EBD Ch 3 Lecture Notes PDF

Chapter Three: Innovation and Pre-Start Up 3.1. Innovation and Its Types 3.1.1. Innovation Innovation is a key function in the entrepreneurial process. According to Drucker: Innovation is the specific function of entrepreneurship …. It is a means by which the entrepreneur either c...

Chapter Three: Innovation and Pre-Start Up 3.1. Innovation and Its Types 3.1.1. Innovation Innovation is a key function in the entrepreneurial process. According to Drucker: Innovation is the specific function of entrepreneurship …. It is a means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth. Innovation is the process by which entrepreneurs turn opportunities into viable, marketable ideas, acting as catalysts for change. Creativity is key to this process, as it generates ideas that enhance the efficiency or effectiveness of systems. Creativity involves two main aspects: process and people. In the context of creativity, process and people refer to distinct yet interconnected elements essential for generating innovative ideas and solutions. Process: This represents the structured, goal-oriented approach to creativity. The creative process generally involves stages designed to address specific challenges. This structure provides a roadmap for transforming initial thoughts into practical solutions. The process itself remains consistent, but it adapts to different problems, guiding efforts in a systematic way that enhances efficiency and focus. People: This aspect refers to the individuals or teams who engage in the creative process. People bring unique perspectives, skills, and experiences, which significantly influence the outcome. Each person’s approach to creativity will vary, contributing diverse insights that enrich the creative effort. Thus, while the process is structured, the people involved fill it with originality, adapting and applying the steps in novel ways to reach effective solutions. 3.1.1.1. The Nature of the Creative Process 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, some individuals have a great aptitude for creativity than others. Also, some people have been raised and educated in an environment that encouraged them to develop their creativity. They have been taught to think and act creatively. For others the process is more difficult because they have not been positively reinforced, and, if they are not creative, they must learn how to implement the creative process. 1 The creative process has five commonly agreed-on phases or steps. Most experts agree on the general nature and relationship among these phases, although they refer to them by a variety of names. Experts also agree that these phases do not always occur in the same order for every creative activity. For creativity to occur, chaos is necessary but a structured and focused chaos. We shall examine this five-step process using the most typical structural development. The process is explained by taking an example of the innovation process a Kenyan startup. Nzambi Matee is a Kenyan engineer and entrepreneur who founded Gjenge Makers (https://www.gjenge.co.ke/), a startup that turns plastic waste into eco-friendly, durable construction bricks. Frustrated by the plastic waste littering her community and its environmental impact, Nzambi set out to transform this waste into a useful resource. Phase 1: Idea Germination The germination stage is a seeding process. Most creative ideas can be traced to an individual’s interest in or curiosity about a specific problem or area of study. At this stage, Nzambi became aware of the growing plastic waste crisis in Kenya and its damaging environmental impact. This sparked her curiosity about whether this waste could be repurposed. She wondered if plastic could be used to create building materials, given its durability and abundance. Phase 2: Preparation Once a seed of curiosity has taken from as a focused idea, creative people embark on a conscious search for answer. If it is a problem they are trying to solve then they begin an intellectual journey, seeking information about a problem and how others have tried to resolve it. If it is an idea for a new product or service, the business equivalent is market research. Inventors will set up laboratory experiments, design will begin engineering new product ideas, and marketers will study consumers buying habits. In rare instances, the preparation stage will produce result. The preparation stage of Nzambi dove into research, studying the properties of plastic and exploring other materials used in construction. She analyzed how waste plastic might be processed to make something as strong and versatile as concrete bricks. She also looked into existing recycling technologies and spoke with engineers to understand technical challenges. Phase 3: Incubation Incubation is a stage of ―mulling it over‖ while the subconscious intellect assumes control of the creative process. This is a crucial aspect of creativity because when we consciously focus on a problem, we behave rationally to attempt to find systematic resolutions. When we rely on 2 subconscious processes, our minds are unhindered by limitations of human logic. The subconscious mind is allowed to wander and to pursue fantasies, and it is therefore open to unusual information and knowledge that we cannot assimilate in a conscious state. This subconscious process has been called the art of synectics, means a joining together of different and often unrelated ideas. Therefore, when a person has consciously worked to resolve a problem without success, allowing it to incubate in the subconscious will often lead to a resolution. For instance, after her research, Nzambi took a break to let the information "sit" and subconsciously process it. She reflected on her observations during her daily life, especially when she saw piles of plastic waste in her community. The subconscious reflection eventually helped her come up with a new approach to processing plastic in a way that could be molded into strong bricks. Phase 4: Illumination The fourth stage, illumination, occurs when the idea resurfaces as a realistic creation. The important point is that most creative people go through many cycles of preparation and incubation, searching for that incident as a catalyst to give their idea full meaning. Reaching the illumination stage separates daydreamers and tinkerers from creative people who find a way to transmute value. For Nzambi , One day, inspiration struck, and she realized she could mix plastic with sand and heat it to create an incredibly durable, lightweight brick. This breakthrough was her "aha" moment, giving her a clear idea of how to proceed. She began sketching designs for a small-scale machine that could carry out this process, envisioning how the materials could be effectively combined to make high-quality bricks. Phase 5: Verification An idea once illuminated in the mind of an individual still has little meaning until verified as realistic and useful. Entrepreneurial effort is essential to translate an illuminated idea into a verified, realistic, and useful application. Verification is the development stage of refining knowledge into application. This is often tedious and requires perseverance by an individual committed to finding a way to ―harvest‖ the practical result of his or her creation. More often, a good idea has already been developed, or the aspiring entrepreneur finds that competitors already exist. Inventors quite often come to this harsh conclusion when they seek to patent their products only to discover similar inventions registered. For instance , Nzambi tested her concept by creating a prototype of the brick-making machine and experimenting with different plastic and sand mixtures. After multiple trials, she developed a 3 final product that was durable, cost-effective, and suitable for construction. With positive feedback from initial testers, Nzambi launched her business, Gjenge Makers, to scale production. Her bricks gained recognition for their sustainability and strength, leading to demand from construction companies and a successful venture. 3.1.1.2. The Innovation Process Most innovations result from a conscious, purposeful search for new opportunities. This process begins with the analysis of the sources of new opportunities. Drucker has noted that because innovation is both conceptual and perceptual, would-be innovators must go out and look, ask, and listen. They look at figures. They look at people. They analytically work out what the innovation has to be to satisfy the opportunity. Then they go out and look at potential product users to study their expectations, values, and needs. Most successful innovations are simple and focused. They are directed toward a specific, clear, and carefully designed application. In the process they create new customers and new markets. Above all, innovation often involves more work than genius. As Thomas Edison once said, ―Genius is 1 percent inspiration and 99 percent perspiration.‖ Moreover, innovators rarely work in more than one area. For all his systematic innovative accomplishment, Edison worked only in the electricity field. 3.1.2. Type of Innovation Four basic types of innovation exist. These extend from the totally new to modifications of existing products or services. In order of originality, the following are the four types: 1. Invention: The creation of a new product, service, or process, often one that is novel or untried. Such concepts tend to be ―revolutionary.‖  Example: mPedigree (Ghana) created a unique technology for verifying the authenticity of pharmaceutical products via mobile phone codes. This innovative solution helps address the issue of counterfeit drugs in Africa, saving lives and improving healthcare safety. It represents invention because it introduced a novel technology to solve a significant health challenge. 2. Extension: the expansion of the product, service or process already in existence. Such concepts make different applications of current idea.  Example: Twiga Foods (Kenya) expanded on traditional food distribution by building a digital platform that links farmers with vendors to streamline the food supply chain. They 4  applied digital innovation to make fresh produce distribution more efficient. This is an extension as it builds on existing supply chains but uses modern technology to enhance distribution. 3. Duplication: The replication of an already existing product, service, or process. The duplication effort, however, is not simply copying but adding the entrepreneur’s own creative touch to enhance or improve the concept to beat the competition  Example: Jumia (Nigeria) is an e-commerce platform that replicated models like Amazon or Alibaba but adapted them to the African context by including local payment methods, logistics, and regional market preferences. Jumia added a regional approach to e-commerce, enhancing the model with localized adaptations to succeed in Africa. This qualifies as duplication because it replicates the e-commerce model but tailors it to the African environment. 4. Synthesis: the combination of existing concepts and factors into a new formulation. This involves taking a number of ideas or items already invented and finding a way so that together they form a new application.  Example: Gebeya (Ethiopia) combines online education and freelance job placement in one platform, focusing on developing and deploying African tech talent globally. By blending training, mentoring, and employment matching, Gebeya provides a comprehensive solution for skills development and job placement. This is synthesis as it integrates elements from edtech and freelancing platforms to form a new, unified service. 3.1.3. Principles of Innovation Potential entrepreneurs need to realize that innovation principles exist. These principles can be learned and, when combined with opportunity, can enable individuals to innovate. The following are the major innovation principles:  Be action oriented: Innovators always must be active and searching for new ideas, opportunities, or sources of innovation.  Make the product, process, or service simple and understandable: People must readily understand how the innovation works.  Make the product, process, or service customer-based: Innovators always must keep the customer in mind. The more an innovator has the end user in mind, the greater the chance the concept will be accepted and used. 5  Start small: Innovators should not attempt a project or development on a grandiose scale. They should begin small and then build and develop, allowing for planned growth and proper expansion in the right manner and at the right time.  Aim high: Innovators should aim high for success by seeking a niche in the marketplace.  Try/test/revise: Innovators always should follow the rule of try, test, and revise. This helps work out any flaws in the product, process, or service.  Learn from failures: Innovation does not guarantee success. More important, failures often give rise to innovations.  Follow a milestone schedule: Every innovator should follow a schedule that indicates milestone accomplishments. Although the project may run ahead or behind schedule, it still is important to have the schedule in order to plan and evaluate the project.  Work, work, work: This is a simple but accurate exhortation with which to conclude the innovation principles. It takes work – not genius or mystery – to innovate successfully. 3.1.4. Major Innovation Myths Presented next is a list of the commonly accepted innovation myths, along with reasons why these are myths and not facts. Myth 1: Innovation is fact and predictable: This myth is based on the old concept that innovation should be left to the research and development department under a planned format. In truth, innovation is unpredictable that may be introduced by anyone. Myth 2: Technical specifications should be thoroughly prepared: Thorough preparation often takes too long. Quite often it is more important to use a try/test/revise approach. Myth 3: Creativity relies on dreams and blue-sky ideas: Accomplished innovators are very practical people and create from the opportunities left by reality- not daydream. Myth 4: Big projects will develop better innovations than smaller ones: This myth has been proved false time and time again. Larger firms are now encouraging their people to work in smaller group, where it is often easier to generate creative ideas. Myth 5: Technology is the driving force of innovation: Technology is certainly one source for innovation, but it is not the only one. Moreover, the customer or market is the driving force behind any innovation. Market-driven or consumer-based innovations have the highest probability of success. 6 3.2. Marketing Research Overview Marketing research is the systematic design, collection, analysis, and reporting of data relevant to a specific marketing situation. It helps businesses understand the market's needs, preferences, and competitive landscape. A new venture can only thrive if there’s a market for its product or service. The Marketing Research Process 1. Define the Problem and Research Objectives The first step involves identifying what information is needed. Entrepreneurs must clearly define the problem or opportunity and outline objectives for the research. For instance, Flutterwave, a Nigerian fintech company, identified the problem of limited payment solutions for African businesses. Their objective was to understand local and international payment needs to create a user-friendly, scalable platform. 2. Develop the Research Plan A research plan is developed to determine how information will be gathered. This includes choosing the research methods, sampling techniques, and data sources (e.g., surveys, interviews, observations). For instance Jumia, an African e-commerce platform, used surveys and data analytics to assess customers’ online shopping behaviors across different regions in Africa before scaling operations. 3. Collect the Information Data collection involves gathering information based on the research plan. This can be done through quantitative methods (e.g., surveys, data analytics) and qualitative methods (e.g., focus groups, interviews). For instance, Sokowatch, a supply chain platform for informal retail stores in East Africa, collected data by visiting small stores to understand their supply needs and pain points. 4. Analyze the Information Once data is collected, it is analyzed to identify trends, patterns, and actionable insights. Analysis often includes interpreting customer demographics, behaviors, and market preferences. For instance, mPharma, a Ghana-based health tech startup, analyzed data from pharmacies and clinics to understand drug pricing and availability challenges in the African healthcare system. 5. Present the Findings 7 Findings are organized into a clear, concise report, often using visual aids like charts and graphs to make data easy to understand. This report should provide actionable recommendations. For example, Twiga Foods, a Kenyan B2B (business to business) food distribution company, used findings from market research to convince investors of the demand for streamlined food distribution in urban Kenya. 6. Make the Decision Based on the research findings, entrepreneurs make strategic decisions regarding product launches, target markets, and marketing tactics. Moringa School, a Kenyan tech education startup, used its research findings on local tech job demand to shape its curriculum and expand into neighboring countries. 3.2.1. Market Research in the Pre-Start-Up Phase Before committing to a business, entrepreneurs should conduct market research to validate their ideas and understand market dynamics. 1. Who is the Customer? Understanding customer demographics and characteristics is key to targeting the right audience.  Sex and Age  Occupation and Education  Income Status  Other Characteristics For example, Thrive Agric, a Nigerian agritech platform, targets farmers and investors by considering their income levels, tech adoption, and willingness to invest in farming. 2. Where is the Market? Market research helps in evaluating market size, location, and specific characteristics.  Market Size and Changes  Local Market Characteristics  Segmenting the Market For instance, Andela, a tech talent development company, segmented the market to train African developers based on the growing demand for remote tech talent globally. 3. Competition: Who are the Market Players? Identifying competitors helps businesses find unique ways to differentiate their products or services. For example, PiggyVest, a Nigerian savings and investment platform, identified competitors like traditional banks and fintech startups, positioning themselves uniquely by offering flexible saving options for young people. 8 4. Distribution: How Will Customers Be Reached? Entrepreneurs need to decide how to make products available to customers through the right channels, whether physical stores, online platforms, or direct sales. Yoco, a South African payment solutions provider, reaches small businesses by offering easy-to-use mobile card machines and an accessible online app. 3.2. Business Model Development (Business Model Canvas) A business model outlines how a company creates, delivers, and captures value. It defines how the business operates, generates revenue, and serves its customers. A common pitfall for startups is the focus on product and technology development while overlooking the development of a solid business model. This course corrects that approach by prioritizing the "business" aspects, ensuring that students understand how to make their ventures profitable and sustainable. 3.2.1. The Business Model Canvas Developed by Alexander Osterwalder, the Business Model Canvas is a visual representation that breaks down a business into nine essential components. It provides a blueprint to design, invent, and refine business models with clarity and precision. The Nine Building Blocks of the Business Model Canvas Each business model is structured around nine building blocks, enabling entrepreneurs to address the main areas necessary for business success: 9  Designed for: Designed by: Date: Version: Business Model Canvas Key Partners Key Activities Value Propositions Customer Relationships Customer Segments Who are our Key Partners? Who What Key Activities do our Value What value do we deliver to the What type of relationship does each of For whom are we creating value? are our key suppliers? Which Key Propositions require? Our Distribution customer? Which one of our our Customer Segments expect us to Who are our most important Resources are we acquiring from Channels? Customer Relationships? customer’s problems are we helping to establish and maintain with them? customers? Is our customer base a partners? Which Key Activities do Revenue streams? solve? What bundles of products and Which ones have we established? Mass Market, Niche Market, partners perform? services are we offering to each How are they integrated with the rest Segmented, Diversified, Multi-sided CATEGORIES: Customer Segment? Which customer of our business model? How costly are Platform MOTIVATIONS FOR Production, Problem Solving, needs are we satisfying? they? PARTNERSHIPS: Optimization Platform/Network and economy, Reduction of risk CHARACTERISTICS: Newness, and uncertainty, Acquisition of Performance, Customization, “Getting particular resources and activities the Job Done”, Design, Brand/Status, Key Resources Channels Price, Cost Reduction, Risk What Key Resources do our Value Through which Channels do our Reduction, Accessibility, Propositions require? Our Distribution Customer Segments want to be Convenience/Usability Channels? Customer Relationships reached? How are we reaching them Revenue Streams? now? How are our Channels TYPES OF RESOURCES: Physical, integrated? Which ones work best? Intellectual (brand patents, copyrights, Which ones are most cost-efficient? data), Human, Financial How are we integrating them with customer routines? Cost Structure Revenue Streams What are the most important costs inherent in our business model? Which Key Resources are For what value are our customers really willing to pay? For what do they currently pay? How are most expensive? Which Key Activities are most expensive? they currently paying? How would they prefer to pay? How much does each Revenue Stream IS YOUR BUSINESS MORE: Cost Driven (leanest cost structure, low price value proposition, contribute to overall revenues? maximum automation, extensive outsourcing), Value Driven (focused on value creation, TYPES: Asset sale, Usage fee, Subscription Fees, Lending/Renting/Leasing, Licensing, Brokerage premium value proposition). fees, Advertising SAMPLE CHARACTERISTICS: Fixed Costs (salaries, rents, utilities), Variable costs, FIXED PRICING: List Price, Product feature dependent, Customer segment dependent, Volume Economies of scale, Economies of scope dependent DYNAMIC PRICING: Negotiation (bargaining), Yield Management, Real-time-Market 10 1. Customer Segments Customer segments refer to the various groups of people or organizations that a business targets to reach and serve. Identifying and focusing on specific market segments is essential to understanding the unique needs and characteristics of each group, allowing for a more tailored approach in product or service delivery. For instance, Nigeria’s fintech company Flutterwave addresses the diverse needs of both small businesses and large enterprises across Africa by offering customized financial solutions that cater to the unique requirements of each segment. 2. Value Propositions Value propositions define the unique products or services that fulfill customers' needs and differentiate a business from its competitors. This distinction is crucial in persuading customers to choose one business over another. Various forms of value—such as newness, performance, customization, accessibility, price, convenience, design, and risk reduction— contribute to this uniqueness. A notable example is Twiga Foods in Kenya, which supports retailers with a streamlined supply chain for fresh produce, ensuring affordable access to food while helping farmers secure reliable market opportunities. 3. Channels Channels represent the means by which a business communicates with and reaches its customers to deliver its value propositions effectively. Establishing efficient and cost- effective channels is essential and may include direct sales, online platforms, or retail partnerships. A prominent example in Africa is Jumia, an e-commerce platform that reaches customers across the continent through online sales, supplemented by local distribution networks and pick-up stations to enhance accessibility and convenience. 4. Customer Relationships Customer relationships encompass the strategies a company adopts to create, nurture, and sustain connections with its customers. Developing strong relationships is critical for building loyalty and boosting customer satisfaction, often achieved through approaches like customer acquisition, retention, and fostering sales growth. In Ghana, for example, mPharma works closely with pharmacies to ensure the availability of affordable medications, thus building lasting relationships with both end customers and healthcare providers. 11 5. Revenue Streams Revenue streams are the methods by which a business generates income from each customer segment. Different types of revenue models include asset sales, subscriptions, usage fees, leasing, licensing, brokerage fees, and advertising. A successful African example is Andela, a talent outsourcing company that connects African software engineers with global tech firms, generating income through contract-based and subscription revenue models that cater to international clients. 6. Key Resource Key resources are the vital assets a business requires to deliver its value propositions, serve customers, and generate revenue. These resources can be physical, intellectual, human, or financial. In Kenya, Safaricom’s M-Pesa service relies heavily on telecommunications infrastructure and a network of agents to enable mobile money transactions, making financial services accessible to millions who previously had limited banking options. 7. Key Activities Key activities are the core tasks a business must undertake to ensure that its model functions effectively. These activities are tailored to each business model and are essential for delivering value, maintaining customer relationships, and sustaining revenue. In Nigeria, Konga, an e-commerce company, focuses on key activities like order fulfillment, inventory management, and customer service, which are crucial for its competitive position in the market. 8. Key Partnerships Key partnerships include the network of suppliers and collaborators a business needs to optimize operations, minimize risks, and acquire essential resources. Partnerships can be instrumental in expanding reach and capability. In Rwanda, Zipline exemplifies effective partnerships by collaborating with governments and health organizations to deliver medical supplies via drones to remote areas, greatly extending its service reach. 9. Cost Structure The cost structure outlines the significant expenses involved in operating a business model, including fixed and variable costs, as well as economies of scale and scope. For instance, Farmcrowdy in Nigeria follows a cost-driven approach by using a digital platform that 12  minimizes traditional overheads. This model connects farmers with investors, lowering costs while supporting a more efficient and scalable business structure. 3.3. Business planning A business plan is a written document crafted by the entrepreneur to outline essential internal and external factors involved in launching a new venture. It serves as a roadmap, integrating strategies across marketing, finance, operations, and human resources. Essentially, a business plan answers three core questions: Where am I now? Where am I going? How will I get there? It also serves as a tool for securing investment or loans, often referred to as a venture plan, loan proposal, or game plan. 3.3.1. Contents and Structure of a Business Plan A comprehensive business plan generally consists of ten sections. 1. Introductory Page: Contains the company’s name, contact information, a brief company description, financing needed, and a confidentiality statement. 2. Executive Summary: Typically, 2-3 pages and prepared after the plan, the executive summary should capture investor interest by highlighting the business concept, market potential, strategy, expected financial outcomes, and entrepreneur’s relevant experience. This section is critical as investors decide here whether to continue reading. 3. Environmental and Industry Analysis To put a new venture in context, entrepreneurs must analyze external environments and industry conditions. This helps identify trends that can influence success. Environmental factors include:  Political Factors: Government stability, trade policies, tax laws, and investment incentives are essential to understand. Favorable tax breaks or subsidies for local businesses in Ethiopia have encouraged sectors like agriculture and textiles, benefiting startups that focus on local production and exports. Shifts in political priorities can influence market conditions. For instance, government support for digital transformation initiatives has helped Ethiopian tech startups like Gebeya, a talent marketplace for tech freelancers, leverage increased funding and support.  Economy: Track indicators like GDP, unemployment rates, and disposable income. For instance, Ethiopian entrepreneur Bethlehem Tilahun considered global demand for ethically sourced products to scale her brand, SoleRebels. 13  Culture: Evaluate demographic shifts, lifestyle trends, and values. Ethiopian agritech startups, for example, have tapped into rising local demand for eco-friendly, sustainable practices as awareness grows.  Technology: Analyze emerging technologies. Digital platforms like ZayRide, a taxi-hailing app, seized the smartphone penetration trend in Ethiopia to offer innovative transport solutions.  Legal Concerns: Pay attention to regulations affecting business operations, including tax policies, product safety, and advertising laws. Changes here can impact distribution, pricing, or promotional tactics. This environmental scan aids in adapting strategies and identifying market opportunities. 4. Industry Analysis should follow, examining specific trends in:  Industry Demand: Understand if the market is growing, the entry of competitors, and evolving consumer needs.  Competition: Identify key competitors, their strengths, and weaknesses. This helps shape a unique market position. 5. Description of the Venture Outline the business scope and mission, beginning with a clear Mission Statement that encapsulates the venture’s purpose and goals. Essential components include:  Product/Service Description: Describe features, benefits, and innovations.  Location and Size: Decide on the physical or digital reach of the business.  Personnel and Equipment Needs: Specify human resources and essential assets.  Background of Entrepreneur(s): Highlight experience and motivation. For instance, when launching soleRebels, Bethlehem Tilahun Alemu emphasized her mission to create fair-wage jobs and showcase Ethiopian craftsmanship. 6. Marketing Plan This section explains strategies for distributing, pricing, and promoting the product or service. Key aspects include:  Product/Service Details: Describe product features, design, packaging, and service procedures to make the concept tangible. 14  Competitive Analysis: Examine competitor strengths and weaknesses. An Ethiopian restaurant, for example, should consider both direct (other full-service restaurants) and indirect competitors (fast food or delivery services).  Pricing Objectives: Set quantifiable goals like profit targets or market share. Pricing objectives guide the business on whether to prioritize high sales volumes or premium profit margins.  Pricing Policies: Outline how pricing will adapt seasonally, match competitors, or offer employee discounts. For example, startups often leverage introductory discounts to attract initial customers.  Price Determination: Account for direct (product purchase or labor) and indirect (rent, utilities) costs. Set prices that cover expenses and achieve profit margins.  Promotion: Determine a mix of direct marketing, advertising, sales promotions, and public relations to reach customers. For instance, ZayRide uses social media ads for targeted local promotion. 7. Production or Operational Plan For manufacturing ventures, a production plan outlines the full production process, including:  Subcontracting: If outsourcing, include subcontractor details, costs, and contracts.  In-house Production: Describe plant layout, machinery, raw materials, suppliers, manufacturing costs, and future equipment needs. For retail or service businesses, this is the Operational Plan, detailing each step in the service or sales process. 8. Organizational Plan Describes ownership structure (sole proprietorship, partnership, or corporation). Include:  Partnership Terms or Corporation Details: If applicable, describe shares, and key stakeholders.  Organization Chart: Clarifies lines of authority and responsibilities. 9. Assessment of Risk Identifying and managing potential risks:  Risk Identification: List risks (e.g., competitor actions, technology changes).  Impact Analysis: Explain potential impacts if risks materialize.  Mitigation Strategy: Outline strategies to prevent, minimize, or respond to each risk. 15 10. Financial Plan Shows investment needs and financial viability:  Start-up Costs: Lists expenses before launch, like inventory, machinery, and training.  Funding: Details financing sources, repayment plans, and any equity options.  Financial Projections: Includes cash flow (monthly for year one, annually for years two and three), profit forecasts, and balance sheets. Key Financial Statements 1. Projected Balance Sheet: Snapshot of assets (cash, equipment) and liabilities (loans, accounts payable) at a specific date. 2. Projected Income Statement: Lists sales, costs of goods, and net profit. 3. Cash Flow Statement: Tracks inflow and outflow to ensure liquidity. Table 2: Financing needs for various stages of development 1. Stage of development Financing needs 2. Pre-start-up prototype development, site acquisition, business plan preparation, research and development, market research 3. Start-up Inventory, plant and equipment, grand opening advertising, professional fees, prepaid expenses 4. Post-start-up Advertising, sales expenses, wages and salaries, rent, utilities, additional inventories, seasonal/cyclical cash flow needs 5. Growth Facility expansion, additional distribution methods, geographical expansion, acquisitions, cost of underwriting more financing Financing Options  Debt Financing: Loans with interest but requiring repayment. It is provided to the venture in exchange for interest payment and does not include the ownership provision. Debt capital is the financing that a small business owner has borrowed and must repay with interest.  Equity Financing: Investors receive ownership and potentially dividends but share in business risks. Equity financing is capital provided in exchange for ownership. Equity 16 financing represents the personal investment of the owner (or owners) in a business, and it is called risk capital. 17