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Entrepreneurship lecture note

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ጅማ ዩኒቨርሲቲ www.ju.edu.et
Entrepreneurship and
Enterprise Development
Lecture Note

By:
Abdulnasir A.
2018
 Contents

1. Entrepreneurship and free enterprises

2. Small Businesses
3. Business planning
4. Product and Service concept
5. Marketing and New Venture
Development
6. Organizing and Financing the New
Venture
7. Managing Growth and Transaction
 Chapter 1: Entrepreneurship and
free enterprises

Definition
□ Entrepreneur/ship, just like management, has no single
definition.
An entrepreneur is a person who is action oriented, highly
motivated, takes risks to achieve goals
An entrepreneur is a person who establishes his own
business with the intention of making profits
An entrepreneur is a person who only provides capital
without taking active part in the leading role in an enterprise.
An entrepreneur is a one who innovates, raise money,
assemble input, choose managers and set the organization
growing.
 Continued…

□ To sum up in the light of the developments, there are four

key elements of entrepreneurs. These are:
Vision (identifying emerging opportunities)
Innovation (creating new business or new ways of doing
something)
Risk bearing (taking risk and facing uncertainty)
Organizing (collection and coordination of the necessary
resources)
 Entrepreneur &
Entrepreneurship

□ Entrepreneurship, like an entrepreneur, has no single

definition.
□ Entrepreneur is a person while entrepreneurship is a
process.
□ Entrepreneurship is aprocess under taken by an
entrepreneur to create incremental value and wealth by
discovering investment opportunities, organizing
enterprises, undertaking risks andeconomic uncertainty
and there by contributing to economic growth
 Historical Perspective

□ During the ancient period the word entrepreneur was used to refer
to a person managing large commercial projects through the
resources provided to him.
□ In the 17th Century a person who has signed a contractual
agreement with the government to provide stipulated products or
to perform service was considered as entrepreneur.
□ In the 18th Century the first theory of entrepreneur has been
developed by Richard Cantillon. He said that an entrepreneur is a
risk taker. If we consider the merchant, farmers and /or the
professionals they all operate at risk. For example, the merchants
buy products at a known price and sell it at unknown price and this
shows that they are operating at risk.
 Continued…

□ The other development during the 18th Century is the

differentiation of the entrepreneurial role from capital
providing role. The later role is the base for today’s venture
capitalist.
□ In the late 19th and early 20th Century an entrepreneur was
viewed from economic perspectives. The entrepreneur
organizes and operates an enterprise for personal gain.
□ In the middle of the 20th and early 21thCentury the notion of
an entrepreneur as an inventor was established.
 Role of entrepreneurs within
the economy

□ Capital formulations: - Entrepreneurs mobilize the idle

saving of the public through the issue of industrial
securities.
□ Improvement in per capita income
□ Generation of employment
□ Improvement of the living standard
□ Economic independence
□ Balances regional development
□ Innovation: the commercial application of invention
□ Imitating role
 Entrepreneurs, Invention and innovation

□ Entrepreneurs
□ Invention
□ Innovation
 Areas of Innovation

□ New product
□ New Services
□ New Production Techniques
□ New Way of Delivering the Product or Service to the
Customer
□ New Operating Practices
□ New Means of Informing the Customer about the Product
□ New Means of Managing Relationship within the
Organization
□ New Ways of Managing Relationships between
Organizations
 Chapter Two : Small Businesses

□ Small business is a business which is independently owned

and operated, not dominated in its field of operation and
meets certain standard of number of employee and
capital.
□ In general there are two approaches to define a small
business; measures of the size and economic/ control
criteria
 Size criteria

□Some of the criteria’s to measure the size are

Number of employees: - for example in Ethiopian case it is
Less than 30 employees (6-30).
Investment paid up capital: - for Ethiopia it is 100,001-
1,500,000 (industry), and 50,001-500,000 birr (service).
Volume of sales, production and deposits are also used to
measure the size of business
If there is ambiguity in the definition between the usage of
man power and capital, it is recommended to use the total
paid up capital as a measurement criteria.
 Economic/Control criteria

□ Market share: has no significant influence on the price of

national quantities of goods sold to any significant level.
□ Independence: independence means that an owner has
control of the business himself.
□ Personalized management: It implies that the owner
actively participates in all aspects of the management of
the business and in major decision making process.
□ Technology: small business is generally labor intensive
□ Geographical area of operation: the area of operation of
a small business is often local
 Economic, social and political aspects of
small business enterprises in Ethiopia

□ Socialistic idea (the equality argument )

□ Less capital and more labor
□ Removing regional imbalances (the decentralization
arguments)
□ Creating self-employment opportunities
□ Ancillary functions
□ Export promotion
□ Supply of critical raw materials
 Small business failure factors

□ Management incompetence
□ Poor financial control
□ Lack of adequate capital
□ Over investment in fixed asset
□ Failure to plan current as well as future operation
□ Failure to adopt proper inventory control system
□ Improper Attitude (The entrepreneur may not respect time,
employees and may have lazy lifestyle and dictatorial style of work)
□ Inadequate marketing plan
□ Incorrect market identification
□ Poor distribution channel
□ Weak marketing communication or promotion
 How to avoid the pitfalls/difficulties of
a small business

□ Know your business in depth:

□ Have a Good Relation with Stake Holders
□ Prepare business plan
□ Managing financial resources
□ Understanding financial statement
□ Learn to manage people effectively
□ Keep in tune with yourself
□ Take up short professional courses in management
(entrepreneurship):
□ Be sensitive to your customers
 Setting up a small business

□ The first and for most step in starting a small business is to

find out a suitable business idea and give a practical shape to
the idea.
□ To think of a goal for the business in the long run rather than
to look for the immediate tomorrow is called Basic Business
Idea.
□ The basic business idea is to meet the broadest needs of the
customers and has a long life perhaps from 5-50 years.
□ The basic business idea facilitates choice of product under an
overall plan.
 Continued…

□ The product line consists of different families of products.

□ The product range on the other hand includes different
sizes of the product within the product line.
□ In order to establish a business venture with an
entrepreneurial system an entrepreneur needs to take the
following steps
1. Search for business idea
2. Process the idea
3. Select the best idea
 What a project an
entrepreneur should have?

□ The project an entrepreneur chooses should be based on

SWOT analysis.

Strength Opportunity

Weakness Threat
 Project classifications

□ Quantifiable and Non-Quantifiable projects

□ Sectorial projects :-under this the following projects can
be mentioned
Agricultural sector
Power sector
Industry and mining
Social service sector
Transport and communication
 Continued…

□ Techno-economic project
Factor intensity oriented classification (labor vs capital
intensive)
Causation oriented classification
Magnitude oriented classification
□ Financial institution classification
New project
Expansion project
Modernization project
Diversification project
 Characteristics of small scale
industry

□ Closely held
□ Personal character
□ Limited scale of operation
□ Indigenous resources
□ Labor intensive
□ Local area of operation
□ Simple organization
 Chapter Three: Business planning

□ A business plan is a written document prepared by the

individual entrepreneur or partners that describes the
goals and objectives of the business along with steps
necessary to achieve those goals.
□ Business plan is also defined as a written summary of the
entrepreneur’s proposed venture, its operational and
financial details, its marketing opportunities & strategy,
and its manager’s skills and abilities.
 Purpose

When business plans are produced

□ At star-up of new business
□ Buyout stage/business purchase
□ Ongoing review stage
□ Major decision
 Purpose

Who is going to prepare business plans

□ Managers:
□ Owners:
□ Lenders:
 Purpose

Why business plans

□ Managers: - Clarifying ideas and finding strength,
weakness, opportunity & threats.
□ Owners:- Assessing feasibility & viability of business,
setting objective & budgets:
□ Lenders: - Evaluate risk us. Benefits, appraise quality of
management
 Scope of Business plan

□ Business plan includes information on the following aspects:

Economic/Market aspects: Economic justification like market
size, market growth, market share.
Technical aspects: Details on technology needed, equipment
and match their sources
Financial aspects: Total investment, cost of capital, ROI,
source of capital, enterprise contribution
Production aspects: product, its design, standard of quality,
usage, production aspect like production process, schedule,
technology.
Managerial aspects: Qualification & experience, commitment
& planning
 Formats of a business plan

□ Executive summary
□ Company History
□ Business Profile
□ Business Strategy
□ Description of the firm’s product
□ marketing strategy
□ Competitors Analysis
□ Officers’ owners’ Resumes
□ Plan of operation
□ Financial data
□ Loan Proposal
 Common Mistakes in Business
Plan Preparation

□ Single-Purpose use
□ One- person commitment
□ Being neglect
□ Unworkable document
□ Unbalanced application
□ Disillusionment
□ Too- action Oriented
□ No Performance Standard
□ Poor progress Control
□ Early consumption
 Chapter Five: Marketing and
New Venture Development

□ Marketing Research: is the systematic gathering,

recording and analyzing of data about problems related to
the marketing of goods and services.
□ It is the function which links the consumer [customer] and
public to the marketer through information-information
used to identify and define marketing opportunities and
problems; generate, define, and evaluate marketing
actions; monitor marketing performance; and improve
understanding of marketing as a process.
 Characteristics of a marketing research

□ Marketing research should be systematic

□ Marketing research is a process
□ Data may be available from difference sources
□ Marketing research may be applied to any aspect of
marketing that requires information to aid decision
making.
□ Research findings and their implementation must be
communicated to the appropriate decision matter.
In conducting marketing research, scientific methods should
be followed. The scientific method requires objectivity,
accuracy, and thoroughness.
 The Scope of Marketing Research

□ Market Research
□ Sales analysis/Research
□ Consumer Research
□ Advertising Research
 The Marketing Research Process

□ Problem definition
□ Examination of primary & secondary data
□ Analysis of data
□ Making Recommendation
□ Implementation of findings
 Marketing Intelligence

□ Marketing intelligence is the systematic collection and

analysis of publicly available information about
competitors and developments in the marketplace.
□ Techniques range from quizzing the company’s own
employees and benchmarking competitors’ products to
researching internet, lurking around industry tradeshows,
and even routing through rivals’ trash bins.
 Competitive Analysis

□ Competitive analysis is a widely used approach for

developing strategies in many industries.
□ According to Porter, the nature of competitiveness in a
given industry can be viewed as a composite of five forces:
1. Rivalry among competing firms
2. Potential entry of new competitors
3. Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of consumers
 Marketing Strategies

□ Marketing strategy refers to the marketing logic by which

the company hopes to create customer value and achieve
profitable relationships.
□ Companies know that they cannot profitably serve all
consumers in a given market.
□ Thus, each company must divide up the total market,
choose the best segment, and design strategies for
profitably serving chosen segments. This process involves
market segmentation, target marketing, differentiation
(actually differentiating the market offering to create
superior customer value), and positioning.
 Diversification Strategies

□ In search of growth, a firm has four options:

1. Market Penetration: the firm can stay with its base
product or service, and its existing market
2. Product Development: the firm can develop related or
new products for its existing market.
3. Market Development: the firm can develop related or
new markets for its existing products.
4. Entry in to new Market: the firm might try to move into
related or new markets with related or new products.
 International Markets

□ International marketing is important because of the

economic theory of comparative advantage.
□ This theory states that each country has natural
advantages over others in the production of certain goods,
and therefore specialization and the trading of surpluses
will benefit everybody.
 Reasons for Internationalization

□ Small or saturated domestic markets

□ Economies of scale
□ International production
□ Customer relationships
□ Market diversification
□ International competitiveness
 Chapter 6: Organizing and Financing
the New Venture

When establishing an entrepreneurial team people should

look for
□ Those who share the same values and vision for the
company
□ Those who have complementary skills
□ Those who have integrity
□ Those who can manage the risks of a small business
 Continued…

The following are common errors in team building

□ Not considering experience and qualification of each
member
□ Putting together a team whose members have different
goals
□ Using only insiders in the board of directors
□ Using family members as attorney and accountant
□ Giving the management team all stock in lieu of salary
 Sources of Finance

 Debt financing (short term)

□Trade credit (Open-book credit & Promissory
notes)
□Loans (Secured Loans & Unsecured Loans)
□Commercial paper
 Debt as Long-term financing
□Long-term loans
□Lease
□Bonds
 Sources of Finance

 Equity Financing
□Stock (Preferred & Common stock)
□Retained earnings
□Sale of assets
 Venture capital

Venture capitalists may be investment bankers

when they invest capital, make loans, and give
management advice intended to assist the
company to achieve significant growth.
Many companies financed by venture capitalists
convert from closely held corporations to public
corporations during the course of their growth.
 Government program

□In USA Small Business Administration loans are

available to smaller businesses.
 Chapter 7: Managing Growth and
Transaction

Preparing for the Launch of the Venture

□ Hiring New Employees
□ Creating Awareness of the New Venture
Managing Early Growth of Venture
□ Motivating and leading the team
□ Financial Control
□ Managing Cash Flow
□ Managing Assets
□ Managing Costs and Profits
□ Taxes
 New Venture Expansion Strategies

□ Mergers & acquisitions

□ Licensing
□ Franchising

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