 100

Therefore gross profit margin may also be stated as:Sales cost of sales x 100
Sales
In situations where the percentage increase over the years than the interpretation is that the rate at
which the cost of goods sold was less than the rate at which the sales was increasing thus
indicating efficiency.
Net profit margin
This is a widely used measure of performance and is comparable across companies in similar
industries. The fact that a business works a very low margin need not cause alarm because there
are some sectors in the industry that work on basis of high turnover and low margin e.g.
supermarkets.

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What is important is whether the net profit margin of a company compares well with similar
businesses. To determine a business performance one has to compare this ratio with the industry
average or firms dealing with similar businesses.
The formula =

Net profit

x 100

Sales
This net profit is usually profit after tax
Return on capital employed
This is one of the most important profitability ratios, as it encompasses all the other ratios. It is
important to note here with no return to capital employed nobody will invest his money on a
business.
Capital employed will be given by:Net profit
Capital employed

x 100

Capital employed can be given by the average of capital i.e.


Opening capital balance + Closing capital balance
2
The ratio shows potential investors into the business what they might hope to receive as return.
The above calculation is applicable to sole proprietorships, for companies.
The following definitions of capital employed are used.
Return on capital employed by ordinary stakeholders.

Return on capital by all long term suppliers of capital.

In a limited capital the return is referred as Return on Owners Equity or Return on stakeholders
funds. Owners Equity will include anything in a balance sheet that describes the owners
capital. These therefore include ordinary share capital + all reserves + profit and loss balance.
Return a capital employed by all long term suppliers of capital will include - ordinary shares
reserves including profit & loss balance.
Preference shares + debentures as well as long term loans. The return will also comprise net
profit, preference have divided debentures and long term interest on long.
Earnings per share
The income after all claims have been paid apart from owners claim (ordinary divided) will
belong to the ordinary shareholders who can make a decision as to how much of this income can
be declared in divided and how much will be retained in the business.
The earning by share is given by:120

Net income after tax preference Divided


Number of ordinary shared issued
Efficiency ratio
There are again several ratios under this category. These include: Stock turn over

Debtors / sales ratio

Creditor / purchases ratio

These ratios can further be explained as follows:

Stock turn over

Stock turnover measures how efficient a business is at maintaining an appropriate level of stock.
A reduction in stock turnover indicates that the business is slowing down. Stock may pile up and
not being sold this may lead to the problem earlier mentioned i.e. liquidity crisis.
Stock turnover is given by:Cost of sales
Average stock
Average stock is given by operating stock + closing stock divided by two.

Debtors / sales ratio

The resources tied up in debtors are an important ratio subject. The money tied up in debtors is
unproductive money and therefore need to be as minimal as possible. Debtors / Sales ratio is
given by Debtors / Sales. The interpretation is the length of time a debtor takes to pay his debt.
There for multiplied by 365 days
Credit control system assists in reduction of the number of days that debtors take to clear their
debts.

Credit / Purchases ratio

This is translated as the length of time that the business takes to pay their creditors. This is
the opposite of the debtors / sales ratio.
Usually calculated as:Creditors
Purchases
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x 365 days

Shareholders ratios
Some of the ratios discussed here fall under other categories such as return on capital
employed by it is worth mentioning them in brief.
Ratios that falls under shareholders ratios include:Earning per share EPS which is given by :Net profit after interest, tax and preference divided
Number of ordinary shares issued
Price earnings ratio
This is given by:Market price per share
Earnings per share
The greater the P/E ratio the greater the demand per share.
Divided yield
This is usually calculated as follows:-

Gross divided per share


Market price per share
These measures the real rate of return by comparing the divided paid to the market price of a
share.
Divided cover
Net profit after tax and preference divide
Ordinary dividend paid and proposed
CAPITAL STRUCTURE RATIOS (Gearing ratios)
The ratios indicate the degree to which the activities of a firm are supported by creditors
funds as opposed to owners.

The relationship of owners equity to borrowed funds is an important indicator of


financial strength.

The debt requires fixed interest payments and repayment of the loan and legal action can
be taken if any amounts due are not paid at the agreed time. A relatively high proportion
of funds contributed by the owners indicated a cushion (surplus) which shields creditors
against possible losses from default in payment. Financial leverage will be to the
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advantage of the ordinary shareholders as long as the rate of earnings. Capital employed
is greater than the rate payable on borrowed funds.
There are more than one way of calculating gearing. Here is the most widely used method.
Long term loans + preference shares

x 100

Ordinary share capital + reserves + preference shares +long term liabilities


Long term loans will include debentures, people investing in ordinary shares in a high geared
company takes far greater risks with their money than if they had invested in a low geared
company.
To reduce gearing ratio the management may opt to take one or a combination of the following:

Issue new ordinary shares

Redeem debentures

Retain profits

On the other hand to increase the gearing the management will consider the following:

Issue new debentures

Buy balk ordinary shares in issue

Issue new preference shares.

Advantages of ratio analysis

Ratios clarify issues, providing meaning to the data bringing out information that is not
otherwise apparent.

Ratios forms basis for decision making or policy formation.

Ratios assist on assessment of efficiency of business organization.

Ratios assist in determination of business performance in comparison with others in the


industry as well as the same business but different financial years.

Ratios clarify issues, providing meaning to the data bringing out information that is not
otherwise apparent.

Ratios forms basis for decision making or policy formation.

Ratios assist on assessment of efficiency of business organization.


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Ratios assist in determination of business performance in comparison with others in the


industry as well as the same business but different financial years

Ratios clarify issues, providing meaning to the data bringing out information that is not
otherwise apparent.

Ratios forms basis for decision making or policy formation.

Ratios assist on assessment of efficiency of business organization.

Ratios assist in determination of business performance in comparison with others in the


industry as well as the same business but different financial years.
LIMITATIONS OF ACCOUNTING STATEMENTS
- Financial statements are only partial information rather than they are historical.
They show the reader in financial terms what has happened in the past, therefore
much more information is needed to fully understand the present situation.
- It is impossible to sensibly compare two businesses which are completely unlike
one another.
- Ratios are usefully calculated from past financial statements and thus are not
indicators of the future.

There are a lot of factors (information) that the past financial statement does not disclose
for instance.

Future plans for the business.

The quality of the staff in the business

The location of the business

The future plans for the government and the effect on the business.

Is its plants and machinery obsolete

It is difficult to decide on the proper basis of comparison companies may be using


different accounting benchmark.

The comparison is difficult due to variation in situations.

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In normal circumstances, price level changes due to inflation thus making it


difficult to interpret the ratios.

Several factors such as recession boom and others can affect ratio analysis.

The basis of asset valuation can be misleading.

Ratios do not indicate immediately where errors lie.

LECTURE EIGHT: THE BUSINESS PLAN


8.2 ESSENTIALS OF A GOOD PLAN
Any plan must have certain features that make it a good plan. Thus, Saleemi (2009) has
identified the following essential features of a good plan.

Simplicity

A plan must be simple and easy to understand. Facts, figures and other data must be well
presented. A plan must be simple so that those who are implementing it must clearly understand
it.

Flexibility

Plans must not be rigid. They must offer flexibility to change as and when the situation so,
demands. For instance, a company may plan to produce 20,000 units during a given period.
However, if there is a strike or some other unforeseen event in the factory, then it would not be
possible to produce the planned units.

Sustainability
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A plan must be suitable to a particular unit or department depending upon the resources and
capabilities, and the targets set.

Acceptance

The plan must be acceptable to the subordinates. If is therefore important that targets set must be
discussed with subordinates and for them to be convinced to accept them.

Facilitate Organizing

A good plan should enable proper organization of resources. The manager should find no
difficulty in making arrangement of resources physical and human resources in order to
achieve the targets. Depending upon the targets, the manager will make proper arrangements of
resources.

Provide Purpose And Direction

A good plan acts as a road map. It should provide proper direction so that the activities can be
conducted smoothly. Depending upon the planned schedules, the manager can give the right
directions to complete the work on time.

Facilitate Control

If the targets are planned clearly, it will enable a manager to monitor the performance. This is
because the actual performance can be easily compared with the planned targets. If there are any
deviations, the manager should be in a position to take the right corrective steps at the right time.

Generate Harmony

A plan should generate team spirit among the different sections or departments of an
organization. This would be possible if the plans of the concerned departments are integrated or
coordinated.

Generate Efficiency

A good plan must make optimum use of the available resources. Maximum possible returns
must be achieved with minimum possible costs.
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Motivate Personnel

A good plan should be realistic and challenging. The plan prepared by the manager should
motivate the subordinates to put in their best efforts and experience in achieving the set targets.
Activity I
Are you able to define a business plan?

8.3

Scope and Value of the Business Plan.

The business plan may be read by employees, investors bankers, venture capitalists, suppliers,
customers, advisors, and consultants. Who is expected to read the plan can often affect its actual
content and focus.

Since each of these groups reads the plan for different purposes, the

entrepreneur must be prepared to address all their issues and concerns.


The business plan is important to each of these groups because:

It helps determine the viability of the venture in a designated market.

It provides guidance to the entrepreneur in organizing his or her planning activities.

It serves as an important tool in helping to obtain financing.


Activity 8.2
Why develop a business plan? Or what are the roles of a business
plan?

You must have come up with the following answers.

Business plan guides entrepreneur by charting the companys future course of action
and devising a strategy for success.

Business plan work as a tool for communication

Business plan works as a call to action

Lets look at these roles in more details.

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Business plan guides as entrepreneur by charting the companys future course of action
and devising a strategy for success.
The plan provides a battery of tools- mission statement, goals, objectives market analysis
budget, and financial forecasts target markets and strategies to help entrepreneurs lead a
company successfully. It gives managers and employees a sense of direction. This works
perfect it everyone is involved in creating the plan updating it or even altering it.
Creating a plan also forces entrepreneurs to subject their ideas to the test of reality.

Business plan as a tool to attract leaders.

Business plan is used to attract leaders and investors.

The business plan provides a vehicle for communicating the potential of the venture, the
opportunities it faces and the way it intends to exploit them in a way which is concise efficient
and effective. This may be of value in communicating with both internal and external
stakeholders. The plan many draw internal together and give them a focus for their activities.
A business plan requires the entrepreneur to assess the venture chances of success more
objectively. A well assembled plan helps prove to outsiders that a business idea can be
successful. To get external financing, an entrepreneurs leaders and investors. These are

The reality test

The competitive test

The value test

Now lets look at these tests in more details.

1. The Reality Test


These can be classified into two:

Internal component

External component starting with external component reality world focus on the
existence of t he market for the product or service proposed. It therefore entails
focusing or industry attractiveness, market niches (gap) potential customers, market
size; degree of competition and other factors while internal component of reality test
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focused on the product or service itself in terms of the cost and how different the
product is from the existing ones and does the product/service offers something of
value to customers.
2. Competitive Test.
Again this factor has two component internal and external components.
-

External part of the competitive test evaluates the companys relative position to its key

competitors. For instance how does the companys strength and weaknesses match up with those
of competitors? They also consider the possibility of success and survival of the new venture.
The internal component focuses on managements ability to create a company that will gain or
edge over existing rivals. The quality, skills and experience of the ventures management team is
assessed.
3.

Value Test. To convince lenders and investors to put their money into the venture, a

business plan must prove to them that it offers a high. Probability of repayment or an attractive
rate of return. Entrepreneurs usually see their businesses. As good investments because they
consider the intangibles of owning the business-gaining control over their own destinies,
freedom to do what they enjoy and other factors.
-

A business plan work as a call to action.

The business plan is a call to action.


The business plan is a call to action. It provides a detailed list of the activities that must be
undertaken, the tasks that must be performed and the outcomes that must be achieved if the
entrepreneur is to convert his or her vision in a new world. The plan may also call upon formal
project management techniques such as critical path analysis in order to organize, priorities and
arrange tasks in a way which makes the best use of scarce resources.
8.4 Elements of a business plan
Smart entrepreneurs recognize that every business plan is unique and must be tailor made. His
elements of a business plan may be standard but the plans should be unique and different. Many
entrepreneurs prefer launching their companies and see what follows than invest the necessary
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time and energy defining and researching their target markets, defining their strategies and
mapping out their finances that planning demands. It is important to note that though business
plan does not guarantee success; it does raise an entrepreneurs chance of succeeding in business.
Generally a business plan would contain between 20 to 40 pages in length. Shorter plans are
viewed to be too sketchy to be of any value and those much longer than this run risk of never
getting used and read. This section will explain the most common elements of a business plan.
It should be noted an earlier staked that a business plan should be unique reflecting uniqueness of
the proposed venture.

What is to be included should also consider the stage at which the venture is at i.e.
some ventures are ongoing while others are new ventures. The plan will also consider
the audience at whom the plan is directed and the action the entrepreneur desires from
them.

A good business plan may include the following.


a)

Title page and table of contents

A business plan is a professional document which should contain a title page with the companys
name logo and address as well as the names and contact information of the founders of the
company. Date of issue may also be included or the cover page, the copy number may also be
included.
b)

Executive summary

This is a summary of all the relevant points of the business venture. It should be concise and a
maximum of two pages is preferred. Executive summary is a synopsis of the entire plan.
It should briefly describe the following.
-

The companys business model and the basis for its competitive edge.

The companys target market(s) and the benefits its products or services will provide
customers.

The qualifications of the founders and key employees

The key financial highlights for example the sales and earnings projections, capital

required rates of return on the investment and whom loan(s) will be repaid where applicable.
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The executive summary must capture the readers attention. If it misses the mark the chances of
the remainder of the plan being read are minimal. Although the executive summary is the first
part of the business plan it should be the last section to be written. It is like a abstract in thesis or
projects.
Vision and mission statement is the next section.

A mission statement expresses in words on entrepreneurs vision for what his


company is and what it is to become. It is the broadest expression of a companys
purpose and defines the direction in which it will move. It anchors a company in reality
and issues as the thesis statement for the entire business plan.

Company History: The owner of an existing small business who is creating a


business plan should prepare a brief history of the operation, highlighting the significant
financial and operational events in the companys life. It is at this juncture that one
indicates when and why the company was formed; how it has evolved over time, and
what the owner envisions for the future.

It should highlight the successful accomplishment of past objectives such as developing


prototypes earning patents, achieving market share targets or securing long term customer
contracts.
c)

Business and industry profile

The lenders and investors need to be acquainted with the industry in which the company operates
or intends to operate. This section therefore provides the reader /investor with an overview of
the industry or market segment in which the new venture will operate. Industry data such as
market size, growth trends and the relative economical and competitive strength of the major
firms in the industry all set the stage for better understanding of the viability of the new product
or service. Strategies such as market entry and exist, the ability to achieve economies of scale or
scope, and the existence of cyclical or seasonal economic trends help the readers to evaluate

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the new ventures. This section should also describe significant industry trends as well as key
success as in the industry as well as give an outlook for its future.
The section also describes the existing and anticipated profitability of the industry.

Any

significant entry or exit of firms or considerations and mergers should be discussed in terms of
their impact on the competitive behaviour of the market.
The companys general business goals and immediate objectives are highlighted in this section.
e)

Business strategy.

This section addresses the question of how, the goals and objectives of the new venture be
achieved. Here the entrepreneur explains how he or she plans to gain a competitive edge in the
market and what sets the business apart from the competition. The entrepreneur explains how he
is going to achieve the goals of the venture in the face of competition and government regulation
and should also identify the image that the business will try to project. The entrepreneur should
show the customer the uniqueness of the company.
The service /products (new) should be different in terms of better, bigger, faster, more convenient
etc.
The strategy section of the business plan should outline the methods the company can use to
satisfy the key success factors required to thrive in the industry.
The following may be considered under this section.

Product strategy This will show the way the product or service will be
differentiated from competitors to be more attractive to customers

Pricing strategy How the product /service will be priced relative to competitors
e.g. other a premium, discounting or means of establishing price, promotional pricing
and price cutting, pricing policy and margins to be offered to intermediaries.

Distribution strategy points the route by which the service /product will be delivered to the
customer, intermediaries (wholesalers, distributors, retailers) who will be partners in distribution

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strategy for working with distributors, policy for exporting and international market if
appropriate.

Promotional Strategy These are approaches to inform customers as well as


intermediaries about the product /service e.g. advertising message means and
medium; sales activity and approaches to selling, sales promotion and other public
relations activity.

Net working relationship between the organization and other organizations in the
network international linkages as well as national /domestic linkages. Use of the
network create and support competitive advantage.

Other issues that may be included in the strategy section is the market strategy which
includes the above as well as a fair description of the target market in terms of age,
gender educational level and other demographic characteristics, where they live work
and shop.

What and why they buy and their needs, needs and habits.
f)

Competitors Analysis

Entrepreneurs should discuss the new ventures competition.

Failure to assess competitors

realistically makes entrepreneurs appear to be poorly prepared, nave or dishonest.


This section should focus on demonstrating that the entrepreneurs company has an advantage
over its competitors.

One should indicate who the key competitors are and what their

weaknesses and strengths are and how the entrepreneur will deal with such circumstances.
g)

Description of the management team

The success of a venture is affected by the quality of its management and financial officers. The
ability and experience of the companys managers is reflected in their financial decisions. Thus
plan should describe the qualifications of business officers, key directors and other person with at
least 20% ownership in the company.

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Activity 8.3
Identify some ventures that have succeed in business through their
management

The management members need to describe in regards to their education levels, work history,
and relevant business experience. An entrepreneur should not cover up previous business failure
whereby investors are suspicious of entrepreneurs who have never experienced a business
failure.
h)

Plan of operation

To complete the description of the business, the owner should construct as organizational chart
identify the businesss key jobs and the qualifications of the people occupying them. Assembling
a management team with the right staff is difficult and maintaining them is even more difficult.
The entrepreneur should describe briefly the steps taken to encourage important officers to
remain with the company. Employment contracts, shares of ownership and pare examples of
measures that can be taken to keep and motivate employees. The form of ownership need to be
described.

This may be sole proprietorship, partnership, public and public companies or

corporations.
i)

Pro-forma (projected) financial statements.

This is considered as the most important section of a business plan. A research done on bankers
revealed that 74% of the bankers under study indicated that financial documentation is the most
important aspect of a business plan for entrepreneurs seeking loans. For existing business,
lenders and investors use past financial statements to judge the health of a company and its
ability to repay loans or generate adequate returns. Financial statements are preferred when they
are audited by a certified public accountant.
The following financial forecasts may be prepared.
Income statements: this shows the revenues from trading structure of the capital provided.
Routine expenditure: Expenditure on salaries, raw materials and consumables, payment of
interest on debt Capital expenditure major investment in new assets, how these assets will
enhance performance Cash flow: difference between revenue and expenditure by period, cash
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flow reflects the liquidity of the business and its ability to find its activities. Its income is more
than expenditure than cash flow is positive. It expenditure is more than income than cash flow is
negative.

8.5

Business Plan Format

As stated earlier there are no hard and fast rules about what a business plan should include since
a business plan must be shaped to reflect the needs and requirements of the venture if represents.
An exhaustive business plan should include the following sub topics.
I

Executive summary

Company name address and some number

Name, address and phone numbers of all very key people.

Brief description of the business, its product /service

Brief overview if the market for your products and services

Brief overview of the strategies that your firm a success

Brief description of the managerial and technical experience of key people

Brief statement of the financial request and how the money will be used.

Charts as tables showing highlights of financial forecasts

II

Vision and mission statement

Entrepreneurs vision for the company

What business to venture in

Values and principles on which the business stand

What makes the business unique

III

Company history (for ongoing businesses)

Company funding

Financial and operational profile

Significant achievement.
135

IV

Business and Industry profile

Industry background and overview

Significant trends

Growth rate

Key success factors in the industry

Outlook for the future stages of growth (start up growth, maturity)

Business Strategy

Desired image and position in market

SWOT Analysis

VI

Strengths

Opportunities

Threats

Focus

Company products and services

Description

Product /service features

Customer benefits

Warranties and guarantees

Uniqueness

b) Patent and trademark protection


c)

d)

Description of production process (where applicable)

Raw materials

Costs

Key suppliers

Future product or service offerings

VII

Marketing strategy

1.

Target market
a) Complete demographic profile
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Complete demographic profile

Other significant customer characteristics

b)

Customers motivation to buy

c)

Market size and trends

How large in the market

Trend of the market growing or shrinking

d)

e)

Advertising and promotion

Media used reader, viewer, listener profiles

Media costs

Frequency of usage

Plans for generating publicity.

Pricing

f)

Cost structure fixed and variable cost

Desired image in market

Comparison against competitors prices

Distribution strategy

VIII

Channels of distribution used

Sales techniques and incentives

Location and layout

Location Demographic analysis of location versus target customer profile

Traffic count

Lease/rented

Labour needs and supply

e) Wage rates
IX

Competitor analysis

Existing competitors

Potential competitors

Impact on your business

D Description of management team

a)

Key managers and employees

Their backgrounds
137

XI

Experience, skills and know how expertise

Resumes of key managers and employees (suitable for an Appendix).

Plan of operation

XII

Form of business chosen and reasoning

Company structure (organizational chart)

Decision making authority

Compensation and benefits packages

Financial forecasts (suitable for an Appendix)

Finance statements

Income statements

Balance sheet

Cash flow statement

b) Break-even analysis
c)

Ratio Analysis with comparisons to industry standard applicable to on going

businesses.
XIII

XIV

Loan or investment proposal

Amount requested

Purpose and uses of funds

Repayment or Cash out schedule (exit strategy)

Timetable for implementing plan and launching the business

Appendices which may entail supportive document, such as market research,


financial statements organizational charts, resumes and other items.

Why some Business Plans fail


Activity 8.4
1. Why do some business plans fail?
2. Come up with a business plan for a potential business you would wish
to manage.

Generally, you need to consider your answer under the following guidelines.

Goals set by the entrepreneur are unreasonable.


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Goals are not measurable.

The entrepreneur has not made a total commitment to the business or to the family.

The entrepreneur has no experience in the planned business.

The entrepreneur has no sense of potential threats or weaknesses to the business.

No customer need was established for the proposed product or service.


8.8

Summary

This lecture has established the essential of a good plan and outlined the
steps in its preparation.

The business plan may be read by many

individuals. The scope of the plan depends on who reads it, the size of the
venture, and the specific industry for which the venture is intended.
The chapter presents a comprehensive outline of a typical business plan. In
addition a brief insight is given as to why business plan may fail.

8.4 Activity
What makes an excellent business plan?
What is the purpose of the business plan if the audience is
(a) the entrepreneur
(b) an investor
(c) A key supplier?
How might the plan be adapted for these different audiences?

Explain the essentials of a good plan.

Examine the elements of a business plan.

8.9 References
Thomas W. Zimmerer and Norman M. Scarborough (2008).
Essentials of Entrepreneurship and small Business Management (5th
Edition). Pearson Education Interantional.

Saleemi Nisar Ahmad, (2009). Entrepreneurship Simplified.


Saleemi Publications Ltd.
139

Hisrich Dhohert, Peter P.M. and Shepherd Dean (2008).


Entrepreneurship (6th Edition). Tata McGraw Hill publishing
company Ltd. New Delhi.

LECTURE NINE: THE MARKETING PLAN

Introduction

The term market is derived from the Latin word merchants, meaning to trade. It also means
merchandise, wares, traffic or a place of business. It is because of these different meanings that
the word is used differently in different contexts. The common use of the term may imply any of
the following.

A place where market is held.

An assembly of people (preferably buyers and sellers).

An area of operation.

An organization which facilitates exchange of commodities

An act of buying and selling.

An assemblage of commercial activities.

Despite the thrust in each of these concepts, the ultimate objective of all is one and the same:
markets help to complete the process of exchange leading to satisfaction of needs of the
participants.
A market, in general, may be described as a place or geographical area where buyers and sellers
meet and function, goods or services are offered for sale and transfers of title of ownership occur.
This idea of market is supported by many. Clark and Clark define this as an area in which the
forces leading to exchange of title to a particular product operate, and towards which and from
which the actual goods tends to travel.
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All businesses trade in markets. A market occurs when buyers and sellers come together to trade.
The buyers demand products, while the sellers supply them. Markets can be small, local markets
with a specified location, a market can be a building (e.g. the stock exchange). Other markets
are national or international with no single location. For example, the world market for oil is a
global market in which buyers and sellers are linked by telephones, faces and the Internet and
trading takes place in many locations.

Markets can be identified in various ways:

Markets for individual goods and services, such as the market for bicycles;

Consumer markets for goods and services bought by individual consumers, such as the
markets for hairdressing or books;

Commercial markets for goods and services bought by businesses such as the markets for
cars or financial services;

Mass markets consisting of a large number of customers for a standard product;

Niche market consisting of a smaller number of customers for a more specialized


product.

9.3

Importance of Marketing

Marketing is important to business firms and to non-profit organizations. It is also important to


consumers and to the society. The importance of marketing is stated as follows.
(A)

Importance to Business Firms

Information for Marketing Decisions:

Marketing department collects valuable

information through marketing research, reports from sales team and dealers and from
other sources. Such information is used to take proper marketing decisions relating to
marketing mix, i.e. product designing, pricing, promotion and distribution.

Accomplishment of Firms Objectives; Marketing helps a business firm to achieve its


objectives.

By producing products that satisfy customers needs and wants, the

company can increase its sales, which in turn enables a firm to achieve its objectives
such as:
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higher profits

Increase in market share, and so on.

Widens Markets: Marketing enables to widen the markets,. With the help of
effective advertising, sales promotion and distribution, a firm can widen its markets
as follows:

From local level to regional level,

From regional level to national level, and

From national level to international level.

Reputation:

Effective marketing enables a firm to earn reputation in the market.

Satisfied customers, dealers and others develop a good image of firms that provide
efficient and effective goods and services. A good image helps a firm to expand and
grow.

Helps to Develop Brand Loyalty: Effective marketing helps to develop brand


loyalty. Brand loyalty refers to:

Repeat purchases by existing customers, and

Favorable recommendations by existing customers to friends, neighbors and


others.
Marketing guru Al Ryes says that customer word-of-mouth is the

best
alternative to adverting. He calls such customer as an evangelist
(religious
believer). This is because; loyal customers tell others what movie
to see, which

computer to purchase, what restaurant to

visit, which doctor to consult, which

mobile phone

to buy, which books to read, which gyms to join and so on.

Helps to Introduce New Products: Reputed firms find it easier to introduce new
products in the market. This is because they enjoy
confidence and support of the loyal

customers. Satisfied customers are

always willing to buy products and services of

those companies in whom

they have trust or faith. They provide ready market

for

products.
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these

Helps to Face Competition. Proper marketing helps to face competition effectively


with the help of good products, right price, effective promotion and distribution.
Through effective marketing strategies, a firm can build competitive advantage.

(B)

Movement to Non-Profit Organizations.


Importance to Non-Profit Organizations.

A non-profit organization is a non-business organization. It is set upto provide and


promote education, training, sports, arts and other socio-cultural activities. Examples of
non-profit organization include educational institutions, trade associations, chambers of
commerce and industry, sports clubs, charitable trusts, religious organizations, etc. a nonprofit organization needs to undertake marketing for the following reasons:

To develop image: Marketing helps the non-profit organizations to develop a good


image for the organization.

For this purpose, the non-profit organization must be

professional in providing its services to its members or to the members of the society. Ti
may also undertake advertising to promote its name and goodwill. Good image of the
organization would enable it to achieve success.

To expand activities: Marketing activities are vital to expand activities of the non-profit
organization. Some non-profit organizations would not like to confine themselves to a
local area. They would like to open their centres at different parts of the country and
even at international level.

To educate masses of its activities/objectives: Marketing activities on the part of a nonprofit organization. Some non-profit organizations is required to educate the masses or
members of the society regarding its activities and/or objectives.Such education can be
done through effective advertising. For instance, to keep a beautiful park always clean
and at the same time non harm is doneto its plants and flowers, a large placard placed
inside the park can bead,:

Do not take anything, except pictures.

Do not leave

anything on the ground, reaccept your footprints.

To crate social awareness: Most non-profit organizations exist to provide services to


the members of the society and not necessarily to their own members. A good
number of social organizations work for the less fortunate members of the society.
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Through effective social welfare campaigns, non-profit organizations create social


awareness in respect of HIV/AIDS, child labour, drug abuse, etc. Such campaigns
help the members of the society to get rid of social evils in the society.

To gain public support: Marketing is required by non-profit organization to gain


public support. Many of the non-profit organizations largely depend on the donations
from the members of the public. Also, their existence depends on the acceptance of
their services or ideas by the members of the society or their members. Therefore,
non-profit organizations need to undertake effective marketing of their services or
ideas to the members of the society.

To enter in new area of activities: Effective marketing is required to enable the


organization to enter in new activities. For instance, a religious organization can also
enter into educational facilities, hospital facilities, etc. therefore, a good religious
organization which is respected by the members of the society would also accept its
entry in other activities and provide good support whenever and wherever required.

To provide information: Marketing activities especially advertising and publicity


are required by a non-profit organization to provide information to the members of
the society.

The information may be in respect of its activities, working, and

performance. It may also provide general information for the benefit of the public.

To accomplish objectives.

Most of all marketing is required by a non-profit

organization to accomplish its objectives. For instance, one of the main objectives of
an educational institution is to provide quality education to improve the overall
performance of its students, so that they are capable and competent enough to face the
challenges of life such as getting good jobs, having moral values and becoming
responsible members of the society.

For this purpose, an efficient educational

institution may have to resort to marketing activities, including advertising.


(C )

Importance to Consumers and Society.

1.

Higher Standard of Living: Because of marketing, consumers can enjoy new and beer

variety of goods and services. Members of the society can get the benefit of new and better type
of goods because of constant research and development undertaken by well established
companies.
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Generates Employment:

Marketing creates a number of jobs in the country, either

directly or indirectly. Employment is generated because of job opportunities in the


production, distribution, advertising and other areas of marketing.

Improves quality and Reduces Cost: Marketing makes it possible to improve quality of
the products because of research and development. It also facilities reduction in prices
because of stiff completion in the market and also due to the economies of large-scale
production and distribution.

Spread Effect: because of marketing, other sectors also expand. This includes expansion
of banking sector, communication sector, and transport sector and so on. Such spread
effect offers more job opportunities.

Creates Utility: Marketing creates form utility, time utility, place utility and possession
utility. Consumers get form utility in the shape size and designs of the product. There is
time utility because goods are available when they need it. It creates place utility because
goods are available as and where consumers want and consumers also get possession
utility from the physical possession of the product.

Enhances Economic Growth:

Marketing ensures optimum utilization of resources.

Through effective production and distribution, marketing enhances speedy economic


growth and well-being of the nation.

9.4

Functions of Marketing
Marketing covers a wide range of functional areas, which are briefly

explained as

follows:

Marketing Research: It is one of the important areas of marketing. Through marketing


research, the marketer can come to know about the likes, dislikes, tastes, preferences and
buying behaviour of the consumers. Necessary information can be collected in respect of
competitors offers. Marketing research helps to bring bout most competition products
and competitive marketing plans to sell the product in the market.

145

Product Development: the company can produce new and better products thorough
research and development. The firm does away with obsolete or outdated products and
introduces new products in their pace. Firms should make constant efforts to upgrade and
update the products so as to survive in the present competitive business world.

Advertising: Now-a-days, advertising is considered to be one of the most effective ways


of promoting good and services,. It makes consumers aware of the qualities, uses and
benefits of the products. Advertising also helps to develop brand image and brand
loyalty.

Sales Promotion:

There are various sales promotion techniques such as sale on

installment basis, free gifts, offering discounts, etc.

The various sales promotion

techniques are used in order to promote and sell the products and services in the market.

Pricing: Price refers to the exchange value at which the seller is willing to sell and buyer
is willing to buy. Effective pricing policy is very vital to the success of the product in the
market. The prices should be reasonable and within the range of the competitors. The
prices should neither be too high nor too low. It is too high, buyers may think twice
before paying for the product. If it is too low, buyers may equate the products quality as
low.

Physical Selling:

It refers to the place of sale and the channel used for selling

Consumers want products to be available at a convenient place and on time.

The

marketer can use either direct channel or indirect to reach the buyers.

Personnel Selling: One of the important areas of marketing involves personnel selling.
For this purpose, there must be proper selection of marketing personnel. If necessary
proper training must be provided. They must be constantly motivated to achieve sales
target.

After-Sale-Service: Effective after-sale-service is a must in case of consumer durables.


Consumers value a company by the quality and speed of after-sales-service. To promote
a good name and reputation in the market, the marketer must offer very good after-saleservice.
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Test Marketing: it is a process of introducing a product or service in a very limited


market area in order to find out whether or not the consumers would accept such a
product or service. If test marketing is successful, then the product or service is launched
over a large market area.

Branding: Branding is an important aspect in todays competitive business world. A


grand name facilitates advertising and promotional efforts.

It aids customers in

identifying the branded item. A good brand creates brand loyalty and among other things
aids in brand extensions.

Other functional areas:

there are several other functional areas such as packing,

marking and labeling, public relations grading, standardization, etc.

Marketing Planning and Strategy

Like all business activities, marketing costs money and time. It is important, therefore, for the
marketing activities of a business to be effective. This means that the revenue from increased
sales resulting from the marketing activities should be higher than the cost involved. For
example, there is little point in spending Kshs. 1 million on advertising that only results in an
additional Shs. 500,000 in sales revenue. To ensure effective marketing, a business must have a
clear strategy and develop a marketing plan.

Market analysis: This is an examination of market conditions to identify new


opportunities.

Market research: this involves gathering and analyzing information to make


better marketing decisions.

Marketing strategy: this involves developing a plan detailing how and where
to compete.

Marketing mix:

this covers the decisions all businesses have to make

regarding selling price, how and where the product is sold, and the image of
the product and the precise nature of the product itself.
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The marketing process


Market analysis
Market research

Marketing Strategy
Marketing mix

Review results
Let us discuss these in details below:
1.

Market Analysis:

As its name suggests, market analysis involves a detailed examination of characteristics of a


market. Market analysis lets businesses spot opportunities in a market by looking at the market
conditions. The most important conditions are market size, growth in the market and market
share.
This is an essential part of marketing planning. Only by knowing the features of a market will a
firm are able to plan effectively what to do next.
Market analysis

Market planning
A market analysis will usually involve estimates of:(a)

Market size: How big is the market? Businesses estimate the size of their market in

terms of the total number of sales (volume of sales) or in terms of the value in shillings (or
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dollars, etc) of all the sales in the market. For example, in the soft drinks market a firm may
measure the number of cans or bottles sold or the value in shillings of the total sales. A firm
must ensure the market is big enough to generate sufficient returns to make it worth competing
in. Firms will be interested both in the existing size of the market and its future size. A market
may be big at present but could decline (e.g. what will demand for DVDs be in ten years time:
will a new product have a replaced this technology?)
Alternatively, a market may be small at the moment but may be likely to grow fast in the future
(e.g. 3G mobile phone technology is still new, but may grow fast in the near future). If a market
is shrinking, a firm may have to decide whether to carry on competing in it or not; it may have to
look for alternative markets. Competition is likely to be fierce in a shrinking market because
there are less and less customers available. By comparison, in a growing market all firms can
expand without having to take sales from each other.
(b)

Market Growth: to what extent is the market growing? How big will it be in the

future? Businesses need to know if the market is growing or shrinking. Competition is fierce in
a shrinking market there are fewer customers to go around. In a growing market, several firms
can grow easily; existing businesses may want to get out of market that is getting smaller, while
new firms will be reluctant to enter a declining market.
(c) Market Share: it is helpful to know the market share of all existing firms within the market.
The market share of a firm or a brand is the percentage that it has of the market sales. For
example, if brand Z has a 25% market share, this means either that 1 in 4 products brought by
customers is brand Z (if the market size is measured in terms of units sold.) in another example,
if 100 shillings out of every 1000 shilling is spent on perfume A, this would mean perfume A had
a 10% market share. (If the market is measured in terms of sales value)
Market share -+ sales - total market size x 100%
Firms with large market share (e.g. Microsoft, Gillette, Coca-Cola) have great
power over suppliers and distributors,. They are likely to be able to demand
preferential treatment and better rates.

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As well as size, share and growth, market analysis measures things like
profitability and the costs of buying equipment and training staff so one can bet in
the market (entry costs).
Market Segmentation
Segmentation is a means of dividing up a market (into segments) to identify consumers with
similar needs. Different groups of customers have different needs. Analyzing different parts
(segments) of a market allows a business to focus on the needs of specific groups within a target
market. If you look at the market for magazines, for example, publishers produce different
publications for different groups: some focus on sports, some are based on hobbies or interests;
others are targeted at particular lifestyles while some are on politics, real estate, relations and so
on. By identifying the needs of different groups, the publishers can produce an appropriate range
of magazines.
Segmentation happens in most markets. There are many different way of segmenting markets
such as:

Age Many products are aimed at particular age groups in society e.g. babies, preteens,
teens, 25 35 years old, middle age, old etc. for example, pampers target babies and
young children. In the tooth paste market, there are tooth pastes aimed at small children,
others are particularly for smokers and some are for people with sensitive teeth. Each of
these products targets a specific group and tries to meet their particular requirements.

Gender (male or female) Products such as clothes obviously differ for men and
women, but other types of producers also target men and women in different ways.
Gillette, for example, is known for producing shaving razors for men but they also have
razors especially made for women keeping in mind that a womans skin is more gentle
and sensitive.

Income Businesses produce goods and services for groups with particular levels of
income e.g. luxury products like Rolex watches and Porsche cars are aimed at high
income groups.
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Socio-economic groups Businesses can segment their market based on the kind of jobs
(and income) people have i.e. senior professionals to low income to unemployed people.

Usage rate Some firms such as tobacco and soft drinks companies distinguish between
heavy users of their products and light users because this may affect the services offered
and the promotional techniques used (e.g. light users may be targeted to turn them into
heavy users).

Geographical region some products have a regional market e.g. some bread companies
only concentrate in particular towns or cities.

Ethnic grouping e.g. vernacular radio stations make it easier for businesses to target
advertising at particular ethnic groups.

Purchase occasions When do people buy flowers or a greeting card? In both of these
markets the producers have tried to increase the number of purchase occasions to provide
more situations when we would send someone a card or flowers.

All the above methods focus on a characteristic of the customer. Every person is different and
has his or her own individual set of characteristics. This means that every customer of a business
is different too. Fortunately, there are certain types of characteristics that are shared by all
customers; it is these characteristics which businesses analyze. In addition, new segmentation
methods categorize markets according to the reasons for buying a product either as an
essential, or to cheer yourself up or as a gift etc. More modern methods of segmentation focus
on the motives people have when they buy products. Why do people chocolates, for example?
To reward themselves? If a firm understands why someone buys their products, this may
influence the way they are promoted.
Is segmentation worth it?
If a firm can identify different groups in a market, it can offer products that precisely match their
requirements. Instead of producing one version of their product or service for everyone, firms
can adjust what they do according to the different needs of each segment. This should lead to
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more sales and profits. However, it is more difficult and more expensive to produce and market
several different products, rather than just one. A firm must weigh up the potential benefits with
the possible costs.
What makes a market segment attractive?
Not all identified market segments are necessarily attractive. There may well be a market for a
magazine called Cricket weekly; for example, but this is unlikely to attract the major publishers,
especially in a country like Kenya because the market segment is fairly small. A market segment
must, therefore, be big enough to be worth competing in. For an asset-led approach, it must also
fit with the firms own strengths. The firm must take into account whether the segment will
continue to be sufficiently big in the future. If the firm was worried about further competitions
or a change in consumer trends, for example, it may not enter, even if the market looks attractive
in the short term.

2.

Market Research

Market research is the collection of market information such as customers likes and dislikes. It
provides a business with information concerning the needs and wants of its customers, the
suitability of its existing or proposed products, and the strength (and weakness) of the
competition that the business faces.
Therefore, the aim of market research is to gather information that may be useful to the firm
when marketing its products. This could be information about sales, competitors, market size,
and new developments in the market or a wide range of other things.

Armed with this

information, the business can:

Proceed with marketing its existing products or developing new products, in the
knowledge that those products will meet the requirements of customers.

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Put the business in a strong competitive position.

Help the firm to be able to make better decisions about what to do next.

Most businesses operate in changing and competitive markets. Customers needs and tastes
change, affecting the demand for products and services, and the types of products and services
that customers want.

Market research to identify customers changing needs is therefore

essential. By maintaining up-to-date and accurate knowledge and awareness of trends in the
market, businesses can take decisions responding to changes and staying competitive.
Businesses carry out market research in order to collect information from and about the market
for their products in other words, about the needs and buying have of their customers and
potential customers. Based on the information obtained, decisions will be made on action to be
taken in response to the findings of the market research. If is vitally important, therefore, that
useful information is obtained from the right sources. The kids of information business want to
collect include:

Who are their customers?

What price are they prepared to pay for the product?

How can the product be developed to be better suited to customers needs?

How does the product compare with that of competitors?

What types of advertising are most effective?

Market research can be used to help firms in a number of different situations:

When considering the launch of a new product, a firm may want to know the size of the
market.

If firms are changing the brand name of a product, it may want to find out how customers
might respond.

Information on customers reactions to different product prices may be invaluable.

Researching consumers views on an advertisement before launching can help to make


sure that the right advertisements are used.

To assess how a product is doing, affirm may want to measure its sales.
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Perhaps one of the most crucial questions market research can address is whether it is
worthwhile competing in a particular market. How large is the market? Is it growing or
shrinking? What profits could be made in the industry? What competitors exist? The firm will
also be interested in the future of the market and whether it is likely to grow or shrink.
Research can also be used to determine possible changes in marketing policies. Should the firm
change the price? Should it change the promotional campaign? Which brand name should the
firm choose?
Essentially then, market research can be used in three main areas:

1.

To identify market opportunities

To assess the relative worth of different plans

To review the success of the plans once implemented.

To identify market opportunities

Businesses research customer buying patterns to help them predict what people will be buying in
the future. A business might use research to help them spot growing markets to get into and
declining markets to get out of. Research on customer likes and dislikes might show a gap (a
business opportunity which one can avail) in the market.
2.

To assess the relative worth of different plans:

Businesses research before launch a product or advertising campaign. It reduces the risk of
mistakes, for example, a publishing firm can decide to print twenty thousand copies of a book
where as the demand for it is only few hundreds.
3.

To review the success of the plans once implemented:

It helps them see if their plans are working. A business that keeps a keen eye on sales figures
will notice if their marketing strategy is having the right effect.

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Market research can be expensive. Bad market research can lead to disastrous business
decisions. Businesses need to plan carefully to make sure they get the maximum benefit from
the market research.
The Three Main uses of Market Research
So research provides a firm with information. If it is undertaken effectively, it can help to
provide firms with a competitive advantage by enabling them to make better decisions.
Types of Research
Deciding how you will get your information, selecting the sources and the way it is collected are
as important as deciding what information is required. Some information may already be
available within the business or else in the form of published reports and statistics. Other
information will have to be collected.
Researching existing sources of information is called secondary research, because the
information was originally gathered for another purpose. It is also called desk research because
much of it can be done at the researchers desk. Research that a business carries out to collect
totally new information is called primary research.
Primary research involves gathering information for the first time. Secondary research uses
information already gathered.
If you were thinking of launching a new type of shampoo and gave it to a group of people to try
first, this would be primary research. If you read some information about the shampoo market in
a newspaper, this would be secondary data. Primary research is also called field research.
Primary and secondary researches have advantages and disadvantages and each is appropriate in
certain situations. If a business is trying to assess the response of viewers to a new
advertisement, primary research will be essential secondary data would not exist. However, if
the firm finds this information from secondary sources.
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Primary Research (gathering new data)


Primary data can be gathered in a variety of ways. These are:

Observation

Experiments

Surveys

Consumer panels

Sampling

These are further explained below:Observation: shops record customers on CCTV cameras to see how they wander around the
store and what attracts their attention e.g. the display, the design, colour and packing of the
product.
Experiments: Business do test marketing by launching a limited number of units of the product
and put on the market in few areas, just to see how it sells. If it succeeds, they sell it nationally.
In this way the sales and customer response of the product can be confectionary such as breakfast
cereals; fruit juices, energy drinks and chocolate bars are often market tested in this way. The
problem with test marketing is that competitors get to see your product before it is fully launched
and they may try to get to the market first.
Surveys: through surveys, people are stopped on the streets and asked about their opinion about
something: this is face-to-face survey. Firms also use telephone and mail surveys to find out
what their customers think. The interviewer (the person conducting the interview) can ask the
interviewee (the person being interviewed) a wide range of questions and interviews are
particularly useful for obtaining peoples views and ideas. In order to save time and avoid any
misunderstanding, it is better to use a standard questionnaire for each interview. Surveys can
also be done through the internet and mobile phones (people can respond by sending short
messages). When designing a questionnaire, the following points should be classified in advance

Who is the questionnaire aimed at (the target population)

What the main information required?

How is the information to be used?

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The next step is to draft the key questions. Open questions are difficult to analyze because the
range of responses may be so large. An example of an open question is how did you get to
school today? However, such questions may provide useful background information. Closed
questions are questions that allow for only a limited number of responses. The above question
may be rephrased as Do you go to school to-day? A third type of question is the multiple-choice
question, where respondents are asked to select an answer from a limited number of choices.
Consumer panel: Occasionally businesses establish permanent panels of their customers to
advise them on their products.

Supermarkets often work with consumer panels that meet

regularly to discuss the products, prices and service offered. Television companies establish
panels of viewers to comment on the quality and content of programmes. Such panels are also
used to estimate viewing figures.
Sampling: A firm may want to gather information using a survey. Usually, it is not possible to
interview all of the people the firm is interested in: this group is called the population. It may be
too expensive or would take too long to talk to everyone in the target population. For example,
imaging a firm was thinking of launching a magazine aimed at 16 to 18 year olds; it could take
months to interview everyone of this age in the country. Instead of doing this, the firm might
decide to take a sample. A sample is a group, which is intended to represent the overall
population. By interview, say 1000 16 to 18 year olds; the firm would hope to get an
impression of what all people of this age a group think.
The most important requirement is that the sample should be representative of the whole. In
other words, if you want to know how many people prefer the taste of Pepsi to Coke; while you
obviously cannot ask everybody who ever drinks cola (the target population), the views of the
people you do ask must be representative of the target population.
Obviously, the results are not totally reliable because the firm has not actually asked everyone in
the population; it has only asked some of them. This means that the firm cannot be totally
confident of the results. This is why, when firms produce market research results, they also state
a confidence level. If the confidence level is 95%, this means the firm thinks that 95% of the
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time the results from the sample will represent the overall population. Therefore, a confidence
level is a measure of the reliability of the findings of primary research.
The more representative a sample is the more confidence a business can have in the results of the
research. A give sample has a better chance of being representative than a small sample. Even a
big sample wont necessarily be 100% representative. There is always a margin of error.
Quantitative and Qualitative Research
Quantitative research: is based on relatively large samples and is statistically valid. It is used to
show what has happened in a market and its findings can be expressed in numerical terms; for
example, sales of Brand X have increased by 45%, 12 million people watched the match last
week or the market for soft drinks is worth over Shs. 4 billion.
Quantitative research, therefore, produces numerical statistics facts and figures. It often uses
multiple-choice questionnaires that ask questions like: When did you last buy this product? A:
within the last day, B: within the last week, C: within the last month, D: within the last year, E:
longer ago, F: have never bought this product. These are called closed questions because they
have fixed, predetermined answers.
Qualitative research by comparison, is based on the opinions of a small focus group or in-depth
one-to-one interviews and aims to understand why customers behave in certain ways or what
they think of a product. Rather than focusing on what happened, it examines why customers to
what they do. For example, a focus group might be used to discuss consumers views of a brand
to understand shopping habits.
Qualitative research looks into the feelings and motivations of consumers. It uses focus groups
that have in-depth discussions on a product, and asks questions like: How does this product make
you feel? These are called open questions. The answer is not restricted to multiple-choice
options.

Closed questions make analysis easier, but sometimes open questions give more

informative data.

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Primary data is specific to the purpose its needed for. This is great for niche markets
secondary data might be too broad or too mainstream to tell you anything useful.
Primary data is exclusive to the business who commissioned the research, so competitors cannot
benefit from the research.
Primary research is always up to date. But primary research is labour intensive, expensive and
slow.
Secondary Research (data already available)
Secondary or desk research involves researching sources of information that is already available.
This is often the cheapest, easiest and quickest type of market research.
Since the information was probably originally obtained for others purposes, it may not be as
relevant or accurate as the researcher would like. If this is the case, the secondary research may
have to be supported by primary research.
Sources for secondary research may be internal (within the business itself) or external (outside
the business). Internal sources include: sales records and reports in journals; research carried out
and made availed by trade associations; reports and statistics published by government
departments; information published by other organizations such as the World Bank and the
United Nations. Other sources (external) can be newspapers, magazines and the Internet (this
carries an astonishing amount of data).
Secondary data that was gathered for a different purpose might be unsuitable. It may contain
errors and it may be out of date. Secondary data is often used to get an initial understanding of a
market. A business may then do more specific primary research to investigate any issues or
problems that are shown up by the secondary data.
Which is best primary or secondary research?
The most suitable type of research depends on the firm itself and the nature of the information it
needs. If a firm is investigating a problem which is very specific to its own products or services
(such as the impact of an advertising campaign) it will need to use primary research. If it is
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studying more general trends, secondary research will be acceptable. The resources of the firm
have an impact, as will the speed at which the information is required. If data is needed quickly
and the firm has limited resources, secondary research is more likely to be used.
Rapid advances in information technology are making it easier and cheaper for organizations to
gather information on their customers. More information can be processed more quickly and
more cheaply than in the past.
How useful is market research?
The value of market research can be judged in terms of the quality of the information it provides
relative to the cost and time taken to gather it. If the information is good quality, is gathered
relatively quickly and cheaply, the firm will no doubt be satisfied with the research. If, however,
the information arrives too late to be of any use, then it will be of limited value.
3.

Market Strategy

The marketing objective determines exactly what the firm is aiming to achieve in marketing
terms. This will contribute to the overall corporate objective. The marketing strategy is the plan
a firm adopts to achieve its marketing objectives.
Thus,
Corporate objective: overall target of the organization.
Marketing objective: target of the marketing function which should contribute to the corporate
objectives.
A firms marketing strategy determines what markets it wants to compete in and what products it
wants to offer.
As we have seen, a strategy is the means of achieving an objective. A marketing strategy is,
therefore, a way of achieving a marketing objective. This means it is the long-term plan the firm
has to ensure it meets its marketing target. A marketing strategy involves and analyzing markets,
choosing which markets to operate in and which products to offer.

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Marketing objectives often focus on sales. In most cases, firms want to increase their overall
sales, but they may also set objectives for particular products or regions. For example, a firm
might be very eager to promote some of its products to a greater extent in the whole region or it
may want to boost sales of its latest brand in particular. A firm might want to spread out sales
over the year (if its existing sales are very seasonal). It may even want to reduce sales, if it
knows it cannot meet the orders and that to accept them might lead to long waiting lists and
dissatisfied customers.
Businesses develop long-term marketing objectives from their overall corporate objectives.
Marketing objectives give a direction to all the marketing that the business does. Marketing
objectives always need to take into account what competitors are up to. Once a business has
sorted out its marketing objectives, it develops medium term marketing strategies as action plans
to achieve the marketing objectives. Next, they think up short-term tactics to put these medium
term plans into action. Tactics are individual marketing actions.
Remember, a strategy is a plan of how to achieve an objective.
A tactics is an activity that you do to fulfill your strategy and get closer to your objective.
Therefore, there strategy is implemented through marketing tactics.

These tactics involve

detailed decisions about factors such as the price and the way the product is distributed.

For example:

A firms marketing objective might be to increase sales by 30% over the next five years.

It marketing strategy might be to launch some of its products in other countries.

The marketing tactics used might include launching the products at a low price in major
cities first and gradually extending this to other parts of the country.

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The interrelationship between objectives, strategy and tactics


Corporate objectives

What is the firm trying to achieve?

Marketing objectives

What does the marketing function need


to do to fulfill the corporate objectives?

Marketing strategy

How will the firm achieve its objectives?

Marketing tactics

What needs to be done to ensure the


strategy is successful?

Determinants of a marketing strategy


When considering a marketing strategy a firms managers should consider:

What is the firm trying to achieve, i.e. what are its marketing objectives? There is no
point cutting prices, for example, if the firm is trying to build an exclusive brand image.
Similarly there is little point diversifying if the firms objective is to focus on its core
products.

What are the market opportunities? What market segments appear to be growing/

What are the firms strengths? What is the firm capable of achieving? Does it have any
unique selling points (USPs)?

What resources does the firm have? For example, what is its financial position? Will it
be able to finance any plans for expansion?

Should the firm compete in a niche or try to compete head-on with the major players in a
mass market?

Should the firm try to match the completion and try to sell the products more cheaply (a
low-cost strategy?

Should it compete in particular areas in the country as a whole or globally?

A firms marketing strategy should aim to exploit its market opportunities and defend it against
threats. It should naturally build on the firms strengths and avoid entering market segments or
offering products where its weaknesses will be exposed.
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Types of marketing strategy:


There are many types of marketing strategies.

These include niche marketing and mass

marketing.
Following are the features of a niche market:

Niche marketing picks out relatively small market segments and tries to cater specifically
to them.

Niche marketing lets small firms survive. Small firms can offer unique selling points
which appeal to a small niche customer base that large firms simply would not bother
with.

Small niche markets suit small niche manufacturers. A small manufacturer can meet the
demand of a small segment of the market. It might not be able to meet the demand of a
mass market.

Another benefit of niche marketing is that a business can have loyal customers who are
often willing to pay premium prices for a product that is just right for them.

There are fewer chances to grow in a niche market. Niche businesses cannot save costs
by producing on large-scale small-scale manufacturers cannot get bulk discounts from
suppliers.

If bigger firms enter the market, niche manufacturers can struggle to survive. Bigger
firms have lower costs and they can be more competitive.

There are a number of advantages of operating in a niche market:


A firm may be able to survive because it is offering a product or service that the large
firms are not bothered about supplying. If a small firm tried to compete in the mass
market, the existing firms might react aggressively.
The firm may be able to operate on a small scale. Many niche markets are relatively
small and specialized. Small organizations are therefore, able to meet the demand in this
market, whereas they might lack the resources to meet demand in a mass market.

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However, firm producing and selling in niche markets also face disadvantages:
If the business earns high profits, other firms might enter the market, making it more
competitive. In some cases, the niche producer will struggle to survive if larger, more
powerful firms enter the market and sell at lower prices.
The market as a whole may be quite small which may limit the overall returns a firm can
achieve.
The market may consist of a small number of customers. This may mean that the firm is
vulnerable to the loss of one or two customers. In the mass market this is less of a
problem: if one customer is lost, there are normally plenty more.
Mass Marketing is Selling Large Quantities of Standardized Goods
Following are the features of a mass market:

A mass market is a large market containing lots of customers with similar


requirements.

Businesses in a mass market sell standardized goods at cheap prices to lots of


customers. Mass market goods include things life washing powder, packed foods,
soft drinks, tooth paste, cassette players, CDs cameras, tires, toilet paper, and batteries
and so on.

Mass production techniques developed in the 19th and 20th centuries, e.g. assembly
line production, made a mass market possible.

These techniques meant that

production could be large scale and cost effective producing standardized goods at
low prices.

Globalization is the process where goods and consumer wants become standardized
across international borders. Globalization has increased the size of the mass market
and made mass marketing more important. You can sell Coca Cola anywhere in the
world.

In a mass market, businesses can grow big and benefit from productive economies of
scale but they must take care that they dont end up with diseconomies of scale.

Mass marketing needs a lot of resources, e.g. lots of machines and lots of workers. If
demand does not meet expectations, machines and workers will not have enough to
do (remain idle) a waste of resources and money.
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Businesses in a mass market need to use marketing to differentiate their product from
all the other products on the market.

Even if the product is not actually all that different from the others (e.g. a washing
powder or box of tissues) its important that customers see it as different in some way
and somehow are more suited to them.

To operate in a mass market, a firm must be able to produce goods on a large scale. This may
require a heavy investment in equipment and in the recruitment of staff. The danger of mass
marketing is that, if demand falls, the firm may be left with unused resources. Machines may sit
idle and there may not be enough work for employees. Before investing in the large-scale
resources essential for a mass marketing strategy, a business must be sure that demand will be
sustained.
The advantage of mass marketing is that the firm can produce large numbers of relatively
standardized products. This means the production process is relatively repetitive and the cost per
unit should be low. However, even though the firm will be producing many thousands of the
same items, it still needs to differentiate itself from the competition. Ariel, Omo, Surf and Persil,
all compete in the same market (as detergents) but try to make themselves different from each
other through the product itself of the price. This is product differentiation.
Ansoffs Matrix
Other marketing strategies can be highlighted by Ansoffs matrix.

Igor Ansoff was a

management writer who outlined four types of marketing strategies.


Market penetration Using this strategy, a firm tries to gain more of its existing
market. For example, if Coca-Cola tried to sell more of its products in Kenya, this would
be market penetration. To do this it may cut the price or launch a new advertising
campaign. This is a relatively low-risk strategy which can be implemented in the shortterm.
Market development This entails a firm selling its existing products in a new market.
This may either be a new segment f the market or a new market geographically. For
example, Johnson and Johnsons baby oil, originally marketed for babies are now being
sold to adults as well. In another example, many sportswear companies have successfully
165

marketed their products as fashion items. Chewing gum companies have offered their
products as an aid to giving up smoking, as something which helps prevent tooth decay
and as a breath freshener; the product therefore has been offered too many new segments.
In recent years, companies such as Bidco have been trying to sell much more of their
products (such as cooking oil, margarine, etc) in other countries of East and Central
Africa as this is a very fast growing market.
New product development Firms pursuing this strategy develop new products to sell
to existing customers. This may either be a modification of an existing product or a
completely new one. For example, DVDs are replacing videos.
Firms operating in the soap, shampoo and determent markets, for example, are
continually developing new brands for their customers. This strategy is risky in the sense
that new products often fail. Only one in ten new products launched survives the first
two years.
Diversification This strategy occurs when a firm offers a new product in a new market.
This does not mean this product or market did not exist before but simply that this firm
had not been involved before. For example, CAT is a producer of industrial equipment
but has used its brand to move into the clothes market. In another example, a chocolate
company may decide to diversify into soft drinks market or a soft drinks company goes
into bottled (mineral) water market. This is a high-risk strategy because the firm may
have only a very limited understanding of the production and marketing requirements of
the new sector. It also means the managers of a business are becoming involved in an
area in which they do not have any experience. If it is successful, however, it actually
reduces the firms risk because it is operating in two different markets. If sales decline in
one market, demand may be sustained or even increase in another one.
Why change a marketing strategy
It may be necessary for a firm to change its marketing strategy for a number of reasons, for
example:
It may have changed its marketing objectives; rather than wanting more sales from a
given product range it may seek to diversify.
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Market conditions may have changed; the slowing down of the rate of growth in the PC
market has led firms life Microsoft to look for new markets to enter, such as computer
games.
Competitors actions; a head-on attack from other firms may force an organization to
move into a new segment or to focus on particular areas of its business where it has a
competitive advantage.
The firms own strengths; as a firm develops its staff, technology and product range, it
may find that its strength create new opportunities and this brings about a change in
strategy.
Marketing Strategies Must Match Business Characteristics
Businesses have to decide whether they have the resources for a potential marketing
Strategy before they commit to it.

Small businesses need modest strategies, given their limited financial resources. Big
multinational corporations usually have several objectives with each one backed up
by a whole load of strategies.

Market leaders are most likely to have marketing strategies that try to keep them at
the top of the market. Smaller firms need strategies that will make them survive in
the market.

Highly competitive markets need good strategies.

Businesses can make use of strengths like a good brand name or a good distribution
network. A business with a strong brand name may decide to diversify and use its
brand in new markets. A business with a strong network of retail outlets could try
selling a larger range of products in its shops.

New opportunities for making, selling or advertising need new strategies to make the
most of them.

What determines a marketing strategy?


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As we have seen, a firms marketing strategy must be derived from its marketing
objectives.

The strategy must also be linked to the opportunities available within the market.
If new technology brings new ways of selling a product (for example, via the
Internet the firms strategy will change).

A firms plan must also be related to its own strengths and resources. If, for
example, a business has a strong distribution network, it may seek to sell other
products through its outlets. If, however, a firm has a strong brand name it may
seek to use this asset in the new markets.

A firms strategy will also be influenced by what competitors are doing. If there
are several large and powerful firms competing in one segment, a firm may want
to avoid this and compete elsewhere.

Characteristics of a Marketing Plan.

The marketing plan should be designed to meet certain criteria. Some important characteristics
that must be incorporated in an effective marketing plan are as follows:

It should provide a strategy for accomplishing the company mission or goal.

It should be based on fact and valid assumptions some of the facts needs are illustrated in
Table 9.1. It must provide for the use of existing resources. Allocation of all equipment,
financial resources, and human resources must be described.
Table 9.1 Facts Needed for Market Planning.

Who are the users, where are they located, how much do they buy, from whom do
they buy, and why?

How have promotion and advertising been employed and which approach has
been most effective?

What are the pricing changes in the market, who has initiated there changes, and
why?

What are the markets attitudes concerning competitive products?

What channels of distribution supply consumers, and how do they function?

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Who

are

the

competitors,

where

are

they

located,

and

what

advantages/disadvantages do they have?

What marketing techniques are used by the most successful competitors? Buy the
least competitors?

What are the companys strengths? Weakness?

(Since: Hirsch, Peters and Shepherd Pg. 223)

3.

An appropriate organization must be described to implement the marketing plan.

4.

It should provide for continuity so that each annual marketing plan can build on it,
successfully meeting longer term goals and objectives.

5.

It should be simple and short. However, it should not be short that details on how to
accomplish a goal are excluded.

6.

Should be flexible to allow for different a changing scenarios and appropriate responding
strategies.

It should specify performance criteria that will be monitored and distributed. For
example, the entrepreneur may establish annual performance criteria of 10 per cent of
market share in a designated geographic area. To attain this goal, certain expectations
should be make at given time period (e.g. at the end of three months we should have a 5
percent share of market). If not attained new strategy or performance students may be
established.
Activity
Are you now required to prepare a marketing planning for a new venture?

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The Marketing Mix

Product

Price

Marketing mix is bound to be different across the companies selling different products.
Marketing mix may also vary between the two companies selling the same product categories.
An important thing to remember about the marketing mix is the way in which all the different
items must work together for the customer to be satisfied. Part of the appeal of a well-known
brand may be that it is quite expensive and that you cannot get it in every shop. If it is too cheap
or too easily available, the brand may become less attractive. By comparison, the success of
Coca-/cola and Pepsi is due, not only to the product itself, but to the way the brand is promoted
and the fact that the products are very easily available. So, the price, the way a product is
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promoted, the way it is distributed and all the other elements of the mix must all complement
each other for the consumer to be satisfied.
The Price
The price of a product or service plays an important part in our decision about whether or not to
buy it. If the price is too high, we simply cannot afford the product even if we want to.
However, the relative importance of price is likely to vary according to the product and the
particular circumstances. As an example, if two petrol stations opposite each other are charging
different prices for petrol, we are likely to choose the cheaper one. When buying a wedding ring,
however, we do not always go for the cheapest. In some cases it may be difficult to compare
prices directly just look at how complicated the price structure is for mobile phones. When
considering the price, it is important to place it in the context of the other elements of the mix
and the buyers circumstances.
Place for distribution
The distribution of a good or service refers to the way in which it gets from the producer to the
consumer. In some cases, the product goes directly.
It is common for manufacturers to use intermediaries to help them get their products to the
market. The intermediaries include:

Retailers retailers such as supermarkets and shops are the final stage in the distribution
chain. Most goods are sold through retailers.

Wholesalers wholesalers buy products in bulk from producers and sell these on to
retailers, who then sell direct to the final consumer. Retailers use wholesalers because
they offer a range of products and it is easier that dealing direct with individual
manufacturers.
Promotion

The promotion of a product involves the communication of various messages to existing or


potential customers. These messages may be aimed at informing customers (e.g. telling them
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about changes done to the product or promotional offers), or persuading them (e.g. putting across
a products benefits compared with the competitors) or reassuring buyers they did the right thing
by buying the product.

A firm can promote its products in various ways, for example

advertising. Advertising involves paying for communications. Adverts can be placed in a range
of media, such as television, newspapers, radio and the internet. Advertising is often used as a
long-term strategy to build brand loyalty.
The Product
The product itself is a crucial element of the marketing mix. Many marketing specialists argue
that it is the most important element of the marketing mix.
A successful product will be designed to meet customer requirement. These requirements will
have been identified, perhaps through market research. The design of the product will take
account of the production process. A well-designed product can save on costs, can be made
easily to a consistent quality and meets the needs of customers very precisely. Many firms try to
rush the design and development stage because they are so eager to get the product out on to the
market to earn money. However, it is often the case that more time spent developing the product
results in a much greater chance of long-term success. Approximately four out of five new
products fail, which shows how risky developing new product can be.
Firms may succeed in the market by launching products that meet new needs or existing needs
more precisely, buy offering a more reliable product or by producing it more cheaply than the
competition, enabling the firm to lower the price.
An Integrated Mix
The key thing to remember when discussing the marketing mix is that it must be part of an
integrated approach. This means that all the different elements of the mix must work together
and complement each other. There is little point trying to develop a high-priced, exclusive brand
to target high-income earners if it is then distributed through every small outlet on the street. In a
well-managed mix, the elements fit well together and enhance the overall value provided to the
customer.

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It is important to see the 4 Ps model as a rather basic model of what influences a decision to buy,
or not buy, a product. We are also influenced by the people who serve us, the way in which we
buy the product, the ease with which the features of one product can be compared with others.
The m ix should be thought of as anything connected with a product or service which influences
the buyers decision.
Some business writers now talk of the 7 Ps, rather than the 4Ps. In addition to the original 4P,
these include:

People a well trained, polite staff can influence people to buy from one shop rather than
another.

Physical environment factors such as the layout, dcor and parking can be an important
influence on which restaurant, club or store a person chooses.

Process the ease of ordering and paying can influence a purchase. Many supermarkets,
at peak hours have many cashiers at the tills service customers in order to reduce queues.

9.8

Marketing Budget

A marketing budget is a quantifiable target which is set by a firm and which relates to its
marketing activities. It may involve a target level of sales for a particular product (a sales
budget) or set out the amount a firm intends to spend to achieve its marketing objectives (an
expenditure budget). The sales budgets may include targets for the absolute level of sales a firm
would like to achieve or for a desired level of market share; they may also include targets for
particular regions or for particular types of customers or distribution channels.

Marketing

expenditure budgets, by comparison, set out the desired amount of spending on activities such as
advertising, sales promotions; paying the sales force, direct mailings and market research.
The size of the sales budgets is likely to depend on:

The level of sales a product has achieved in the past: a firm may extrapolate future sales
target based on past trends. Extrapolation is a method of predicting future trends. This
involves identifying the underlying trend in past data and projecting this trend forwards.

The expenditure budget: a firm may set a higher sales target if it is also intending to
spend more on its marketing activities.
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Marketing conditions: actions by competitors and the state of the economy, may affect
the firms expected level of sales.

Objectives and strategy: the target level of sales for a niche product is obviously likely to
be lower than it is for a mass-market product.

The size of the marketing expenditure budget will depend on:

The firms overall financial position. The amount of money allocated to a particular
function such as marketing will inevitably depend on what it has available to spend in
total.

In a successful year it may be easier to have a bigger budget than in an

unsuccessful year. On this basis the marketing budget is likely to be lower when sales are
lower and bigger when they are higher. This is often what actually happens within
organizations although in many ways this is not a particularly sensible way to budget. In
unsuccessful years the budget should arguably be higher (not lower) in order to improve
the firms sales,

The firms marketing objectives and strategy.

The amount of money allocated for

marketing activities should clearly depend on what the firm is trying to achieve and the
returns it expects to gain from its plans. When first launching a product, for example, the
promotional budget is likely to be higher than it is for a more established product.
Similarly, when first entering a new segment, spending on market research may be higher
than in a normal year.

The amount the firm expects to receive back is also of critical importance: a firm is likely
to be prepared to spend more marketing a project with a high rate of return than on one
which has a low expected rate of return.

Competitors. A firms budget is very likely to be affected by the amount its competitors
are spending. If its competitors increase their spending on product development or
promotion, for example, a firm may feel it necessary to increase its own expenditure to
maintain its competitive position.

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Financial position
Marketing objectives
And strategies

Marketing expenditure
Budget

Competitors spending
Expected returns

Of course, just because a firm has a large marketing budget does not mean that its marketing
is necessarily more effective; the effectiveness of marketing activities will depend in part on
the funds available, but it will also depend on whether the right activities have been chosen in
the first place and how effectively they are being managed and implemented.
The marketing budget should be set in consultation with those who will be responsible for
undertaking the activities it involves. The amount of money to be spent of marketing overall,
for example, should be agreed with the marketing manager. Given that the marketing
manager is the person who will be held accountable if the target is not achieved, he or she
should obviously be involved in deciding what the figure should be.
By involving the people who will actually have to achieve these financial targets, the firm is
more likely to gain their commitment. If, instead, people are simply told that they have to
achieve certain targets without any prior discussion they are unlikely to feel much ownership
of the budgets and as a result are unlikely to be committed to them. They may resent the fact
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they have not been involved in the process of setting the targets and consequently they may
not be motivated to achieve.
Sales Forecasting
A key element of a marketing plan is the sales forecast. This sets out targets for overall sales
and for particular products and services. A sales forecast acts as a goal against which a firm
can measure its progress. It also drives many other decisions within the firm. For example;

The production schedule will have to be closely linked to the sales forecasts to ensure
the firm has the appropriate mix and number of products at the right time.

The sales forecast will also influence the cash flow forecast; only by knowing what
sales are expected to occur can the finance department estimate cash inflows. Having
compared the expected inflows with expected cash outflows the finance function can
then decide if particular steps need to be taken, such as arranging overdraft or loan
facilities.

Human resource decisions will also depend on the expected level of sales. Decisions
about staffing levels and the allocation of staff to particular duties will inevitably be
determined by the expected sales levels. Strong sales growth may require more
recruitment, for example.

Producing a sales forecast


A sales forecast may be produced in a number of ways:

It may be based on backdate (i.e. data from the past). The firm may look at sales
levels in previous years, identify and underlying trend and extrapolate from this. A
tour company experiencing a fall in the number of enquiries in a particular month
compared to past years may change its sales forecast downwards. This technique is
useful, provided the trends identified in the past continue into the future. If, in fact,
there has been a major shift in buying patterns (e.g. the timing of buying has changed)
extrapolation could be misleading.

The firm may use market research to try to identify likely future trends. The value of
this research depends on whether it is primary or secondary and the quality of the

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information. If a small sample is used, for example, the forecast is less likely to be
accurate than if a large sample had been used.

It may be based on the firms best guess. Managers could use their own experience or
hire industry experts for their opinion of hat is most likely to happen. This approach
to forecasting is common if the rate of change in the market is great or if the firm is
facing a new scenario and does not have past data to build on.

The method of forecasting used by a firm will depend on the nature of the product and the
market situation.
Why forecasts can be wrong?
Forecasts can only be predictions of the future. They may well be wrong because:

Customer-buying behaviour changes suddenly, e.g. customers suddenly decide a product


is unsafe or unfashionable.

The original market research was poor. This may be because the sample was too small or
was unrepresentative.

Alternatively, it may be because the results were wrongly

interpreted; this could be because the firm was in a rush to launch the product. In some
cases the research may actually have been ignored managers may have been certain that
they knew best and gone ahead with the decision regardless of the findings of market
research.

The experts were wrong; even the best-informed people can misread a situation and make
mistakes-just look at the predictions of so-called experts before any horse race or football
match or look at the many different and often conflicting forecasts of growth in the
economy that are often published in the newspapers.

Just because a market is attractive is attractive at the moment does not mean it will always be
appealing.

New competitors, sudden change in consumer tastes, new laws, changes in

technology and social change can all affect the success of a market in the future. In the 1950s
the market for black and white televisions was growing; now what remains is just a tiny market.
In the 1960s the market for computer games was non-existent; now it is worth several hundred
million dollars a year. DVDs were only introduced in the 1990s but are now commonplace.
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Inevitably a firms external and internal conditions are likely to change and this can make it
extremely difficult to estimate future sales. However, this does not necessarily make forecasting
a useless management tool. The simple process of forecasting makes managers think ahead and
plant for different scenarios. This may help to ensure they are much better prepared for change
than if they did not forecast all.
Also, even though a forecast may not be exactly accurate it may give an indication of the
direction in which sales are moving and some sense of the magnitude of future sales, which can
help a firms planning. Ultimately it may not matter much whether sales are 2,000,002 units or
2,000,020 units but it makes a big difference whether they are 2m or 4m or 4m in terms of
staffing, finance and production levels, i.e. provided the forecast is approximately right it can
still be very useful even if it is not exactly correct.
It is also important to remember that sales forecasts can be updated. A firm does not have to
make a forecast and leave it there. As conditions change and new information comes in, the
managers can update the forecast and adjust accordingly.
The reliability of forecasts
Forecasts are most likely to be correct when

A trend has been extrapolated and the market conditions have continued as before

A test market is used and is truly representative of the target population

The forecast is made by experts (such as your own sales teams) and they have good
insight into the market and future trends.

The firm is forecasting for the near future. It is usually easier to estimate what sales will
be in 3 months time compared to estimating sales in the five years time.

STEPS IN PREPARING THE MARKETING PLAN

Figure 9.1 illustrates the various stages involved in preparing the marketing plan.
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Figure 9.1

Sample Flowchart of a marketing plan

Critically examine present and prospective


product/market situation

Take into account company goals and restraints


Set marketing objectives that are specific and
measurable
Determine marketing strategies, and prepare
action programs with assigned responsibilities
and dates of accomplishment
Reevaluate programs against objectives

Objectives
attainable
Objectives not
attainable

Draft marketing plan, with steps to monitor progress of


programs

Match feasibility of programs against


Available resources or restraints

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Feasible
Not feasible

Submit marketing plan for approval


(Source: Hisrich, Peters, Shepherd, pg 232)

WHY SOME MARKETIGN PLANS FAIL

Marketing plans are ineffective or fail meeting marketing goals for different reasons. In fact
failure may also be considered a matter of degree since some goals may be met and others
missed completely. Some of the reasons for failure can be avoided if the entrepreneur is careful
in preparing the marketing plan. Some of the more common reasons for failure include:

Lack of real plan The marketing plan is superficial and lacks detail and substance,
especially regarding goals and objectives.

Lack of an adequate situation analysis. It is invaluable to know where you are and
where you have been, before deciding where you want to go. Careful analysis of the
environment can result in reasonable goals and objectives.

Unrealistic goals: - This generally results because of a lack of understanding of the


situation.

Unanticipated competitive moves, - with a good situations analysis, as well as an


effective monitoring process, competitive decisions can be assessed and predicted
with some degree of accuracy.

Product deficiencies often results from rushing the product to the market.

Acts of God Such as an oil spill, flood, famine, hurricane, or war the entrepreneur
has no control.

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9.11 Summary
In this lecture, we have looked at the importance of marketing to the
business firms, to nonprofit organizations and to consumer and society at
large. We have also reviewed the major functions of marketing, as well as
the marketing, planning and strategy. We have looked at aspects covering
market analysis, market research, marketing strategy and the marketing mix.
We have also looked at the marketing budget and the factors that determine
the six of the budget we obtained the characteristics of a good marketing
plan, outlined the steps involved in the preparation of a marketing plan and
finally we have look at some of the major causes as to why marketing plans
fail.
References

Hisrich R, Peters M.P and Shepherd D.A (2008)


Entrepreneurship Simplied. Saleemi publications Ltd, Nrb.

Greene L.C. (2006) Entrepreneurship Southwestern, Canada.

LECTURE 10: MANAGING GROWTH OF A VENTURE


10.1

INTRODUCTION

One of the essential acts of entrepreneurship is new entry. New entry refers to either offering a
new product to an established market or to a new market. Offering an established product to a
new market; or creating a new organization. Whether associated with a new product, a new
market and/or a new organization, newness is like a double-edged sword. On the other hand,
newness represents something rare, which can help differentiate a firm from its competitors. On
181

the other hand, newness creates a number of challenges for entrepreneurs. In this lecture we
attempt to explore the various growth strategies undertaken by entrepreneurs. We also look at
the strategic growth of business ventures.

We also examine the financial control options

available to business firms and lastly, explore the various options of business ventures going
public.
Objectives
At the end of this lecture, you should be able to:
1. Explore the various growth strategies employed by entrepreneurs;
2. Look at the various aspects of strategic growth;
3. Explain the financial control options available to business firms;
4. Examine the various options available for business ventures going
public.
10.3

GROWTH STRATEGIES

Business growth is critical to entrepreneurial success. The potential for growth is one of the
factors which distinguish the entrepreneurial venture from the small business. A successful new
entry provides the opportunity for the entrepreneur to grow his/her business. For example,
introducing a new product into an existing market provides the opportunity to take market share
from competitors; entry into a new market provides the opportunity to service a new group of
customers; and a new organization has a chance to make and build upon, its first sales.

10.1 Activity
What are some of the growth opportunities available to an entrepreneur?

10.3.1

Penetration Strategies

A penetration strategy focuses on the firms existing product in its existing market, and the
entrepreneur attempts to penetrate this product or market further by encouraging existing
customers to buy more of the firms current products. Marketing can be effective in encouraging
more frequent repeat purchase. This strategy attempts to better exploit its original entry.
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10.3.2

Market Development Strategies

This involves selling the firms existing products to new groups of customers. New groups of
customers can be categorized in terms of:

New geographical markets

New demographic market;

And/or based on a new product use.

New geographical market simply suggests selling the existing product in new locations. New
demographic marketing involves offering the product to customer based upon their income;
where they live, their education, age, and sex etc.
And finally, new product use involves modifying the product slightly in order to better satisfy
customers who use the product for a different purpose from which it was originally intended.
10.2 Activity
Can you find suitable examples of geographic, demographics, and new
product use based on market development strategies.

10.3.3

Product Development Strategies

This involves developing and setting new products to people who are already purchasing the
firms existing products. Experience with a particular customer group is a source of knowledge
on the problems customers have with existing technology and ways in which they can be better
served.
10.3.4

Diversification Strategies
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Diversification strategies involve selling a new product to a new market. Even though both
knowledge bases appear to be new, some diversification strategies are related to the
entrepreneurs (and the firms) knowledge. In fact there are three types of related diversification
that are best explained through discussion of the value-added chain.
As illustrated in Figure 10.1 a value-added chain captures the steps it takes to develop raw
materials into a product and get it into the hands of the customers. Value is added at every stage
of the chain. For the value-added each firm makes some profit. If we focus on the manufacturer,
opportunities for growth arise from backward integration, forward integration, and horizontal
integration. Backward integration refers to taking a step back (up) on the value-added chain
toward the raw materials, which in this case means that the manufacturer also becomes a raw
materials wholesaler. In essence the firm becomes its own supplier. Forward integration is
taking a step forward (down) on the value-added chain toward the customers, which in this case
means that the firm also becomes a finished goods wholesaler. In essence the firm becomes its
own buyer.

FIGURE 10.1 Example of a Value Added Chain and Types of Related Diversification
Value-added chain for product 1

Value-assed chain for product 2

Backward
Integration

Horizontal
---------------184

Forward
Integration

Source (Hisrich P.D. et al, Entrepreneurship Pg. 455)


Backward or forward integration provides an entrepreneur with a potentially attractive
opportunity to grow his or her business. First, these growth opportunities are related to the firms
existing knowledge base, and the entrepreneur could therefore have some advantage over others
with no such experience or knowledge. Second, being ones own supplier and/or buyer provides
synergistic opportunities to conduct these transactions more efficiently than they are conducted
with independent firms fulfilling these roles. Third, operating as a supplier and/or a buyer of the
original business provides learning opportunities that could lead to new processes and/or new
product improvements that would not have been available if this integration had not taken place.

185

A third type of related diversification is horizontal integration. The growth opportunity occurs at
the same level of the value-added chain but simply involves a different, but complementary,
value-added chain. For example, a firm that manufactures washing machines may go into the
manufacture of detergent. These products are complementary in that they need each other to
work. Again the relatedness of the new product to the firms existing product means that the firm
will likely have some competences in this new product and may provide learning opportunities.
Further, horizontal integration provides the opportunity to increase sales of the existing product.
For example, the existing product and the new product may be bundled and sold together, which
may provide increased value to customers and increase sales. Examples of bundled products
include computer hardware and software, televisions and video recorders, and telephones and
answering machines.
What about introducing a new product into a new market that is not related to the existing
business (i.e. not forward, backward, or horizontal integration? The short answer is, Dont do
it If it is not related to the current business, then what possible advantage can this firm have
over competitors? Ego and the mistaken belief in the benefits of a firms diversifying its risk
lead some entrepreneurs to pursue unrelated diversification to their own peril.

10.4.

STRATEGIC GROWTH

10.4.1 Key Learning Outcome


An Understanding of the ways in which competitive advantage can be developed as the venture
grows. The strategic approach to organizational management regards the organization as a single
coherent entity which must be managed in its entirety. It locates the organization conceptually in
an environment from which it must draw resources and add value to them. The organization
must then distribute the new value created to its stakeholders. The strategic approach also
recognizes that the organization is in competition with other organizations who also seek to
attract and utilize those recourses.

186

From a strategic perspective, the organization is able to compete for resources by virtue of the
competitive advantages it develops and maintains. Growth represents the businesss success in
drawing in resources from its environment.

It is a sign that the business has built up a

competitive advantage and has managed to sustain it in the face of competitive pressure.
However, a competitive advantage is not static.

Sustaining an advantage simultaneously

develops and enhances it.


All advantages are very sensitive to business growth. In general, expansion of the business can
be used to enhance a competitive advantage. This will only occur, however, if the entrepreneur
us sensitive to the nature of the competitive advantages that their venture enjoys and strives to
actively manage that advantage as the business grows and develops.
10.4.2

Growth and Cost Advantages

The main source of cost advantages are experience effects. Practice in delivering the outputs
leads to a reduction in cost (strictly, the cost of adding a particular amount of value). Costs tend
to fall in an exponential way as output increases linearly. Hence, experience cost advantages are
(usually) held by the business which has achieved the greatest cumulative output. This can lead
to a virtuous circle (see Fig. 20.4. Cost leadership means that the customer can be offered a
lower price. This increases demand for the firms outputs relative to those of competitors. This
leads to the firm developing a volume output lead over competitors. In turn, this volume
advantage leads to enhanced cost leadership and the ability to offer customers and even lower
price, and so on.
Clearly, the entrepreneur can build in cost advantages as the business grows. Such a strategy
offers the potential for a consistent and sustainable advantage in the marketplace. It is, however,
a strategy which requires certain conditions to be met and it is not without risk. If the strategy is
to work the entrepreneur must be sure of a number of features of the market they are developing.

187

Fig 20.4: The virtuous circle of cost leadership


10.4.3 Cost Advantages have not already been established in the Market
If cost advantages have already been established in the market, then the business will risk being a
follower rather than a leader. If the ventures costs are not genuinely lower than those of the
leading competitor then undercutting the leader to subsidise costs and offer the customer a lower
price will demand a high level of investment. In some instances such undercutting will be
construed as anti-competitive by regulatory bodies. It is, in any case, always expensive.
In order to become a cost leader it is better if the entrepreneur is first into a market. In effect,
what this means is that the innovation which the venture is based is sufficiently different to
constitute a new market.
10.4.4 Potential Volume Outputs Make Entry into the Market Worthwhile
Experience curve cost reductions only become meaningful when the output volumes are quite
high. Consequently a cost leadership strategy is not a realistic option for a small or even a
medium-sized business serving a local market. Cost leadership really becomes a serious option
for the business which is an industry maker and which aims to deliver its outputs to a wide
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(which increasingly today means global) market. This is not to say that price is not an important
factor for smaller businesses or that they should not manage costs rather that cost as the mainstay
of competitive advantage is really the prerogative of the large player.
A corollary of this fact is that the entire market must be ready to accept a fairly homogeneous
product.

If too much specialization is required at a local level then the extent to which

production is repetitive will be lost and hence the possibility of cost-reducing experience will
also be lost.
10.4.5 Sales of the Product they are offering to the Market are Sensitive to Price
Experience cost advantages are gained via volume output. The virtuous circle will only be
followed if customers respond to lower prices by buying more of the price leaders offerings.
This demands that the products offered are price sensitive which means that the forms products
must be substitutable with those of competitors. Substitutability implies that the products of
different supplies are pretty much equivalent (from the buyers perspective) and can replace one
another in use. To be substitutable, products costs associated with them; that is, there should be
no additional expense for the customer when moving from one supplier to another.
If switching costs are present and the entrepreneur is the first to get customers on board then they
may use these costs as the basis of a competitive advantage. Again, this emphasizes the
importance of innovation in entrepreneurial success.
10.4.6 The Experience Curve will be Steep enough (but not too steep!)
An experience curve has a gradient. This is the rate at which increasing output reduces costs,
that is, the speed at which learning takes place. The experience curve needs to be steep enough
for the volume advantages that the pioneering entrepreneur can gain to lead to cost advantages
which have a meaningful impact on prices in the marketplace. If, however, the curve is too steep
then followers will find it easier to catch up, and any advantage gained initially will be quickly
eroded.

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10.4.7 Distribution can be maintained


A price advantage offered to the customer is only useful if the customer can get hold of the
product. This implies that distribution can be readily achieved. If independent agencies are
involved in the distribution process (for example, wholesalers or retailers) then there is always
the danger that a follower will, in some way or other interfere with the cost-leaders ability to
distribute. In effect they will look towards distributors as the basis for developing a non-cost
competitive advantage. If such a distributor lock out occurs then the leader will lose volume
and any cost advantage can be rapidly lost. Often, such actions are restricted by anti-trust
legislation,. However, such legislation is difficult to enforce. If the business is multinational,
then distributors may be tempted to favor local suppliers. Governments who have seen a
strategic advantage in supporting local producers have been known to resist pressure to open
their markets by accusing global cost-leaders of dumping (i.e. of selling below cost to establish
their presence in a market). Even if such accusations are eventually disproved, volume sales
may have been lost already. With a cost leadership strategy, time equals volume which means
costs which equals money.
10.4.8 Technological Innovation will not reset the Experience Curve
Experience is gained by repetitive utilization of a particular operational technology to
manufacture or deliver a service. If the technological basis of an industry changes then descent
down a new experience curve begins. In cost terms, all bets are off! Innovation, both in the type
of product offered to the customer and the means for its delivery, offers both an opportunity and
a threat. It may be the means by which the entrepreneur first enters the market and gains an
advantage has been built on a particular technology, they are vulnerable to a new generation of
innovators. This means that the entrepreneurial business, even if it is following a cost leadership
strategy must still look towards maintaining innovation.
10.4.9 The Entrepreneur (and financial backers) has Patience!
Cost leadership is not a short-term strategy. The pay-offs are far from immediate. While
competing on a price leadership basis, profit margins must be kept slim i.e. just sufficient to
cover overhead costs. Thus is the only way in which the business can be sure that it is reflecting
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its cost advantage with the most competitive market price. However, it will be tempting to raise
prices and to increase short-term profit margins. The entrepreneur may be looking for additional
returns to invest in the growth of the business. Investors may be eager to see a positive return on
their investment. The business may see a price increase as a viable option. It will be in a
market-leading position (certainly in volume terms).

It may have established a strong

relationship with customers. Competitors may have found it hard to gain a foothold in the
market. However, the temptation to increase prices must still be resisted!
All these advantages are a consequence of keeping prices low. They are the basis on which the
business can gain a future reward for maintaining tight profit margins. If the business increases
its prices too early then it can create a cost umbrella under which less efficient competitors may
shelter. It may be just the gap a competitor needs in order to gain a toe-hold in the market. If a
cost leadership strategy is to be effective then the business pursuing it must keep its nerve and
keep prices as low as possible for a long as possible. Optimally, prices should be kept to a
minimum until market growth has stopped.

After this the market will start to lose its

attractiveness to new entrants as gaining market share will tend to require the conversion of
existing customers rather than drawing new ones into the market. At this point the cost leading
business can start to raise prices above costs, to increase profit margins and to harvest its
investment.
Figure 20.5 shows how technology innovation and the creation of cost umbrellas both present
risks for a cost leadership strategy.
Selling price
Competitors price
Ventures price

Cumulative Output

Fig. 20.5: Risks in a cost leadership strategy


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10.4.10 Costs are actively Managed


Even through costs often follow a mathematical; relationship to output volume this does not
mean that increasing output automatically drives down costs. Increasing output gives the firms
managers the opportunity to drive down costs but that is an opportunity they must grasp actively.
The management of cost must become the focus of managerial activity. In fact, it must become
the key criterion around which decisions are made.
Cost leadership is a strategy which has an impact on, and must be supported by, all the firms
stakeholders. As noted above, customers must be responsive to price and investors must be
willing to play a long game.

In addition, suppliers mist recognize threat they must be

competitive in the proof at which they offer inputs to the business. Further, employees will
become aware (and if not managed properly, acutely aware) of the fact that they themselves are
costs as well as partners in the creation of the business. There is a danger that this will lead
them to see their interests as being counter to that of the business. A focus on managing costs
must be single-minded. It must also be implemented with sensitivity.
10.5

IMPLICATIONS OF GROWTH FOR THE FIRM

Because growth makes a firm bigger it begins to benefit from the advantages of size. For
example, higher volume increases production efficiency, makes the firm more attractive to
suppliers and therefore increases its bargaining power size also enhances the legitimacy of the
firm, because firms that are larger are often perceived by customers, financiers, and other
stakeholders as more stable and prestigious. But as the firm grows, it changes. These changes
introduce a number of managerial challenges. These changes arise from the following pressures:

1.
Existing Financial Resources

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Pressures on

Growth has a large appetite for cash. Investing in growth means that the firms resources can
become stretched quite thin.

With financial resources highly stretched the firm is more

vulnerable to unexpected expenses that could push the firm over the edge and into bankruptcy.
Resource slack is required to ensure against most environmental shocks and to foster further
innovation.
2.

Pressures on Human Resources

Growth is also fueled by the work of employee. If employees are spread too thin by the pursuit
of growth, then the firm will face problems of employee morale, employee burn out, and an
increase in employee turnover. These employee issues could also have a negative impact on the
firms corporate culture.

For example, an influx of a large number of new employees

(necessitated by an increase in the number of tasks and to replace those that leave) will likely
dilute the corporate culture, which is a concern, especially if the firm relies on its corporate
culture as a source of competitive advantage.

Pressures on the Management of Employees

Many entrepreneurs find that as the venture grows, they need to change their management style
that is change the way the entrepreneur deals with employees. Management decision making
that is the exclusive domain of the entrepreneur can be dangerous to the success of a growing
venture. This is sometimes difficult for the entrepreneur to realize since he or she has been so
involved in all important decisions since the business was created. However, in order to survive,
the entrepreneur will need to consider some managerial changes.

Pressures on the Entrepreneurs Time

One of the biggest problems in growing a firm is encapsulated in the phrase If I only had more
time.

While this is a common problem for all manages, it is particularly applicable to

entrepreneurs who are growing their businesses. Time is the entrepreneurs most precious yet
limited resource. It is a unique quantity: The entrepreneur cannot store it, rent it, hire it, or buy
it. It is also totally perishable and irreplaceable. No matter what an entrepreneur does, todays
ration is 24 hours and yesterdays time is already history.

Growth is demanding of the

entrepreneurs time, but as the entrepreneur allocates time to growth it must be diverted from
other activities and this can cause problems.

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There are actions the entrepreneur can take to better manage these issues and more effectively
grow his or her business. We will not discuss some of the necessary actions.

OVERCOMING PRESSURES ON EXISTING FINANCIAL RESOURCES

To overcome pressures on existing resources, the entrepreneur could acquire new resources. The
acquisition of new resources is expensive, whether in terms of the equity sold or the interest
payments from debt. The need or the magnitude of the new resources required can be reduced
through better management f existing resources. Such important management activities include
financial control, managing inventory, and maintain good records.
10.3 Activity
Explain how an entrepreneur can manage cash flows, inventory and
maintain good records.

10.6.1 Managing Cash Flows


Since cash outflow may exceed cash inflow when growing a business, the entrepreneur should
try to have an up-to-date assessment of his or her cash position. This can be accomplished by
preparing monthly cash flow statements, such as that found in Figure 10.2 and comparing the
budgeted or pro forma statements with the actual results. The July budgeted amounts are taken
from the pro forma cash flow statement of MPP plastics. The entrepreneur can indicate the
actual amounts next to the budgeted amounts. This will be useful for adjusting the pro forma for
the remaining months, as well as for providing some indication as to whether cash flow problems
may exist.
Figure 10.2: MPP Plastics Inc. (Statement of Cash Flow) July, Year 1 (000s)
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Figure 14.4 shows a few potential problem areas. First, sales receipts were less than anticipated.
Management needs to assess whether this was due to nonpayment by some customers or to an
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increase in credit sales.

If the lower amount is due to nonpayment by customers, the

entrepreneur may need to try enforcing faster payment by sending reminder letters or making
telephone calls to delinquent customers. Bounced checks from customers can also affect cash
flow since the entrepreneur has likely credited the amount to the account and assumed that the
cash is readily available.

If the lower receipts are resulting from higher credit sales, the

entrepreneur may need to either consider short-term financing from a bank or try to extend the
terms of payment to his or her suppliers.
Cash disbursements for some items were greater than budgeted and may indicate a need for
tighter cost controls. For example, cost of goods was $22.500, which was $1,700 more than
budgeted. The entrepreneur may find that suppliers increased their prices, which may require a
search for alternative sources or even raising the prices of the products/services offered by the
new venture. If the higher cost of goods resulted from the purchase of more supplies, then the
entrepreneur should assess the inventory costs from the income statement. It is possible that the
increased cost of goods resulted from the purchase of more supplies because sales were higher
than expected. However, if these additional sales resulted in more credit sales, the entrepreneur
may need to plan to borrow money to meet short-term cash needs. Conclusions can be made
once the credit sales and inventory costs are evaluated.
The higher selling expenses may also need to be assessed. If the additional selling expenses
were incurred in order to support increased sales (even if they were credit sales), then there is no
immediate concern. However, it no additional sales were generated, the entrepreneur may need
to review all of these expenses and perhaps institute tighter controls.

Managing Inventory

During the growth of a new venture the management of inventory is an important task. Too
much inventory to meet customer demands can be a drain on cash flow since manufacturing,
transportation, and storage costs would be borne by the venture. On the other hand, too little
inventory can also cost the venture in lost sales, or it can create unhappy customers who may
choose another firm if their needs are not met in a timely manner.

Managing Fixed Assets

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Fixed assets generally involve long-term commitments and large investments for the new
venture. These fixed assets, such as the equipment appearing in Figure 14.6 will have certain
costs related to them. Equipment will require servicing and insurance and will affect utility
costs. The equipment will also be depreciated over time, which will be reflected in the value of
the asset over time.
If the entrepreneur cannot afford to buy equipment or fixed assets, leasing could be considered as
an alternative. Leasing may be a good alternative to buying depending on the terms of the lease,
the type of asset to be leased, and the usage demand on the asset. For example, leases for
automobiles may contain a large down payment and possible usage or mileage fees that can
make the lease much more expensive than a purchase. On the other hand, lease payments
represent an expense to the venture and can be used as a tax deduction. Leases are also valuable
for equipment that becomes obsolete quickly. The entrepreneur can take a lease for short
periods, reducing the long-term obligation to any specific asset. As with any other make or buy
decision, the entrepreneur should consider all costs associated with a lease or buy decision as
well as the impact on cash flows.

Managing Costs and Profits.

Although the cash flow analysis discussed earlier in the chapter can assist the entrepreneur in
assessing and controlling costs, it is also useful to compute the net income for interim periods
during the year. The most effective use of the interim income statement is to establish cost
standards and compare the actual with the budgeted amount for that time period. Costs are
budgeted based on percentages of net sales. These percentages can then be compared with actual
percentages and can be assessed over time to ascertain where tighter costs controls may be
necessary.

Record Keeping

In order to support this effort toward financial control, it is helpful to consider using a software
package to enhance the flow of this type of information. With a growing venture it may also be
necessary to enlist the support and services of an accountant or a consultant to support record
keeping and financial control. These external service firms can also help train employees using
the latest and most appropriate technology that can meet the needs for the venture.

196

A system for storing and using customer information becomes vitally important for a growing
firm.

Growth typically involves marketing to new customers, and a large influx of new

customers can overwhelm more primitive systems.

For example, previously customer

information may have been stored in the meteor of the different sales people. However, as the
sheer number of customers increase, the memory capacity of a salesperson may be exceeded and
important information (and new and existing sales) could be lost.
Not only will a database increase the capacity to hold and process information, it begins to
accumulate bits of knowledge contained within different individuals into an organizational
knowledge that is accessible to everyone within the firm. By building organizational knowledge
the entrepreneur is else dependent upon any one individual. For example, if the top salesperson
were to die or otherwise leave the organization, then a considerable amount of important
information could be lost to the firm. Specifically, customer information should be returned in a
data base, which includes information on a contact person.

GOING PUBLIC

Going public occurs when the entrepreneur and other equity owners of the venture offer to sell
some of the company to the public through the stock exchange. The resulting capital infusion to
the company from increased number of stockholders provides the firm with financial resources
and generally with a relatively liquid investment vehicle.
Consequently, the firm will have greater access to capital markets in the future and a more
objective picture of the publics perceptive of the value of the business.
10.7.1 Advantages and Disadvantages if Going Public
1.

Advantages

(a)

Ability to obtain equity capital

(b)

Enhanced ability to borrow

(c)

Enhanced ability to raise equity

(d)

Liquidity and valuation

(e)

Prestige
197

(f)

Personal wealth

2.

Disadvantages

(a)

Increased risk of liability

(b)

Expense

(c)

Regulation of corporate governance policies and procedures

(d)

Disclosure of information

(e)

Pressures to maintain growth pattern

(f)

Loss of control
10.4 Activity
Outline the procedure undertaken by a firm in Kenya before it can be
allowed to go public.

10.8 Summary
In this lecture, we have looked various growth strategies that include
penetration strategies, marketing development strategies, product
development strategies and diversification strategies. We have also looked
at strategic growth and growth at strategic growth and growth and cost
advantages.
We have examined the implications of growth for the firm, looking at
how a firm can minimize pressure on various resources. Finally, the
lecture concludes by looking at how to overcome pressure on existing
financial resources, and the advantages and disadvantages of a firm
going public.

1. Explain the various gro

10.5 Activity
1. Explain the various with strategies employed by entrepreneurs.
2. Explain the various aspects of strategic growth.
3. Explain the financial control options available to a business firm.
4. Explain the procedure that a firm must take in order to go public.

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10.9 References
1.

Hisrich R.D., Peters P.M. and Shepherd D.A. (2008).

Entrepreneurship. (6th Edition). Tata McGraw-Hill Publishing


Company Ltd. New Delhi.
2.

Wickham A. Philip (2001). Strategic Entrepreneurship. A decision-

making Approach to New Venture Creation and Management Prentice


Hall. England.
3. Nandan H. (2007). Fundamentals of Entrepreneurship. Prentice-Hall.
New Delhi.

LECTURE 11
THE ENTREPRENEUR AND THE LAW

Introduction (Done)

Objectives (Done)

INTELLECTUAL PROPERTY RIGHTS

The special aptitude of inventing or creating something unique is marked by the use of intelligent
thought or human intellect. In other words, a new and useful product process device or even an
idea is the creation of brain or human intellectual

faculties. The use of human intellectual

powers guides one along an advanced technology or knowledge. Advanced technology or


knowledge serves one to attain a definite result that is a new and useful invention or creation.
The advanced technology or knowledge conceived by the use of ones intellectual powers,
therefore, is treated as an intellectual property of the originator. The intellectual property is
regarded as any other assets with commercial value that the owner or rightful holder may
possess, enjoy, use or dispose of. According to the matter of legal protection of intellectual
property, the exclusive rights conferred by various Laws on the inventors, originators, holders or
199

their assignees or heirs to use, sell, assign, leave, license or will the priceless knowledge to
anyone are commonly known as intellectual property rights.
With relation to the legal regulatory systems providing protections to the interests of the true
inventors or their assignees, intellectual property rights are broadly classified into two groups,
namely:
(a)

Industrial property rights and Copyrights

Industrial property rights refer to the exclusive rights covering


(i)

Patents

(ii)

Designs and

(iii)

Trademarks, service marks, certification marks, collective marks and defensive


marks.

Intellectual property rights will regard to copyrights relate to expressive literary, dramatic or
musical works of writers, composers and artists. An overview of the Intellectual Property Rights
has been depicted in Table 11.2
Figure 11.Intellectual Property Rights An Overview
Industrial Property Rights
Copyrights
Patents
Designs
Trade marks
Service marks
Certification marks
Collective marks
Defensive marks

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The World Intellectual Property Organization, which consists of 171 nations, provides further
elucidation and clarifies that the concept of intellectual property is relevant in any of the
following areas:

inventions in all fields of human Endeavour;

Scientific discoveries

Industrial designs;

Trademarks, service marks and commercial names and designations;

Literary, artistic and scientific works;

Performances of performing artists, phonographs; and

Protection against unfair competition

LEGAL PROTECTION

Research is the process of advancing technology or knowledge and invention is the product of
advanced technology or knowledge. Invention implies creating something new and useful as a
result of ingenious thinking and experiment. Innovation is the act of introducing an invention or
a creative idea to the masses primarily with commercial objective.
Research activities, generally speaking, are taken up without any commercial ambition, but the
products of most research efforts may have the potential of becoming commercially successful.
Ideally, the benefits of research, or for that matter the details of an invention, should be freely
available to everyone for the wellbeing of the society at large. But individuals and business
houses may not be interested in taking initiative and spending their resources for advancement of
knowledge unless they have the confidence and assurance of deriving substantial benefits,
hopefully in terms of financial inducements, from research and inventive efforts.
With a view to giving impetus to research activities, various legal regulatory systems have been
evolved to protect inventions from unauthorized exploitation for profit or advantage by
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infringers.

The legal protections grant the true inventors, their heirs, agents or assignees

exclusive rights for limited periods to be the only persons entitled to use or sell their new
technologies or creative ideas. After the stipulated time a technology belongs to public and
anyone can use and profit from it.
It was way back in the 18th Century that the patent system was first introduced in the United
States of America in order to promote the progress of science and useful arts by securing for
limited times to authors and inventors the exclusive rights to their respective writings and
discoveries.

Currently, there are about 140 countries that have enacted patent and other

regulatory laws to provide legal protections to inventions and creative ideas. Patents take care of
discoveries or inventions and so long as the protection continues, the holder of a valid patent
enjoys the exclusive right to use or sell the new technology as also prevent others from using the
invention. Patents as exclusive property rights can be sold, transferred, licensed or willed to
others. The originator of a design is entitled to the exclusive right to apply his or her newly
created design to any object belonging to a particular class of articles for which it has been
registered. Registration of a trademark grants its proprietor a kind of monopoly right to sue the
registered mark, comprising a word or a symbol or both, for bona fide trading or business
purpose. The right of ownership in a trademark is acquired by registration of the mark under the
relevant Act and therefore following assignment or transmission of the right by the holder to
another person.

Copyright protects the exclusive proprietary privilege in respect of ones

literary, dramatic or artistic work including cinematographic film or record.

PATENTS

11.5.1

What is a Patent?

Patenting is over 2500 years old. It is recorded in history in 500BC, in Greece, encouragement
was being out to who should discover any new refinement in luxury, the profits arising from
which were secured by patent for the space of a year. In England, forms of patenting have been
in existence since 1623. In the United States, the first congress adopted a patent Act, in 1970. In
East Africa, before 1980s, most of the laws regarding IPRs were mere replicas of existing British
laws.

202

A Patent us a grant from the Government which confers on the grantee (patentee) for a limited
period of time the exclusive privilege of making, selling and using the invention for which a
patent has been granted and also authorizing other to do so.
In simple words, a patent is an authentic document issued by the Government acknowledging
something having been invented and granting a special privilege, right or license to a person for
his/her new and useful invention. One to whom a grant is made or privilege secured by patent
and who enjoys the monopoly or exclusive right to make, use or sell the invention is known as
patentee. The person to enjoy the exclusive privilege must make a new invention known to the
public and be competent to make others familiar with the facts, occurrences and utilities of the
invention. This process of familiarizing with or imparting of knowledge for an understanding of
the pertinent matter is to be explicitly demonstrate in detail by the inventor. The written
document in which the explicit detail are given by the inventor is referred to as a patent
application.
In the United States of America, following categories of patents are generally granted:
Utility patent: This relates to the novelty and usefulness of an invention, which lays stress on
how it works to obtain something new and useful. Utility patent is obtainable for a new
machine, process composition or method to make or produce something unique and useful. It is
the common and commercially most valuable among all kinds of patent granted there.
Design patent. This is grant4d in recognition of the ornamental appearance of a useful object,
i.e. how it looks and not how it works.
Plant patent. This is allowed in favour or a developer for a unique and new variety of plant
which did not exist before but has been reproduced by cutting grafting or other asexual means.
Activity 11.1
What categories of patent are generally granted in Kenya?

11.5.2 Patent Infringement

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It is important for the entrepreneur to be sensitive about whether she/he is infringing on someone
elses patent. The fat that someone else already has a patent does not mean the end of any
illusions of starting a business.

Many businesses, inventions or innovations are result of

improvements as, or modifications of existing products.


Copying and improving on a product may be perfectly legal (no patent infringement) and
actually good business strategy. If it is impossible to copy and improve the product to avoid
patent infringement, the entrepreneur may try to license the product from the patent hold.
Do expired patents exist that accomplish same purpose?
Is patent recent or is it nearly expired?
File for Patent
Assess whether patent now exists
Figure 11.2 illustrates the steps that an entrepreneur should follow as she/he considers marketing
a product that may infringe on an existing patent.
Figure 11.2: Options to Avoid Infringement
Unacceptable
Can product be changed slightly without infringement?
Ready to expire

Acceptable

Begin planning for introduction when existing patent expires


Develop product using older designs
NO

YES

Develop modified version


Seek License
Source: Adopted from H.D. Coleman and J.D. Vandenberg in Hisrich D.R. et al (2006) p/ 165
11.53Patent Types
The patent seeker would base the type he or she needed on the kind of protection that particular
patent offered and what subject matter it covered.
1.

Utility Patent

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A utility patent is the kind of patent a business or individual would apply for to cover a new
invention. It is granted for new products, process, machines and methods of manufacture and
composition of matter including an upgraded form of something that has already been invented.
The utility patent protects the invention from other individuals and business and keeps them from
making and selling the inventions include business method patents, pioneer patent, chemical
patents, cyber patent, fencing patent and improvement patent.
2. Design Patent
A design patent is typically the kind of patent a business or individual applies for when they have
created an original design of a product that will be manufactured. This type of patent keeps other
businesses and individuals from creating or making a profit from the design for 14 years from the
patent date. Entrepreneurs can also select other protection periods such as 3 , or 7 years. The
duration of protection is to enable the owners to commercialize designs and to be able to realize
the benefits of their ingenuity.
The design may be a distinguishing feature that allows an individual to have exclusive use of
visual imagery thus creating brand identification. For example, a new pair of jogging boots may
fail to have a utility patent but may have design patent if the new design changes the physical
appearance of the boots.
3.

Plant Patent

Any new variety of plant that has been asexually reproduced can be granted a plant patent.

The

new plant must not exist in nature or in an uncultivated state. A plant patent is the kind of patent
an individual or business would apply for if they had had invented or discovered a new or
unheard of plant. This may include cultivating different types of plants to create mutants or
hybrids and also newly found seedlings.
This patent protects the owner by keeping other individuals or businesses from creating the type
of plant or profiting from the plant for at least 20 years from patent.

205

Business method Patents are a class of patents which disclose and claim new methods of doing
business. This includes new types of e-commerce, insurance, banking, tax and compliance etc.
Pioneer Patent covers a function or a major technological advance never before performed, a
wholly novel device, or subject matter of such novelty and improvement.
Process Patent/Chemical for method of treating specific materials to produce a certain result.
Cyber Patent/Internet Patent is a utility patent on an invention that combines business methods
and software program for internet applications.
Fencing Patent is a patent having claims directed to an improvement on a pre-existing
invention.
These different types of patents are all for the purpose of protecting an original idea and the
individual who had that idea. They keep others from being able to capitalize on that idea for a
significant amount of time and patents can be reissued before the original patents expire.
11.5.4 Implications of Patents and Copyrights for entrepreneurs
1. Positive implications
In accordance with the original definition of the term patent, patents facilitate and encourage
disclosure of innovations into the public domain for the common good. It therefore follows that
awarding patents generally makes the details of new technology publicly available, for
exploitation by anyone after the patent expires, or for further improvement by other inventors.
Furthermore, when a patents term has expired, the public record ensures that the patentees idea
is not lost to humanity.
Since patenting means protection and exclusivity, it gives the entrepreneur a window of time to
exclusively profit from his ingenuity for the selected period of protection and keeps others away
from laying any undue claim at all to the idea. The Kenyan entrepreneur would by patents be
conflict that his efforts are not in vain and would endeavour to continue being more enterprise.
206

Patenting allows a clever small-time inventor to use the exclusive right status to become a
licensor and accumulate capital argues. Stim, Rishard achieves this by licensing the invention
and allowing innovation to occur because he or she chooses to not manage a manufacturing
buildup for the invention. This brings along the economies of specialization, allowing others to
concentrate on manufacturability.
Obtaining intellectual property rights creates valuable assets. Indeed the Wikipedia defines
patents and copyrights as intangible assets. As such the Kenyan entrepreneur can make money
on them by selling, licensing to others, mortgaging, willing, assigning, leveraging as assets of a
new enterprise, transferring, or using them as collateral.
Lastly, patents have been argued to provide incentives for economically efficient research and
development. Without patents, R & D spending would be significantly less or eliminated
altogether, limiting the possibility of technological advances or breakthroughs. Entrepreneurs
would be much more conservative about the R & D investments they made, as third parties
would be free to exploit any developments.
This second justification is closely related to the basic ideas underlying traditional property
rights.
2. The negative implications
The concept of patenting (no-disclosure) itself makes technology transfer to Kenyan
entrepreneurs difficult and costly.

Ummy Ally Mwalimu argues that strengthening IPRs

protection may lead to increased royalty payments required by technology-holders.

These

factors reduce the ability of the Kenyan entrepreneur to catch up through imitation and
adaptation of advanced technologies.
The average cost of obtaining a patent and maintaining it for a 20 year term is almost Ksh.
400,000 according to the First Schedule Fees available at KIPI website. For utility models the
total estimate is a fairer Kshs. 50,000 for a ten year period. Such a cost is definitely prohibitive
to upcoming entrepreneurs. Their innovations would certainly not be patented as they cannot
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afford the fees; indeed the inventions may be stolen by large multi-nationals. A young man
reportedly filed a suit against Safaricom Limited as concerns the ownership rights of the popular
money transfer service M-Pesa

Life of a Patent
The period for which the exclusive right is conferred on a patentee is known as the life of a
patent. In terms of validity period, patents are broadly classified into two groups as discussed
below.
A patent for an invention involving a process or method of manufacture of a substance intended
for use as food, medicine or drug shall be valued for a period of seven years from the date of the
patent or five years from the data of sealing of the patent, whichever is less.
Patents relating to all other inventions are valid for a period of fourteen years from the date the
respective patents are granted.
The date of the patent means the date on which the complete specification, along with the patent
application, is filed with the patent office concerned. The date of sealing refers to the date when
the patent office endorses final approval provided there is no objection from anyone which in the
prescribed period from the date of publication of its notification of acceptance, or in case the
patent office does not refuse to grant permission for one reason or the other.
Activity
Describe the procedure of applying for a patent in Kenya.

DESIGNS

What is Design?
Design means only the features of shape, configuration, pattern or ornamentation of an article
made by any industrial process or means, be that manual, mechanical or chemical, separate or
combined.
Registrable Designs
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The design of an article may be registered if its shape, configuration, pattern or ornamentation
made by any industrial process (mechanical, chemical or both) is new or original. The principle
or the mode of construction of an article or its mere mechanical fabrication cannot be registered
as a design. Trademarks, trade names, mere pictures or photographs cannot be registered as
designs. The articles or goods to which designs applied are sought to be registered include:

Articles made wholly of metal or predominantly of metal and jewellery;

Books and bookbinding of all materials;

Articles made wholly of rubber, wood, bone, ivory, papier mache, celluloid, Bakelite or
of similar substances; or of materials that constitute mostly of such substances;

Articles made wholly of glass, earthenware, porcelain, burnt or baked clay, or cement or
in which such materials predominate;

Articles made wholly of paper, cardboard, millboard or strawboard or mostly of such


materials;

Articles made mostly or wholly of leather;

Paper hangings;

Carpets, rugs and floor covering in all materials;

Boots, shoes and the like of footwear;

Millinery and Wearing apparel;

Printed or woven designs on textile goods other than checks or stripes

Printed or woven designs on textile goods being checks or stripes.

11.7

TRADEMARKS

What is a Trademark?
A trademark denotes any word, letter, name, initial, signature, figure, numeral, artistic, design or
device or any combination of these adopted and used to identify and distinguish the goods of one
manufacturer or merchant from these manufactured and/or marketed by others. The dictionary
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meaning of trademark is that it is a device pointing distinctly to the origin or ownership of


merchandise to which it is applied and which is legally reserved to the exclusive used of the
owner as a maker or seller. In other words, a trademark is a visual symbol which established the
relationship between the goods or service on sale and the concerned person having the right to
use it as a proprietor or registered user. Unlike the patent, a trademark can last indefinitely, as
long as the mark continues to perform its indicated function.
Activity
Can you differentiate between a trademark and a design?

Functions of a Trademark
With the Industrial Revolution in the 19th Century, trademark has become increasingly important
as a means of distinguishing products among many competitors. Most goods are better known
by their trademarks and the marks thus used exclusively by their respective owners, as makers or
sellers, eventually become brand names. Goods identified by brand names carry assurances that
the customers may expect the quality consistent with the reputation of the owners of the
trademarks. It is because of these distinctive functions that under the common law a trademark
is always treated as an inseparable part often goodwill of a business. However, among the varied
functions of a trademark, the following three are said to be the most prominent.

A trademark primarily helps a customer identify the origin or source of the goods on sale.

A trademark calls attention to the quality of the goods. The origin or source once
identified, a customer forms an opinion about the quality and acceptability of the goods.
If the origin is already known, the degree of quality is also ascertained and it the source is
unknown, the quality is also uncertain.

A trademark serves as an effective tool for advertisement and sales promotion, It creates a
lasting impression on the minds of the customers not only about the quality of the goods
but also reputation of the user of the mark. Under the modern competitive businesses
conditions, a trademark plays a crucial role in promoting not only the sale of merchandise
but also in the reputation or goodwill of a business.
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Benefits of a Trademark
A trademark is regarded as an incorporeal property that is a sort of an asset without any material
or physical existence. In the eye of the law, a trademark is like any other property with
commercial value and hence the term proprietor of a trademark, aptly used un various
provisions of the said Act. The property exists in the exclusive right of an owner to sue the mark
in specific tradable goods and, subject to certain conditions, restrain others from using the same
or nearly the same mark. The right to a trademark can be used or sold and transferred and may
be lawfully used by the purchaser. But the sale and transfer by the original owner has to take
place with the transfer of the business goodwill in accordance with the common law in case the
trademark is unregistered and without the transfer of the goodwill. The following are considered
to be some of the key benefits of a registered trademarks:

It provides notice to everyone that you have the exclusive rights to sue the mark
throughout a given area.

It entitles you to sue for trademark infringement which can result in recovery of profits,
damages and costs.

It established incontestable rights regarding the commercial use of the mark.

It entitles you to use the notice of registration.

It provides a basis for filing trademark application in foreign countries.

It establishes the right to deposit registration with customs to prevent importation of


goods with a similar mark.

Choosing a Trademark
In the matter of choosing a trademark, the decision should be based on the following, criteria,
among other statutory requirements:

A trademark may be a letter, word, name, numeral, figure, design or device or even a
combination thereof. If a word is to be chosen, it should be short, and easy to pronounce,
spell and remember. A word which tends to glorify or magnify the character or quality of
the goods should be avoided. According to the Trade Marks Registry in India, The
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ideal word for trademark is an invented or coined word. Devise refers to any pictorial
representation. For instance, the illustrative letter T symbolizes the products
manufactured and marketed by the TATs; the name Maruti identifies the origin of the
particular species of automobiles from those made and sold by others; and the artistic
design of a railway steam locomotive represents the Indian Railways.

A prominent geographical name associated with the reputation or quality of the particular
goods for which a mark is to be registered should not be selected.

A trademark, which is the same or nearly the same as a trademark already in use or
registered in the name of another proprietor in relation to the goods of similar mature,
character and utility is not accepted for registration.

A trademark is not registrable if:


-

It portrays in any manner the national flag or emblem of India or any other country;

It comprises or contains anything that may hurt the religious sentiments of anyone;

It depicts or contains any matter that is obscene or offensive to propriety or


morality;

Its use may tend to lower the image or reputation of others;

Its use will be opposed to any law already in force;

It is the name of any chemical element or chemical compound;

Its sue may cause confusion or deception to anyone;

Further, one should not imitate another persons trademark, especially a familiar one, even if the
relevant tradable foods are not the same. This will minimize, if not eliminate, the chances of
others raising any objection to the application for registration of a trademark. Equally important,
the delay in the processing of the registration application can also be avoided.
Activity
Outline the fundamental requirements for registration in Kenya.

11.8

COPYRIGHT

What is Copyright?
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The term copyright denotes the exclusive right given by law to the creator of a literary,
dramatic, musical or artistic work, or to a producer of a sound recording or cinematographic film,
or to one who develops a computer software program. Copyright, which refers to the protection
given to a creative person to control and benefit from a work of authorship, is also known as
authors right. It is legalized protection which not only established an authors ownership right
to do or authorize other to do such acts as a permissible by law, but also restrains any
unauthorized person committing such acts.
Works in Which Copyrights Exist
Copyright protection is dependent primarily upon a work being original, rather created
independently and not copied from any other work, and made for the first time. The protection
under copyright exists on the mode and manner of expression, but not on the subject matter in a
work. An original, i.e. unimitated, expressive work may be copyrighted even if someone else has
already authored a somewhat similar work on the same subject.
These Works Include:

Original literary, dramatic, musical and artistic works and computer programs;

Cinematographic films; and

Sound recordings.
Activity
Activity Review Questions
1. Discuss the concept of legal protection for innovation.
2. Write a short note on the scope and importance of legal protection
for innovations.
3.

What is patent? What are its different types?

4. What is patent right? Indicate the benefits available from it.


5. What is trademark? What are its different features?
6. How many types of trademark are there? What are their important
features?
7. What is the important of trademark in business?
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8. What is infringement of trademark?


9. What is copyright? What benefits are available from copyright?
10. What are the things that cannot be copyright?
11. What is infringement of copyright?
12. Discuss briefly the procedure for registration of:
(i)

patent

(ii)

trademark and

(iii)

copyright

13.

Define Intellectual Property Right. Discuss its drawbacks.

14.

Discuss the scope and important of Intellectual Property Right in


entrepreneurship.

References
1. Nandan H. (2007) Fundamentals of Entrepreneurship. Prentice-Hall.
New Delhi
2. Grenn L. Cynthia (2006) Entrepreneurship. South-Western Canada

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LECTURE TWELVE: INTERNATIONAL MARKETS


12.3 The Importance of International Business to the Firm
International markets are very important for success of any business organization. Failure to
cultivate international or global markets can be a lethal mistake for modern business regardless
of their size. A few decades ago small companies needed to concern themselves mainly with
competitors who were a few meters away but today small companies face fierce competition
from companies that may be several time zones away. As a result entrepreneurs find themselves
under pressure to expand into international markets and to build business without borders.
Operating a successful business increasingly requires entrepreneur to see their companies as
global citizens rather than companies based in a particular geographical region. For small
companies around the world going global is a matter of survival not preference. There are a
number of reasons why businesses opt to go global. Going global can be tremendous strain on
new businesses, but entrepreneurs who take the plunge into global business reap the following
benefits:

Offset sales declines in the domestic market. Markets in foreign countries may be
booming when those of your country are sagging. In other words a small company
export act as a counter-cyclical balance against flagging domestic sales.

Increase sales and profits. Two forces are working in tandem to make global business
increasingly attractive: income rising to levels at which potential sales are now possible,
and the realization that number of the planets population lives outside any country.

Extend their products life cycle. Some companies have been able to take products that
had reached the maturity stage of the product life cycle in a particular country and sell
them successfully in foreign markets.

Lower manufacturing costs. In industries characterized by high levels of fixed costs,


businesses that expand into global markets can lower their manufacturing costs by
spreading those fixed costs over a large number of units.

Lower the cost of their products. Many companies find that purchasing goods or raw
materials at the lowest cost requires them to shop the global marketplace.

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Improve competitive position and enhance reputation. Going up against some of the
toughest competition in the world forces a company to hone its competitive skills.

Raise quality levels. Customers in many global markets are much tougher to satisfy than
those in the local markets. One reason Japanese products have done so well worldwide is
that Japanese companies must build products to satisfy their customers at home, who
demand extremely high quality and are sticklers for details. Businesses that compete in
global markets learn very quickly how to boost their quality levels to world class
standard.

Become more customer-oriented. Delving into global markets teaches business owners
about the unique tastes, customs, preferences, and habits of customers in many different
cultures. Responding to these differences imbues businesses with a degree of sensitivity
toward their customers, both domestic and foreign.

12.4 Strategies for Going Global


Activity
Assuming you are an entrepreneur what strategies can you adopt to go
international?

Now check if you mentioned the following strategies

Creating a web site

Establishing international locations

Outsourcing

Exporting

Countertrading and bartering

International franchising
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Foreign licensing

Creating joint ventures

Relying on trade intermediaries

In our technology-rich global environment, fastest, least expensive, and lowest-cost strategic
option to creating a global business presence is creating a web site. On e-commerce, the web
gives even the smallest businesses the ability to sell its goods and services or over the world. By
establishing a presence online, a local producer gains access to customers anywhere in the world.
A company web site is available to anyone anywhere any time therefore has become a tool that is
essential to doing business as the telephone and fax machine.

Table 12.1 shows the internet users by world region


Region

Use of internet in %

Europe

28.5

United States/Canada

22.2

Latin America

7.8

Africa

2.3

Middle East

1.8

Asia/Pacific Rim

37.4

Total

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(b) The next strategy is opting for Trade Intermediaries


When considering cost and risks involved trade intermediaries becomes the next best option.
Trade Intermediaries are domestic agencies that serve as distributors in foreign countries for
domestic companies of all size. They rely on their net works of contacts, their extensive
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knowledge of local customs and markets and their experience in international trade to market
products effectively and efficiently across the world. These trade intermediaries serve as export
departments for small businesses, enabling them to focus on what they do best and delegate the
responsibility of coordinating foreign sales effort to the intermediaries. The following are some
of the intermediaries that a business may use to market its produce internationally.

Export Management Companies. These operate like trade intermediaries, working


on a buy and sell arrangement with domestic small companies, taking title to the
goods then selling them in foreign markets. They provide small businesses with lowcost, efficient, independent international marketing and export department provide all
range o0f services from market research, to giving any relevant advice.

Export Trading Companies. This is another strategy through which one can join
global market. Export trading companies are businesses that buy and sell products in
a number of countries and they typically offer a wide range of services such as
exporting, importing, shipping, storing and distribution to mention but a few. The
difference between export management companies and export trading company is that
the later perform both export and import trades across borders. The other difference
is that export trading companies represents several companies dealing with the same
product line while export management usually create exclusive contracts with
companies for a particular product line.

Manufacturers Export Agents. These act as international sales representatives in a


limited number of markets for various non competing domestic companies. They
operate on commission basis and their relationships with the producers is short lived.

Manufacturers Export Agents. These act as international sales representatives in a


limited number of markets for various non competing domestic companies. They
operate on commission basis and their relationships with the producers is short lived.

Export Merchants. These are domestic wholesalers who do business in foreign


markets. Export merchants carry competing lines which imply that they have little
loyalty to suppliers. Most export merchants specialize in a particular industry, such
as office equipment, computers and industrial supplies and others.
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Resident buying offices. These refer to government or privately owned operations


of one country established in another country for the purpose of buying goods made
there. Selling to such offices is just like selling to domestic customers since they
handle all the export processes.

Foreign Distributors. Businesses may also opt to make use of foreign distributors to
reach their global market. In this situation local producer export their produce to the
distributors who in turn market and distribute the produce in the foreign country.

(c)

Joint

ventures. Joint ventures both domestic and foreign lower the risk of

venturin global markets for new Businesses. They also give small companies more foreign
lands. In domestic joint venture two or more small business in the same country form an alliance
for the purpose of exporting their goods and services.

For export ventures participating

companies get antitrust immunity, allowing them to cooperate truly. The businesses share the
responsibility and the costs of getting export licenses and permits and they split the ventures
profits. Establishing a joint venture with the right partner has become an essential part of
maintaining a competitive position in global markets for a growing number of industries.In a
foreign joint venture a domestic small business forms an alliance with a company in the target
nation. The host partner brings to the joint venture valuable knowledge of the local market and
its method of operation as well as of the customs and the tastes of local customers making it
easier to conduct business in the foreign country. Sometimes

foreign

countries

place

certain limitations on joint ventures. Some nations require host

companies to own at least

51% of the venture. The most important factor for a successful joint venture is to choose the
right partner.

A productive joint venture is much like a

which require commitment,

communication and understanding. The partners must be sharing the objectives to minimize
misunderstanding and possible disagreements.

(d)Foreign licensing.

This involves licensing other businesses in other countries to utheir

patents, trademarks, copyrights technology and other systems already in place.

In return for

licensing these assets, a company collects royalties from the sales of its foreign licenses.
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Licensing is ideal for companies whose value lies in its intellectual

property,

products or services recognized name or proprietary technology.

unique

Other than products a

businesses may also license in tangibles such as processes, technology copyrights or trademarks.
Some entrepreneurs earn more money from licensing their know-how for product design,
manufacturing or quality control than they do from actual sale of products

(e)

International Franchising

Intellectual facility. Due to competition a growing number of franchises have been attracted to
international market. This is aimed at boosting sales and profits as the domestic market has
become increasingly saturated with outlets and much tougher to

bring growth from. Although

international expansion is not a good idea for a new franchises it is an appropriate for
experienced franchiser and its franchises increases. In addition, complex legal and regulatory
requirements and cultural differences make international franchising challenging for in
experienced franchisers.

Importing and Outsourcing


In addition to selling their goods in foreign markets, small companies also buy goods from
distributors and manufacturers in foreign markets. In fact, the intensity of price competition in
many industries from textiles and handbags to industrial machinery and computers means
that more companies now shop the world market, looking for the lowest prices they can find.
Because labor costs in countries such as China and India are far below those in other nations,
businesses there offer goods and services at very low prices. Increasingly, these nations are
home to well-educated, skilled workers that are paid far less than comparable workers in the
United States or Western Europe. For instance, a computer programmer in the United States
might earn $100,000 a year, but in India, a computer programmer doing the same work earns
$20,000 a year or less. As a result, many companies either import goods or outsource work
directly to manufacturers in countries where costs are far lower than they would be domestically.

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This trend towards outsourcing to cut costs and remain competitive is prevalent among
companies selling low-cost items as well as in those producing luxury goods. For many years,
European makers of luxury clothing resisted outsourcing the production for anything other than
their least expensive garments such as jeans and T-shirts to companies in Eastern Europe and
Africa.

Entrepreneurs who are considering importing goods and service or outsourcing their
manufacturing to foreign countries should follow these steps:

Make sure that importing or outsourcing is right for your business. Even though
foreign manufacturers often can provide items at significant cost savings, using them may
not always be the best business decision.

Entrepreneurs sometimes discover that

achieving the lowest price may require a tradeoff of other important factors such as
quality and speed of delivery. When Patrick Kruse, owner of Ruff Wear, the business that
sells dog booties, began outsourcing many of his companys products to Chinese
factories, he discovered that the quality of the goods was poor. We actually had to
refuse some shipments, which really hurt our business, he says. In addition, some
foreign manufacturers require sizable minimum orders, perhaps $200,000 or more, before
they will produce a product.

Establish a target cost for your product. Before setting off on a global shopping spree,
entrepreneurs first should determine exactly what they can afford to spend on
manufacturing a product and make a profit on. Given the low labor costs of many
foreign manufacturers, products that are the most labor intensive make good candidates
for outsourcing.

Do your research before you leave home. Investing time in basic research about the
industry and potential suppliers in foreign lands is essential before setting foot on foreign
soil. Useful resources are plentiful, and entrepreneurs should use them, including the
Web, the Federation of International Trade Association, industry trade associations,
government agencies (for example, the U.S. Commercial Services Gold Key Matching
Service), and consultants.
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Be sensitive to cultural differences.

When making contacts, setting up business

appointments, or calling on prospective manufacturers in foreign lands, make sure that


you understand what accepted business behavior is and what is not. Again, this is where
your research pays off; be sure to study the cultural nuances of doing business in the
countries you will visit.

Do your groundwork. Once you locate potential manufacturers, contact them to set up
appointments, and go visit them. Preliminary research is essential to finding reliable
sources of supply, but face time with representatives from various companies allows
entrepreneurs to judge the intangible factors that can make or break a relationship.

Protect your companys intellectual property.

A common problem that many

entrepreneurs have encountered with outsourcing is knockoffs.

Some foreign

manufacturers see nothing wrong with agreeing to manufacture a product for a company
and then selling their own knockoff version of it. Securing a nondisclosure agreement
and a contract that prohibits such behavior helps, but experts say that securing a patent
for the item in the source country itself (not just the United States) is a good idea.

Select a manufacturer. Using quality, speed of delivery, level of trust, degree of legal
protection, costs, and other factors, select the manufacturer that can do the job for your
company.

Provide an exact model of the product you want manufactured.

Providing a

manufacturer with an actual model of the item to be manufactured will save lots of time,
mistakes, and problems. Its always better to cost something from an actual item rather
than an idea of items, says Jennifer Adams, owner of a consulting firm that helps
entrepreneurs to locate foreign manufacturers.

Stay in constant contact with the manufacturer and try to build a long-term
relationship.

Communication is a key to building and maintaining a successful

relationship with a foreign manufacturer. Weekly teleconferences, e-mails, and periodic


visits are essential to making sure that your company gets the performance you expect
from foreign manufacturer.
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Activity
We have now covered strategies that a business can adopt to participate in
international market.

One of the problems identified as an obstacle to

international trade involvement is lack of information. Indicate five sources of


information for international market

Lets now embark on barriers to international trade.


12.5 Barriers to International Trade.
Government traditionally have a variety of barriers to block free trade among nations in an
attempt to protect businesses within their own boarders. The benefit of protecting their own
companies however comes at the expense of foreign businesses, which force limited access to
global markets. Numerous trade barriers both domestic and international restrict the freedom of
businesses in global trading. Examples of these restrictions include:

Domestic Barriers
Sometimes potential exporters are those that emanate from within. Three major internal
restrictions are as follows:

Attitude

Information

Finance

The biggest barrier to small businesses exporting is the attitude that this business in small and
that international trade is meant for corporation.

Another reason entrepreneurs neglect

international market is a lack of information about how to get started. The keys to success in
international market are choosing the correct target market and designing the appropriate strategy
to reach it. This requires access to information and research.

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An additional obstacle is the inability of small firms to obtain adequate export financing
international sales and the unwillingness to accept the perceived higher levels of risk they create
for the lender.

International Barriers

These barriers can be classified into two.

Tariff barriers

Non tariff barriers

2.1 Tariff Barriers


A tariff is a tax or duty that a government imposes on goods and services imported into that
country. Imposing tariffs raises the price of the imported goods making them less attractive to
consumers and protects the domestic markets of comparable product and services.

2.2

Non Tariff Barriers

Many nations have lowered the tariffs they impose on products and services brought into their
borders, but they rely on other non-tariff structures such as

Quotas

A quota is a limit on the amount of a product imported into a country. These restrict the amount
of a particular item that would be imported from a particular country.

Embargoes. An embargo is a total ban on imports of certain products. The motivation


for embargo is not always economic, but it also can involve political differences,
environmental disputes, terrorism and other issues.

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Dumping. In an effort to grab market share quickly some companies have been guilty of
dumping products; selling large quantities of them at prices that are below cost in foreign
countries. The concerned countries impose various restrictions to protect their industries.

Political barriers. Companies doing business in politically risky lands face the very real
dangers of government takeovers of private property; coups intended to overthrow ruling
parties, kidnapping bombings and other violent acts against businesses and their
employees and other threatening events.

Business Barriers. Businesses are operated differently in different countries. Therefore


for a business to duplicate the practices they have adopted and have used successfully in
their domestic market and using them in foreign market is not always a good idea. For
instance in the area of human resources management common practices in some countries
are not always common to other countries example of these may include overtime
arrangements, employees benefits which are restricted disfavored or forbidden in some
countries. All these serve as a barrier to international trade/market.

Cultural Barriers
The culture of a nation includes beliefs, values, views and more than that inhabitants
share. Culture customs and norms of behavior differ greatly among nations and making
the correct impression is extremely critical to building a long-term business relationship.
The diversity of languages; business philosophies, practices and traditions make
international trade more complex than selling to the business down the street. Lets look
at an example:
A US entrepreneur flies to Tokyo to close a deal with a Japanese executive. He is pleased
when his host invites him to play a round of golf shortly after he arrives. He plays well
and manages to win by a few strokes. This happened for three days. In the third day the
American was now growing impatient and asked his host when we are going to start
225

doing business but his host surprised by the question answered. But we have been doing
business.
The US business executive should have known that personal relationships are important
before business deals are sealed.

The travel and shipping expenses may be high international flights can be very expensive
sending or receiving packages from overseas can also be very costly.

International Trade Agreements


It is generally assumed that free trade among nations results in enhanced economic
prosperity for all parties involved, in the recent past we have witnessed a gradual opening
of trade among nations. Hundreds of agreements have been negotiated among nations in
this period, with each contributing to free trade across the globe.
Activity
Identify one trade agreement that has been signed of recent involving your
country and discuss advantages and disadvantages of such an agreement to
the residents of the countries involved.

12.6 Summary
In this lecture we have been able to cover the following topic: International
markets. Under this we covered the importance of international market
which include:

Offset sales declines in the domestic market

Increase sales and profits

External trade and their product. Life cycle

Lower manufacturing costs

Lower the cost of their products

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Improve competitive positions and enhance reputation

Raise quality levels

To become more customer oriented

Next we looked at barriers to international trade these included:

Domestic barriers as well as international barriers.

Domestic barriers include lack of positive attitude, information and finance.


International barriers includes both tariff and non-tariff barriers.
The lecture also covered strategies for going Global. These include:

Creating presence on the web.

Relying on trade intermediaries

Creating joint ventures

Foreign licensing

International

Counter-trading and bartering

Exporting

Outsourcing

Establishing international locations

References
1. Hisrich R., Peters M.P. Shepherd D.A. (2008) Entrepreneurship
McGraw hill. New Delhi
2. Wickham (2001) Strategic Entrepreneurship Prentice Hall: Harlow
3. Zimmerer, T.W. Scarrborough, N.M. and Wilson, D. (2008) Essentials of
Entrepreneurship and Small Business Management Pearson and
Prentice Hall. New Jersey.

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