LECTURE NOTES FOR ENTREPRENUERSHIP
MASTERS STUDENTS
By Patrick Mutisya
2011 1
LECTURE ONE INTRODUCTION TO ENTREPRENEURSHIP Contents
Introduction Nature and importance of Entrepreneurship Historical development of Entrepreneurship Personal characteristic of Entrepreneurship Function of Entrepreneurship Distinction between an Entrepreneur and a Manager Role of Entrepreneurship in eco development Summary References
LECTURE TWO EMERGING ISSUES IN ENTREPRENEURSHIP Contents
Introduction Entrepreneurship myths The case of Kenya Theories of Entrepreneurship Culture of Entrepreneurship Gender and Entrepreneurship Summary References
LECTURE THREE 2
FORMS OF ENTREPRENEURSHIP Contents
Small Business Entrepreneurship Types of Business Ownership Classification of family business Partnership business Cooperatives Limited company Franchise Types of franchise methods Corporate Entrepreneurship Summary References
LECTURE FOUR MICRO & SMALL SCALE ENTERPRISES Contents
Classification of Business firms The role of SME in Eco development Advantages and disadvantages of SME Challenges facing the development of SME in developing countries The role of government in the development of SMEs in Kenya Summary References
LECTURE FIVE CREATING & STARTING THE VENTURE Contents Definition of creativity and innovation 3
Some of new ideas Methods of generating ideas Summary References
LECTURE SIX FINANCING NEW VENTURES Contents
Introduction Financing means and some of finance Venture capital Summary References
LECTURE SEVEN ANALYSIS AND INTERPRETATION OF FINANCIAL ACCOUNTING STATEMENTS Contents
Introduction Significance of using Ratio Types of Ratios Capital structure Ratios (Gearing Ratios) Limitation of Accounting statements
LECTURE EIGHT THE BUSINESS PLAN Contents Introduction Essentials of a good Business Plan Scope and value of the Business plan 4
Elements of a business plan Business plan format Summary References
LECTURE NINE THE MARKETING PLAN Contents
Introduction Importance of marketing Function of marketing Marketing budget Steps in preparing the market budget Why some marketing plans fail Summary References
LECTURE TEN MANAGING GROWTH OF A VENTURE Contents
Introduction Growth strategies Implication of growth for the firm Going public Summary References
LECTURE ELEVEN THE ENTREPRENEUR AND THE LAW Contents 5
Introduction Intellectual property rights Legal protection Patents Designs Trademarks Copyright Summary References
LECTURE TWELVE INTERNATIONAL MARKETS Contents
Introduction Importance of international business to the firm Summary References
6
LECTURE ONE : INTRODUCTION TO ENTREPRENUERSHIP Lecture Content • Introduction •
Objectives
1.2The nature and importance of Entrepreneurship 1.3Historical Development of Entrepreneurship 1.4Personal characteristics of Entrepreneurship 1.5Functions of Entrepreneurship 1.6Distinction between an entrepreneur and a manager 1.7Role of entrepreneurship in Economic Development 1.8Introduction 1.9References This is to welcome you to the study of Entrepreneurship and Business Management. This lecture will introduce you to the concept of entrepreneurship evolution of entrepreneurship and the role of entrepreneurship to economic development. 1.2 Objectives or Aim At the end of this Lecture you should be able to: •
Explain the nature and importance of entrepreneurship
•
Explain the historical Development of entrepreneurship
•
Examine the personal characteristics of entrepreneurship
•
Explain the major functions of entrepreneurship
•
To distinguish an entrepreneur from manager
•
To analyze the role of entrepreneurship to an economy 7
1.3 THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP 1.3.1
Nature of Entrepreneurship
Entrepreneurship, generally speaking, refers to the overall course of action undertaken by an owner in starting and managing his/her enterprise for profit. However, the term entrepreneurship continues to be used in different ways. One usage relates entrepreneurship to the process, leading to the creation and running of any new business regardless of its size, product, service, potential, a firm of ownership. Another view point sees entrepreneurship as being essentially concerned with developing a new idea, based at which a risk – bearing unique product, service or method is marketed by means of setting up a new independent unit or by using a directly existing unit. The latter notion views entrepreneurship as the complete process involving conceptualization of an idea, of which a new thing should be, and eventually, starting and running a venture ceiling the unique product or proving a service never seen or known before. Both usages, however, give prominence to the role of a devoted business person played by one who plans, owns, organizes and manages a concern and bears risks in expectation of good earnings. Essential features of entrepreneurship:
•
Entrepreneurship, in fact is much more than simply starting and running an ordinary business. To know more about the nature of entrepreneurship, we will now discuss some of the essential features that make entrepreneurship fundamentally different from any other ordinary business. These include: •
Identification of Opportunity. In any entrepreneurial endeavor, a thorough analysis of market potential is the foremost prerequisite. This is followed by analysis of consumer wants and needs, innovation of something unconventional and useful, assemblage of 8
resources, strategy to face competition, and subsequently starting and running an enterprise. This is why, it is often said that entrepreneurship is a process by which people tap unutilized opportunities and fulfill much and wants through innovations. One inclined to embark in an entrepreneurial venture for profit must first recognize a potential market opportunity. •
Innovation In the opinion of the famous economist and theorist Joseph Schumpeter, entrepreneurship is primarily concerned with the broad process through which new products or methods are created and introduced replacing conventional things or practices. As contrasted with ordinary business activity, another distinguishing feature of entrepreneurship is innovation. Innovation as observes Schumpeter’s analyses may occur in any of the following ways: •
Introduction of new product/service
•
Us of a new method of production
•
Opening up of a new market
•
Use of a newly found raw material; or
•
Restructuring of an organization
However, in modern times the concept of innovation stands expanded to a much wider perspective:
Novel changes are being introduced in business financing, human resource
management, inventory control, marketing, packaging, personal banking and various other areas, thus, mobile banking i.e. M-PESA service s are now described as innovations. •
Entrepreneurial Attitude
Development of entrepreneurship is essentially dependent on the entrepreneurial attitude, that is to say a special frame of mind marked by an independent energetic spirit to assume risks and of course, coverage to undertake something new. Such individuals visualize new opportunities; risk their own money and fortune and combine resources in unusual ways to innovate new products, production techniques, production devices or services. These enterprising people who as change agents play the role of innovators, mobile resources, establish new industries, create employment opportunities and contribute to national wealth are entrepreneurs. Role in Development 9
Entrepreneurship contributes immensely to the economic growth and thereby plays a vital role in the development process. It sows the seeds of development and that, in turn, facilities the growth and spread of entrepreneurship. As society moves gradually from under development to the phase of development, market opportunities widen and individuals acquire more finance, purchasing power, skills, abilities and
motives. As a result, the social and economic environments tend to become
more
conducive to the growth as well as further expansion of entrepreneurship. •
Leadership
Ordinary business deals with directing production, sales and day-to-day operation in line with the conventional practices. Generally speaking, an ordinary business person playing the role of a capitalist provides finance for the sake of ownership and control, but does not assume the innovatory role to the extent an entrepreneur would do. Contrarily, entrepreneurship primarily cares about the introduction of something new and of course remunerative. In this task, unlike an ordinary business person, the entrepreneur assumes the dual role of innovation-cum-capitalist.
The essence of
entrepreneurship is to utilize an enterprise’s capability to pursue the goal-oriented change for something unconventional but rewarding. And it is in this context that entrepreneurial mission requires a cunning leadership to direct effective use of the available resources. •Small Business and Family Business Many determined individuals embrace entrepreneurship as the means to make a selfemployed profitable career. Through entrepreneurship, they pursue their unique ideas and personal goals to achieve success, wealth, power and fame independently. This is why very often people equate entrepreneurship with the conduct of small business enterprises and family businesses. • Conducive Environment At times market conditions may be more or less helpful to ordinary business, yet normally a variety of complex problems, including high risks, uncertain earnings, unavailable capital, high interest rates, and endless rules and regulations of ten leas to lack of interest in independent small businesses. In such situations, it becomes quite necessary to encourage enterprising individuals to take active interest in 10
entrepreneurial efforts so as to maintain the growth of entrepreneurship. This calls for a conducive environment and purposeful inducements to entrepreneurs. Some of the crucial factors that may create an environment favorable for sustained growth of private entrepreneurship include: •
An inspiring national policy or innovation
•
Incentives for creative ideas
•
Intellectual property rights
•
Ample technical and communication infrastructure
•
Organizational framework for creativity
•
Non-expensive loan capital
•
Large product market
•
Cordial employer-employee relations
•
Business-oriented educational systems
•
Social order, rule of law and political stability among others’ Activity Can you now be able to explain the essential features of entrepreneurship?
1.4.3 Definitions The Entrepreneur The word entrepreneur in English originated from the French word ‘entreprendre’, meaning ‘to undertake’. According to the is one who organizes, managers Oxford English Dictionary
and assumes the risks of a business enterprise. The
(1978) describes entrepreneur as ‘one who undertakes; a
manager, controller; champion’. entrepreneur to a
Webster’s dictionary (1971) an entrepreneur
The BBC English Dictionary (1993) refers an
person who sets up a business.
Richard Contillon (1620 – 1734) defines an entrepreneur as someone who takes the risks of running an enterprise by paying certain price for securing and using resources for a 11
product and resetting it at an uncertain price. Joseph Schumpeter (1883-1950) defines an entrepreneur as ‘an innovators? David Holt (2203) defines an entrepreneur as a person who incubates new ideas, starts enterprises based on those ideas and provide added value to society based as their independent initiative. Obviously, a comprehensive and unanimously acceptable definition of the word entrepreneur is yet to be adapted. However, combining some of the salient characteristics or traits, it may be said that he term entrepreneur specifies precisely a dynamic individual who has creative talents, takes initiatives, assembles necessary resources, risks own money and fortune, undertakes a new venture, introduces something new ad useful, and who is eventually rewarded with a profit or loss, monetary benefits, personal satisfaction and independence.
•
Entrepreneurship This is the act or process of identifying business opportunities, assembling the necessary resources, taking calculated risks to initiate a successful business activity. Activity Can you be able to think about some of the factors that one considers when making the decision to becoming self-employed?
•
Historical Development of Entrepreneurship One way of tracing the development of entrepreneurship is to trace the evolution of the definition for an entrepreneur.
1.4.1
Earliest Period 12
An early example of the earliest definition of an entrepreneur as a go-between is Marco Polo, who attempted to establish trade routes to the Far East. As a go-between, Marco Polo would sign a contract with a money person (forerunner of today’s venture capitalist) to sell his goods. A common contract during this time provided a loan to the merchant-adventurer at a 22.5 percent rate, including insurance. While the capitalist was a passive risk bearer, the merchant-adventurer too the active role in trading, bearing all the physical and emotional risks. When the merchantadventurer successfully sold the goods and completed the trip, the profits were divided with the capitalist taking most of them (up to 75 per cent), while the merchant-adventurer settled for the remaining 25 percent. 1.4.2
Middle Ages
In the middle Ages, the term entrepreneur was used to describe both an actor and a person who managed large production projects. In such large production projects, this individual did not take any risks but merely managed the projects using the resources provided, usually by the government of the country. A typical entrepreneur in the Middle Ages was the cleric – the person in charge of great architectural works, such as castles and fortifications, public buildings, abbeys and cathedrals. 1.4.3. 17th Century The re-emergent connection of risk with entrepreurship development in the 17 th century, with an entrepreneur being a person who entered into contractual arrangement with the government to perform a service or to supply stipulated products. Since the contract price was fixed, any resulting profits or losses were the entrepreneur’s. One entrepreneur in this period was John Law, a Frenchman, who was allowed to establish a royal bank. The bank eventually evolved into an exclusive franchise to form a trading company in the New World – the Mississippi Company. Unfortunately, this monopoly on French trade led to Law’s downfall when he attempted to push the company’s stock price higher than the value of its assets, leading to the collapse of the company. Richard Cantillon, a noted economist and author in the 1700s understood Law’s mistake. Cantillon developed one of the early theories of the entrepreneur and is regarded by some as the founder of the term. He viewed the entrepreneur as a risk talker, observing that merchants,
13
farmers, craftsmen and other sole proprietors “buy at a certain price and sell at an uncertain process, therefore operating at a risk”.
1.4.4
18th Century
In the century, the person with capital was differentiated from the one who needed capital. In other words, the entrepreneur was distinguished from the capital provider (the present-day venture capitalist).Thus the capitalist was differentiated from the entrepreneur. Entrepreneurs were regarded as capital users as opposed to capitalist who were seen as capital providers. One reason for this differentiation was the industrialization occurring throughout the world. Many of the inventions developed during this time were reactions to the changing world. Both Whitney and Edison were developing new technologies and were developing new technologies and were able to finance their inventions themselves. Whereas Whitney financed his cotton gin with expropriated British crown property. Edison raised capital from private sources to develop and experiment in the fields of electricity and chemistry. Doth Edison and Whitney were capital users (entrepreneurs), not providers (venture capitalists). A venture capitalist is a professional money manager who makes risk investments from a pool of equity capital to obtain a high rate of return on the investments. 1.4.5.
19th and 20th Centuries
In the 19th and early 20th centuries, entrepreneurs were frequently not distinguished from managers and were viewed mostly from an economic perspective: Briefly stated, the entrepreneur organizes and operates an enterprise for personal gain. He pays current prices for the materials consumed in the business, for the use of the land, for the personal services he employs, and for the capital he requires. He contributes his own initiatives, skills and ingenuity in planning, organizing and administering the enterprise. He also assumes the chance of loss and gain consequent to unforeseen and uncontrollable circumstances. The net residue of the annual receipts of the enterprise after all costs have been paid, he retains for himself. Andrew Carnegie is one of the best examples of this definition. Carnegie invented nothing, but rather adapted and developed new technology in the creation of products to achieve economic vitality. Carnegie who descended from a poor Scottish family, made the American steel industry 14
one of the wonders of the industrial world, primarily through his unremitting competitiveness rather than his inventiveness or creativity. In the middle of the 20th century, the notion of an entrepreneur as an innovator was established. The function of the entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or more generally an untried technological method of producing a new commodity or producing an old one in a new way, opening a new source of supply of materials or new outlet for products, by organizing a new industry. The concept of innovation and newness is an integral part of entrepreneurship in this definition. Indeed, innovation the act of introducing something new is one of the most difficult tasks for the entrepreneur. It takes not only the ability to create and conceptualize but also the ability to understand all the forces at work in the environment. The newness can consist of anything from a new product to a new distribution system to a method for developing a new organizational structure. Edward Harriman, who recognized the Ontario and Southern railroad through the Northern Pacific Trust, and John Pierpont Morgan, who developed his large banking house by reorganizing and financing the nation’s industries, are examples of entrepreneurs fitting this definition. These organizational innovations are frequently as difficult to develop successfully as the more traditional technological innovations (transistors, computers, and laser) that are usually associated with being an entrepreneur. This ability to innovate can be observed throughout history, from the Egyptians who designed and built great pyramids out of stone blocks weighing many tone each, to the Apollo lunar module, to laser surgery, to wireless communication. Although the tools have changed with advances in science and technology, the ability to innovate has been present in every civilization. The dominant notion of entrepreneurship in this era is creativity and innovation. 1.5
CHARACTERISTICS OF A SUCCESSFUL ENTREPRENEUR
Who actually is an entrepreneur and what are his/her qualities and characteristics? No universally accepted answer exists for this question. Some people think that an entrepreneur is an individual who takes the risk of starting and running an own business for the principal 15
purpose for making profit and growing in the business. This would mean that one who establishes a business and manages it only for profit without a vision for growth is more of a business person than an entrepreneur. In other words all entrepreneurs are business people and not all business people are entrepreneurs. The following are some of the characteristics of an entrepreneur: •
RISK TAKER
Entrepreneurs are often thought of in terms of the risk they assume. Even the dictionary describes an entrepreneur as one who assumes business risks. However, like all prudent business people, entrepreneurs know that taking high risks is a gamble. Entrepreneurs are neither high nor low risk takers. They prefer situations in which they can influence the outcome, and they like challenges if they believe the odds are in their favour. They seldom act until they have assessed all the risks associated with an endeavour, and they have an innate ability to make sense out of complexity. These are traits that carry them on to success where others fail. •
DESIRE TO ACHIEVE
Any successful entrepreneur will tell you that starting a business is not a get-rich-quick alternative. New businesses usually take from one to three years to turn a profit. In the meantime, you will do well to break even. During the business start-up stage, entrepreneurs do not buy anything they do not need, such as fancy cars. Most drive junk cars and use their surplus money to pay off debt or reinvest it in the business. Their focus is on creating a company with a strong financial base for future expansion. A strong enough dream and desire will always point towards success and provide the fuel to get there. •
PERSONAL LIFE
All successful entrepreneurs work long hours, which cuts into their personal life. However, long working hours are not unique to entrepreneurs. Many corporate managers and executives work well beyond the average forty-hour work week. The primary difference between the entrepreneur and his or her corporate counterpart is schedule control. In the corporate world, you may not have control over your schedule. If some higher-level manager 16
calls a Saturday meeting, you’ve got no choice but to be there. Entrepreneurs don’t mind working sixty to seventy hour weeks, but they will do everything they can to preserve their private time. They schedule important meetings, during the week so that they can have weekends off for their personal life, which is very important to them. •
HIGH-TECH WIZARDS
We are all aware of a few “high-tech” entrepreneur wizards, such as Microsoft’s Bill Gates who have made it. Media attention overplays the success of these few high-tech entrepreneurs. Only a small percentage of today’s personal businesses are considered high tech just a few years ago is not considered high tech by today’s standards. It takes high profits margins, not high tech, to make it as an entrepreneur. One has only to look at the recent problems that have plagued the computer industry to understand this basic principle. High-tech personal computers did very well when they made high profit margins. The industry went into a nose dive when profits fell. •
ABILITY TO WORK WITH OTHERS
Initially, entrepreneurs might work alone on a business idea by tinkering in the solitude of their garage or den. However, the astute entrepreneur knows that he or she must draw on the experience and ideas of others in order to succeed. Entrepreneurs will actively seek the advice of others and will make many business contacts to validate their business ideas. The entrepreneur who is a loner and will not talk to anybody will never start a successful business.
•
VERSATILE KNOWLEDGE
A recent study of successful entrepreneurs showed that most of them worked for a large corporation for a number of years before they started their own business. In every instance, they used the corporate structure to learn everything they could about the business they intended to establish, before they started.
17
•
VENTURE CAPITAL USERS
Entrepreneurs know that venture capital money is one of the most expensive forms of funding they can get. Consequently, they will avoid venture capitalist, using them only as a last resort. Most entrepreneurs fund their business from personal savings or by borrowing from friends or lending institutions. •
DEDICATION
That entrepreneurs are not dedicated to any one thing is a myth. Dedication is an attribute that all successful entrepreneurs exhibit. They are dedicated to becoming their own boss. To this end, they will conduct extensive research campaigns into the advantages and disadvantages of their business ideas in their dedicated drive to start a business. •
ACTION ORIENTED
This is exhibited by their motivation to take action when and where necessary. •
SELF-CONFIDENCE
An entrepreneur is confident of achieving realistic and challenging goals, coupled with a sense of effectiveness, will ultimately contribute to the success of the venture. They also have the ability to solve problems and make decisions which involves striving with determination. •
FLEXIBLE AND ABLE TO ADAPT
Albert Shapero (1985) concluded that individuals often become entrepreneurs by being thrown into situations that force them to fashion their own means of economic livelihood. Immigrants fit in this model. Circumstances afford few options for these individuals, who frequently are able to adapt and overcome many barriers to start their own ventures. •
INDEPENDENCE
Many individual become ‘economically displaced’ (unemployed) or finds themselves disillusioned with faltering careers. For these individuals, starting a new venture can be exhilarating, a breath of fresh air into an otherwise stale life-style.
18
INITIATIVE AND POSITIVE THINKER
•
They have the ability to generate new ideas and implement them ahead of the others to be able to create a competitive edge. Entrepreneurs are resourceful and creative. Entrepreneurs believe in themselves; see half a glass as full not half way or half empty. They are able to endure great difficulties and stay focused for long. In consideration of the foregoing discussion, however, some of the inherent characteristics that make up or identify entrepreneurs as a distinctive class are listed in table 1. Table 1: Some of the Major Characteristics of Entrepreneurs. •
Energetic and diligent
•
Keen to assume responsibility
•
Self-confident and optimistic
•
Single minded
•
Able to take calculated risk
•
Hardworking
•
Inquisitive
•
Good health
•
Foresighted
•
Dynamic leader
•
Alert to grab opportunity
•
Responsive to suggestions
•
Strong desire for independence
•
Responsive to criticism
•
Persevering
•
Strong desire for money
•
Ambitious
•
Versatile knowledge
Activity Can you now attempt your own characterization of successful entrepreneurs?
FUNCTIONS OF ENTREPRENEURS
•
The general function of an entrepreneur is to achieve one or more of the following objectives. •
Entry of a new venture into an existing system 19
•
Survival or expansion of existing ventures
•
Achieve operation efficiency
•
Achieve higher productivity
•
Use non-conational resources
•
Make optimum use of unutilized or underutilized resources
•
Add value to existing goods or services
•
Savings in costs of inputs
For success of an entrepreneur; innovatory attitude is fundamental. The complex tasks that the successful entrepreneurs usually perform may be classified under the following major functional areas. •
Understanding own capability; This involves examining dominant aspect of the business environment that influence survival and growth of an enterprise, identifying and comparing own personal abilities and skills vis-à-vis those particularly essential to entrepreneurial success and to establish own strength, weaknesses and the overall capability to translate a creative ideas into a business reality.
•
Planning a new venture; This function entails preparation of project report; estimating technical know-how; plant machinery and supporting services needed and knows their suppliers. The function also involved establishing legal requirements for setting up a new unit, understanding layout of production operation and space requirement as well as estimating both permanent and working capital needed to start up a venture and immediate future requirement.
•
Organizing a new venture; This function involves among others determining organizational structure of an organization choosing the form of ownership of the proposed firm. Ensuring proper maintenance of office records, initiating steps for observance of related statutory and non-statutory requirements.
•
Identifying a new venture opportunity; This entails identifying market needs and establishing need for a change. Carrying out market research and analyzing techno-economic feasibility of an idea conceived in mind. To establish answers to 20
internal and external risk. Factors as well as ascertaining the workable new venture opportunity. •
Managing finance; This function entails arranging own and borrowed capital, availing grants and subsidies obtainable from government where appropriate, outlining business credit policy and collection procedure. In addition the function also entails preparation and review from time to time sectional and master budgets in addition to period funds flow that need to be prepared.
•
Managing production operation; This function basically involves formulation of purchasing policy and inventory central system; formulation of framework for total quality control and guidelines for production schedule and ensuring that every component/raw material procured is of right quality from right source at right price in right quantity and is delivered at right place and in right time.
•
Managing work force; This function involves among other systematic manpower planning, preparation of job descriptions for all positions at all level, determining pay and perquisites for each position, selecting and recruiting personnel for each position and assigning responsibility. The function also involves delegation of authority to the personnel concerned; supervising training and motivating employees as appropriate as well as evaluating performance of each employee.
•
Managing market; This is a function that entails collecting and analyzing regularly data on customer needs with special references to product quality; function of the product, pricing and after sale service.
The entrepreneurs also work out and adopt a comprehensive marketing mix approach involving usable marketing strategy. The function also involves putting into effect and monitoring the course of action on new product development, determining its basic design packaging and labeling as well as determining and conducting period review of pricing policy considering the actual cost and market image of the product or service; the need to achieve marketing target or 21
the compulsion to effectively meet challenges from competitors. In addition, the above, the function also involves reviewing and where necessary take corrective steps in advertising, publicity personal selling and other promotional strategies and motivating sales and servicing personnel as well as closely studying their market assessment. Activity At this juncture you are in a position to explain the major functions of entrepreneurs. Explain at least five functions of Entrepreneurs 1.7 DISTINCTION BETWEEN AN ENTREPRENUER AND A MANAGER Many people believe that there is no difference between a manager and an entrepreneur. However, there is a significant difference between a manager and an entrepreneur thus majority are not always correct. A manager can be defined as the individual who oversees the day to day operations and efficiency of a continuous process. The tasks of a manager include availing required personnel machinery and raw materials which are combined in appropriate proportions to produce outputs, minimize wastages, maximize resources, and execute contracts and marketing. A manager is therefore responsible for the achievement of vision, mission, and objectives of the venture using the minimum resource possible. The entrepreneur on the other hand is responsible for combining resources, locating new ideas, and converting them into products and services. Drucker is of the opinion that the entrepreneur has the responsibility of establishing new products and new markets. Managers on the other hand are viewed as people who ensure operations are functioning effectively and efficiently. The entrepreneur must coordinate, direct others to direct the business to a new development. An entrepreneur is a person who organizes and manages a business undertaking assuming the risk for the sake of profits. An entrepreneur requires communication skills; the ability to make one understood. To be successful one requires technical skills to understand his product and market. 22
A successful entrepreneur must have strategic management skills to consider both long and short-term implication of decisions made; strength and weaknesses as well as competition. The role of the entrepreneur has evolved with time and professional entrepreneurs rely more on intellect and or gut instincts. In the past, entrepreneur was viewed as a boss but of recent he is viewed as a leader. Many entrepreneurs were self reliant but now they are inquisitive and net workers. They need to take quick decisions but now they take time to build consensus. A manager can be said to be one who does not own the venture while as an entrepreneur owns the venture and manager of the venture who maximizes opportunities. A manager may be employed by Entrepreneur to manage the business on behalf of the entrepreneurs and adhere to policies formulated by the entrepreneur for which he/she had no direct role when they were made.
Activity • Close your book now and write down features between a Manager and entrepreneur. •
Most entrepreneurs are also managers. To what extent do you agree with the above statement?
You can now confirm your answer to activity 1 by looking at the following table: Comparison of entrepreneurs and traditional managers FEATURE TRADITIONAL ENTREPRENUERS MANAGERS Primary motive Promotion and other Independence and ability to traditional corporate rewards advance in the corporate rewards Time orientation Short term meeting quotas Survival and achieving 5 -10 and budgets years growth Activity Delegates and supervisors Direct involvement more than direct involvement Risk Careful Moderate risk taker Status Failure and mistakes Decisions
Concerned about status symbols Tries to avoid mistakes and surprises Usually agrees with those in higher management 23
No concern about status Deals with mistake and failures Follow dreams with decision
Who serves
Others
Self and customers
Relationship with others
Hierarchy as basic relationship
Transactions and deal making as basic relationship
1.8
ROLE OF ENTREPRENUERSHIP IN ECONOMIC DEVELOPMENT
Entrepreneurship plays other roles in economic development other than increasing per capita output and income; it involves initiating and constituting change in the structure of business and society. This exchange is accompanied by growth and increased output, which allows more growth and increased output, which allows more wealth to be divided by the various participants. The theory of economic growth depicts innovation as the key not only in developing of new products (or services) for the market but also in stimulating investment interest in the new ventures being created. The new investment work on both the demand and the (supply side) and the resultant new spending utilizes the new capacity and output (demand side). The process through which innovation develops and commercializes through entrepreneurship activity stimulates economic growth. In specific entrepreneurs contribution to National Development include the following: •
Creation of employment for themselves as well as others who are involved in the entrepreneurship.
•
Activities. These activities generate income that is taxable by the government thus assisting government to pay public servants
•
Providing training grounds to other people who boost their knowledge and gain experience in many areas of life by working for the entrepreneurship.
•
Decentralizing economic activities – This is achieved through location of business in different parts of the country.
•
Entrepreneur through various activities help to conserve and utilize local resources. A few of such activities includes: recycling of paper; metal and plastics.
•
Foreign exchange earnings. Entrepreneurs through participation in international trade earn foreign exchange for the country.
24
•
Through contribution to the development of social amenities, infrastructure and provision of goods and services entrepreneurs help to raise the living stewards of society.
1.9 Summary In this lecture, we have attempted to look at the nature of entrepreneurship and heighted the essential features of entrepreneurship. We have looked at the historical developments of entrepreneurship and attempted a definition of entrepreneurship and at the same time outlined some of the characteristics of a successful entrepreneur. We have explained the functions of entrepreneurs and attempted a distinction between an entrepreneur and a manager and completed by looking at the role of entrepreneurship in economic development.
In this lecture, we have attempted to look at the nature of entrepreneurship and heighted the essential features of entrepreneurship. We have looked at the historical developments of entrepreneurship and attempted a definition of entrepreneurship and at the same time outlined some of the characteristics of a successful entrepreneur. We have explained the functions of entrepreneurs and attempted a distinction between an entrepreneur and a manager and completed by looking at the role of entrepreneurship in economic development. Activity •
Activity what impact does entrepreneurship have on your local province and national economies
•
Discuss the common characteristics of a successful entrepreneur
•
Discuss the common characteristics of a successful entrepreneur
•
What are the major entrepreneurial functions
•
Attempt a trace of the historical development of entrepreneurship
25
LECTURE TWO: EMERGING ISSUES IN ENTREPRENEURSHIP 2.1 Introduction This lecture is going to cover some of the emerging and controversial issues in entrepreneurship. One of the key controversies is whether entrepreneurs are born or are self made individuals and also reviewing some theories explaining entrepreneurship.
We will attempt to look at the
relationship between culture and entrepreneurial development, gender and entrepreneurship, ethical and social responsibilities of entrepreneurs, and entrepreneurial careers and education. 2.2 Objectives At the end of this lecture you should be able to: •
Discuss various entrepreneur myths that exist.
•
Examine theories of entrepreneurship.
•
Explore the relationship between culture and entrepreneurship.
•
Examine the relationship between gender and entrepreneurship.
•
Examine ethical and social responsibilities surrounding entrepreneurs.
•
Examine the Entrepreneurship careers and education in Kenya.
2.3 Entrepreneurship Myths In Lecture one, we noted that there are many interpretations and definitions of entrepreneurship. According to intellectuals and business experts, the definition of entrepreneurship is simply the combining of ideas, hard work and adjustment to the changing business market. It also entails meeting market demands. More importantly, it describes the key directive of any business innovation. Innovation is by far the primary factor that governs the very creation of a small business or entrepreneurship. When a person chooses to become an entrepreneur, they choose to be an organizer. However, not everyone is suited to being an entrepreneur – and not everyone has the necessary skills to do so successfully.
26
The National commission of Entrepreneurship (NCE), of America has highlighted six (6) myths about entrepreneurs. These include:•
The Risk-Taking Myth: “Most successful entrepreneurs take wild, uncalculated risks in starting their companies.” Risk is an intrinsic part of any business venture. It is only later on in the development of the company, when the business has created some real value, that entrepreneurs risk losing it all if they are to continue growing.
•
The High-Tech Invention Myth:
“Most successful entrepreneurs start their
companies with a breakthrough invention – usually technological in nature.” Having a breakthrough invention, a unique product or a radically new process is not a necessary element at the beginning of most successful growth companies.
There are exceptions, like Federal Express, which was started in the 1970s on the thenunheard of idea of creating a worldwide system of transportation dedicated to providing overnight delivery of packages.
But far more common are entrepreneurial growth
companies like Jiffy Lube, which brought moderate change and certainly marketable distinctions – but not “revolution” – to the way we change our oil. •
The Expert Myth: “Most successful entrepreneurs have strong track records and years of experience in their industries.” While founders of successful companies may become knowledgeable and prominent in their field later on, early-stage growth companies are just as likely to be started by relative amateurs with little background experience in the field. A full 40 percent of inc. 500 founders had no prior experience in the industry they were entering, NCOE research, 2008.
27
For example, Jann Wenner started Rolling Stone magazine when he was just 21 and just out of college.
Steve Wozniak, who helped found Apple computers, was an
“undistinguished” engineer at Hewlett-Packard when he built the first Apple computer. John Katzman was a part-time tutor at Hunter College in New York when he founded the Princeton Review, a test-preparation and tutoring company.
•
The Strategic Vision Myth: “Most successful entrepreneurs have a well-considered business plan and have researched and developed their ideas before taking action.”
Strategic planning and research are in fact hallmarks of the later stages of development, rather than a necessary initial ingredient. For many start-ups, extensive research and planning are often both unnecessary and financially impossible. At this early stage, adaptiveness is much more important than a thorough, rationalized decision making process. •
The Venture Capital Myth: “Most successful entrepreneurs start their companies with millions in venture capital to develop their idea, buy supplies, and hire employees”. Venture capital is dominant in some industry sectors – biotech, some high-tech start-ups, Internet – where capital requirements force companies to skip the early growth stages. But it – or any other type of formal financial support – is surprisingly uncommon among most successful entrepreneurial growth companies at their early stages of development. In 1999, for example, fewer than 4,000 of the roughly 700,000 new businesses created were venture capital funded. That means that less than 1 percent of all new businesses were backed by venture capital. Even Bill Gates and Paul Allen, founders of Microsoft, failed to secure venture capital when they started their company in 1975 and networking giant Cisco Systems was initially financed from the personal savings and borrowing of its two founders. 28
•
Entrepreneurs are Born Many people believe that entrepreneurs possess inmate, genetic, talents.
However,
experts generally agree that most entrepreneurs were not born; they learned to become entrepreneurs. The recent proliferation of college and university courses on the subject supports this point. Entrepreneurship is currently being successfully taught.
Activity 2.1 Can you identify any other myths about the entrepreneurs?
2.3.1
Entrepreneurship Development in Africa
According to an article in the African Executive magazine (2008) some people such as the Igbos and Ijebus of Nigeria, the Kikuyu of Kenya and the Baganda are well known within their nations as born entrepreneurs. This is because these tribes have cultures which instill entrepreneurial values on their people right from a tender age.
These values encourage savings, capital
accumulation and investment for entrepreneurial ventures. However it is difficult to develop entrepreneurial tendencies especially among young people in many other communities that do not encourage entrepreneurial cultures as they view small businesses as an occupation for the uneducated. It is further argued that due to high poverty levels Ugandans go into business just for survival. Nonetheless, many painstakingly built up fortunes are recklessly squandered by those who inherit businesses due to inadequacy of entrepreneurial values. According to Wamumo Gordon in the story of an Entrepreneur, this behavior is a disease in Uganda. Traditional approaches to education fall short of imparting some of the values entrepreneurs’ posses. It is also true that many people in Uganda go to business without clear goals. They have either been forced into it by economic conditions, or they are ignorant of what it means to run a business. 2.3.2
The case of Kenya 29
Entrepreneurs are widely recognized as the prime movers of economic development; the people who translate ideas into action. An interesting thought not widely accepted definition of an entrepreneur is a person who has the ability to scan and identify opportunities in his or her environment, gather the resources necessary to take advantage of the opportunities and implement successful action to utilize the opportunities. Recognizing the prime-mover status of business entrepreneurs, the Kenya Government has implemented a wide-ranging set of strategies to encourage youth to initiate their own small businesses. The major focus for this effort is small enterprise development (SED). Small enterprise development in Kenya has traditionally involved establishing an enabling environment for small enterprise growth including analysis and adjustments to the regulatory environment that has been a hindrance to prospective small business owners.
Formal small enterprise
development policy encompasses entrepreneurship development programs under a heading ‘Non-financial Promotional Programs’ (NFPP). The other two aspects in SED policy are the provision of responsive small enterprise credit facilities and an examination of gender issues. Furthermore, the Kenyan Government has been in the forefront in promoting and encouraging entrepreneurial culture through various legislation and support mechanisms such as Sessional paper No. 1 of 1986 on Economic management for Renewed growth, Sessional paper No. 2 of 1992 on small enterprise and Jua Kali Development in Kenya, and Sessional paper of 1996 on Industrial transformation to the year 2020. Entrepreneurship development is primarily aimed at youth in technical training institutions but is now being expanded to include the Universities.
It involves introducing youth to
entrepreneurship and the role of business entrepreneurs in economic development. They also get an opportunity to analyze the difficult employment situation in Kenya and are encouraged to consider self-employment as a career choice. Stacked up against such a choice are many examples of business failures in the community, negative attitudes towards business, and misconceptions about what makes a business succeed (the common view is that all you need to succeed is capital).
30
One major task of entrepreneurship education trainers is to counter these negative influences with positive ones such as presentation of successful role models and case studies of successful small enterprises.
One major problem is how to integrate entrepreneurship concepts and
practices into the teaching of technical subjects. Students are encouraged to initiate microbusinesses while still in college as a way to enable them to acquire an insight into the operation of a business. They are also required to identify a potential business as well as prepare and present a complete Business Plan as their final-year evaluation in the subject. It is estimated that as many as 75% of small enterprises started in Kenya fall within three years of their birth. Indeed an enterprise that is more than three years old is regarded as having achieved some measure of success. Most dynamic societies are those that have the most entrepreneurs plus the economic and legal structure to encourage and motivate entrepreneurs. According to Bwisa (1997), most research on entrepreneurship in Africa (including Kenya) has tended to look at it unfavorably due to low level of efficiency in the operation. This was said to be due to lack of relevant entrepreneurial culture and skills. The question of what factors lead individuals to become entrepreneurs is an old one. It is also common knowledge that although the propensity to entrepreneurship varies from one society to another, a universal constant is that no matter how many entrepreneurs emerge, most do not succeed in creating lasting organizations. In Kenya, we are looking at self-employment as one way of creating employment for youth. Approximately 500,000 graduates from various tertiary academic institutions enter the job market annually. However, due to low economic growth, rampant corruption, nepotism and demand for experience by potential employees, a majority of youth remain unemployed (National Youth Policy 2002). We must therefore work hard to understand how and why entrepreneurs succeed, as this is the key in ensuring youth employment. 2.4
Theories of Entrepreneurship
Entrepreneurial characteristics are not universal.
There are no specific laws or set of
characteristics that are seen to be independent across situations to guide the entrepreneur to 31
success. That is why differences in entrepreneurial characteristics are evident between nations and also different ethnic groups in various nations. The differences in entrepreneurship can also be explained by four theories that include; •
Psychological
•
Sociological
•
Economical and
•
Anthropological.
It is important to note however, that the field of entrepreneurship has no unified theory to explain who an entrepreneur is, rather it presents a body of independent theories which are supported by research evidence. The difficulty in achieving and building a universal theory has to do with the evasive nature of the entrepreneur’s behavior and cultural differences. Cultural practices vary from country to country, continent to continent and thus make it difficult to use any of the theories to sufficiently answer the question, “What makes an entrepreneur?” 2.4.1
Psychological Entrepreneurship Theories
The psychological entrepreneurship theory is based on five psychological factors. They are traits, motives, incentives, need for achievement and locus of control. This view states that people with high need for achievement have a tendency to strive for success. High achievement is associated with better performance of tasks hence entrepreneurs are those who exhibit qualities of leadership in solving persistent professional problems and demonstrate an eagerness to seize unusual opportunities. According to the psychological view of entrepreneurship, an entrepreneur is goal oriented, rather than means oriented. An entrepreneur must not only have a high capacity for risk sustaining, which is a function of high confidence. •
Personality Traits Dennis Coon in his book introduction to Psychology defines Personality traits as “stable qualities that a person shows in most situations.” To the traits theorists there are enduring inborn qualities or potentials of the individual that naturally makes him an entrepreneur. The obvious or logical question on your mind may be “what are the exact traits/inborn qualities? “ The answer is not a straight forward one; this means that no particular or 32
specific traits can be traced or pointed out. However, some insights into these traits or inborn qualities can be evident by identifying the characteristics associated with the entrepreneur. The characteristics give a clue or an understanding of these traits or inborn potentials.
Some of the characteristics or behavior associated with entrepreneurs is that; they tend to be more opportunity driven they nose around, demonstrate high level of creativity and innovation, and show high level of management skills and business know-how. They are optimistic and they see the cup a half full than a half empty, they are emotionally resilient and have mental energy, they are hard workers, they also show intense commitment and perseverance, they thrive on competitive desire to excel and win, they tend to be dissatisfied with the status quo and desire improvement, they are transformational in nature, to them failure is a tool and springboard and they are lifelong learners. They also believe that they can personally make a difference, they are individuals of integrity (i.e. trustworthiness, honesty and principled) and above all visionary.
The trait model is still not supported by research evidence. Our only way to explain or claim that it exists is to look through the lenses of one’s characteristics/behavior and conclude that one has the inborn quality to become an entrepreneur. (ii)
Need for Achievement While the traits focus on enduring inborn qualities the need for achievement theory put forward by McClelland (1961), one of the influential motivation theorists say that human beings have a need to succeed, accomplish, excel or achieve. Hence that person or individual will do all there is to move from the bottom of the ladder to the top. Studies provide
evidence
for
the
relationship
entrepreneurship (Johnson, 1990).
between
achievement
Similarly, Shaver & Scott
motivation
and
(1991) believe that
achievement motivation may be the only convincing personological factor related to new venture creation. (iii)
Locus of Control 33
Locus of Control is an important aspect of personality. The concept was first introduced by Julian Rotter in the 1950s. Rotter (1966) refers to Locus of Control as an individual’s perception about the underlying main causes of events in his/her life. In other words, a locus of control orientation is a belief about whether the outcomes of one’s actions are contingent on what one does (internal control orientation) or an event outside ones personal control (external control orientation). 2.4.2 Sociological Entrepreneurship Theory The sociological theory is the second of the major entrepreneurship theories. Sociological enterprise focuses on the social context. This theory includes social networks, life course stage context, ethnic identification and population ecology.
Although entrepreneurial activities
originate from individuals, entrepreneurs are neither independent to their immediate environment nor omnipotent to carry out all business related tasks single handedly for long periods of time. To an economist’s view, entrepreneurship is synonymous with the business accomplishments of an individual. But as business grows, the role of the organization i.e. collective behavior of people in the organization becomes critical to its success. Reynolds (1991) has identified four social contexts that are related to entrepreneurial opportunity. The first one is social networks, here; the focus is on building social relationships and bonds that promotes trust and not opportunism. In other words, the entrepreneur should not take undue advantage of people to be successful rather success comes as a result of keeping faith with the people. The second he called the life course stage context which involves analyzing the life situations and characteristic of individuals who have decided to become entrepreneurs. The experiences of people could influence their thought and action thereby wanting to do something meaningful with their lives. The third context is ethnic identification; this is where one’s sociological background is one of the decisive “push” factors to become an entrepreneur. For example, the social background of a person determines how far he/she can go. Marginalized groups may violate all obstacles and 34
strive for success.
Their disadvantaged background spurs them to make life better for
themselves. The fourth social context is called population ecology. The idea is that environmental factors play an important role in the survival of businesses.
The political system, government
legislation, customers, employees, competition are some of the environmental factors that may have impact on survival of new venture or the success of the entrepreneur.
2.4.3
Anthropological Entrepreneurship Theory
Anthropology is the study of the origin, development, customs and beliefs of a community. In other words, the culture (how we are programmed or socialized to behave in society) of the people in the community. The anthropological theory says that for someone to successfully initiate a venture the social and cultural context should be examined or considered. Here emphasis is on the culture entrepreneurship model or what has been referred to as indigenous entrepreneurship. The model says that new venture is created by the influence of one’s culture. Cultural practices lead to entrepreneurial attitudes (innovation e.t.c.) and that also lead to venture creation behavior.
For example, a culture that frowns on the celebration of success and
achievement may not develop positive attitudes about success and that may stifle innovation and creativity. In other words, the attitudes required to affect behaviors or venture creation is essentially embedded in the cultural practices of the community. 2.4.4
Economic Entrepreneurship Theory
John Alois Schumpeter (1934) is credited as the father of economic entrepreneurship theory. Central to this theory is the creation of something new as an important function of an enterprise and that the new creation processes serve as impulses for the motion of market economy (capitalist engine). The economic entrepreneurship view starts by the acquisition of the means of production and continually reviewing these factors, methods and processes used by the
35
entrepreneur.
The economic end is justified by the creativity and innovativeness of the
entrepreneur. The main incentive to entrepreneurship here is the promises of wealth. The above theories offer no comprehensive and universal model as the theories in their current state are independent and narrow.
There is therefore the need to build an integrated
entrepreneurship model that will take cognizance of all the four independent perspectives. The factors influencing the establishment of an ethnic enterprise are multifaceted and include education, generation, the local population, the economic situation, job opportunities, location, cultural and religious differences, and the origin. These factors describe why ethnic groups differ in terms of approaching and developing enterprises. 2.5 2.5.1
Culture and Entrepreneurship Ethnic Entrepreneurship
Understanding the differences in entrepreneurship behavior of various ethnic groups in the context of the environment and economic opportunities (or lack of thereof) available in the societal context has been a great challenge. Ethnic entrepreneurship is ‘a set of connections and regular patterns of interaction among people sharing common national background or migration experiences’ (Waldinger et al., 1990a:3). Since the emphasis for theoretical explanations of this phenomenon is based upon those patterns of interaction, the focus of the majority of studies in this area is the ethnic group. Various definitions for the term ‘ethnic group’ have been suggested. According to Yinger (1985:27) for example, an ethnic group is ‘a segment of a larger society whose members are thought, by themselves or others, to have common origin and to share important segments of a common culture and who, in addition, participate in shared activities in which the common origin and culture are significant ingredients.’ An alternative term used to ‘ethnic’ is ‘immigrant entrepreneurs,’ which in turn would only include the individuals who have actually immigrated over the past few decades. This definition excludes, however, members of ethnic minority groups who have been living in the country for several centuries such as AfroAmerican in the USA, Jews in Europe or aborigines in general. ‘Ethnic’ on the contrary, does not exclude immigrant or minority groups. 36
Light and Gold (2000:3) for their part speak of ‘ethnic economy,’ which they define as ‘any ethnic or immigrant’s self-employed group, its employers, their co-ethnic employees, and their unpaid family workers.’ They further introduce the concept of ethnic ownership economy to distinguish between an ethnic economy that is based on property right and ownership and an ‘ethnic economy whose basis is de facto control based on numbers, clustering, and organization, the ethnic-controlled economy.’ Whereas ethnic ownership economy consists of small and medium-size businesses owned by ethnic or immigrant entrepreneurs and their co-ethnic helpers and workers, ethnic control economy refers to industries, occupations, and organization of the general labor market in which co-ethnic employees (not owners) exert appreciable and persistent economic power. This power usually results from their numerical clustering, their numerical preponderance, their organization, government mandates, or all four. The ‘ethnic controlled’ economy is completely independent of the ‘ethnic ownership’ economy. The participants in the ethnic controlled economy exert control rather than ownership authority. 2.5.2 Culture and Business As an entrepreneur, you will come into contact with all kinds of people. Many of these people will be from cultures different from yours whether your business operates only in Kenya or all over the world, you will need to become familiar with and learn to respect other cultures. Culture is a set of customs, beliefs, and social attitudes that characterize a particular group of people. Every society has its own culture, and even culture and its own characteristics. Arab culture emphasizes traditional religious belief and family values. Chinese culture emphasizes respect for older people and commitment to family.
Traditional nature American culture
emphasizes respect for nature. Kenya is a multicultural society. People from different cultures live here. As an entrepreneur, you need to appreciate different cultures because:
37
•
You need to be comfortable with your customers. If you are open to other cultures you can attract more customers.
•
People from different cultures may have different needs and wants. Understanding these can help you market your business more efficiently with locally and internationally.
As an entrepreneur, you may have to work with people from different cultures. Hence, there are at least five things that you can do to develop these relationships. •
Avoid stereotyping people. Do not assume that all people form a particular ethnic or cultural group behave the same way or like the same thing.
•
Focus on similarities rather than differences. Most people, regardless of their culture, want the same things in life.
•
Learn about different cultures. Learning about different cultures will make you more comfortable around people from that culture.
•
Make friends with someone from a different culture.
This can help you begin to
appreciate different cultures. •
Try to understand and identify with other people’s feelings. Try to understand cultural views that are different from your own.
If you do business approach, you will need to learn about cultures of the countries in which you plan to operate. Hence, •
Familiarize yourself with other cultures.
•
Speak the language.
•
Research different cultures.
•
Understand cultural practices.
•
Develop cultural sensitivity.
2.6 Gender and Entrepreneurship Women constitute around half of the total world population. In traditional societies, they were confined to performing household activities. participate in all sorts of activities.
In modern societies, they have come out to
The global evidence buttress that women have been
performing exceedingly well in different sphere of activities like academics, politics 38
administration social work and so a Khanka (199). Now, they have started plunging into industry and also running their enterprises successfully. Therefore, it is fitting to explore how gender and entrepreneurship are related. Women entrepreneurs may be defined as a woman or a group of women who initiate, organize and run a business enterprise. In terms of Schumpeterian concept of innovative entrepreneurs, women who innovate imitate or adopt a business activity are called women entrepreneurs ‘? In a nutshell women entrepreneurs are those women who think of a business enterprise, initiate it, organize and combine the factors of production, operate the enterprise and undertake risks and handle economic uncertainty involved in running a business enterprise. Women are the backbone of economic development in many developing countries. Global entrepreneurship monitor (GEM) reports that women entrepreneurs create jobs, wealth and innovation across 37 countries surveyed. In many of these countries the rate of growth of women creating new business is greater than the rate of growth for men entrepreneurs. (Reynolds, et al 2002). Women entrepreneurs in Kenya are creating employment and contributing to general economic growth 48% of all micro-small and medium sized enterprises (MSMES) which contribute 20% of Kenya’s GDP have created 462,00 jobs annually since 2000. In spite of their contribution to the economic development, their freedom to lead and make strategic business decisions is greatly hampered by among other things culture, financial status and lack of education. A growing amount of research shows that countries that fail to address gender are losing out on significant economic growth. (World Bank) The Gender and Economic Assessment in Kenya demonstrates that addressing gender barriers in Kenya could generate significant economic gender based inequalities in education and access to
39
agriculture inputs in Kenya could result in a one off increase in as much as 4.3 % in GDP growth if this gender barriers are tackled. Needless to say, such trend in the field of entrepreneurship has attracted queries as to what drives and motivates women to start up businesses of their own despite the many challenges they face. 2.6.1 What would Motivate Women to Become Entrepreneurs? Most women entrepreneurs have similar motivational drives as that of their male counterparts’ i.e. •
Being one’s own boss
•
Opportunity to make more money
•
Belief that running one’s own business is more compatible with balancing ones familiar role.
•
The fact that corporate worlds have opened up more opportunities for women. It also appears that women who set up their own business. •Had become frustrated with demanding but unsatisfying work environment •
Had a need to earn a reasonable living
•
The inflexibility and unaccommodating nature of the corporate world t women’s situations
•
The problem of discrimination and the glass ceiling effect that deprives
women to achieve more senior executive positions. Since the family affects aspects of personal development. Goal orientation, personality and motivation, it is thus an early and overriding source of influence on career choice. In particular, it is proposed that when a child of an entrepreneurial mother perceives his/her parent (the role model) as positive and successful, then the child is most likely to imitate the entrepreneurial mother.
40
The probability of someone becoming an entrepreneur can be increased by exposing the individual either vividly or through formal learning experiences to tasks associated with owning a business.
2.6.2 Challenges/Barriers that Prevent Women Entrepreneurs from Reaching their full Potential (Negative influencing factors to women entrepreneurs in Kenya)
•
Unequal access to property and land In Kenya only 1% of land titles are owned by women, while 5 to 6% held in joint names. Unequal access to land and property means that women are unable to secure loans for their businesses.
Without financing, women are unable to grow their businesses, and
they remain stuck at the micro-enterprise level. As noted by Roseanne Ndiga, owner of Green Corner Café’ in Nairobi “I have approached several banks but they would not give us loans because of collateral” Source: Voice of Women Entrepreneurs in Kenya. •
Taxes and customs In a recent World Bank survey, over 60% of women perceived taxes and customers as constrains to their business growth, compared to only 40% of men.
This negative
perception makes women less likely to register their businesses and it deprives the government of tax revenue. •
Culture These are the customs and beliefs, art, way of life and social organization of a particular group (Oxford advanced learners dictionary). Most Kenyan cultures look down upon women, and they emphasize that their main role is to take care of their husbands and children. Women who deviate from these expected norms are considered to be deviants. In fact it is a common trend in Kenya to find that most success women are either single or are divorced.
•
Lack of decision making authority 41
Women have always been subjected to dependence on significant men in their life’s when it comes to decision making. Even when they run their own businesses, men always feels like they have an upper hand in deciding what goes regardless of how much they understand the business. •
Limited mobility Unlike men, women mobility in Kenya is highly limited due to various reasons. Cumbersome exercise involved in starting an enterprise coupled with the officials’ humiliating attitude towards women compels them to give up the idea of starting an enterprise.
•
Competition from well established male dominated enterprises Men have their own way of running their businesses. They also have other advantages that women do not have that make them offer women stiff competition. Some of this includes issues like, men can take greater risks, and they are more capable of using uncouth means e.g. bribery, corruption among other which women shy from.
•
Lack of accurate information Relative lack of exposure to the external world and poor networking were seen as impediments to Kenya women entrepreneurs.
•
Lack of finance for expansion Women experience in negotiating with banks and their lack of financial confidence to argue for what they are entitled to are some of the challenges faced by women entrepreneurs in obtaining loans.
•
Lack of risk take propensity Lack of confidence, strong individual involvement and willingness to take risks prevent women entrepreneurs in sustaining successful entrepreneurship. (Richard, Howarth and Finnegan, 2004)
•
Domestic commitments (balancing a woman’s role in the home and enterprise expectations). Socio-cultural expectations.
•
Lower education levels This puts Kenyan women entrepreneurs at a disadvantage compared to men. While the gender gap in primary education has decreased in the recent years, the gap remains large at the tertiary education levels. 42
A curriculum that does not emphasize entrepreneurship skills decreases the chances that women will have the knowledge needed to excel in business. •
Stereotyping Societies view are largely negative about women entrepreneurs and many are pessimistic about the capabilities and think that they are doomed to fail in a male dominated environment.
•
Poor access to justice Although this is seen to affect both men and women, access to justice is essential for ensuring smooth business operations, and it spans to issues such as enforcing contracts and employment disputes. Women in Kenya have difficulties when accessing justice. Using formal courts in Kenya ca be costly, complex and time consuming. When a women entrepreneur finds herself in court, the process can have potentially destructive consequences as noted by Esther Passaris of Adopt A Light. This could be because of the dubious judiciary system, which seeks to serve their interests, apart from solving the case.
2.6.3 Positive Influencing Factors to Women entrepreneurs in Kenya 1. Characteristic traits 2. Government policies 3. Characteristics traits Studies have shown that women have certain characteristics that could propel them out of poverty if harnessed.
Jailbert (2000) suggested that women entrepreneurs have common
characteristics
•
Sharp communication skills
•
Intuitive people skills
•
Consensus building competencies
•
Multi-tasking
2. Government policies 43
(a) Recent policy trends in Kenya The government is looking into increasing representation of women in all key decisions making organs. There may be greater benefits for encouraging leadership and strategic decision making by women entrepreneurs in the future that in the past. This includes the emergence of greater democratic space for women coupled with change in profiles of women transition economies, increasing gender mainstreaming (UNDP, 1998). However, despite the above, Lapidus (1993), delineated three features that deserve emphasis for their role in shaping women’s economic position. •
Women must overcome sexual stereotyping of occupation which is sustained by government policies and societal attitudes.
•
Female occupational choices are profoundly influenced by men’s authority.
•
Women entrepreneurs who pursue demanding careers encounter societal prejudices, because women are expected culturally to assume household responsibilities.
b) Government initiative to support women. Through the women enterprise fund, the Kenya government has put plans in place to enable women assess funds to start and also expand their business. This fund is designed to address the perennial challenges women face in their desire to venture in enterprise development. The fund has so far been able to support over 10,000 women entrepreneurs (Ministry of Gender & Social Services). c) Banks and Loan Services The banking sector has also improved greatly in its support towards women’s development issues. In the past, it was impossible for a woman to acquire a bank loan without the husband consent. This greatly limited a woman’s ability to start or expand any development idea she had. Nowadays, women can easily get loans for as long as they can show that they are capable of paying and if they have collateral.
This has greatly contributed to success in many
businesses run by women. 44
The women enterprise fund is a bit limiting because it mainly targets women who have micro enterprise. Those who need huge capital to begin large businesses can only seek help from the banks. 2.6.4 1.
Differences between men and women entrepreneurs Decision making
Men make more independent decisions compared to women. Women and especially those who are married have to depend on a large extent on their husbands when making decisions. When women make decisions without consulting men, conflicts are about to arise. Many women agree that their enterprises would do much better if they were able to make independent decisions. On the contrary, men are known to make major decisions without consulting their wives. 2.6.4 Differences between men and women entrepreneurs 1. Decision making Men make more independent decisions compared to women. Women and especially those who are married have to depend on a large extent on their husbands when making decisions. When women make decisions without consulting men, conflicts are bound to arise. Many women agree that their enterprises would do much better if they were able to make independent decisions. 2.
Strategy and leadership
Even though there are many pieces of policy documents on gender mainstreaming and empowerment, the changes are yet to take effect. This has greatly curtailed women’s efforts to succeed as they should in their enterprises. 3.
Risk taking
Men take more and bigger risks compared to women. The belief that the bigger the risk the greater the gain can be seen when the men reap their benefits. Recommendations •
Recognition 45
•
Women entrepreneurs need to be recognized of their existence.
•
They need to be recognized as a group contributing towards economic growth and development of the country.
As long as these entrepreneurs are not recognized and given priority, their potential and entrepreneurial capacity will remain undermined. Reduce domestic burdens of women
•
Young non schooling children can pose a great challenge to a woman entrepreneur. If day care centers could be set up to take care of young ones, then this burden could be eased. Access to education
•
Poor access to education and training programs which are imperative in helping women in their entrepreneurship, managerial and technical skills should be thoroughly addressed. In Kenya, there are several NGOs that support women entrepreneurs. They include:
•
•
Kenya Women Finance Trust.
•
Equity bank in conjunction with a UN agency.
•
African Networks and Associations of People living with HIV.
•
Abantu for Development.
•
Kenya Eco Village Program. (Transforming Rural Lives and Settlements)
•
Any others.
Social and Ethical responsibilities of the Entrepreneur
Entrepreneurs have responsibilities to the people they work and deal with. They also have responsibilities to the communities in which they are located. They even have a responsibility to the environment. An owner of your own business, you will also be forced to deal with what is right or wrong. In other words you will have to make ethical decisions about the way you want to run your business.
Hence, in this section, we will explore the social and ethical
responsibilities of the entrepreneur.
•
Social Responsibilities
46
As an individual, you have personal responsibilities to yourself, to your family, and to your friends. As an entrepreneur, you have responsibilities to your customers, your suppliers, your investors, your creditors, and your community. Responsibilities to customers
•
Your customers are your most important assets. You will need to treat them correctly, or they will no longer use your services or buy your products.
When dealing with
customers, you should: •
Treat all customers with respect
•
Be honest.
Never take unfair advantage of customers who do not know
everything about the product or service they want to buy. Help your customer make good purchasing decisions. •
Avoid exaggerating the merits of your products or services. Remember that customers who are not happy with what they purchase will not do business with you again.
•
Inform customers of possible dangers of the products you well. Remember that this is also a legal requirement.
•
Handle all disputes fairly. Try to see both sides of an issue when there is a disagreement with a customer. Responsibilities to Suppliers
•
You depend on your suppliers to provide you with the goods you need to manufacture or sell your products. Hence, to ensure that you maintain good relationship with them, you need to: •
Treat all suppliers with respect
•
Refuse to participate in dishonest schemes your suppliers may suggest; especially schemes to conceal payments from Revenue Authorities.
•
Give suppliers time to fill your order. Try not to wait until the last minute to ask for supplies.
•
Handle all disputes fairly.
•
Let your current supplier know the reason for your decision if you change suppliers. 47
Responsibilities to Creditors and Investors
•
Creditors and Investors have shown faith in your ability to succeed. To repay their confidence in you, you should run your business as carefully as possible. Never conceal losses and things negative about the business from them. Responsibilities to your Community
•
Business owner have a special responsibility to their communities.
They can get
involved in Community issues by: Contributing money to charities, cultural institutions, and causes in which they
•
believe.
Not all businesses can make large contributions, but any donation is
welcomed. Donate products or services used. Used clothing stores donate unsold clothes to
•
charities. Get involved in issues affecting local authorities i.e. cleaning parks, or get
•
involved with charitable organizations, volunteering both time and money. Responsibilities to your Employees
•
Whenever society changes, businesses have to respond. In order to attract and retain good employees, you will have to become sensitive to the needs of the people who work for you by: •
Accommodating your employees’ family needs.
•
Considering flexible working hours e.t.c. Respect the Environment
•
Damage to the environment comes from different sources. Businesses have a major impact on the environment. As an entrepreneur, you will have an obligation to do as little harm as possible to your surroundings. To meet your environmental responsibilities, you should: •
Protect the environment from pollutants.
Don’t knowingly dump hazardous
materials on the ground or in lakes and rivers. •
Conserve non-renewable resources, such as coal and oil, by using them efficiently. 48
Reduce waste and dispose of waste responsibly. Recycle materials such as paper,
•
plastic, glass, steel e.t.c. Use environmentally safe and sustainable energy sources to meet your business
•
needs. Sell products that cause as little damage to the environment as possible for
•
example, do not sell a car wash solution that kills plants. 2.7.2
Ethical Issues
Ethics is the study of moral choices and values. Ethics involve choosing between right and wrong. Behaving ethically means behaving in an honest manner. Different cultures define ethical behavior differently. In some countries, it is considered unethical to take bribes; in others paying bribes may be an accepted business practice. Even within the same culture, individuals develop different standards, or codes of ethics. A code of ethics is the level of ethical behavior demanded by an individual, a business, or a culture. Some individuals have very high standards of ethics while others do not develop a standard of ethics at all. They act without thinking whether their actions are right or wrong. Business ethics have to do with the application of the principles of right and wrong to issues that come up in the work place. Some people believe that entrepreneurs need not concern themselves with ethical issues. They might think that acting ethically can hurt their profits. In fact, using ethics in business can help you avoid disasters. It also can make customers and suppliers more willing to do business with you. As the owner of your business, it will be up to you to inspire your employees to behave ethically. You will want to establish an ethical workplace for several reasons: •
You want to do the right thing
•
You want to serve as a role model to others
•
You want to be proud of the way you conduct yourself, and you want others to be proud of you
•
Ethical behavior is good for business because it gains the trust of customers 49
•
Employees are more likely to act ethically if they see the business owner acting in an ethical manner
•
Acting ethically reduces the possibility of being sued.
One way that you can communicate your ethical beliefs to the people who work for you is by creating a written code of ethics. Such guidelines will help you and your employees make ethical decisions. Entrepreneurship Career and Education in Kenya
•
An entrepreneurial activity stimulates innovation upon which economic growth and development depend. The high degree of correlation between entrepreneurship and economic growth warrants it being taught. Entrepreneurship is practical economics. It is therefore important to teach the practice of economic theory. There may be some genetic and environmental inclinations that tend to destiny some people forward entrepreneurial careers. But there is some evidence to suggest that many more people have entrepreneurial potential but never become entrepreneurs. Education therefore has a central responsibility in identifying and nurturing those who can be the change agents in the decades to come, and can make a profound differences in the future supply of entrepreneurs. Activity 2.2 What should Entrepreneur Education focus on?
Ideally, it should focus on: •
Equipping the learner with characteristics and skills that make them eager to become venture initiators.
•
Focus on the historical context and descriptions of the role of the entrepreneur and entrepreneurship in economic history.
•
Focus on developing innovation, risk taking, imagination, problem solving and decisionmaking skills.
•
Aim at changing the attitudes. 50
•
Summary
In this Lecture, we have looked at various myths that have been advanced about entrepreneurship, with the major theme being the argument whether entrepreneurs are born or taught. We have also looked at four theories of entrepreneurship, i.e. psychological, sociological, economically and anthropological. We have also explored the relationship between entrepreneurship and culture, and also gender. We have examined the Challenges affecting women entrepreneurs in Kenya, and the efforts being made to promote up and coming female entrepreneurs. This lecture has also examined the social and ethical responsibilities of the entrepreneur and looked at the reasons why it is important for the entrepreneur to have business ethics and also show some social responsibility toward various important stakeholders. We have concluded by briefly looking at entrepreneurial education and what it entails and the career path of an entrepreneur
51
Activity •
Give an account of growth of women entrepreneurs in Kenya
•
It is important for entrepreneurs always to act in an ethical manner? Why or why not?
•
Explain the concept of social responsibility
•
Why are some communities more entrepreneurial than others
•
Advance the view that Western Nations (especially Americas) are more entrepreneurial than developing countries (i.e. Kenyans)
•
Advance the view that certain ethnic communities are more entrepreneurial than others.
•
What career paths are available for entrepreneurs in Kenya.
Activity • Give an account of growth of women entrepreneurs in Kenya •
It is important for entrepreneurs always to act in an ethical manner? Why or why not?
•
Explain the concept of social responsibility
•
Why are some communities more entrepreneurial than others
•
Advance the view that Western Nations (especially Americas) are more entrepreneurial than developing countries (i.e. Kenyans)
•
Advance the view that certain ethnic communities are more entrepreneurial than others.
•What career paths are available for entrepreneurs in Kenya?
52
References • Drucker, Peter. F (199) Innovation and Entrepreneurship. • Eno Maurel, Motivations and performance conditions for ethnic entrepreneurship. •M.G. Visram, 1987; Red soils of Tsavo, Q Hunter Limited •Peter Njenga; 2008, Emerging Kenyan Entrepreneurs; Comlit Communications •Robert D. Hisrich & Michael P. Peters; 2002 Entrepreneurship; Tata MacGraw Hill. • Drucker, Peter. F (199) Innovation and Entrepreneurship. • Eno Maurel, Motivations and performance conditions for ethnic entrepreneurship. • M.G. Visram, 1987; Red soils of Tsavo; Q Hunter Limited • Peter Njenga; 2008, Emerging Kenyan Entrepreneurs; Comlit Communications • Robert D. Hisrich & Michael P. Peters; 2002 Entrepreneurship; Tata MacGraw Hill. • Oands Ogachi, 1999, Economic reform political liberalization and Economic ethnic conflict in Kenya, Afrique et development • http:/joe, sagepub.com, journal of entrepreneurship • World Bank 2005. ‘Youth Development in Kenya: Report on Economic and Sector work’ Nairobi • Reynolds, P.D. (2002), Global Entrepreneurship Monitor (GEM) ‘Report on Women and Entrepreneurship’ London Business School • UNDP (1998), Gender and Poverty, social development and poverty elimination division • Bitange N. and fides W.M. (2006). Women entrepreneurs and strategic decision, UoN Kenya • http://www.morebusiness.com/business-entrepreneurship. •
•
Drucker, Peter. F (199) Innovation and Entrepreneurship.
•
Eno Maurel, Motivations and performance conditions for ethnic entrepreneurship.
•
M.G. Visram, 1987; Red soils of Tsavo, Q Hunter Limited
•
Peter Njenga; 2008, Emerging Kenyan Entrepreneurs; Comlit Communications
•
Robert D. Hisrich & Michael P. Peters; 2002 Entrepreneurship. Tata MacGraw Hill. 53
•
Oands Ogachi, 1999, Economic reform political liberalization and economic ethnic conflict in Kenya, Afrique et development
•
http:/joe, sagepub.com, journal of entrepreneurship
•
World Bank 2005. ‘Youth Development in Kenya: Report on Economic and Sector work’ Nairobi
•
Reynolds, P.D. (2002), Global Entrepreneurship Monitor (GEM) ‘Report on Women and Entrepreneurship’ London Business School
•
UNDP (1998), Gender and Poverty, social development and poverty elimination division.
•
Bitange N. and fides W.M. (2006). Women entrepreneurs and strategic decision, UoN Kenya
•
http://www.morebusiness.com/business-entrepreneurship.
LECTURE THREE: FORMS OF ENTERPRENEURSHIP SMALL BUSINESS ENTREPRENEURSHIP The interpretation of small business varies across countries and continents. Different countries identify small business by different rules, principles and standards. Regardless of these rules, principles and standards, the expression small business is widely applicable to private trading commercial or industrial enterprises characterized by small investment, assets, operation, output, sales, number of employees and scope. In simple words, small business generally refers to private enterprises managed on a small scale. These include workshops, wholesale or retail stores, advertising agencies, professional and personal service firms, tailoring shops, hotels and restaurants and many more of diverse description that are owned and run independently by private individuals.
54
Activity Attempt your own classification of business in Kenya
Individuals who fail to find suitable salaried jobs or who want to be their own bosses make their living from self-employed occupations independently running small; trading, manufacturing or service enterprises. Traditionally small enterprises, as owner-operators, take personal initiatives, mobilize and invest own resources to start any suitable business requiring small capital and risk their money and fortunes. For many of them it is not possible to begin with on a large scale. Small enterprises, especially in developing countries, cut best capable of starting on a small scale may not have access to ample finance, advance technology and also superior managerial expertise to undertake improved operation.
As economic history describes in most cases
proprietor-operators of small establishments who take up their self-employed occupation on economic necessities engage themselves in routine activities. Their meager resources, limited specialization in small trade, economic ignorance, insensitivities to potential market opportunities and inability to take bigger risks also add to the lack of entrepreneurship in their operations. This explains why small business is mainly engaged in doing things in line with conventional practices or techniques. Nevertheless, as some writers point out, it is neither essential nor practical for every small business person to possess all the entrepreneurial qualities. Even the qualities that high achievers among successful innovators are not exactly similar in term of nature, constitution and degree. The distinction between entrepreneurs and small business persons, therefore, is somewhat hazy and contradictory.
There is no unanimity on this the question whether the concept of
entrepreneurship is applicable to large undertakings only or to small business ventures as well. The importance of small enterprises in Kenya’s socio-economic development has long been recognized. The Kenyan government has attempted to come up with various policy guidelines in support of the growth of small businesses. The principle reasons being those small businesses: 1.
Provide large scale direct and indirect employment to literature as well as illiterate people; 55
2. Help in the mobilization of resources, including small savings; 3.
Prevent concentration of wealth and means of production in the hands of a few;
4. Create equality of opportunity to all; 5.
Play prominent roles in the development of the national economy; and
6.
Bring about balanced regional development.
Advantages of Small Business 1.
Uses affordable machinery and other capital equipment
2.
It involves much lesser risk in terms of capital outlay
3.
An individual may invest own modest resources and start any suitable business requiring little capital.
4.
It can be started within a short period and without much difficulty, especially where the licensing regime is flexible.
5.
An ancillary unit may get financial and material support from large establishments.
6.
Much of wasteful expenditure on purchase, inventory advertisement and marketing can be avoided.
7. 8. 9.
Its products or services may be offered at cheaper prices. It provides employment to more illiterate and unskilled people. It provides goods and services according to the specific needs and wants of the customers.
10.
Attract numerous support and inducements from government.
Disadvantages of Small Business 1.
Inadequacy of capital hinders technological ingratiation, expansion, diversification or 4even replacement of old and absolute machinery.
2.
Absence of skilled personnel, modern technology and equipment and professional management often weaken the competitiveness of a unit.
3.
Want of stringent quality control mechanism renders its products or services unacceptable to customers.
4.
Power shortages, labour unrest, frequent increases in the costs of power and fuel, and unrestricted entry of cheaper foreign goods add to the sickness of small units. 56
5.
Money lenders and middlemen frequently exploit owner-operators who do not know practical marketing strategies. Activity Can you identity other advantages and disadvantages of small business?
TYPES OF OWNERSHIP Many businesses are initially started by one person often with the help of the family members. Others are started by one person then change to partnerships or limited companies straight away. The different types of ownership may include: SOLE PROPRIETOR This is a one person business and is quite common all over the world. Such a firm is registered in the name of the entrepreneur, though it can carry a trade name. The sole proprietor invests own and borrowed funds and uses own skills and abilities in the management of affairs of the firm. The abilities (or lack of them) of the entrepreneur determine success or failure of the business. The proprietor is the only person who has the legal right or exclusive title to all the assets of his/her business and is solely responsible for its operations control of the business depends on the owner who has to work long hours and hardly takes leave since there is nobody to relieve him/her. In case of proprietor decides to withdraw from all business activities and in the event of there being none to succeed him/her, more often the business is sold to someone or closed. ADVANTAGES OF SOLE PROPRIETORSHIP 1.
Easy to start or to close
2.
Negligible restrictions
3.
Owner’s exclusive control
4.
Immediate decision and speedy action
5.
Direct supervision of employees
6.
Direct dealings with customers
7.
Low establishment expenses 57
8.
Owner enjoys all the profits
9.
Flexibility of operations
DISADVANTAGES OF SOLE PROPRIETORSHIP 1.
Inadequacy of resources
2.
Limited manpower
3.
Owner’s unlimited ability
4.
Dearth of managerial skills
5.
Excessive burden on owner
6. Growth and stability of business depend on owner’s health, initiative, and business Acumen and innovational mentality. FAMILY BUSINESS Family members start a major portion of new businesses launched in the world every year. It is estimated that 60% of businesses in the world start as family ventures and researchers estimate that at least 90% of businesses in the United States of America are family owned and controlled. Whatever the family ties, however, starting a business with a spouse, parents, siblings, children or other family members presents unique challenges over and above the usual problems a startup faces. That’s why only one in three family businesses survives to the next generation. In the startup stage, the dangers can be especially acute. This is because busine4ss management in family-owned companies is conditioned, as in any other company, by economic and organizational factors, but also by emotional issues. Mixing business, personal and home life will eventually produce a volatile brew. Family members sometimes join the excitement of a business startup without a clear idea of their role once the business is underway. If the family is involved in the startup venture, one should be clear up front about compensation, exit plans, succession plans and other details before they become a problem in later stages of business growth.
58
A family business may be defined in terms of ownership, authority and responsibility. One or more family members have authority and responsibility while employees may or may not be family members. Broadly, a family business can be defined as a business that is owned and managed by one or more family members. It can also be define as an organization whose direction is influenced through the exercise of kinship ties, management roles, or ownership rights. In summary, a family business is a unique synthesis of the following: •
Ownership control (15 percent or higher) by two or more members of a family or a partnership of families.
•
Strategic influence by family members on the management of the firm, whether by being active in management, by continuing to shape the culture, or by serving as advisors or board members.
•
Concern for family relationship
•
The dream (or possibility) of continuity across generations.
The following characteristics define the essence of the distinctiveness of family businesses: 1.
The presence of the family
2.
The owner’s dream of keeping the business in the family (the objective of business continuity from generation to generation)
3.
The overlap of family, management, and ownership, with its zero-sum (win-lose) propensities, which render family business particularly vulnerable during succession.
4.
The unique sources of competitive advantage derived from the interaction of family, management, and ownership, especially when family unity is high.
5.
Generally stay together and basically have a common goal.
6.
Great cohesiveness due to shared background and values of the family members.
7.
Great potential for taking risks, developing human resources, access to capital and provision of continuity particularly in comparison with public sector or large privatelyheld entities.
59
8.
Charitable services are visibly linked to specific family enterprises which have incentive to ensure that programs actually work, providing needy groups and individuals with better opportunities for development and autonomy.
9.
Capacity to make long term investments and more inclined to reinvest in itself to support and perpetuate wealth for future generations.
10.
Operating philosophy of a family firm is typically guided by personalized mission to whom employees can bond and rely upon for their sense of autonomy and personal security.
11.
Founders and their successors in family firms tend to be highly accountable to them and to maintain both a strong sense of family and responsibility.
CLASSIFICATION OF FAMILY BUSINESS Family businesses in Kenya can be classified into three (3) categories: •
Owner-managed business (OM) – the entrepreneur or the one who started the business.
•
The sibling partnership (SP) – after the entrepreneur, mom and dad die, the siblings try to work in the family business.
•
The cousin syndicate (CS) – when the siblings die, the cousins try to manage the family business.
Succession planning in family businesses is one of the issues that have not been adequately addressed and it is at this stage when the venture fails to carry on after the second generation takes over. It is worth noting that succession planning in family business is an important component that should be thought of as early as when the venture is being initiated. But often, this does not happen. People start thinking of a succession plan as late as when the founder is aged or even immediately after his or her death. For those with a son or a daughter who is working in the family business, it is natural to want to pass the business on to them. Sometimes, this works out great for everyone. But all too often the second generation simply doesn’t have the mindset to continue the business effectively. For instance in the US, in “Beating the Midas Curse”, Estate attorneys Rod Zeeb and Perry Cochell reference studies that show 65% of secondgeneration family businesses fail and a mind-boggling 90% of third-generation 60
businesses fail (Harris 1990). Not much of the studies have been carried out in Kenya amount the reasons why family businesses fail, but reading findings from such similar studies in the US and elsewhere present generalizeable notions that cut across all family-owned businesses the world over. For instance, accounting firm Kreischer Miller surveyed 3,000 family-owned businesses in the US and found that almost all expect to keep ownership and management within the family through the generations. However, only half have a formal plan in place to identify and train family members to take the reins once founders retire. Many families neglect to train mentor and groom future family executives. According to Mario Vicari, a director at Kreischer Miller, familial bonds often discourage owners and family members from disciplining relatives or holding them accountable for their performance. As a result, Vicari finds that family companies are negatively affected because the second generation of leaders was never fully prepared. No matter how big a family gets, if they just depend on their won gene-pool, they are bound to fail. In the larger scheme of things, families – even good ones – can and do produce morons. They fail, because they disregard everyone’s advice and put those morons in places of authority – just because they are family members. Family businesses ill fail because they stuff heir kith and kin in their boards so much that they dilute their boards effectively, resulting in weak infrastructure that directly affects decision making. Those who survive, on the other hand, are inevitably led by those who have the required cajoles to stand up to familial and peer pressures and follow their longer term vision resolutely, without succumbing to mediocre decisions made for momentary or egotistical gains (Daniel, 2005) This is true for most family businesses in Kenya and the situation becomes even cumbersome and complex when compounded with the strong cultural beliefs and practices that are inherent in most African societies. The founder as the most influential person in family business sets the tone for management succession. The founder’s acceptance of the reality that the business will sooner or later have a different generation of managers or it will no longer exist after 61
his/her exit fosters management succession planning while rejection of this reality stifles the planning. Ideally, the founder integrates management concerns into strategic planning and because family issues ultimately shape the business strategy, the founder, in the succession planning has to have family commitment rather than just a founder commitment. Activity Can you identify some of the reasons why family business in Kenya die after the founder dies?
The following can be summarized as reasons why family businesses in Kenya fail after the founder dies. 1.
Type of Family – The success of a family business after the founder’s death can largely rely on the type of family, i.e. whether a family is monogamous or polygamous. Succession disputes are more likely to be rampant in a polygamous family set-up than a monogamous set-up.
2.
Technical Reasons – Many founders do not adequately prepare the second and third generations with required technical skills to run the business. Families do not invest in training their sons and daughters in management and other technical aspects required in the business. There is a misguided connotation that “because they are my sons or daughters, they have the genes that will lead them to cussed like I have been”. Also for example if the founder was like a witch doctor or carpenter the family members may not be able or interested to easily acquire such skills for the business to continue after the founder dies.
3.
Legality of the Business – The second generation may not be interested to carry on with the business their parents did because of its legal status. A good example is the Akasha family that denounced the lucrative narcotics business after the founder’s death.
4.
Social Network Enjoyed by the Founder – The second generation may not enjoy a ‘well business connected network’ that boosted the founder’s ability to succeed in business. Many business partners may shy off working with the second generation for 62
lack of trust or merely because of the age gap. Initiating a new social network in the industry will of cause shocks for the business. 5.
Debts and Other Liabilities left by the Founder – Often, when the founder dies, that business is obligated to clear all debts and liabilities entered into by the deceased. This means digging into the business savings and sometimes working capital as well as assets to clear such pending issues. This can greatly affect a venture and may even cause its collapse.
6.
The Founder Syndrome – many business founders have a pattern of clinging to the business empire they created from scratch and are not willing to let out any information or control over the business they founded. This effectively keeps off the family members off the business affairs. The natural scenario in such a case is that the business dies when the founder dies.
7.
Culture – The African traditional culture states that only sons should inherit property, family businesses included. This means that even if the family has a very capable daughter, the sons, who may not be as competent as the daughter take over the business.
8.
Lack of Interest – The sons and daughters may not be interested in pursuing family business as a career. This means they opt to take up other careers at the expense of the family business.
9.
Lack of proper documentation and Record Keeping – Founders may not keep adequate records of all business transactions. Most of the information is stored in their own memories, thus, the second and third generations do not have a chance to learn from past business experiences.
10.
Founder’s Short Term Vision – Some family business founders only initiate businesses as a means to earn a livelihood to feed family. The argument here is once the children are grown up; they will set up their own businesses or look for other means of earning a livelihood.
11.
Lack of Specialization – The founder changing from one business to another thus the family feel they have no business they can promote.
12.
Favoritism – by founder thus the rest rebel against the favored ones once the founder dies.
13.
No name to protect by Family members, for example, Kamau and sons enterprises. 63
14.
The Government has not put up any strategies to ensure family businesses can move peacefully after the founder’s death.
15.
Business vision lacking and where available not shared among family members thus the founder dies with the vision thus the remaining family members nay not know where it was heading.
16.
Panic by suppliers, customers, creditors and other players in the business lading to some shifting loyalties while others want all debts and liabilities cleared instantly thus destabilizing the business.
Fig. 3.1 – Possible Changes in New Venture Status
Family business may or may not fail as indicated in the model above Activity How in your opinion may children be prepared to take over the family business?
Preparing children to take over a family business is an initiative that should start as early as when the business is being formed. This means planning for succession of the business by family members is a major issue if a business has to survive after the founder’s death. But a fundamental question here is ‘should it be a must that a business started as a family venture should always be run through generations of the same family members’? This notwithstanding, the following steps can be undertaken to prepare children to take over the family business after the founder’s exit. •
Involvement of children in running business – Children should be treated as partners and part and parcel of the family business. They should be kept within the loop and actively participate in all business processes of the family venture. This creates a sense of recognition and ownership among the children and increase their commitment to success of the business even after the parents die.
•
Vision, mission and goals shared among all family members – More often, the family venture is a brain child of the founder who may not be interested in sharing his/her vision and mission with the rest of the family members. This creates an isolation where children 64
and other family members feel left out. In order to motivate children to take the business, the vision and mission of the family business should be shared across all family members. •
Ensure family members accrue benefits – Some family business are solely run and managed by the founder. All benefits are under his/her custody and will be utilized after his/her authorization. It is important to let the family members; children included benefit from the venture so that they can see and feel its value, thereby committing to drive it to success many years later.
•
Appropriate training in relevant technical fields – Taking the example of many Asian family businesses, we see that different family members are trained in different professional fields like accounting, management, information technology and so on. This makes the family business self sufficient in terms of technical expertise.
•
Branding of family business – When citing the name of the business, choose a brand name that is all inclusive and shows recognition and concern of the family lineage. A good example is the way Asian family businesses are branded. For example, A.O. Bayusuf and Sons. This gives the children some security and protection in terms of owning the business after the parents die.
•
Develop a succession plan. A family business without a formal succession plan is asking for trouble. The plan should spell out the details of how and when the torch will be passed to a younger generation. It needs to be a financially sound plan for the business, as well as retiring family members. Outside professional advice to draw up a plan is essential.
•
Require outside experience first. If your children will be joining the business, make sure they get at least three to five years business experience elsewhere first. Preferably in an unrelated industry. This will give them valuable perspective on how the business world works outside of a family setting.
•
Divide roles and responsibilities. While various family members may be qualified for similar tasks, duties should be divided up to avoid conflicts. Big decisions can be made together, but a debate over each little move will bog the family business down.
•
Treat family members fairly.
While some experts advise against hiring family
members at all, that sacrifices one of the great benefits of a family business. Countless 65
small companies would never have survived without the hard work and energy of dedicated family members. Qualified family members can be a great asset to your business. But avoid favoritism. Pay scales, promotions, work schedules, criticism and praise should be evenhanded between family and non-family employees. Don’t set standards higher or lower for family members that for others. 3.4.3
Partnership Business
This is formed when two or more people team up to do business together. In simple words, when by means of a contractual agreement several individuals associate with common ownership and management of a venture, such a business relationship is termed as partnership. Partnerships are governed in Kenya by the Partnership Act (Cap 29). Some of the significant features of partnership are: 1.
The primary objective of partnership is to share profit or losses.
2.
A relation without profit motive is not regarded as partnership.
3.
A partnership venture must be managed by all partners or by anyone among them acting for all.
Types of Partnership Partnership is broadly classified in two groups: 1.
General or ordinary; and
2.
Limited partnership
General partnership is again divided into two subgroups: (a)
Partnership –at-will and
(b)
Joint venture or particular partnership
General or ordinary partnership refers to an arrangement, which makes all the partners jointly and severally responsible for all the debts and liabilities of a business. Simply defined, all partners will have to hear the risks or unlimited liabilities. In limited partnership: 66
(i)
There must be one or more general partners whose liabilities for all the debts and obligations of the firm shall remain unlimited; and
(ii)
there must be one or more limited (also known as special) partners who will be liable for an amount to the extent of one’s capital contribution.
Partnership-at-will refers to a business formed for an indefinite period, i.e. without any specific agreement about the continuance of partnership. Partnership-at-will can be dissolved at any time as and when a notice to that effect is served by a partner. Particular partnership, who known as joint venture, or period and it comes to an end on soon on the specific purpose or period is over. Formation of Partnership A partnership may be formed by oral or by written agreement or inferred from the conduct of parties. However, in the event of disagreement occurring in future among partners, for proper adjudication of disputes, it is the normal practice that the terms and conditions as agreed upon by partners are written in detail? These terms and conditions are incorporated in a document known as a partnership deed. The particulars that are of major significance and incorporated in a partnership deed relate to: (i)
Name and address of the firm;
(ii)
Nature of business and its duration, if any;
(iii)
Names and addresses of partners;
(iv)
The date of commencement and the duration of partnership.
(v)
The amount of capital to be contributed by each partner and methods of raising finance in future if so required.
(vi)
The ratios of sharing profits and losses
(vii)
Salaries, commissions etc., payable to partner (if any).
(viii)
The duties, powers and obligations of all partners.
67
(ix)
The procedures to be followed in case of retirement, death and admission clause of partners.
(x)
Arbitration in case of disputes among the partners.
(xi)
Criteria for introduction and expulsion of partners.
(xii)
Causes for dissolution and method of settlement of accounts.
(xiii)
Rights of remaining partners to buy in shares is a retiring partner.
(xiv)
Method of valuation of goodwill and other assets and liabilities in care of addition or retirement or death of a partner.
Advantages of Partnership 1.
Not much of statutory formalities are involved for setting up a unit.
2.
Partners mobilize own resources and thus facilitate inflow of required funds.
3.
Partners take personal attention for better management and profitability.
4.
Units having sound financial position may secure loans from financial institutions.
5.
It is possible to take quick actions as the circumstances may demand.
6.
Partners cooperation and proper supervision of workers ensures higher productivity and better services to customers.
Disadvantages of partnership 1.
Every partner is liable for business debts to an unlimited extent.
2.
All partners will be held responsible for mistakes or misdeeds committed by any one of them.
3.
Disagreement or lack of cooperation among partners, or dishonesty of anyone may disturb the very existence of the business.
4.
Ownership right is not freely transferable because a partner cannot sell his/her share without the consent of others.
3.3.4
Cooperative
A cooperative society is a voluntary association of ten or more individuals who come together for the benefit of their common economic interests. It is a joint enterprise where all the members contribute capital and labour and who manage its affairs with an 68
understanding to primarily distribute among themselves equally the profits earned or benefits derived out of that venture. Cooperative activities are widely practical in various areas of economic life. Some of the major areas of operation include: •
Individual or producers’ cooperatives – organized and managed by small producers who join human to effectively meet the competition form large producers.
•
Agricultural cooperatives – formed by to obtain necessary inputs and assistance (seeds, fertilizers, implements, finance etc), for production as well as marketing purposes.
•
Credit cooperatives – are formed to collect and accumulate members’ own small savings that they distribute among members, requiring immediate financial aid on loans.
•
Service cooperatives are run with a view to rendering varied service facilities to own members at no-profit-no-loss basis.
Advantages of Cooperative 1.
It is relatively easy and simple to form and establish
2.
Ordinarily talented individuals lacking much of material possessions may benefit by becoming its member
3.
Liability to each member is limited to the extent of one’s investment in it.
4.
Retirement, death or insolvency of any member does not in any way affect its continuity.
5.
It is managed by a committee directly elected by its members.
6.
Members are entitled to get quality goods or services at fair prices or loans at concessional interests and on affordable terms of security and repayment.
7.
Generally members render voluntary services for daily operations and as a result its productivity may be better and establishment expenses much less.
8.
Shares held by members are easily transferable.
9.
Members are assured of prompt marketability of their products affording quick and reasonable returns.
10.
Moneyless members are freed from being exploited by middlemen and financers.
69
Disadvantages of Cooperative 1.
Generally people having technical skills or managerial expertise are not admitted as members or appointed as employees.
2.
Want of skilled personnel or absence of coordination among members adversely affects operational efficiency.
3.
Groupism, rivalry and mismanagement by vested interests often lead to inefficiencies or closure 0f a unit.
3.4.5
Limited Company
This is an association of many individuals, who contribute to a common capital to conduct a business for gain. The common capital is divided into equal parts, each of a certain fixed uniform value, know as shares and the individuals so contributing are members commonly known as share holders. Important Features of Limited Companys. 1.
A limited company has a separate and independent legal entity as if an artificial person.
2.
Its existence continues indefinitely so much so that it is not to be dissolved due to the retirement, death or insolvency of any member.
3.
Any of its shareholders can freely sell and transfer own shares without the consent of others.
4.
Its management is controlled by a Board of Directors elected by and from the shareholders.
5.
Its shareholders have no right to participate in the general conduct and management of business and affairs of the company.
6.
It has a right to acquire and transfer property in its own name.
7.
It can sue others and be sued by others in its own name.
8.
It can admit equity as well as preferential shareholders. Preference shareholders will have preferential rights to profits and also to refund of capital, in the event of its dissolution, but will not have any voting right. The right of equity shareholders to profits and refund of capital will come next to that of preference shareholders, but they will have the voting rights. 70
9.
It can take up any risky venture, because its liability is limited to the aggregate face value of its total number of shares.
10.
Its shareholders are not responsible for the acts of the company.
Advantages of limited company 1.
Liability of every shareholder is limited.
2.
Shares are transferable freely
3.
Continuity of existence is certain
4.
Sufficient capitable is obtainable
5.
Technical and managerial experts may be employed
6.
Advance technology may be introduced to improve operational efficiency.
7.
Risky ventures having higher profit possibilities may be undertaken.
8.
Significant economies of large scale production is achievable.
9.
Significant economies of large scale production is achievable.
Disadvantages of Limited Company 1.
Burden some procedure to be completed for formation and registration.
2.
Numerous statutory requirements make the operation difficult and expensive.
3.
Few shareholders control the management and enjoy most of the benefits.
4.
Majority of shareholders do not have any control over the general conduct of business.
5.
Large workforce, confrontation with management and labour unrest become unavoidable.
3.5
FRANCHISE
A franchise is a right granted to an individual or group to market a company’s goods or services within a certain territory or location. The franchisor (the company owner) sells the rights to the franchisee and then typically receives a fee for ongoing support, therefore having a vested interest in the success of each franchise. In other words it is an agreement or license between two parties which gives a person or group of people the right to market a product or service using the trademark of another business. Franchising began back in the 1850’s when Isaac Singer invented the sewing machine. 71
In order to distribute his machines outside of his geographical area, and also provide training to customers on the use of the machines, singer began selling licenses to entrepreneurs in different parts of the country. Today many such franchise opportunities are advertised via the web and other media. Examples of franchises include carvel, Tutoring club and liberty tax service. In short, franchise implies a contractual arrangement between a principal and its Agent or Agents for mutual benefits from a business established by the Principal in exchange for certain payments. In franchise system, a Principal (usually an individual or an enterprise) is commonly known as a franchisor or licensor and its agent (also an Individual or an Enterprise) as a franchisee or licensee. 3.5.1
Important Features of Franchise
1.
Franchisee manages own affairs with autonomy, selling or providing franchise product or services, and assumes all risks generally associated with any business.
2.
Franchisor plays the role of entrepreneur, starts a new venture in the face of competition, undertakes business in line with worn innovatory idea and explores untapped market opportunity.
3.
Franchisor requires that every would-be franchisee must have:
•
The requisite funds for non-refundable license (entry) fee and refundable security deposit, with payable to franchisor to start with
(b)
The capacity to arrange for own use of the necessary business accommodation, manpower, office equipment and furniture; and
(c) 4.
The will and determination to achieve high business turnover.
Franchisee is appointed for a specified location keeping in view the business possibility that can be developed in that area.
5.
Reputable franchisor attracts customers because of the general belief that the quality of the products or services belonging to a well-known name would be as good as that of similar products or services bearing the same name marketed elsewhere and for which one does not have to travel to faraway places. 72
6.
Franchisor usually provides franchisee with necessary expertise, implements, materials as well as sales promotional supports.
7.
Franchisee pays from time to time a predetermined share of the profit, termed as loyalty, to franchisor.
8.
Franchisee’s success is very much dependent on franchisor’s business integrity and above all customers’ confidence in franchisor’s products or services.
3.5.2
Advantages for Franchisee
1.
There is a higher likelihood of success since a proven business formula is in place. The products, services, and business operations have already been established.
2.
Bankers usually look at successful franchise chains as having a lower risk of repayment default and are more likely to loan money based on that premise.
3.
The corporate image and brand awareness is already recognized. Consumers are generally more comfortable purchasing items they are familiar with and working with companies they know and trust.
4.
Franchise companies usually provide extensive training and support to their franchisees in effort to help them succeed.
5.
Many times products and services are advertised at a local and national level by the main franchise companies. This practice helps boost sales for all franchisees, but individual franchisees don’t absorb the cost.
6.
A franchise is a duplicate of a successful business concept. The franchisee owns the outlet, therefore, he hires his own employees and oversees the management its day-to-day operations. He has high stakes in the business because his money is involved.
7.
When one buys a franchise, he is buying an established concept that has a good record of accomplishment. The franchise is allowed the use of the company’s trademark and brand name. Because of this, the company is, in effect, giving the franchisee a license to market its products carrying a brand that is already familiar with the consumers. Many popular franchises have instant brand-name recognition and have created a loyal following among consumers. Therefore, the franchisee is getting into a business that already has a ready market.
73
8.
Although running his own business, the franchisee can tap the services of the parent company anytime he needs assistance. The services of the head office organization are available to him, too, whenever he needs help. Furthermore, many companies have field operations personnel whom the franchisor can call on to help him deal with any problem he may encounter in the operation of the business.
Most franchises being offered
nowadays are turnkey operations. Upon the signing of the franchise agreement and payment of the franchise fee, the franchisee receives the equipment and supplies required in running the business. Furthermore, the franchisor provides assistance in identifying a good business location for the new outlet. The company assists the franchisee in negotiating his lease, preparing plans for outlet layout, shop fitting, and furnishing his store. It also provides assistance in determining the appropriate stock inventory for the opening of the business. This kind of support and the other benefits under the franchise agreement is what sets franchising apart. 9.
The franchisee is given the necessary training to start his business and eventually run it smoothly. The franchisees as well as his employees are taught all the business systems of the company covering product preparation, quality standards, business controls, recruitment of personnel and marketing. A good franchisor will provide training to the franchise staff on a continuous basis.
10.
Compared to a non-franchise business, less capital is needed in a franchised business since the experience and tested system of operations of the parent company would already have eliminated the unnecessary expense incurred through trial and error.
11.
The franchisee is able to procure all necessary supplies at lower costs because the prices are negotiated by the company with the suppliers in behalf of all the franchise units. Because of the size and projected regularity of orders, the franchisor is able to get huge discounts. Buying wholesale for the whole network means big savings for the individual franchises. This gives the franchises a big advantage over their competitors because they are able to 74
reduce expenditures on a continuous basis. This procurement set-up is definitely more advantageous to the franchisee as against procuring supplies independently. 12.
A franchise is the beneficiary of an extensive marketing campaign made possible by the sharing of the costs by the franchises. Many franchisees are required to shell out and advertisement royalty to the company as their share in the cost of promotional campaigns of the company, effectively spreading the cost among all the franchises. This accounts for the large marketing resources of the franchisor enabling the company to avail of the services of top-caliber advertising agencies. Being situated in highly visible locations and benefiting from a huge promotions budget is a potent combination that is difficult for competitors to overcome.
13.
The Company conducts continuous research and development programs so that the business can improve the existing products and develop new ones to offer to the consumer. The marketplace changes rapidly and business persons have to keep up with the pace. The chance to seize the opportunity of leading in the market is available for only a very short while. This stiff competition necessitates continuous research and development programs for the company and the franchise network to succeed.
14.
As a franchise network expands, its stature is business becomes bigger. Mall owners prefer to have popular franchises in their malls because they want to present their shopping centers as a one-stop-shop where everything that customers want can be bought. Therefore, a franchisee will encounter very little difficulty in obtaining a lease in ideal locations. Because a franchisee becomes part of the giant image of the parent company, he will probably find that running a franchised business is not only so much easier than being on your own, it can also be the best decision a franchisee has ever made.
15.
Because the franchisee is buying a proven business concept, the business risks involved are largely minimized. The parent company has already resolved most, if not all, of the 75
problem areas in its systems and procedures. What the franchisee is getting is a refined package of technical expertise, marketing strategies, and operational systems. 16.
All franchise units are required to maintain a single set of quality standards in so far as product, customer care, and service are concerned. Here, the company will ensure that these standards are strictly adhered to and maintained in all its franchise units so that the whole network presents an image of providing quality products and services.
•
Advantages for Franchisor
•
Franchising is a business concept that benefits the two parties involved.
For that
franchisor, franchising is advantageous because rapid growth can be more feasible even with minimum capital expenditures. When franchisees pay the franchisor for the chance to copy a proven business strategy, franchisors receive a steady flow of cash from royalties, which can be used to expand further. •
Franchising a business can be like hitting two birds with the same stone: a franchise is being paid to expand it. Moreover, because others operate individual retail stores of the business that the franchisor originally established, direct managing responsibilities become the obligation of the franchisee. Hence, the franchisor will have more time in his hands to explored ways to further develop and promote the business.
•
The only way to develop as quickly is through franchising. Expansion is the only way a company can realize maximum profits.
In franchising, there are not many
obstacles to stunt the expansion of a company, therefore, there is a big possibility of really expanding the franchise network not only in the country but also even overseas. At present, franchising is the only business concept that can make that possible. 4.
Franchised businesses grow rapidly, sometimes having several outlets in a certain area, pushing the competition out.
All these benefits for the franchisor are, in turn,
advantageous to the franchisees since the franchises are largely dependent on the success and stature of the parent company. No other business concept can offer such as attractive and beneficial arrangement. 5.5.4
Disadvantages for Franchisee 76
1.
Franchises can be costly to implement. Also, many franchises charge ongoing royalties cutting into the profits of franchisees.
2.
Franchisors usually require franchisees top follow their operations manual to a tee in order to ensure consistency. This limits any creativity on the part of the franchisee.
3.
Franchisees must be very good at following directions in order to maintain the image and level of service already established. If the franchisee is not capable of running a quality business or does not have proper funding, this could curtail success.
4.
Exceedingly high initial payments on account of license (entry) fee and security deposit.
5.
Substantial block capital needed for our business accommodation, office decoration, furniture and equipment, etc.
6.
Sizable amount of working capital required for staff and day-to-day operation.
7.
Sometimes franchisors may be lax on their commitment to support the franchisee. Also, they may make poor decisions that would have an ill effect on the franchisee. Therefore, it is important to research any franchise concept thoroughly before signing any agreements.
8.
Sharing of cost extravagant centralized publicity sponsored by franchisor.
9.
Uncertainty of adequate return on investment in the long run.
10.
Considerable portion of the profit payable to franchisor.
11.
Risk of dishonest franchisor taking over business of an unwatchful; franchise.
12.
Probability of being deceived by false promise of franchisor.
5.5.6
Types of Franchise Methods
There are two types of Franchisee methods. There is business format Franchising product and trade name franchising. These maybe explained in detail as follows: 1.
Business Format Franchising Business format franchising offers a variety of services to the franchisees. They provide the franchisee use of trademarks and logos, as well as a complete system of doing business. They will assist the franchisee with site, selection, interior layout and design, hiring and training, advertising and marketing, product supply and more. The franchisee 77
pays an upfront franchisee fee and agrees to pay continuing royalties to the franchiser that help the franchiser provide research, development and support for entire system. The type involves three characteristics 1.
The franchisee sells goods or services which meet the franchisor’s quality standards (in cases where the franchisee operates under the franchisor’s trade mark, service mark, trade name, advertising or other commercial symbol designating the franchisor (“mark") or which are identified by the franchisor’s mark;
2.
The franchisor exercise significant assistance in, the franchisee’s method of operation; and
3.
The franchisee is required to make a payment to the franchisor or a person affiliated with the franchisor at any time before to within six months after the business opens.
2.
Product and Trade Name Franchising Product and trade name franchising generally is associated with industries such as automotive, petroleum and soft drink. This type of franchising does not include royalty fees. The franchiser provides trademarks and logos, national advertising campaigns, but most importantly, product. This type, also offers three characteristics:
1.
The franchisee sells goods or services which are supplied by the franchisor or a person affiliated with the franchisor;
2.
The franchisor assists the franchisee in any way with respect to securing accounts for the franchisee, or securing locations or sites for vending machines or rack displays, or providing the services of a person able to do either; and
3.
The franchisee is required to make a payment to the franchisor or a person affiliated with the franchisor at any time before or within six months after the business opens. Franchising may seem like an easy way to start one’s own business and many times it is just that. However, investing in a franchise is no guarantee that you will be successful.
78
Your success in franchising will depend on three key factors; your ability to raise the cash to buy the franchise and open it for business, the care with which you select the franchise, and most importantly your drive and ambition to make your franchise a success. Activity Are you now in a position to explain franchising and outline its advantages and disadvantages for the Franchisee and Franchisor?
3.6
CORPORATE ENTREPRENEURSHIP
It refers to an intense entrepreneurship culture in a corporate set-up or limited company where special emphasis is placed on systematic innovatory activities financed by the company and undertaken on a continuing process by several individuals specifically engaged for that purpose. In a corporate entrepreneurship, salaried employees, supported with organizational resources, carry out activities for achievement of innovations on an ongoing process. Limited companies spend huge amounts on research and development, invent new technologies and develop large scale innovations for new products or services. Large companies, employing persons having management specialization, recognize unmet market needs and wants and act quickly to exploit profit opportunities that escape the notice of individual entrepreneurs or small firms. Accordingly, the process of innovation and factor creation, which adds to the productive growth and competitive strength for an enterprise, has become a routine function in large business. This is because large companies better equipped with apple financial resources, managerial; skills and creative talents, can take advantage of economies of large-scale production, apportionment of high research and development costs over large volume of production; access to foreign technological know-how; joint collaboration; import of capital goods, components and basic raw materials; vast marketing and distribution network, and mass publicity campaign through print and electronic media.
79
Summary In this lecture, we have explored the different forms of enterprises, looking and their advantages and disadvantages. We saw that in individual ownership, we have the sole proprietorship and family business in collective ownership, we examine family businesses, partnerships, cooperators, and limited companies. Finally, we looked at corporate entrepreneurship, where the efforts of an individual or several individuals can perform the tasks of innovations within a corporate set-up.
Activity 1.
Are small business owners entrepreneurs? Discuss
2.
Discuss briefly government incentives offered to promote small business in Kenya
3. What is a family business? Explain its features and its advantages and disadvantages. 4.
Discuss the characteristics of corporate entrepreneurship.
5.
What is a franchise, and what are its advantages and disadvantages?
References 1.
Dave, Lavinsky (2008) Entrepreneurship; Untold Reasons Why Business Fail. Harper publishers. New York.
2.
Davis, Holmers (1988) Essentials for Striking the Right Balance in a Family Business, New York, USA
3.
Rober Ditt, Peter P.M. and Sheppard, D.A., (2005) Entrepreneurship. Mc Ground Hill.
4.
H. Nandan (2007). Fundamentals of Entrepreneurship. Prentice Hull. New Delhi.
80
LECTURE FOUR MICRO AND SMALL – SCALE ENTERPRISES 4.2
CLASSIFICATION OF BUSINESS FIRMS
Business firms are classified as micro scale, small scale and medium-sized. It is important to note that there are no standard criteria or classification on businesses because some author tends to consider statutory regulatory measures, statistical records and numbers of volumes of employees or sales turnover and amount of capital invested. Particular classification are used for establishing eligibility for government or donors and are based on the financial characteristics for instance management services, goods ownership, gender specialization technique and market orientation all of which are used to determine performance. In Kenya some scholars classify businesses into 4 categories. Those that employ six or fewer employees are considered to be micro, those employing 7 to 10 workers are considered small, while those employing 11 to 50 workers are classified as medium. Those that employ more than 50 workers are classified as large scale organizations.
Table 4.1 Classification of businesses in Kenya S/N 1.
CLASSIFICATION Micro Scale Business
NUMBER OF EMPLOYEES 6≤
2.
Small Enterprises
7 to 10
3.
Medium size firm
11 to 50
4.
Large Scale Organization
50≥
Turning to developed countries the situation is not different. EU member’s states traditionally have their own definition of what constitutes an SME for instance the traditional definition in Germany had a limit of 250 employees. Other countries may be having a different limit. EU has started to standardize the concepts its current definition categorizes companies with fewer employees as “micro” those with fewer than 50 employees as “small” and those with fewer than 81
250 as “medium.” Table number 4.2 shows business classification in terms of number of employees, turnover, and total balance sheet. Table 4.2 BUSINESS CLASSIFICATION IN EUROPE Enterprise Category Medium-sized Small Micro
Head Count <250 <50 <10
Turnover ≤€50 million ≤€10 million ≤€2 million
Balance Sheet ≤€43 m ≤€10 m ≤€2 m
In US when businesses are categorized by the number of employees SME often refers to those with fewer than 100 employees, while medium-sized business often refers to those with fewer than 500 employees. As seen in our discussion above, it is apparent that there is no universally accepted classification of businesses however let’s look at major distinguishing factors between SMEs and large organization. 4.3.1
DIFFERENCE BETWEEN SME’S AND LARGE SCALE PRODUCTION ENTERPRISES • Market for SMEs is small and unstable. Large scale businesses require large and stable market to be profitable. They are also not flexible while SME agents operate in an imperfect knowledge; •
SMEs are alert to price discrepancies and to previously unnoticed changes;
•
SMEs are quick to adopt innovations in other industries and localities
•
Large enterprises have human resource development sections and invest in their human resources •
Large scale firms require high managerial qualifications with some being highly specialized and enterprise specific whereas SME’s are lowly skilled and for some smaller enterprises it is a learning process.
•
The link between research and industry in SMEs is weak
•
SMEs are tailored to meet specific customer needs. Thus, production is not large scale. •
Large scale production requires standardization that leads to mass production while goods and services in some SMEs are not tailored to meet customer needs 82
•
SMEs are semi -subsistence producers
•
The SMEs are frequently harassed by municipal and central government authorities while large scale enterprises are favoured by government and banks in the provision of infrastructural services and credit
•
SMEs are able to exploit sources of capital which would otherwise not be available for development purposes.
•
Small scale enterprises and informal apprenticeships offer low quality training thus, they cannot survive present day liberalization
•
SMEs are a learning process
•
Large scale enterprises have access to financing and credit facilities whereas SMEs are self financed by loans from family or other informal sectors or micro financing while SMEs would not survive slack periods if they were to pay high interest loans.
4.4
THE ROLE OF MSE IN ECONOMIC DEVELOPMENT
Definitional issues and paucity of data in some areas make any analysis of SME impacts difficult.
However evidence exists showing how important this sector is for sustainable
development in emerging economies. Some of the role of SME in economic development includes: •
Creation of employment: - Entrepreneurs create employment for themselves and others by starting business all over the country. They also pay taxes that are used by the government in provision of essential services to the public.
NB
Most of them are labor – intensive providing more employment opportunities to low skilled •
workers.
Providing services and product: - MSES produce goods and services that they avail to the public.
(c) MSES provide training ground for new entrepreneurs:- Entrepreneurs help others boost their knowledge and get experience in many areas of life. •
Increase the gross domestic product (GDP) through: •
Paying taxes to the government 83
•
•
Creation of employment
•
Multiplier effect.
SME is important for agriculture:- Dependent nations transitioning to an industrial and service oriented economy.
•
SMES are correlated with lower income distribution inequality:- Other roles include the following: Entrepreneurship promotes capital formation by mobilizing the idle savings of the
• public •
It provides immediate large-scale employment thus reducing unemployment which is considered by many as the root of all socio-economic problems.
•
It promotes balanced regional development.
•
It helps reduce the concentration of economic power.
•
It stimulates the equitable distribution of wealth, income, and even political power in the interest of the country.
•
It encourages effective resource mobilization of capital and skills which might otherwise remain idle.
•
It induces backward and forward linkages which stimulates the process of economic development in the country.
•
Small scale enterprises promote country’s export trade which is ingredient to economic development.
4.5
Advantages and Disadvantages of MSE,
84
4.6 CHALLENGES FACING THE DEVELOPMENT OF MSES IN DEVELOPING COUNTRIES There are several challenges facing MSES in developing countries. These include: Mismatch between personal characteristics and characteristic of a good entrepreneurs, lack of resources and unfavorable environments (internal and external environment). Mismatch between personal characteristics and characteristics of a good or successful entrepreneur. For one to start up and succeed in business on entrepreneur must be willing to work hard, pursue his/her goals persistently, be innovative and must be motivated and determined to succeed. In addition to personal characteristics mentioned above, an entrepreneur requires skills which are acquired through training and experience in the proposed line of business. Adequate knowledge about the product or service and managerial skills are important to success of a business.
Some
entrepreneurs lack such skills. For an entrepreneur to be successful the entrepreneur needs to be in good physical and mental condition. The second challenge facing MSES is lack of necessary resources.
These may include –
financial resources, relevant personnel, and machinery and raw materials. Finance – money is the kingpin of starting a business.
It may be got from personal savings, borrowed from
individuals and institutions like bank, finance houses, building societies, and cooperatives. It has been observed however that MSES as a segment in the economy are ignored. Reports show that entrepreneurs with access to credit or financial assistance are likely to perform well in their venture than those who lack support. For the entrepreneurs to expand their operation, it is imperative that funds are available MSES are hampered by lack of access to credit. This forms a major constraint to growth. Female entrepreneurs are badly affected due to lack of tangible security. In a situation where credit is available it is often unaffordable to the informal sector of MSES thus most MSES do not take advantage of economies of scale. The other problem facing MSES is the problem of marketing. Small scale enterprises do not posses any
marketing
organization.
In
consequences
their
products
compare
unfavourably with the quality of the products of the large scale units. The problem of under-utilization of capacity is the next problem. There are studies that clearly indicate the gross under-utilization of installed capacities in small-scale
enterprises.
According
to 85
Arun
Ghosh(1988),the
percentage
utilization of capacity was only 47 in mechanical engineering industries,50 in electrical equipment ,58 in automobile ancillary industries,55 in leather products and only 29 in plastic products .This translate to an average of between 50 to 40 percent of capacity not being utilized. The very integral to the problems of Under-utilization of capacity is power problem faced by small-scale industries. There are two aspects to the problem one the power supply is not available and two when it is available it is rationed out unlike large industries they do not afford alternative sources of power like thermal. In addition to the problems enumerated above, the small-scale enterprises have been constrained by a number of other problems. These include technological obsolescence, inadequate and irregular supply of raw materials, lack of organized
markets
channels,
imperfect
knowledge
of
market
conditions,
unorganized nature of operations, inadequate availability of credit facility, constraint of infrastructure facilities and deficient managerial and technical skills. Now let us consider some of these constraints in more details. 4.6.1
UNFAVOURABLE POLICY ENVIRONMENT
The major shortcomings in the MSE sector development in Kenya have been inappropriate policy design, weak implementation framework and failure to institute and effectively monitor policy implementation. In the past the policy formulation process and design has not been consultative and has mainly been driven by the Government. As a result the policies failed to address the specific needs of the target groups and lacked ownership by the entrepreneurs. At the operational level poor coordination has led to duplication of efforts and sub-optimal utilization of scarce resources. There is no mechanism for coordinating all the stakeholders and facilitating their participation in policy development and implementation. This was according to Session paper no.2 of 2005.
86
4.6.2 INHIBITIVE LEGAL AND REGULATORY ENVIRONMENT An enabling and regulatory environment is imperative for MSE sector to play an effective role as an engine for economic growth, poverty eradication and employment creation. Some laws that are in existence are cumbersome, out of step with current realities and hostile to the growth of MSE sector. Specifically the bylaws applied by many Local authorities are not standardized and appear in most cases, punitive instead of facilitative. At the same time, the role of provincial administration in the enforcement of regulations and in jurisdiction over land utilities tends to overlap and conflict with local authorities. Further the bureaucratic and lengthy process of transacting business with the Government agencies adversely impacts on the operations of the MSEs by diverting the scarce resources from production to sheer housekeeping. Coupled with the above majority of MSEs have no title deeds for the sites on which they operate and they cannot therefore invest in the work sites. The absence of security of tenure denies them access to credit in addition to in accessibility to power, roads and water 4.6.3 UNFAVORABLE TAXATION REGIME The existing tax regime is not only cumbersome but is also a deterrent factor in the growth of MSEs The tax regime does not encourage MSEs to either register or pay taxes. Instead, it serves as a formidable barrier to the graduation of informal enterprises into the formal sector. It also increases compliance costs and restricts upward mobility of MSEs. Value Added Tax which is applicable to most products and services is costly for businesses to administer, increases transaction costs and inhibits cash flow for all categories of enterprises. There is lack of vigilance by custom administrators against the dumping of subsidized imported goods. This poses unfair competition to MSEs products. Cost and delays in clearing imports and exports through customs pose a threat to the productivity and market outreach of most MSEs as well as deterring domestic investment. 4.6.4 ENTRY BARRIERS (FORMAL AND INFORMAL) Formal barriers are well understood, informal barriers are not are not well known but a few example exist. In matatu business self regulatory bodies (cartels) control this industry and greatly 87
hinder entry of new entrepreneurs into the market. Insecurity also poses a major challenge to the sector as it afflicts all the business sectors including the MSEs. While the legal framework can effectively deal with the barriers, it may not effectively deal with cartels and informal trade practices which are not clearly visible and documented. 4.6.5 HEALTH AND SAFETY IN WORKPLACE Occupational health and safety is critical for enhanced productivity, enterprise growth and expansion. Currently the MSE sector is adversely affected by limited access and adherence to the health and safety regulations. The Factories and Other Places of work act cap 514 does not cover the sector, yet it is in this sector that workers are so exposed to all sorts of occupational hazards and other forms of work related accidents.
4.6.6 HIV/AIDS In addition to the above HIV/AIDS pandemic has great economic impact on all sectors of production in terms of productivity, skilled man power, and increased cost of labour as a result of high absenteeism. Activity 1. Describe in brief atleast four (4) major contributions of MSEs to the economic development of your country. 2. Discuss the challenges facing MSEs. Now let’s look at what was expected of you. I expected among others •
Generation of employment opportunities with relatively low capital/investment
•
Promotes more equitable distribution of national income
•
Makes effective mobilization of untapped capital and human skills
•
Promotes balanced regional development
•
Leads to generation of foreign income through exportation of their produce
88
4.5
ROLE OF GOVERNMENT IN THE DEVELOPMENT OF MSES IN KENYA
As noted elsewhere MSES contribute greatly to economic development of an economy. However several constraints which affect successful operation of these MSES have been reported.
These increased competition and lack of markets, lack of credit facilities, poor
infrastructure (transport network), raw materials, shortages dishonored workers and lack of essential facilities including lack of power (electricity) e.g. frequent blackouts as well power rationing. The government plays on important role in supporting MSES in their operations. This is done through: •
Monitoring potent applications. This reduces unnecessary competition from competitors. The government also provides technical services to the MSES concerning specific products.
Through licensing the government is able to determine the number of a
particular type of business operating in a particular region at a time. •
New product ideas can come in response to government regulations. For example the requirement by the government for public service vehicles to be fitted with speed governors led to the production and distribution of speed governors gadgets in the country.
•
Sometimes the government has been seen to be influencing the start up and growth of MSES negatively. Through planning department the government determines the location and operation of MSES. The frequent police sweeps in wrong places is a common problem in many developing countries, Kenya included. The aim of the government to keep order could be genuine but the outcome affects adversely the growth of MSES.
•
The government also regulates and controls economic activities leaving no room for MSES to operate successfully. Scholars have identified bulldozing and harassment as common problem to MSES.
89
•
Lack of capital has also been raised as a major problem facing MSES in Kenya. Government policies make it difficult for MSES to obtain funds. It takes a long time (procedures) to obtain a license and to meet all obligations required to be compliant.
•
The government also influences MSES operations through taxation. The component of taxation has impacted negatively MSES it is suspected that one stop approach to taxes will precipitate growth of MSES.
It is noted that MSES are ignored by commercial banks due to regulatory or taxes that business have to meet first. It is evident that some laws are a hindrance to MSES. Some of these are cumbersome for example local authority by-laws and lengthy processes of dealing with government agencies. Summary We have now defined MSSEs in terms of number of employee employed and capital invested. We have also looked at the contribution of MSSEs to the economic development of a country which include among others. •
Encouraging balanced regional development
•
Stimulation of equitable distribution of wealth
•
Generation of foreign exchange through exportation of their products
•
Creation employment
•
Promotes capital formation by mobilization of idle savings of the public
Finally we considered major challenges facing development of MSEs in developing countries which included •
Lack of required personality with necessary characteristics 90
•
Lack of necessary resources
•
Unfriendly government policies
•
Lack of access to power
•
Technological obsolescence
•
Lack of organized market channels and
•
Imperfect knowledge of market conditions.
References Arun Ghosh(1988)Government Policies Concerning Small-Scale Industries An Appraisal; Small-scale enterprises in
Industrial Development: The
Indian Experience,Sage Publication, New Delhi.
LECTURE FIVE: CRATING AND STARTING THE VENTURE 5.3
Definition of Creativity and Innovation
Creativity and innovation are often used to mean the same thing, but has a unique connotation. Creativity is the ability to bring something new into existence. There is emphasis on the ability and not the activity of bringing something new into existence. A person may therefore conceive of something new and envision how it will be useful, but not necessarily take the necessary action to make it a reality. Innovation is the process of doing new things. Ideas have little value until they are converted into new products, services, or processes. Innovation, therefore, is the transformation of creative ideas into useful applications, but creativity is a prerequisite to innovation. Creativity is the generation of ideas that results in the improved efficiency or effectiveness of a system. Two important aspects of creativity exist: process and people. The process is goal oriented; it is designed to attain a solution to a problem. The people are the resources that determine the solution. The process remains the same but the approach that the people will use will vary.
91
5.4
Sources of New ideas
Potential entrepreneurs must always be alert to the opportunities that lie in the external and internal environments in which they live. This alertness will allow an entrepreneur to create an idea from what others simply cannot recognize. The sources may be discussed as follows: 1. Trends Trends signal shifts in the current paradigm or thinking of the major population. Observing trends will grant an entrepreneur the ability to recognize a potential opportunity. Trends need to be observed in society (health, senior living, and demographics), technology (mobile technology, e-commerce, and internet), economy (higher disposable income, performance pressures) and government (increased regulations, petroleum prices, terrorism). 2.
Unexpected Occurrences
These are successes or failures that, because they are unanticipated or unplanned, often prove to be a major innovative surprise to everyone. The infamous 9/11 terrorist attack on the United States is a good example of an unexpected occurrence; it produced an influx of innovative solutions to the newly created challenge of homeland security. 3.
Incongruities
These occur when a gap or difference exists between expectations and reality. For example, when Fred Smith proposed overnight mail delivery, he was told, “if it were that profitable, the US post office would be doing it.” It turned out that Fred Smith was right. An incongruity existed between what Fred Smith felt was needed and the way business was currently conducted, thus, he created FedEx. 4.
Process needs
These occur when an answer to a particular need is required. Venture capitalists often refer to these needs as ‘pain’ that exists in the marketplace – the entrepreneur must recognize an innovative solution, or ‘painkiller.’
92
5.
Industry and market changes
Continual shifts in the marketplace are caused by developments such as consumer attitudes, advancements in technology and industry growth. Industries and markets always undergo changes in structure, design or definition. The entrepreneur needs to be aware and seize these emerging opportunities. 6.
Demographic Changes
These arise from trend changes in population, age, education, occupation, geographic location and similar factors. Demographic shifts are important and often provide new entrepreneurial opportunities. For example, as the average population age in Florida has increased, land development, recreational and health care industries all have profited.
7.
Perceptual Changes
These are changes that cur in peoples interpretation of facts and concepts. Perceptual changes are intangible but meaningful. Perception can cause major shifts in ideas to take place. The fitness craze, caused by the perceived need to be healthy and physically fit, has created a demand for both health foods and health facilities throughout the country. 8.
Knowledge – based concepts
These are the basis for the creation or development of something brand new. Inventions are knowledge based; they are product of new thinking, new methods, and new knowledge. Such innovations often require the longest time period between initiation and market implementation because of the need for testing and modification. For example, today’s cell phone technology has advanced to include not just phone service but cameras, internet access and music. This has revolutionized the way we use different technologies today.
9.
Consumers
This is the final focal point of the idea for a new product or service. This attention can take the form of informally monitoring potential ideas and needs or formally arranging for consumers to 93
have an opportunity to express their opinions. Care needs to be taken to ensure that the idea or need represents a large enough market to support a new venture. 10.
Existing companies
Potential entrepreneurs and entrepreneurs should also establish a formal method for monitoring and evaluating competitive products and services on the market. Frequently, this analysis uncovers ways to improve on these offerings that may result in a new product that has more market appeal.
11.
Distribution channels
Members of the distribution channels are also excellent sources for new ideas because of their familiarity with the needs of the market. Not only do channel members frequently have suggestions for completely new products, but they can also help in marketing the entrepreneur’s newly developed products. One entrepreneur found out from the salesclerks that the reason his hosiery was not selling was due to its color. By heeding the suggestion and making the appropriate color changes, his company became the leading supplier of non brand hosiery in that region of the United States. 12.
Federal Government
The federal government can be a source of new product ideas in two ways. First the files of the patent office contain numerous new product possibilities. Although the patents themselves may not be feasible, new product introductions, they can frequently suggest other more marketable product ideas. Several government agencies and publications are helpful in monitoring patent applications. The official gazette, published weekly by the U.S Patent office, summarizes each patent granted and lists all patents available for license or sale. Also the Governments Patents Board publishes lists of abstracts of thousands of government-owned patents; a good resource of such information is the Government-Owned Inventories Available for License. Other government agencies, such as the office of technical services assist entrepreneurs in obtaining specific product information.
94
Second, new product ideas can come in response to government regulations. For example the occupational safety and health act (OSHA), aimed at eliminating unsafe working conditions in industry, mandated that first-aid kits be made available in business establishments employing more than three people. The kit had to contain specific items that varied according to the company and the industry. The weather proofed first-aid kit needed for a construction company had to be different from the one needed by a company manufacturing facial cream or a company in retail trade. In response to OSHA, both established and newly formed ventures marketed a wide variety of first-aid kits. One newly formed company, R&H safety sales company, was successful in developing and selling first-aid kits that allowed companies to comply with the act. 13.
Research and Development
The largest source of new ideas is the entrepreneur’s own “research and development,” efforts that may be a formal endeavor connected with one’s current employment or an informal lab in the basement or garage. A more formal research and development department is often better equipped and enables the entrepreneur to conceptualize and develop successful new product ideas. One research scientist in a Fortune 500 company developed a new plastic resin that became the basis of a new product, a plastic molded modular cup pallet, as well as a new venture –the Arnolite Pallet Company, Inc.- when the Fortune 500 company was not interested in developing the idea.
Activity You can now think of those unfulfilled needs that are dominant in your locality or anywhere and think of how to fulfill them. METHODS OF GENERATING IDEAS 1. Focus Groups. Involves a group of 8 to 14 participants who are involved in an in-depth discussion led by a moderator. The group is stimulated by comments from other group members in creatively conceptualizing and developing a new product idea to fulfill a market need. One company interested in the women’s slipper market received its new product concept for a “warm and comfortable slipper that fits like an old shoe” from a focus group of 12 women from various socioeconomic backgrounds in the Boston area. The concept was developed into a new product 95
that was a market success. The basis of the advertising message was formed by comments of focus group members. In addition to generating new ideas, the focus group is an excellent method for initially screening ideas and concepts. Using one of several procedures available, the results can be analyzed more quantitatively, making the focus group a useful method for generating new product ideas. 2. Brainstorming. It is a group method for obtaining new ideas and solution. Freewheeling is encouraged here where the wilder the idea the better, Quantity of ideas is also desired where the greater the number of ideas, the greater the likelihood of the emergence of useful ideas, combinations and improvements of ideas are encouraged; ideas of others can be used to produce still another new idea criticism is not allowed by anyone in the group. The brainstorming session should be fun, with no one dominating or inhibiting the discussion. 3. Problem Inventory Analysis. This uses individuals in a manner that is analogous to focus groups to generate new product ideas. However, instead of generating new ideas themselves, consumers are provided with a list of problems in a general product category. They are then asked to identify and discuss products in this category that have the particular problem. This method is often effective since it is easier to relate known products to suggested problems and arrive at a new product idea than to generate an entirely new product idea by itself. Problem inventory analysis can also be used to test a new product idea. Results of this method must be carefully evaluated as they may not actually reflect a new business opportunity, for example general foods’ introduction of a compact cereal box in response to the problem that the available boxes did not fit well on the shelf was not successful. The perceived problem of package size had little effect on actual purchasing behavior. To ensure the best results, problem inventory analysis should be used primarily to identify product ideas for further evaluation.
5.6
The nature of the Creative process. People assume that some people are born
creative and others are not, or that only the gifted or highly intelligent person is capable of generating creative ideas and insights. Creativity is not some mysterious and rare talent reserved for a select few. It is a distinct way of looking at the world that is often illogical. The creative process involves seeing relationships among things that others have not seen. 96
Creativity is a process that can be developed and improved. Everyone is creative to some degree. However, as is the case with many abilities and talents (athletics, artistic) some individuals have a greater aptitude for creativity than others. Also, some people have been raised and educated in an environment that encouraged them to develop their creativity. For others, the process is more difficult because they have not been positively reinforced; if they are to be creative, they must learn how to implement the creative process.
5.6.1
The creative process
Action by itself has no meaning; it is of little value to simply ‘do things’ without having inspiration and direction. Entrepreneurs need ideas to pursue, and ideas seldom materialize accidentally. Isaac Newton may have been hit on the head by a falling apple, but he discovered gravity through a lifetime of scientific investigation. Ideas usually evolve through a creative process whereby imaginative people germinate idea, nurture them, and develop them successfully. The creative process has four commonly agreed on steps. Phase 1: Background or Knowledge Accumulation Successful creations are generally preceded by investigation and information gathering. This usually involves extensive reading, conversations with others working in the filed, attendance at professional meetings and workshops and a general absorption of information relative to the problem or issue under study. Additional investigation in both related and unrelated fields is sometimes involved. This exploration provides the individual with a variety of perspectives on the problem, and it is particularly important to the entrepreneur, who needs a basic understanding of all aspects of the development of a new product, service, or business venture. People practice the creative search for background knowledge in a number of ways. Some of the most helpful are to: •
read in a variety of fields
•
join professional groups and associations
•
attend professional meetings and seminars 97
•
travel to new places
•
talk to anyone and everyone about your subjects
•
scan magazines, newspapers and journals for articles related to the subject
•
develop a subject library for future references
•
carry a small notebook and record useful information
•
Devote time to pursue natural curiosities.
Phase 2: The Incubation Process Creative individuals allow their subconscious to mull over the tremendous amounts of information they gather during the preparation phase. This incubation process often occurs while they are engaged in activities totally unrelated to the subject or problem. It happens even when they are sleeping. Getting away from the problem from a problem and letting the subconscious mind work on it allows creativity to spring forth. Some of the most helpful steps to induce incubation are: •
engage in routine, ‘mindless’ activities
•
exercise regularly
•
play sports, puzzles
•
think about the project or problem before falling asleep
•
meditate
•
Sit back and relax on a regular basis.
Phase 3: The Idea Experience This phase of the creative process is often the most exciting, because it is when the idea or solution the individual is seeking is discovered. Sometimes referred to as the ‘Eureka factor,’ this phase is also the one the average person incorrectly perceives as the only component of creativity.
98
As with the incubation process, new and innovative ideas often emerge while the person is busy doing something unrelated to the enterprise, venture or investigation. Sometimes the idea appears as a bolt out of the blue. In most cases, however, the answer comes to the individual incrementally. Slowly but surely, the person begins to formulate the solution. Because it is difficult to determine when the incubation process ends and the idea experience phase begins, many people are unaware of moving from phase 2 to phase 3. Following are ways to speed up the idea experience: •
daydream and fantasize about your project
•
practice your hobbies
•
work in a leisurely environment
•
put the problem on the back burner
•
keep a notebook at bedside to record late night or early morning ideas
•
Take breaks while working.
Phase 4: Evaluation and Implementation This is the most difficult step of a creative endeavor and requires a great deal of courage, selfdiscipline and perseverance. Successful entrepreneurs can identify ideas that are workable and that they have the skills to implement. More importantly, they do not give up when they run into temporary obstacles. Often they will fail several times before they successfully develop their best ideas. In most cases, entrepreneurs will take the idea in an entirely different direction or will discover a new and more workable idea while struggling to implement the original one. Another important part of this phase is the reworking of ideas to put them into final form. Frequently an idea emerges from phase 3 in rough form, so it needs to be modified or tested to achieve its final shape. Some of the most useful suggestions for carrying out this phase are to:
•
Increase your energy level with proper exercise, diet and rest
•
Educate yourself in the business planning process and all facets of business
•
Test your ideas with knowledgeable people
•
Take notice of your intuitive hunches and feelings 99
•
Educate yourself in the selling process
•
Learn about organizational policies and practices
•
Seek advice from others
•
View the problems you encounter while implementing your ideas as challenges. Activity Now are you in a position to explain the creative process
Figure 5.1: The four phases of the creative thinking process. This figure illustrates the four phases of the creative thinking process. If a person encounters a major problem while moving the process, it is sometimes helpful to go back to a previous phase and try again. If an individual is unable to formulate am idea or solution (phase 3) a return to phase 1 often helps. By immersing himself in the data, the individual allows the unconscious mind to begin anew processing the data, establishing cause and effect relationships and formulating potential solutions. Innovation Innovation is a key function in the entrepreneurial process. Innovation according to … can be defined as the process by which entrepreneurs convert opportunities (ideas) into marketable solutions. It is the means by which they become catalysts for change. It is the combination of the vision to create a good idea and the perseverance and dedication to remain with the concept through implementation. Innovation process If creativity is the seed that inspires entrepreneurship, innovation is the process of entrepreneurship. It implies action, not just conceiving new ideas. Inventers are not necessarily innovators; Invention is the creation of something new that results in new knowledge while Innovation is the transformation of an idea or resources into useful applications. This results in new products, services or processes. 100
For an idea to have value, it must be proven useful or be marketable, and to achieve either status, the idea must be developed. Innovation is the development process; it is the translation of an idea into an application. It requires persistence in analytically working out the details of product design or service, to develop marketing, obtains finances and plan operations. Most innovations result from a conscious, purposeful search for new opportunities. Most successful innovations are simple and focused. They are directed towards a specific, clear and carefully designed application. Figure 5.2
Elements in the Innovation Process
Source (pg. 37 5.6.3
Business Practices that Create Innovative Cultures:
Leaders who want to create an innovative business culture must understand the steps of the creative process, but that alone is not enough. To promote business innovation, executive leaders should commit to the following business practices, and institutionalize them in the culture - by training managers in these practices and then doling out promotions and rewards to those who employ them successfully.
•
Select the most promising innovators, but encourage unexpected surprises: To build innovative “hothouses” in an organization, executives may want to cull out the most promising idea-generators and provide them with extra resources. Those are the people who can benefit most from the “buffer zones” in step two. But the other practices listed in this section should be generalized throughout the organization, if possible, so that innovators in unexpected places will have the room to produce ideas and results. Leaders should train other managers to understand the stages of the creative process, and evaluate managers based on their ability to promote and shepherd through to completion new ideas that they encounter. 101
•
Create “buffer zones” for the most innovative people: Creating “buffer zones” means building a kind of protective cocoon around creative people or around the innovative teams within an organization. That means eliminating the ways that policies or other work pressures get in the way or discourage the information gathering involved in the preparation stage. It also means being sure that the tools and resources are available when creative people go looking around for data or answers to questions. The executive leader for such a group should do the advance work and run the interference necessary to let creative people go through the preparation stage without interference or harassment.
•
Give innovators room to “play:” For innovators, anything they can do to mess around with the kinds of data or projects that they see as helpful - will be helpful. That can be hard to remember when they seem to have lost their minds, or to have lost their focus! But during the incubation stage, activities that may look like useless diversions - that may not even look like work - are all necessary to allow the deeper parts of the brain to solve a problem and make new connections. For typical results-oriented executives, this can be hard to do especially when the creative team happens to be a team of executives working to create a new business process. The senior executive who may have assigned the task may be hard pressed to let his innovative team have the time and space to produce truly transformative solutions. The key to letting people have room to “play” is to refrain from judgment of their activities or methods.
•
Resist the temptation to look for immediate results: Any team can develop incremental solutions or recommendations. There is no business or technological process that cannot be improved through study and modification. But to build a culture that truly encourages innovation, the pressure to get immediate results will yield only incremental improvements, and the need to meet deadlines can sometimes kill the creative process before the illumination stage. While it is true that deadlines can focus creative teams and encourage timely ultimate illumination, setting deadlines should not be overused because they often will interfere with the creative process. Close communication with creative people working on a project can help leaders develop a feel for when setting a deadline will help, rather than 102
hinder
•
the
process.
Commit to driving the best ideas through to implementation: Innovators are seldom the best salespeople for their ideas. They are, by nature, more likely to work in isolation, play with their ideas, or generally rub others who are less creative the wrong way. The business leaders who want to encourage innovation must act as the first-line filter to test the best ideas and solutions, choosing which ones are the right ones to see through to fruition. Then the executive advocate must commit to the internal sales and marketing project to build coalitions that will bring the new idea into a reality. This takes courage and persistence, and an ability to work the political and social process involved in getting others to adapt to innovation. This is important, not only to reap the rewards of innovation in practice, but to encourage other innovators by showing them that their best efforts will actually be adopted and see the light of day - in your organization, and not your competitor’s!
Leaders who want to encourage business creativity must be sure also to build talent driven, positive cultures that place a value on learning. EXAMPLES OF ENTREPRENEURS Williams Henry Gates III At 34, Bill Gates became the youngest individual billionaire in the world in 1989. He taught himself computer programming at the age of 13, dropped out of Harvard University at 19 to start Microsoft Corporation with his friend Allen and at 31 took his company public, cracking the billion-dollar mark for his personal net assets. Microsoft is the power behind MS-DOS computer operating systems, dozens of computer applications and innovative computer systems technology. Gates wrote a program for the Altair computer, the BASIC interpreter. This software was the breakthrough and beginning of Microsoft. The software Gates created for the Altair was soon to be one of his greatest contributions and beginning in the history of computer science. Peter Munga Peter
Munga
is
the
Chairman
of
Equity
Banks
board
of
directors.
Mr. Munga is a Certified Public Secretary with vast experience in both public and private sector 103
management. He holds a diploma in Human Resources and Financial Management. Mr. Munga is a retired Deputy Secretary. He is an accomplished African business leader and entrepreneur who started Equity Bank in 1984. He felt the need to enable the smallholder farmers’ access affordable savings and credit facilities so that they could break out of the poverty cycle and build better lives From a small village-based building society (1984) to a fully listed commercial bank that is listed in the Nairobi Stock Exchange, Equity Bank is home to over half of all bank accounts in Kenya. Mr. Munga and Equity Bank pioneered a range of innovative financing arrangements to increase farmers' access to credit facilities; mobile rural banking services, innovative electronic banking, post harvest warehouse receipting schemes and widespread agro dealer financing facilities. Esther Passaris Esther Passaris is the founder of Adopt-a-light, Business concept devised during a trip to South Africa in 2002. Esther states that the whole concept was to provide lighting and improve security in Nairobi. Nairobi was downgraded in 2000 because of insecurity. Ms Passaris felt that Adopta-light would help replace Nairobi to its former glory. Adopt a Light, a private-public partnership project to light-up the streets and slums of Nairobi, Kenya. It allows the financing of installation and maintenance of efficient public lighting infrastructure in slums, streets and other public areas to reduce crime, enhance road safety and improve the urban environment. Adopt a Light generates income through the provision of materials to upgrade and repair existing street light poles and install new poles within the city. Kiichiro Toyoda: Kiichiro Toyoda was the son of famed inventor and entrepreneur Sakichi Toyoda, and the driving force behind establishment of Toyota Motor Corporation. Kiichiro Toyoda made the decision for Toyoda Loom Works, the family business then that specialized in making looms, to branch into automobiles, considered a risky business at the time. Shortly before Sakichi Toyoda died, he encouraged his son to follow his dream and pursue automobile manufacturing. After his father's death, he convinced Toyoda Industries' new president, his adoptive brother Risaburo Toyoda, to fund research into auto-making. By 1934 104
Toyoda and his team had designed and built their first gasoline-powered engine, and convinced stockholders to fully fund his new division. In 1935 Toyoda built the prototype for its first car, combining Japanese components with Ford and Chevy parts under a Chrysler body to construct what they called Model A1. In 1936 the spelling of the nameplate was altered from Toyoda to Toyota, as Toyoda himself believed the new name was easier to pronounce. The auto division was quickly successful and was spun off as a separate business, the Toyota Motor Corporation, in 1937, with Toyoda as Vice President. He resigned from the company in 1948 due to flagging sales and profitability, passing away four years later. In 1957, his cousin and confidant Eiji Toyoda became head of Toyota Motor Corporation, overseeing its successful expansion worldwide and the launch of Japan's most prominent luxury vehicle brand, Lexus.
Activity Describe how innovation is important as a dimension of entrepreneurship.
5.6.5
Windows and Corridors
A window is a time horizon during which opportunities exist before something else happens to eliminate them. A unique opportunity, once shown to produce wealth, will attract competitors, and if the business is easy to enter, the industry will attract competitors, and if the business is easily to enter, the industry will become rapidly saturated. Bicycles did not become viable commercial products until people needed them as transportation. When the need occurred, hundreds of bicycle manufacturers rushed to take advantage of the window of opportunity? Literally every successful product and service has had an optimal period of time for commercialization. Those introduced too early have usually failed, and those introduced too late suffered from crowded markets. Another aspect of many successful ventures is called the corridor principle. This principle suggests that opportunities evolve from entrepreneurs being positioned in similar work or having had experience with related ventures so that when a window opens it is easy for them to move quickly into a new venture. 105
William Gates of Microsoft, for example, was first approached by IBM in 1980 to program an operating system for the PC. He turned down the offer. He had a fledgling software company and working with minor programs he helped to sell. The idea of a major software effort was inconceivable. However, he and several friends realized the opportunity and began working independently to create the MS – Dos system. His early efforts probably would have kept Gates in an obscure part of the software industry, but the brief opportunity to create the new operating system led to enormous success. This does not mean that entrepreneurs must first work aimlessly and wait for twist of fate to create opportunities. It means that entrepreneurs who are active and watching for changes are more likely to recognize opportunities. 5.7
E-commerce is stat up businesses
The changing world of technology offers new opportunities for entrepreneurs to be belt o access information for many business activities efficiently i.e. expediently and at very low cost. The internet can serve as an important source of information in the preparation of the business plan for such segments as the industry analysis, competitor analysis and measurement of market potential and others. Internet is also useful resource for planning and decision making. It can therefore be said that internet is a business intelligence resource which also provides opportunities for marketing strategy. Through website a company can provide information on the company, its products and services as well as ordering instructions. An entrepreneur should access competitor’s websites to gain more knowledge about their strategy is the market place. One advantage of internet services is that it is cheap and act as a vehicle for the entrepreneur to gather information about the market competition and customers as well as to distribute advertise and sell company products and services. In addition to websites, the entrepreneur can also investigate new groups to gather information anomaly from experts and customers and competitors and market needs – using the internet which represent the newsgroups on the internet. The entrepreneur can use key words to identify the most appropriate newsgroup. These newsgroups represent potential customers who can be asked specific questions on their needs, competitive products and potential interest in the new ventures products and services members of the news group respond to such questions providing valuable information to the entrepreneur internet services is cheap comparatively since one need to interest in hardware and software, with some improvements and modifications is the internet, the opportunities for the entrepreneur in planning the start up or the growth of a venture will be invariable. 106
Summary In this lecturer, we have defined the concepts of creativity and innovation, which are importance for starting up new ventures for entrepreneurs. We have also examined various sources of new ideas to an entrepreneur and looked at methods that entrepreneurs may use to generate new ideas. We have explored the nature of the creative process and innovation and lastly we have examined the role E-commerce in starting up new ventures.
Activity • Explain the Process of Creativity. •
Identify and describe major changes that create opportunities for entrepreneurs.
•
Explain the concepts of “windows” and “corridors” for new ventures.
•
Describe the main factors that lead to success for new ventures.
•
Describe how innovation is important as a dimension of entrepreneurship and identify major changes that crate opportunities for entrepreneurs with special reference to developing countries.
•
Examine source of the sources of new ideas for entrepreneurs.
•
Examine source of the sources of new ideas for entrepreneurs.
•
Discuss various methods of generating new ideas for entrepreneurs.
•
Discuss the influence of E-commerce in new ventures creating.
107
References •
Web page: Schuler A. J, Business Creativity and Innovation: How to Build an Innovative Culture, Copyright (c) 2002 A. J. Schuler, Psy. D.
•
Hisrich R. D, Peters M.P, Shepherd D. A, Entrepreneurship 6th ed, 2005, McGraw – Hill/ Irwin
•
Enterprising women: the magazine for women business owners, women magazine Vol9 No5 (www.womenable.com)
•
Kuratko D.F, Entrepreneurship: Theory, Process, Practice 8ed, 2009, South-western, Cengage learning
•
www.equitybank.co.ke
•
Holt H.D. (2003) Entrepreneurship: New Delhi.
•
Hisrich D.R., Petr P.m., and shepherd AD (2008) Entrepreneurship 6th Edition. McGraw-Hill New Delhi.
108
LECTURE SIX: FINANCING NEW VENTURES 6.0
INTRODUCTION
Becoming a successful entrepreneur requires one to become a skilled fund-raiser; this requires a lot of time and energy. In start-up companies or businesses, raising capital can easily consume as much as one-half of the entrepreneur’s time and can take many months to complete. Capital is any form of wealth employed to produce more wealth. It exists in many forms, in a typical business they include, cash, inventory, plant and equipment. Entrepreneurs need three different types of capital depending on the use, this include fixed capital, working capital and finally growth capital these types will be discussed in much details at a later stage. 6.1 Investment Decision For one to make investment decision one need to consider the following factors: •
Type of capital required for example fixed capital working capital or growth capital.
•
Sources of capital available such as equity or debt source or internal or external source.
•
Cost involved.
•
Implications such as loss of control.
•
Risks involved.
As mentioned earlier Capital may be classified according to the use as follows use: •
Fixed capital.
•
Working capital.
•
Growth capital.
Fixed Capital Fixed capital is needed to purchase a company’s permanent assets such as building, Land, Computers and equipment. Money invested in these fixed assets tends to be frozen because it cannot be used for other purposes. The money involved in purchase of fixed assets is normally substantial and credit terms usually are lengthy. Lenders of fixed capital expect the assets purchased to improve the efficiency and thus the profitability of the business and to create improved cash flow that ensures payment. Working Capital 109
To borrow a leaf from accountants we shall define working capital as current assets less current liabilities. Current assets refer to the resources of the business that represent cash or can be converted into cash easily or are cash. While as current liabilities refers to debts that ought to be cleared in the near future normally one year. The need for working capital arises because of the uneven flow of cash into and out of the business due to normal seasonal fluctuations these may include, credit sales, seasonal sales swings or unforeseeable changes in demand. Let’s now look at how working capital can be used in an organization: •
Buy inventory
•
Pay bills
•
Finance credit sales
•
Pay wages and salaries
•
Take care of unexpected emergencies.
Lenders of working capital expect it to produce higher cash flows to ensure repayment at the end of the production or sales cycle. Growth Capital What is the difference between working capital and growth capital? Unlike working capital growth capital is not related to the seasonal fluctuations of a business. Growth capital is meant for expanding or for changing the primary direction of a business. Lenders of fixed capital or growth capital expect the funds to improve a company’s profitability and cash flow position thus ensuring repayment. Question What are the major sources of finance to a business? 6.2 FINANCING MEANS AND SOURCES OF FINANCE Sources of finance can be classified into two major ways. •
a) Equity source b) Debt source 110
(ii)
a) internal source b) External source
Let’s look at the two sources in details starting with the first classification. EQUITY CAPITAL VERSUS DEBT CAPITAL Debts financing is a financing method involving an interest bearing instrument usually a loan. Most of such loans require fixed assets such as vehicles land machines and others to be used as collateral security. Debt financing requires entrepreneur to pay back the amount borrowed well as interest. Equity financing on the other hand does not require collateral security and it offers the investor some form of ownership position in the venture. The investor’s shares in the profits of the venture as well as any disposition of its assets as per the percentage of business owned. Factors that may be considered in making decision on whether to go for debt financing or equity financing includes the following:•
Availability of funds
•
The assets of the venture
•
The rate of interest
•
Repayment period
•
The use of the finance e.g. to finance fixed assets, to finance working capital activities or to finance growth activities of an organization.
Internal versus External source of finance Internal source of funds refers to internally generated funds or generated within the business Activity Give some example of internal source of finance to an organization
I know you must have mentioned among others - Profits ploughed back - Sale of assets - Reduction in working capital - Collection of account receivable more quickly 111
- Reduction of repayment period. Activity Having mentioned some examples of internal source of fund/finance you can now look at finance generated from outside the organization. External sources of finance include the following: •
Self
•
Family friends
•
Commercial bank
•
Government loan programmers
•
Private and public placements
The source to be considered need to consider the following factors •
The length of time the funds are available
•
The cost involved.
•
The amount of company control lost
Let’s now discuss the external sources of finance mentioned above •
Personal saving – There are very few ventures started up without the personal funds of the entrepreneur. These sources of fund are considered to be the least expensive source both in terms of cost as well as in terms of control. These sources also are essential in attracting other finances such as commercial banks, private investors and others. Lenders and investors expect entrepreneurs to put their own money into a business start up. If an entrepreneur is not willing to risk their own money, potential investors are not likely to risk their money in the business either. No wonder that investors argue that put your money where other money is or finance is like a river which flow towards where much water accumulates for instance lakes or oceans. Failure to invest enough in ones business leads to excessive borrowing or giving up a significant portion of ownership to outsiders. This is likely to result to intense pressure on the business cash-flow or reducing the founder’s enthusiasm for making a business successful.
•
After the entrepreneur, family and friends are a common source of capital for a new venture. They are most likely to invest due to their relationship with the entrepreneur. 112
Finance from friends and relatives results to equity financing. This source may result to some conflict however the following measure should be taken to avoid such conflicts. •
Ensure the business arrangements are strictly business.
•
Loans or investment from this source should be treated in the same way as the finance from other sources.
•
Any loan should specify the rate of interest and the proposed repayment schedule as well as the principal amount
•
The entrepreneur should settle everything up front and in writing.
•
All the details of financing must be agreed upon before the money is put into venture.
These include the amount involved, the terms of money, the rights and responsibilities of the investors and what happens if the agreement is not adhered to and this has to be in writing. •
Partners
Entrepreneurs can take on partners to expand the capital foundations of a business. Before entering into any partnership arrangement entrepreneurs must consider the impact of giving up some personal control over operations and of sharing profits with others. When one invites partners into their business they risk losing control over the business. Activity Discuss the various types of partnership that exist in business world on the basis of time and types partners. (d) Commercial banks are by far the source of finance used by entrepreneurs when collateral security is available. The collateral acceptable to the banks could be informed of land, equipment building, vehicles, stock or bonds. There are several types of bank loan available, these depends on the collateral available. Such as Accounts receivable, inventory, equipment or real estate. At this juncture you are advised to read Hirsch R.D. et. Al (2008) page 328-329 for more details. Now we need to consider basis of lending decisions by the commercial banks.
Lending
decisions are made on the basis of the following 5Cs. These include character, capacity capital, collateral and conditions. 113
Past financial statement such as balance sheets income and expenditure statements need to be analyzed considering profitability and credit ratios inventory turnover, aging of accounts receivable capital invested and commitment to the business to make lending decisions. Future projections such as market size, sales and profitability are also evaluated to back up lending decisions.
In addition to these intuitive factors such as the character and capacity of the
entrepreneur need to be factored in the lending decisions. •
Public and Private offering.
In entrepreneur one source finance through sale of stock either to the public or to some specific private individuals referred to as going public or going private respectively. The difference between private offering and public offering is mainly the procedures involved and the target investors. Now let’s explore the disadvantage and disadvantages of going public. Advantages •
The business is able to obtain equity capital
•
Enhanced ability to borrow
•
Ability to attract and retain key employees
The owners can dispose of their shares easily and it is prestigious to own shares in large companies and list companies have an advantage over others. Let’s now look at external source disadvantages •
Public companies leads to public exposure and there is potential of loss of control
•
Public companies are inflexible and take a lot of time to make decision as well as implementing them. Time and expense in addressing queries from shareholders as well as to pay the press and financial analysts in compliance with companies Act requirement. Other expenses; involved include, Accounting fees legal fee, underwriter’s fees, registration fees as well as printing fees.
•
Reports – companies are required to prepare annual reports or statement for their operations.
Private placing on the other hand is one way to obtain the needed funds with less public disclosure. These funds are frequently in the form of intermediate or long term debt with a float interest rate or preferred stock with specific dividend requirements. For a company to qualify for private placement.
The company needs a limited number of investors, the investors have 114
available all the material information about the company that would be included in a public registration statement, the investors must be ready to hold securities for a specified period following the purchase. •
Government grants are another alternative source of finance available to businesses. This source varies in terms and types from country to count Activity You are required to identify some government agencies that provide finance for business development to entrepreneurs in Kenya.
Now confirm whether you included the following agencies in your list. Industrial and commercial development corporations (ICDC) Kenya industrial estates (KIE) Small enterprise finance company (SEFCO) Joint loans board schemes (JLBS) Agriculture finance corporations (AFC) 6.5 VENTURE CAPITAL This is also an alternative form of equity discussed earlier .This involve corporations and large companies assembling pools of capital and then use them to purchase equity positions in young businesses they believe have high growth and high profit potential producing high return percentage. These companies in addition benefit small and upcoming companies and businesses in technical expertise, distribution channels and marketing knowhow, as well as providing introductions to important customers and suppliers. In addition to the above advantages upcoming businesses benefit from large companies since they acquire credibility, such that doors that would otherwise be closed to upcoming businesses magically is open when the right company is involved.
115
Summary We have covered the following main points in this lecture •
Types of capital or finance needed by a business organization which include Fixed capital, working capital and growth capital.
• •
Capital is classified into two major ways a) Equity finance b)Debt finance and or
(ii) a)Internal source of finance b)External source of finance
Activity (1)Why is it so difficult for most business to raise the capital needed to start; operate or expand their ventures? (2)What is the most common source of equity funds in a typical small business? If an owner lacks sufficient equity capital to invest in the firm what options are available for raising it.
LECTURE SEVEN: ANALYSIS AND INTERPRETATION OF FINANCIAL ACCOUNTING STATEMENTS Objectives At the end of this lecture you should be able to:•
Explain how the use of ratios can help to analyze, the profitability, liquidity, efficiency and capital structure of businesses. 116
•
Compute the main accounting ratios.
•
Interpret the results of calculating accounting ratios.
•
Explain the advantages and disadvantages of the gearing of an organization fairy high or low.
•
Explain limitations of accounting statements.
Introduction Let’s first define the term ratio but before we define together first execute the following. Activity You are required to give your definition of the term ratios Explain at least two users of the ratios in business analysis
Now check if your answer concurs with the one given here. Ratio is the mathematical relationship between two quantities in the form of a fraction or percentages. Users of ratios: There are several parties interested in analyzing fractional statements. These include:•
Lenders
•
Customers.
•
Suppliers
•
Employees
•
Government agencies
•
Competitors and others.
117
All these will be interested in different things therefore there is no single ratio that would meet their needs but a series of ratios may provide something that they will find relevant and from which they can investigate further if necessary. Ratio analysis is the first step in assessing an entity and pinpoint items that many require further investigation. Ratio analysis is essentially concerned with calculation of relationships, which after proper identification and interpretation may provide information about the operations and state of affairs of business enterprise. The analysis is made to provide indicators of past performance in terms of critical success factors of a business. This enables one to make sound judgment without relying on guess work and intuition Different business require different situation. e.g. capital requirement this differs from one type of business to another. SIGNIFICANCE OF USING RATIO •
It is compared with other ratios in the same set of financial statements.
•
It is compared with the same ratio in previous financial statements. (trade analysis)
•
It is compared with a standard of performance (industry average). Such a standard must be either the ratio which represents the typical performance of the trade or industry, or the ratio which represents the target set by management as desirable for the business.
TYPES OF RATIOS Ratios may be classified as follows:•
Liquidity ratios
•
Profitability ratios
•
Efficiency ratios
•
Shareholders ratios 118
Capital structure ratios
•
Let’s consider each one of the ratios mentioned in more details. Liquidity ratios – This ratio measures the ability of the firm to meet its short term financial obligations when and as they fall due. Failure to clear short term debts result to the failure of the business as it would be forced into liquidation. There are two main ratios in liquidity ratio. These include:•
Current ratio
•
Quick ratio also known as acid test ratio.
These may further be explained as follows:Current ratio The current ratio expresses the relationship between the firm’s current assets and its current liabilities.
Current assets normally increase cash, marketable services, account receivable
(debtors) and inventories. Current liabilities consist of accounts payable (creditors) short term notes payable, short term loans, current materials of long term debt, accrued taxes and other accrued expenses e.g. rent, wages etc Current ratio is given by
Current assets
Current liabilities Generally a ratio of 2:1 is acceptable A ratio of 0.85: 1
0.92:1 indicates that the current assets are lower than the current liabilities
and that the business is unable to support its short-term debt. 119
Though businesses are set to earn profits, profitability is not enough evidence of successful business. It is important to pay creditors, expenses, loans falling due at the correct times. Failure to meet this obligation would mean closure of the business despite the profits that may have been reported. Quick ratio / Acid test ratio This ratios measures assets that are quickly converted into cash and they are compared with current liabilities. There are some assets that are not easily conversable into cash. e.g. stock. Acid test examines the ability of the business to cover its short term obligations from its quick assets only. Acid test ratio is given by = Current asset – stock Current liabilities Profitability ratios There are several ratios that fall under profitability ratio. These include the following:•
Gross profits as percentage of sales.(gross profit margin)
•
Net profit as a percentage of sales (net profit margin)
•
Return on capital employed ratio
Profitability is the ability of a business to earn profit over a period of time. Although the profit figure is the starting point for any calculation of cash flow, profitable companies can still fail for lack of cash. Nevertheless, without profit there is no cash and therefore profitability must be set as a critical success. A company should earn profits to survive and grow over a long period of time. Gross profit margin Normally the gross profit has to rise proportionally with sales. It can also be useful to compare the gross profit margin across similar businesses although there will often be good reasons for any disparity. Gross profit margin is given by
Gross profit Sales It is important to note that gross profit is given by sales – cost of sales. 120
x 100
Therefore gross profit margin may also be stated as:Sales – cost of sales x 100 Sales In situations where the percentage increase over the years than the interpretation is that the rate at which the cost of goods sold was less than the rate at which the sales was increasing thus indicating efficiency. Net profit margin This is a widely used measure of performance and is comparable across companies in similar industries. The fact that a business works a very low margin need not cause alarm because there are some sectors in the industry that work on basis of high turnover and low margin e.g. supermarkets. What is important is whether the net profit margin of a company compares well with similar businesses. To determine a business performance one has to compare this ratio with the industry average or firms dealing with similar businesses. The formula =
Net profit Sales This net profit is usually profit after tax
x 100
Return on capital employed This is one of the most important profitability ratios, as it encompasses all the other ratios. It is important to note here with no return to capital employed nobody will invest his money on a business. Capital employed will be given by:Net profit Capital employed
x 100
Capital employed can be given by the average of capital i.e. Opening capital balance + Closing capital balance 2 The ratio shows potential investors into the business what they might hope to receive as return. The above calculation is applicable to sole proprietorships, for companies. The following definitions of capital employed are used. • Return on capital employed by ordinary stakeholders. 121
•
Return on capital by all long term suppliers of capital.
In a limited capital the return is referred as Return on Owner’s Equity or Return on stakeholder’s funds. Owner’s Equity will include anything in a balance sheet that describes the owner’s capital. These therefore include ordinary share capital + all reserves + profit and loss balance. Return a capital employed by all long term suppliers of capital will include - ordinary shares reserves including profit & loss balance. Preference shares + debentures as well as long term loans. The return will also comprise net profit, preference have divided debentures and long term interest on long. Earnings per share The income after all claims have been paid apart from owner’s claim (ordinary divided) will belong to the ordinary shareholders who can make a decision as to how much of this income can be declared in divided and how much will be retained in the business. The earning by share is given by:Net income after tax – preference Divided Number of ordinary shared issued Efficiency ratio There are again several ratios under this category. These include:• Stock turn over •
Debtors / sales ratio
•
Creditor / purchases ratio
These ratios can further be explained as follows:
•
Stock turn over
Stock turnover measures how efficient a business is at maintaining an appropriate level of stock. A reduction in stock turnover indicates that the business is slowing down. Stock may pile up and not being sold this may lead to the problem earlier mentioned i.e. liquidity crisis. Stock turnover is given by:Cost of sales Average stock Average stock is given by operating stock + closing stock divided by two. •
Debtors / sales ratio
122
The resources tied up in debtors are an important ratio subject. The money tied up in debtors is unproductive money and therefore need to be as minimal as possible. Debtors / Sales ratio is given by Debtors / Sales. The interpretation is the length of time a debtor takes to pay his debt. There for multiplied by 365 days Credit control system assists in reduction of the number of days that debtors take to clear their debts.
•
Credit / Purchases ratio
This is translated as the length of time that the business takes to pay their creditors. This is the opposite of the debtors / sales ratio. Usually calculated as:Creditors
x 365 days
Purchases • Shareholders ratios Some of the ratios discussed here fall under other categories such as return on capital employed by it is worth mentioning them in brief. Ratios that falls under shareholders ratios include:Earning per share EPS which is given by :Net profit after interest, tax and preference divided Number of ordinary shares issued • Price earnings ratio This is given by:Market price per share Earnings per share The greater the P/E ratio the greater the demand per share. • Divided yield This is usually calculated as follows:-
Gross divided per share Market price per share These measures the real rate of return by comparing the divided paid to the market price of a share. • Divided cover 123
Net profit after tax and preference divide Ordinary dividend paid and proposed CAPITAL STRUCTURE RATIOS (Gearing ratios) • The ratios indicate the degree to which the activities of a firm are supported by creditor’s funds as opposed to owners. •
The relationship of owner’s equity to borrowed funds is an important indicator of financial strength.
•
The debt requires fixed interest payments and repayment of the loan and legal action can be taken if any amounts due are not paid at the agreed time. A relatively high proportion of funds contributed by the owners indicated a cushion (surplus) which shields creditors against possible losses from default in payment. Financial leverage will be to the advantage of the ordinary shareholders as long as the rate of earnings. Capital employed is greater than the rate payable on borrowed funds.
There are more than one way of calculating gearing. Here is the most widely used method. Long term loans + preference shares
x 100
Ordinary share capital + reserves + preference shares +long term liabilities Long term loans will include debentures, people investing in ordinary shares in a high geared company takes far greater risks with their money than if they had invested in a low geared company. To reduce gearing ratio the management may opt to take one or a combination of the following:•
Issue new ordinary shares
•
Redeem debentures
•
Retain profits
On the other hand to increase the gearing the management will consider the following:•
Issue new debentures
•
Buy balk ordinary shares in issue 124
•
Issue new preference shares.
Advantages of ratio analysis •
Ratios clarify issues, providing meaning to the data bringing out information that is not otherwise apparent.
•
Ratios forms basis for decision making or policy formation.
•
Ratios assist on assessment of efficiency of business organization.
•
Ratios assist in determination of business performance in comparison with others in the industry as well as the same business but different financial years.
•
Ratios clarify issues, providing meaning to the data bringing out information that is not otherwise apparent.
•
Ratios forms basis for decision making or policy formation.
•
Ratios assist on assessment of efficiency of business organization.
•
Ratios assist in determination of business performance in comparison with others in the industry as well as the same business but different financial years
•
Ratios clarify issues, providing meaning to the data bringing out information that is not otherwise apparent.
•
Ratios forms basis for decision making or policy formation.
•
Ratios assist on assessment of efficiency of business organization.
•
Ratios assist in determination of business performance in comparison with others in the industry as well as the same business but different financial years. LIMITATIONS OF ACCOUNTING STATEMENTS - Financial statements are only partial information rather than they are historical. They show the reader in financial terms what has happened in the past, therefore much more information is needed to fully understand the present situation. - It is impossible to sensibly compare two businesses which are completely unlike one another. - Ratios are usefully calculated from past financial statements and thus are not indicators of the future. 125
There are a lot of factors (information) that the past financial statement does not disclose for instance. •
Future plans for the business.
•
The quality of the staff in the business
•
The location of the business
•
The future plans for the government and the effect on the business.
•
Is its plants and machinery obsolete
•
It is difficult to decide on the proper basis of comparison companies may be using different accounting benchmark.
•
The comparison is difficult due to variation in situations.
•
In normal circumstances, price level changes due to inflation thus making it difficult to interpret the ratios.
•
Several factors such as recession boom and others can affect ratio analysis.
•
The basis of asset valuation can be misleading.
•
Ratios do not indicate immediately where errors lie.
LECTURE EIGHT: THE BUSINESS PLAN 8.2 ESSENTIALS OF A GOOD PLAN
126
Any plan must have certain features that make it a good plan. Thus, Saleemi (2009) has identified the following essential features of a good plan. •
Simplicity
A plan must be simple and easy to understand. Facts, figures and other data must be well presented. A plan must be simple so that those who are implementing it must clearly understand it. •
Flexibility
Plans must not be rigid. They must offer flexibility to change as and when the situation so, demands. For instance, a company may plan to produce 20,000 units during a given period. However, if there is a strike or some other unforeseen event in the factory, then it would not be possible to produce the planned units. •
Sustainability
A plan must be suitable to a particular unit or department depending upon the resources and capabilities, and the targets set. •
Acceptance
The plan must be acceptable to the subordinates. If is therefore important that targets set must be discussed with subordinates and for them to be convinced to accept them. •
Facilitate Organizing
A good plan should enable proper organization of resources. The manager should find no difficulty in making arrangement of resources – physical and human resources in order to achieve the targets. Depending upon the targets, the manager will make proper arrangements of resources. •
Provide Purpose And Direction
127
A good plan acts as a road map. It should provide proper direction so that the activities can be conducted smoothly. Depending upon the planned schedules, the manager can give the right directions to complete the work on time. •
Facilitate Control
If the targets are planned clearly, it will enable a manager to monitor the performance. This is because the actual performance can be easily compared with the planned targets. If there are any deviations, the manager should be in a position to take the right corrective steps at the right time. •
Generate Harmony
A plan should generate team spirit among the different sections or departments of an organization. This would be possible if the plans of the concerned departments are integrated or coordinated. •
Generate Efficiency
A good plan must make optimum use of the available resources. Maximum possible returns must be achieved with minimum possible costs. •
Motivate Personnel
A good plan should be realistic and challenging. The plan prepared by the manager should motivate the subordinates to put in their best efforts and experience in achieving the set targets. Activity I Are you able to define a business plan?
8.3
Scope and Value of the Business Plan.
The business plan may be read by employees, investor’s bankers, venture capitalists, suppliers, customers, advisors, and consultants. Who is expected to read the plan can often affect its actual content and focus.
Since each of these groups reads the plan for different purposes, the
entrepreneur must be prepared to address all their issues and concerns. The business plan is important to each of these groups because: 128
•
It helps determine the viability of the venture in a designated market.
•
It provides guidance to the entrepreneur in organizing his or her planning activities.
•
It serves as an important tool in helping to obtain financing. Activity 8.2 Why develop a business plan? Or what are the roles of a business plan?
You must have come up with the following answers. •
Business plan guides entrepreneur by charting the company’s future course of action and devising a strategy for success.
•
Business plan work as a tool for communication
•
Business plan works as a call to action
Let’s look at these roles in more details. -
Business plan guides as entrepreneur by charting the company’s future course of action and devising a strategy for success. The plan provides a battery of tools- mission statement, goals, objectives market analysis budget, and financial forecasts target markets and strategies to help entrepreneurs lead a company successfully. It gives managers and employees a sense of direction. This works perfect it everyone is involved in creating the plan updating it or even altering it. Creating a plan also forces entrepreneurs to subject their ideas to the test of reality.
-
Business plan as a tool to attract leaders.
-
Business plan is used to attract leaders and investors.
The business plan provides a vehicle for communicating the potential of the venture, the opportunities it faces and the way it intends to exploit them in a way which is concise efficient and effective. This may be of value in communicating with both internal and external stakeholders. The plan many draw internal together and give them a focus for their activities. 129
A business plan requires the entrepreneur to assess the venture’ chances of success more objectively. A well assembled plan helps prove to outsiders that a business idea can be successful. To get external financing, an entrepreneur’s leaders and investors. These are •
The reality test
•
The competitive test
•
The value test
Now let’s look at these tests in more details.
1. The Reality Test These can be classified into two:•
Internal component
•
External component starting with external component reality world focus on the existence of t he market for the product or service proposed. It therefore entails focusing or industry attractiveness, market niches (gap) potential customers, market size; degree of competition and other factors while internal component of reality test focused on the product or service itself in terms of the cost and how different the product is from the existing ones and does the product/service offers something of value to customers.
2. Competitive Test. Again this factor has two component internal and external components. -
External part of the competitive test evaluates the company’s relative position to its key
competitors. For instance how does the company’s strength and weaknesses match up with those of competitors? They also consider the possibility of success and survival of the new venture. The internal component focuses on management’s ability to create a company that will gain or edge over existing rivals. The quality, skills and experience of the venture’s management team is assessed. 130
3.
Value Test. To convince lenders and investors to put their money into the venture, a
business plan must prove to them that it offers a high. Probability of repayment or an attractive rate of return. Entrepreneurs usually see their businesses. As good investments because they consider the intangibles of owning the business-gaining control over their own destinies, freedom to do what they enjoy and other factors. -
A business plan work as a call to action.
The business plan is a call to action. The business plan is a call to action. It provides a detailed list of the activities that must be undertaken, the tasks that must be performed and the outcomes that must be achieved if the entrepreneur is to convert his or her vision in a new world. The plan may also call upon formal project management techniques such as critical path analysis in order to organize, priorities and arrange tasks in a way which makes the best use of scarce resources. 8.4 Elements of a business plan Smart entrepreneurs recognize that every business plan is unique and must be tailor made. His elements of a business plan may be standard but the plans should be unique and different. Many entrepreneurs prefer launching their companies and see what follows than invest the necessary time and energy defining and researching their target markets, defining their strategies and mapping out their finances that planning demands. It is important to note that though business plan does not guarantee success; it does raise an entrepreneur’s chance of succeeding in business. Generally a business plan would contain between 20 to 40 pages in length. Shorter plans are viewed to be too sketchy to be of any value and those much longer than this run risk of never getting used and read. This section will explain the most common elements of a business plan. It should be noted an earlier staked that a business plan should be unique reflecting uniqueness of the proposed venture. •
What is to be included should also consider the stage at which the venture is at i.e. some ventures are ongoing while others are new ventures.
The plan will also
consider the audience at whom the plan is directed and the action the entrepreneur desires from them. A good business plan may include the following. 131
a)
Title page and table of contents
A business plan is a professional document which should contain a title page with the company’s name logo and address as well as the names and contact information of the founders of the company. Date of issue may also be included or the cover page, the copy number may also be included. b)
Executive summary
This is a summary of all the relevant points of the business venture. It should be concise and a maximum of two pages is preferred. Executive summary is a synopsis of the entire plan. It should briefly describe the following. -
The company’s business model and the basis for its competitive edge.
-
The company’s target market(s) and the benefits its products or services will provide customers.
-
The qualifications of the founders and key employees
-
The key financial highlights for example the sales and earnings projections, capital
required rates of return on the investment and whom loan(s) will be repaid where applicable. The executive summary must capture the reader’s attention. If it misses the mark the chances of the remainder of the plan being read are minimal. Although the executive summary is the first part of the business plan it should be the last section to be written. It is like a abstract in thesis or projects. Vision and mission statement is the next section.
•
A mission statement expresses in words on entrepreneur’s vision for what his company is and what it is to become. It is the broadest expression of a company’s purpose and defines the direction in which it will move. It anchors a company in reality and issues as the thesis statement for the entire business plan.
•
Company History: The owner of an existing small business who is creating a business plan should prepare a brief history of the operation, highlighting the significant 132
financial and operational events in the company’s life. It is at this juncture that one indicates when and why the company was formed; how it has evolved over time, and what the owner envisions for the future. It should highlight the successful accomplishment of past objectives such as developing prototypes earning patents, achieving market share targets or securing long term customer contracts. c)
Business and industry profile
The lenders and investors need to be acquainted with the industry in which the company operates or intends to operate. This section therefore provides the reader /investor with an overview of the industry or market segment in which the new venture will operate. Industry data such as market size, growth trends and the relative economical and competitive strength of the major firms in the industry all set the stage for better understanding of the viability of the new product or service. Strategies such as market entry and exist, the ability to achieve economies of scale or scope, and the existence of cyclical or seasonal economic trends …help the readers to evaluate the new ventures. This section should also describe significant industry trends as well as key success as in the industry as well as give an outlook for its future. The section also describes the existing and anticipated profitability of the industry.
Any
significant entry or exit of firms or considerations and mergers should be discussed in terms of their impact on the competitive behaviour of the market. The company’s general business goals and immediate objectives are highlighted in this section. e)
Business strategy.
This section addresses the question of how, the goals and objectives of the new venture be achieved. Here the entrepreneur explains how he or she plans to gain a competitive edge in the market and what sets the business apart from the competition. The entrepreneur explains how he is going to achieve the goals of the venture in the face of competition and government regulation
133
and should also identify the image that the business will try to project. The entrepreneur should show the customer the uniqueness of the company. The service /products (new) should be different in terms of better, bigger, faster, more convenient etc. The strategy section of the business plan should outline the methods the company can use to satisfy the key success factors required to thrive in the industry. The following may be considered under this section. •
Product strategy – This will show the way the product or service will be differentiated from competitors to be more attractive to customers
•
Pricing strategy – How the product /service will be priced relative to competitors e.g. other a premium, discounting or means of establishing price, promotional pricing and price cutting, pricing policy and margins to be offered to intermediaries.
Distribution strategy points the route by which the service /product will be delivered to the customer, intermediaries (wholesalers, distributors, retailers) who will be partners in distribution strategy for working with distributors, policy for exporting and international market if appropriate. •
Promotional Strategy – These are approaches to inform customers as well as intermediaries about the product /service e.g. advertising message means and medium; sales activity and approaches to selling, sales promotion and other public relations activity.
•
Net working – relationship between the organization and other organizations in the network – international linkages as well as national /domestic linkages. Use of the network create and support competitive advantage.
•
Other issues that may be included in the strategy section is the market strategy which includes the above as well as a fair description of the target market in terms of age, gender educational level and other demographic characteristics, where they live work and shop.
What and why they buy and their needs, needs and habits. 134
f)
Competitors Analysis
Entrepreneurs should discuss the new ventures competition.
Failure to assess competitors
realistically makes entrepreneurs appear to be poorly prepared, naïve or dishonest. This section should focus on demonstrating that the entrepreneurs company has an advantage over its competitors.
One should indicate who the key competitors are and what their
weaknesses and strengths are and how the entrepreneur will deal with such circumstances. g)
Description of the management team
The success of a venture is affected by the quality of its management and financial officers. The ability and experience of the company’s managers is reflected in their financial decisions. Thus plan should describe the qualifications of business officers, key directors and other person with at least 20% ownership in the company. Activity 8.3 Identify some ventures that have succeed in business through their management
The management members need to describe in regards to their education levels, work history, and relevant business experience. An entrepreneur should not cover up previous business failure whereby investors are suspicious of entrepreneurs who have never experienced a business failure. h)
Plan of operation
To complete the description of the business, the owner should construct as organizational chart identify the business’s key jobs and the qualifications of the people occupying them. Assembling a management team with the right staff is difficult and maintaining them is even more difficult. The entrepreneur should describe briefly the steps taken to encourage important officers to remain with the company. Employment contracts, shares of ownership and p…are examples of measures that can be taken to keep and motivate employees. The form of ownership need to be described. This may be sole proprietorship, partnership, public and public companies or corporations. 135
i)
Pro-forma (projected) financial statements.
This is considered as the most important section of a business plan. A research done on bankers revealed that 74% of the bankers under study indicated that financial documentation is the most important aspect of a business plan for entrepreneurs seeking loans. For existing business, lenders and investors use past financial statements to judge the health of a company and its ability to repay loans or generate adequate returns. Financial statements are preferred when they are audited by a certified public accountant. The following financial forecasts may be prepared. Income statements: this shows the revenues from trading structure of the capital provided. Routine expenditure: Expenditure on salaries, raw materials and consumables, payment of interest on debt Capital expenditure major investment in new assets, how these assets will enhance performance Cash flow: difference between revenue and expenditure by period, cash flow reflects the liquidity of the business and its ability to find its activities. Its income is more than expenditure than cash flow is positive. It expenditure is more than income than cash flow is negative.
8.5
Business Plan Format
As stated earlier there are no hard and fast rules about what a business plan should include since a business plan must be shaped to reflect the needs and requirements of the venture if represents. An exhaustive business plan should include the following sub topics. I
Executive summary •
Company name address and some number
•
Name, address and phone numbers of all very key people.
•
Brief description of the business, its product /service
•
Brief overview if the market for your products and services
•
Brief overview of the strategies that your firm a success 136
•
Brief description of the managerial and technical experience of key people
•
Brief statement of the financial request and how the money will be used.
•
Charts as tables showing highlights of financial forecasts
II
Vision and mission statement •
Entrepreneurs vision for the company
•
What business to venture in
•
Values and principles on which the business stand
•
What makes the business unique
III
Company history (for ongoing businesses) •
Company funding
•
Financial and operational profile
•
Significant achievement.
IV
Business and Industry profile •
Industry background and overview
•
Significant trends
•
Growth rate
•
Key success factors in the industry
•
Outlook for the future stages of growth (start up growth, maturity)
V
Business Strategy •
Desired image and position in market
•
SWOT Analysis •
Strengths
•
Opportunities
•
Threats 137
• VI
Focus
Company products and services Description
• •
Product /service features
•
Customer benefits
•
Warranties and guarantees
•
Uniqueness
b) Patent and trademark protection c)
d)
Description of production process (where applicable) •
Raw materials
•
Costs
•
Key suppliers
Future product or service offerings
VII
Marketing strategy
1.
Target market a) Complete demographic profile •
Complete demographic profile
•
Other significant customer characteristics
b)
Customer’s motivation to buy
c)
Market size and trends •
How large in the market
•
Trend of the market – growing or shrinking
d)
e)
Advertising and promotion •
Media used – reader, viewer, listener profiles
•
Media costs
•
Frequency of usage
•
Plans for generating publicity.
Pricing •
Cost structure – fixed and variable cost
•
Desired image in market 138
• f)
Comparison against competitors prices
Distribution strategy
VIII
•
Channels of distribution used
•
Sales techniques and incentives
Location and layout
•
Location – Demographic analysis of location versus target customer profile
•
Traffic count
•
Lease/rented
•
Labour needs and supply
e) Wage rates IX
Competitor analysis •
Existing competitors
•
Potential competitors
•
Impact on your business
X
D Description of management team
a)
Key managers and employees
XI
XII
•
Their backgrounds
•
Experience, skills and know how expertise
•
Resumes of key managers and employees (suitable for an Appendix).
Plan of operation •
Form of business chosen and reasoning
•
Company structure (organizational chart)
•
Decision making authority
•
Compensation and benefits packages
Financial forecasts (suitable for an Appendix) •
Finance statements
•
Income statements
•
Balance sheet
•
Cash flow statement 139
b) Break-even analysis c)
Ratio Analysis with comparisons to industry standard applicable to on going
businesses. XIII
XIV
Loan or investment proposal •
Amount requested
•
Purpose and uses of funds
•
Repayment or “Cash out” schedule (exit strategy)
•
Timetable for implementing plan and launching the business
Appendices – which may entail supportive document, such as market research, financial statements organizational charts, resumes and other items.
•
Why some Business Plans fail Activity 8.4 1. Why do some business plans fail? 2. Come up with a business plan for a potential business you would wish to manage.
Generally, you need to consider your answer under the following guidelines. •
Goals set by the entrepreneur are unreasonable.
•
Goals are not measurable.
•
The entrepreneur has not made a total commitment to the business or to the family.
•
The entrepreneur has no experience in the planned business.
•
The entrepreneur has no sense of potential threats or weaknesses to the business.
•
No customer need was established for the proposed product or service. 8.8
Summary
This lecture has established the essential of a good plan and outlined the steps in its preparation.
The business plan may be read by many
individuals. The scope of the plan depends on who reads it, the size of the venture, and the specific industry for which the venture is intended. 140
The chapter presents a comprehensive outline of a typical business plan. In addition a brief insight is given as to why business plan may fail.
8.4 Activity •What makes an excellent business plan? •What is the purpose of the business plan if the audience is (a) the entrepreneur (b) an investor (c) A key supplier? How might the plan be adapted for these different audiences? •
Explain the essentials of a good plan.
•
Examine the elements of a business plan.
8.9 References • Thomas W. Zimmerer and Norman M. Scarborough (2008). Essentials of Entrepreneurship and small Business Management (5th Edition). Pearson Education Interantional. •
Saleemi Nisar Ahmad, (2009). Entrepreneurship Simplified. Saleemi Publications Ltd.
•
Hisrich Dhohert, Peter P.M. and Shepherd Dean (2008). Entrepreneurship (6th Edition). Tata McGraw Hill publishing company Ltd. New Delhi.
LECTURE NINE: THE MARKETING PLAN
•
Introduction 141
The term market is derived from the Latin word merchants, meaning “to trade”. It also means merchandise, wares, traffic or a place of business. It is because of these different meanings that the word is used differently in different contexts. The common use of the term may imply any of the following.
•
A place where market is held.
•
An assembly of people (preferably buyers and sellers).
•
An area of operation.
•
An organization which facilitates exchange of commodities
•
An act of buying and selling.
•
An assemblage of commercial activities.
Despite the thrust in each of these concepts, the ultimate objective of all is one and the same: markets help to complete the process of exchange leading to satisfaction of needs of the participants. A market, in general, may be described as a place or geographical area where buyers and sellers meet and function, goods or services are offered for sale and transfers of title of ownership occur. This idea of market is supported by many. Clark and Clark define this as “an area in which the forces leading to exchange of title to a particular product operate, and towards which and from which the actual goods tends to travel.” All businesses trade in markets. A market occurs when buyers and sellers come together to trade. The buyers demand products, while the sellers supply them. Markets can be small, local markets with a specified location, a market can be a building (e.g. the stock exchange). Other markets are national or international with no single location. For example, the world market for oil is a global market in which buyers and sellers are linked by telephones, faces and the Internet and trading takes place in many locations.
•
Markets can be identified in various ways: 142
•
Markets for individual goods and services, such as the market for bicycles;
•
Consumer markets for goods and services bought by individual consumers, such as the markets for hairdressing or books;
•
Commercial markets for goods and services bought by businesses such as the markets for cars or financial services;
•
Mass markets consisting of a large number of customers for a standard product;
•
Niche market consisting of a smaller number of customers for a more specialized product.
9.3
Importance of Marketing
Marketing is important to business firms and to non-profit organizations. It is also important to consumers and to the society. The importance of marketing is stated as follows. (A)
Importance to Business Firms Information for Marketing Decisions:
•
Marketing department collects valuable
information through marketing research, reports from sales team and dealers and from other sources. Such information is used to take proper marketing decisions relating to marketing mix, i.e. product designing, pricing, promotion and distribution. Accomplishment of Firms’ Objectives; Marketing helps a business firm to achieve its
•
objectives.
By producing products that satisfy customers’ needs and wants, the
company can increase its sales, which in turn enables a firm to achieve its objectives such as: •
higher profits
•
Increase in market share, and so on.
Widens Markets: Marketing enables to widen the markets,. With the help of
•
effective advertising, sales promotion and distribution, a firm can widen its markets as follows: •
From local level to regional level,
•
From regional level to national level, and
•
From national level to international level. 143
Reputation:
•
Effective marketing enables a firm to earn reputation in the market.
Satisfied customers, dealers and others develop a good image of firms that provide efficient and effective goods and services. A good image helps a firm to expand and grow. Helps to Develop Brand Loyalty: Effective marketing helps to develop brand
•
loyalty. Brand loyalty refers to: •
Repeat purchases by existing customers, and
•
Favorable recommendations by existing customers to friends, neighbors and others. Marketing guru Al Ryes says that customer word-of-mouth is the
best alternative to adverting. He calls such customer as an evangelist (religious believer). This is because; loyal customers tell others what movie to see, which
computer to purchase, what restaurant to
visit, which doctor to consult, which
mobile phone
to buy, which books to read, which gyms to join and so on. •
Helps to Introduce New Products: Reputed firms find it easier to introduce new products in the market. This is because they enjoy confidence and support of the loyal
customers. Satisfied customers are
always willing to buy products and services of
those companies in whom
they have trust or faith. They provide ready market
for
these
products. •
Helps to Face Competition. Proper marketing helps to face competition effectively with the help of good products, right price, effective promotion and distribution. Through effective marketing strategies, a firm can build competitive advantage.
• (B)
Movement to Non-Profit Organizations. Importance to Non-Profit Organizations.
•
A non-profit organization is a non-business organization. It is set upto provide and promote education, training, sports, arts and other socio-cultural activities. Examples of 144
non-profit organization include educational institutions, trade associations, chambers of commerce and industry, sports clubs, charitable trusts, religious organizations, etc. a non-profit organization needs to undertake marketing for the following reasons: •
To develop image: Marketing helps the non-profit organizations to develop a good image for the organization.
For this purpose, the non-profit organization must be
professional in providing its services to its members or to the members of the society. Ti may also undertake advertising to promote its name and goodwill. Good image of the organization would enable it to achieve success. •
To expand activities: Marketing activities are vital to expand activities of the non-profit organization. Some non-profit organizations would not like to confine themselves to a local area. They would like to open their centres at different parts of the country and even at international level.
•
To educate masses of its activities/objectives: Marketing activities on the part of a nonprofit organization. Some non-profit organizations is required to educate the masses or members of the society regarding its activities and/or objectives.Such education can be done through effective advertising. For instance, to keep a beautiful park always clean and at the same time non harm is doneto its plants and flowers, a large placard placed inside the park can bead,:
Do not take anything, except pictures.
Do not leave
anything on the ground, reaccept your footprints.
•
To crate social awareness: Most non-profit organizations exist to provide services to the members of the society and not necessarily to their own members. A good number of social organizations work for the less fortunate members of the society. Through effective social welfare campaigns, non-profit organizations create social awareness in respect of HIV/AIDS, child labour, drug abuse, etc. Such campaigns help the members of the society to get rid of social evils in the society.
•
To gain public support: Marketing is required by non-profit organization to gain public support. Many of the non-profit organizations largely depend on the donations from the members of the public. Also, their existence depends on the acceptance of their services or ideas by the members of the society or their members. Therefore, 145
non-profit organizations need to undertake effective marketing of their services or ideas to the members of the society. •
To enter in new area of activities: Effective marketing is required to enable the organization to enter in new activities. For instance, a religious organization can also enter into educational facilities, hospital facilities, etc. therefore, a good religious organization which is respected by the members of the society would also accept its entry in other activities and provide good support whenever and wherever required.
•
To provide information: Marketing activities especially advertising and publicity are required by a non-profit organization to provide information to the members of the society.
The information may be in respect of its activities, working, and
performance. It may also provide general information for the benefit of the public. •
To accomplish objectives.
Most of all marketing is required by a non-profit
organization to accomplish its objectives. For instance, one of the main objectives of an educational institution is to provide quality education to improve the overall performance of its students, so that they are capable and competent enough to face the challenges of life such as getting good jobs, having moral values and becoming responsible members of the society.
For this purpose, an efficient educational
institution may have to resort to marketing activities, including advertising. (C )
Importance to Consumers and Society.
1.
Higher Standard of Living: Because of marketing, consumers can enjoy new and beer
variety of goods and services. Members of the society can get the benefit of new and better type of goods because of constant research and development undertaken by well established companies.
•
Generates Employment:
Marketing creates a number of jobs in the country, either
directly or indirectly. Employment is generated because of job opportunities in the production, distribution, advertising and other areas of marketing. •
Improves quality and Reduces Cost: Marketing makes it possible to improve quality of the products because of research and development. It also facilities reduction in prices 146
because of stiff completion in the market and also due to the economies of large-scale production and distribution. •
Spread Effect: because of marketing, other sectors also expand. This includes expansion of banking sector, communication sector, and transport sector and so on. Such spread effect offers more job opportunities.
•
Creates Utility: Marketing creates form utility, time utility, place utility and possession utility. Consumers get form utility in the shape size and designs of the product. There is time utility because goods are available when they need it. It creates place utility because goods are available as and where consumers want and consumers also get possession utility from the physical possession of the product.
•
Enhances Economic Growth:
Marketing ensures optimum utilization of resources.
Through effective production and distribution, marketing enhances speedy economic growth and well-being of the nation.
9.4
Functions of Marketing Marketing covers a wide range of functional areas, which are briefly
explained as •
follows:
Marketing Research: It is one of the important areas of marketing. Through marketing research, the marketer can come to know about the likes, dislikes, tastes, preferences and buying behaviour of the consumers. Necessary information can be collected in respect of competitors’ offers. Marketing research helps to bring bout most competition products and competitive marketing plans to sell the product in the market.
•
Product Development: the company can produce new and better products thorough research and development. The firm does away with obsolete or outdated products and introduces new products in their pace. Firms should make constant efforts to upgrade and update the products so as to survive in the present competitive business world.
•
Advertising: Now-a-days, advertising is considered to be one of the most effective ways of promoting good and services,. It makes consumers aware of the qualities, uses and 147
benefits of the products. Advertising also helps to develop brand image and brand loyalty. •
Sales Promotion:
There are various sales promotion techniques such as sale on
installment basis, free gifts, offering discounts, etc.
The various sales promotion
techniques are used in order to promote and sell the products and services in the market. •
Pricing: Price refers to the exchange value at which the seller is willing to sell and buyer is willing to buy. Effective pricing policy is very vital to the success of the product in the market. The prices should be reasonable and within the range of the competitors. The prices should neither be too high nor too low. It is too high, buyers may think twice before paying for the product. If it is too low, buyers may equate the product’s quality as low.
•
Physical Selling:
It refers to the place of sale and the channel used for selling
Consumers want products to be available at a convenient place and on time.
The
marketer can use either direct channel or indirect to reach the buyers.
•
Personnel Selling: One of the important areas of marketing involves personnel selling. For this purpose, there must be proper selection of marketing personnel. If necessary proper training must be provided. They must be constantly motivated to achieve sales target.
•
After-Sale-Service: Effective after-sale-service is a must in case of consumer durables. Consumers value a company by the quality and speed of after-sales-service. To promote a good name and reputation in the market, the marketer must offer very good after-saleservice.
•
Test Marketing: it is a process of introducing a product or service in a very limited market area in order to find out whether or not the consumers would accept such a product or service. If test marketing is successful, then the product or service is launched over a large market area. 148
•
Branding: Branding is an important aspect in today’s competitive business world. A grand name facilitates advertising and promotional efforts.
It aids customers in
identifying the branded item. A good brand creates brand loyalty and among other things aids in brand extensions.
•
Other functional areas:
there are several other functional areas such as packing,
marking and labeling, public relations grading, standardization, etc.
•
Marketing Planning and Strategy
Like all business activities, marketing costs money and time. It is important, therefore, for the marketing activities of a business to be effective. This means that the revenue from increased sales resulting from the marketing activities should be higher than the cost involved. For example, there is little point in spending Kshs. 1 million on advertising that only results in an additional Shs. 500,000 in sales revenue. To ensure effective marketing, a business must have a clear strategy and develop a marketing plan.
•
Market analysis: This is an examination of market conditions to identify new opportunities.
•
Market research: this involves gathering and analyzing information to make better marketing decisions.
•
Marketing strategy: this involves developing a plan detailing how and where to compete.
•
Marketing mix:
this covers the decisions all businesses have to make
regarding selling price, how and where the product is sold, and the image of the product and the precise nature of the product itself. The marketing process Market analysis Market research
149
Marketing Strategy Marketing mix
Review results Let us discuss these in details below: 1.
Market Analysis:
As its name suggests, market analysis involves a detailed examination of characteristics of a market. Market analysis lets businesses spot opportunities in a market by looking at the market conditions. The most important conditions are market size, growth in the market and market share. This is an essential part of marketing planning. Only by knowing the features of a market will a firm are able to plan effectively what to do next. Market analysis
Market planning A market analysis will usually involve estimates of:(a)
Market size: How big is the market? Businesses estimate the size of their market in
terms of the total number of sales (volume of sales) or in terms of the value in shillings (or dollars, etc) of all the sales in the market. For example, in the soft drinks market a firm may measure the number of cans or bottles sold or the value in shillings of the total sales. A firm must ensure the market is big enough to generate sufficient returns to make it worth competing in. Firms will be interested both in the existing size of the market and its future size. A market may be big at present but could decline (e.g. what will demand for DVDs be in ten years time: will a new product have a replaced this technology?) 150
Alternatively, a market may be small at the moment but may be likely to grow fast in the future (e.g. 3G mobile phone technology is still new, but may grow fast in the near future). If a market is shrinking, a firm may have to decide whether to carry on competing in it or not; it may have to look for alternative markets. Competition is likely to be fierce in a shrinking market because there are less and less customers available. By comparison, in a growing market all firms can expand without having to take sales from each other. (b)
Market Growth: to what extent is the market growing? How big will it be in the
future? Businesses need to know if the market is growing or shrinking. Competition is fierce in a shrinking market – there are fewer customers to go around. In a growing market, several firms can grow easily; existing businesses may want to get out of market that is getting smaller, while new firms will be reluctant to enter a declining market. (c) Market Share: it is helpful to know the market share of all existing firms within the market. The market share of a firm or a brand is the percentage that it has of the market sales. For example, if brand Z has a 25% market share, this means either that 1 in 4 products brought by customers is brand Z (if the market size is measured in terms of units sold.) in another example, if 100 shillings out of every 1000 shilling is spent on perfume A, this would mean perfume A had a 10% market share. (If the market is measured in terms of sales value) Market share -+ sales - total market size x 100% Firms with large market share (e.g. Microsoft, Gillette, Coca-Cola) have great power over suppliers and distributors,. They are likely to be able to demand preferential treatment and better rates. As well as size, share and growth, market analysis measures things like profitability and the costs of buying equipment and training staff so one can bet in the market (entry costs).
151
Market Segmentation Segmentation is a means of dividing up a market (into segments) to identify consumers with similar needs. Different groups of customers have different needs. Analyzing different parts (segments) of a market allows a business to focus on the needs of specific groups within a target market. If you look at the market for magazines, for example, publishers produce different publications for different groups: some focus on sports, some are based on hobbies or interests; others are targeted at particular lifestyles while some are on politics, real estate, relations and so on. By identifying the needs of different groups, the publishers can produce an appropriate range of magazines. Segmentation happens in most markets. There are many different way of segmenting markets such as: •
Age – Many products are aimed at particular age groups in society e.g. babies, preteens, teens, 25 – 35 years old, middle age, old etc. for example, ‘pampers’ target babies and young children. In the tooth paste market, there are tooth pastes aimed at small children, others are particularly for smokers and some are for people with sensitive teeth. Each of these products targets a specific group and tries to meet their particular requirements.
•
Gender (male or female) – Products such as clothes obviously differ for men and women, but other types of producers also target men and women in different ways. Gillette, for example, is known for producing shaving razors for men but they also have razors especially made for women keeping in mind that a woman’s skin is more gentle and sensitive.
•
Income – Businesses produce goods and services for groups with particular levels of income e.g. luxury products like Rolex watches and Porsche cars are aimed at high income groups.
•
Socio-economic groups – Businesses can segment their market based on the kind of jobs (and income) people have i.e. senior professionals to low income to unemployed people.
152
•
Usage rate – Some firms such as tobacco and soft drinks companies distinguish between heavy users of their products and light users because this may affect the services offered and the promotional techniques used (e.g. light users may be targeted to turn them into heavy users).
•
Geographical region – some products have a regional market e.g. some bread companies only concentrate in particular towns or cities.
•
Ethnic grouping e.g. vernacular radio stations make it easier for businesses to target advertising at particular ethnic groups.
•
Purchase occasions – When do people buy flowers or a greeting card? In both of these markets the producers have tried to increase the number of purchase occasions to provide more situations when we would send someone a card or flowers.
All the above methods focus on a characteristic of the customer. Every person is different and has his or her own individual set of characteristics. This means that every customer of a business is different too. Fortunately, there are certain types of characteristics that are shared by all customers; it is these characteristics which businesses analyze. In addition, new segmentation methods categorize markets according to the reasons for buying a product – either as an essential, or to cheer yourself up or as a gift etc. More modern methods of segmentation focus on the motives people have when they buy products. Why do people chocolates, for example? To reward themselves? If a firm understands why someone buys their products, this may influence the way they are promoted. Is segmentation worth it? If a firm can identify different groups in a market, it can offer products that precisely match their requirements. Instead of producing one version of their product or service for everyone, firms can adjust what they do according to the different needs of each segment. This should lead to more sales and profits. However, it is more difficult and more expensive to produce and market several different products, rather than just one. A firm must weigh up the potential benefits with the possible costs.
153
What makes a market segment attractive? Not all identified market segments are necessarily attractive. There may well be a market for a magazine called Cricket weekly; for example, but this is unlikely to attract the major publishers, especially in a country like Kenya because the market segment is fairly small. A market segment must, therefore, be big enough to be worth competing in. For an asset-led approach, it must also fit with the firm’s own strengths. The firm must take into account whether the segment will continue to be sufficiently big in the future. If the firm was worried about further competitions or a change in consumer trends, for example, it may not enter, even if the market looks attractive in the short term.
2.
Market Research
Market research is the collection of market information such as customers’ likes and dislikes. It provides a business with information concerning the needs and wants of its customers, the suitability of its existing or proposed products, and the strength (and weakness) of the competition that the business faces. Therefore, the aim of market research is to gather information that may be useful to the firm when marketing its products. This could be information about sales, competitors, market size, and new developments in the market or a wide range of other things.
Armed with this
information, the business can:
•
Proceed with marketing its existing products or developing new products, in the knowledge that those products will meet the requirements of customers.
•
Put the business in a strong competitive position.
•
Help the firm to be able to make better decisions about what to do next.
154
Most businesses operate in changing and competitive markets. Customers’ needs and tastes change, affecting the demand for products and services, and the types of products and services that customers want.
Market research to identify customers’ changing needs is therefore
essential. By maintaining up-to-date and accurate knowledge and awareness of trends in the market, businesses can take decisions responding to changes and staying competitive. Businesses carry out market research in order to collect information from and about the market for their products – in other words, about the needs and buying have of their customers and potential customers. Based on the information obtained, decisions will be made on action to be taken in response to the findings of the market research. If is vitally important, therefore, that useful information is obtained from the right sources. The kids of information business want to collect include:-
•
Who are their customers?
•
What price are they prepared to pay for the product?
•
How can the product be developed to be better suited to customers’ needs?
•
How does the product compare with that of competitors?
•
What types of advertising are most effective?
Market research can be used to help firms in a number of different situations:•
When considering the launch of a new product, a firm may want to know the size of the market.
•
If firms are changing the brand name of a product, it may want to find out how customers might respond.
•
Information on customers’ reactions to different product prices may be invaluable.
•
Researching consumers’ views on an advertisement before launching can help to make sure that the “right” advertisements are used.
•
To assess how a product is doing, affirm may want to measure its sales.
155
Perhaps one of the most crucial questions market research can address is whether it is worthwhile competing in a particular market. How large is the market? Is it growing or shrinking? What profits could be made in the industry? What competitors exist? The firm will also be interested in the future of the market and whether it is likely to grow or shrink. Research can also be used to determine possible changes in marketing policies. Should the firm change the price? Should it change the promotional campaign? Which brand name should the firm choose? Essentially then, market research can be used in three main areas:
1.
•
To identify market opportunities
•
To assess the relative worth of different plans
•
To review the success of the plans once implemented.
To identify market opportunities
Businesses research customer buying patterns to help them predict what people will be buying in the future. A business might use research to help them spot growing markets to get into and declining markets to get out of. Research on customer likes and dislikes might show a gap (a business opportunity which one can avail) in the market. 2.
To assess the relative worth of different plans:
Businesses research before launch a product or advertising campaign. It reduces the risk of mistakes, for example, a publishing firm can decide to print twenty thousand copies of a book where as the demand for it is only few hundreds. 3.
To review the success of the plans once implemented:
It helps them see if their plans are working. A business that keeps a keen eye on sales figures will notice if their marketing strategy is having the right effect. Market research can be expensive. Bad market research can lead to disastrous business decisions. Businesses need to plan carefully to make sure they get the maximum benefit from the market research. 156
The Three Main uses of Market Research So research provides a firm with information. If it is undertaken effectively, it can help to provide firms with a competitive advantage by enabling them to make better decisions. Types of Research Deciding how you will get your information, selecting the sources and the way it is collected are as important as deciding what information is required. Some information may already be available within the business or else in the form of published reports and statistics. Other information will have to be collected. Researching existing sources of information is called secondary research, because the information was originally gathered for another purpose. It is also called desk research because much of it can be done at the researcher’s desk. Research that a business carries out to collect totally new information is called primary research. Primary research involves gathering information for the first time. Secondary research uses information already gathered. If you were thinking of launching a new type of shampoo and gave it to a group of people to try first, this would be primary research. If you read some information about the shampoo market in a newspaper, this would be secondary data. Primary research is also called field research. Primary and secondary researches have advantages and disadvantages and each is appropriate in certain situations. If a business is trying to assess the response of viewers to a new advertisement, primary research will be essential – secondary data would not exist. However, if the firm finds this information from secondary sources. Primary Research (gathering new data) Primary data can be gathered in a variety of ways. These are: •
Observation 157
•
Experiments
•
Surveys
•
Consumer panels
•
Sampling
These are further explained below:Observation: shops record customers on CCTV cameras to see how they wander around the store and what attracts their attention e.g. the display, the design, colour and packing of the product. Experiments: Business do test marketing by launching a limited number of units of the product and put on the market in few areas, just to see how it sells. If it succeeds, they sell it nationally. In this way the sales and customer response of the product can be confectionary such as breakfast cereals; fruit juices, energy drinks and chocolate bars are often market tested in this way. The problem with test marketing is that competitors get to see your product before it is fully launched and they may try to get to the market first. Surveys: through surveys, people are stopped on the streets and asked about their opinion about something: this is face-to-face survey. Firms also use telephone and mail surveys to find out what their customers think. The interviewer (the person conducting the interview) can ask the interviewee (the person being interviewed) a wide range of questions and interviews are particularly useful for obtaining people’s views and ideas. In order to save time and avoid any misunderstanding, it is better to use a standard questionnaire for each interview. Surveys can also be done through the internet and mobile phones (people can respond by sending short messages). When designing a questionnaire, the following points should be classified in advance
•
Who is the questionnaire aimed at (the target population)
•
What the main information required?
•
How is the information to be used?
The next step is to draft the key questions. Open questions are difficult to analyze because the range of responses may be so large. An example of an open question is ‘how did you get to 158
school today?’ However, such questions may provide useful background information. Closed questions are questions that allow for only a limited number of responses. The above question may be rephrased as ‘Do you go to school to-day? A third type of question is the multiplechoice question, where respondents are asked to select an answer from a limited number of choices. Consumer panel: Occasionally businesses establish permanent panels of their customers to advise them on their products.
Supermarkets often work with consumer panels that meet
regularly to discuss the products, prices and service offered. Television companies establish panels of viewers to comment on the quality and content of programmes. Such panels are also used to estimate viewing figures. Sampling: A firm may want to gather information using a survey. Usually, it is not possible to interview all of the people the firm is interested in: this group is called the population. It may be too expensive or would take too long to talk to everyone in the target population. For example, imaging a firm was thinking of launching a magazine aimed at 16 to 18 year olds; it could take months to interview everyone of this age in the country. Instead of doing this, the firm might decide to take a sample. A sample is a group, which is intended to represent the overall population. By interview, say 1000 16 to 18 – year olds; the firm would hope to get an impression of what all people of this age a group think. The most important requirement is that the sample should be representative of the whole. In other words, if you want to know how many people prefer the taste of Pepsi to Coke; while you obviously cannot ask everybody who ever drinks cola (the target population), the views of the people you do ask must be representative of the target population. Obviously, the results are not totally reliable because the firm has not actually asked everyone in the population; it has only asked some of them. This means that the firm cannot be totally confident of the results. This is why, when firms produce market research results, they also state a confidence level. If the confidence level is 95%, this means the firm thinks that 95% of the
159
time the results from the sample will represent the overall population. Therefore, a confidence level is a measure of the reliability of the findings of primary research. The more representative a sample is the more confidence a business can have in the results of the research. A give sample has a better chance of being representative than a small sample. Even a big sample won’t necessarily be 100% representative. There is always a margin of error. Quantitative and Qualitative Research Quantitative research: is based on relatively large samples and is statistically valid. It is used to show what has happened in a market and its findings can be expressed in numerical terms; for example, sales of Brand X have increased by 45%, 12 million people watched the match last week or the market for soft drinks is worth over Shs. 4 billion. Quantitative research, therefore, produces numerical statistics – facts and figures. It often uses multiple-choice questionnaires that ask questions like: “When did you last buy this product? A: within the last day, B: within the last week, C: within the last month, D: within the last year, E: longer ago, F: have never bought this product.” These are called closed questions because they have fixed, predetermined answers. Qualitative research by comparison, is based on the opinions of a small focus group or in-depth one-to-one interviews and aims to understand why customers behave in certain ways or what they think of a product. Rather than focusing on what happened, it examines why customers to what they do. For example, a focus group might be used to discuss consumers’ views of a brand to understand shopping habits. Qualitative research looks into the feelings and motivations of consumers. It uses focus groups that have in-depth discussions on a product, and asks questions like: How does this product make you feel? “These are called open questions. The answer is not restricted to multiple-choice options.
Closed questions make analysis easier, but sometimes open questions give more
informative data.
160
Primary data is specific to the purpose it’s needed for. This is great for niche markets – secondary data might be too broad or too mainstream to tell you anything useful. Primary data is exclusive to the business who commissioned the research, so competitors cannot benefit from the research. Primary research is always up to date. But primary research is labour intensive, expensive and slow. Secondary Research (data already available) Secondary or desk research involves researching sources of information that is already available. This is often the cheapest, easiest and quickest type of market research. Since the information was probably originally obtained for others purposes, it may not be as relevant or accurate as the researcher would like. If this is the case, the secondary research may have to be supported by primary research. Sources for secondary research may be internal (within the business itself) or external (outside the business). Internal sources include: sales records and reports in journals; research carried out and made availed by trade associations; reports and statistics published by government departments; information published by other organizations such as the World Bank and the United Nations. Other sources (external) can be newspapers, magazines and the Internet (this carries an astonishing amount of data). Secondary data that was gathered for a different purpose might be unsuitable. It may contain errors and it may be out of date. Secondary data is often used to get an initial understanding of a market. A business may then do more specific primary research to investigate any issues or problems that are shown up by the secondary data. Which is best – primary or secondary research? The most suitable type of research depends on the firm itself and the nature of the information it needs. If a firm is investigating a problem which is very specific to its own products or services (such as the impact of an advertising campaign) it will need to use primary research. If it is 161
studying more general trends, secondary research will be acceptable. The resources of the firm have an impact, as will the speed at which the information is required. If data is needed quickly and the firm has limited resources, secondary research is more likely to be used. Rapid advances in information technology are making it easier and cheaper for organizations to gather information on their customers. More information can be processed more quickly and more cheaply than in the past. How useful is market research? The value of market research can be judged in terms of the quality of the information it provides relative to the cost and time taken to gather it. If the information is good quality, is gathered relatively quickly and cheaply, the firm will no doubt be satisfied with the research.
If,
however, the information arrives too late to be of any use, then it will be of limited value. 3.
Market Strategy
The marketing objective determines exactly what the firm is aiming to achieve in marketing terms. This will contribute to the overall corporate objective. The marketing strategy is the plan a firm adopts to achieve its marketing objectives. Thus, Corporate objective: overall target of the organization. Marketing objective: target of the marketing function which should contribute to the corporate objectives. A firm’s marketing strategy determines what markets it wants to compete in and what products it wants to offer. As we have seen, a strategy is the means of achieving an objective. A marketing strategy is, therefore, a way of achieving a marketing objective. This means it is the long-term plan the firm has to ensure it meets its marketing target. A marketing strategy involves and analyzing markets, choosing which markets to operate in and which products to offer.
162
Marketing objectives often focus on sales. In most cases, firms want to increase their overall sales, but they may also set objectives for particular products or regions. For example, a firm might be very eager to promote some of its products to a greater extent in the whole region or it may want to boost sales of its latest brand in particular. A firm might want to spread out sales over the year (if its existing sales are very seasonal). It may even want to reduce sales, if it knows it cannot meet the orders and that to accept them might lead to long waiting lists and dissatisfied customers. Businesses develop long-term marketing objectives from their overall corporate objectives. Marketing objectives give a direction to all the marketing that the business does. Marketing objectives always need to take into account what competitors are up to. Once a business has sorted out its marketing objectives, it develops medium term marketing strategies as action plans to achieve the marketing objectives. Next, they think up short-term tactics to put these medium term plans into action. Tactics are individual marketing actions. Remember, a strategy is a plan of how to achieve an objective. A tactics is an activity that you do to fulfill your strategy and get closer to your objective. Therefore, there strategy is implemented through marketing tactics.
These tactics involve
detailed decisions about factors such as the price and the way the product is distributed.
For example: •
A firm’s marketing objective might be to increase sales by 30% over the next five years.
•
It marketing strategy might be to launch some of its products in other countries.
•
The marketing tactics used might include launching the products at a low price in major cities first and gradually extending this to other parts of the country.
163
The interrelationship between objectives, strategy and tactics Corporate objectives
What is the firm trying to achieve?
Marketing objectives
What does the marketing function need to do to fulfill the corporate objectives?
Marketing strategy
How will the firm achieve its objectives?
Marketing tactics
What needs to be done to ensure the strategy is successful?
Determinants of a marketing strategy When considering a marketing strategy a firm’s managers should consider: •
What is the firm trying to achieve, i.e. what are its marketing objectives? There is no point cutting prices, for example, if the firm is trying to build an exclusive brand image. Similarly there is little point diversifying if the firm’s objective is to focus on its core products.
•
What are the market opportunities? What market segments appear to be growing/
•
What are the firm’s strengths? What is the firm capable of achieving? Does it have any unique selling points (USPs)?
•
What resources does the firm have? For example, what is its financial position? Will it be able to finance any plans for expansion?
•
Should the firm compete in a niche or try to compete head-on with the major players in a mass market?
•
Should the firm try to match the completion and try to sell the products more cheaply (a low-cost strategy?
•
Should it compete in particular areas in the country as a whole or globally?
164
A firm’s marketing strategy should aim to exploit its market opportunities and defend it against threats. It should naturally build on the firm’s strengths and avoid entering market segments or offering products where its weaknesses will be exposed. Types of marketing strategy: There are many types of marketing strategies.
These include niche marketing and mass
marketing. Following are the features of a niche market:•
Niche marketing picks out relatively small market segments and tries to cater specifically to them.
•
Niche marketing lets small firms survive. Small firms can offer unique selling points which appeal to a small niche customer base that large firms simply would not bother with.
•
Small niche markets suit small niche manufacturers. A small manufacturer can meet the demand of a small segment of the market. It might not be able to meet the demand of a mass market.
•
Another benefit of niche marketing is that a business can have loyal customers – who are often willing to pay premium prices for a product that is just right for them.
•
There are fewer chances to grow in a niche market. Niche businesses cannot save costs by producing on large-scale – small-scale manufacturers cannot get bulk discounts from suppliers.
•
If bigger firms enter the market, niche manufacturers can struggle to survive. Bigger firms have lower costs and they can be more competitive.
There are a number of advantages of operating in a niche market: A firm may be able to survive because it is offering a product or service that the large firms are not bothered about supplying. If a small firm tried to compete in the mass market, the existing firms might react aggressively. The firm may be able to operate on a small scale. Many niche markets are relatively small and specialized. Small organizations are therefore, able to meet the demand in this market, whereas they might lack the resources to meet demand in a mass market. 165
However, firm producing and selling in niche markets also face disadvantages: If the business earns high profits, other firms might enter the market, making it more competitive. In some cases, the niche producer will struggle to survive if larger, more powerful firms enter the market and sell at lower prices. The market as a whole may be quite small which may limit the overall returns a firm can achieve. The market may consist of a small number of customers. This may mean that the firm is vulnerable to the loss of one or two customers. In the mass market this is less of a problem: if one customer is lost, there are normally plenty more. Mass Marketing is Selling Large Quantities of Standardized Goods Following are the features of a mass market:•
A mass market is a large market containing lots of customers with similar requirements.
•
Businesses in a mass market sell standardized goods at cheap prices to lots of customers. Mass market goods include things life washing powder, packed foods, soft drinks, tooth paste, cassette players, CDs cameras, tires, toilet paper, and batteries and so on.
•
Mass production techniques developed in the 19th and 20th centuries, e.g. assembly line production, made a mass market possible.
These techniques meant that
production could be large scale and cost effective – producing standardized goods at low prices. •
Globalization is the process where goods and consumer wants become standardized across international borders. Globalization has increased the size of the mass market and made mass marketing more important. You can sell Coca Cola anywhere in the world.
•
In a mass market, businesses can grow big and benefit from productive economies of scale – but they must take care that they don’t end up with diseconomies of scale. 166
Mass marketing needs a lot of resources, e.g. lots of machines and lots of workers. If
•
demand does not meet expectations, machines and workers will not have enough to do (remain idle) – a waste of resources and money. Businesses in a mass market need to use marketing to differentiate their product from
•
all the other products on the market. Even if the product is not actually all that different from the others (e.g. a washing
•
powder or box of tissues) it’s important that customers see it as different in some way – and somehow are more suited to them. To operate in a mass market, a firm must be able to produce goods on a large scale. This may require a heavy investment in equipment and in the recruitment of staff. The danger of mass marketing is that, if demand falls, the firm may be left with unused resources. Machines may sit idle and there may not be enough work for employees. Before investing in the large-scale resources essential for a mass marketing strategy, a business must be sure that demand will be sustained. The advantage of mass marketing is that the firm can produce large numbers of relatively standardized products. This means the production process is relatively repetitive and the cost per unit should be low. However, even though the firm will be producing many thousands of the same items, it still needs to differentiate itself from the competition. Ariel, Omo, Surf and Persil, all compete in the same market (as detergents) but try to make themselves different from each other – through the product itself of the price. This is product differentiation. Ansoff’s Matrix Other marketing strategies can be highlighted by Ansoff’s matrix.
Igor Ansoff was a
management writer who outlined four types of marketing strategies. Market penetration – Using this strategy, a firm tries to gain more of its existing market. For example, if Coca-Cola tried to sell more of its products in Kenya, this would be market penetration. To do this it may cut the price or launch a new advertising campaign. This is a relatively low-risk strategy which can be implemented in the shortterm. 167
Market development – This entails a firm selling its existing products in a new market. This may either be a new segment f the market or a new market geographically. For example, Johnson and Johnson’s baby oil, originally marketed for babies are now being sold to adults as well. In another example, many sportswear companies have successfully marketed their products as fashion items. Chewing gum companies have offered their products as an aid to giving up smoking, as something which helps prevent tooth decay and as a breath freshener; the product therefore has been offered too many new segments. In recent years, companies such as Bidco have been trying to sell much more of their products (such as cooking oil, margarine, etc) in other countries of East and Central Africa as this is a very fast growing market. New product development – Firms pursuing this strategy develop new products to sell to existing customers. This may either be a modification of an existing product or a completely new one. For example, DVDs are replacing videos. Firms operating in the soap, shampoo and determent markets, for example, are continually developing new brands for their customers. This strategy is risky in the sense that new products often fail. Only one in ten new products launched survives the first two years. Diversification – This strategy occurs when a firm offers a new product in a new market. This does not mean this product or market did not exist before but simply that this firm had not been involved before. For example, CAT is a producer of industrial equipment but has used its brand to move into the clothes market. In another example, a chocolate company may decide to diversify into soft drinks market or a soft drinks company goes into bottled (mineral) water market. This is a high-risk strategy because the firm may have only a very limited understanding of the production and marketing requirements of the new sector. It also means the managers of a business are becoming involved in an area in which they do not have any experience. If it is successful, however, it actually reduces the firm’s risk because it is operating in two different markets. If sales decline in one market, demand may be sustained or even increase in another one. Why change a marketing strategy
168
It may be necessary for a firm to change its marketing strategy for a number of reasons, for example: It may have changed its marketing objectives; rather than wanting more sales from a given product range it may seek to diversify. Market conditions may have changed; the slowing down of the rate of growth in the PC market has led firm’s life Microsoft to look for new markets to enter, such as computer games. Competitors’ actions; a head-on attack from other firms may force an organization to move into a new segment or to focus on particular areas of its business where it has a competitive advantage. The firm’s own strengths; as a firm develops its staff, technology and product range, it may find that its strength create new opportunities and this brings about a change in strategy. Marketing Strategies Must Match Business Characteristics Businesses have to decide whether they have the resources for a potential marketing Strategy before they commit to it. •
Small businesses need modest strategies, given their limited financial resources. Big multinational corporations usually have several objectives with each one backed up by a whole load of strategies.
•
Market leaders are most likely to have marketing strategies that try to keep them at the top of the market. Smaller firms need strategies that will make them survive in the market.
•
Highly competitive markets need good strategies.
•
Businesses can make use of strengths like a good brand name or a good distribution network. A business with a strong brand name may decide to diversify and use its 169
brand in new markets. A business with a strong network of retail outlets could try selling a larger range of products in its shops. •
New opportunities for making, selling or advertising need new strategies to make the most of them.
What determines a marketing strategy? •
As we have seen, a firm’s marketing strategy must be derived from its marketing objectives.
•
The strategy must also be linked to the opportunities available within the market. If new technology brings new ways of selling a product (for example, via the Internet the firm’s strategy will change).
•
A firm’s plan must also be related to its own strengths and resources. If, for example, a business has a strong distribution network, it may seek to sell other products through its outlets. If, however, a firm has a strong brand name it may seek to use this asset in the new markets.
•
A firm’s strategy will also be influenced by what competitors are doing. If there are several large and powerful firms competing in one segment, a firm may want to avoid this and compete elsewhere.
Characteristics of a Marketing Plan.
•
The marketing plan should be designed to meet certain criteria. Some important characteristics that must be incorporated in an effective marketing plan are as follows: •
It should provide a strategy for accomplishing the company mission or goal.
•
It should be based on fact and valid assumptions some of the facts needs are illustrated in Table 9.1. It must provide for the use of existing resources. Allocation of all equipment, financial resources, and human resources must be described. Table 9.1 Facts Needed for Market Planning. •
Who are the users, where are they located, how much do they buy, from whom do they buy, and why? 170
How have promotion and advertising been employed and which approach has
•
been most effective? What are the pricing changes in the market, who has initiated there changes, and
•
why? •
What are the market’s attitudes concerning competitive products?
•
What channels of distribution supply consumers, and how do they function?
•
Who
are
the
competitors,
where
are
they
located,
and
what
advantages/disadvantages do they have? What marketing techniques are used by the most successful competitors? Buy the
•
least competitors? What are the company’s strengths? Weakness?
•
(Since: Hirsch, Peters and Shepherd – Pg. 223)
• 3.
An appropriate organization must be described to implement the marketing plan.
4.
It should provide for continuity so that each annual marketing plan can build on it, successfully meeting longer term goals and objectives.
5.
It should be simple and short. However, it should not be short that details on how to accomplish a goal are excluded.
6.
Should be flexible to allow for different a changing scenarios and appropriate responding strategies.
•
It should specify performance criteria that will be monitored and distributed. For example, the entrepreneur may establish annual performance criteria of 10 per cent of market share in a designated geographic area. To attain this goal, certain expectations should be make at given time period (e.g. at the end of three months we should have a 5 percent share of market). If not attained new strategy or performance students may be established. Activity Are you now required to prepare a marketing planning for a new venture?
171
The Marketing Mix
Product
Price
Marketing mix is bound to be different across the companies selling different products. Marketing mix may also vary between the two companies selling the same product categories.
172
An important thing to remember about the marketing mix is the way in which all the different items must work together for the customer to be satisfied. Part of the appeal of a well-known brand may be that it is quite expensive and that you cannot get it in every shop. If it is too cheap or too easily available, the brand may become less attractive. By comparison, the success of Coca-/cola and Pepsi is due, not only to the product itself, but to the way the brand is promoted and the fact that the products are very easily available. So, the price, the way a product is promoted, the way it is distributed and all the other elements of the mix must all complement each other for the consumer to be satisfied. The Price The price of a product or service plays an important part in our decision about whether or not to buy it. If the price is too high, we simply cannot afford the product even if we want to. However, the relative importance of price is likely to vary according to the product and the particular circumstances. As an example, if two petrol stations opposite each other are charging different prices for petrol, we are likely to choose the cheaper one. When buying a wedding ring, however, we do not always go for the cheapest. In some cases it may be difficult to compare prices directly – just look at how complicated the price structure is for mobile phones. When considering the price, it is important to place it in the context of the other elements of the mix and the buyer’s circumstances. Place for distribution The distribution of a good or service refers to the way in which it gets from the producer to the consumer. In some cases, the product goes directly. It is common for manufacturers to use intermediaries to help them get their products to the market. The intermediaries include:
•
Retailers – retailers such as supermarkets and shops are the final stage in the distribution chain. Most goods are sold through retailers.
•
Wholesalers – wholesalers buy products in bulk from producers and sell these on to retailers, who then sell direct to the final consumer. Retailers use wholesalers because 173
they offer a range of products and it is easier that dealing direct with individual manufacturers. Promotion The promotion of a product involves the communication of various messages to existing or potential customers. These messages may be aimed at informing customers (e.g. telling them about changes done to the product or promotional offers), or persuading them (e.g. putting across a product’s benefits compared with the competitors) or reassuring buyers they did the right thing by buying the product.
A firm can promote its products in various ways, for example
advertising. Advertising involves paying for communications. Adverts can be placed in a range of media, such as television, newspapers, radio and the internet. Advertising is often used as a long-term strategy to build brand loyalty. The Product The product itself is a crucial element of the marketing mix. Many marketing specialists argue that it is the most important element of the marketing mix. A successful product will be designed to meet customer requirement. These requirements will have been identified, perhaps through market research. The design of the product will take account of the production process. A well-designed product can save on costs, can be made easily to a consistent quality and meets the needs of customers very precisely. Many firms try to rush the design and development stage because they are so eager to get the product out on to the market to earn money. However, it is often the case that more time spent developing the product results in a much greater chance of long-term success. Approximately four out of five new products fail, which shows how risky developing new product can be. Firms may succeed in the market by launching products that meet new needs or existing needs more precisely, buy offering a more reliable product or by producing it more cheaply than the competition, enabling the firm to lower the price.
174
An Integrated Mix The key thing to remember when discussing the marketing mix is that it must be part of an integrated approach. This means that all the different elements of the mix must work together and complement each other. There is little point trying to develop a high-priced, exclusive brand to target high-income earners if it is then distributed through every small outlet on the street. In a well-managed mix, the elements fit well together and enhance the overall value provided to the customer. It is important to see the 4 Ps model as a rather basic model of what influences a decision to buy, or not buy, a product. We are also influenced by the people who serve us, the way in which we buy the product, the ease with which the features of one product can be compared with others. The m ix should be thought of as anything connected with a product or service which influences the buyers’ decision. Some business writers now talk of the 7 Ps, rather than the 4Ps. In addition to the original 4P, these include: •
People – a well trained, polite staff can influence people to buy from one shop rather than another.
•
Physical environment – factors such as the layout, décor and parking can be an important influence on which restaurant, club or store a person chooses.
•
Process – the ease of ordering and paying can influence a purchase. Many supermarkets, at peak hours have many cashiers at the tills service customers in order to reduce queues.
9.8
Marketing Budget
A marketing budget is a quantifiable target which is set by a firm and which relates to its marketing activities. It may involve a target level of sales for a particular product (a sales budget) or set out the amount a firm intends to spend to achieve its marketing objectives (an expenditure budget). The sales budgets may include targets for the absolute level of sales a firm would like to achieve or for a desired level of market share; they may also include targets for particular regions or for particular types of customers or distribution channels. 175
Marketing
expenditure budgets, by comparison, set out the desired amount of spending on activities such as advertising, sales promotions; paying the sales force, direct mailings and market research. The size of the sales budgets is likely to depend on: •
The level of sales a product has achieved in the past: a firm may extrapolate future sales target based on past trends. Extrapolation is a method of predicting future trends. This involves identifying the underlying trend in past data and projecting this trend forwards.
•
The expenditure budget: a firm may set a higher sales target if it is also intending to spend more on its marketing activities.
•
Marketing conditions: actions by competitors and the state of the economy, may affect the firm’s expected level of sales.
•
Objectives and strategy: the target level of sales for a niche product is obviously likely to be lower than it is for a mass-market product.
The size of the marketing expenditure budget will depend on:•
The firm’s overall financial position. The amount of money allocated to a particular function such as marketing will inevitably depend on what it has available to spend in total.
In a successful year it may be easier to have a bigger budget than in an
unsuccessful year. On this basis the marketing budget is likely to be lower when sales are lower and bigger when they are higher. This is often what actually happens within organizations although in many ways this is not a particularly sensible way to budget. In unsuccessful years the budget should arguably be higher (not lower) in order to improve the firm’s sales, •
The firm’s marketing objectives and strategy.
The amount of money allocated for
marketing activities should clearly depend on what the firm is trying to achieve and the returns it expects to gain from its plans. When first launching a product, for example, the promotional budget is likely to be higher than it is for a more established product. Similarly, when first entering a new segment, spending on market research may be higher than in a ‘normal’ year. 176
•
The amount the firm expects to receive back is also of critical importance: a firm is likely to be prepared to spend more marketing a project with a high rate of return than on one which has a low expected rate of return.
•
Competitors. A firm’s budget is very likely to be affected by the amount its competitors are spending. If its competitors increase their spending on product development or promotion, for example, a firm may feel it necessary to increase its own expenditure to maintain its competitive position.
Financial position Marketing objectives And strategies
Marketing expenditure Budget
Competitors’ spending Expected returns
Of course, just because a firm has a large marketing budget does not mean that its marketing is necessarily more effective; the effectiveness of marketing activities will depend in part on the funds available, but it will also depend on whether the right activities have been chosen in the first place and how effectively they are being managed and implemented.
177
The marketing budget should be set in consultation with those who will be responsible for undertaking the activities it involves. The amount of money to be spent of marketing overall, for example, should be agreed with the marketing manager. Given that the marketing manager is the person who will be held accountable if the target is not achieved, he or she should obviously be involved in deciding what the figure should be. By involving the people who will actually have to achieve these financial targets, the firm is more likely to gain their commitment. If, instead, people are simply told that they have to achieve certain targets without any prior discussion they are unlikely to feel much ownership of the budgets and as a result are unlikely to be committed to them. They may resent the fact they have not been involved in the process of setting the targets and consequently they may not be motivated to achieve. Sales Forecasting A key element of a marketing plan is the sales forecast. This sets out targets for overall sales and for particular products and services. A sales forecast acts as a goal against which a firm can measure its progress. It also drives many other decisions within the firm. For example; •
The production schedule will have to be closely linked to the sales forecasts to ensure the firm has the appropriate mix and number of products at the right time.
•
The sales forecast will also influence the cash flow forecast; only by knowing what sales are expected to occur can the finance department estimate cash inflows. Having compared the expected inflows with expected cash outflows the finance function can then decide if particular steps need to be taken, such as arranging overdraft or loan facilities.
•
Human resource decisions will also depend on the expected level of sales. Decisions about staffing levels and the allocation of staff to particular duties will inevitably be determined by the expected sales levels. Strong sales growth may require more recruitment, for example.
Producing a sales forecast A sales forecast may be produced in a number of ways: 178
•
It may be based on backdate (i.e. data from the past). The firm may look at sales levels in previous years, identify and underlying trend and extrapolate from this. A tour company experiencing a fall in the number of enquiries in a particular month compared to past years may change its sales forecast downwards. This technique is useful, provided the trends identified in the past continue into the future. If, in fact, there has been a major shift in buying patterns (e.g. the timing of buying has changed) extrapolation could be misleading.
•
The firm may use market research to try to identify likely future trends. The value of this research depends on whether it is primary or secondary and the quality of the information. If a small sample is used, for example, the forecast is less likely to be accurate than if a large sample had been used.
•
It may be based on the firm’s best guess. Managers could use their own experience or hire industry experts for their opinion of hat is most likely to happen. This approach to forecasting is common if the rate of change in the market is great or if the firm is facing a new scenario and does not have past data to build on.
The method of forecasting used by a firm will depend on the nature of the product and the market situation. Why forecasts can be wrong? Forecasts can only be predictions of the future. They may well be wrong because: •
Customer-buying behaviour changes suddenly, e.g. customers suddenly decide a product is unsafe or unfashionable.
•
The original market research was poor. This may be because the sample was too small or was unrepresentative.
Alternatively, it may be because the results were wrongly
interpreted; this could be because the firm was in a rush to launch the product. In some cases the research may actually have been ignored – managers may have been certain that they knew best and gone ahead with the decision regardless of the findings of market research. •
The experts were wrong; even the best-informed people can misread a situation and make mistakes-just look at the predictions of so-called experts before any horse race or football 179
match or look at the many different and often conflicting forecasts of growth in the economy that are often published in the newspapers. Just because a market is attractive is attractive at the moment does not mean it will always be appealing.
New competitors, sudden change in consumer tastes, new laws, changes in
technology and social change can all affect the success of a market in the future. In the 1950s the market for black and white televisions was growing; now what remains is just a tiny market. In the 1960s the market for computer games was non-existent; now it is worth several hundred million dollars a year. DVDs were only introduced in the 1990s but are now commonplace. Inevitably a firm’s external and internal conditions are likely to change and this can make it extremely difficult to estimate future sales. However, this does not necessarily make forecasting a useless management tool. The simple process of forecasting makes managers think ahead and plant for different scenarios. This may help to ensure they are much better prepared for change than if they did not forecast all. Also, even though a forecast may not be exactly accurate it may give an indication of the direction in which sales are moving and some sense of the magnitude of future sales, which can help a firm’s planning. Ultimately it may not matter much whether sales are 2,000,002 units or 2,000,020 units but it makes a big difference whether they are 2m or 4m or 4m in terms of staffing, finance and production levels, i.e. provided the forecast is approximately right it can still be very useful even if it is not exactly correct. It is also important to remember that sales forecasts can be updated. A firm does not have to make a forecast and leave it there. As conditions change and new information comes in, the managers can update the forecast and adjust accordingly. The reliability of forecasts Forecasts are most likely to be correct when •
A trend has been extrapolated and the market conditions have continued as before
•
A test market is used and is truly representative of the target population 180
•
The forecast is made by experts (such as your own sales teams) and they have good insight into the market and future trends.
•
The firm is forecasting for the near future. It is usually easier to estimate what sales will be in 3 months time compared to estimating sales in the five years’ time.
•
STEPS IN PREPARING THE MARKETING PLAN
Figure 9.1 illustrates the various stages involved in preparing the marketing plan. Figure 9.1
Sample Flowchart of a marketing plan
Critically examine present and prospective product/market situation
Take into account company goals and restraints Set marketing objectives that are specific and measurable Determine marketing strategies, and prepare action programs with assigned responsibilities and dates of accomplishment Reevaluate programs against objectives
Objectives attainable Objectives not attainable
Draft marketing plan, with steps to monitor progress of 181
programs
Match feasibility of programs against Available resources or restraints
Feasible Not feasible
Submit marketing plan for approval (Source: Hisrich, Peters, Shepherd, pg 232)
•
WHY SOME MARKETIGN PLANS FAIL
Marketing plans are ineffective or fail meeting marketing goals for different reasons. In fact failure may also be considered a matter of degree since some goals may be met and others missed completely. Some of the reasons for failure can be avoided if the entrepreneur is careful in preparing the marketing plan. Some of the more common reasons for failure include:
•
Lack of real plan – The marketing plan is superficial and lacks detail and substance, especially regarding goals and objectives.
•
Lack of an adequate situation analysis. It is invaluable to know where you are and where you have been, before deciding where you want to go. Careful analysis of the environment can result in reasonable goals and objectives.
•
Unrealistic goals: - This generally results because of a lack of understanding of the situation. 182
•
Unanticipated competitive moves, - with a good situations analysis, as well as an effective monitoring process, competitive decisions can be assessed and predicted with some degree of accuracy.
•
Product deficiencies – often results from rushing the product to the market.
•
Acts of God – Such as an oil spill, flood, famine, hurricane, or war – the entrepreneur has no control. 9.11 Summary In this lecture, we have looked at the importance of marketing to the business firms, to nonprofit organizations and to consumer and society at large. We have also reviewed the major functions of marketing, as well as the marketing, planning and strategy. We have looked at aspects covering market analysis, market research, marketing strategy and the marketing mix. We have also looked at the marketing budget and the factors that determine the six of the budget we obtained the characteristics of a good marketing plan, outlined the steps involved in the preparation of a marketing plan and finally we have look at some of the major causes as to why marketing plans fail. References • Hisrich R, Peters M.P and Shepherd D.A (2008) Entrepreneurship Simplied. Saleemi publications Ltd, Nrb. •
Greene L.C. (2006) Entrepreneurship Southwestern, Canada.
LECTURE 10: MANAGING GROWTH OF A VENTURE 183
10.1
INTRODUCTION
One of the essential acts of entrepreneurship is new entry. New entry refers to either offering a new product to an established market or to a new market. Offering an established product to a new market; or creating a new organization. Whether associated with a new product, a new market and/or a new organization, ‘newness’ is like a double-edged sword. On the other hand, newness represents something rare, which can help differentiate a firm from its competitors. On the other hand, newness creates a number of challenges for entrepreneurs. In this lecture we attempt to explore the various growth strategies undertaken by entrepreneurs. We also look at the strategic growth of business ventures.
We also examine the financial control options
available to business firms and lastly, explore the various options of business ventures going public. Objectives At the end of this lecture, you should be able to: 1. Explore the various growth strategies employed by entrepreneurs; 2. Look at the various aspects of strategic growth; 3. Explain the financial control options available to business firms; 4. Examine the various options available for business ventures going public. 10.3
GROWTH STRATEGIES
Business growth is critical to entrepreneurial success. The potential for growth is one of the factors which distinguish the entrepreneurial venture from the small business. A successful new entry provides the opportunity for the entrepreneur to grow his/her business. For example, introducing a new product into an existing market provides the opportunity to take market share from competitors; entry into a new market provides the opportunity to service a new group of customers; and a new organization has a chance to make and build upon, its first sales.
184
10.1 Activity What are some of the growth opportunities available to an entrepreneur?
10.3.1
Penetration Strategies
A penetration strategy focuses on the firms’ existing product in its existing market, and the entrepreneur attempts to penetrate this product or market further by encouraging existing customers to buy more of the firms’ current products. Marketing can be effective in encouraging more frequent repeat purchase. This strategy attempts to better exploit its original entry. 10.3.2
Market Development Strategies
This involves selling the firm’s existing products to new groups of customers. New groups of customers can be categorized in terms of: •
New geographical markets
•
New demographic market;
•
And/or based on a new product use.
New geographical market simply suggests selling the existing product in new locations. New demographic marketing involves offering the product to customer based upon their income; where they live, their education, age, and sex etc. And finally, new product use involves modifying the product slightly in order to better satisfy customers who use the product for a different purpose from which it was originally intended. 10.2 Activity Can you find suitable examples of geographic, demographics, and new product use based on market development strategies.
185
10.3.3
Product Development Strategies
This involves developing and setting new products to people who are already purchasing the firm’s existing products. Experience with a particular customer group is a source of knowledge on the problems customers have with existing technology and ways in which they can be better served. 10.3.4
Diversification Strategies
Diversification strategies involve selling a new product to a new market. Even though both knowledge bases appear to be new, some diversification strategies are related to the entrepreneur’s (and the firm’s) knowledge. In fact there are three types of related diversification that are best explained through discussion of the value-added chain. As illustrated in Figure 10.1 a value-added chain captures the steps it takes to develop raw materials into a product and get it into the hands of the customers. Value is added at every stage of the chain. For the value-added each firm makes some profit. If we focus on the manufacturer, opportunities for growth arise from backward integration, forward integration, and horizontal integration. Backward integration refers to taking a step back (up) on the value-added chain toward the raw materials, which in this case means that the manufacturer also becomes a raw materials wholesaler. In essence the firm becomes its own supplier. Forward integration is taking a step forward (down) on the value-added chain toward the customers, which in this case means that the firm also becomes a finished goods wholesaler. In essence the firm becomes its own buyer.
FIGURE 10.1 Example of a Value Added Chain and Types of Related Diversification 186
Value-added chain for product 1
Value-assed chain for product 2
Backward Integration
Horizontal ----------------
Forward Integration
Source (Hisrich P.D. et al, Entrepreneurship – Pg. 455) Backward or forward integration provides an entrepreneur with a potentially attractive opportunity to grow his or her business. First, these growth opportunities are related to the 187
firm’s existing knowledge base, and the entrepreneur could therefore have some advantage over others with no such experience or knowledge. Second, being one’s own supplier and/or buyer provides synergistic opportunities to conduct these transactions more efficiently than they are conducted with independent firms fulfilling these roles. Third, operating as a supplier and/or a buyer of the original business provides learning opportunities that could lead to new processes and/or new product improvements that would not have been available if this integration had not taken place. A third type of related diversification is horizontal integration. The growth opportunity occurs at the same level of the value-added chain but simply involves a different, but complementary, value-added chain. For example, a firm that manufactures washing machines may go into the manufacture of detergent. These products are complementary in that they need each other to work. Again the relatedness of the new product to the firm’s existing product means that the firm will likely have some competences in this new product and may provide learning opportunities. Further, horizontal integration provides the opportunity to increase sales of the existing product. For example, the existing product and the new product may be bundled and sold together, which may provide increased value to customers and increase sales. Examples of bundled products include computer hardware and software, televisions and video recorders, and telephones and answering machines. What about introducing a new product into a new market that is not related to the existing business (i.e. not forward, backward, or horizontal integration? The short answer is, “Don’t do it” If it is not related to the current business, then what possible advantage can this firm have over competitors? Ego and the mistaken belief in the benefits of a firm’s diversifying its risk lead some entrepreneurs to pursue unrelated diversification to their own peril.
10.4.
STRATEGIC GROWTH
10.4.1 Key Learning Outcome
188
An Understanding of the ways in which competitive advantage can be developed as the venture grows. The strategic approach to organizational management regards the organization as a single coherent entity which must be managed in its entirety. It locates the organization conceptually in an environment from which it must draw resources and add value to them. The organization must then distribute the new value created to its stakeholders. The strategic approach also recognizes that the organization is in competition with other organizations who also seek to attract and utilize those recourses. From a strategic perspective, the organization is able to compete for resources by virtue of the competitive advantages it develops and maintains. Growth represents the business’s success in drawing in resources from its environment.
It is a sign that the business has built up a
competitive advantage and has managed to sustain it in the face of competitive pressure. However, a competitive advantage is not static.
Sustaining an advantage simultaneously
develops and enhances it. All advantages are very sensitive to business growth. In general, expansion of the business can be used to enhance a competitive advantage. This will only occur, however, if the entrepreneur us sensitive to the nature of the competitive advantages that their venture enjoys and strives to actively manage that advantage as the business grows and develops. 10.4.2
Growth and Cost Advantages
The main source of cost advantages are experience effects. Practice in delivering the outputs leads to a reduction in cost (strictly, the cost of adding a particular amount of value). Costs tend to fall in an exponential way as output increases linearly. Hence, experience cost advantages are (usually) held by the business which has achieved the greatest cumulative output. This can lead to a ‘virtuous circle’ (see Fig. 20.4. Cost leadership means that the customer can be offered a lower price. This increases demand for the firm’s outputs relative to those of competitors. This leads to the firm developing a volume output lead over competitors. In turn, this volume advantage leads to enhanced cost leadership and the ability to offer customers and even lower price, and so on.
189
Clearly, the entrepreneur can build in cost advantages as the business grows. Such a strategy offers the potential for a consistent and sustainable advantage in the marketplace. It is, however, a strategy which requires certain conditions to be met and it is not without risk. If the strategy is to work the entrepreneur must be sure of a number of features of the market they are developing.
Fig 20.4: The virtuous circle of cost leadership 10.4.3 Cost Advantages have not already been established in the Market If cost advantages have already been established in the market, then the business will risk being a follower rather than a leader. If the venture’s costs are not genuinely lower than those of the leading competitor then undercutting the leader to subsidise costs and offer the customer a lower price will demand a high level of investment. In some instances such ‘undercutting’ will be construed as anti-competitive by regulatory bodies. It is, in any case, always expensive. In order to become a cost leader it is better if the entrepreneur is first into a market. In effect, what this means is that the innovation which the venture is based is sufficiently different to constitute a ‘new’ market.
190
10.4.4 Potential Volume Outputs Make Entry into the Market Worthwhile Experience curve cost reductions only become meaningful when the output volumes are quite high. Consequently a cost leadership strategy is not a realistic option for a small or even a medium-sized business serving a local market. Cost leadership really becomes a serious option for the business which is an industry maker and which aims to deliver its outputs to a wide (which increasingly today means global) market. This is not to say that price is not an important factor for smaller businesses or that they should not manage costs rather that cost as the mainstay of competitive advantage is really the prerogative of the large player. A corollary of this fact is that the entire market must be ready to accept a fairly homogeneous product.
If too much specialization is required at a local level then the extent to which
production is repetitive will be lost and hence the possibility of cost-reducing experience will also be lost. 10.4.5 Sales of the Product they are offering to the Market are Sensitive to Price Experience cost advantages are gained via volume output. The virtuous circle will only be followed if customers respond to lower prices by buying more of the price leader’s offerings. This demands that the products offered are price sensitive which means that the form’s products must be substitutable with those of competitors. Substitutability implies that the products of different supplies are pretty much equivalent (from the buyer’s perspective) and can replace one another in use. To be substitutable, products costs associated with them; that is, there should be no additional expense for the customer when moving from one supplier to another. If switching costs are present and the entrepreneur is the first to get customers on board then they may use these costs as the basis of a competitive advantage.
Again, this emphasizes the
importance of innovation in entrepreneurial success. 10.4.6 The Experience Curve will be Steep enough (but not too steep!) An experience curve has a gradient. This is the rate at which increasing output reduces costs, that is, the speed at which learning takes place. The experience curve needs to be steep enough for the volume advantages that the pioneering entrepreneur can gain to lead to cost advantages 191
which have a meaningful impact on prices in the marketplace. If, however, the curve is too steep then followers will find it easier to catch up, and any advantage gained initially will be quickly eroded.
10.4.7 Distribution can be maintained A price advantage offered to the customer is only useful if the customer can get hold of the product. This implies that distribution can be readily achieved. If independent agencies are involved in the distribution process (for example, wholesalers or retailers) then there is always the danger that a follower will, in some way or other interfere with the cost-leader’s ability to distribute. In effect they will look towards distributors as the basis for developing a non-cost competitive advantage. If such a distributor ‘lock out’ occurs then the leader will lose volume and any cost advantage can be rapidly lost. Often, such actions are restricted by anti-trust legislation,. However, such legislation is difficult to enforce. If the business is multinational, then distributors may be tempted to favor local suppliers. Governments who have seen a ‘strategic’ advantage in supporting local producers have been known to resist pressure to open their markets by accusing global cost-leaders of ‘dumping’ (i.e. of selling below cost to establish their presence in a market). Even if such accusations are eventually disproved, volume sales may have been lost already. With a cost leadership strategy, time equals volume which means costs which equals money. 10.4.8 Technological Innovation will not reset the Experience Curve Experience is gained by repetitive utilization of a particular operational technology to manufacture or deliver a service. If the technological basis of an industry changes then descent down a new experience curve begins. In cost terms, all bets are off! Innovation, both in the type of product offered to the customer and the means for its delivery, offers both an opportunity and a threat. It may be the means by which the entrepreneur first enters the market and gains an advantage has been built on a particular technology, they are vulnerable to a new generation of innovators. This means that the entrepreneurial business, even if it is following a cost leadership strategy must still look towards maintaining innovation. 192
10.4.9 The Entrepreneur (and financial backers) has Patience! Cost leadership is not a short-term strategy. The pay-offs are far from immediate. While competing on a price leadership basis, profit margins must be kept slim i.e. just sufficient to cover overhead costs. Thus is the only way in which the business can be sure that it is reflecting its cost advantage with the most competitive market price. However, it will be tempting to raise prices and to increase short-term profit margins. The entrepreneur may be looking for additional returns to invest in the growth of the business. Investors may be eager to see a positive return on their investment. The business may see a price increase as a viable option. It will be in a market-leading position (certainly in volume terms).
It may have established a strong
relationship with customers. Competitors may have found it hard to gain a foothold in the market. However, the temptation to increase prices must still be resisted! All these advantages are a consequence of keeping prices low. They are the basis on which the business can gain a future reward for maintaining tight profit margins. If the business increases its prices too early then it can create a ‘cost umbrella’ under which less efficient competitors may shelter. It may be just the gap a competitor needs in order to gain a toe-hold in the market. If a cost leadership strategy is to be effective then the business pursuing it must keep its nerve and keep prices as low as possible for a long as possible. Optimally, prices should be kept to a minimum until market growth has stopped.
After this the market will start to lose its
attractiveness to new entrants as gaining market share will tend to require the conversion of existing customers rather than drawing new ones into the market. At this point the cost leading business can start to raise prices above costs, to increase profit margins and to harvest its investment. Figure 20.5 shows how technology innovation and the creation of cost umbrellas both present risks for a cost leadership strategy. Selling price Competitor’s price Venture’s price
193
Cumulative Output
Fig. 20.5: Risks in a cost leadership strategy
10.4.10 Costs are actively Managed Even through costs often follow a mathematical; relationship to output volume this does not mean that increasing output automatically drives down costs. Increasing output gives the firm’s managers the opportunity to drive down costs but that is an opportunity they must grasp actively. The management of cost must become the focus of managerial activity. In fact, it must become the key criterion around which decisions are made. Cost leadership is a strategy which has an impact on, and must be supported by, all the firm’s stakeholders. As noted above, customers must be responsive to price and investors must be willing to play a long game.
In addition, suppliers mist recognize threat they must be
competitive in the proof at which they offer inputs to the business. Further, employees will become aware (and if not managed properly, acutely aware) of the fact that they themselves are ‘costs’ as well as partners in the creation of the business. There is a danger that this will lead them to see their interests as being counter to that of the business. A focus on managing costs must be single-minded. It must also be implemented with sensitivity. 10.5
IMPLICATIONS OF GROWTH FOR THE FIRM
Because growth makes a firm bigger it begins to benefit from the advantages of size. For example, higher volume increases production efficiency, makes the firm more attractive to suppliers and therefore increases its bargaining power size also enhances the legitimacy of the firm, because firms that are larger are often perceived by customers, financiers, and other stakeholders as more stable and prestigious. But as the firm grows, it changes. These changes introduce a number of managerial challenges. These changes arise from the following pressures:
194
1.
Pressures on
Existing Financial Resources Growth has a large appetite for cash. Investing in growth means that the firm’s resources can become stretched quite thin.
With financial resources highly stretched the firm is more
vulnerable to unexpected expenses that could push the firm over the edge and into bankruptcy. Resource slack is required to ensure against most environmental shocks and to foster further innovation. 2.
Pressures on Human Resources
Growth is also fueled by the work of employee. If employees are spread too thin by the pursuit of growth, then the firm will face problems of employee morale, employee burn out, and an increase in employee turnover. These employee issues could also have a negative impact on the firm’s corporate culture.
For example, an influx of a large number of new employees
(necessitated by an increase in the number of tasks and to replace those that leave) will likely dilute the corporate culture, which is a concern, especially if the firm relies on its corporate culture as a source of competitive advantage. •
Pressures on the Management of Employees
Many entrepreneurs find that as the venture grows, they need to change their management style that is change the way the entrepreneur deals with employees. Management decision making that is the exclusive domain of the entrepreneur can be dangerous to the success of a growing venture. This is sometimes difficult for the entrepreneur to realize since he or she has been so involved in all important decisions since the business was created. However, in order to survive, the entrepreneur will need to consider some managerial changes. •
Pressures on the Entrepreneur’s Time
One of the biggest problems in growing a firm is encapsulated in the phrase “If I only had more time”.
While this is a common problem for all manages, it is particularly applicable to
entrepreneurs who are growing their businesses. Time is the entrepreneur’s most precious yet limited resource. It is a unique quantity: The entrepreneur cannot store it, rent it, hire it, or buy it. It is also totally perishable and irreplaceable. No matter what an entrepreneur does, today’s 195
ration is 24 hours and yesterday’s time is already history.
Growth is demanding of the
entrepreneur’s time, but as the entrepreneur allocates time to growth it must be diverted from other activities and this can cause problems. There are actions the entrepreneur can take to better manage these issues and more effectively grow his or her business. We will not discuss some of the necessary actions.
•
OVERCOMING PRESSURES ON EXISTING FINANCIAL RESOURCES
To overcome pressures on existing resources, the entrepreneur could acquire new resources. The acquisition of new resources is expensive, whether in terms of the equity sold or the interest payments from debt. The need or the magnitude of the new resources required can be reduced through better management f existing resources. Such important management activities include financial control, managing inventory, and maintain good records. 10.3 Activity Explain how an entrepreneur can manage cash flows, inventory and maintain good records.
10.6.1 Managing Cash Flows Since cash outflow may exceed cash inflow when growing a business, the entrepreneur should try to have an up-to-date assessment of his or her cash position. This can be accomplished by preparing monthly cash flow statements, such as that found in Figure 10.2 and comparing the budgeted or pro forma statements with the actual results. The July budgeted amounts are taken from the pro forma cash flow statement of MPP plastics. The entrepreneur can indicate the actual amounts next to the budgeted amounts. This will be useful for adjusting the pro forma for the remaining months, as well as for providing some indication as to whether cash flow problems may exist. Figure 10.2: MPP Plastics Inc. (Statement of Cash Flow) July, Year 1 (000s) 196
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Figure 14.4 shows a few potential problem areas. First, sales receipts were less than anticipated. Management needs to assess whether this was due to nonpayment by some customers or to an increase in credit sales.
If the lower amount is due to nonpayment by customers, the
entrepreneur may need to try enforcing faster payment by sending reminder letters or making telephone calls to delinquent customers. Bounced checks from customers can also affect cash flow since the entrepreneur has likely credited the amount to the account and assumed that the cash is readily available.
If the lower receipts are resulting from higher credit sales, the
entrepreneur may need to either consider short-term financing from a bank or try to extend the terms of payment to his or her suppliers. Cash disbursements for some items were greater than budgeted and may indicate a need for tighter cost controls. For example, cost of goods was $22.500, which was $1,700 more than budgeted. The entrepreneur may find that suppliers increased their prices, which may require a search for alternative sources or even raising the prices of the products’/services offered by the new venture. If the higher cost of goods resulted from the purchase of more supplies, then the entrepreneur should assess the inventory costs from the income statement. It is possible that the increased cost of goods resulted from the purchase of more supplies because sales were higher than expected. However, if these additional sales resulted in more credit sales, the entrepreneur may need to plan to borrow money to meet short-term cash needs. Conclusions can be made once the credit sales and inventory costs are evaluated. The higher selling expenses may also need to be assessed. If the additional selling expenses were incurred in order to support increased sales (even if they were credit sales), then there is no immediate concern. However, it no additional sales were generated, the entrepreneur may need to review all of these expenses and perhaps institute tighter controls. •
Managing Inventory
During the growth of a new venture the management of inventory is an important task. Too much inventory to meet customer demands can be a drain on cash flow since manufacturing, transportation, and storage costs would be borne by the venture. On the other hand, too little 197
inventory can also cost the venture in lost sales, or it can create unhappy customers who may choose another firm if their needs are not met in a timely manner. •
Managing Fixed Assets
Fixed assets generally involve long-term commitments and large investments for the new venture. These fixed assets, such as the equipment appearing in Figure 14.6 will have certain costs related to them. Equipment will require servicing and insurance and will affect utility costs. The equipment will also be depreciated over time, which will be reflected in the value of the asset over time. If the entrepreneur cannot afford to buy equipment or fixed assets, leasing could be considered as an alternative. Leasing may be a good alternative to buying depending on the terms of the lease, the type of asset to be leased, and the usage demand on the asset. For example, leases for automobiles may contain a large down payment and possible usage or mileage fees that can make the lease much more expensive than a purchase. On the other hand, lease payments represent an expense to the venture and can be used as a tax deduction. Leases are also valuable for equipment that becomes obsolete quickly. The entrepreneur can take a lease for short periods, reducing the long-term obligation to any specific asset. As with any other make or buy decision, the entrepreneur should consider all costs associated with a lease or buy decision as well as the impact on cash flows. •
Managing Costs and Profits.
Although the cash flow analysis discussed earlier in the chapter can assist the entrepreneur in assessing and controlling costs, it is also useful to compute the net income for interim periods during the year. The most effective use of the interim income statement is to establish cost standards and compare the actual with the budgeted amount for that time period. Costs are budgeted based on percentages of net sales. These percentages can then be compared with actual percentages and can be assessed over time to ascertain where tighter costs controls may be necessary. •
Record Keeping
In order to support this effort toward financial control, it is helpful to consider using a software package to enhance the flow of this type of information. With a growing venture it may also be necessary to enlist the support and services of an accountant or a consultant to support record 198
keeping and financial control. These external service firms can also help train employees using the latest and most appropriate technology that can meet the needs for the venture. A system for storing and using customer information becomes vitally important for a growing firm.
Growth typically involves marketing to new customers, and a large influx of new
customers can overwhelm more primitive systems.
For example, previously customer
information may have been stored in the meteor of the different sales people. However, as the sheer number of customers increase, the memory capacity of a salesperson may be exceeded and important information (and new and existing sales) could be lost. Not only will a database increase the capacity to hold and process information, it begins to accumulate bits of knowledge contained within different individuals into an organizational knowledge that is accessible to everyone within the firm. By building organizational knowledge the entrepreneur is else dependent upon any one individual. For example, if the top salesperson were to die or otherwise leave the organization, then a considerable amount of important information could be lost to the firm. Specifically, customer information should be returned in a data base, which includes information on a contact person.
•
GOING PUBLIC
Going public occurs when the entrepreneur and other equity owners of the venture offer to sell some of the company to the public through the stock exchange. The resulting capital infusion to the company from increased number of stockholders provides the firm with financial resources and generally with a relatively liquid investment vehicle. Consequently, the firm will have greater access to capital markets in the future and a more objective picture of the public’s perceptive of the value of the business. 10.7.1 1.
Advantages and Disadvantages if Going Public Advantages
(a)
Ability to obtain equity capital
(b)
Enhanced ability to borrow 199
(c)
Enhanced ability to raise equity
(d)
Liquidity and valuation
(e)
Prestige
(f)
Personal wealth
2.
Disadvantages
(a)
Increased risk of liability
(b)
Expense
(c)
Regulation of corporate governance policies and procedures
(d)
Disclosure of information
(e)
Pressures to maintain growth pattern
(f)
Loss of control 10.4 Activity Outline the procedure undertaken by a firm in Kenya before it can be allowed to go public.
10.8 Summary In this lecture, we have looked various growth strategies that include penetration strategies, marketing development strategies, product development strategies and diversification strategies. We have also looked at strategic growth and growth at strategic growth and growth and cost advantages. We have examined the implications of growth for the firm, looking at how a firm can minimize pressure on various resources. Finally, the lecture concludes by looking at how to overcome pressure on existing financial resources, and the advantages and disadvantages of a firm going public.
200
10.5 Activity 1. Explain the various gro 1. Explain the various with strategies employed by entrepreneurs. 2. Explain the various aspects of strategic growth. 3. Explain the financial control options available to a business firm. 4. Explain the procedure that a firm must take in order to go public.
10.9 References 1.
Hisrich R.D., Peters P.M. and Shepherd D.A. (2008).
Entrepreneurship. (6th Edition). Tata McGraw-Hill Publishing Company Ltd. New Delhi. 2.
Wickham A. Philip (2001). Strategic Entrepreneurship. A decision-
making Approach to New Venture Creation and Management Prentice Hall. England. 3. Nandan H. (2007). Fundamentals of Entrepreneurship. Prentice-Hall. New Delhi.
LECTURE 11 THE ENTREPRENEUR AND THE LAW •
Introduction (Done)
•
Objectives (Done)
•
INTELLECTUAL PROPERTY RIGHTS
The special aptitude of inventing or creating something unique is marked by the use of intelligent thought or human intellect. In other words, a new and useful product process device or even an idea is the creation of brain or human intellectual
faculties. The use of human intellectual
powers guides one along an advanced technology or knowledge. Advanced technology or 201
knowledge serves one to attain a definite result that is a new and useful invention or creation. The advanced technology or knowledge conceived by the use of one’s intellectual powers, therefore, is treated as an intellectual property of the originator. The intellectual property is regarded as any other assets with commercial value that the owner or rightful holder may possess, enjoy, use or dispose of. According to the matter of legal protection of intellectual property, the exclusive rights conferred by various Laws on the inventors, originators, holders or their assignees or heirs to use, sell, assign, leave, license or will the priceless knowledge to anyone are commonly known as intellectual property rights. With relation to the legal regulatory systems providing protections to the interests of the true inventors or their assignees, intellectual property rights are broadly classified into two groups, namely: (a)
Industrial property rights and Copyrights
Industrial property rights refer to the exclusive rights covering (i)
Patents
(ii)
Designs and
(iii)
Trademarks, service marks, certification marks, collective marks and defensive marks.
Intellectual property rights will regard to copyrights relate to expressive literary, dramatic or musical works of writers, composers and artists. An overview of the Intellectual Property Rights has been depicted in Table 11.2 Figure 11.Intellectual Property Rights – An Overview Industrial Property Rights Copyrights Patents Designs Trade marks Service marks 202
Certification marks Collective marks Defensive marks
The World Intellectual Property Organization, which consists of 171 nations, provides further elucidation and clarifies that the concept of intellectual property is relevant in any of the following areas:
•
•
inventions in all fields of human Endeavour;
•
Scientific discoveries
•
Industrial designs;
•
Trademarks, service marks and commercial names and designations;
•
Literary, artistic and scientific works;
•
Performances of performing artists, phonographs; and
•
Protection against unfair competition
LEGAL PROTECTION
Research is the process of advancing technology or knowledge and invention is the product of advanced technology or knowledge. Invention implies creating something new and useful as a result of ingenious thinking and experiment. Innovation is the act of introducing an invention or a creative idea to the masses primarily with commercial objective. Research activities, generally speaking, are taken up without any commercial ambition, but the products of most research efforts may have the potential of becoming commercially successful. Ideally, the benefits of research, or for that matter the details of an invention, should be freely available to everyone for the wellbeing of the society at large. But individuals and business 203
houses may not be interested in taking initiative and spending their resources for advancement of knowledge unless they have the confidence and assurance of deriving substantial benefits, hopefully in terms of financial inducements, from research and inventive efforts. With a view to giving impetus to research activities, various legal regulatory systems have been evolved to protect inventions from unauthorized exploitation for profit or advantage by infringers.
The legal protections grant the true inventors, their heirs, agents or assignees
exclusive rights for limited periods to be the only persons entitled to use or sell their new technologies or creative ideas. After the stipulated time a technology belongs to public and anyone can use and profit from it. It was way back in the 18th Century that the patent system was first introduced in the United States of America in order to “promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive rights to their respective writings and discoveries”.
Currently, there are about 140 countries that have enacted patent and other
regulatory laws to provide legal protections to inventions and creative ideas. Patents take care of discoveries or inventions and so long as the protection continues, the holder of a valid patent enjoys the exclusive right to use or sell the new technology as also prevent others from using the invention. Patents as exclusive property rights can be sold, transferred, licensed or willed to others. The originator of a design is entitled to the exclusive right to apply his or her newly created design to any object belonging to a particular class of articles for which it has been registered. Registration of a trademark grants its proprietor a kind of monopoly right to sue the registered mark, comprising a word or a symbol or both, for bona fide trading or business purpose. The right of ownership in a trademark is acquired by registration of the mark under the relevant Act and therefore following assignment or transmission of the right by the holder to another person.
Copyright protects the exclusive proprietary privilege in respect of one’s
literary, dramatic or artistic work including cinematographic film or record.
•
PATENTS
11.5.1
What is a Patent?
204
Patenting is over 2500 years old. It is recorded in history in 500BC, in Greece, encouragement was being out to who should discover any new refinement in luxury, the profits arising from which were secured by patent for the space of a year. In England, forms of patenting have been in existence since 1623. In the United States, the first congress adopted a patent Act, in 1970. In East Africa, before 1980s, most of the laws regarding IPRs were mere replicas of existing British laws. A Patent us a grant from the Government which confers on the grantee (patentee) for a limited period of time the exclusive privilege of making, selling and using the invention for which a patent has been granted and also authorizing other to do so. In simple words, a patent is an authentic document issued by the Government acknowledging something having been invented and granting a special privilege, right or license to a person for his/her new and useful invention. One to whom a grant is made or privilege secured by patent and who enjoys the monopoly or exclusive right to make, use or sell the invention is known as patentee. The person to enjoy the exclusive privilege must make a new invention known to the public and be competent to make others familiar with the facts, occurrences and utilities of the invention. This process of familiarizing with or imparting of knowledge for an understanding of the pertinent matter is to be explicitly demonstrate in detail by the inventor. The written document in which the explicit detail are given by the inventor is referred to as a patent application. In the United States of America, following categories of patents are generally granted: Utility patent: This relates to the novelty and usefulness of an invention, which lays stress on how it works to obtain something new and useful. Utility patent is obtainable for a new machine, process composition or method to make or produce something unique and useful. It is the common and commercially most valuable among all kinds of patent granted there. Design patent. This is grant4d in recognition of the ornamental appearance of a useful object, i.e. how it looks and not how it works. Plant patent. This is allowed in favour or a developer for a unique and new variety of plant which did not exist before but has been reproduced by cutting grafting or other asexual means. 205
Activity 11.1 What categories of patent are generally granted in Kenya?
11.5.2 Patent Infringement It is important for the entrepreneur to be sensitive about whether she/he is infringing on someone else’s patent. The fat that someone else already has a patent does not mean the end of any illusions of starting a business.
Many businesses, inventions or innovations are result of
improvements as, or modifications of existing products. Copying and improving on a product may be perfectly legal (no patent infringement) and actually good business strategy. If it is impossible to copy and improve the product to avoid patent infringement, the entrepreneur may try to license the product from the patent hold. Do expired patents exist that accomplish same purpose? Is patent recent or is it nearly expired? File for Patent Assess whether patent now exists Figure 11.2 illustrates the steps that an entrepreneur should follow as she/he considers marketing a product that may infringe on an existing patent. Figure 11.2: Options to Avoid Infringement Unacceptable Can product be changed slightly without infringement? Ready to expire
Acceptable
Begin planning for introduction when existing patent expires Develop product using older designs NO
YES
Develop modified version Seek License Source: Adopted from H.D. Coleman and J.D. Vandenberg – in Hisrich D.R. et al (2006) p/ 165
206
11.53Patent Types The patent seeker would base the type he or she needed on the kind of protection that particular patent offered and what subject matter it covered. 1.
Utility Patent
A utility patent is the kind of patent a business or individual would apply for to cover a new invention. It is granted for new products, process, machines and methods of manufacture and composition of matter including an upgraded form of something that has already been invented. The utility patent protects the invention from other individuals and business and keeps them from making and selling the inventions include business method patents, pioneer patent, chemical patents, cyber patent, fencing patent and improvement patent. 2. Design Patent A design patent is typically the kind of patent a business or individual applies for when they have created an original design of a product that will be manufactured. This type of patent keeps other businesses and individuals from creating or making a profit from the design for 14 years from the patent date. Entrepreneurs can also select other protection periods such as 3 ½, or 7 years. The duration of protection is to enable the owners to commercialize designs and to be able to realize the benefits of their ingenuity. The design may be a distinguishing feature that allows an individual to have exclusive use of visual imagery thus creating brand identification. For example, a new pair of jogging boots may fail to have a utility patent but may have design patent if the new design changes the physical appearance of the boots. 3.
Plant Patent
Any new variety of plant that has been asexually reproduced can be granted a plant patent.
The
new plant must not exist in nature or in an uncultivated state. A plant patent is the kind of patent an individual or business would apply for if they had had invented or discovered a new or unheard of plant. This may include cultivating different types of plants to create mutants or hybrids and also newly found seedlings. 207
This patent protects the owner by keeping other individuals or businesses from creating the type of plant or profiting from the plant for at least 20 years from patent. Business method Patents are a class of patents which disclose and claim new methods of doing business. This includes new types of e-commerce, insurance, banking, tax and compliance etc. Pioneer Patent covers a function or a major technological advance never before performed, a wholly novel device, or subject matter of such novelty and improvement. Process Patent/Chemical for method of treating specific materials to produce a certain result. Cyber Patent/Internet Patent is a utility patent on an invention that combines business methods and software program for internet applications. Fencing Patent is a patent having claims directed to an improvement on a pre-existing invention. These different types of patents are all for the purpose of protecting an original idea and the individual who had that idea. They keep others from being able to capitalize on that idea for a significant amount of time – and patents can be reissued before the original patents expire. 11.5.4 Implications of Patents and Copyrights for entrepreneurs 1. Positive implications In accordance with the original definition of the term ‘patent,’ patents facilitate and encourage disclosure of innovations into the public domain for the common good. It therefore follows that awarding patents generally makes the details of new technology publicly available, for exploitation by anyone after the patent expires, or for further improvement by other inventors. Furthermore, when a patent’s term has expired, the public record ensures that the patentee’s idea is not lost to humanity.
208
Since patenting means protection and exclusivity, it gives the entrepreneur a window of time to exclusively profit from his ingenuity for the selected period of protection and keeps others away from laying any undue claim at all to the idea. The Kenyan entrepreneur would by patents be conflict that his efforts are not in vain and would endeavour to continue being more enterprise. Patenting allows a clever small-time inventor to use the exclusive right status to become a licensor and accumulate capital argues. Stim, Rishard achieves this by licensing the invention and allowing innovation to occur because he or she chooses to not manage a manufacturing buildup for the invention. This brings along the economies of specialization, allowing others to concentrate on manufacturability. Obtaining intellectual property rights creates valuable assets. Indeed the Wikipedia defines patents and copyrights as intangible assets. As such the Kenyan entrepreneur can make money on them by selling, licensing to others, mortgaging, willing, assigning, leveraging as assets of a new enterprise, transferring, or using them as collateral. Lastly, patents have been argued to provide incentives for economically efficient research and development. Without patents, R & D spending would be significantly less or eliminated altogether, limiting the possibility of technological advances or breakthroughs. Entrepreneurs would be much more conservative about the R & D investments they made, as third parties would be free to exploit any developments. This second justification is closely related to the basic ideas underlying traditional property rights. 2. The negative implications The concept of patenting (no-disclosure) itself makes technology transfer to Kenyan entrepreneurs difficult and costly.
Ummy Ally Mwalimu argues that strengthening IPRs
protection may lead to increased royalty payments required by technology-holders.
These
factors reduce the ability of the Kenyan entrepreneur to catch up through imitation and adaptation of advanced technologies.
209
The average cost of obtaining a patent and maintaining it for a 20 year term is almost Ksh. 400,000 according to the First Schedule Fees available at KIPI website. For utility models the total estimate is a fairer Kshs. 50,000 for a ten year period. Such a cost is definitely prohibitive to upcoming entrepreneurs. Their innovations would certainly not be patented as they cannot afford the fees; indeed the inventions may be stolen by large multi-nationals. A young man reportedly filed a suit against Safaricom Limited as concerns the ownership rights of the popular money transfer service M-Pesa
Life of a Patent The period for which the exclusive right is conferred on a patentee is known as the life of a patent. In terms of validity period, patents are broadly classified into two groups as discussed below. A patent for an invention involving a process or method of manufacture of a substance intended for use as food, medicine or drug shall be valued for a period of seven years from the date of the patent or five years from the data of sealing of the patent, whichever is less. Patents relating to all other inventions are valid for a period of fourteen years from the date the respective patents are granted. The date of the patent means the date on which the complete specification, along with the patent application, is filed with the patent office concerned. The date of sealing refers to the date when the patent office endorses final approval provided there is no objection from anyone which in the prescribed period from the date of publication of its notification of acceptance, or in case the patent office does not refuse to grant permission for one reason or the other. Activity Describe the procedure of applying for a patent in Kenya.
•
DESIGNS 210
What is Design? Design means only the features of shape, configuration, pattern or ornamentation of an article made by any industrial process or means, be that manual, mechanical or chemical, separate or combined. Registrable Designs The design of an article may be registered if its shape, configuration, pattern or ornamentation made by any industrial process (mechanical, chemical or both) is new or original. The principle or the mode of construction of an article or its mere mechanical fabrication cannot be registered as a design. Trademarks, trade names, mere pictures or photographs cannot be registered as designs. The articles or goods to which designs applied are sought to be registered include: •
Articles made wholly of metal or predominantly of metal and jewellery;
•
Books and bookbinding of all materials;
•
Articles made wholly of rubber, wood, bone, ivory, papier mache, celluloid, Bakelite or of similar substances; or of materials that constitute mostly of such substances;
•
Articles made wholly of glass, earthenware, porcelain, burnt or baked clay, or cement or in which such materials predominate;
•
Articles made wholly of paper, cardboard, millboard or strawboard or mostly of such materials;
•
Articles made mostly or wholly of leather;
•
Paper hangings;
•
Carpets, rugs and floor covering in all materials;
•
Boots, shoes and the like of footwear;
•
Millinery and Wearing apparel;
•
Printed or woven designs on textile goods other than checks or stripes
•
Printed or woven designs on textile goods being checks or stripes. 211
11.7
TRADEMARKS
What is a Trademark? A trademark denotes any word, letter, name, initial, signature, figure, numeral, artistic, design or device or any combination of these adopted and used to identify and distinguish the goods of one manufacturer or merchant from these manufactured and/or marketed by others. The dictionary meaning of trademark is that it is a device pointing distinctly to the origin or ownership of merchandise to which it is applied and which is legally reserved to the exclusive used of the owner as a maker or seller. In other words, a trademark is a visual symbol which established the relationship between the goods or service on sale and the concerned person having the right to use it as a proprietor or registered user. Unlike the patent, a trademark can last indefinitely, as long as the mark continues to perform its indicated function. Activity Can you differentiate between a trademark and a design?
Functions of a Trademark With the Industrial Revolution in the 19th Century, trademark has become increasingly important as a means of distinguishing products among many competitors. Most goods are better known by their trademarks and the marks thus used exclusively by their respective owners, as makers or sellers, eventually become brand names. Goods identified by brand names carry assurances that the customers may expect the quality consistent with the reputation of the owners of the trademarks. It is because of these distinctive functions that under the common law a trademark is always treated as an inseparable part often goodwill of a business. However, among the varied functions of a trademark, the following three are said to be the most prominent. •
A trademark primarily helps a customer identify the origin or source of the goods on sale.
•
A trademark calls attention to the quality of the goods. The origin or source once identified, a customer forms an opinion about the quality and acceptability of the goods. If the origin is already known, the degree of quality is also ascertained and it the source is unknown, the quality is also uncertain. 212
•
A trademark serves as an effective tool for advertisement and sales promotion, It creates a lasting impression on the minds of the customers not only about the quality of the goods but also reputation of the user of the mark. Under the modern competitive businesses conditions, a trademark plays a crucial role in promoting not only the sale of merchandise but also in the reputation or goodwill of a business.
Benefits of a Trademark A trademark is regarded as an incorporeal property that is a sort of an asset without any material or physical existence. In the eye of the law, a trademark is like any other property with commercial value and hence the term “proprietor of a trademark”, aptly used un various provisions of the said Act. The property exists in the exclusive right of an owner to sue the mark in specific tradable goods and, subject to certain conditions, restrain others from using the same or nearly the same mark. The right to a trademark can be used or sold and transferred and may be lawfully used by the purchaser. But the sale and transfer by the original owner has to take place with the transfer of the business goodwill in accordance with the common law in case the trademark is unregistered and without the transfer of the goodwill. The following are considered to be some of the key benefits of a registered trademarks: •
It provides notice to everyone that you have the exclusive rights to sue the mark throughout a given area.
•
It entitles you to sue for trademark infringement which can result in recovery of profits, damages and costs.
•
It established incontestable rights regarding the commercial use of the mark.
•
It entitles you to use the notice of registration.
•
It provides a basis for filing trademark application in foreign countries.
•
It establishes the right to deposit registration with customs to prevent importation of goods with a similar mark.
Choosing a Trademark 213
In the matter of choosing a trademark, the decision should be based on the following, criteria, among other statutory requirements: •
A trademark may be a letter, word, name, numeral, figure, design or device or even a combination thereof. If a word is to be chosen, it should be short, and easy to pronounce, spell and remember. A word which tends to glorify or magnify the character or quality of the goods should be avoided. According to the Trade Marks Registry in India”, “The ideal word for trademark is an invented or coined word”. Devise refers to any pictorial representation. For instance, the illustrative letter “T” symbolizes the products manufactured and marketed by the TATs; the name “Maruti” identifies the origin of the particular species of automobiles from those made and sold by others; and the artistic design of a railway steam locomotive represents the Indian Railways.
•
A prominent geographical name associated with the reputation or quality of the particular goods for which a mark is to be registered should not be selected.
•
A trademark, which is the same or nearly the same as a trademark already in use or registered in the name of another proprietor in relation to the goods of similar mature, character and utility is not accepted for registration.
•
A trademark is not registrable if: -
It portrays in any manner the national flag or emblem of India or any other country;
-
It comprises or contains anything that may hurt the religious sentiments of anyone;
-
It depicts or contains any matter that is obscene or offensive to propriety or morality;
-
Its use may tend to lower the image or reputation of others;
-
Its use will be opposed to any law already in force;
-
It is the name of any chemical element or chemical compound;
-
Its sue may cause confusion or deception to anyone;
Further, one should not imitate another person’s trademark, especially a familiar one, even if the relevant tradable foods are not the same. This will minimize, if not eliminate, the chances of others raising any objection to the application for registration of a trademark. Equally important, the delay in the processing of the registration application can also be avoided. 214
Activity Outline the fundamental requirements for registration in Kenya.
11.8
COPYRIGHT
What is Copyright? The term “copyright” denotes the exclusive right given by law to the creator of a literary, dramatic, musical or artistic work, or to a producer of a sound recording or cinematographic film, or to one who develops a computer software program. Copyright, which refers to the protection given to a creative person to control and benefit from a work of authorship, is also known as author’s right. It is legalized protection which not only established an author’s ownership right to do or authorize other to do such acts as a permissible by law, but also restrains any unauthorized person committing such acts. Works in Which Copyrights Exist Copyright protection is dependent primarily upon a work being original, rather created independently and not copied from any other work, and made for the first time. The protection under copyright exists on the mode and manner of expression, but not on the subject matter in a work. An original, i.e. unimitated, expressive work may be copyrighted even if someone else has already authored a somewhat similar work on the same subject. These Works Include: •
Original literary, dramatic, musical and artistic works and computer programs;
•
Cinematographic films; and
•
Sound recordings. Activity Activity Review Questions 1. Discuss the concept of legal protection for innovation. 2.
Write a short note on the scope and importance of legal protection 215
for innovations. 3.
What is patent? What are its different types?
4. What is patent right? Indicate the benefits available from it. 5. What is trademark? What are its different features? 6. How many types of trademark are there? What are their important features? 7. What is the important of trademark in business? 8. What is infringement of trademark? 9. What is copyright? What benefits are available from copyright? 10. What are the things that cannot be copyright? 11. What is infringement of copyright? 12. Discuss briefly the procedure for registration of: (i)
patent
(ii)
trademark and
(iii)
copyright
13.
Define Intellectual Property Right. Discuss its drawbacks.
14.
Discuss the scope and important of Intellectual Property Right in entrepreneurship.
References 1. Nandan H. (2007) Fundamentals of Entrepreneurship. Prentice-Hall. New Delhi 2. Grenn L. Cynthia (2006) Entrepreneurship. South-Western Canada
216
LECTURE TWELVE: INTERNATIONAL MARKETS 12.3 The Importance of International Business to the Firm International markets are very important for success of any business organization. Failure to cultivate international or global markets can be a lethal mistake for modern business regardless of their size. A few decades ago small companies needed to concern themselves mainly with competitors who were a few meters away but today small companies face fierce competition from companies that may be several time zones away. As a result entrepreneurs find themselves under pressure to expand into international markets and to build business without borders. Operating a successful business increasingly requires entrepreneur to see their companies as global citizens rather than companies based in a particular geographical region. For small companies around the world going global is a matter of survival not preference. There are a number of reasons why businesses opt to go global. Going global can be tremendous strain on new businesses, but entrepreneurs who take the plunge into global business reap the following benefits: •
Offset sales declines in the domestic market. Markets in foreign countries may be booming when those of your country are sagging. In other words a small company export act as a counter-cyclical balance against flagging domestic sales.
•
Increase sales and profits. Two forces are working in tandem to make global business increasingly attractive: income rising to levels at which potential sales are now possible, and the realization that number of the planets population lives outside any country.
•
Extend their products life cycle. Some companies have been able to take products that had reached the maturity stage of the product life cycle in a particular country and sell them successfully in foreign markets. 217
•
Lower manufacturing costs. In industries characterized by high levels of fixed costs, businesses that expand into global markets can lower their manufacturing costs by spreading those fixed costs over a large number of units.
•
Lower the cost of their products. Many companies find that purchasing goods or raw materials at the lowest cost requires them to shop the global marketplace.
•
Improve competitive position and enhance reputation. Going up against some of the toughest competition in the world forces a company to hone its competitive skills.
•
Raise quality levels. Customers in many global markets are much tougher to satisfy than those in the local markets. One reason Japanese products have done so well worldwide is that Japanese companies must build products to satisfy their customers at home, who demand extremely high quality and are sticklers for details. Businesses that compete in global markets learn very quickly how to boost their quality levels to world class standard.
•
Become more customer-oriented. Delving into global markets teaches business owners about the unique tastes, customs, preferences, and habits of customers in many different cultures. Responding to these differences imbues businesses with a degree of sensitivity toward their customers, both domestic and foreign.
12.4 Strategies for Going Global Activity Assuming you are an entrepreneur what strategies can you adopt to go international?
Now check if you mentioned the following strategies •
Creating a web site
•
Establishing international locations 218
•
Outsourcing
•
Exporting
•
Countertrading and bartering
•
International franchising
•
Foreign licensing
•
Creating joint ventures
•
Relying on trade intermediaries
In our technology-rich global environment, fastest, least expensive, and lowest-cost strategic option to creating a global business presence is creating a web site. On e-commerce, the web gives even the smallest businesses the ability to sell its goods and services or over the world. By establishing a presence online, a local producer gains access to customers anywhere in the world. A company web site is available to anyone anywhere any time therefore has become a tool that is essential to doing business as the telephone and fax machine.
Table 12.1 shows the internet users by world region Region
Use of internet in %
Europe
28.5
United States/Canada
22.2
Latin America
7.8
Africa
2.3
Middle East
1.8
Asia/Pacific Rim
37.4
Total
100 219
(b) The next strategy is opting for Trade Intermediaries When considering cost and risks involved trade intermediaries becomes the next best option. Trade Intermediaries are domestic agencies that serve as distributors in foreign countries for domestic companies of all size. They rely on their net works of contacts, their extensive knowledge of local customs and markets and their experience in international trade to market products effectively and efficiently across the world. These trade intermediaries serve as export departments for small businesses, enabling them to focus on what they do best and delegate the responsibility of coordinating foreign sales effort to the intermediaries. The following are some of the intermediaries that a business may use to market its produce internationally. •
Export Management Companies. These operate like trade intermediaries, working on a buy and sell arrangement with domestic small companies, taking title to the goods then selling them in foreign markets. They provide small businesses with lowcost, efficient, independent international marketing and export department provide all range o0f services from market research, to giving any relevant advice.
•
Export Trading Companies. This is another strategy through which one can join global market. Export trading companies are businesses that buy and sell products in a number of countries and they typically offer a wide range of services such as exporting, importing, shipping, storing and distribution to mention but a few. The difference between export management companies and export trading company is that the later perform both export and import trades across borders. The other difference is that export trading companies represents several companies dealing with the same product line while export management usually create exclusive contracts with companies for a particular product line.
•
Manufacturers Export Agents. These act as international sales representatives in a limited number of markets for various non competing domestic companies. They operate on commission basis and their relationships with the producers is short lived. 220
•
Manufacturers Export Agents. These act as international sales representatives in a limited number of markets for various non competing domestic companies. They operate on commission basis and their relationships with the producers is short lived.
•
Export Merchants. These are domestic wholesalers who do business in foreign markets. Export merchants carry competing lines which imply that they have little loyalty to suppliers. Most export merchants specialize in a particular industry, such as office equipment, computers and industrial supplies and others.
•
Resident buying offices. These refer to government or privately owned operations of one country established in another country for the purpose of buying goods made there. Selling to such offices is just like selling to domestic customers since they handle all the export processes.
•
Foreign Distributors. Businesses may also opt to make use of foreign distributors to reach their global market. In this situation local producer export their produce to the distributors who in turn market and distribute the produce in the foreign country.
(c)
Joint
ventures. Joint ventures both domestic and foreign lower the risk of
venturin global markets for new Businesses. They also give small companies more foreign lands. In domestic joint venture two or more small business in the same country form an alliance for the purpose of exporting their goods and services.
For export ventures participating
companies get antitrust immunity, allowing them to cooperate truly. The businesses share the responsibility and the costs of getting export licenses and permits and they split the venture’s profits. Establishing a joint venture with the right partner has become an essential part of maintaining a competitive position in global markets for a growing number of industries.In a foreign joint venture a domestic small business forms an alliance with a company in the target nation. The host partner brings to the joint venture valuable knowledge of the local market and its method of operation as well as of the customs and the tastes of local customers making it easier to conduct business in the foreign country. Sometimes
foreign
certain limitations on joint ventures. Some nations require host
companies to own at least
221
countries
place
51% of the venture. The most important factor for a successful joint venture is to choose the right partner.
A productive joint venture is much like a
which require commitment,
communication and understanding. The partners must be sharing the objectives to minimize misunderstanding and possible disagreements.
(d)Foreign licensing.
This involves licensing other businesses in other countries to utheir
patents, trademarks, copyrights technology and other systems already in place.
In return for
licensing these assets, a company collects royalties from the sales of its foreign licenses. Licensing is ideal for companies whose value lies in its intellectual
property,
products or services recognized name or proprietary technology.
unique
Other than products a
businesses may also license in tangibles such as processes, technology copyrights or trademarks. Some entrepreneurs earn more money from licensing their know-how for product design, manufacturing or quality control than they do from actual sale of products
(e)
International Franchising
Intellectual facility. Due to competition a growing number of franchises have been attracted to international market. This is aimed at boosting sales and profits as the domestic market has become increasingly saturated with outlets and much tougher to
bring growth from. Although
international expansion is not a good idea for a new franchises it is an appropriate for experienced franchiser and its franchises increases. In addition, complex legal and regulatory requirements and cultural differences make international franchising challenging for in experienced franchisers.
Importing and Outsourcing In addition to selling their goods in foreign markets, small companies also buy goods from distributors and manufacturers in foreign markets. In fact, the intensity of price competition in many industries – from textiles and handbags to industrial machinery and computers – means 222
that more companies now shop the world market, looking for the lowest prices they can find. Because labor costs in countries such as China and India are far below those in other nations, businesses there offer goods and services at very low prices. Increasingly, these nations are home to well-educated, skilled workers that are paid far less than comparable workers in the United States or Western Europe. For instance, a computer programmer in the United States might earn $100,000 a year, but in India, a computer programmer doing the same work earns $20,000 a year or less. As a result, many companies either import goods or outsource work directly to manufacturers in countries where costs are far lower than they would be domestically. This trend towards outsourcing to cut costs and remain competitive is prevalent among companies selling low-cost items as well as in those producing luxury goods. For many years, European makers of luxury clothing resisted outsourcing the production for anything other than their least expensive garments such as jeans and T-shirts to companies in Eastern Europe and Africa.
Entrepreneurs who are considering importing goods and service or outsourcing their manufacturing to foreign countries should follow these steps: •
Make sure that importing or outsourcing is right for your business. Even though foreign manufacturers often can provide items at significant cost savings, using them may not always be the best business decision.
Entrepreneurs sometimes discover that
achieving the lowest price may require a tradeoff of other important factors such as quality and speed of delivery. When Patrick Kruse, owner of Ruff Wear, the business that sells dog booties, began outsourcing many of his company’s products to Chinese factories, he discovered that the quality of the goods was poor. “We actually had to refuse some shipments, which really hurt our business,” he says. In addition, some foreign manufacturers require sizable minimum orders, perhaps $200,000 or more, before they will produce a product. •
Establish a target cost for your product. Before setting off on a global shopping spree, entrepreneurs first should determine exactly what they can afford to spend on manufacturing a product and make a profit on. Given the low labor costs of many 223
foreign manufacturers, products that are the most labor intensive make good candidates for outsourcing. •
Do your research before you leave home. Investing time in basic research about the industry and potential suppliers in foreign lands is essential before setting foot on foreign soil. Useful resources are plentiful, and entrepreneurs should use them, including the Web, the Federation of International Trade Association, industry trade associations, government agencies (for example, the U.S. Commercial Services’ Gold Key Matching Service), and consultants.
•
Be sensitive to cultural differences.
When making contacts, setting up business
appointments, or calling on prospective manufacturers in foreign lands, make sure that you understand what accepted business behavior is and what is not. Again, this is where your research pays off; be sure to study the cultural nuances of doing business in the countries you will visit. •
Do your groundwork. Once you locate potential manufacturers, contact them to set up appointments, and go visit them. Preliminary research is essential to finding reliable sources of supply, but “face time” with representatives from various companies allows entrepreneurs to judge the intangible factors that can make or break a relationship.
•
Protect your company’s intellectual property.
A common problem that many
entrepreneurs have encountered with outsourcing is “knockoffs”.
Some foreign
manufacturers see nothing wrong with agreeing to manufacture a product for a company and then selling their own “knockoff” version of it. Securing a nondisclosure agreement and a contract that prohibits such behavior helps, but experts say that securing a patent for the item in the source country itself (not just the United States) is a good idea. •
Select a manufacturer. Using quality, speed of delivery, level of trust, degree of legal protection, costs, and other factors, select the manufacturer that can do the job for your company.
•
Provide an exact model of the product you want manufactured.
Providing a
manufacturer with an actual model of the item to be manufactured will save lots of time, 224
mistakes, and problems. “It’s always better to cost something from an actual item rather than an idea of items,” says Jennifer Adams, owner of a consulting firm that helps entrepreneurs to locate foreign manufacturers. •
Stay in constant contact with the manufacturer and try to build a long-term relationship.
Communication is a key to building and maintaining a successful
relationship with a foreign manufacturer. Weekly teleconferences, e-mails, and periodic visits are essential to making sure that your company gets the performance you expect from foreign manufacturer. Activity We have now covered strategies that a business can adopt to participate in international market.
One of the problems identified as an obstacle to
international trade involvement is lack of information. Indicate five sources of information for international market
Let’s now embark on barriers to international trade. 12.5 Barriers to International Trade. Government traditionally have a variety of barriers to block free trade among nations in an attempt to protect businesses within their own boarders. The benefit of protecting their own companies however comes at the expense of foreign businesses, which force limited access to global markets. Numerous trade barriers both domestic and international restrict the freedom of businesses in global trading. Examples of these restrictions include: Domestic Barriers
•
Sometimes potential exporters are those that emanate from within. Three major internal restrictions are as follows: •
Attitude
•
Information 225
•
Finance
The biggest barrier to small businesses exporting is the attitude that this business in small and that international trade is meant for corporation.
Another reason entrepreneur’s neglect
international market is a lack of information about how to get started. The keys to success in international market are choosing the correct target market and designing the appropriate strategy to reach it. This requires access to information and research.
An additional obstacle is the inability of small firms to obtain adequate export financing international sales and the unwillingness to accept the perceived higher levels of risk they create for the lender. •
International Barriers
These barriers can be classified into two. •
Tariff barriers
•
Non tariff barriers
2.1 Tariff Barriers A tariff is a tax or duty that a government imposes on goods and services imported into that country. Imposing tariffs raises the price of the imported goods making them less attractive to consumers and protects the domestic markets of comparable product and services.
2.2
Non Tariff Barriers
Many nations have lowered the tariffs they impose on products and services brought into their borders, but they rely on other non-tariff structures such as
226
•
Quotas
A quota is a limit on the amount of a product imported into a country. These restrict the amount of a particular item that would be imported from a particular country. •
Embargoes. An embargo is a total ban on imports of certain products. The motivation for embargo is not always economic, but it also can involve political differences, environmental disputes, terrorism and other issues.
•
Dumping. In an effort to grab market share quickly some companies have been guilty of dumping products; selling large quantities of them at prices that are below cost in foreign countries. The concerned countries impose various restrictions to protect their industries.
•
Political barriers. Companies doing business in politically risky lands face the very real dangers of government takeovers of private property; coups intended to overthrow ruling parties, kidnapping bombings and other violent acts against businesses and their employees and other threatening events.
•
Business Barriers. Businesses are operated differently in different countries. Therefore for a business to duplicate the practices they have adopted and have used successfully in their domestic market and using them in foreign market is not always a good idea. For instance in the area of human resources management common practices in some countries are not always common to other countries example of these may include overtime arrangements, employees benefits which are restricted disfavored or forbidden in some countries. All these serve as a barrier to international trade/market.
•
Cultural Barriers The culture of a nation includes beliefs, values, views and more than that inhabitants share. Culture customs and norms of behavior differ greatly among nations and making the correct impression is extremely critical to building a long-term business relationship. 227
The diversity of languages; business philosophies, practices and traditions make international trade more complex than selling to the business down the street. Let’s look at an example: A US entrepreneur flies to Tokyo to close a deal with a Japanese executive. He is pleased when his host invites him to play a round of golf shortly after he arrives. He plays well and manages to win by a few strokes. This happened for three days. In the third day the American was now growing impatient and asked his host when we are going to start doing business but his host surprised by the question answered. But we have been doing business. The US business executive should have known that personal relationships are important before business deals are sealed. •
The travel and shipping expenses may be high international flights can be very expensive sending or receiving packages from overseas can also be very costly.
•
International Trade Agreements It is generally assumed that free trade among nation’s results in enhanced economic prosperity for all parties involved, in the recent past we have witnessed a gradual opening of trade among nations. Hundreds of agreements have been negotiated among nations in this period, with each contributing to free trade across the globe. Activity Identify one trade agreement that has been signed of recent involving your country and discuss advantages and disadvantages of such an agreement to the residents of the countries involved.
228
12.6 Summary In this lecture we have been able to cover the following topic: International markets. Under this we covered the importance of international market which include: •
Offset sales declines in the domestic market
•
Increase sales and profits
•
External trade and their product. Life cycle
•
Lower manufacturing costs
•
Lower the cost of their products
•
Improve competitive positions and enhance reputation
•
Raise quality levels
•
To become more customer oriented
•
Next we looked at barriers to international trade these included:
•
Domestic barriers as well as international barriers.
Domestic barriers include lack of positive attitude, information and finance. International barriers includes both tariff and non-tariff barriers. The lecture also covered strategies for going Global. These include: •
Creating presence on the web.
•
Relying on trade intermediaries
•
Creating joint ventures
•
Foreign licensing
•
International
•
Counter-trading and bartering
•
Exporting
•
Outsourcing
•
Establishing international locations
229
References 1. Hisrich R., Peters M.P. Shepherd D.A. (2008) Entrepreneurship McGraw hill. New Delhi 2. Wickham (2001) Strategic Entrepreneurship Prentice Hall: Harlow 3. Zimmerer, T.W. Scarrborough, N.M. and Wilson, D. (2008) Essentials of Entrepreneurship and Small Business Management – Pearson and Prentice Hall. New Jersey.
230
