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UNIVERSITY OF DAR ES SALAAM

COMPUTING CENTREDiploma in Computing and Information Technology

TECHNO- ENTREPRENEURSHIP AND INNOVATION

DRAFT MANUAL_V1_OCTBER 18TH 2011

2008 University Computing Centre Ltd

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TABLE OF CONTENTS

3TABLE OF CONTENTS

Error! Bookmark not defined.DCIT 05202: TECHNO-ENTREPRENEURSHIP AND INNOVATION

4CHAPTER ONE: INTRODUCTION

51.3 1 Historical background

71.3.2 Definition of Entrepreneur today

71.3.3 Intrapreneurship

71.3.4 Is an entrepreneur born or made?

81.3.5 General Entreprising Tendencies/Traits [GETs]

91.3.6 How can GETs be developed?

91.3.7 Types of skills required in Entrepreneruship

101.3.8: Comparison of Traditional Managers and Entrepreneurs

101.3.9 Revision Questions for One

284.5.2 Business consolidation process

354.6.8 THE ORGANISATION PLAN

364.6.9 OPERATIONAL (PRODUCTION) PLAN

37- Describe your monthly labour requirements

384.10 FINANCIAL PLAN

vi5.2: Sources of BusinessIdeas

viiivi. Buy a Franchise or an Existing Business

ix5.3 Tips for Starting a Business that willsucceed

xi5.4. Assessing the Business Ideas

CHAPTER ONE: INTRODUCTION

1.1: What is techno-entrepreneurship?

Techno-entrepreneurship can be defined as linking technology with entrepreneurship issues particularly in the market.

The goal of Technology Entrepreneurship is to prepare students for the kinds of technically-linked business challenges that are inherent to situations where the answer (a technical innovation) is being developed in parallel with the problem (a market need).

1.2 What is innovation?

There is little consensus on exactly how to define innovation. Whilst it is widely understood and accepted that innovation is a major source of an organizations competitive advantage. Actual definitions of innovation vary often so as to better meet the requirements or characteristics of a particular study.

What is common in most definitions of innovation is a focus on novelty and newness and that it creates profit or adds economic value to the organization responsible for it.

In the 1930s Joseph Schumpter put forward five types of innovation definitions:

i. Introduction of a new product or a qualitative change in an existing product

ii. Process innovation new to an industry

iii. Opening of a new market

iv. Development of new sources of supply for raw material

v. Other inputs and changes in the industrial organization

Generally innovation definitions are derived from one or a combination of the following parameters:

a. The generation of a new idea: This is where new ideas are formed from old ideas, or new relationships / perspectives are formed between entities or subjects

b. The invention of something new: A new product or service

c. The diffusion of new ideas: The transfer of new ideas to new geographic locations

d. Improving something: This can be improving a product or service for example to make it commercially viable as [Thomas Edison] did with the electric light bulb or it can be improving a system or process

e. Doing something different: Getting to the end result of a task or problem by doing something radically different to what would be expected

f. Adopting something new to the social setting of which it is applied: This is where something that has proven to be successful or useful elsewhere is used to similar advantage in a new environment.

g. Market based: An innovation that is developed to meet the needs of a market.

h. New perspective: Seeing something from a new perspective

i. Incremental improvements: Making incremental improvements to a product or service or implementing continuous improvement (kaizen) as can happen from applying Lean techniques

1.3: Entrepreneurship concept

1.3 1 Historical background

During the past few decades, a considerable amount of research has been carried out on entrepreneurship. One reason for a heightened interest in the subject has been the appreciation of the role of entrepreneurship in fostering economic growth. Much of the research has attempted to establish patterns for predicting incidence of entrepreneurship and/or identifying success factors. Evidence from studies on entrepreneurship shows that entrepreneurs are not randomly drawn from the population; they tend to share certain backgrounds and orientations.

The term, Entrepreneur is derived from French word which means Entreprendre, meaning to undertake. An Entrepreneur is the one who undertake to organize, manage and assume the risks of business. The term ' was used for the first time in economic theory by Richard Cantillon, a Frenchman, in the late 18th century. He saw the entrepreneur as somebody who innovates, invests and takes risks.

However, it is John Baptiste Say who, in the early 19th century, first made a clear distinction between the capitalist and the entrepreneur. The usage of the term became increasingly regular in the second half of the 19th century. This was because while many capitalists had liquidity surpluses which they tried to invest, entrepreneurs provided interesting opportunities.

In the early 20th century, Joseph Schumpeter presented what has been credited as the most significant meaning of the term 'entrepreneur'. He saw the essence of entrepreneurship as innovative behavior. According to Schumpeter, the essence of entrepreneurship lies in the perception and exploitation of new opportunities...it always has to do with bringing about a different use of national resources in that they withdraw from their traditional employ and subject them to new combinations (Schumpeter, 1934).

1.3.2 Definition of Entrepreneur today

An Entrepreneur is defined broadly as a person who thinks, reasons, and acts in a way that result in the creation, enhancement, realization, and renewal of value for an individual, group, organization and the society at large.

Entrepreneurs always add values through efforts, Money or skills and he realizes the rewards from these efforts.

An entrepreneur is different from a business man who buys and sells good and services for profit. Not all business men are necessarily entrepreneurs.

Entrepreneurs are found in all professions-education, medicine, research, law, architecture, engineering, social work, distribution and the government.

Entrepreneurship is a dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time and career commitment or provide value for some products or services.

1.3.3 Intrapreneurship

Entrapreneurship is practicing entrepreneurship within an existing/established organization. E.g. Religious institution, Corporate Organization, Government agencies, NGO, Home/family/relationship etc.

Intrapreneurs are highly valued in todays world, because it calls for constant improvement, aggressiveness, vision, ability to assess risks and quickly take action, etc

Existing businesses have the financial resources, business skills and the marketing and distribution system to commercialize innovation successfully.

1.3.4 Is an entrepreneur born or made?

Entrepreneurship researchers point to two major contentions. There are those who argue that entrepreneurship is a function of individual personality traits (born with). That there exists a number of recognizable behaviors, and attributes that are commonly associated with the enterprising person, and which may further distinguish between entrepreneurs and non-entrepreneurs or between successful entrepreneurs and unsuccessful enterpreneurs. These are innovativeness, creativeness, proactive ness, need for achievement, risk taking independence. Etc.

On the other hand, those in the second strand, argue that entrepreneurship is an environmentally determined phenomenon (made). That the display of enterprising behaviors and attitudes will be stimulated or otherwise, by different environments.

There is now an overwhelming literature, (including proponents of the trait approach) that point to the common conclusion, and to which we also subscribe to, that entrepreneurship is not a biological trait. More specifically, entrepreneurs can be developed and that even the much advocated entrepreneurial traits and behaviors such as need for achievement and risk-taking can be learnt. That the mix and degree of enterprising attributes will vary between persons, but more importantly the enterprising behavior can be developed by exposure to stimuli and therefore can be learned.

1.3.5 General Entreprising Tendencies/Traits [GETs]

Generally, an entrepreneur possess the following Traits/behaviors

i. Creativity behavior

ii. Initiative taking behavior

iii. Innovative behavior

iv. Strong sense of independence and autonomous behaviour v. Strong sense of ownership behaviourvi. Aggressive behaviour vii. Determined/Perseverance behavior

viii. Hard working behavior

ix. Pro-active behavior

x. Strong action orientation behaviourxi. Ability to consolidate resourcesxii. Belief in self/ believe can make things happenxiii. Belief that rewards come with own effort and hard work brings its rewardsxiv. Opportunistic behaviour

xv. Networking behavior

xvi. Behaviour to take reasonable risks xvii. Achievement orientation/urge to succeed/conquer1.3.6 How can GETs be developed?

GETs can be developed by:

(i) Always ask the question is there a better way?

(ii) Challenge custom, routine and tradition

(iii) See mistakes and failures as mere pit stops on the way to success

(iv) Identify yourself with successful people.

(v) Expose yourself to difficult and challenging situations

(vi) Share information with others

(vii) Add value to everything you do

(viii) Be an achiever finish what you start

(ix) Set long-term goals

(x) Try to make things happen for yourself

(xi) Solve your own problems before seeking help

(xii) Be proud/feel good about yourself and your work

(xiii) Observe others and copy but dont be a copycat

(xiv) Experiment

(xv) Realize that there may be more than one answer

1.3.7 Types of skills required in Entrepreneruship

The skills required by entrepreneurs can be classified into three main areas namely Technical skills, Business management skills and Personal entrepreneurial skills

Technical skillsBusiness management skillsPersonal entrepreneurial skills

i. Writing

ii. Oral communication

iii. Monitoring environment

iv. Technical business mgmnt

v. Technology

vi. Interpersonal

vii. Listening

viii. Ability to organize

ix. Network building

x. Management style

xi. Coaching

xii. Being a team playeri. Planning and goal setting

ii. Decision making

iii. Human relations

iv. Marketing

v. Finance

vi. Accounting

vii. Management

viii. Control

ix. Negotiation

x. Venture launch

xi. Management growthi. Inner control

ii. Risk taker

iii. Innovative

iv. Change oriented

v. Persistent

vi. Visionary leader

vii. Ability to manage change

1.3.8: Comparison of Traditional Managers and Entrepreneurs

BASIS TRADITIONAL MANAGERSENTREPRENEURS

1. Primary motivesPromotion of traditional rewards e.g. Office, staff and powerIndependence, opportunity to create and money.

2. ActivityDelegates and supervises more than direct involvementDirect involvement

3. RiskCarefulModerate risk taker

4. StatusConcerned about status symbolsNot concerned about status symbols

5. DecisionUsually agrees with those in upper management positions Follow dreams with decisions

6. Failure and mistakesTries to avoid mistakes and surprisesDeals with mistakes and failures

1.3.9 Revision Questions for One

1. Define the term, entrepreneur

2. Differentiate the term, entrapreneuship from entrepreneuship

3. What do you understand by the term, copreneurs?

4. Mention any seven requirements for a copreneur to be successful.

5. Differentiate a business man from an entrepreneur.

6. Mention any eight General Entrepreneurship Tendencies (GETs) of an entrepreneur.

7. Outline any seven ways of developing/acquiring General Entrepreneurship Tendencies

8. Mention the three classes of skills required in entrepreneurship

9. Mention Requirements for a successful copreneurship

10. Compare a traditional manager and an entrepreneur.

11. What will you see to know that a student is enterprising?

12. Write T if the statement is TRUE or F if the statement is FALSE

i. An entrepreneur is a person who takes very serious business risks to maximize profit [ ]

ii. Entrepreneurship is a biological trait [ ]

iii. An entrepreneur is a small business trader [ ]

iv. Expose yourself to difficult situations can develop your General Enterprising Tendencies[ ]

v. An entrepreneur is always more concerned about status symbols as compared to a traditional manager [ ]

vi. Poor entrepreneurs see mistakes and failures as mere pit stops on the way to success [ ]

13. Suppose you are looking for a Manager to head your newly established business venture. Describe at least 5 key criteria you would use to differentiate an entrepreneurial manager you would like to employ, from a traditional manager.

14. a) List three categories/groups of skills required for an entrepreneur. b) For any one category of skills of your choice, write short notes on any three specific skills.15. With an example in each case, describe the following General Entrepreneurship Traits (GETs)i. Proactive behaviour

ii. Risk taking behaviour iii. Networking behaviouriv. Opportunistic behaviour 16. People are born with different levels of entrepreneurship traits. Describe at leas 5 ways by which one can develop his/her General Entrepreneurship Traits.

17. People are born with different levels of entrepreneurship traits. With examples in each case, describe how the following ways can assist you in developing your entrepreneurship traits

ii. See mistakes and failures as mere pit stops on the way to success

iii. Identify yourself with successful people.

iv. Expose yourself to difficult and challenging situations

v. Be an achiever finish what you start

vi. Observe others and copy but dont be a copycat

vii. Experiment

18. Choose the appropriate statement from section II and match it to the correct/ corresponding items in section I (CHAPTER 1 AND CHAPTER 2) (10 marks)

SECTION ISECTION II

i: A person with external locus of control [ ]

ii. Is a technical skill needed by an entrepreneur [ ]

iii. Mwajuma, a bank manager, scrutinizes everything proposed by her Executive Director before accepting [ ]

iv. A person perceives a strong level of incongruency between his personal attributes and the role he holds in society and hence motivated to change. [ ]

v. A trait possessed by any good entrepreneur [ ]

a. Psychodynamic model

b. Writing skills

c. An Entrepreneurial Manager

d. Creative behavior

e. Is unlikely to become a successful entrepreneur

f. A carefree Manager

g. Decision making skills

h. Is likely to become a successful entrepreneur

i. Observe and copy.

j. Social-marginality theory

k. Traditional Manager

l. Aggregative behavior

CHAPTER TWOINFLUENCES ON ENTREPRENEURIAL BEHAVIOUR

Entrepreneurial behavior is considered a function of the individual motivations, ability and environmental influences. A number of theories have been proposed to explain these phenomenons. These are:

i. Psychological explanations of entrepreneurial behavior

ii. Sociological explanations of entrepreneurial behavior

iii. Socio-economic background factors (demographic factors)

2.1 Psychological explanations of entrepreneurial behavior

Some psychologists have attempted to identify individual characteristics capable of successfully predicting entrepreneur behavior. These efforts have culminated into models which are posited as capable of accounting for differences between entrepreneurs and other members of society in terms of a single trait or a constellation of traits. These are sometimes referred to as 'born' models, in the sense that they tend to view entrepreneur behavior as a disposition of in-born qualities.

2.1.1 Need for achievement (NArch)

McClelland (1961), the pioneer of trait models, suggested that individuals with high need for achievement (nAch) were more likely to choose entrepreneurial careers than others. He defined nAch as "the desire to do well for the sake of an inner feeling of personal accomplishment". A person endowed with such a need will spend time considering how to do a job better or how to accomplish something important to them.

High achievers are said to like situations where they can take personal responsibility for finding solutions to problems.

They like rapid feedback on their performance so that they can judge whether they are improving or not.

They avoid what they perceive as very easy or very difficult tasks as they dislike succeeding by chance.

They prefer striving to achieve targets which present both a challenge and are not beyond their capabilities. This ensures worthwhile effort and results in feelings of accomplishment and satisfaction.

2.1.2 Locus of control

Rotter (1966) proposed a model to measure 'locus of control' the extent to which people believe that they control their own destinies. People with an internal locus of control are those individuals who believe themselves to be in control of their destinies.

In contrast, those with an external locus of control sense that, fate, in the form of events outside their control or powerful people, has a dominating influence over their lives.

Individuals with a strong internal locus of control are, according to this model, more likely to engage in entrepreneurship. The reasoning behind this model is that people who believe that they control their destinies would be more willing to venture into the uncertainties and challenges involved in running a business compared to those that believe that most of what happens to them is outside their control.

2.1.3 Psychodynamic model

The Psychodynamic model was proposed by Kets de Vries (1977). He posed entrepreneurial behavior as an outcome of a family background often filled with images of endured hardships.

Such experiences may leave the adult troubled by a burdensome psychological inheritance centered around problems of self-esteem, insecurity and lack of confidence and with repressed aggressive wishes towards persons in control.

The entrepreneur thus becomes a deviant, drifting from job to job unable to 'fit in' and develops a non-conformist stand.

The refusal to accept authority structure and social norms results into an inability to work smoothly with others which in turn leads to the setting up of an independent economic unit as an act of " innovative rebelliousness".2.1.4 Risk taking propensity According to this theory, the level of risk preference low, moderate, high can influence an individual's decision to start a business.

Risk taking propensity is defined as a generalized tendency to choose more risky alternatives (Bird, 1989).

Reuss (1970) suggested that "venture spirit and willingness to take risks" is the major trait of entrepreneurship.

Bird (1989) suggests that characteristics that dispose people to orientation towards risk taking include optimism; tolerance to ambiguity; high need to achieve; fearlessness; impulsiveness; a decision cognitive style; beliefs about ones control; a personal history in which risk was rewarded; and having family conditions that support risk taking, such as a working spouse or a social supportive system.

2.1.5 Innovation Many social scientists have singled out innovation as the true mark of an entrepreneur (Schumpeter, 1934; Stevenson and Sahlman, 1989; Stanworth et al, 1989). This is in line with the view of the entrepreneur as an agent of change, bringing about new resource combinations.

Stanworth and Gray, (1991) draw a distinction among the terms innovation, creativity and change.

i. To create is to bring in something into existence...so a craftsman may be very creative.

ii. To innovate is to bring novelties (derived from Latin word novus for "new), so it is likely to be concerned with broader processes of change within an organization.

iii. While all innovations are concerned with change, not all changes are innovations (Stanworth and Gray, 1989). Hence, buying new equipment would be a change, but not an innovation referring the 'organized tour' of business.

2.1.6 Psychological models: conclusionThe principle weaknesses of the trait approach have been summarised by a number of experts. Chell (1985), a leading expert in the area of entrepreneurship, says that there would appear to be a great deal which is equivocal and inconclusive about the trait approach to entrepreneurship. Later, she asserted that "there appears to be very low correlation between the assessment of the trait and actual behaviour" (Chell, 1986). Several observers have questioned the rationale for predicting entrepreneur behavior using the specific traits discussed above. They contend that some of the more obvious and possibly decisive attributes have been left out. Lynn (1969) suggested that one of the underlying personality traits of the entrepreneur could be anxiety or neuroticism. Ray (1993) has added physical appearance and likeability. He goes on to argue that other theories may be better placed to explain entrepreneurial behavior than personal traits. Among these he mentions sports psychology and activation theory of tourism. Of the latter, he says that entrepreneurs may be high activation people, who prefer unstructured tours, while managers, small business owners and franchisees are the lowactivation people, preferring the 'organized tour' of business.

2.2 Sociological explanations of entrepreneurial behavior

While psychological models attempt to explain behavior in terms of qualities within an individual, sociological theories suggest that entrepreneur behavior is a function of the individual's interaction with society. That is, entrepreneurs are 'made' by society. This section explores four main sociological models.2.2.1 The social marginality model

This model is based on two premises. The first premise is that the meaning of any economic action (including starting a business) is the satisfaction of wants. It follows then that there would be no economic action if there were no needs to be satisfied.

The other premise is that it is society that shapes the desires we observe. Our choices are therefore fenced by social habits and conventions (Schumpeter, 1934). Stanworth and Curran (1976) used the above reasoning to explain the process of entry into entrepreneurship.

Stanworth and Curran (1976) suggest that individuals who perceive a strong level of incongruency between their personal attributes and the role they hold in society (eg. teachers, policemen, nurses, lawyers, etc) will be motivated to change or reconstruct their social reality. This can take many forms. Some people may reconstruct their reality by joining political parties, religious organisations, charities, etc. Others may change careers. Self employment offers another possibility.

2.2.2 Inter-generational inheritance of enterprise culture via role modeling- This theory purports that entrepreneur practice is largely inherited. Accordingly, offsprings of entrepreneurial families are more likely to be involved in businesses than others.

Several explanations can be offered to support this theory. A person who grows up around a family that runs a business is likely to benefit from the skills, accumulated experiences and connections of the existing firm.

She or he is also likely to have better access to advice, credit, established markets, sources of inputs, etc. The fact that these will make it easier to start a business may be a big encouragement to those associated with businessmen.

Birley (1984) has suggested that a strong grounding in the business and ownership ethic at an early age is a useful and powerful driving force for children as they begin to choose future careers.

2.2.3 Small firms as role models

There has been a notion that those who form small businesses are likely to have previously worked in small firms and to have used them as a role model (Chell, 1985). For one thing, it may become easier for the potential entrepreneur to envision a role comparable to that of his boss.

Also, the owner manager may sometimes act as a mentor, playing the role of convincing, assuring, and sometimes instructing subordinates in the process of starting their own ventures (Shapero and Sokol, 1982). In some cases, the existing business may assure some support to the new one, say, as a market or a source of materials or credit.

2.2.3 Sociological models: conclusion

Although sociological models seem to be more closely related to entrepreneur behavior than are psychological characteristics, they have their own share of criticisms. The most notable weakness of these models is that each tends to explain a certain group of entrepreneurs, leaving out the rest. Another weakness is that they do not tell us why people exposed to the same social situation will choose careers differently, with some selecting self employment.

Related to this is the possibility that it helps to see someone lesser than oneself establish the credibility for an act; an employee may be convinced that if the owner manager can do it, he should be able to do it equally or even better.

2.3. Socio-economic background factors

The entrepreneurship research literature mentions a number of socioeconomic background factors that are considered to influence propensity to start a business. These factors include age, ethnicity, marital status, education and experience. This section reviews these factors.

2.3. Socio-economic background factors (demographic factors)

The entrepreneurship research literature mentions a number of socio-economic background factors that are considered to influence propensity to start a business. These factors include age, ethnicity, marital status, education and experience. This section reviews these factors.

2.3.1 AgeGiven the usual demands of the process of starting a new business, one would expect the middle aged person to be better placed than young or old one to successfully enter into entrepreneurship. Young people may have the energy required to launch new ventures, but lack the financial means to do so.

Older people have money, but lack the energy to start independent ventures and willingness to change their lifestyles. Middle aged people have some money, and energy and are more willing to change their lifestyles. However, many of them are likely to be 'forced' into some form of self employment after retirement.

2.3.2 EthnicityEthnic origin of a person is said to influence the choice between paid employment and self semployment. Shapero (1982) argues that ethnic groups that have produced high numbers of entrepreneurs are also displaced groups. This argument is based on the social marginality thesis, which contends that marginal groups have a higher propensity of becoming self employed.

2.3.3 Marital statusStudies in the UK have shown that the self-employment rate is much lower for single persons than for those in other categories. Marital status is closely related to age and stages of life; married people are likely to be middle or old aged, while single people will mostly be younger.

Even when age is controlled for, the rate of self-employment remains lower for singles (Burrows, 1991). This appears to be in line with the social development model, which recognized the influence of social support system in one's propensity to become an entrepreneur.

2.3.4 EducationTwo conflicting hypotheses have been proposed regarding the role of education in the entrepreneurial process. The first is that formal education can operate as an impediment to entrepreneurship because, rather than develop creative free thinkers, it fosters conformity and low tolerance for ambiguity, leading to thought and behavior processes that refuse to admit tolerance, and social values that preclude "getting one's hands dirty" (Ronstadt, 1984).

The alternative argument is that education develops competencies required in an entrepreneurial venture as it fosters creativity, curiosity, open mindedness and good interpersonal skills. As well, technical education is important to careers and ventures using or creating advanced technology (Bird, 1989).

2.3.5 Socio-economic background factors: conclusion

Social economic background factors are fairly good in explaining the entry into entrepreneurship. They however have the weakness of being closely related, to such an extent that it may sometimes be difficult to know which factors are most important in determining behavior. The factors are the easiest to research as they are merely classification variable, which are found even in secondary sources of information. Like all other individual characteristics, they cannot fully explain differences in behavior between entrepreneurs and those in other careers or between successful and unsuccessful entrepreneurs.

2.4 Environmental factors

So far, our discussion has focused around individual characteristics that impact on the propensity to become self employed. However, persons with similar characteristics may engage in different occupations, depending on the type of environment they face. This is why the there are significant spatial variations in the rate of formation of small businesses in various parts of the world as well as within different countries 2.4.1: Barriers to entry

The ease of entry as determined by the resources required to successfully launch a venture depends on the types of industries in the localities, with an industrial climate biased towards small, independent or autonomous units of employment being more favorable.

Probability of establishing a small business in localities dominated by industries with high barriers to entry, such as steel, ship building, chemicals and aircraft manufacturing is expected to be lower, compared to those with less domination by heavy industries.

2.4.2: Plant size structure

The plant size structure is likely to influence the opportunities for passing over skills, experiences and role modelling in a locality. Generally, workers in smaller firms have closer contact with customers as well as the owner manager than ones in larger firms. As noted before, workers in such an environment are more likely to be self-employed than their counterparts in larger firms.

2.4.3 Occupational structureAs indicated in the discussion of social class influence, the majority of those who form small businesses come from small employer, employee, manager and skilled worker backgrounds. Regions with more people involved in these occupations are therefore more likely to form a large number of businesses than those with different types of jobs.

Again, Storey (1994) notes that the evidence from empirical studies in UK on this relationship is ambiguous. A positive relationship was found in studies in West Anglia, but such association was not found either in East Midland or North East of England.

2.4.4 The Economy

Economic factors that are considered responsible for spatial variations in small firm formation include availability of information, access to finance, availability of premises, ownership structure, regional specialization and demand.

2.4.5 Access to informationAccording to Sweeny (1987), information tends to be local, and most regular contacts are normally within 30 minutes of a person's travelling time. The implication of this is that the amount and quality of information is mainly dependent on the wealth of stock of knowledge in the locality. Knowledge comes in the form of conferences, exhibitions, contact with potential customers, suppliers, small business owner managers and informal reading.

Localities rich in information are typically administrative centers, and regions with dynamic or progressive industries. Regions dominated by mature technology, externally owned firms, declining level of best practice as well as those relying predominantly on extractive industries tend to have poor access to information and hence lower rates of small firm formation.

2.4.6: DemandMost small businesses serve restricted geographical markets. As a result, there will be more opportunities in more affluent or populous areas than others. A few firms may be sufficient to exploit all opportunities in a rural locality. Therefore, the rate of small firm formation in rural areas will be lower compared to urban ones.

2.4.7 Ownership structureAreas dominated with subsidiaries of large companies are likely to have fewer opportunities for new, small businesses than ones with single unit ones. This is because while small single unit firms will source their products locally, subsidiaries have less freedom in choosing the source of inputs.

Revision questions

1. List four major groups of theories/influences on entrepreneurship behavior.

2. With practical examples in each case, write short notes on the following psychological influences on entrepreneurship behavior

i) Locus of control

ii) Psychodynamic model

iii) Risk taking propensity

iv) Inter-generational inheritance theory of entrepreneurship traits

3. Under social-marginality theory of influences on Entrepreneurship behavior, Stanworth and Curran (1976) suggest that individuals who perceive a strong level of incongruency between their personal attributes and the role they hold in society will be motivated to change or reconstruct their social reality.i) Elaborate the above suggestion

ii) Do you agree with the above suggestion? Elaborate your answer.

CHAPTER THREE: THE ROLE OF NTREPRENEURIAL NETWORKS ON BUSINESS DEVELOPMENT

Introduction

The role of networks in fostering business performance and economic growth has been widely acknowledged by entrepreneurship scholars in the recent years. Networks are deemed to have the potential to address challenges related to Smallness, Newness and Isolation of the enterprises.

to manage a business well is to manage its future; to manage its future is to manage information; and to manage information is to network (Barker, 2000).

How do we define networks? There are many definitions, Including the views that:i. Networks are organisational relationships: In its simplest form, the term network is used to refer to two or more organisations involved in long-term relationships (Thorelli, 1986).

ii. Networks are social and economic relationships: a framework of individuals and organisations, which form the stage upon which entrepreneurial performance is played (Wickham, 1998).

iii. Networks are ties: networking is an activity, which is differentiated from normal business behaviour in terms of the nature of relationships strong ties, weak ties, and one-off events (Birley and Muzyka, 1997).iv. Networks as linkages and means for flexible specialisation: institutional arrangements, which facilitate flexible specialisation among firms operating together in a given geographical milieu (Piore & Sabel, 1984).

v. In general terms, therefore: Accordingly, networking activities are those social and economic processes through which individuals and organisations develop long-term relationships with particular sets of stakeholders for the purpose of accessing support and facilitating exchange.

3.2 WHY BE CONCERNED ABOUT ENTREPRENEURIAL NETWORKS?

(THE RATIONALE FOR NETWORKING)

Relationships are vital in all spheres of life, here are a few facts about the importance of social relationships:

i. People with strong social support networks enjoy better physical and mental health than those without such networks. Not only are people with good support networks less likely to become ill, but when they do, they recover faster.

ii. People with large personal networks tend to live longer than those with small networks.

iii. Personal happiness and satisfaction depend in large part on the quality of relationships with other people.

iv. Building good working relationships is the main cause of success for managers who take charge of a new situation

v. Close relationships with customers save money. It costs three to five times as much to get a new customer as it does to keep an existing one!

vi. Strong partnerships with suppliers yield lower costs and higher quality products and services

vii. Business effectiveness, in general, depends more on human-related activities, such as building relationships, interpersonal skills, and communication, than on technical skills and abilities

viii. Managers with large personal networks get higher-paying positions than managers with small networks

ix. Managers with larger, well-diversified networks get promoted faster and at younger ages compared with their peers with underdeveloped networks

x. Professionals who find jobs through personal contacts (instead of classified advertisements or other impersonal means) find better, more satisfying jobs that they stay with longer

xi. Relationships are fundamental human need

xii. Repeated interactions encourage cooperation, trust, & ties

xiii. Networks make the world small

xiv. It supports accumulation, and deployment of physical and soft resources, which entrepreneurs can not do without (Aldrich and Zimmer, 1986)

3.3 IMPLICATIONS ON TANZANIAN (SMALL AND MEDIUM ENTREPRISES) SMEs ACTORS AND ENTREPRENEURS

Networks are instrumental towards overcoming SMEs challenges of Smallness, Newness and Isolation:

They leverage resources

They broker information

They enhance capacities and capabilities

3.4 Building intelligence networks

InsideOutside

Superiors Customers

Personal Peers Suppliers

Subordinates Investors

Team members Union leaders

Directors Government officials

Work units Organizations of:

Teams Clients

Group Departments Suppliers

Divisions Investors

Subsidiaries Communities

Offices Etc

3.5 PILLARS OF EFFECTIVE NETWORKING

3.5.1 Mutual understanding:

Strive to have a clear understanding of what you intend to achieve from your networking initiatives.

Strive to understand the expectations of the other parties you interact with:

- internal

- external

3.5.2 Mutual benefits

Both parties win in an authentic relationship.

Each part takes the others welfare into account

There is mutual exchange of:

Task-related benefits

Relationship-related benefits

Inspiration-related benefits

3.5.3 Relationship contract

Think of a relationship as an implicit contract, an unwritten agreement, wherein reciprocity prevails

A psychological/interpersonal contract

- a tacit, but agreed upon, set of mutual expectations concerning performance, roles, trust, and influence.

3.4 Revision questions

1. Define entrepreneurship networks.

2. Name three pillars of networks.

3. For any business of your choice, discuss how can good networks promote the business.

4. The limited growth of business in Tanzania is at times associated with the lack of supportive networks. Discuss.

5. Describe any four benefits of effective networking for a Business Manager

CHAPTER FOUR: BUSSINESS PLANNING

4.1: Basic facts about business planning

The purpose of a business enterprise is to make profit, which depends on the success with which an operator pursues opportunities to do business and manages the business process. The purpose of a business plan is to focus an operators attention and effort on the essential factors that determine profit.

Every case, the combination of an operator, an enterprise, and the immediate context in which they exist is unique and no one has discovered a universal formula for success. Teachers, trainers and consultants can provide guidance but ultimately the operator must take full responsibility for learning how to operate successfully and make a profit. The same principle applies to business planning; an operator must take full responsibility for implementing a plan successfully. This chapter provides guidelines to help structure first the concept of a business project and then the planning of it. The plan you produce will be different from others because you, your project and the circumstances are different, so the chapter should not be regarded as providing specifications, only guidance.

Finally, planning is one of the important functions of managing an enterprise, for which, to re-emphasise the point, you as owner and operator are responsible. Like running the business generally, this is something you have to learn by doing!

4.2 Basic business processes

A business enterprise is a transformation process during which value is added to inputs and the output distributed and exchanged for a money value

Input

Transformation

(Adding value)

Distribution

of output

Exchange

Transaction

Resources are introduced into the business at the input stage, the requirement for them depending on the type and quantity of goods or services to be produced and the methods of producing them. Resources needed by established enterprises include land or premises, investment capital and working capital, technology and equipment, materials or goods for resale, and labour. The transformation process is the core production or service activity and is supported by others such as purchasing raw materials and selling finished goods. Business enterprises are generally classified according to their core activity, such as extraction, agriculture, manufacture, or business services. Output from the core transformation process is distributed to sales points and exchanged at a price for money. The exchange process includes market development, product promotion, retail and wholesale selling. All business activities can be related to these basic processes.

4.3: BUSINESS PLANNING PROCESS MODEL

4.4: When is it useful to have a Business Plan?

a. When starting a business, it is useful to have a plan of action and an estimate of profit to show that the idea is feasible and to minimize mistakes and wastage of time and resources

b. When deciding a strategy to grow a business, a plan is useful for showing the financial targets, the actions to be taken to attain them, the costs that will be incurred, and how they will be paid.

c. In order to monitor and control the performance of a business at any time, a business plan is useful for showing budget for operations and overheads, showing when cash is needed to pay bills becoming due, and to assure that the budget is not exceeded and cash is always available

d. When seeking financial assistance at any time from formal sources such as banks and from equity investors such as partners and venture capitalists. Then a plan is useful for demonstrating the viability of the business idea.

Remember

Borrowing money is expensive. Before you decide to borrow, check that your finances are under tight control and there is no wastage of resources in any area of the business. Good cost control can reduce your need for working capital, the amount of funds tied up in day to day activities, and this may make the difference between having to borrow or not.

Wastage can result from:

i. Buying in poor quality materials

ii. Mistreating or mishandling materials

iii. Poor product designs that use more material than is necessary

iv. Stocks too high tying up funds

v. Stocks too low, stock outs causing excessive down-time

vi. Old stocks that dont move

vii. Poor stock control

viii. High level of production defects

ix. Poor production layout

x. Excessive staffing

4.5: Business development process

There are three types of enterprise development - business start-up, business consolidation and business growth - each of which is a distinct stage in the process of developing a business:

4.5.1 Business start-up process

The business start-up process extends from the conception of an idea to putting it into practice and evaluating its potential empirically:

(i) Propose a business idea

(ii) Confirm the feasibility of the business idea*

(iii) Decide the level of entry into the market*

(iv) Produce a business start-up plan

(v) Obtain and deploy the necessary resources

(vi) Start doing business

(vii) Monitor and evaluate the results

*Planning for start-up can only begin after the feasibility of the business idea has been confirmed and after the level of entry into the market has been decided. This will depend on the funds available for the start-up

4.5.2 Business consolidation process

Business consolidation can take place at any time after a period of development and change, the aim being to stabilise an enterprise within its current markets:

(i) Review profitability(ii) Review production efficiency(iii) Review the customer base(iv) Set new performance targets and budgets

(v) Make necessary operational changes

(vi) Monitor and evaluate the results

*Planning can only start after these reviews have been completed.

4.5.3 Business growth process

Business growth is of two types. Type 1 growth is an increase in sales derived from a more productive use of existing resources and more effective exploitation of markets. Type 2 growth is increased sales derived from an increase in production capacity and/or product range derived from investment. The steps in the process are:

(i) Review the current performance of the business (in the market, in its production/service operations, in meeting financial targets

(ii) Analyse the current capacity of the business to support growth (resource base, experience base, control base, ideas base management/leadership base)*

(iii) Develop a growth project

(iv) Start and complete the project

(v) Monitor and evaluate the results

*Planning for growth can only start after current performance and capacity have been analysed and potential weaknesses addressed. A pre-growth consolidation project to deal with weaknesses may be necessary.

4.6 An outline of a Business Plan

i. Cover Sheet

ii. Executive Summary

iii. Table of Contents

iv. Statement of Purpose

v. Company History

vi. Business Description

vii. Products and Services

viii. Market Analysis

Industry analysis

Customer analysis

Competitor

Pricing strategy

Sales/Marketing Strategy

ix. Organizational Plan/Management

x. Operational Plan

xi. Financial Plan

xii. Appendices

4.6.1 Cover Sheet

This section narrates identity information. These are:

i. The words Business Plan

ii. Your name and business name

iii. Company logo

iv. Address

v. Telephone number

vi. Fax Number

vii. Email Address

viii. Web Address (URL)

ix. Submission date

4.6.2 Executive Summary

Executive Summary is among the most important parts of the business plan, because it summaries all important features of the plan. Most people will read the executive summary before deciding to read or not to read the whole document. It is normally written last. It includes:

i. Name of business promoter and her brief background

ii. Name of the business

iii. Business start date

iv. Location

v. Business objectives

vi. Major activity of the business

vii. Market prospects

viii. Financial forecasts

4.6.3 Table of Contents

This section enables the reader to navigate through the document easily. The reader will now which section of the plan is on which page. The table of content shows page numbers, sections and subsections of the report.

4.6.4 Statement of Purpose

This section discusses briefly the major objectives of the business plan. It can be financing and or operational. For financing objectives, the important issues to talk about are:

How much money is needed?

What will the money be used for?

How will the funds benefit the business?

Why does this loan or investment make business sense?

How will the funds be repaid?

In case of operational objectives key issues to address include:

Who will use it?

Will it layout strategy plans?

How will it be updated?

Sample: Statement of Purpose

This business plan is written to secure financing in the amount of $24,000, which will cover the following costs:

$10,000 in equipment

$14,000 in operating capital

The loan will supplement the owners equity investment of $20,000, and will be repaid beginning the month after disbursement according to lender terms. Funds will play a crucial role in sustaining the business as the client base grows, and will allow the business to become self-sufficient by the beginning of year two.

4.6.5 Company History

Company history (or even the history of the individual business promoter) is very important since it enables the reader of the business plan document to get the company profile, track record and achievement. This section narrates:

i. Mission Statement

ii. Basic product description

iii. Names of principals (owners, Management) and brief background on each

iv. Legalities: business type

v. Company location

vi. Number of employees

vii. Customer highlights

viii. Your niche and unique qualities

ix. Strategic alliances

x. Awards and merits

xi. Company milestones (business formation, opening date, hiring employees, revenue levels/ growth)

xii. 1-3 year plan future milestones to reach (sales goals, hiring employees)

Sample: Company History

MAAKA Child Care strives to become the most-well known and reputable service provider in the Tegeta Area, Dar es Salaam Tanzania, with a targeted focus on safety, enrichment, and comfort. The Company was founded based on a growing trend: quality child care is a key issue for working parents, and has now become a top priority for Dar es Salaam region.

The business is owned and operated by its co-founders, Masawe Associates and Kalimanzira and Sons ltd. Each has had extensive experience working with children prior to opening this project, in both a teaching and managing capacity. Since opening in March of 2005, MAAKA Child Care has reached the following milestones:

Incorporated andregistered as a child care centre in Dar es Salaam and became licensed in March, 2006

Renovated owned residence of principal to operate, at Nyirenda street, Tegeta.

Enlisted first 20 full-time clients/children in April 2006

Reached monthly break even June 2010

Hired 3 full-time staff teacher June 2008

Tshs 50,000,000 in revenue by September 2011

MAAKA plans to reach its capacity of 120 children by the end of December 2013, where projected monthly income will be Tshs 100,000,000. By June of the following year, the MAAKA will look to expand the centre, to a capacity of up to 200 children.

4.6.6 Business Description, products and services

Describe briefly the business you are planning to undertake/develop including basic products or services offered, business type-new, takeover, expansion, franchise, etc. Also include the following

General strategy plan

List of planned milestones (business formation, opening date, hiring employees, reaching certain revenue goals)

Planned strategic alliances

Work already done

Experience in the business

Detailed description of products or services

Indicate stage of development: in-process, prototypes, samples

Patents or trademarks, legal contracts, licensing agreements, regulations, certifications

Sample: Products and Services

At MAAKA Child Care, we continually work to provide the most well-balanced day care schedule possible for the children. Every day is a mix of lesson time and free play with a weekly theme, generally a number or letter. Most children arrive between 7:30 and 9:30am. The early arrivals eat breakfast at the facility and then engage in free play as the other children arrive and join them. At 9:30, all of the children sit down for a snack. Each day, the program begins with the pledge of commitment and then moves to activities related to the calendar.

The program includes discussion of the months of the year, days of the week, seasons, holidays, and the weather. During the lesson, two-to-four worksheets (made up in advance) on the topic of the week are used. The sheets include tracing of the letter or number the children are learning, coloring pictures of the related objects, matching games, etc. At least once each week, the children use paints, glue, and scissors to complete a project or craft pertaining to the scheduled theme.

After lessons, the children read a book, or are taught a new song. This is followed by free play prior to lunch. It is a goal of the center to bring the children outdoors, weather permitting, each day. At noon, lunch is served, and is generally a hot meal, consisting of a meat, vegetable, fruit, and grain (such as pasta, rice, or bread) as per the New York State guidelines.

After lunch, the morning program is repeated and expanded. This is followed by afternoon snack at 2:30pm. Since parents begin pickups at 3:30pm, the children are allowed free play with developmental toys such as puzzles, blocks, and Legos, all of which are kept within their reach.

Diapers are changed as needed throughout the day and records are kept of the changes. The younger children are put down to nap either in porta-cribs or on mats during the morning or afternoon hours as dictated by their individual schedules and the parents wishes. Hands-on computer training is planned once the center moves to its new location and space permits a computer center.

4.6.7 Market Analysis/Marketing Plan

This is one of the most important parts of the business plan. The following subsections must be analyzed properly for the overall project to become successful:

4.6.7.1 Industry analysis

Describe the size of the industry in which your proposed business belongs

Which industry does your proposed business belong to? Example: a grocery shop/bar belongs to the food and beverages retailing industry: a Dala Dala business belongs to the transport industry. What is the size of the industry in your proposed community? (Give the total number of firms in the industry) Describe the key characteristics of the industry to which your proposed business belongs What are the sizes of firms in the industry? (Indicate small, medium or large) What technology generally used do your competitors indicate the following: e.g Labour-intensive or capital-intensive; Modern or outdated. What is the average number of employees in other firms? How competitive is the industry? E.g. Very or not very What is the general level of sales/profitability for firms operating in the industry? What seasonal factors are experienced in the industry? Describe the industrial trends and prospects What are the trends and prospects of sales in the industry? (Indicate signs of growth, stability or decline)

What are the trends and prospects of technological development in the industry? What are the competitive trends in the industry? (Example, product innovations)4.6.7.2 Customer analysis

Who are your potential customers? Classify them individual customers , corporate customers

What are the most relevant characteristics of your customers? Consider: age, income, sex education, occupation, and religion or ethnic group where applicable)

How will customers judge your products or services? (Consider performance, economy, convenience, comfort, safety or durability of each product or service)

When will customers purchase your products(s) or service (s)? (Consider: time, day of week, month)

What sort of buying pattern does this indicate?

Volume of purchases: Indicate quantities of product or service likely to be purchased at a given

Time, the frequency of purchases and the desired mode of payment

Describe the market size for your products or services

Can you estimate the number of potential customers (firms consumers) that need your products or services?

4.6.7.3 Competitor analysis

Describe you potential competitors.

Where are your potential competitors in relation to your proposed business location?

How will the location of your competitors affect your business?

Where are your potential competitors in relation to your proposed business location?

How will the location of your competitors affect your business? (State the advantages and disadvantages of your location in relation to theirs)

What size are your competitors? Are they small medium, or large in relation to you business? (Consider assets, sales volumes, number of employees, and number of brands

What are the advantages and disadvantages of the size of your business compared with competitors?

Compare your proposed products or services with those of your competitors How do your products or services compare with those offered by your competitors? For each area of comparison, give an assessment (very low), (low), (moderate), (high) and (very high). (Consider performance, quality, reputation, after-sales service, and other areas specific to your business)

What competitive advantages (s) will your products or services have over those of your Competitors?

Describe the overall strengths and weakness of you potential competitors For each area of comparison allocate score on a scale from; very low, low, moderate, high. (Consider benefits to customers, technology, location, management, and distribution channels, and other areas specific to your business)

With reference to your competitors overall strengths and weaknesses, in what ways will it be easy/difficult to compete with them?

4.6.7.4 Pricing strategies

Describe your pricing strategy

How will you calculate the selling price of your products or services?

What factors will you consider in setting your selling prices? (Consider government price controls, competitors selling prices, positioning, cost of production and distribution

What will be the selling prices for each of your products or services?

What credit terms will suit your products or services?

4.6.7.5 Sales/Marketing Strategy

Describe the methods you will use to make sales. What selling methods will you employ? (Consider, personal selling, selling through an agent)

What criteria will you use for deciding who gets credit?

When will you consider giving customers a discount?

Will you provide an after-sales service? If so, what will it cost you?

If you intend to sell directly to customers, how will you recruit, retain, and remunerate your Sales force?

If you intend to use distributors or agents, how will you select and motivate them?

Which geographical areas will you sales arrangements cover?

Describe the methods you will use to advertises your products or services to your customers Which advertising media will you use?

Describe the kind of image you would like your business and products or service to have.

How often will you advertise and how much will each advertisement cost?

How will you measure the effectiveness of your advertisements?

Describe the methods you will employ to promote your products or services

What promotional incentives will you use?

Which promotional methods will you employ on a regular basis? (Consider using trade shows, sponsorship or competitions)

How much will each method of promotion cost?

How will you measure the effectiveness of your promotional campaigns?

4.6.7.6 Distribution strategy

Describe the channels of distribution that you will use

How will you get your products or services to your customers? (Consider using sales representatives, wholesales, franchises or distributors) What modes of transport will you use? (Consider road, rail or air) How much will the chosen means of transport cost you per month? What specific distribution problems do you anticipate? How do you plan to solve these problems4.6.8 THE ORGANISATION PLAN

In the organization plan for the business, you will show policies for staff development and human resource management for achieving an efficient production and distribution of goods and services. You will present descriptions and training and staff compensation plans. You will also indicate the support and services required for your business.

4.6.8.1 Organization

What type and numbers of members will be in the organisation?

Directors

Managers

Employee types

4.6.8.2 Management Team

Will you manage the business yourself?

What exactly are your duties and responsibilities?

How much monthly salary will you draw from the business?

Describe the duties and responsibilities of your proposed management team.

What will be the exact duties and responsibilities of each member of your proposed Management team? (Indicate their salaries, in relation to the duties and responsibilities)

What performance incentives will you provide to members of the management team?

4.6.8.3 Employees

Identify the other personnel you will require

How many employees will you require in total?

What are their job titles and salary?

Note that job descriptions for each type of employee showing details of their functions, responsibilities and the skills they will need.

Where will you obtain qualified employees?

Describe how you will evaluate the performance of each of your employees (Specify a variety of methods for evaluation the performance of employees, as they are likely to be involve in differing functions)

What is your training plan for your employees?

How will you remunerate/reward your employees

What performance incentives will you provide to your employees?

What arrangements have you made for an event when you lose a key worker to a competitor, illness, or other causes?

4.6.9 OPERATIONAL (PRODUCTION) PLAN

In the operational section of business planning, you will describe the facilities, labour and overheads required to produce your proposed products and services. If you are in the manufacturing business, you will explain the manufacturing process for making your product. For a service business, you will describe the key process of offering your services. In both manufacturing and service industries, you should indicate any regulations, compliances and approvals that will affect your operations.

4.6.9.1 Product/service design and development

- Describe the proposed design and development of your products or services.

Explain your approach to the designs of your proposed products or services?

How do you intend to develop your proposed products or services?

What cost will you incur in designing and developing your products or services?

What kind of technology will you use to manufacture your products or offer you services

What level of technology will you apply in producing your products or offering your services?

Is your choice of technology the best available?

If not, why have you chosen not to use an alternative technology?

How appropriate is your choice of technology? (Consider simplicity in utilisation, cost-effectiveness, flexibility in adoption, efficiency n production, extent of local availability or frequency or maintenance)

How do you plan to cope with changes in technology, which affect your proposed business?

4.6.9.2 Production facilities and capacity

- Describe the machinery and equipment you will require for your production

What machinery and equipment will you need? Who will supply the critical items?

Will you buy, line or lease equipment? At what cost?

- Explain your plans for maintaining and repairing machinery and equipment

Who will maintain and repair the machinery and equipment?

Will spare parts for major items be available locally? If they are, who will be your suppliers?

If spare parts are not available locally, what importation arrangements will you need to make?

- Describe the features of your proposed workshop/shed/factory/labour. Where will you install machinery and equipment? Will the workshop space allow for future expansions? If not, what are your plans for expansion?- Describe the other equipment that you will require for your business

What other equipment will you need? (Example: telephones, office computers, etc. Specify item, quality required, date needed and cost)

- Describe your monthly raw material requirements

What raw materials will you need for production? (Give details of type, source, quantities and costs frequency required)

Will the materials be readily available throughout the year?

If not, what are your plans to deal with possible shortages?

Will raw materials be transported to your business? How much will this cost per month?

4.6.9.3 Production strategies

- Describe your monthly labour requirements

How many direct and indirect workers will you need? Direct workers are production and sales

What level of skills do you require of your workers? (List employees skills needs according to their various functions, where appropriate

What will be the total cost of production labour per month?

What preliminary production expenses will you incur?

What will be your monthly production overheads? Example: rent electricity, telephone and water etc.

What will be the production cost per unit?

What will be the total cost of production in a given period? (Example: per week, month, quarter or year)

4.6.9.4 Production process/service and government regulations

- Describe the production process

Input

Transformation

(Adding value)

Distribution

of output

Exchange

Transaction

What external factors are likely to affect your production/service process?

How do you intend to minimize the impact of these external factors?

- Identify the government regulations that will affect your business.

What permits and licenses will you require before you start your project, from whom, at what cost and how long do they take to get?

What approvals and compliances are regularly renewable and at what cost?

Which other regulations are likely to affect your particular business?

4.10 FINANCIAL PLAN

In the financial plan, you will deal with the financial aspects of your proposed business. To gauge your future financial potential, you will prepare pro-forma balance sheets, pro- forma profit and loss accounts/Income statement and a projected cash flow statement. You will also determine the break-even level of sales and calculate the expected profitability ratios of your business. Finally, you will indicate your financial requirements and proposed capitalisation.

4.10.1 Methods of Financing (Sources of funds)

a. Personal funds

b. Family/ friend loans and gifts

c. Angel investor

d. Venture capital

e. Grants

f. Personal loan

g. Business loan

4.10.2: Profit and loss projections (Income statement)

- An income Statement is a financialstatement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary ofhow the business incurs itsrevenues and expensesthrough both operating and non-operating activities. It alsoshows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Also known as the "profit and loss statement" or "statement of revenue and expense"

- A summary of a management's performance as reflected in the profitability (or lack of it) of an organization over a certain period. It itemizes the revenues and expenses of past that led to the current profit or loss, and indicates what may be done to improve the results..

Major items on the Income statement are revenues/sales and costs incurred. Specifically, it shows:

i. Cash sales

ii. Credit sales

iii. Other income

iv. Total sales

v. Direct costs (raw materials, labour, salaries, etc)

vi. General expenses and overheads (rent, electricity, water, etc)

vii. Total direct costs

viii. Gross profit/loss

ix. Net profit/loss

AN EXAMPLE OF AN INCOME STATEMENT.

PROFIT AND LOSS YEAR COMMENCINGY1Y2Y3

Sales income

Cash sales

Credit sales

Other

Total sales A

Less direct costs (cost of goods sold)

Materials or stocks

Labour

Promotion

Sales wages and commissions

Transport

Other

Total direct cost B

GROSS PROFIT A-B=C

GROSS PROFIT % OF SALES

General expenses and overheads

General marketing

General administration

Communications

Office consumables

Rent

Water

Electricity

Repairs/decoration

Insurance

Interest on loans

Leasing/hire purchase expenses

Depreciation

Other

Total expenses and overheads D

NET PROFIT BEFORE TAX C-D=E

Provision for tax F

Net profit after tax E-F=G

4.10.2: Balance sheet projections

A condensed statement that shows the financial position of an entity/Organization on a specified date (usually the last day of an accounting period).

Major items shown by the balance sheet are assets and liabilities. Specifically, it shows

i. Current assets ( cash, bank deposits, Inventory, finished goods, debtors, etc)

ii. Fixed Assets ( Premises, Plant and equipment, vehicles, furniture and fittings, etc)

iii. Current liabilities ( trade creditors, tax and insurance, hire purchase creditors, etc)

iv. Long term loans

AN EAMPLE OF A BALANCE SHEET:

BALANCE SHEET At start-upYear 1Year 2

Fixed assets

Premises

Plant &equipment cost

Vehicles at cost

Furniture & fittings at cost

Other

Accumulated depreciation

Total fixed assets A

Current assets

Raw materials

Finished goods

Debtors

Bank deposit

Cash

Other

Total current assets B

TOTAL ASSETS A+B=C

Less current liabilities:

Trade creditors

Tax and insurance

Hire purchase creditors

Directors loans to the business

Other

Total current liabilities =D

NET ASSETS C-D=E

Represented by:

Capital introduced

Long term borrowing

Profit brought from P & L account

TOTAL CAPITAL EMPLOYED

4.10.3: Cash Flow Statement

Cash flow statements and projections express a business's results or plans in terms of cash in and out of the business, without adjusting for accrued revenues and expenses. The cash flow statement doesn't show whether the business will be profitable, but it does show the cash position of the business at any given point in time by measuring revenue against outlays/expenses The following items are listed in the order they need to appear on your cash flow statement:

i. Cash refers to cash on hand in the business.

ii. Cash sales are income from sales paid for by cash.

iii. Receivables is income from the collection of money owed to the business resulting from sales.

iv. Other income is income from investments, interest on loans that have been extended, and the liquidation of any assets.

v. Total income is the sum of total cash, cash sales, receivables and other income.

vi. Material/merchandise is the raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.

vii. Direct labor is the labor required to manufacture a product (for manufacturing operations only) or to perform a service.

viii. Overhead is all fixed and variable expenses required for the operations of the business.

ix. Marketing/sales is all salaries, commissions and other direct costs associated with

x. Taxes are all taxes, except payroll, paid to the appropriate government institutions.

xi. Loan payments are the total of all payments made to reduce any long-term debts.

xii. Total expenses are the sum of material, direct labor, overhead expenses, marketing, sales, R&D, G&A, taxes, capital and loan payments.

CASH FLOW STATEMENT

JANFEBMARAPRJUNJULAUGSEPOCTNOVDECTT

Revenue

Cash sales

Credit sales collected

Capital introduction

Other income

Total revenue A

Direct costs

Materials or stocks

Labour

Promotion

Sales wages and

Commissions

Transport

Total direct costs B

General overheads

General marketing

General

Administration

Communication

Office consumables

Establishment

Expenses

Rent

Water

Electricity

Repairs/decoration

Insurance

Interest on loans

Leasing/hire purchase

Capital assets

Vehicle costs

Owners drawings

Total O/H Costs C

Other payments

Repayment of loans

VAT

Income tax

Total other payments D

TOTAL PAYMENTS B+C+D=E

Monthly surplus/deficit A-E=F

Opening cash

Cumulative surplus/deficit

4.11: Revision questions

1. Choose the correct answer about a financial plan of a business plan (10 marks)

ii. Why is balance sheet prepared?

a. to show debtors and creditors at a certain time

b. to show how much profit a business makes

c. to show the financial position of a business at a certain time

[c]

d. to show total debit equals total credit

e. None of the above

iii. Which of the following information does the balance sheet show?

a. gross profit

[b]

b. capital

c. sales

d. expenses

e. both A and B are correct

iv. Which of the following is a use of fund in running a business venture?

a. Purchase of equipment

b. Sale of company assets

c. Inventory procurement

[d]

d. both A and C are correct

e. Cash income

v. Which of the following does not appear on a cash flow statement?

a. Sales

b. Revenues/collections

c. direct costs

d. General overhead cost

[a]

e. A, B and C are correct

vi. Which one of the following is one of the functions of a cash flow statement?

a. to show amount of cash at bank

b. to show sales and expenses at a certain time

c. to show the financial position of a business at a certain time[a]

d. C and D are correct

e. None of the above

vii. Which of the following information does not appear on the income statement?

a. Sales

b. Capital

c. gross profit

[b ]

d. expenses

e. None of the above

viii. On which part of the financial statement can we find Plant and equipment?

a. Balance sheet

b. Income statement

c. Cash flow statement

[a]

d. On balance sheet and cash flow statement

e. None of the above

ix. viii. Which of the following is a source of fund for starting a business venture?

a. Bank loan

[d]

b. Balance sheet

c. Personal savings

d. A and C are correct

e. Income statement

x. Which of the following is a function of Income statement?

a. To show gross income

b. To show net income

[d ]

c. To show total expenditure

d. All A, B and C are correct

e. To show assets and liabilities

xi. Which of the following is not a liability item on the balance sheet?

a. Bank loan

[c ]

b. Hired machinery

c. Equity

d. Personal loan

e. None of the above

2. Briefly outline any five components of customer analysis of the business plan document

3. Describe briefly the main importance of having a well written executive summary of the Business Plan document

4. Describe briefly the main importance of having a well written table of contents of the Business Plan document

5. Briefly outline any five components of market analysis of the business plan document

CHAPTER FIVE: STARTING A NEW BUSINESS VENTURE

5.1: Environmental Assessment:

The environment is the most comprehensive component in the venture creation process. It includes all the factors that affect the decision to start a business, for example, government regulation, competitiveness, and life cycle stage.

Within specific industries and in specific geographic regions, environmental variables and the degree of their impact will differ. The new venture process begins with an idea for a product, service, or business. In order to succeed in business undertaking, an entrepreneur should scan the environmental concerned before entering the venture. An environmental assessment is synonymously used along with the term environmental scanning. This is very vital for any business undertaking venture. When entrepreneur performs an environmental assessment she/he will use the tool termed as SWOT Analysis.

5.1.1: External Environment Analysis (Opportunities and Threats)

Once the business undertaking has identified its customer tend to be, important values it holds, type of products/services it produces renders, and entrepreneur, it should know the part of the environment it needs to monitor to achieve her goals. Business entity has to monitor the external macro environmental forces. When these macro environmental forces are supportive to the business ideas, they are categorized as opportunities. But when they are potentially hindering the implementation of the business ideas, they categorized as threats. Examples of external environment factors/forces are:

OPPORTUNITIES THREAT S

A: Political forcesi. Presence of stable political stability Presence of unstable political stability

ii. Presence of favorable employment legislation Absence of favorable employment legislation

iii. Presence of good government orientation and stability Presence of poor government orientation and instability

iii. Presence of good foreign trade policies Presence of poor foreign trade policies

iv. Presence of good tax laws and policies Presence of poor tax laws and policies

iii. Presence of fair competition laws and policies Absence of fair competition laws and policies

OPPORTUNITIES THREAT S

B: Economic forcesi. It is relatively easy to access fund and capital for starting business Unavailability of capital to finance business startups

ii. Raw materials and commodities are readily available and cheap Raw materials and commodities are hardly available, at very high prices

iii. Energy costs are relatively low and supply is reliable

Energy costs are very high and supply erratic and unreliable

iv. Stable Exchange rates

Fluctuating Exchange rates

Low unemployment rate, and high workforce skill levels.High unemployment rate, and low workforce skill levels.

C: Natural/environmental forcesii. Rare occurrences of natural disasters like floods, earthquakes, and volcanoes high occurrences of natural disasters like floods, earthquakes, and volcanoes

D: Demographic forcesi. Huge total population is a potential marketSparse total population

ii. Favorable population distributionunfavorable population distribution

iii. Favorable population density unfavorable population density

iv. Favorable age group distributionunfavorable age group distribution

v. Favorable birth and death rateunfavorable birth and death rate

vi Favorable life expectancy at birth unfavorable life expectancy at birth

5.1:2 Internal factors analysis (Strength and weakness)

When the following factors are present in the business enterprise, we call them strengths. But when they are absent/ lacking, we call them weaknesses. Some of the common internal strengths and or weakness are

SnStrengths Weakness

1Availability of distinctive competencesAbsence of distinctive competences

2Adequate internal financial resourcesInadequate internal financial resources

3Availability good competitive skillsAbsence of competitive skills

4. Availability of proprietary technologyLack of proprietary technology

5Presence clear strategic directionNo clear strategic direction

6Presence of managerial depth and talentsLack of managerial depth and talents

7Resilience to competitive pressureVulnerable to competitive pressure

8Access to economies of scaleLack of access to economies of scale

9Presence of competitive advantagePresence of competitive disadvantage

5.2: Sources of BusinessIdeasBusiness ideas are all around you. Some business ideas come from a careful analysis of market trends and consumer needs; others come from chance/coincidence. If you are interested in starting a business, but don't know what product or service you might sell, exploring these ways of getting business ideas flowing will help you choose.

i. Examine your own skills set for business ideas.Do you have a talent or proven track record that could become the basis of a profitable business?

The other day I spoke to a man who had spent years managing cleaning services at a hospital. Today he runs his own successful domestic and business cleaning service. An ex-logger I know is now making his living as an artist; he creates "chainsaw sculptures" out of wood. And the examples of professionals who have started their own agencies or consulting service businesses are legion.

To find a viable business idea, ask yourself, "What have I done? What can I do? Will people be willing to pay for my products or services?"

ii. Keep up with current events and be ready to take advantage of business opportunities.If you read or watch the news regularly with the conscious intent of finding business ideas, you'll be amazed at how many business opportunities your brain generates. Keeping up with current events will help you identify market trends, new fads, industry news - and sometimes just new ideas that have business possibilities.

iii. Invent a new product or service.Think back 30 years ago. Was there a huge demand for anti-virus software, Internet Service Providers, or desktop computers? No! The key to coming up with business ideas for a new product or service is to identify a market need that's not being met..

Look around and ask yourself, "How could this situation be improved?" Ask people about additional services that they'd like to see. Focus on a particular target market and brainstorm business ideas for services that that group would be interested in.

iv. Add value to an existing product.The difference between raw wood and finished lumber is a good example of putting a product through an additional process which increases its value, but additional processes are not the only way value can be added. You might also add services, or combine the product with other products. For instance, a local farm which sells produce also offers a vegetable delivery service; for a fee, consumers can have a box of fresh vegetables delivered to their door each week.

What business ideas can you develop along these lines? Focus on what products you might buy and what you might do to them or with them to create a profitable business.

v. Investigate other markets.Some business ideas aren't suited to local consumption - but appeal greatly to a foreign market. My own little town is surrounded by acres of wild blueberries. For years the bushes produced berries that mainly fed bears and birds; B.C. has a thriving blueberry industry that doesn't leave room for a wild blueberry market. But one entrepreneur realized that there is a high demand for products such as these in Japan - and those same wild blueberries are now being harvested and shipped. Finding out about other cultures and investigating other market opportunities is an excellent way to find business ideas.

vi. Buy a Franchise or an Existing Business

Many times, the fastest and easiest way to start a business is to simply buy an existing business or franchise. Franchises are attractive because theyve already proven successful and you are simply buying into their system. Existing businesses are attractive because you can pick and choose the right business and most of the legwork has already been done.

vii. Get on the bandwagon.Sometimes markets surge for no apparent reason; masses of people suddenly "want" something, and the resulting demand can't be immediately met. For example, during the SARS epidemic, there was an insatiable demand for facial masks in several countries - and many entrepreneurs capitalized on this business idea.

A "bandwagon effect" is also created by larger social trends. There is much more of a demand for home-care services for the elderly than is currently being supplied. And the trend for pets to be treated as family members continues, creating demand for all kinds of pet-related services that didn't exist even ten years ago.5.3 Tips for Starting a Business that willsucceedi. Do what you love.

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