Entrepreneurship Handout PDF

ENTREPRENEURSHIP COURSE CONTENT ITEM PAGE 1. Concept of Entrepreneurship………………………………………………………………………………………………………………2 2. Business Idea and Opportunities………………………………………………………………………………………………………….8 3. Personal Attributes and Chara...

ENTREPRENEURSHIP COURSE CONTENT ITEM PAGE 1. Concept of Entrepreneurship………………………………………………………………………………………………………………2 2. Business Idea and Opportunities………………………………………………………………………………………………………….8 3. Personal Attributes and Characteristics……………………………………………………………………………………………10 4. Environment Scanning……………………………………………………………………………………………………………………….12 5. Feasibility Study…………………………………………………………………………………………………………………………………19 6. Business Plan……………………………………………………………………………………………………………………………………23 7. Forms of Business Ownership…………………………………………………………………………………………………………….30 8. References…………………………………………………………………………………………………………………………………………32 “Small opportunities are often the beginning Of great enterprises” Demosthenes (385 – 322 BC) 1  CONCEPT OF ENTREPRENEURSHIP Introduction Entrepreneurship has assumed super importance for accelerating economic growth both in developed and developing countries. It promotes capital formation and creates wealth in country. It is hope and dreams of millions of individuals around the world. It reduces unemployment and poverty and it’s a pathway to prosper. Entrepreneurship is the process of searching out opportunities in the market place and arranging resources required to exploit these opportunities for long term gains. It is the process of planning, organizing, opportunities and assuming. Thus it is a risk of business enterprise. It may be distinguished as ability to take risk independently to make utmost earnings in the market. It is a creative and innovative skill and adapting response to environment of what is real. What is Entrepreneurship? Entrepreneurship has been defined by different people in different ways. Some of these definitions are as follows; a) Entrepreneurship is considered as the combination of an entrepreneur and an enterprise. Organizing an enterprise is described as entrepreneurship (an enterprise being defined as a unit of economic activities). b) Entrepreneurship can be described as a creative and innovative response to the environment. Such responses can take place in any field-business, industry, agriculture, education etc. therefore it refers to a process of doing new things or doing things that are already being done in a new way. c) Entrepreneurship is the cycle of activities starting from the conception of the investment opportunity to successfully transforming the activity into the viable business reality d) Entrepreneurship is the art of creating or developing a business through innovation, creativity, progressive imagination and risk taking initiatives. Who is an Entrepreneur? Just like entrepreneurship an entrepreneur as been defined in different ways. Some of these definitions are as follows: a) Going by the definition of entrepreneurship in d) above, an entrepreneur is a person who upon identifying a viable business opportunity uses innovation, creativity, progressive imagination and risky taking initiative to start a new business or develop an existing one. b) Generally speaking, an entrepreneur is the owner of the business who contributes the capital and bears the risk of uncertainties in business life. c) In the present techno-economic context, an entrepreneur is one who; 2   Scans the environment for business opportunities  Evaluates the business opportunities in the context of the personal capabilities, strengths and weaknesses  Arranges for the capital and obtains the necessary licenses required to start an enterprise  Acts as a guarantor for the financial institutions  Acquires or develops technical know-how  Starts and runs the unit TYPES OF ENTREPRENEURS Entrepreneurs can be described in different ways. One way is to describe them as Pulled and Pushed entrepreneurs. PULLED ENTREPRENEURS These are those that are attracted into business because of their role models or they have associated themselves with successful entrepreneurs and attempt to emulate them. They have a pressing desire to run own business right from the start and are generally more appreciated to start business. They have a higher success rate. PUSHED ENTREPRENEURS These are those that are forced to venture into business by circumstances beyond their control. For example, retrenched, retired, declared redundant or dismissed. They are forced to engage in business for purposes of survival and normally conduct through trial and error. They usually have low success rate. Entrepreneurs can also be categorized as social, serial or lifestyle entrepreneur. SOCIAL ENTREPRENEUR A social entrepreneur is motivated by a desire to help, improve and transform social, environmental, educational and economic conditions. Key traits and characteristics of highly effective social entrepreneurs include ambition and a lack of acceptance of the status quo or accepting the world "as it is". The social entrepreneur is driven by an emotional desire to address some of the big social and economic conditions in the world, for example, poverty and educational deprivation, rather than by the desire for profit. Social entrepreneurs seek to develop innovative solutions to global problems that can be copied by others to enact change. Social entrepreneurs act within a market aiming to create social value through the improvement of goods and services offered to the community. Their main aim is to help offer a better service improving the community as a whole and are predominately run as non profit schemes. Zahra et al. (2009: 519) 3 said that “social entrepreneurs make significant and diverse contributions to their communities and societies, adopting business models to offer creative solutions to complex and persistent social problems”. SERIAL ENTREPRENEUR A serial entrepreneur is one who continuously comes up with new ideas and starts new businesses. In the media, the serial entrepreneur is represented as possessing a higher propensity for risk, innovation and achievement. Serial entrepreneurs are more likely to experience repeated entrepreneurial success. They are more likely to take risks and recover from business failure. LIFESTYLE ENTREPRENEUR A lifestyle entrepreneur places passion before profit when launching a business in order to combine personal interests and talent with the ability to earn a living. Many entrepreneurs may be primarily motivated by the intention to make their business profitable in order to sell to shareholders. In contrast, a lifestyle entrepreneur intentionally chooses a business model intended to develop and grow their business in order to make a long-term, sustainable and viable living working in a field where they have a particular interest, passion, talent, knowledge or high degree of expertise. A lifestyle entrepreneur may decide to become self-employed in order to achieve greater personal freedom, more family time and more time working on projects or business goals that inspire them. A lifestyle entrepreneur may combine a hobby with a profession or they may specifically decide not to expand their business in order to remain in control of their venture. Common goals held by the lifestyle entrepreneur include earning a living, doing something that they love, earning a living in a way that facilitates self-employment, achieving a good work/life balance and owning a business without shareholders. Many lifestyle entrepreneurs are very dedicated to their business and may work within the creative industries or tourism industry, where a passion before profit approach to entrepreneurship often prevails. While many entrepreneurs may launch their business with a clear exit strategy, a lifestyle entrepreneur may deliberately and consciously choose to keep their venture fully within their own control. Lifestyle entrepreneurship is becoming increasing popular as technology provides small business owners with the digital platforms needed to reach a large global market. Younger lifestyle entrepreneurs, typically those between 25 and 40 years old, are sometimes referred to as Treps. What is Intrapreneurship? Intrapreneurship is the practice of entrepreneurship by employees within the organization. Differences between Entrepreneurship and Intrapreneurship Entrepreneurship is the practice of embarking on a new business or reviving an existing business by pooling together a bunch of resources, in order to exploit new found opportunities. An entrepreneur 4 takes substantial risk in being the owner and operator of a business with expectations of financial profit and other rewards that the business may generate. On the contrary, an intrapreneur is an individual employed by an organization for remuneration, which is based on the financial success of the unit he is responsible for. Intrapreneurs share the same traits as entrepreneurs such as conviction, zeal, and insight. As the intrapreneur continuous to express his idea vigorously, it will reveal the gap between the philosophy of the organization and the employee. If the organization supports him is pursuing his ideas, he succeeds. If not, he is likely to leave the organization and set up his own. What is creativity? Creativity refers to the phenomenon whereby a person creates something new (a product, a solution, a work of art etc.) that has some kind of value. What counts as "new" may be in reference to the individual creator, or to the society or domain within which the novelty occurs. What counts as "valuable" is similarly defined in a variety of ways. Scholarly interest in creativity ranges widely: Topics to which it is relevant include the relationship between creativity and general intelligence; the mental and neurological processes associated with creative activity; the relationship between personality type and creative ability; the relationship between creativity and mental health; the potential for fostering creativity through education and training, especially as augmented by technology; and the application of an individual's existing creative resources to improve the effectiveness of learning processes and of the teaching processes tailored to them. Creativity and creative acts are therefore studied across several disciplines - psychology, cognitive science, education, philosophy (particularly philosophy of science), technology, theology, sociology, linguistics, business studies, and economics. As a result, there are a multitude of definitions and approaches. What is Innovation? The term innovation derives from the Latin innovatio,the noun of action from innovare. The Etymology Dictionary further explains innovare as dating back to 1540 and stemming from the Latin innovatus, pp. of innovare "to renew or change," from in- "into" + novus"new". The central meaning of innovation thus relates to renewal or improvement, with novelty being a consequence of this improvement. For an improvement to take place it is necessary for people to change the way they make decisions, or make choices outside of their norm. Schumpeter C.S. (~1930) states that "innovation changes the values onto which the system is based". When people change their value system, the old (economic) system will change to make room for the better one. When that happens innovation has occurred. Innovation can be seen as something that does, not something that is. 5 On a lower level, innovation can be seen as a change in the thought process for doing something, or the useful application of inventions or discoveries. It may refer to incremental, emergent, or radical and revolutionary changes in thinking, products, processes, or organizations. Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice. In many fields, such as the arts, economics and government policy, something better must be substantially different to be innovative. In economics the change must increase value, customer value, or producer value. The goal of innovation is positive change, to make someone or something better. Innovation and the introduction of it that leads to increased productivity is a fundamental source of increasing wealth in an economy. DIFFERENCES BETWEEN EMPLOYMENT AND ENTREPRENEURSHIP (SELF-EMPLOYMENT) Self-employed are those workers who earn a living by running their own business. Examples include plumbers, gardeners and freelance photographers etc. Many people start their business adventure dreaming of riches and freedom. And while both are certainly possible, the first thing to understand is that there are trade offs in being self employed. Difficulty bosses, annoying co-workers, peculiar policies, demand upon your time and limits on how much money you can make are traded for independence, creativity, opportunities, and power. But by the same token, you also swap a regular paycheque and benefits for no paycheque and no benefits. A life of security, comfort, and regularity is traded for one of uncertainty There are definitely pros and cons to be self-employed. Advantages of Self Employment  Control. Even if you like your boss and your job, possibilities remain that you can be laid off any time; the company can go bankrupt. But if you are self-employed, you are in control of you work and career  Money. Many people chose to be self-employed because they think they are more money worth than they are making on a job or they want to provide a better life for their families. There is a limit to what amount of money one can make when employed. There are far fewer limits when you are an entrepreneur  Creativity and independence. Self employment provides for great creativity and independence. Running your own business may require you to be a marketing wizard, salesman, bookkeeper, secretary and manager all rolled into one  Freedom. Working at your own business gives you the flexibility to decide when and where you will work. You decide your hours and place of business  Gender. In entrepreneurship anyone whether male or female can start any enterprise of their choice whereas in employment, certain are specifically designed for specific gender  Age discrimination. An entrepreneur can be of any age whilst an employee should be of a specific age 6 Disadvantages of Self Employment  Uncertainty. The life of an entrepreneur is not necessary an easy one. It is fun. It is challenging, exciting, spontaneous. The hardest part of being in business for your self is that there is no steady source of income; paycheque does not come every 30 days  Risk. Not all entrepreneur ventures are successful. The willingness to take a smart, calculated risk is the hallmark of smart entrepreneurs  Lack of structure. Many people like the structure for working for someone’s. They know what is expected of them and what they need to accomplish each day. This is not true when you work for yourself. The work is very unpredictable There is need to consider both risks and rewards of entrepreneurship before deciding to jump in. It is easy to become infatuated with the idea of owning a business. But if one was to do it right, and be successful, then there is need to take emotions out of the equation. One has to begin thinking like a businessman, consider risks, and make informed, intelligent, calculated decisions 7  BUSINESS IDEA AND OPPORTUNITIES What is a business Idea? A business idea is a concept or a response to a particular problem, if properly worked on and planned for, can translate into a business enterprise. It is a short and precise description of the basic operations of the business. It will tell you; Business ideas are the seed of the enterprise development. An entrepreneur’s initial task is to scan the environment and create new business ideas. It is from the created ideas that bring about opportunity identification. The business idea will tell you the following:  What product or service your business will sell  Who your business is going to sell to  How your business is going to sell its products or services  Which need your business will fulfill Finding a Sound Idea for your Business STEP 1: Be alert to see a need for a new product/service or a way to improve an existing product. Ask yourself the following questions  What problem(s) will my product/service solve?  Which type of people needs this product/service to solve their problems? STEP 2: Define the features, advantages and benefits of your product/service  Features are what the product is made of  Advantages are what the features can do  Benefits are the values the product gives to the customer by using it STEP 3: Find ways of achieving the results you want from the product/service. By selling the product you may want to achieve one of the following objectives;  You want to realize enough profit so you can become financially secure  You want to use the profit for improving or expanding your business  Or you want to better education for your children After setting you objectives, you should now find methods on how to sell the product to realize the results. Sources of Innovative and Creative Ideas  Develop the basic idea for you business from your hobby or special interest  Be on the lookout for shortcomings in the existing products/services  Find extraordinary uses for ordinary things 8   Turn changes in the society into a business opportunity  Capitalize on necessity, the mother of invention  Spinning off from your present job BUSINESS OPPORTUNITIES A business opportunity is a business (economic) idea which can be adjusted to new situations to make or start a business and earn profit. It can be ideas, chances, situations or things that if seen and realized can be used to provide the economic value and benefit those who utilize them They are many opportunities that can make people venture into entrepreneurship. Identification of those opportunities and knowing their economic value will make someone successful in business. Some of the business opportunities are explained below.  Skill/Knowledge. A skill is the technical expertise that one posses in a particular field or vocation (e.g. metal fabrication, computer repair and maintenance). If you posses a skill or knowledge in a particular field or vocation, that already is the business opportunity readily available to you.  Availability of Resources. The quantity and quality of resources and how they are used determine the amount of profit to be generated from business. Examples of resources include human resource, finance, raw materials, finished products, machinery, equipment, land, buildings, time etc. Therefore, you need to know the economic value that is in each resource in and around you. Then that becomes the key to identifying resources as a business opportunity that you can utilize for your economic benefit.  Government Policies. Government policies are in themselves a business opportunity. For example government promotes agriculture and has put in some incentives like subsidies on inputs and tax free on imported agriculture equipment.  Problems in the Community. Problems existing in the community are a potential business opportunity e.g. shortages of commodities like food, clothing, building materials etc can present an opportunity for one to start a business.  Culture, Traditions and Religions. The growing trend of celebrating cultural and tradition ceremonies in Zambia, has presented an opportunity for fashion and knitting designers to design and make attire which suits each ceremony.  Shortcomings in the Existing Product. Some products or services are do not satisfy the customers’ needs properly e.g. Poor quality products. Therefore, in trying to come up with a better product/service, can present a good business opportunity.  Becoming a Middleman. Many business organizations from other parts of the world may want to work with a local person with suitable business credentials. Therefore this can present a very good business opportunity. 9  PERSONAL ATTRIBUTES AND CHARACTERISTCS Introduction The most significant influence on an individual's decision to become an entrepreneur is workplace peers and the social composition of the workplace. Entrepreneurs also often possess innate traits such as extroversion and a propensity for risk-taking. According to Schumpeter, an entrepreneur characteristically innovates, introduces new technologies, increases efficiency, productivity, or generates new products or services. An entrepreneur acts as a catalyst for economic change and research indicates that entrepreneurs are highly creative individuals who imagine new solutions by generating opportunities for profit or reward. The need to move from the formal-job-dependent syndrome to the enterprising position must be supported or backed by entrepreneurial attributes. Some of the attributes are as follows; a) Hard work This is the application of one’s maximum effort when doing work. It may be physical, mental or both. Always remember that business is not for lazy people and not only should you work hard but should also enjoy working hard. b) Creativity This is the ability to do something new. It may be a new business idea or product/service that is one way of keeping and attracting customers and to stay in business. c) Innovative This is the ability to come up with or do something different e.g. a different business idea/product/service. An entrepreneur must strive to come with something different and must also be able to adapt to different changes in the running of business. d) Intelligent This is the ability to think, analyze and act appropriately to a given circumstance or situation. Intelligent people think before they act and as an entrepreneur you need to abide by this same simple rule. e)Risk taking: They have an inclination to take calculated, moderate and, intelligent risks i.e they tend to avoid both excessively high as well as low risks f) Efficient This the ability to make the best use of the resources available to achieve a set goal or objective g) Honesty 10 You need to build confidence and trust between people who include customers, suppliers or lenders. At no given time should anyone dealing with you feel heated as or betrayed just as you would not want to be cheated betrayed. h) Courageous This is the ability of not fearing. It may be fear to take a decision or action because of anticipated consequences or risks. i) Information Seeking This is the ability to lookout for useful information. A lot of things do take place in the business world and an entrepreneur can get to know these things by being an information seeker. Therefore keep abreast with current affairs as this may help you to expand you business. j) Goal Setting The ability to determine in advance what you want to achieve in future, short or long term k) Discipline This is the ability to conform to set and accepted rules and regulations written or unwritten. It is the order of doing things and where there is order there is progress. l) Practicability This is the ability to perform. Ideas should be applied into real action to yield results and become beneficial to the entrepreneur and the community in general. 11  ENVIRONMENTAL SCANNING Introduction All businesses operate in an environment. There are people, natural resources and organizations in the environment. Understanding the environment will reduce the uncertainties and provides evidence for opportunities. Description of Environmental Scanning Now that you have identified one business idea you want to develop, you must understand that your business will operate in an environment. The environment that you will be operating in include customers, industry, government, national bodies, labour, private individuals, competitors, suppliers, employees etc. The other term for the environment is surroundings. Scanning is checking or examining. Understanding the surroundings will reduce the uncertainties. The Importance of Environmental Scanning; Environmental scanning is important for these reasons:  Spot important economic, social, cultural, environmental, health, technological, and political trends, situations, and events in the country and outside that may have an effect on your business  Identify the potential opportunities and threats for the business arising from these trends, situations, and events  Achieve an accurate understanding of your business’s strengths and weaknesses  Present a support for study of future opportunities Techniques of Environmental Scanning There are a number of techniques you can use to carry out an environmental assessment. This module will cover the following techniques: 1. BPEST Analysis; 2. Porters Five Force Model; 3. SWOT analysis; 4. Value Chain Analysis 1. BPEST Analysis BPEST analysis is concerned with the environmental influences on a business. The acronym stands for the Business Political, Economic, Social and Technological issues that could affect the strategic development of a business. It is a part of the external analysis when carrying out environmental scanning or doing market research, and gives an overview of the different environmental factors that an 12 enterprise has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. BUSINESS ENVIRONMENT This is where you analyse the environment from the business perspective. Under business you look at the state of the industry, both current and projected, whether it is good or not. You should also find out about the following:  How is the market in terms of current and projected demand  How do the buyers behavior on the market  Are there in possibilities of new entrants on the market  How reliable are the suppliers  Are there any business association you can affiliate yourself to POLITICAL ENVIRONMENT Political factors are how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have great influence on the health, education, and infrastructure of a nation  ECONOMIC ENVIRONMENT Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy  SOCIAL ENVIRONMENT Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how that company operates. For example, an aging population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).  TECHNOLOGICAL ENVIRONMENT Technology factors include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum 13 efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation. 2. PORTERS FIVE FORCE MODEL Michael Porter's famous Five Forces of Competitive Position model provides a simple perspective for assessing and analyzing the competitive strength and position of a corporation or business organization Five competitive forces influence the level of competition in an industry which finally will have a say on the level of profit in a particular industry. The competitive forces are:  The threat of new entrants to the industry;  The threat of substitute products or services;  The bargaining power of customers;  The bargaining power of suppliers  The rivalry of current competitors The threat of new entrants to the industry – a new entrant into an industry will bring extra capacity and more competition The threat of substitute products or services – a substitute product or service produced by another industry satisfying the same needs of the customers; The bargaining power of customers - customers want better products at lower prices. Meeting this want may result in the lowering of profitability; The bargain power of suppliers – suppliers can apply force to obtain higher prices for their products and services. The rivalry of current competitors – the higher the rivalry the likely possibility of lowering prices and high investment in marketing to beat competition which may results in low profitability 14 3. SWOT ANALYSIS SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It is a tool for auditing an enterprise and its environment. It is the first stage of planning and helps entrepreneurs and marketers to focus on key issues. Strengths and weaknesses are internal factors. Opportunities and threats are external factors. In SWOT, strengths and weaknesses are internal factors. For example, a strength could be:  Your specialist marketing expertise.  A new, innovative product or service.  Location of your business.  Quality processes and procedures.  Committed and caring staff  Any other aspect of your business that adds value to your product or service. 15 A weakness could be:  Lack of marketing expertise.  Undifferentiated products or services (i.e. in relation to your competitors).  Location of your business (e.g. located far away from customers)  Poor quality goods or services.  Damaged reputation. An opportunity could be:  A developing market such as the Internet.  Mergers, joint ventures or strategic alliances.  Moving into new market segments that offer improved profits.  A new international market.  A market vacated by an ineffective competitor. A threat could be:  A new competitor in your home market.  Price wars with competitors.  A competitor has a new, innovative product or service.  Competitors have superior access to channels of distribution.  Taxation is introduced on your product or service. You should be careful when using SWOT analysis because it can be very subjective. Do not rely on SWOT too much. Two people rarely come-up with the same final version of SWOT. Simple Rules for Successful SWOT Analysis.  Be realistic about the strengths and weaknesses of your organization when conducting SWOT analysis.  SWOT analysis should distinguish between where your organization is today, and where it could be in the future.  SWOT should always be specific. Avoid grey areas.  Always apply SWOT in relation to your competition i.e. better than or worse than your competition.  Keep your SWOT short and simple.  Avoid complexity and over analysis Once key issues have been identified with your SWOT analysis, they feed into marketing objectives. SWOT can be used in conjunction with other tools for audit and analysis, such as BPEST analysis and Porter's Five-Force analysis. 16 4. VALUE CHAIN ANALYSIS Value Chain Analysis is tool for working out how you can create the greatest possible value for your customers, as well as your best route to profit maximization. In business, customers pay you to take raw inputs, and to “add value” to them by turning them into something of worth to other people. In manufacturing, where the manufacturer adds value by taking raw material of little use to the customer (house wife/husband) for example, maize and turning it into something that customers are prepared to pay money, for example mealie meal. This idea is also important in service industries such as training, where people use inputs of time, knowledge, equipment and systems to create services of real value to the person being served - the customer in this case the learner. The Value Chain Analysis helps you identify the ways in which you create value for your customers, and then helps you think through how you can maximize this value: whether through nice products or useful services. To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value-generating activities referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram: Porter's Generic Value Chain M A Marketing Inbound Outbound R > Operations > > & > Service > Logistics Logistics G Sales I N Firm Infrastructure HR Management Technology Development Procurement 17 The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. The primary value chain activities are:  Inbound Logistics: the receiving and warehousing of raw materials and their distribution to manufacturing as they are required.  Operations: the processes of transforming inputs into finished products and services.  Outbound Logistics: the warehousing and distribution of finished goods.  Marketing & Sales: the identification of customer needs and the generation of sales.  Service: the support of customers after the products and services are sold to them. These primary activities are supported (Support Activities) by:  The infrastructure of the firm: organizational structure, control systems, company culture, etc.  Human resource management: employee recruiting, hiring, training, development, and compensation.  Technology development: technologies to support value-creating activities.  Procurement: purchasing inputs such as materials, supplies, and equipment. The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that a firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows: Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors. What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition.. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that offer high service levels. By contrast, a strategy based on seeking cost advantage will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. 18  FEASIBILITY STUDY Introduction Feasibility study is the assessment of the market, technical, and financial situation of the proposed business to ascertain its viability and practicability. The tendency of sensing a business opportunity and immediately pour resources into it to start an enterprise without thorough investigation results in disastrous results and great waste. What is Feasibility Study? Feasibility study is an examination to see whether your business idea is viable or practical. The feasibility study aims at answering your question of “should I continue with the proposed business idea?” All the feasibility activities are aimed at answering this question. The feasibility study outlines and analyzes several alternatives or methods of achieving business success. A feasible business is one where the business will generate adequate cash-flow and profits, withstand the risks it will encounter, remain viable in the long-term and meet your entrepreneurial goals. The business idea can be a new start-up business, the purchase of an existing business, an expansion of current business operations, or a new enterprise for an existing business. You conduct the feasibility study before preparing the business plan. Once you have carried out a feasibility study then you can proceed to write a business plan. Objectives The objective of a feasibility study is to find out if the project you are thinking of can be done, and if so, how. A feasibility study should tell an entrepreneur:  Whether the project can be done;  What are alternative solutions?  What are the criteria for choosing among them?  Is there a preferred alternative? After a feasibility study, an entrepreneur makes a go or no-go decision Conducting a Feasibility Study You have in your hands a business idea that you like. Casual observations, discussing with other people indicate that it is a good business idea. You have good reviews further by reading more about it but can it work? Investment Assessment Techniques There are many assessment techniques that can be used to a find the profitability and viability of the project. Some of them are as follows: 1. Payback period 2. Net Present Value 3. Internal Rate of Return. 19 1. Payback Period Payback period is the time (usually in years) required to recover the original cash outlay invested in a business project. If a business generates constant annual cash inflows, the payback period can be computed by dividing cash outlay by the annual cash inflow. Payback period = Cash investment/annual cash inflow For example if a business project requires an investment of K 50, 000, 000 and generates an annual cash inflow of K 12, 500, 000. The payback period is as follows: Payback period = 50,000, 000/12, 500, 000 = 4 years. 2. Net Present Value Net Present Value (NPV) is used more or less exclusively in Feasibility Studies. It is based on the concept that the money that you receive in the future is worth less than the money you have now. Whenever we open a savings account and place our money at, say, 5 percent interest per year, we are implicitly stating that for us $1.05 one year from today is worth at least as much as $1.00 today. If we buy a five-year certificate of deposit that pays 5 percent per year, for every dollar we give up today, we will receive $1.28 in five years (assuming that interest is compounded annually). We are implicitly stating that $1.28 in five years time is worth the same as $1.00 today. Discounting involves the reverse procedure; it answers the question, how much is $1.28, received in five years, worth today? The answer depends on the interest rate we are willing to accept. If we are willing to accept an interest rate of 5 percent per year, then $1.28 in five years is worth $1.00 today. Equivalently, we are saying that $0.78 today is worth $1.00 in the future. The Net Present Value of a particular Project alternative is the sum of the all positive and negative amounts of money that flow through the project during its life. All costs such as set-up cost and operating costs are negative and income is positive. Therefore the higher the Net Present Value is the better the alternative is. Calculating NPV Let's assume that the discount rate (the interest rate that you could earn elsewhere or at which you could borrow) will not change over the life of the project. This makes the calculation simpler. With this assumption, we can use the usual formula: Present Value of any one income amount = (Income amount) / ( (1 + Discount Rate) to the n power) n is the number of years into the future that the income amount will be received (or spent, if the income amount is negative). 20 The net present value (NPV) of a whole income stream is the sum of these present values of the individual amounts in the income stream. If we still assume that income comes or goes in annual bursts and that the discount rate will be constant in the future, then the NPV has this formula: Calculating NPV with Varying Future Interest Rates The future interest rate does not have to be constant for this theory to apply. The interest rate can vary, but that makes the formulas messier. For example, if r1 is the expected interest rate next year, and r2 is the expected interest rate the year after that, then the present value today of I2 income in year 2 is I2/(1+r1)(1+r2). The I’s are income amounts for each year. The subscripts (which are also the exponents in the denominators) are the year numbers, starting with 0, which is this year. The discount rate, assumed to be constant in the future, is r. The number of years the investment lasts is n. Three properties of the net present value of an income stream are:  Higher income amounts make the net present value higher. Lower income amounts make the net present value lower.  If profits come sooner, the net present value is higher. If profits come later, the net present value is lower.  Changing the discount rate changes the net present value. For an investment with the common pattern of having costs early and profits later, a higher discount rate makes the net present value smaller. The decision criteria when using Net Present Value is accept a business project if the present value of cash inflows over a number of year is positive and accept that project with the highest NPV from among the alternatives. Example 1 A business project costs initially K 25, 000, 000 and generates year end cash inflows of K9,000, 000;K8,000,000;K 7, 000, 000;K 6, 000, 000 and K5, 000, 000 from one year to five years. Calculate the Net Present Value if the required rate of return is 10%. Solution 𝐼1 𝐼2 𝐼𝑛 𝑁𝑃𝑉 = 𝐼0 + + 2 + ⋯+ (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)𝑛 9,000 8,000 7,000 6,000 5,000 = −25,000 + 1 + 2 + 3 + 4 + (1 + 0.1) (1 + 0.1) (1 + 0.1) (1 + 0.1) (1 + 0.1)5 21  9,000 8,000 7,000 6,000 5,000 = −25,000 + + + + + 1.1 1.21 1.331 1.4641 1.61051 = −25,000 + 8,181.82 + 6,611.57 + 5,259.20 + 4,098.08 + 3,104.61 = 𝑲𝟐, 𝟐𝟓𝟓. 𝟐𝟖 Exercise A new leisure club requires an investment of $25,000 now and another $5,000 and $2,000 at the end of the first and second year respectively. In return, membership subscription should give an income of $9,000; $8,000; $7,000; $6,000 and $5,000 from one year to year five. Calculate the net present value if the required rate of return is 10%. Is the project feasible? 3. Internal Rate of Return (IRR) IRR is the rate which equates the present value of cash inflows with the present value of cash outflows of an investment. It is the rate at which the NPV is zero. It is the discount rate that makes the net present value equal to 0. To calculate IRR you have to calculate NPV at different discount rates. The discount rate which gives you NPV equal to zero is the IRR. When using Internal Rate of Return to asses the profitability of the project accept business project if the internal rate of return is higher than or equal to the cost of capital ASSIGNMENT Calculate the Internal Rate of return in example 1 above 22  BUSINESS PLAN Introduction After finding a sound idea for your business and reviewing the necessary experience and attributes you are in the better position to plan how you will manage you business preparing a good business plan takes time and very much depends on the quality and detail of the of the data you gather. Make a business plan part of your personal involvement not only during data collection stage but also during the drafting and editing of the whole document What is a Business Plan? A Business Plan can be described as a document in which you present your business idea, goals and objectives, and how you are going to achieve them. It is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals. Importance of a Business Plan There are many reasons why you need a business plan, the following being the most notable:-  For Management of the Business – writing the business plan enables you to refine your business idea and to think through the challenges you are likely to encounter before you have to deal with them. The goals and objectives you set in your business plan provide a means for measuring your performance. The business plan is a valuable tool for communicating the goals and objectives of the business to employees.  For obtaining financial support – the business plan is a key document when you are seeking loan finance from banks, or equity finance from investors or partners.  For securing business contracts – a well written business plan does inspire confidence in those you seek supply contracts or tenders from, as well as those you wish to procure goods and services from.  A communication tool to professional service providers – such as lawyers and business consultants. Business Plan Outline 23  A business plan normally starts with an Executive Summary, which should be concise and interesting. People almost always expect to see sections covering the Company, the Market, the Product, the Management Team, Strategy, Implementation, and Financial Analysis. The precise business plan format can vary. If you have the main components, the order doesn’t matter that much, but here’s the suggested sequence for a business plan. Two outlines are provided here; one simple and the other more detailed. Simple business plan outline Executive Summary: Write this last. It’s just a page or two of highlights. Company Description: Legal establishment, history, start-up plans, etc. Product or Service: Describe what you’re selling. Focus on customer benefits. Market Analysis: You need to know your market, customer needs, where they are, how to reach them, etc. Strategy and Implementation: Be specific. Include management responsibilities with dates and budgets. Make sure you can track results. Management Team: Describe the organization and the key management team members. Financial Analysis: Make sure to include at the very least your projected Profit and Loss and Cash Flow tables. Build your plan, and then organize it. It is not the must that you develop the plan in the same order you are going to present it as a finished document. For example, although the Executive Summary obviously comes as the first section of a business plan, It is recommended writing it after everything else is done. It will appear first, but you write it last Standard tables and charts There are also some business tables and charts that are normally expected in a standard business plan. Cash flow is the single most important numerical analysis in a plan, and should never be missing. Most plans will also have Sales Forecast and Profit and Loss statements. Business plans should also have separate Personnel listings, projected Balance Sheet, projected Business Ratios, and Market Analysis tables. Also, every Business plan should include bar charts and pie charts to illustrate the numbers. 24 Expanded Business Plan Outline Here’s an expanded full business plan outline, with details you might want to include in your own business plan. 1.0 Executive Summary 1.1 Objectives 1.2 Mission 1.3 Keys to Success 2.0 Company Summary 2.1 Company Ownership 2.2 Company History (for ongoing companies) or Start-up Plan (for new companies) 2.3 Company Locations and Facilities 3.0 Products and Services 3.1 Products and Service Description 3.2 Competitive Comparison 3.3 Sales Literature 3.4 Sourcing and Fulfillment 3.5 Technology 3.6 Future Products and Services 4.0 Market Analysis Summary 4.1 Market Segmentation 4.2 Target Market Segment Strategy 4.2.1 Market Needs 4.2.2 Market Trends 4.2.3 Market Growth 4.3 Industry Analysis 4.3.1 Industry Participants 4.3.2 Distribution Patterns 4.3.3 Competition and Buying Patterns 4.3.4 Main Competitors 5.0 Strategy and Implementation Summary 5.1 Value Proposition 5.2 Competitive Edge 5.3 Marketing Strategy 5.3.1 Positioning Statements 5.3.2 Pricing Strategy 5.3.3 Promotion Strategy 5.3.4 Distribution Patterns 5.3.5 Marketing Programs 25 5.4 Sales Strategy 5.4.1 Sales Forecast 5.4.2 Sales Programs 5.5 Strategic Alliances 5.6 Milestones 6.0 Web Plan Summary 6.1 Website Marketing Strategy 6.2 Development Requirements 7.0 Management Summary 7.1 Organizational Structure 7.2 Management Team 7.3 Management Team Gaps 7.4 Personnel Plan 8.0 Financial Plan 8.1 Important Assumptions 8.2 Key Financial Indicators 8.3 Break-even Analysis 8.4 Projected Profit and Loss 8.5 Projected Cash Flow 8.6 Projected Balance Sheet 8.7 Business Ratios 8.8 Long-term Plan Business Plan Outline Advice Size your business plan to fit your business. Remember that your business plan should be only as big as what you need to run your business. While everybody should have planning to help run a business, not everyone needs to develop a complete formal business plan suitable for submitting to a potential investor, or bank, or venture contest. So don’t include outline points just because they are on a big list somewhere, or on this. Presenting a Business Plan Your business plan may be for purposes of securing a loan from a bank or micro financing institution, or for convincing partners to be part of the business. Whatever the case may be, it is usual for such stakeholders to request you to present your proposal in person to them. They want you to speak to them about your business plan, despite that they will already have read it. When stakeholders request a presentation from you, it is generally a sign that you wrote a good business plan. Why then do these people want to listen to you in person? There are two main reasons, 26   To seek clarification and elaboration on some aspects of the business plan.  To know the person behind the plan, as this is what ultimately determines its success or failure. This is perhaps the main reason why you are asked to present your plan. As you speak, the audience will be hoping to make a good judgment that you possess the qualities necessary to make the business plan actually work. You must therefore know what these qualities are, and then manage the entire presentation process in such a way that you give a maximum demonstration of these desirable qualities. But, first and foremost you must know what you are going to present. (i)Areas of Focus When Presenting a Business Plan Be sure that you thoroughly know and understand all aspects of your business plan and then prepare notes specifically for the presentation focusing on the following areas.  A very brief background.  Statement of the business concept that is, the products, the customers, the customers’ needs which will be satisfied, and how the product will be made available to the customers.  Discussion of the market and your competitive advantage. This is a key area; ensure you give it sufficient emphasis.  Discussion of the competencies of the managers and key staff. This is another key area which you must give sufficient stress.  Discussion of the financial forecasts. Do not forget to make a statement on the underlying assumptions.  Discussion of some of the weak areas of your business plan and how they will be addressed. Demonstrate that these weaknesses are not beyond correction.  Conclusion, summing up the overall benefits of the business proposition to the various stakeholders. (ii) The Key Qualities Being Looked For By Stakeholders/Audience The following are the personal qualities you must demonstrate and project to your audience as you present your Business Plan. Motivation Your desire to make a success of your business must show. Enthusiasm You must portray genuine interest in the plan you are presenting. Integrity 27 As you speak, the audience must get the impression that you re trustworthy and subscribe to a code of good conduct in business. Managerial Ability You must portray to the audience that you have the ability to direct both material and human resources to the ultimate success of the Business Plan. (iii) Skills Necessary for a Successful Presentation To be able to get desired impressions and information to the audience, you need to develop ad refine the following. Poise The way you carry yourself has a lasting impression upon the audience. Show that you are calm and in control. This is quite different from giving off airs of arrogance. Voice Control Speak strongly without being overly loud. Develop a good voice modulation and intonation without which you are certain to be boring. Address the audience Do not talk to the board, the flip chart, or the notes in your hand. Always keep the audience interested in what you are saying. Maintain frequent eye contact with each and every one of them. If the audience comprises only a few people, try and turn the presentation into a discussion. Manage your time well Keep the presentation short. Duration of 20 minutes is good enough. It is difficult to hold the interest of the audience beyond 30 minutes. Avoid being asked to wind up. Manage the feedback well You will be required to answer questions and make clarifications. Respond with thoughtfulness and honestly. If you do not know or are not sure of a particular point, say so and pledge to supply the answer in a few days. Graciously acknowledge any valid criticism. Note down any comments, suggestions and criticisms which require to be acted upon and be sure to do so in due time. 28 Assignment 2 Read your Business Plan so that you are thoroughly familiar with each and every one of its aspects. Prepare the notes for a 10- minute presentation which you will be required to make to either a panel of 5 people, or to your full class. 29  FORMS OF BUSINESS OWNERSHIP Introduction The form of business ownership describes how a business is legally set up. In other words, the form of business ownership is the business' legal structure. In Zambia, the most common forms of business ownership are the sole proprietorship, partnership, private limited company and public limited company. All these forms of business belong to the private sector. SOLE TRADER / PROPRIETORSHIP This is the business owned and controlled by one person with unlimited liability. Unlimited liability is a legal obligation on the owners of the business to pay all debts of the business. Even their personal possessions may be claimed. A sole proprietorship is not registered with the state like a limited liability company or corporation. You don't have to do anything special or file any papers to set up a sole proprietorship -- you create one just by going into business for yourself. Legally, a sole proprietorship is inseparable from its owner -- the business and the owner are one and the same. This means the owner of the business reports business income and losses on his or her personal tax return and is personally liable for any business-related obligations, such as debts or court judgments. PARTNERSHIPS Similarly, a partnership is simply a business owned, controlled and financed by two and up to twenty people that hasn't filed papers to become a corporation or a limited liability company. The owners have unlimited liability. You don't have to file any paperwork to form a partnership -- the arrangement begins as soon as you start a business with another person. As in a sole proprietorship, the partnership's owners pay taxes on their shares of the business income on their personal tax returns and they are each personally liable for the entire amount of any business debts and claims. Sole proprietorships and partnerships make sense in a business where personal liability isn't a big worry, for example, a small service business in which you are unlikely to be sued and for which you won't be borrowing much money for inventory or other costs. PRIVATE LIMITED COMPANY (LTD) A company owned by shareholders of the minimum of 2 and maximum of 50. The words ‘limited company’ or simply ‘ltd’ appear after its name e.g. Drilltech ltd. A limited number of shares are issued 30 and are not easily transferred. These shares are usually owned by family and friends of the business. The business has limited liability i.e. shareholders are only responsible for the company’s debts up to the value of their shareholding. PUBLIC LIMITED COMPANY (PLC) This is the type of the Company owned by shareholders of 50 and above. The letters “Plc’ appear after its name e.g. Zambia Sugar PLC. It must have K5,000,000 of capital when founded, and may allow its share to be bought by the general public trough the stock exchange. The business has limited liability 31 REFERENCES 1. Badhai B., Entrepreneurship for Engineers 2. Matoka W.C. et.al, Entrepreneurship Skills Development Trainers Manual, TEVETA, Lusaka 3. Nyirongo L., Seize Your Business Opportunities 4. Sayila A.K., Becoming an Entrepreneur 5. Telsang M.T., Industrial and Business Management 32