GST 203: Introduction to Entrepreneurship Lecture Notes PDF

GST 203: INTRODUCTION TO ENTREPRENEURSHIP SKILLS UNIT 1: FOUNDATION OF ENTREPRENEURSHIP a. Concept of Entrepreneurship b. Characteristics of Entrepreneurship c. Types of Entrepreneurship d. Roles of Entrepreneurship in Economic Development e. Who is an Entrepreneur? f. Functions of an En...

GST 203: INTRODUCTION TO ENTREPRENEURSHIP SKILLS UNIT 1: FOUNDATION OF ENTREPRENEURSHIP a. Concept of Entrepreneurship b. Characteristics of Entrepreneurship c. Types of Entrepreneurship d. Roles of Entrepreneurship in Economic Development e. Who is an Entrepreneur? f. Functions of an Entrepreneur g. Characteristics of an Entrepreneur h. Entrepreneurial Skills i. Meaning of Intrapreneurship j. Difference between Entrepreneurs and Intrapreneurs UNIT 2: THEORIES OF ENTREPRENEURSHIP  Socio-cultural Theories of Entrepreneurship  Economic Theories of Entrepreneurship  Psychological Theories of Entrepreneurship UNIT 3: CONCEPT OF CREATIVITY AND INNOVATION IN BUSINESS  What is Creativity  Characteristics of Creativity  Roles of Creativity in Entrepreneurship  Importance of Creativity  Techniques of Enhancing Creativity  Hindrances to Creativity  Types of Creativity  Process of Creativity  Meaning of Innovation  Types of Innovation UNIT 4: DISCOVERING BUSINESS OPPORTUNITIES  Meaning of a business opportunity  Sources of a business opportunity  Considerations for choosing a business opportunity UNIT 5: FEASIBILITY ANALYSIS AND BUSINESS PLAN  Meaning of Feasibility Study 1  Basic Issues to Consider During Feasibility Study  Uses of Feasibility Report  Contents of Feasibility Report  Meaning of Business Plan  Difference between Feasibility Study and Business Plan  Contents of a business plan UNIT 6: FINANCING START UP ENTERPRISES  Meaning of Entrepreneurial Financing  Sources of Entrepreneurial Finance  Challenges facing Business Financing UNIT 7: BUSINESS ENVIRONMENT  Meaning of a business environment  Types of business environment UNIT 8: FORMS OF BUSINESS OWNERSHIP  Choosing a Form of Business Ownership  Forms of Business Ownership  Sole Proprietorship  Partnership  Limited Liability Company or Corporation 9. MANAGING FAMILY BUSINESS  Meaning of Family Business  Types of Family Business  Characteristics of Family Business  Advantages and Disadvantages of Family Business  Challenges of Family Businesses  Family Business Models  Succession Planning  Succession Planning Process  Challenges of Succession Planning UNIT 1: FOUNDATION OF ENTREPRENEURSHIP 2 A. Concept of Entrepreneurship The word entrepreneur originated from a French word, “entreprende” which means “to undertake” (Akanni, 2010). The decision to undertake a project is driven by human orientation. This suggests that entrepreneurship is a way of thinking. Entrepreneurship has been defined as the process through which individuals/governments individually or jointly exploit available economic opportunities without being scared by associated risks or inadequate resources under their control. It also explains the process that involves the creation of an innovative economic organization for the purpose of gain or growth under conditions of risk and uncertainty. B Characteristics of Entrepreneurship Creativity Innovation Problem solving C. Types of Entrepreneurship Entrepreneurship is categorized as follows: I. According to the Type of Business: Entrepreneurs are found in various types of business coronations of varying sizes. We may broadly classify them as follows: Business Entrepreneur: Business entrepreneurs are individuals who conceive an idea for a new product or service and then create a business to materialize their idea into reality. They tap both production and marketing resources in their search to develop a new business opportunity. They may set up a big establishment or a small business unit. They are called small business entrepreneurs when found in small business units such as printing presses, textile processing houses, advertising agencies; readymade garments, or confectionery. In a majority of cases, entrepreneurs are found in small trading and manufacturing businesses, and entrepreneurship flourishes when the size of the business is small. Trading Entrepreneur: A trading entrepreneur is one who undertakes trading activities and is not concerned with manufacturing work. He identifies potential markets, stimulates demand for his product line, and creates a desire and interest among buyers to go in for his product. He is engaged in both domestic and overseas trade. Britain, due to geographical limitations, has 3 developed trade through trading entrepreneurs. These entrepreneurs demonstrate their ability to push many ideas ahead to promote their businesses. Industrial Entrepreneur: Industrial entrepreneur is essentially a manufacturer, who identifies the potential needs of customers and tailors a product or service to meet the marketing needs. He is a product-oriented man who starts in an industrial unit because of the possibility of making some new product. The entrepreneur has the ability to convert economic resources and technology into a considerably profitable venture. He is found in industrial units such as the electronic industry, textile units, machine tools or videocassette tape factories, and the like. Corporate Entrepreneur: A corporate entrepreneur is a person who demonstrates his innovative skill in organizing and managing corporate undertakings. A corporate undertaking is a form of business organization, which is registered under some statute or Act, which gives it a separate legal entity. A trust registered under the Trust Act, or companies registered under the Companies Act are example of corporate undertakings. A corporate entrepreneur is thus an individual who plans, develops and manages a corporate body. Agricultural Entrepreneur: Agricultural entrepreneurs are those entrepreneurs who undertake agricultural activities as raising and marketing of crops, fertilisers and other inputs of agriculture. They are motivated to raise agriculture through mechanization, irrigation and application of technologies for dry land agriculture products. They cover a broad spectrum of the agricultural sector and include its allied occupations. II. According to the Technology used: The application of new technology in various succors of the national economy is essential for the future growth of business. We may broadly classify these. entrepreneurs on the basis of the use of technology as follows: Technical Entrepreneur: A technical entrepreneur is essentially compared to a “craftsman.” He develops improved quality of goods because of his craftsmanship. He concentrates more on production than marketing. On not much sales generation by and does not do various sales promotional techniques. He demonstrates his innovative capabilities in the matter of production of goods and rendering of services. The greatest strength, that the technical entrepreneur has, is his skill in production techniques. 4 Non-technical Entrepreneur: Non-technical entrepreneurs are those who are not concerned with the technical aspects of the product with which they deal. They are concerned only with developing alternative marketing and distribution strategies to promote their business. Professional Entrepreneur: A professional entrepreneur is a person who is interested in establishing a business, but does not have an interest in managing or operating it once it is established. A professional entrepreneur sells out the running business and starts another venture with the sales proceeds. Such an entrepreneur is dynamic and he conceives new ideas to develop alternative projects. III. According to the Entrepreneur’s Motivation: Motivation is the force that influences the efforts of the entrepreneur to achieve his objectives. An entrepreneur is motivated to achieve or prove his excellence in job performance. He is also motivated to influence others by demonstrating his business acumen. Pure Entrepreneur: A pure entrepreneur is an individual who is motivated by psychological and economic rewards. He undertakes an entrepreneurial activity for his personal satisfaction in work, ego, or status. Induced Entrepreneur: An induced entrepreneur is one who is induced to take up an entrepreneurial task due to the policy measures of the government that provide assistance, Incentives, concessions, and necessary overhead, facilities to start a venture. Most of the induced entrepreneurs enter business due to financial, technical, and several other facilities provided to them by the state agencies to promote entrepreneurship. A person with a sound project is provided package assistance to his project. Today, import restriction and allocation to production quotas to mall units have induced many people to start a small-scale industry. Motivated Entrepreneur New entrepreneurs are motivated by the desire for self-fulfillment. They come into being because of the possibility of making and marketing some new product for the use of consumers. If the product is developed to a saleable stage, the entrepreneur is further motivated by reward in terms of profit. Spontaneous Entrepreneurs, These entrepreneurs start their businesses as Entrepreneurs. They are persons with initiative, boldness, and confidence in their_- ability, which activates, their, underage entrepreneurial activity. Such entrepreneurs have a strong conviction and confidence in their inborn ability. 5 V. According to the Stages of Entrepreneurial Development: Entrepreneurs may also be classified as first-generation entrepreneurs, modern entrepreneurs, and classical entrepreneurs depending upon the stage of development. They are explained below: First-Generation Entrepreneur: A first-generation entrepreneur is one who starts an industrial unit with innovative skills. He is essentially an innovator, combining different technologies to produce a marketable product or service. Modern Entrepreneur: A modern entrepreneur is one who undertakes business a venture which goes well along with the changing demand in the market. He undertakes a venture that suits the current marketing needs. Classical Entrepreneur: A classical entrepreneur is one who is concerned with the customers and marketing needs through the development of a self-supporting venture. He is a stereotypical entrepreneur whose aim is to maximize his economic returns at a level consistent with the survival of the firm with or without an element of growth. Social Entrepreneurship: Social entrepreneurship is a new, innovative business venture that influences change. A social entrepreneur has a specific cause that they care about, and they develop a business model around making a positive impact. The main goal is to create lasting social change through business. A social entrepreneurs may decide to establish business to enhance economic development; education; gender equality; health care; agriculture; environmental sustainability; renewable energy; community development; etc. Social entrepreneurship can operate as a non-profit, for-profit, or hybrid business (also known as a social enterprise), depending on the business model that you prefer and the availability of funding. D. Roles of Entrepreneurship to Economic Development Entrepreneurs play vital roles in the economic growth and development of a country. The roles of entrepreneurship are as follows: 1. Supply of goods and services 2. Creation of employment opportunities 3. Enhancement of per capita income. 4. Increase in the standard of living 6 5. Increase in government revenue. E. Who is an Entrepreneur? An entrepreneur is someone who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them. F. Functions of Entrepreneurship Entrepreneurial functions define activities that the entrepreneur is expected to perform. On the basis of this understanding, the entrepreneur is expected to perform the following functions: 1. Perception and identification of business opportunities: This is the first function of the entrepreneur. It has to do with the recognition and definition of an unsatisfied need of individuals, firms, or households that can be satisfied with a product or service at the right price that will guarantee satisfactory profit to the entrepreneur. In other words, business 13 opportunity occurs whenever there is a vacuum in the marketplace that is not being satisfied by existing organizations or is being inadequately satisfied. 2. Selection of the legal form, and location of the business: The form of business ownership that the entrepreneur may decide to go into depends entirely on the amount of capital available to the individual. To this end, the business enterprise may be operated either as a sole proprietorship, partnership or limited liability. The selection of the initial legal form of the enterprise as well as the location and site of the enterprise is the second function performed by the entrepreneur. 3. Identification, selection and acquisition of key resources: The identification, selection and acquisition of key resources is yet another function unique to entrepreneurs. For any startup firm to survive and grow depends heavily on the availability of competent manpower who will be able to translate the entrepreneur‘s ideas into concrete forms. Thus, key personnel must be sourced and encouraged to contribute their talents and energy during and after the turbulent period of formation and take-off. In addition, the technology that is suitable for the needs of the firm must be identified, evaluated and acquired. Sourcing of funds is one of the major constraints in starting businesses by entrepreneurs since the organization has no track record to boost of with investors and bankers, a 7 lot depends on the talents and trust of the entrepreneur to develop an attractive project idea, from a credible and resourceful team in order to encourage others to believe in the business. 4. Innovation: This is usually regarded as the height of entrepreneurship. Innovation may be defined as the translation of a new idea into a new company. In other words, innovation simply refers to striving to satisfy your customers better than what competitors are doing/offering. This may take the form of a new product in an old market; an old product in a new market; or an entirely new product in a new market. It is important to emphasize that 14 sustaining the patronage of customers depends largely on the ability of the entrepreneur to respond to their needs with new or modified products, new and better techniques of production that reduce the cost of production, and better methods of distribution, pricing, and promotion. 5. Risk bearing: This has been traditionally associated with the entrepreneur. There are various types of risks in business. The risk of fire, accidents, bad debts, theft, etc. can be minimized by taking preventive action and by insuring against them. Other risks arise because business decisions are future-oriented. Risk of business failure may arise from adverse fluctuation in demand, unfavorable government policies, the strong competitive advantage of other firms, obsolete technology, and hence high cost of operation, etc. These risks cannot usually be insured against and must be borne by the entrepreneur. One way of managing risk is for the entrepreneur to engage actively in monitoring the environment in order to be able to respond and adapt to the dynamic nature of the environment from time to time. By so doing, the entrepreneur proactively assesses the conditions facing him/her, and on the basis of the evaluation of his/her strengths and weaknesses, he or she makes a choice of a strategy considered suitable. Having made a choice, the entrepreneur accepts personal responsibility for the outcome of his/her decision. 6. Management of the ongoing enterprises: The job of an entrepreneur is not hit and run or one off activity. But rather, it is on a continuous basis (on going activity). To be able to sustain the ongoing nature of the business, the entrepreneur must put in place these activities namely: establishment of goals and targets for the enterprise; determination of the tasks to be undertaken to achieve the goals/targets; efficient and effective allocation of the necessary resources and controlling of the activities involved. This simply implies that the entrepreneur is a planner, organizer, communicator, coordinator, leader, motivation 15 controllers, and most of all, a facilitator. Management of the ongoing enterprise also involves the process whereby the 8 entrepreneur monitors and evaluates changes that are continuously taking place in the political, economic, socio-cultural, technological, legal, and ecological environment so as to respond appropriately to ensure the survival of the business. G. Characteristics of an Entrepreneur Entrepreneurs have the following characteristics: 1. Entrepreneurs are courageous, alert, and sensitive to their environments. They pay attention to details and also analyze situations. 2. They have the capacity to create visions for business ventures. 3. They are good at mobilizing factors of production to achieve success. 4. Entrepreneurs are great thinkers. 5. They have the need for achievement 6. They take responsibility. They use their own resources in their own way to achieve their objectives. 7. They always show the willingness to take calculated risks. 8. They have a future orientation. They plan, think, and look into the future business opportunities. 9. They have the drive for independence. H. Entrepreneurial Skills There are two main types of key entrepreneurial skills; Personal and Interpersonal skills. 1. Personal Skills: There are three major personal skills: developing self-awareness skills, managing stress skills, and problem-solving skills. a. Developing Self-awareness Skills:  Determining values and priorities.  Identifying logical style  Being aware of one’s strengths and weaknesses  Assessing attitude toward change b. Managing Stress Skills:  Coping with stressors 9 The main types of workplace stress are economic, business, and personal. A recession places economic stress on a business because the normal sources of capital and revenues dry up as banks refuse to loan money and customers stop buying. Business stress relates to the internal difficulties a company experiences in producing a quality product. Personal stress affects business owners and employees alike. It is a result of long work hours, pressure to succeed, and family and health concerns. Business owners carry the burden of managing the company so it grows and produces enough revenue to pay employees and the owner. Inherent in that burden is the stress of dealing with day-to-day problems caused by breakdowns in plant and equipment, industry competition, transaction failures, slow customer payments, lawsuits, and employee problems. When the economy is booming, there is stress in keeping the company producing at a fast enough pace to meet the demand for its products and strategic planning to take advantage of the opportunities presented to grow the company during good times. A recession can threaten a company's survival. These problems are particularly difficult for many business owners because they are compounded by the necessity to lay off workers or reduce their pay. Often, the business owner goes without pay in order to make ends meet when business is slow. Employees are affected in the workplace by role stress, personality conflicts, task overload, job dissatisfaction, management decisions, pressure to perform, and more personal stresses such as financial difficulties, poor health, and family problems. Employees express their stress by exhibiting poor attitudes at work to make up for their feelings of vulnerability to the whims of management and lack of power to affect change in their work situations. The business owner's difficulty dealing with the pressures of running a business often directly affects the level of employee stress. Additionally, poor management decisions that fail to take into account the reality of how they affect the work process and employee performance generate significant employee stress. During recessions, employee morale is also affected by the fear of job loss.  Managing time effectively  Delegating functions to save time  Using appropriate stress management strategies c. Problem-Solving Skills:  Solving problems creatively 10  Using a rational approach in problem-solving  Using a creative approach to problem-solving  Nurturing innovation in others 2. Interpersonal Skills. The four major types of interpersonal skills required for an entrepreneur are as follows: efficient communication, influential skills, motivating others, and conflict management skills. a. Efficient Communication:  Providing effective coaching  Counseling others  Listening actively  Understanding concerns and problems by proper probing  Using questioning and probing for a better understanding of others  Using effective communication for building rapport with others b. Influential Skills:  Projecting power and influences  Exercising influence on others  Empowering others  Projecting a self-confident and strong image c. Motivating Others:  Diagnosing poor performance  Creating a motivating environment  Rewarding accomplishment  Providing proper feedback  Monitoring performance d. Conflict Management Skills:  Managing conflicts effectively  Identifying causes of conflicts  Selecting and applying appropriate strategies for conflict management  Resolving confrontations 11 I. Meaning of Intrapreneurship Intrapreneurship simply means entrepreneurship in an existing organization. It is a system that allows an employee to act like an entrepreneur within a company. Intrapreneurship is the process that enhances the progress of a company because of the creative ideas of its valuable employees. The intrapreneur enjoys the support of an existing company. J. Who is an Intrapreneur? The term intrapreneur is coined from two words, intra, meaning, internal and entrepreneur. An intrapreneur works inside a company to develop an innovative idea or project that will enhance the company’s future. He is given autonomy to work on a project that may have a considerable impact on the company. Intrapreneurs are highly motivated individuals who have specific skill set, as well as leadership abilities and unique innovative vision. An intrapreneur is an employee who is tasked with developing an innovative idea within a company. The intrapreneurs has access to the resources and capacities of an established company. The risks and rewards associated with the activities are enjoyed by the company. UNIT 2: THEORIES OF ENTREPRENEURSHIP Socio-cultural Theories of Entrepreneurship Max Weber (German Sociologist) Max Weber wrote a popular text entitled, “The Protestant Ethics and Spirit of Capitalism” in 1930. The basis of Max Weber’s theory is religion and social change. The theory suggests that religious beliefs exert a strong influence on entrepreneurship development. He argued that the key to entrepreneurship success was the spirit of capitalism with its foundation in religious beliefs of predestination, self-discipline, good works, and religious salvation. The theory of social change discusses the major role of capitalism in developing entrepreneurship qualities in an individual. The entrepreneurial qualities of an individual or group depend on the society the person belongs to. Weber theorized that modern industrial capitalism emanated from protestant ethics comprising religious beliefs, the body of ideas, habits, and values that favor the rational pursuit of gains and profit. Religious belief produces the concept of capital or assets to create more wealth towards the ultimate religious salvation. He asserted that successful entrepreneurs are those who:  Persistently and intensively exert themselves in their callings.  Are goal-oriented 12  Build up productive assets or capital resources because they believe such behavior leads to success.  Have a great deal of energy and willingness to play the role demanded for operating a business. They are willing to make necessary sacrifices to run a business.  Accept discipline and are willing to live a frugal life, at least, at the initial stage of business life.  Have a resistance to social and traditional positions in their own activities. Everett Hagen’s Theory In 1962, Hagen wrote a book: “Theory of Social Change.” Hagen introduced the theory of social change to explain how individuals change their social status in order to gain societal respect. It was argued that when individuals feel they are not respected by society, they tend to implement innovative ways to positively transform their social status. The desire to change a prevailing social status is interpreted as the human tendency to become an entrepreneur. Someone seeks to change his or her social status: a. When he loses his social status to someone who has suddenly gained popularity and attained enhanced respect. b. If there is a form of insult by someone superior to him. c. If he is unable to accept a newly acquired social status as a result of a transformation in social order. Hagen’s theory argues that a withdrawal from existing social status drives entrepreneurial qualities in an individual. This explains that withdrawal from a social status tends to transform someone from an ordinary person to an entrepreneur. Hagen compared an authoritarian personality with a creative personality. He maintained that an authoritarian personality is a feature of traditional society while a creative personality is of modern society. A creative personality is the basis for positive entrepreneurship. The accumulation of creative personalities in modern societies results in positive changes that build the entrepreneurial group. An entrepreneurial group is built for achievement, autonomy, and social economic growth. Economic Theories of Entrepreneurship The economic theory of entrepreneurship explores the relationship between economic conditions and entrepreneurial activity. Theories majorly focus on the virtues of free trade, competition, and specialization. The theories explain the roles of an entrepreneur in terms of the production and distribution of goods and services in a competitive marketplace. 13 Prof. David McClelland’s Theory McClelland wrote a book entitled, “The Achieving Society” in 1961. He maintained that the entrepreneur is the central figure in economic growth. Even if the country is endowed with a large amount of natural resources, blessed with favorable trade opportunities and internal political stability, growth may not occur unless individuals take advantage of available opportunities. He posited that an entrepreneur is not a capitalist, rather he is a manager who has an inner feeling of accomplishment. He suggested that entrepreneurs:  Take moderate risk usually through innovation; the risk must be calculated.  Have the desire to achieve where the achievement is equated to doing a good job. Profit is not necessarily the principal motive of the entrepreneur.  Take personal responsibility for the results of decisions as a measure of one’s ability or degree of judgment.  Do jobs that give accurate feedback to facilitate evaluation of results. Richard Cantillon’s Risk Theory of Profit (1775) Cantillon made significant contribution in the explanation economic position of entrepreneurship. He describes an entrepreneur as a speculator who conducts exchanges and bears risks arising from market conditions. The theory is known as risk theory of profit because of uncertainty in the prices at which goods are bought and sold. An entrepreneur is someone who undertake risks for profit. Cantillon argues that an entrepreneur is not an innovator; he cannot change the demand and supply trend. He maintained that an entrepreneur is someone who is perceptive, intelligent, and willing to take risk. According to him, the main role of an entrepreneur is to bring the two exchange parties together. Joseph Schumpeter’s Theory of Innovation Schumpeter wrote a book entitled, “Capitalism, Socialism and Democracy” in 1947. The theory argues that entrepreneurship is synonymous with innovation. The theory maintains that entrepreneurs do not operate with conventional technologies and do not believe in making small changes to an existing production method. The main goal of entrepreneurship is to develop new technologies and products that can bring huge changes in society. In this theory, an entrepreneur is regarded as an innovator who is responsible for introducing new ideas in business operations. 14 An innovation is achieved by creating a new product; introducing a new method of production; opening up a new market; creating new sources of material; and initiating a new organization of industry. Schumpeter describes entrepreneurial actions as the major factor influencing business cycles and economic development. Entrepreneurial innovation replaces old products and processes thereby forcing competitors to key into it. The entrepreneur must have great instincts, mental freedom, and the ability to withstand social opposition. Alfred Marshal’s Theory Marshal presented an entrepreneur as someone who is a risk-taker and an administrator. He posited that entrepreneurs are those who identify opportunities, engage in production, reduce cost, and increase profit. He classified entrepreneurs into active entrepreneurs (those who find new ways) and passive entrepreneurs (those who join the bandwagon). Marshall proposed agglomeration of economies. Agglomeration explains the tendency of increasing returns as a result of accumulation of resources in a geographic location. The two main forms of agglomeration are (1) urbanization of economies (accumulation of the population at one point) and (2) localization of economies (accumulation of a specific industry at a location). He argues that agglomeration has strong positive impact on entrepreneurship development. Psychological Theories of Entrepreneurship Thomas Cochran’s Theory Cochran’s theory explains that entrepreneurship is determined by cultural values, role expectations, and social sanctions. The theory posited that entrepreneurial performance is shaped by the attitude of the person towards the profession; societal role expectations that are held by sanctioning groups; and the operational requirements of the job he is engaged in. Cochran posited that efficient and effective entrepreneurial decision-making involves the following factors:  Determination of the capital requirement.  Obtaining legal assistance  Research the relevant market segments.  Locating the business.  Securing the human resources.  Determination of appropriate accounting procedures.  Provision of physical facilities. 15  Determination of risk and insurance coverage.  Determination of data/information needs. Cochran further suggested a comprehensive business plan to attract finance for the business. The business plan must consider the following:  Business goals, objectives, vision and mission.  Peculiarities of the market of interest.  Actual and potential competitors, including their strengths and weaknesses.  Expected selling prices of products or services.  Product or service specifics and characteristics.  Major technology and relevant skills required.  Patent rights to be held.  Distribution channel options available.  Needed capital requirement.  Additional funds for the business.  Proposed business location, including its justification.  Projected profit and loss position over a stated time and period.  Ownership structure including likely changes. UNIT 3: CONCEPT OF CREATIVITY AND INNOVATION IN BUSINESS Meaning of Innovation (new product) The word “new” could mean minor changes in the quality, size, packaging, price or any other attributes of the product. The main determinant of a new product is consumer perception, not necessarily the degree of technical change. A new product is a product perceived by the consumer as such. What is new to you may be old to others and what is new in a place may be old in other places. Types of Innovation Key marketing literature has shown relevant classifications of innovation. Some creative works suggested various typologies of innovation using the following criteria: 1. Object of company’s activity being innovated 2. Extent of changes on the product (product perspective) 16 3. Based on how the new product affects established consumers pattern of consumption (Market perspective). 4. Based on the nature of knowledge, technological changes and market competiveness brought about by the innovation. (Based on the degree of Novelty associated with it) 1. Types of Innovation Based on Company’s Activity Being Innovated: This categorization emphasizes key company’s operations and actions taken to make a new product. The typologies in this category include products, services and process innovation. a. Product Innovation: Product innovation involves the transformation of concepts or ideas into products, changes in design of products, or use of new materials and components in the manufacture of products. Product innovation is defined as the introduction of a good or service that is new or significantly improved regarding its characteristics or intended uses, including significant improvements in technical specification, component and materials, incorporated software, user friendliness or other functional characteristics (OECD Oslo Manual 2005). Product innovation can utilize new knowledge or technologies, or combination of existing knowledge or technologies. The term product covers both goods and services. Product innovation is a difficult process driven by advancing technologies, changing customer needs, shortening product life cycles and increasing global competition. Product innovation is the result of bringing to life a new way to solve the customer’s problem through a new product or service. Product innovation encompasses all the efforts put into a product from conception to development and commercialization to meet the needs and expectations of customers and all stakeholders. Product innovation has become a powerful tool for keeping the company aligned with changing market conditions. Companies develop new products to meet shifting consumer demands, to capitalize new technologies and to move ahead of competition. Being innovation is seen as a necessary strategy for the modern day businesses. Stanton (1981) describes the three categories of product innovation as follows: i. Product that is really innovated (New-to-the-world). It is considered new by the business organization and the market. 17 ii. Replacement for existing products that are significantly different from the existing goods (Line extension). Line extensions are products still familiar to the business organization but new to the market. iii. Imitating products that are new to a particular company but not new to the market (Me-too products). It is products that are considered new to the business organization but not new to the market. b. Service Innovation: Service innovation is overlooked because it is less spectacular and eye catching. Service innovations take some forms of new ways of providing a service, often with a novel and very different business model. The creation of the ‘Direct Line’ telephone insurance business is a good example of the first type of service innovation. For years the insurance business had been transacted via high street outlets, door-to-door, by post or through intermediaries known as insurance brokers. Developments in computing and telecommunications provide customers with a better service and to enable service providers to improve their productivity by providing it at affordable prices. c. Process Innovation: Business-to-business (B2B) Ecommerce is dramatically reducing the need for paperwork and those who process paper, namely administrators Jones and Rose (1990). It is no surprise that all sorts of business organizations from airlines to insurance companies offer a discount for buying online. Buying online means less paper and money spent processing paper. One has only to look at the price of the discounts offered to get an idea of the efficiency gains that firms can make. All thanks to process innovation. 2. Types of Innovation based on the Extent of changes on the product This classification looks at innovation based on the degree of changes on the product. Here, the degree of innovation or uniqueness is defined in terms of the product itself. Under this perspective, three variants are discernible. a. Product Improvement: This kind of innovation involves minor changes to existing products with the aim of improving their performance (in use and appearance). It usually replaces old ones. Example, “New Improved” lux replacing the old lux soap. 18 b. Product Proliferation: This is also called line extension. This type of innovation involves additions to an existing line of products, without fundamental changes in form, components, or technology. Example would be shaving blades in new sizes. Unlike in product improvement, they exist simultaneously in the market. c. Product Advancement: This innovation leads to distinct new products: “The newness of the new”. The products are substantially different in form, ingredient, or technology, from other previous products. 3. Types of Innovation Based on How the New Product affects Established Consumers’ Pattern of Consumption: This classification sees degrees of innovation from market standpoint. In this case, innovation is grouped based on the effect of a product’s uniqueness on established consumer consumption patterns. Thomas S. Robertson classified innovation into the following: a. Continuous Innovation: This type of innovation rarely affects the established consumption pattern, and usually represents only slight changes to an existing product. Examples are addition of detergents to the bar soaps market; addition of fluoride to toothpastes; removal of potassium bromate from bread; reduction or removal of sugar from soft drink, etc. Remember Diet Coke. All these are new brands in already existing brand category, and therefore readily fit into established patterns of consumer behavior. b. Dynamically Continuous Innovation: This type of innovation tends to disrupt consumers’ behavior, yet does not change it significantly. Relatively little modifications in behavior are necessary for the consumers to adapt to this newness in products. Example may be the introduction of cassava bread, electronic toothbrushes, changing from a manual vehicle to an automatic one, etc. c. Discontinuous Innovation: This type of innovation causes a break with the past. It is an entirely new experience and therefore demands new consumption patterns. Example could be an electric vehicle. In summary, the types of innovation are made more concise in table 3.1. Table 3.1: Scope of Innovation using two variables: Product, and Market 19  Degree of Newness Perspective Levels of Newness Basis of Newness Product Improvement Minor changes in existing products (color, size, etc) Proliferation Modification of products, affecting form and function Advancement Major change inform, function, and technology Market Perceived Continuity with socio- Behavioral cultural patterns Differences - Continuous - Dynamically Continuous - Discontinuous Source: Burton H. Marcus and Edward M. Tanber (1979). Marketing Analysis and Decision- Making, (Toronto: Little, Brown and Co 4. Types of Innovation Based on the Degree of Novelty it Commands: Innovation strides can be differentiated in terms of the degree of novelty associated with them. According to Borrowing Freeman (1982), innovation can be viewed as an incremental or a radical change. Incremental versus radical dichotomy as a marketing theory emerged in the 1970s. It explains the classes of organizations that are fit to innovate and under certain conditions. Christenson (1997) posited that Incremental Innovation is a change that builds on a firm’s expertise in component technology within an established architecture. Henderson and Clark (1990) see Radical Innovation as that which establishes a new dominant design, and handle a new set of core design concepts embodied in components that are linked together in a new architecture. Incremental and radical innovations take two opposite extreme positions. The two intermediate stages between these two extremes are Modular Innovation and Architectural Innovation. Thus, Henderson and Clark (1990) classified innovation into four types, namely; incremental, modular, architectural, and Radical innovations. Change Associated with Types of Innovation Innovation Components System Incremental Improved No change Modular New No change Architectural Improved New configuration/architecture Radical New New configuration/architecture 20 Source: Henderson and Clark (1990). 1. Incremental innovation: This refines and improves an existing deign, through improvements in the components. It is important to note that these are improvements not changes, the components are not radically altered. Christensen (1997) defines incremental innovation in terms of: ‘a change that builds on a firm’s expertise in component technology within an established architecture.’ Incremental innovation in washing machine is when a machine comes with a more powerful motor to give faster spin speeds. Incremental innovations are the commonest. Gradual improvements in knowledge and materials lead to most products and services being enhanced over time. However, these enhancements typically take the form of refinements in components rather than changes in the system. Thus a new model of an existing and established product is likely to leave the architecture of the system unchanged and instead involve refinements to particular components. Attributes of incremental Innovation: The following are some of the characteristics of Incremental Innovation:  It utilizes or enhances existing or current core competences and capabilities.  Involves modest technological changes from existing products  Responds to customer needs identified from current offers.  Uses existing resources (Human, Machine, Finance)  Prolongs the life of the product while sustaining the competitiveness of existing products in the market.  Enables continued growth with low risk.  Cost effective.  Adoption of the innovation is faster. Incremental Innovation is cost effective, very easy to plan and develop, and guarantees faster adoption by target market. It is easier to copy incremental innovation. 2. Modular Innovation: Modular innovation uses the architecture and configuration associated with the existing system of an established product, but employs new components with different design concepts. As with incremental innovation, modular innovation does not involve a whole new design. However, modular innovation does involve new or at least significantly different components. In the case of the clockwork radio it is the power source that is new. The radio 21  operates in much the same way as any other radio. The use of new or different components is the key feature of modular innovation, especially if the new components embrace a new technology. New technology can transform the way in which one or more components within the overall system operate, but the system and its configuration/architecture remains unchanged. Clearly the impact of modular innovation is usually less dramatic than is the case with radical innovation. People still listen to the radio in the way they always have. But the fact that it does not need an external power source means that new groups often living in relatively poor countries without access to a stable and reliable supply of electricity can get the benefit of radio. 3. Architectural Innovation: With architectural innovation, the components and associated design concepts remain unchanged but the configuration of the system changes as new linkages are instituted. Henderson and Clark (1990) argued that ‘the essence of an architectural innovation is the reconfiguration of an established system to link together existing components in a new way.’ This is not to say that there will not be some changes to components. Manufacturers may decide to refine and improve some components, but the changes will be minor leaving the components to function as they have in the past but within a new redesigned and re-configured system. However the significance of the Walkman is not just that it sold well. It illustrates the power that is sometimes associated with architectural innovations. As well as securing Sony’s future as a consumer electronics manufacturer, it had much wider impact on society. It was soon copied by other manufacturers, but more significantly it changed the behaviour of consumers. Young people found they could combine a healthy lifestyle while continuing to listen to music so that the Walkman may be said to have helped promote a whole range of activities like the jogging, walking and the use of the gym. 4. Radical Innovation: Radical innovation is about much more than improvements to existing designs. A radical innovation calls for a whole new design, ideally using new components configured (i.e. integrated into the design) in a new way. In Henderson and Clark’s (1990) terms, ‘Radical innovation establishes a new dominant design, and hence a new set of core design concepts embodied in components that are linked together in a new architecture.’ 22 Radical innovations are comparatively rare. Rothwell and Gardner (1989) estimated that at the most about 10 percent of innovations are radical. Radical innovation is often associated with the introduction of a new technology. This is a typical case of transforming technology. Attributes of Radical Innovation:  Radical innovation gives a competitive edge or advantage to the firm.  It is very difficult to copy a radical innovation.  It involves new knowledge, resources and technologies.  It also involves high financial risk. Radical Innovations Radical Innovation Technology Impact on Society Telephone Telecommunication New means of mass communication Jet Airliner Jet Power Growth of mass travel foreign holidays Television Television New leisure activity entertainment Personal Computer Microprocessor New administrative system, internet services e.g banking Why Do Companies Decide To Develop New Products? Companies develop new products for the following reasons: 1. Knowledge of the fact that products pass through various cycles in life enables businesses understand that they cannot live forever. Hence, they develop new product which will likely replace products that may phase out. 2. The need to sustain the profit level of a company: As a result of fluctuating consumer patronage and the threat of obsolescence which hangs over most products, the profit level of a firm would more likely be sustained if a new product is introduced to replace the one that is in decline stage or that has gone obsolete. 3. The increasing consumer discerning and selective tendencies now motivate firms to constantly try to satisfy them through product innovation. 4. Environmental factors: Availability of raw materials suggests that new products will constantly be developed. For example, all-Nigerian beer and bread are being expected following government decision to disallow importation of vital inputs for making these products. 5. Big companies introduce new products into the market for image making purposes since refusal to innovate may be seen as a sign of decay or conservatism. 23 6. Some firms develop products to fruitfully and profitably use some idle resources such as technical expertise, machinery and equipment, or waste or refuse products which could be utilized in the production of other goods. 7. Companies sometimes introduce new products as a way of diversifying their risks. Having more than one product, in this case, becomes a way of avoid putting all their eggs in a basket. UNIT 4: DISCOVERING BUSINESS OPPORTUNITIES Meaning of a business opportunity A business opportunity defines the chance to take advantage of an occurrence in the market for business gain. It is very important given that it creates: 1. The chance to build a business: A business opportunity can be an existing unsolved problem in the market or a new problem arising from current trends, which is the chance to build a business. 2. The chance to avoid failure: A business is likely to fail without opportunities. This is because they are essential for implementing ideas and innovations that can make a business successful. They allow businesses to take the right decision at the right time. 3. The chance to grow: Opportunities allow businesses to create and implement ideas and innovations. It is also a chance to improve performance by solving existing problems better, providing a more refined value proposition to the target market, and building a more efficient business model. 4. The chance to maximize profits: A business opportunity involves favorable conditions that can be used to increase profits. These conditions include but are not limited to the availability of resources, the existence of market demand, and the presence of favorable competition. The goal is to find solutions that can potentially maximize profits while solving problems. Sources of a Business Opportunity 1. Strengths and skills, 2. Family and friends 3. Current trend 24 4. Unmet need (e.g., affordable product, user-friendly product, portable product, product alternatives, self-service). 5. Research organization 6. New market 7. New product uses 8. Untapped resources 9. New technology 10. Competitors 11. Strategic partners 12. The Unexpected (e.g., natural disaster, pandemic) 13. Industry and Market Disparities (e.g., regulations, deregulation, changes in supply chains, obsolescence over time, and structural problems after an industry boom). Demographic Shifts (shift in age, income level, occupation, family structure, education level) 14. Changes in taste Considerations for Choosing a Business Opportunity 1. Clarity: Good opportunities are clear, well defined, and straightforward. They allow businesses to accurately and completely identify problems and create solutions that can maximize their potential. 2. Relevance: Good opportunities are relevant to the scenario in which they exist. They provide added value to customers, markets, and industries. This means they do not only represent potential but also relevance for solving existing problems or creating added value for others. 3. Feasibility: Good opportunities are realistic and feasible. They help businesses achieve their goals while making them more efficient, productive, and profitable. 4. Profitable: A good opportunity is capable of providing returns on investment. It is able to achieve its objectives while capitalizing on the available resources, strategies, and assets more efficiently. 5. Cost of converting the opportunities 6. Organizational resources 25 7. Scalable: A good opportunity is scalable. This means it can be expanded to a bigger or a wider scale. It can extend to various markets and industries while maximizing the results of investments in terms of time, human resources, and money. UNIT 5: FEASIBILITY ANALYSIS AND BUSINESS PLAN Meaning of Feasibility Study The starting point of a new business is idea generation. This is followed by the feasibility study. A feasibility study is conducted on a new business idea to understand how practical, profitable, and sustainable the business is. A feasibility study defines a controlled process of identifying problems and opportunities, determining objectives, describing situations, defining successful outcomes, and assessing the range of costs and benefits associated with several alternatives for solving a problem. Feasibility study comprises detailed information about a business structure, resources needed to run the business, the market, the products or services, and logistics involved in delivery the product. A feasibility study serves as a standard for measuring the success of a proposed business. It lists all that is required to run the business, identifies logistical concerns, indicates convincing business potentials, serves as the foundation for developing a business plan, and provides important information for rational decision-making. Basic Issues to Consider During Feasibility Study The key areas that should be considered when conducting feasibility study include: 1. Market Analysis: Customer knowledge – Evaluate demographic factors, lifestyle, personality, attitude, etc. Consider consumer and business markets. 2. Economic Analysis: Understanding customer purchasing power – income level; economic system; economic cycle; inflation, etc. 3. Technical Analysis: Dynamics of the business (Procedures and methods). 4. Manpower Analysis: Understanding the type of labor force required for the business (skilled, semi-skilled, or unskilled; skill set) 5. Financial Analysis: Understanding the costs and income potential. (Budgeting, income, cash flow, and balance sheet projections) 6. Location Analysis: Identification of a good location for the business. 7. Risk Analysis: Capital risk, market risk, inflationary risk, legislative risk, etc. 8. Competitor Analysis: Understanding competitors (direct and indirect) 26 9. Industry Analysis: Understanding the industry 10. Product Analysis: Knowledge of the product (the need area it satisfies, features and benefits). Uses of Feasibility Report The entrepreneur uses feasibility report: 1. To meet the stipulated requirements of financial institutions. 2. To provide the basic information for effective decision making with respect to the proposed investment. Given that it shows market potentials, technical and financial implications of the opportunities, feasibility report enables the entrepreneur to accept or reject the project. 3. To assist the entrepreneur in developing future plans for the organization. 4. To serve as the basis for measuring the performance of the proposed business. Contents of Feasibility Report The contents of feasibility report are as follows: 1. A brief description of the project 2. The project objective 3. The economic and social justification for the project 4. Organization and management 5. Technical and production considerations 6. Demand and supply outlook 7. Marketing strategies 8. Financial projections. 9. Cost of the project 10. Financing plan 11. Risk analysis: Capital risk, inflationary risk, interest rate risk, market risk, liquidity risk, legislative risk, and default risk. Business Plan Meaning of Business Plan A business plan is a written document which describes all relevant events involved in a new or an existing business. The business plan includes business goal, the strategies, potential problems and solutions, the organizational structure and the required capital. The business plan locates your 27 business destination through its road map. It describes how to get to the destination, minimize the possibility of failure and maximizes the likelihood of success. The business plan helps in the following ways: 1. Effective planning of business 2. Sourcing of capital from investors, financial institutions, and suppliers. 3. Effective handling of eventualities Difference between Feasibility Study and Business Plan A feasibility study is not the same thing as a business plan. The feasibility study is a research conducted before developing a business plan. The feasibility study helps determine whether an idea or business is viable or not. The study seeks to understand product viability, market viability, business model viability, financial viability, etc. The business plan is developed to take advantage of identified business opportunity. Contents of a Business Plan 1. Executive Summary: Summary of the key sections of the report. 2. Table of Contents 3. Company Description: It contains the following: Company name, address and location. Form of ownership and legal status. Date when the company was founded. Development stage the business – (start-up or expanding). Benefits of your business to your country. Vision: Which image will your business portray in ten years? Mission: How do you intend to actualize your vision (strategy)? Objectives: Long term and short-term objectives should be measurable. 4. Management: List of proposed managers, titles, responsibilities, experience, skills, and costs. 5. Product Description: Product or service features and benefits 6. Customer Analysis: Differentiate end users from customers. Demographic characteristics of consumer market. For business market, consider key customers, purchase frequency, purchasing process for business market. 28 7. Competitor Analysis: Direct and indirect competitors. The competitors’ strategies. Conduct SWOT analysis here. 8. Industry Analysis: Which industry, the size, growth rate, and outlook of the industry. The market leader. 9. Operations Plan: This section covers the following: Input Factors (location, premises, furniture, machinery, etc.), Production / manufacturing processes, Output and performance indicators, Delivery and payment, Quality control, Potential problems and preventive measures 10. Marketing Plan: 7Ps of marketing 11. Financial Plan: The amount of finance required. The projected revenue or assets to secure. The ratio of debt or equity financing will be needed. Income projection, cash flow projection, balance sheet projection, 12. Development Plan: Steps and milestones 12. Critical Risks: Capital risk, inflationary risk, interest rate risk, market risk, liquidity risk, legislative risk, and default risk. UNIT 6: FINANCING START UP ENTERPRISES Meaning of Entrepreneurial Financing Entrepreneurs require capital to start, maintain, and expand their businesses. Capital is a set of resources needed to run a business. The resources are classified into financial resources, human resources, material resources, as well as machines and equipment. Interestingly, finance is necessary to employ other kinds of resources. Entrepreneurial financing involves the process of providing the required amount of money for a business. Businesses may need money to purchase equipment, and inventory, create awareness, restructure, or renovate the enterprise. Business financing is challenging in the sense that the Entrepreneur will determine:  The alternative sources of funds  The risk of using each source of fund  The duration of financing (i.e; short-term, medium-term, or long-term)  The cost of getting funds from each source  Government restrictions and institutional constraints. 29 Sources of Entrepreneurial Finance The sources of entrepreneurial finance are classified into: 1. The personal and family sources 2. The internal sources 3. The external sources 1. The Personal and Family Sources: This source of funds is most applicable to start-ups; some existing businesses use it. Personal saving is the first source of funds for start-ups. It motivates the business owner to work hard and encourages investment. When personal saving is not enough to meet business obligations, family members and friends provide necessary assistance. The financial assistance may be in the form of a loan or gift to support the Entrepreneur. 2. The Internal Sources: Existing businesses generate funds internally. The internal sources of business funds are from retained profit and provision for tax. In the first instance, the fixed and working capital requirements can be financed through profits made from business activities. Second, given that business tax is payable a year after the profit is made, the money could used be used to fund a business activity. 3. The External Sources: External sources of finance are those that are obtained from outside a business. The external sources are further divided into short-term, medium-term, and long-term sources. Short-term Finance Sources: These are sources of funds that are repayable within one year. Funds from these sources are used to meet routine financial needs such as payment of salaries, wages, electricity bills, rents, etc. The amount of money involved in short-term sources is relatively small. It is ideal to finance short-term projects with short-term funds. Sources of short-term funds are: a. Trade Credits or Credit Facility: This type of credit allows firms to defer payment for their purchases to a later date. This provides an opportunity to the firm to use the fund for other purposes pending the agreed date for payment. In this kind of financing, the seller decides to offer credit facility to the customer for a specified period of time. The entrepreneurs is obliged to pay the money on the due date. 30 b. Specialized Institutions: These institutions are established to provide credit facilities to micro, small, and medium enterprises. The specialized institutions include: microfinance bank, corporative banks, and agricultural development banks, etc. c. Commercial Paper: it is a promissory note issued by big firms to raise short-term fund from market. Promissory note is issued by issuing house (merchant bank) on behalf of the company. The merchant bank finds interested investors and it is paid commission for the service. Commercial papers carry coupon rates which expires between 30 and 270 days. d. Bank Overdraft (Bank Credit): Banks extend credits to their loyal customers by allowing them to draw money in excess (to a certain limit) of the balance in their account to meet certain needs. e. Acceptance Credit (Bankers Acceptance): This is a bill of exchange that is guaranteed by a bank. The bank accepts to liquidate the debt o maturity should a default occur. Invariably, the bank conveys some security on the debt instrument in the money market. f. Accruals: Due expenditures may be deferred to a future date while the money meant for that purpose is gainfully employed in other activities. Expenditures often involved in accruals include salaries, rents, wages, electricity bills, etc. The deferment of the expenditure allows the firm further use of the money. ii. Medium-term Finance Sources: The medium-term sources explain finance sources that are available between two and five years. Funds from this source are used for acquisition of small tools and light equipment with a few years life span. Medium-term financing are debts obtained through borrowing. These sources have implications for interest payment. The medium-term sources of finance are: bank loans, equipment leasing, hire purchase, mortgaging, sale and lease back, finance companies, etc. a. Bank Loans: One of the main functions of deposit money banks is granting of loans to individuals and businesses. Bank loans are paid at relatively long period of time, it requires high interest rate, collateral, and takes rigorous assessment of applicants. b. Equipment Leasing: This is an agreement which stipulates that the user of certain equipment (lessor) will pay an agreed sum to the owner (lessee) for using the equipment. In this case, the 31  user cannot at any time claim ownership of the equipment. Leasing is a source of finance for heavy and expensive equipment. c. Hire Purchase: This is an agreement where the owner of a machine leases it to the hirer on the terms that the hirer shall pay the owner a number of installments until the price has been paid before the ownership of the machine shall be transferred to the hirer. d. Sale and Lease Back: In this case, a company may sell one of its equipment and thereafter repossess it through a lease arrangement. The method enables the company to acquire cash from the sale of the assets and utilize the same asset, though on payment of agreed rentals. e. Finance Companies: These are assets-based lenders who lend money from the acquisition of inventory and equipment. It is easier to acquire loans from financing companies than banks although they charge higher interest rates iii. Long-term Finance Sources: Challenges facing Business Financing 1. Poor Business Plan 2. Lack of cash flow 3. Not using a budget UNIT 7: BUSINESS ENVIRONMENT Meaning of Business Environment The business environment explains all factors that directly or indirectly influence the activities of any company. Each of the business environments or factors is strong in the sense that it deserves a manager’s attention. The business environment can make or mar marketing plan and implementation. Types of Business Environment Business environment is divided into three. They include: 1. Internal business environment, 2. Task environment, and 3. External business environment. 32  Business Environment Internal Business Task (Performance) External Business Environment Environment Environment Competitors Political Environment Marketing Resources Customers Economic Environment Non-Marketing Resources Suppliers Social Environment Regulators Technological Environment Strategic Partners Legal Environment Business Facilitators Environmental Factor Demographic Environment 1. Internal (Micro) Business Environment: Internal or micro business environment indicates all internal, controllable variables of a company. They are called “organizational variables” because they are peculiar to the company, and are controlled and manipulated the mangers in company. The internal business environment is further divided into marketing resources and non-marketing resources. Examples of marketing resources are product, price, promotion and place. Non-marketing resources are units in the organization, namely, personnel, finance, research and development (R & D), production, and other units. 2. Task or Performance Environment: Task environment are semi-controllable variables. This type of environment comprises those organizations which influence a given company’s operational performance. The task or performance environment include companies which compete with an organization, companies which supply raw materials, component parts, or products to an organization and companies which render services (e.g, consultancy, financial services, marketing research, communication agencies) that facilitate achievement of an 33  organization’s objectives. The task environment are organization’s partners which comprises competitors, customers or buyers, suppliers, distributors, strategic partners and marketing facilitators. Task environment are independent entities which work to achieve their own goals and objectives. A company may decide the group of partners to work with but it cannot determine how those partners work. This makes task environment relatively uncontrollable. a. Competitors: Company’s competitors are those organizations which compete with it for resources. Companies compete for money in customer’s wallet and non-monetary resources such as the right for patent, loan, contract, quality labour, business location, technological breakthrough, and scarce raw materials, share of market, share of mind, etc. All companies work to satisfy needs and wants of consumers better than competitors. Competition is classified into close and distance competitors. Competition is a factor in the sense that activities of other companies directly and indirectly affect business operation in the industry. b. Customers or Buyers: Customers explains those who pay for a product of service. There are individual and institutional buyers. In the context of our discussion, we focus on institutional buyers which include: schools, hospitals, government agencies, wholesalers, retailers, distributors, manufacturers, and so on. Dealing with customers has become increasing complex in recent times. New products or service, new methods of marketing, and more discriminating customers have added uncertainty to how businesses relate to their customers. Also, companies face significant difference among customers when they decide to go international. c. Suppliers: Suppliers are organizations which provide resources to other organizations. Firms decide to exclusively deal with one supplier whereas others select a few suppliers. It is dangerous to deal with one supplier. The firm will likely suffer stock out when there is strike action or when the supplier goes out of business. This situation can effectively be handled by maintaining a competitive relationship among suppliers so as to ensures constant supply of materials and components parts and to keep costs down. d. Regulators: Regulators are elements of task environment which have potential to control, legislate, or influence an organization’s policies and practices. There are two kinds of regulators, namely, regulatory agencies and interest groups. Regulatory agencies are established by the government to protect the public from certain business practices or to protect the organizations from one another. Regulatory agencies include: Standard Organization of Nigeria (SON), National Agency for Food and Drug Administration and Control (NAFDAC), Public 34  Complaints Commission, to mention a few. An interest group is organized by its members to attempt to influence organizations. Prominent interest groups are Nigeria Bar Association (NBA), the Nigerian Medical Association (NMA), the Nigerian Society of Engineers, National Association of Nigerian Students (NANS), National Council of Women’s Societies (NCWS), etc. e. Strategic Partners: Strategic partners or allies are those companies who work together in joint venture or other partnerships. Strategic partnerships help companies to get from other companies the expertise they lack. They also help spread risk and open new market opportunities. f. Business Facilitators: Business facilitators are independent institutions which assist companies in running special business activities. The business facilitators include: market research firms advertising agencies, transportation firms, warehousing firms, insurance brokers and agents, commercial banks, consultancy firms, etc. 3. External (Macro) Business Environment: It defines all external, uncontrollable variable or forces which have the capacity to make or mar the business activities. External business environment includes Political, Legal, Economic, Socio-cultural, Technological, Environmental, and demographic factors which impact on business success or failure. The external business factors are discussed as follows: a. Legal-Political Environment: Legal-political environment consist of laws, government agencies, and pressure groups that influence and limit various organizations and individuals in the given society. Governments develop public policies to guide commerce – sets of laws and regulations that limit business for the good of society as a whole. Almost every marketing activity is subject to a wide range of laws and regulations. Legal-political environment covers: environmental protection laws, taxation policy, employment laws, government policy, and legislation. b. Economic Environment: The economic environment consists of factors that affects consumer purchasing power and spending patterns. Nations vary greatly in their levels of and distribution of income. Industrial economies constitute rich markets for many different kinds of goods. Subsistence economies consume most of their own agricultural and industrial output and offer 35  few market opportunities. Economic factors involve economic system, economic (business) cycle, inflation, and employment. c. Socio-cultural Environment: The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences, and behavours. People grow up in a particular society that shapes their basic beliefs and values. They absorb a world view that defines their relationships with others. The following cultural characteristics affect marketing decision making: persistence of cultural values, shifts in secondary cultural values d. Technological Environment: Technology is used in this context to refer to the application of science in the production and distribution of goods and services. Technological advances widen the range of goods and services available. Technological advances have, in some cases, eased and in other cases, complicated Marketers jobs. Technological environment are new discoveries and innovations, speed of technology transfer, rates of obsolescence. e. Environmental Factor: Environmental or ecological factors influencing businesses are related to actions and processes necessary to protect natural environmental and in the same time maintain and increase efficiency of the company. Climate change, pollution, etc. are key environmental issues being faced by all manufacturing firms. f. Demographic Environment: This the study of human populations in the terms of size, density, location, age, gender, race, occupation, and other statistics. The demographic environment is a major factor because it involves people, and people make up the market. In addition, changes in the world demographic environment have major implications for business. Thus, Marketers keep track of demographic trends and developments in their markets. They track changing age and family structure, geographic population shifts, educational characteristic, and population diversity. UNIT 8: FORMS OF BUSINESS OWNERSHIP Choosing a Form of Business Ownership A form of a business ownership is fundamental in the life any business. The business growth, expansion, and sustainability hinges on the legal form of that enterprise. The most common alternatives for new businesses are a sole proprietorship, a partnership, and a limited company (or 36 a corporation). Businesses may decide to operate as a cooperatives. There is no good or bad decision on the choice of legal form of a business. The business owner may seek some guidance from a lawyer or an accountant. The manager should consider the following before selecting a legal form of his or her business. a. The cost of registering and starting a business. b. The procedure for registering and starting a business. c. The financial risk a business takes. d. The way decisions are made in the business. e. The liability of the owner(s). f. The continuity of the business. g. The taxation of business profits. Forms of Business Ownership There are four main forms of business are a sole proprietorship, a partnership, a limited company (or a corporation), and cooperatives. 1. Sole Proprietorship A sole proprietorship is a business owned, financed, and managed by an individual. This is why it is called a one-man business. The sole business owner takes all risks, bears all losses, and enjoys all rewards alone. Sole proprietors are found among small and medium enterprises. Characteristics of Individual Ownership a. Owned by single individual. b. It is easy start, manage and control. c. The owner has unlimited liability; he is liable for the business at all times. d. The sole business owner pays personal income tax for the profit earned from the business. e. The owner and the business are considered as one; the business is not separate from the owner. f. There is no need to create a separate legal entity. Advantages of Sole Proprietorship a. Autonomy and self-direction b. It is easy and inexpensive to start and administer. c. Business income is reported as owner’s personal income. d. All profits belong to the owner 37 e. Business affairs are kept very private. Disadvantages of Sole Proprietorship a. Unlimited liability. b. Expansion problems due to lack of capital. c. Lack of continuity. d. Limited access to external resources. 2. Partnership A Partnership is defined as two or more people who agree to provide capital and work together in a business with a purpose of making profit. Advantages of Partnership a. Easy to set-up b. Provides a larger capital base and more growth prospects c. Work load is shared. d. Responsibility and control is also shared e. Provides a diversified pool of expertise resulting in efficient management. Disadvantages of Partnership a. Unlimited liability b. Disagreement among the partners may cause delays in decision making c. Lack of continuity. Legal requirements of Partnership a. The maximum number of partners is defined b. Partners have to sign a partnership deed according to the articles of partnership for that particular country c. All partners participate in management but the right of a junior partner may be restricted by articles d. There may be “sleeping” partners who do not participate in day-to-day management affairs. e. The sharing of profits and losses according to the partnership deed or in the absence of any such clause according to the law of the country. 38 f. A partnership doesn’t possess a corporate status and each partner is severally and jointly liable. Each partner incurs unlimited personal liability for not only himself but for all other partners for any debts incurred by the partnership. 3. Limited Liability Companies or Corporation Forming and operating a corporation is more complicated and costly, but it's worth it for some small businesses. The main feature of limited companies and corporations that attracts small businesses is the limit they provide on their owners' personal liability for business debts and court judgments against the business. Another factor might be income taxes: You can set up a limited company or a corporation in a way that lets you enjoy more favorable tax rates. In certain circumstances, the business may be able to stash away earnings Characteristics of a Limited Company 1. Voluntary association of persons 2. Separate legal entity 3. Limited Liability 4. Separation of ownership from management 5. Transferability of shares 6. Perpetual existence 7. The ability to acquire broad capital base. 39 Advantages of Limited Company a. Greater permanency and stability of company life b. Limited liability in case of any loss c. Transfer of Owner is very easy d. The grab huge capital and investors Disadvantages of Limited Company a. Company formation is very complicated and requires legal work b. Double taxation c. Exploitation of shareholders d. Stock exchange speculation is harmful for shareholders 40