cam 206 module - entrepreneurship

CAM 206: ENTREPRENEURSHIP AND SMALL BUSINESS

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ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT


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TABLE OF CONTENTS

Contents Assignments/self-tests ..................................................................................................................... 3

Examinations ................................................................................................................................... 3

Module Objectives .......................................................................................................................... 3

LESSON 1: INTRODUCTION .......................................................................................................... 4

LESSON 2: THE PROCESS ENTREPRENEURSHIP MYTHS ............................................................... 8

LESSON 4: WAYS OF GETTING INTO SELF EMPLOYMENT.......................................................... 15

LESSON 5: IDENTIFICATION OF A BUSINESS OPPORTUNITY...................................................... 23

LESSON 6: TYPES OF ENTREPRENEURS ...................................................................................... 26

LESSON 7: ENTREPRENEURIAL SKILLS ........................................................................................ 29

LECTURE 8: THE ENTREPRENEUR’S TASKS ................................................................................. 32

LECTURE 9: ENTREPRENEURIAL MOTIVATION .......................................................................... 35

LECTURE 19: SOURCES AND TYPES OF BUSINESS FINANCE ...................................................... 38

LESSSON 10: THE ENTREPRENEUR AND RISK ............................................................................ 46

LECTURE 11: COPING WITH COMPETITION ............................................................................... 49

LESSON 12: BUSINESS INCUBATION .......................................................................................... 56

Public/Private Incubators ...................................................................................................... 59

LESSON 13: THEORIES OF ENTREPRENEURSHIP ........................................................................ 63

LESSONS 14 &15: THE BUSINESS PLAN ..................................................................................... 69


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CAM 206: ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT

Introduction

The module introduces the learner to entrepreneurship and small business

management. The learner will gain an appreciation of tools on how to identify business

opportunities and other related issues in entrepreneurship and small business

management.

Assignments/self-tests

There are two (2) assignments and two (2) continuous assessment tests that the learner

will undertake in the course of the study. These assignments will account 30% of the final

score.

Examinations

The examination will be a sit-in at the appropriate centre to be advised and will

contribute 70% of the final score.

Module Objectives

At the end of the course, the student should be able to:

1) Understand the concept of entrepreneurship and small business.

2) Appreciate the role of entrepreneurship in society.

3) Prepare a business plan

Recommended reading

Kuratco, D. F. & Hodgets, R. M. (2007). Entrepreneurship Theory, Process,Practice.

Quebec, Canada: Thomson, Southwestern

Additional reading

Hisrich, R. D., Peters, M.P., & Shepherd, D. A. (2008). Entrepreneurship (7th Ed. ) New

York: M cGraw Hill.

Holt, H D. (2003). Entrepreneurship (New venture creation). India: Prentice Hal


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LESSON 1: INTRODUCTION

1.1. Introduction

This will be the first lesson. The learner will be expected to know basic definitions

regarding entrepreneurship. The terminologies include entrepreneurship among others.

1.2: Lesson objectives

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

1) Define the term entrepreneur and other related terminologies

2) Highlight the advantages and disadvantages of self-employment

1.3 Lesson outline

This lesson is organized as follows:

1. Introduction

2. Lesson objectives

3. Lesson outline

4. Definition of terms

5. Advantages of self-employment.

6. Disadvantages of self-employment.

7. Revision questions

8. Summary

9. Suggested reading

1.4 Terminologies

Self-employment

A person is said to be self-employed when he has identified a business opportunity,

started a business and is involved in running the business.

Entrepreneur

Self-employed people are commonly referred to as entrepreneurs. Entrepreneurs are

people who are able to identify business opportunities in a certain environment, gather

and put in place the necessary resources and start a business enterprise.

In this course, the terms entrepreneur and self-employment shall be taken to mean the

same thing.


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A small Business Enterprise

A business is considered small if it meets the following criteria:

a) It is independently owned, operated and financed

b) One or very few people run the business

c) It has fewer than 50 staff

d) It has relatively little impact on the industry within which it operates

A business opportunity is any idea that an entrepreneur can exploit to make profit.

Entrepreneurial attributes: These are the characteristics that are often possessed by

successful entrepreneurs.

INTRAPRENEUR

SOCIAL ENTREPRENEURSHIP

Entrepreneurial competencies: Are some of the skills an entrepreneur an entrepreneur

requires to manage the business successfully, for example: financial skills, human

resource management skills etc.

Manufacturing: This is the process of transforming a raw material from its original form

to another one that is acceptable to the user for example a person in the Jua Kali sector

transforms metal into “jikos”, “sufurias” etc.

A carpenter transforms wood into furniture etc.

Service: This is the provision of intangible items. For example, a person who owns a

canteen, a hair dresser, a barber etc.

Wholesaling: This is the buying and selling of goods in bulk. For example, buying maize

from Kenya Cereals and Produce Board and then selling it to other buyers.

Retailing: This is the sale of goods to the final user or consumer. Supermarkets,

boutiques etc. are examples of retail businesses.

1.5 ADVANTAGES OF SELF EMPLOYMENT TO INDIVIDUALS

Independence

Independence: this means that you are be your own boss. You are able to make your own

decisions regarding your business.

Potential


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You are able to exploit your potential to full capacity and become more creative and

innovative by exploiting all your talents and abilities.

Employment creation

You are able to create employment: not only are you able to employ yourself, but as the

business grows and expands, you will be able to employ other people.

Income

The business provides you with a source of income from the profits derived from the

business.

Prestige

Successful entrepreneurs are admired in society and their opinions are sought by many

people.

Role model

You become a role model to young people who would also like to be entrepreneurs.

Ownership

Self-employment provides you with an opportunity to own a business enterprise

DISADVANTAGES

Risk of failure

Risk of failure can be very high especially for someone engaging in business for the first

time. This could be due to lack of experience among other factors.

Personal liability

Most start-ups are usually registered as sole proprietorships which means that the

entrepreneur is liable for any losses in the business.

Uncertain income

Frequently limited income especially before the business breaks even and starts to make

profit and grow

Stress due to long working

Owning and running a business requires a lot of commitment of time and effort

Loneliness

Owning and running a business means that the entrepreneur has to spend long hours in

the business most often at the expense of his social li


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Summary

In this lesson, you learned:

1) how to define entrepreneurship terminologies

2) advantages and disadvantages of self-employment

Suggested reading

Kuratco, D.F., & Hodgets, R.M. (2007). Entrepreneurship. Theory, Process, Practice.

Quebec, Canada: Thomson South western

1.7 Revision questions

1. Define the term entrepreneurship

2. Identify five examples of manufacturing businesses

3. Identify five examples of retail businesses

4. Identify five examples service businesses


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LESSON 2: THE PROCESS ENTREPRENEURSHIP MYTHS

2.1 Introduction

Welcome to the second lesson on Entrepreneurship and Small Business Management.

The lesson is about the entrepreneurship process and entrepreneurship myths.

2.3 Lesson outline

The lesson is organised as follows:

2.1 introduction

2.2 lesson objectives

2.3 lesson outline

2.4 The entrepreneurship process

2.5 entrepreneurship myths

2.6 revision questions

2.7 summary

2.8 suggested reading.

2.2 Lesson objectives:

At the end of the lecture you should be able:

1) Explain the entrepreneurship process

2) Describe the entrepreneurship myths

1)


1) Differentiate between self employment and entrepreneurship

2) Outline the benefits of self employment to individuals

2) Highlight the disadvantages of self employment to an individual

3)


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2.4 THE ENTREPRENEURSHIP PROCESS

An entrepreneur must find, evaluate and develop an opportunity by overcoming the

forces that resist the creation of something new. The process of starting a SBE involves

five distinct phases:

Phase one: identification of a business opportunity

An opportunity is a gap in the market where the potential exists to do something. New

opportunities exist all the time but they do not necessarily present themselves. They must

be looked for. The identification of new opportunities is one of the key tasks of

entrepreneurs who must constantly scan the business landscape to find the gaps left there

by existing players (including themselves) in the market place.

Phase two: evaluation of the environment

Once an opportunity has been identified, it must be carefully evaluated. This involves

looking at the opportunity at length and establishing if it is viable.

An opportunity must fit the personal goals and skills of the entrepreneur. The assessment

of the opportunity requires answering the following questions: What market need does it

fill? What is the nature of completion in the industry where the opportunity occurs? etc.

Phase three: develop a business plan

A business plan is a document that demonstrates persuasively that enough

products/services can be sold for the business to become viable. A good business plan is

essential for developing the opportunity and determining the resources required, for

obtaining those resources and successfully managing the resultant venture.

Phase four: determine the resources

An entrepreneur must determine the resources required for exploiting the opportunity.

Care must be taken not to under estimate the amount or variety of the resources required.

These resources should then be acquired in a timely and cost effective manner.

Phase five: open and manage the enterprises


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After the successful acquisition of resources, the entrepreneur must use them to start and

manage his business successfully. He needs to develop an appropriate management style,

understand the key variable for the success of the business, identify potential problems

and put in place control systems. Some entrepreneurs have difficulty managing and

growing their businesses.

2.5 LESSON 2 B: ENTREPRENEURIAL MYTHS

The following are some of the myths of entrepreneurship as stipulated in Kuratco &

Hodgetts, 2007).

1) Entrepreneurs are doers not thinkers

2) Entrepreneurs are born, not made

3) Entrepreneurs are always inventors

4) Entrepreneurs are academic and social misfits

5) Entrepreneurs must fit into the profile presented in books and articles which

describe the characteristics which are supposed to be possessed by the successful

entrepreneur

6) All the entrepreneur needs is money for the business to succeed

7) Entrepreneurs are high risk takers (gamblers)

8) All entrepreneurs must first fail before they can succeed.


1) Outline five other myths associated with entrepreneurship

2) Come up with explanations to counter the myths listed above


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1.5 Summary

In this lecture you have learnt:

1) The process of entrepreneurship

2) The myths associated with entrepreneurship

1.6 Suggested reading

Kuratco & Hodgetts: Entrepreneurship theory, process and practice


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LESSON 3: REQUIREMENTS FOR ENTRY INTO SELF EMPLOYMENT

3.1 Introduction

Welcome to the third lesson on Entrepreneurship and Small Business Management. The

lecture is divided into two sections: section one is on the entrepreneur’s contribution to

national development; section two deals with requirements for self-employment.

3.3 The lesson is organised as follows:

3.1 introduction


3.3 lesson outline

3.4 The entrepreneur’s contribution to national development

3.5 requirements for entry into self-employment


3.7 summary

3.8 suggested reading

2.2 Lesson Objectives:


1) Explain the entrepreneurship contribution to national development

2) Analyse the requirements for self-employment

4)


3) Differentiate between self employment and entrepreneurship

4) Outline the benefits of self employment to individuals

5) Highlight the disadvantages of self employment to an individual

6)


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3.4 HOW ENTREPRENEURS CONTIBUTE TO NATIONAL DEVELOPMENT

National development is concerned with the sound and proper utilization of resources

so as to improve the living standards of the people through the provision of quality goods

and services.

Some of the ways through which an entrepreneur can contribute to national

development include the following:

1) Employment creation not only to self but to others as well

2) Improving of the standards of living

3) Contribution to the GDP and GNP of the country

4) Wealth creation

5) Seedbed for industrialization through creativity and innovation

6) Source of revenue to the government

7) Generation of foreign exchange

8) Conservation of foreign exchange through export of goods

9) Conservation of the environment

10) Reduction in crime etc.

3.5 REQUIREMENTS FOR SELF EMPLOYMENT

There are certain things that must be put in place before one starts his own business.

The business idea

This is the business opportunity or the gap you have identified and want to fill.

Capital

This is the initial capital required by an entrepreneur to meet pre operational expenses

such as licences etc.

Skills

A skill is an ability to perform a certain task

An entrepreneur requires two types of skills to run his business successfully:


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a) Technical skills is the skill required to perform a specific task successfully e.g.

accounting skills, carpentry skills etc.

b) Management skills are the skills required for the daily running of the business

e.eg people management skills, money management skills etc.

Business premises

The business must be located somewhere. The entrepreneur needs to establish where the

business will be located, the size of the business premises. He needs to obtain the finance

to rent or purchase the premises.

Technology

This is the machinery, tools or equipment the entrepreneur will require in manufacturing

the goods or providing the services.

Market

These are the potential customers. Business cannot be started before establishing the

existence of potential customers.


1) outline five requirements of initial capital

2) explain five characteristics of a good business location

3.7 Summary


1) Definition of the main terms in entrepreneurship

2) Advantages of self-employment to an entrepreneur

3.7 Suggestion for further reading



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LESSON 4: WAYS OF GETTING INTO SELF EMPLOYMENT

4.1 Introduction

Welcome to the fourth lesson on Entrepreneurship and Small Business Management. The

lecture is on ways of getting into self-employment.

4.2 Lesson objectives


1) list the various ways of getting into self-employment

2) highlight the advantages and disadvantages of each of these methods

Lesson outline

This lesson is organised as follows:

4.1 introduction


4.3 lesson outline

4.4 ways of getting into self-employment

4.5 advantages of buying an existing business

4.6 disadvantages of starting from scratch

4.6 franchising

4.7 advantages of franchising

4.8 disadvantages of franchising

4.4 The following are the ways people get into self-employment:

Buy an existing business

Starting from scratch


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Franchising arrangements

Inheriting a family business

4.5: Buying an existing business

Advantages

i. Inherit an existing clientele

ii. Physical facilities (location) are already in place

iii. Reduces the risk of failure

iv. Inherent equipment (experiences and production is already high)

v. Inherent good will

vi. Reduces the need to spend time, money, energy for a thorough planning (initial)

hence profits come faster. Stress of starting from scratch

vii. Inherent faster proven management system

viii. In most cases its inventory or stock is already present

ix. Suppliers and inherited suppliers

x. Inherent equipment

xi. Financing the purchase of the bus is restricted to one single transaction

4.6 Starting from scratch

Disadvantages

a) Chances of failure are high.

b) Unproven operations therefore running the business may be more difficult.

c) Possibility of improper/ inadequate planning.

d) No history to show suppliers or banks/ No history to fall on.

e) No knowledge of how competitors behave;


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f) Stressful

g) Expensive in terms of advertising etc.

4.7 Franchising

A franchise is an agreement that brings a franchiser (the parent company of a product or

method) with a franchisee (small business that pays fees and royalties for exclusive rights

to local distribution of the product or service.

Through the franchise agreement the franchisee gains the benefit of the parent company’s

expertise, experience, management systems, marketing and financial help. The franchiser

benefits by expanding its operation through building a base of franchisee rather than

using its own capital and resources for expansion. The franchiser normally regulates the

location of the franchises so that they do not compete against each other.

Franchising systems

There are two types of franchises: product distribution franchises and business format

franchises

a) Product/trade name franchising

This allows the franchisee (the dealer) to buy product from the franchiser (the supplier) or

to license the use of a trade name.

This approach typically connects a single manufacturer with many deals. The idea is to

make product available to consumers in a specific geographical region through exclusive

dealers. Soft drink bottlers and petrol stations for example use this type of franchising.

b) Entire Business Franchising

This means that the franchisee purchases not only the franchiser products but also the

entire way of doing business including operational procedures, marketing strategies,

physical building layout, equipment, and full business services.


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Advantages and disadvantages of franchising.

Advantages to the Franchisee

Proven product

The franchisee gets to sell a product or service that has proved to be successful.

Customers are aware of the product. They know the name and they know what to expect

when coca cola launched Dasani, more likely bought it because of the fact that it is made

by coca cola.

Marketing experience

Franchisers spend millions advertising to help build an image that independent business

could not afford. Franchisees share in theses advertising costs, usually based on their

gross revenues, but it is still a great advantage to have access to the marketing expertise

of the franchisor.

Financial assistance

Some franchisors provide financial assistance to franchisees in the form of trade credit on

inventory or overhead reductions by the franchisor choosing, purchasing and owning

buildings.

Professional guidance

A franchisor can provide technical and managerial assistance not available to an

independent business. Most franchisors provide training, both as preparation for running

the business and as instruction after the business takes off. A good franchisor is available

to provide day to day assistance and professional guidance should a crisis arise.

Franchisees can also receive a great deal of technical help regarding store layout and

design, location, purchasing and equipment.


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Opportunity to learn about the business

For people who go into business on an unfamiliar field, franchising provides an

opportunity to learn. In fact, some franchisors prefer that their franchisees not have

experience in that particular field. They prefer to train them from scratch so there are no

bad habits to break.

Recognized standards

Franchisors impose quality standards on for franchisees to follow. This ensures

consistency to customers. As a franchisee, you will benefit from quality control standards

of cleanliness, service and productivity.

Efficiency

Because of increased efficiency, a franchise can sometimes be stated and operated with

less capital than it takes to start an independent business. Franchisors have already been

through the learning curve and learnt their lessons. Inventory needs such as what to stock

and what will sell quickly, are known before you open the doors so you will not waste

money on inventory, equipment or supplies that you don’t need. Many franchisors often

provide financial resources for start-up and working capital inventory.

Potential for growth

If you are successful with a franchise, you will have the opportunity to multiply that

success by expanding to other franchises in other locations.

Disadvantages to the franchisee

Cost of franchise

The services, assistance and assurance in buying a franchise comes at a price. Every

franchisor will charge a fee and or a percentage of the sales revenue to franchiser. These


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may seem excessive after you have been in business for a while and you begin to feel

how they affect your bottom line.

Restriction of freedom and creativity

Most people open their businesses because they have a desire for independence but franchises

have policies and procedures that must be followed to maintain the franchise agreement. Also the

size of your market will be limited by territorial restrictions. Also, although you may feel that

some products, promotions or policies are not appropriate for your area, you will have little

recourse after the agreement has been signed

Overdependence on the franchisor

Franchisors do not always know what is best for every set of local conditions. The franchisee

must be willing and able to apply his own managerial decisions in running the business in a way

best suited to the local market and avoid being over dependent on the franchisor.

The franchisee might have very high expectation which might not be realized.

Termination of the franchise agreement

There could be difficulty in terminating the franchise agreement or having it terminated

against you.

Most franchise agreements run between 5-20 years. What if you want to transfer your

rights to a family member or sell the franchise to someone else or terminate the

agreement?

Poor performance of other franchisees

The poor performance of one franchisee can seriously affect your business as franchisees

are looked as one unit because the implicit message from franchises is that “we are all

alike” for good or bad

Advantages to the franchisor


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Expansion with limited capital investment

The franchiser expands his distribution sources with limited equity investment. Fees from the

franchisee provide capital for the franchiser rather than having to borrow from lenders or attract

outside investors.

Multiple sources of revenue

The franchise fee which is paid when the agreement is signed, a certain percentage of the

franchisee monthly gross revenue and money earned from selling the necessary products

and suppliers to franchisees earn the franchisor money from many sources.

Motivated Franchisees

Try their best to ensure the success of the business which translates to more money of franchiser.

Bulk purchasing

A centralized purchasing of products and supplies allows the franchiser to take advantage

of volume discounts, since they are buying for all the franchise location.

Disadvantages to franchisor

1. Loss of control

Franchisees who do not maintain their business to the required standards reflect poorly

not only on other franchisees but also on the parent company, while the franchiser

controls the business to the extent of the franchise agreement.

Franchisees are still independent business people and franchiser must get permission on

them before any products are changed, added or eliminated.

2. Profit sharing with the franchisee.

3. Disputes may arise over issues such as payment of fees, termination of franchisee

agreement, method s of operation, etc.


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1) Outline the disadvantages of buying an existing business

2) Highlight the advantages of starting a business from scratch

4.10 Summary


3) The various ways of getting into self-employment

4) Advantages of buying an existing business

5) Disadvantages of starting a business from scratch

6) Advantages and disadvantages of franchising

4.11Suggested reading



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LESSON 5: IDENTIFICATION OF A BUSINESS OPPORTUNITY

1.1 Introduction

Welcome to the fifth lesson on Entrepreneurship and Small Business Management. The

lecture deals with the various factors that can help a potential entrepreneur to identify a

business opportunity.



1) List the various factors that can aid an entrepreneur to identify a business

opportunity.

2) Provide examples of business opportunities you have identified.

5.3 Lesson outline

The lesson is organised as follows|

5.1 introduction


5.3 lesson outline

5.4 factors that assist an entrepreneur to identify a business opportunity


5.6 summary


5.4 Some factors that assist an entrepreneur to identify a business opportunity

1. Environment

The entrepreneurs studies /scans the environment to see what business opportunities may

exist there. He looks at the demographic patterns in terms of composition of the

population regarding age, gender, occupation, purchasing income, the lifestyle, culture

and religion etc.


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2. Government Policy

The entrepreneur must keep up to date with the latest information including government

policies as these could offer business opportunities e.g. the laptop project.

3. Prior work experience

Working for someone else in your area of interest can help you avoid many errors and

begin to build competitive advantages. It gives you the chance to ask yourself: “what

would I do differently if I was running this business?

5. Exploit your talents/hobbies

You could have certain talents that you could exploit to start a business.

6. A hobby is something that a person enjoys doing. This can also be exploited to start a

business.

7. Skills

You could have undergone some kind of training and acquired the relevant skills. This

could be exploited to start a business.

8. Exploit the change in technology.

Technology is dynamic and keeps changing. The changes in technology often provide

business opportunities.

9. Exploit the change in lifestyles, tastes and preferences.

10. Examine the weaknesses of existing businesses and exploit these weaknesses.

5. 5 Revision questions

List five business opportunities you have identified

5.6 Summary

In this lecture, you have learnt:

1. What a business opportunity is


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2. How to identify a business opportunity

Suggested Reading



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LESSON 6: TYPES OF ENTREPRENEURS

6.1Introduction

Welcome to the sixth lecture on Entrepreneurship and Small Business Management. The

lecture is divided into two parts. Part one tackles types of entrepreneurs and part two

looks at skills of entrepreneurs.


At the end of this lesson, you should be able to:

1) Describe the various types of entrepreneurs

2) Describe the skills required by entrepreneurs to run a business successfully

6.3 Outline

The lesson is organised according to the following outline:

6.1 introduction


6.3 outline

6.4 types of entrepreneurs


6.6 summary


6.4 Different sources have classified entrepreneurs using different criteria. In this

case entrepreneurs are classified as follows:

1. The Cantillon Entrepreneur (Named After the 18th Century French economist Richard

Cantillon)


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This is a classic type of entrepreneur who identifies an opportunity which has not been

exploited then innovates in order to exploit it. This entrepreneur brings people money and

materials together to bring entirely a new business.

2. The Industry Maker Entrepreneur

He goes beyond merely creating a new firm. The innovation is of such importance that a

whole industry is created on the back of it. They develop not only new products but also

whole technology to produce them e.g. Henry Ford who invented the Assembly line;

Thomas Edison-domestic electrical products; Bill Gates-Software operating systems

3. Entrepreneur/Corporate entrepreneur

Is a manager who operates within an established firm but does so in an entrepreneurial

fashion, usually the chief executive officer or a senior manager, they are called upon to

be innovative and to provide dynamic leadership to the organization particularly when it

is facing a period of change?

4. The Small Business Enterprise (S.B.E) Owner

This is an entrepreneur who takes responsibilities for owning and running their own

business. The business may be small because it is in its early stage of growth or the

owner may actually wish to limit their size of business because they are satisfied that it

gives them a reasonably secure income and control over their lives.

5. Technology based Entrepreneur

They are especially important in modern business as they take advantage of new

scientific development especially in areas of information technology, biotechnology and

engineering science to offer their benefit to the wider world. Investors are attracted by the

high growth potentials of such business.

6. Serial and portfolio Entrepreneurs

The motivations of entrepreneurs are many and varied; they are driven by desire for

independence, prestige, a sense of achievement as much as if not more than by a desire to

make money. This is the most evident in a group of entrepreneurs whom having led one

business to success move on to start another. They are called serial or habitual

entrepreneurs.

Portfolio entrepreneurs are those who run several businesses simultaneously.


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7. Craft Entrepreneurs

Any entrepreneur who uses a particular knowledge or skill to start a business is called a

craft entrepreneur. Such entrepreneurs have the required technical job experience but they

usually lack managerial training. They have the following characteristics: they are usually

paternalistic – they manage the business as his/her family; they are reluctant to delegate

authority; they start off and operate with limited capital. They usually employ family

members such business owners seek merely to make enough money to provide a steady

income for self and family.

8. Expansion Oriented Entrepreneur

Such entrepreneurs start off as craft entrepreneurs. However he takes the risk of

expanding his business and to face the challenge of changing their role from being a craft

operator to expanding craft production capacity and to grow.


1) Look around your locality and identify five different types of entrepreneurs


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LESSON 7: ENTREPRENEURIAL SKILLS

7.1Introduction

Welcome to the seventh lesson in entrepreneurship and small business management. The

lecture is about the skills required by an entrepreneur for the success of the enterprise.



1) Explain the general management skills an entrepreneur requires to run the

business successfully

2) Describe the human resource skills required by an entrepreneur for the successful

running of the business

7.3 Outline

This lesson outlined as follows:

7.1 introduction


7.3 outline

7.4 definition

7.5 general management skills

7.5 human resource management skills


7.7 summary


7.4 Definition


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A skill is simply knowledge which is demonstrated by action. It is an ability to perform a

certain task

An entrepreneur cannot successfully manage the business without certain skills.

1) The entrepreneur requires general management skills to organize the physical and

financial resources needed to run the venture.

2) Human resource management skills are needed to obtain the necessary support from

others for the venture to succeed.

7.5 Some important general management business skills include;

Strategy skills – an ability to consider the business as a whole, to understand how it fits

within its market place, how it can organize itself to deliver value to its customers, and

the ways in which it does this better than the competition.

Planning skills – an ability to consider what the future might offer, how it will impact on

the business and what needs to be done now to prepare it.

Marketing skills – an ability to see past the firm’s offerings and their features, to be able

to see how they satisfy the customer’s needs and why the customer finds them attractive.

Financial skills – an ability to manage money, to be able not only to keep track of

expenditure and to monitor cash flow, but also to assess investments in terms of their

potential and their risks.

Project management skills – an ability to organize projects, to set specific objectives, to

set schedules and to ensure that the necessary resources are in the right place at the right

time.

Time management skills – an ability to use time productively, to be able to prioritize

important jobs and get things done to schedule.

7.6 Human Resource Management Skills

Leadership skills – an ability to improve people to work in a specific way and to

undertake the tasks that are necessary for the success of the venture. Leadership is about

more than merely diverting people, it is also about supporting them and helping them

achieves the set goals.


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Motivation skills – an ability to entice people and get them to give their full commitment

to the task in hand, being able to motivate demands and understanding of what drives

people and what they expect from their jobs. If not be forgotten that for an entrepreneur

an ability to motivate himself is as important as an ability to motivate others.

Delegation skills – an ability to allocate tasks to different people. Effective delegation

involves more than instructing. It demands a full understanding of the skills that people

possess, how they use them and how they may be developed to fulfil future needs.

Communication skills – an ability to use written and spoken language effectively to

express ideas and inform others and to influence their actions.

Negotiation skills – an ability to understand what is wanted from a situation, what is

motivating others in that situation, and recognizing the possibilities of maximizing the

outcomes for all parties.

All the above human resource management skills are interrelated.

Revision questions

1) Describe the types of entrepreneurs that exist within your locality

2) List the types of skills you believe they possess.

Summary

In this lecture, you learnt about:

1)the various types of entrepreneurs

2) the skills required by entrepreneurs for success of a business

7.7 Suggestions for further reading



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LECTURE 8: THE ENTREPRENEUR’S TASKS

8.1 Introduction

Welcome the eighth lecture on entrepreneurship and small business management. The

lecture looks at the tasks performed by an entrepreneur


By the end of this lecture, you should be able to:

1) Explain the tasks performed by an entrepreneur

8.3 outline


8.1 introduction


8.3 outline

8.4 entrepreneurial tasks


8.6 summary


8.4 Entrepreneurial Tasks

Entrepreneurs differ from other types of managers in the tasks they perform. Some of the

more important ones are:

i) Owning the organization

An entrepreneur is a person who identifies a gap in the market and then innovates

in order to exploit the gap. He is the owner of the business. He works for himself.


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He is not employed by anyone. He is also described as the owner manager as he is

also involved in the management of the business.

ii) Founding new organizations

The entrepreneur is recognized as the person who undertakes the task of bringing

together the different elements of the organization (people, property, productive

resources etc.), and giving them a separate legal identity.

However, many people who “buy into” organizations that have already been

founded and then extend them, develop them or absorb them into their existing

organizations are also entrepreneurs.

iii) Innovation

Innovation is a crucial part of the entrepreneur process. Entrepreneurs must do

something new or there would be no point in their entering the market. (Peter

Drucker & J. A Schumpeter). However, innovation in a business sense can mean

a lot more than merely developing a new product or technology. The idea of

innovation encompasses any new way of doing something so that value is created.

Innovation can mean a new product/ service but it can also include a new way of

delivering an existing product/ service so that it’s cheaper/ more convenient to use

etc.

iv) Identification of a business opportunity

The identification of the new opportunities is one of the key tasks of

entrepreneurs who must constantly scan the business landscape for gaps left by

existing players. (Including themselves) in the market place. That opportunity

must then be exploited by something new (innovation) which fills the market gap.

v) Application of expertise

It has been said that entrepreneurs are characterized by the way that they bring

some sort of expertise to their jobs. This expertise may lie in their ability to

innovate or to spot new opportunities. However, they also have a special ability

in deciding how to allocate scarce resources in the situations where information is

limited.

vi) Provision of leadership


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Entrepreneurs need the support of other people both from within the business and

outside e.g. investors, customers, suppliers, credit controllers etc. If all these

people are to pull in the same direction, to be focused on the task at hand and to

be motivated, then they must be supported and directed by the entrepreneur.


Explain how the tasks of an entrepreneur differs from those of an ordinary

manager

8.6 Summary

In this lecture, you learned about the tasks performed by an entrepreneur




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LECTURE 9: ENTREPRENEURIAL MOTIVATION

9.1 Introduction

Welcome to the ninth lesson on entrepreneurship and small business management. The

lecture is about entrepreneurial motivation

9.2 Lesson objectives At the end of this lecture, you should be able to:

1)explain the internal motivating factors to an entrepreneur 2) explain the external motivating factors to an entrepreneur

9.3 Outline

This lesson is organised as follows

9.1 introduction


9.3 outline

9.4 internal motivating factors


9.6 summary


9.4 Motivation

Motivation can be internal (intrinsic) or external (extrinsic).

Entrepreneurial motivation can be internal and/or external. This section looks at the

internal motivators to an entrepreneur.


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Entrepreneurs are often driven by the following factors:

Profit maximization

The desire to make as much money as possible can be a very powerful drive to

entrepreneurship. This will drive the entrepreneur to work extremely hard, become

innovative and even diversify their businesses.

Desire to succeed

Successful entrepreneurship brings not only economic power but also social power where

the entrepreneur. The entrepreneur’s opinion will be sought after as he will be a respected

member of the society.

Independence/self-reliance

Entrepreneurs are usually independent people who like to be their own bosses and don’t

like to be controlled by others. They like to do things their own way and to be as

innovative and creative as they can.

Survival

Sometimes, people find themselves in self-employment not out of their own choice but as

the only means of survival. Such a person could have lost his salaried employment or

cannot secure salaried employment for some reason.

Adventure

You must be adventurous by taking risks or facing challenges without knowing the

outcome. This gives you the opportunity to explore new areas and opportunities and helps

you to enhance your innovativeness.

Power

Highly successful entrepreneurs are some of the most powerful people in the world. They

have power over the lives of people and institutions that rely on them for employment

etc.

Self-actualization

Having achieved the basic human needs, you will become more confident in your

abilities. You will now afford to take time to be more creative and innovative.


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Analyse five external sources of motivation to an entrepreneur

9.6 Summary

In this chapter, you learnt about the internal factors that motivate entrepreneurs




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LECTURE 19: SOURCES AND TYPES OF BUSINESS FINANCE

9.1Introduction

Welcome the tenth lesson on entrepreneurship and small business management. The

lesson looks at the tasks performed by an entrepreneur



1) Explain the types of business finance

2) Identify sources of business finance

9.3 Outline


9.1 introduction


9.3 outline

9.4 definition

9.5 Sources of business finance

9.6 criteria for evaluating sources of business finance

9.7 types of business finance

9.8 conditions for borrowing


9.10 summary


9.4 Definition of business finance


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Note that the source and type a business finance you are likely to choose will influence

the nature of business enterprise you intend to start.

Business finance is the amount of money you need to start your business. It enables you

either to buy the machinery and equipment, build your business premises, hire labour or

meet daily obligations of your business. Finance needed to start your business is

commonly known as capital.

As an entrepreneur the primary types of capital you are likely to arrange for included

start-up capital, working capital and expansion capital. Start -up capital is the capital you

will require to begin a business while working capital is the amount of money you will

need to meet the day to day activities of the business. Expansion capital is the capital you

require to help your business grow.

9.5 The source of business finance

The source of business finance refers to where the capacity you need for starting your

business come from. Such sources may include personal savings, inheritance, borrowing

from friends, banks, Co-operatives, government organizations, non-government

organizations, among others.

9.6 Criteria for evaluating sources of business finance selection

One of your most important decisions is to select the right source of financing. The

choice affects the future of your business activities. The key decision that you will be

forced to make is to determine which is appropriate source of financing for your current

needs.

Receiving a short term bank loan, when a long term loan is required, can soon create

crisis for your business. Selling part of your business to raise capital that could have

been borrowed may be extremely costly.

When you select the right source of finance, the capital obtained is free from un-

necessary costs, risks and possibilities of losing control of your own business.

Primary evaluation factors

To determine the most suitable source of raising capital for your business, you may

consider the following factors.

a) Costs


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Which source exposes your business to the lowest degree of risk? The cost of your capital

source is measured by its impact on your earnings and not the increased expenses

incurred by the business. Consider a company that is deciding between a Shs. 20,000

loans at 10% interest or selling 25% of the shares in the business in order to raise Shs.

20,000. The business expects to pay interest on the loan of Shs. 200 per year which

would reduce its net profit by Shs. 2,000 before taxes. If the business expects to earn Shs.

30,000 interest expense would reduce it to Shs. 28,000. In the equity alternative, the net

income would be Shs. 30,000 since there would be no interest expense. However, only

Shs. 22,500 would be applicable to the present owners since Shs. 7,500(30,000x25%)

would represent the participation of the new shareholders. Therefore the income of the

business under the equity alternative would be higher, but the participation of the present

owners would be less.

You should be able to know that each capital source has its own cost. Internal sources

such as the sale or the liquidation of assets could lead to loss of revenue following

inventory disposal or added operation costs if machinery were sold to generate costs. If

you use trade credit, discount is forfeited. In reaching a decision, it is important that you

consider all relevant costs for each source.

b) Risk

You take general risks when raising capital. Use of trade credit could lead to supplier

dissatisfaction and possible damage to your credit worthiness.

Because borrowed money must be repaid with interest, debt capital imposes obligations

upon the cash flow of your business which must be paid to avoid default. A default could

cause you a number of actions such as forfeiture of collateral or forced bankruptcy. The

only money source that frees your business from the risk is equality capital because the

equity investor is the risk taker but not the business.

c) Flexibility

If you rely upon asset management to meet your capital needs then deny your business

credit extensions or inventory purchases which leads to lost sales.

Use of trade credit as a major capital source makes your business depend on a few

suppliers which denies you the chance to buy from other suppliers who charge low

prices.

Loans carry conditions that prevent your business from securing additional debts because

the assets are tied as security.


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d) Control

The use of internal financing and trade credit, is unlikely to have an impact upon the

control of the business exercised by you. If you are an equity investor you are entitled to

some degree of control in the company operations. Shares issued to your partners usually

carry voting rights in proportion to the number of shares purchased.

Lenders do not ordinarily participate in the affairs of the business but are legally entitled

to a vote in corporate matters as are common shareholders. However, major loans from

banks, insurance companies, or others may require that the lenders interest in keeping

abreast of corporate affairs could affect your control of the business.

e) Availability

Your business may be restricted in its abilities to raise capital due to non-availability of

preferred resources. Regardless of the source considered most feasible, your business

only has access to whatever is available.

9.7 Types of business Finance.

Being an entrepreneur exposes you to many types of business finance. Some of these

include:

a) Short term funds

These are funds from external sources used in your business but are repayable within a

year. Such funds include trade credit, bank overdraft, bank loan, borrowing from private

sources e.g. family, friends, relatives etc.

b) Medium term funds

These are external funds used in your business and are repayable within a period of five

years. For example you may use bank loans and loans from non-banking institutions such

as small enterprise finance company(SEFCO), Industrial commercial development

corporation(ICDC), Agricultural Finance Corporation(AFC), Industrial development

bank(IDB), Kenya Industrial Estates(KIE), Rural development fund(RDF) and many

others.

c) Long term funds


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Funds from external sources used in your business and are repayable for a period

exceeding five years are called long term funds. They may include bank loan and loans

from non-bank financial institutions such as ICDC, IDB, KIE, AFC, etc..

9.8 Factors in selecting types of business finance

Your ability as entrepreneur to obtain the finance needed is necessary for the operation of

your business. Some of these factors which may assist you in deciding the types of

finance to use are as the amount of money required.

When you set out to borrow money for your firm it is important to know the amount of

money you need from a bank or any lending institution. For huge sums of money you can

borrow from banks and non-bank financial institutions. However, for little funds you can

borrow from traders, friends, relatives, etc.

The purpose of money

In financing your new business it is necessary to determine what you need the money for.

There are many costs and expenses to consider. Some of these may include

a) Start-up costs

These are expenses which occur once when beginning your business. Some examples of

start-up costs are costs on fixtures and equipment, starting inventory, deposits for rent

and utilities, business license and permits, legal fees, and advertising for the grand

opening.

If you were opening a restaurant, you would have many start-up costs. You would have

to buy tables and chairs, for your customers to sit on, ovens and fryers to cook food,

plates, knives, spoons and forks. You would also have to buy or lease a building, pay for

a business license and restaurant permit and get your menu printed.

b) Operating expenses

These are expenses incurred daily to make the business operational/functional e.g.

payments for inventory, advertising, wage/salary, insurance, repairs to equipment,

monthly rents and other utilities.

Once your restaurant is open you will have to incur regular operating expenses. For

example you will continually have to buy food pay the cooks and the waitresses, pay

sales tax (VAT), monthly rents, replace stock, etc.


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c) Personal expenses

These are the costs that are necessary for you to live. Although the money you need to

start and operate the business is important, do not overlook the money you need for

personal of living expenses, some examples include food, transportation, clothing

insurance cover, utilities, medical bills and entertainments.

Some businesses take between 1-3 years to be able to generate profits. Hence there will

be very little for personal expenses. You must plan for these expenses when thinking

about your money needs. Sometimes people will start a new business while working on

another job or they have a spouse who earns money from an outside job. This helps to

limit the money needed to finance the business.

Conditions of borrowing

When you want to borrow money from banks or other lending institutions certain

conditions and terms may be put to you so as to protect the financiers against un-

necessary risk and poor management practices by borrowers.

Some limitations which you will encounter when you borrow money are

a) Repayment terms should the money be repaid monthly or yearly, in large sum or

by instalments

b) Security requirements

c) Periodic reporting of business progress

Collateral

Sometimes your signature is the only security the bank needs when requesting for a loan.

At times, the bank requires additional assurance that you will repay the money. The kind

and amount of security depends on the bank and on your situation.

If your financial statements cannot justify the amount of loan you need then the bank may

require you to produce any of the following security types:

a) Title deed

b) Share certificate

c) Insurance policies

d) Fixed bank deposits

e) Log book

f) Jewellery and precious stones


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Sometimes the bank may require you to look for a guarantor.

Other factors

There are additional factors you may consider when making a decision on the type of

finance to use

a) External influence e.g. when heavy borrowing makes lenders control your

business

b) The alternative sources of finance

c) The risk involved eg possibilities of losing your business in case of non-

repayment of debts, receivership.

Debt and equity financing

Debt financing refers to the borrowed funds used in the operation of your business which

are repayable in future. There are many types of debt financing. Some of them include:

a) Trade credit

b) Short term credit

c) Long term credit

Trade credit: This is money you owe your suppliers who permit you to carry inventory on

open account. A good credit experience determines your ability to repay borrowed money

Short term credit: Banks and other lenders will provide this type of money to make

purchases of inventory for special reasons such as buying inventory for the next selling

season. Such funds are useful because they increase sales which improves repayment

rate. You pay short term credit in less than one year.

Long term credit: Loans for more than a year are used for expansion or modernization of

your business. They are repaid out of accumulated profits.

Note: Money borrowed for a temporary purpose should be used in profit producing areas

of your business and will be repaid out of that operation.

Equity financing includes your personal contribution and the contribution of others whom

you agree to share profits with. You get it by relinquishing a part of your profits to other

investors. This is to say you sell an interest in tour business.

Equity funds are those which remain in the services and increase your net worth.


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1) Explain the advantages of equity financing to an entrepreneur

2) Explain the advantages of debt financing to an entrepreneur

9.10 Summary

In this chapter, you learnt about the sources and types of business financing to an

entrepreneur.




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LESSSON 10: THE ENTREPRENEUR AND RISK

10.1Introduction

Welcome to the tenth lesson on entrepreneurship and small business development. The

lecture is about the entrepreneur and risk.


By the end of this lesson, you should be able to:

1) Identify the different types of entrepreneurial risks

2) Determine the type of risk taker you are

10.3 Outline


10.1 introduction


10.3 outline

10.4 definition

10.5 types of risk takers


10.7 summary

10 8 suggested reading

10.4 Definition

Risk taking is undertaking to do something without knowing what the outcome will be.

When you start a business, you are taking a risk since the business could succeed or fail.

Your success in the business will depend on your ability to identify the risk, calculate the

risk, minimise it and take it.


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In order to do this, you need to start by knowing the types of risk taker you are. You can

be one of the following risk takers:

10.5 Types of risk takers

Low risk taker: you will be a low risk taker if you are afraid to take any type of risk at

all. You are involved in doing routine things in the business because you are afraid of the

outcome should you take any business risk.

Moderate risk taker: you will be considered a moderate risk taker when you take some

measure of risk. You will take risks in order to be innovative and make modifications in

procedures and functions.

High risk taker: you are a high risk taker when you are highly creative, innovative and

willing to accept change. You need to try various alternatives and develop innovations for

products and services in new areas of business.

However, before you take any risk, you first of all need to evaluate it and minimise it .

Some of the questions you can yourself before taking a risk involve:

Is the goal worth the risk involved?

How can the risk be minimised?

What preparations do I need to make before taking the risk?

What are the most likely obstacles in achieving the goal?


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1) Explain five different types of risk a business can face in the business

environment

2) Analyse how as an entrepreneur, you can tackle such risks.

10.7 Summary

In this lesson, you learnt about:

1) The different types of risk takers

.

10. Suggested reading


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LECTURE 11: COPING WITH COMPETITION

11.1 Introduction

Welcome to the eleventh lecture on entrepreneurship and small business management.

The lecture looks at how an entrepreneur can cope with competition.


1) To establish the types of competition

2) To establish what determines reaction patterns of firms

3) To analyse the importance of Customer Value Analysis

11.3 Outline


11.1 introduction


11.3 outline

11.4 definition

11.5 types of competition

11.6 strengths and weaknesses

11.7 reaction patterns

11.8 customer value analysis

11.9 Classes of competitors


11.11 summary


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11.4 Definition

Competition is where a group of firms offer a product or class of products that are close

substitutes of each other.

11.5 TYPES OF COMPETITION

Pure Monopoly

Is where only one firm provides a certain product/ service in a certain geographical area.

Oligopoly

A few firms selling the same products that range from highly differentiated to

standardise. Pure oligopoly consists of a few companies producing the same product.

They find it hard to change anything more than the going price. The only way to gain a

competitive edge is by lowering costs.

Duopoly

This is where only two firms are selling the same product or service.

Monopolistic

Many competitors are able to differentiate their products and to focus on particular

market segments where they can meet the needs of their customers in a superior ways and

command a price premium or they can charge the same as the competition and command

a larger market share.

Pure Competition

This is where very many competitors offer the same product because there is no basis for

differentiation, the competitors prices will be the same.

No competitor will advertise unless advertising can create psychological differentiation.


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11.6 STRENGTHS AND WEAKNESSES

The entrepreneur needs to gather information on the strength and weaknesses of each

major competitor

According to Arthur D. Little, a firm will occupy one of the following competitive

positions in the larger market.

Dominant

This firm controls the behaviour of all other firms and has a wide choice of strategic

options

Strong

This firm can take independent action without endangering its long term position and can

maintain this portion regardless of the actions of the major competitors.

Favourable

This firm has exploitable strength and more than average opportunities to improve its

position in the market place.

Tenable

This firm is operating at sufficiently satisfactory level to warrant continuing in business

but it exists at the sufferance of the dominant company and has a less than average

opportunity to improve its position.

Weak

This firm has unsatisfactory performance but an opportunity exists for improvement. It

must change quickly or else exit

Non-viable

This firm has unsatisfactory performance and no opportunities for improvement. The

sooner it exits the market place the better.

11.7 REACTION PATTERNS


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Each competitor has a certain way of doing business regarding the actions of the

competition and they fall into the following categories

The laid back competitor

It does not react quickly or strongly to the rivals move

Reasons

It may tell their customers are loyal

They may be milking the business

May be slow in noticing the move by the competitor

May lack funds to react

Rivals must access the reasons for this behaviour and exploit it.

The selective competitor

Reacts only to certain types of attacks e.g. he might respond to price reduction by the

competitor but not to increased advertising by the competitor

The tiger competitor

Reacts swiftly and strongly to any assault

The stochastic competitor

This is a competitor that doesn’t exhibit a predicable reaction pattern. There is nothing in

his history or economic situation to give an indication of his reaction pattern, many SBE

fall into this categories, reacting only on miscellaneous when they can afford.

Selecting competitors to attack and avoid

With good competitive intelligence, managers will find it easier to formulate their

competitive strategies.

11.8 CUSTOMER VALUE ANALYSIS

Very often, managers conduct customer value to reveal the company’s streghts and

weaknesses relative to various competitors. The major steps in such an analysis are:


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Step one

Identify the major attributes that customers value in a product e.g. customers are asked

what attributes and performance level they look for when choosing a product.

Step two

Assess the quantitative importance of the different attributes e.g. customer are asked to

rate the importance of the different attributes.

Step three

Assess the company’s and the competitors performance on the different customer values

against their rated importance customers are asked to describe where they see the

company’s and the competitors performance on each of the attributes.

Step four

Examine how customers in a specific segment rate the company’s performance against a

specific major competitor on an attribute by attribute basis. If the company’s attribute

exceeds the competitors on all fronts the company can charge a higher price thereby

earning higher profits or it can charge the same price and gain a large market share.

Step five

Monitor customer values over time

The company must carry out this analysis periodically as the business environment is

constantly changing.

11.9 CLASSES OF COMPETITIORS

After the company has conducted its Customer Value Analysis, it can focus its attack on

one of the following classes of competitors.

Strong versus weak competitors

Most companies aim their attacks at weak competitors because this requires fewer

resources yet in attacking the weaker competitors the firm achieves little in the way of

improved capabilities. The firm should attract strong competitors as well so as to keep up


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with the best because even strong companies have their weaknesses which can be

exploited.

Close versus distant competitors

Most companies compete with firms resembling the most.

Good versus Bad competitors

Every industry contains these two. A company should support its good companies and

attack the bad ones. Good competitors play by the rules of the industry. They make

realistic assumptions about the industry growth potential. They set prices in reasonable

relationship to cost.

They limit themselves to a portion or segment of the industries.

They motivate others to lower cost or improve differentiation and they accept the general

level of their share and profit.

Bad competitors try to buy market share rather than earn it.

They take large risks.

They invest in over capacity.

They upset industrial equilibrium.


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1) Provide examples of companies that fall into the different types of

competition

2) Explain customer value analysis

3) Analyse the various ways that an SME can cope with competition.

11.11 Summary

In this chapter, you learnt:

1) The various types of competition

2) Reaction patterns of firms

3) Customer value analysis

4) Classes of competitors

11. 12Suggested reading



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LESSON 12: BUSINESS INCUBATION

12.1 Introduction

Welcome to the eleventh lesson on entrepreneurship and small business management.

The lecture looks at business incubation



1) Explain the importance of incubation

2) List the common services offered by incubation companies

3) Describe the factors considered by incubators

4) Explain the factors to consider when selecting an incubator

5) Describe the benefits of incubation

12.3 Outline

This lesson follows the following order

12.1 Introduction


12.3 Outline

12.4 definition

12.5 introduction

12.6 service offered by incubation companies

12.7 factors considered by incubators

12.8 factors to consider when selecting incubators

12.9 benefits of incubation

12.10 summary


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12.4 Definition

Business incubation can be defined as the interactive process which involves nurturing

and supporting newly started businesses by providing them with a conducive

environment to thrive.

12.5 Introduction

Small businesses are prone to failure and therefore the need for incubation. Business

incubation starts on a very fundamental level, often with a single individual who comes

up with a concept he or she thinks should be further explored. This individual brings

others in on the idea incubation process, making the idea stronger and more viable.

Ultimately, the idea may be turned into a product, assuming that funding can be secured

and that the idea is commercially viable.

Many companies foster idea incubation by clustering workers together in collaborative

environments. Cooperative groups work best for idea incubation because other members

of the group can identify strengths and weaknesses of the idea, resulting in a stronger

finished product. Some companies offer their services as professional idea incubators.

These companies use a staff of individuals who are trained to think innovatively. Idea

incubation firms often provide support for product development all the way through the

process from the initial vague concept to commercial production.

Successful idea incubation can result in products ranging from clothespins to computers.

Ultimately, strong leadership and executive skills are required along with an

entrepreneurial spirit. Once an idea has been incubated, it needs to be developed,

prototyped, and commercially presented. Appointing a team leader can encourage this,

along with creating a work environment in which all employees are encouraged to make

contributions.

Business incubators are designed to accelerate the successful development of

entrepreneurial companies through an array of business support resources and services,

developed and orchestrated by incubator management and offered both in the incubator

and through its network of contacts.

Incubators vary in the way they deliver their services, in their organizational structure,

and in the types of clients they serve. Successful completion of a business incubation

program increases the likelihood that a start-up company will stay in business for the long

term: Historically, 87% of incubator graduates stay in business.

12.6 Services offered by incubation facilities


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The following are the common services offered by most incubation facilities:

• Coaching and mentoring

• Intellectual property

• Marketing assistance

• High-speed Internet access/infrastructure

• Help with accounting/financial management

• Access to bank loans, loan funds and guarantee programs

• Help with presentation skills

. Law, regulations and policy

• Provision of a business premise

• Referrals/networking

• Financing

• Comprehensive business training programs

• Advisory boards and mentors

• Management team identification

• Help with business etiquette

• Technology commercialization assistance

• Help with regulatory compliance

• Intellectual property management

Entrepreneurs who wish to join a business incubation program must apply for admission.

Acceptance criteria vary from program to program, but in general only those with

feasible business ideas and a workable business plan are admitted. It is this factor that

makes it difficult to compare the success rates of incubated companies against general

business survival statistics.

Although most incubators offer their clients office space and shared administrative

services, the heart of a true business incubation program is the services it provides to

start-up companies. The amount of time a company spends in an incubation program can

vary widely depending on a number of factors, including the type of business and the

entrepreneur's level of business expertise. Life science and other firms with long research

and development cycles require more time in an incubation program than manufacturing

or service companies that can immediately produce and bring a product or service to

market.

12.7 Types of Business Incubators

Classical Incubator/Business Centers

They are more like a nursery, start-up unit or a community workshop. They provide

start-up businesses with premises and a variety of services that are necessary at

the early stage of development.


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Industrial Estates

These offer a more dynamic approach to regional economic development agencies.

EPZ (Export Processing Zones)

They help to develop exports and foreign trade potential given that they have linkages to

foreign economies. The aim of EPZs is to attract foreign direct investments,

provide access to infrastructure and tax incentives.

Science and Technology Incubators

They provide a creative environment for attracting and promoting research

commercialization and technology based enterprises.

Virtual/Internet Business Incubators

They provide/make services available through a virtual media. They help to provide

networks by allowing enterprises to interact with partners, suppliers, customers,

etc. This is done through the internet or electronic data interchange.

Public Incubators/Publicly Sponsored Incubators (Non-profit)

They are mostly sponsored by government and other economic departments. Their main

objective is job creation and economic development rather than profit.

Non-governmental Incubators

These are sponsored by NGOs and other charitable organizations simply to provide

development in a given area.

Privately Sponsored Incubators

These are mostly owned by organized groups of private investors who put them up as an

Investment with a hope of getting a return on the investment. They charge a higher for

their services compared to those which are government sponsored.

Public/Private Incubators These are owned by joint efforts of the government and other private organizations. Here

the government provides the funding while the private bodies provide the

expertise.

Academic related/research or scientific incubators

They are established as academic research projects with the objective of translating their

research findings into practice.


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12.8 Factors Considered By Business Incubators

Compatibility with other partners in the incubation facility so as to minimize conflict of

interest and unfair competition for resources.

The uniqueness of the idea which influences the survival of a project or the potential for

growth.

Whether the project specification suits that particular incubator.

Technical, social, economic, legal and political feasibility have to be weighed with a view

to evaluating the viability of such a project.

Size of the project in regard to funding process, implementation time and other

requirements.

The business plan and other elements of the business plan.

Availability of market or demand for the product produced.

12.9 Factors to Consider When Selecting a Business Incubator

Space and Services

Related issues like charges for space and service

Type of services offered

Lease charges/requirements

Availability of room for expansion

Quality

Does the incubator:

Provide quality services

Understand your business needs

Offer access to valuable contacts and networks

Success Rates

Ask yourself the following questions:

How is the track record of the incubator?

What is the experience of others who have used the incubator before you?

How do they current tenants feel about the incubator?

Policies and Procedures of the Incubators

How long can you remain as a tenant?

Can you easily move out if the business fails?


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How flexible are the policies

Does it offer training programs and other beneficial services?

Management

Does the incubator appear well managed?

Does it appear to relate well with the business community

Is it well supported by other sponsoring organizations?

12.10 Benefits of Business Incubators

Acts as a catalyst for economic development by boosting entrepreneurial growth

and services.

Helps young businesses to overcome challenges of new start-ups.

Encourages faster growth and survival or new businesses.

Help to convert ideas into ventures by supporting the tangible ideas.

They benefit those who cannot access mainstream services such as bank loans which

require high collateral.

Help to provide conducive environment for businesses to flourish.

Provide network facilities which are essential for business growth and marketing.


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1) List the kinds of services offered by incubation companies

2) Explain the factors that you could consider when looking for an incubator

company.

3) Analyse the benefits of incubation to a country such as Kenya.

12. 12 Summary

In this chapter, you learned about:

1) The different types of incubators

2) Factors considered by incubation companies in selecting businesses to incubate

3) Factors considered by potential entrepreneurs looking for incubators

4) Benefits of incubation

12. 13 Suggested reading



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LESSON 13: THEORIES OF ENTREPRENEURSHIP

13.11Introduction

Welcome to the thirteenth lesson on entrepreneurship and small business management.

The lecture covers theories of entrepreneurship.


By the end of this lesson, you should have learnt about the different theories of

entrepreneurship

Outline

This lesson is structured as follows:

13.1 introduction


13.5 outline

13.4 The psychological approach

13.5 Joseph Schumpeter’s theory of entrepreneurship


13.7 summary


The following are some entrepreneurship theories

13.4 THE PSYCHOLOGICAL APPROACH

Over the past few decades, entrepreneurial research has identified a number of

personality characteristics that differentiate entrepreneurs from others. They are:


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The need for achievement (n Ach)

People with high levels of n Ach have a strong desire to solve problems, enjoy setting

goals and achieving them through their own efforts and like receiving feedback on how

they are doing. They are moderate risk takers.

Internal locus of control

Successful entrepreneurs believe in themselves. They do not believe that the success or

failure of their businesses is as a result of luck, fate, chance or forces beyond their

control.

They believe that for the most part, the future is theirs to control through their own

efforts. They believe that their accomplishments and setbacks are within their own

control and influence and not forces beyond their control.

Calculated Risk takers

Start-up entrepreneurs face uncertainty compounded by constant changes that introduce

ambiguity and stress into every aspect or their business. Setbacks and surprises are

inevitable making the entrepreneurial environment a highly risky. However, successful

entrepreneurs avoid taking unnecessary risks. When they decide to participate in a

venture, they do so in a calculated, carefully thought out manner. They do everything

possible to minimize the risk.

Innovative and creative

The role of an entrepreneur is to innovate. A successful entrepreneurial venture is usually

based on significant innovation. This might be a technological innovation, for example a

new product or a new way of producing something or it might be an innovation in

offering a new service etc.

Growth oriented

One of the key characteristics of entrepreneurship is business growth. Entrepreneurs take

the necessary risks that ensure business growth.

Hard work

Entrepreneurs put a lot of physical and mental effort into developing their ventures. They

often work long and antisocial hours. After all, the entrepreneur is their own most


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valuable asset. Most of them are “married” to their businesses, resulting in health

problems due to stress as well as family problems.

Setting of personal goals

Entrepreneurs to set themselves SMART goals. They benchmark their achievements

against these personal goals. As a result entrepreneurs tend to work to internal standards

rather than look to others for assessment of their performance.

Resilience

Not everything goes right all the time. In fact, failure may be experienced more often

than success. Entrepreneurs must not only pick themselves up after things have gone

wrong, but also learn positively from the experience and use that learning to increase the

chances of success next time round.

Confidence

Entrepreneurs must demonstrate that they not only believe in themselves, but also in the

venture they are pursuing in order for others to feel confident about the venture.

However, there is the risk of entrepreneurs becoming overconfident which could result in

various business problems such as being too sure of themselves to be receptive to good

advice.

Highly optimistic

Entrepreneurs have ceaseless optimism (even during bleak time). This is a key factor of

entrepreneurial success. They maintain a high enthusiasm level that allows others to

believe in them during tough periods.

Receptiveness to new ideas and change

Entrepreneurs should not be over confident. They must recognise their own limitations

and the possibilities that they have to improve their skills. They must be willing to revise

their ideas in the light of new experience. They must be receptive to change by being

willing to embrace the possibilities presented by change rather than resist them. Good

entrepreneurs are always aware that they could do things better and are receptive to a

chance to improve their skills and develop new ones.

Assertiveness


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Entrepreneurs are usually clear regarding what they want to gain from a situation and are

not shy to express their wishes. This does not mean being aggressive, nor does it mean

adopting a situation and refusing to budge. It means being committed to outcomes, not

means. True assertiveness relies on mutual understanding and is founded on good

communication skills.

Information seeking

Entrepreneurs are not, on the average, more intelligent than other people. They are,

however, characterised by inquisitiveness. They are never satisfied by the information at

any one time and constantly seek more. Good entrepreneurs tend to ask more questions

than making statements during communication.

Seeking feedback

Effective entrepreneurs are often described as quick learners. Unlike many people,

however, they also have a strong desire to know how well they are doing and how they

might improve their performance. Hence, they actively seek out and use feedback.

Feedback is also central to their learning from their mistakes and setbacks.

Attuned to opportunity

Successful entrepreneurs are constantly scanning the environment to identify gaps left

there by various players, including themselves. They are never really satisfied with the

way things are at any moment in time.

Good at networking

It has been established that businesses need to establish networks if they are to become

more competitive. Networking is the process of creating alliances with people and

alliances beyond the immediate boundaries of the venture. It is the process of linking up

with the right people to get things done and the success of a business depends, to a certain

extent, in knowing the right people in the right places.

Integrity and reliability

These two are a key factor to successful entrepreneurship. It is what makes successful

personal and business relationships to endure. Investors, partners, and creditors and

customers value them highly. They help build and sustain trust and confidence in the

enterprise.

Commitment, determination and perseverance


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More than any other, total dedication to success as an entrepreneur can overcome

obstacles and setbacks. Sheer determination and an unwavering commitment to succeed

often win out against odds that many people would consider insurmountable. They can

also compensate for personal shortcomings.

Persistent problem solving

Entrepreneurs are not intimidated by difficult situations. Yet they are neither relentless

nor foolhardy in their relentless attack on a business problem or an obstacle that is

impeding business operations. Simple problems bore them; unsolvable ones do not

warrant their time. However, they are realistic in recognising what they can or cannot do

and where they can get help in difficult but unavoidable problems.

13.5 Joseph Schumpeter’s Theory of Economic Development

According to Schumpeter, economic development consists of coming up with

innovation. He argues that entrepreneurship is the process of creating innovative and

evolutionary processes to create successful business undertakings. The essence of

entrepreneurship, therefore, lies not simply in putting together business activities in their

original formations but in establishing new innovative business combinations in terms of

supplies, products, markets processes or organization. This, according to Schumpeter, is

important because it brings forth a force that disrupts market equilibrium thereby creating

change, which results to new opportunities.

The theory accorded the entrepreneur the role of an innovator. The entrepreneur is not

merely a manager, but comes with something new. Schumpeter identified five types of

innovation. These include:

i) The introduction of a new product;

ii) The introduction of a new method of production;

iii) The opening up of new markets;

iv) The conquest of a source of raw materials or semi manufactured goods and

v) The creation of a new type of industrial organization such as the creation of a

monopoly.

However it is the introduction of a new product and its continued improvement that leads

to economic development. The entrepreneur is motivated by the following factors: i) the

desire to build his own business empire; ii) the desire to conquer and prove his

superiority, and iii) the joy of creating something entirely new and proving his ingenuity.

The nature and activities of the entrepreneur depend on his socio-cultural activities. In

order to perform his economic function, the entrepreneur requires two things: i) technical


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knowledge to make new products; ii) finance from banking institutions. Once the new

innovation becomes successful and profitable, other entrepreneurs want to copy it and

benefit from it. The theory continues by stating that innovation in one field may result in

a wave of innovations in other related fields; for example, the emergence of a motor

vehicle industry may stimulate a wave of new investments in the construction of

highways, tyres petroleum products and more.

Thus, Schumpeter, saw entrepreneurs not so much as the lubricant that oiled the wheels

of an economy, but as self-interested individuals who sought short term monopolies

based on some innovation. Once an entrepreneurial monopoly was established, as earlier

mentioned, a new generation of entrepreneurs came along with more innovations that

aimed to supersede that monopoly in a process Schumpeter called “creative destruction.”

Where the ordinary person (static man) sees nothing but routine, the entrepreneur (action

man), knows that there exists a nearly endless number of new relationships to move the

business forward. Schumpeter argues that an entrepreneurial economy is an

amalgamation of innovative combinations that defy the centrality of economic

equilibrium.


1) outline what you consider to the critical attributes for successful

entrepreneurship

13.7 Summary

In this lesson, you learnt about theories of entrepreneurship




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LESSONS 14 &15: THE BUSINESS PLAN

14.1Introduction

Welcome to the last lesson in entrepreneurship and small business management. The

lesson provides information about the business plan.


By the end of this lesson, you will be able to plan:

1) List the various uses of business plan

2) Write a business

14.3 Outline

The lesson is structured as follows:

14.1 introduction


14.3 The business plan

a) What is a Business Plan?

A document which spells out the goals and objective of a business and clear

outlines how and when they will be achieved.

b) Why Write a Business Plan?

To obtain financing.

Guide for opening a business.

Guide foe business expansion


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Guide for managing a business.

To communicate clearly with interested parties.

c) When is a Business Plan Written?

After deciding to go into business.

Before starting the business.

When an entrepreneur wants to expand.

d) Who Writes the Business Plan?

Each prospective business owner/manager writes a business plan for the business

he/she wants to open.

A support agency may assist in writing certain areas of the business plan.

e) How Is a Business Plan Organized?

Cover page

Table of contents

Executive summary

Business description

Marketing Plan

Organizational Plan

Operational/production Plan

Financial Plan

Potential risks and problems

Appendices

THE BUSINESS PLAN


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TOP PAGE

Student details

COVER PAGE

Name of business:

Logo

Mission

Vision

Address and telephone, Email address, website of the business

Prepared by:

Signature of owner

Name of owner:

Date

Contact details

TABLE OF CONTENTS

CHAPTER ONE

EXECUTIVE SUMMARY

Summarized statement on:

Business description

Opportunity and entry

Target market


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Competitive advantage

Management team

Financial plan

Critical risks and problems, and solution

CHAPTER TWO

BUSINESS DESCRIPTION

(a) Owner Details

Name:

Age:

Address:

Occupation:

Education/Professional Qualifications:

Business Experience:

NB: In a partnership, this information should be provided for all the partners

(b) The Business Venture

Name of business:

Location of business:

Legal form of business:

Major activity of business:

Principal customers:

Location of customers:

Amount to be invested by owners:


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Amount to be borrowed:

Total amount needed for the venture:

(c) The product/Service

Name of product/service:

Features of product/service:

Benefits obtained from product/service:

Unique features of product/service

(d) Entry Plan

Competitive advantage of the business:

Weakness of competition:

Pricing plan:

Plans to attract customers

(e) Growth Plan

Trends which signal business growth:

Opportunities arising from this trend:

Plans to take advantage of the opportunities:

State at least three short term goals

State at least three medium term goals

State at least one long term goal

f) The industry

Describe the industry under which your proposed business will fall


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What is the trend of the industry?

What is the general size of businesses in the industry?

What is the average number of employees in the firms of the industry?

What is the basic capital requirement for entry into the industry?

Are there any seasonal factors that are experienced in the industry?

CHAPTER THREE

THE MARKETING PLAN

(a) Potential Customers

Type of customers (individuals, institutions):

Total target market population:

Number of customers who can buy product/service:

(b) Competition

Names of the key competitors:

Location in relation to your business:

Size of the competitors:

Comparisons between your product(s) or service(s) and those of the competitors:

Strengths and weakness of the competitors:

Plans to capitalize on the weakness of the competitors:

(c) Pricing

Methods of calculating the selling price of your product/service:


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Factors which will influence your price setting, e.g. competitor’s prices:

Actual selling price(s) of your product(s) or service(s):

Credit terms to be offered:

Discounts to be allowed:

Any after-sales service(s) and relevant costs:

(d) Sales Tactics

Method of direct selling or personal selling:

Method of indirect selling:

Method of recruitment and retention of the sales force:

Utilization of distributors or agents:

Ways of selecting and motivating distributors or agents:

Geographical area you intend to serve:

(e) Advertising and Promotion

Media to be used:

Product/service image to be portrayed:

Image to be projected regarding business:

Frequency of advertisements:

Cost per advertisement placement:

Measuring effectiveness of the advertisements:

Plans for initial promotional campaign:

Plans for regular promotional methods:

Cost for each promotional event:


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Measuring effectiveness of promotional campaigns:

(f) Distribution

Channels to be utilized:

Means of transport you will use:

Transport cost per month:

Anticipated distribution problems:

Overcoming distribution problems:

CHAPTER FOUR

ORGANIZATION PLAN

(a) Organizational Structure

Draw the organizational chart of the business

(b) Key Personnel

Number of positions:

Title of positions:

Duties of positions:

Remuneration level:

Incentive package:

(c) Ordinary Employees

Numbers required:

Titles and duties:

Remuneration:


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Incentive package:

(d) Support Services

Banking:

Bookkeeping:

Legal:

Postal:

Management advice:

Other:

CHAPTER FIVE

OPERATIONAL PLAN

(a) Draw the ground plan of the proposed workshop/ business premises

(b) Production facilities

Give a detailed description of the machinery/tools/equipment which will be used

in the business

Their cost

The source

repairs & spare part which may be required in future

describe the other fixed assets to be used in the business

c) Production process

Give a detailed description of how the goods will be produced/ how the

service(s) will be provided.


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(c) Production Cost

TYPE OF COST MONTHLY COST

Source of materials

Materials required

Transportation

Workers/labour

Overhead expenses

Cost per unit

TOTAL COST

(d) Complying With Operational Requirements

TYPE OF REQUIREMENT COST

Licences

Taxes

Other approvals

TOTAL COST


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CHAPTER SIX

FINANCIAL PLAN

(a) Pre-operational Costs

ITEM COST

Transport

Market research

Plan properties

Meeting people

Photocopying

Installations

TOTAL COST

b) Working Capital

ITEM AMOUNT

Stock of raw materials

Work in progress

Stock of finished goods

Debtors

Cash

TOTAL WORKING CAPITAL


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c) Pro-forma Income Statement

Pro-forma income statement for the year ending:

ITEM AMOUNT

Sales:

Cost of goods sold

Gross profit

Expenses:

Wages

Rent

Water

Telephone

Electricity

Advertising

Stationery

Postage

Transport

Repairs

Net profit before tax

Tax

NET PROFIT AFTER TAX


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d) Pro-forma Balance Sheet

ASSETS AMOUNT

Current Assets:

Cash

Debtors

Stock of finished goods

Stock of raw materials

Total Current Assets

Fixed Assets:

Machinery and equipment (cost)

Accumulated depreciation

Vehicles (cost)


Furniture and fittings(cost)


Other (specify) fixed assets (cost)


Total Fixed Assets

TOTAL ASSETS

LIABILITIES

Current Liabilities:

Creditors

Other (specify) liabilities

Total Current Liabilities


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Long-term Liabilities

Bank loan

Other (specify)

Owner’s Equity

TOTAL LIABILITIES AND EQUITY

e) Projected Cash Flow Statement

YEAR 1

1 2 3 4 5 6 7 8 9 10 11

Beginning

balance

Add cash

sales

Accounts

receivable

Others

CASH

RECEIPTS

TOTAL CASH

AVAILABLE

TOTAL CASH

PAYMENT


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ENDING CASH

BALANCE

f) Calculate the expected break-even point of your proposed business

Determine the sales and total variable costs. Calculate the total contribution margin.

e) Total contribution margin:

Sales – Total Variable Costs = Sh.

(ii) Calculate the contribution margin percentage:

Contribution margin % =Contribution margin x 100 = Sh.

Sales

(iii) Determine the total fixed costs, ie. Operating expenses, for year 1:

Total fixed costs = Sh.

(iv) Calculate the break-even level of sales in shillings:

Break-even level = Fixed costs =Sh.

Contribution margin %

(v) Break-even revenue:

Total sales

Less cost of sales

Contribution

Contribution Ratio (%) = Contribution x 100 = Sh.

Total sales


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(vi) Break-even turnover = Fixed cost = Sh.

Contribution margin %

(vii) Break-even units = Contribution margin = Sh.

Fixed costs

g) Desired Financing

ITEM AMOUNT

Pre-operational costs

Working capital

Fixed assets

TOTAL DESIRED FINANCING

h) Capitalization

ITEM AMOUNT

Total investment

Owners contribution

Borrowed funds

i) Profitability


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(i) Gross profit percentage

Gross Profit ( ) x 100 = Sh.

Sales ( )

(ii) Return on equity

Net Profit after tax ( ) x 100 = Sh.

Owners equity ( )

(iii) Gross profit percentage

Net Profit after tax ( ) x 100 = Sh.

Total investment ( )

CHAPTER SEVEN

Potential risks

Problem

Solutions

14.5

1) Write a business plan

14.6 Summary

In these lessons, you learned how to write a business plan




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IMPORTANT

TYPING INSTRUCTIONS

THE BUSINESS PLAN WILL NOT BE ACCEPTED IF IT DOES NOT ADHERE

TO THE FOLLOWING INSTRUCTIONS:

The finished business plan should be spiral bound

Should not be less than 20 pages

Start each chapter on a new page

Theme font: Times New Roman

Font size 12

Line spacing: 1.5

Margins: standard

cam 206 module - entrepreneurship

Documents

small business management

business opportunities

business plan

business opportunity

business incubation

theories of entrepreneurship

types of business finance

process entrepreneurship