Entrepreneurship Notes PDF

ENTREPRENEURSHIP APPLYING ENTREPRENEURIAL CONCEPTS Definition of entrepreneurship Entrepreneurship is the art of creating or developing a business through innovation, creativity, progressive imagination and risk taking initiative. The key terms in this definition are discussed below. (a) Art...

ENTREPRENEURSHIP APPLYING ENTREPRENEURIAL CONCEPTS Definition of entrepreneurship Entrepreneurship is the art of creating or developing a business through innovation, creativity, progressive imagination and risk taking initiative. The key terms in this definition are discussed below. (a) Art – this is the subject of study that is not scientific. Is mans that two people can use two different methods but achieve the same result. An entrepreneur must have an artistic mind. (b) Creating – this involves coming up with a new or original business that did not exist before. (c) Developing – this involves making an already existing business bigger and more successful. (d) Business – this is a legal activity created with the purpose of making profit. (e) Innovation – this is the application of better solutions that meet new requirements or needs/wants. It is the coming up with something original, new, and important that breaks into market or society. This leads to having more effective products, services, processes, technologies, or ideas. (f) Creativity – this is the ability of coming up with something new and valuable by combining already existing ideas or items. (g) Progressive imagination – this is the ability to think of clever and original ideas, possibilities, or solutions that will gradually or steadily develop the business. (h) Risk taking – this refers to the tendency to engage in behaviours that have the potential of loss resulting from a given action, but at the same time have the opportunity to make profit or a gain. 1 The key words in this definition already represent the fundamental characteristics of an entrepreneur. In summary, the concept of entrepreneurship calls for an individual to: have an artistic mind; being focused on development; being innovative, creative, and imaginative; and having the ability to take calculated risks. Definition of entrepreneur An entrepreneur is a person who, upon identifying a viable business opportunity uses innovation, creativity, progressive imagination and risk taking initiative to start a new business enterprise or develop an existing one. Definition of intrapreneurship and intrapreneur Intrapreneurship is the act of behaving like an entrepreneur within a large organisation. The intrapreneur is a highly motivated, proactive and action-oriented person who is comfortable with taking the initiative within the boundaries of the organisation in pursuit of an innovative product or service. Differences between an entrepreneur and an intrapreneur Entrepreneur Intrapreneur Owns the business Is employed by an organisation Fruits of success (e.g. profits) belong Fruits of success (e.g. profits) belong to the entrepreneur to the organisation rather than the intrapreneur (although he/she may be rewarded) Failure has a personal cost. Losses are Failure is borne by the organisation borne by the entrepreneur (although he/she may be punished) 2 Types of entrepreneurs There are two main types of entrepreneurs. (a) Pulled entrepreneurs These are individuals who go into establishing their own businesses because they have either associated themselves with successful entrepreneurs or have admired certain entrepreneurial role models and are emulating them. This could be because their parents have been entrepreneurs, or their friends run businesses. These entrepreneurs generally prepare adequately before starting their enterprises and, therefore, have higher rates of success. Examples of pulled entrepreneurs are Zambians of Asian origin. (b) Pushed entrepreneurs These find themselves staring their businesses due to circumstances beyond their control. This may be due to the fact that they have been retired, retrenched, declared redundant, and so on. They resort to starting their own businesses as the only means of survival. Because of this, they respond to unplanned circumstances, starting their businesses through trial-and-error. Hence their rate of success is generally low. Examples include a number of Zambians who were retrenched or retired during the 1990s. Ways in which entrepreneurs operate Entrepreneurs operate in different ways, such as the following: 1 Soloist – this is an entrepreneur who owns and run the business alone, and therefore does not have anyone to assist him/her. 2 Acquirer – this is an entrepreneur who buys a business or inherits it and improves it to prosperity. 3 Grouper – this is an entrepreneur who identifies different talents in people and brings them together to form a vibrant group for his/her business. 3 4 Professional – this is an entrepreneur who uses his/her professional competences to establish a business. 5 Inventor – this is an entrepreneur who invests something that he/she discovers that it is needed by many people and sets up a business based on his/her discovery. 6 High-tech – this is an entrepreneur who uses state-of-the-art technology to improve his/her business and give it a strong appeal. 7 Speculator – this is an entrepreneur who is a chancer who becomes an entrepreneur through trial-and-error and speculation. 8 Manipulator – this is an entrepreneur who manipulates other stakeholders and get things going. 9 Workforce builder – just like a grouper, this type of entrepreneur identifies and mobilises a workforce and develops it into a skilled and experienced team that contributes to the success of his/her business. 10 Committed manager – this type of entrepreneur uses his/her managerial skills and experience to develop a committed entrepreneurial management approach to business. 11 Conglomerator – this is an entrepreneur with highly diversified skills and believes in building business conglomerates (many different types of businesses). 12 Capital aggregator – this is an entrepreneur with insatiable desire for mobilising capital which is then ploughed into enterprise development. 13 Key partner – this is an entrepreneur who may not be directly involved in the running of an enterprise but provides key resources to the continued survival of an enterprise. 14 Lifestyle – this is an entrepreneur whose lifestyle (typical way of life) is generally doing business. 4 Forms of business An entrepreneur who wants to establish a business has four possible options to choose from: Sole proprietorship Partnership Limited company Cooperative Criteria for comparison of the four forms of business 1 Will this form help the enterprise to easily access capital? 2 Will the form of business have continuity? 3 Is the liability of the owner(s) limited? 4 How does management participate? 5 Is it easy to transfer ownership? 6 What are the record keeping requirements? 7 How do the tax burdens compare? 8 What is the cost of starting and registering the business? 9 What is the simplicity of starting the business? Sole proprietorship A sole proprietorship is a business owned by one person who has all the authority to make decisions about the business. The owner is called a sole proprietor. The procedure for starting a sole proprietorship is simple and the cost is low. However, it is the most risky form of business because the owner is personally responsible for all the debts of the business. If the business borrows money or gets items on credit and fails to pay its debts, the creditors can force the owner to pay 5 from his/her private money even if this would require the owner to sell his/her personal property in order to pay off the debts. The business has unlimited liability. Once the profit of the business has been calculated, the owner may pay tax on the profit. Advantages of sole proprietorship All the profits from the business belong to the owner. The cost of starting this form of business is low. It is easy to start and register a sole proprietorship. The owner makes all the decisions. Disadvantages of sole proprietorship The owner is personally liable for all the losses and debts of e business. It is difficult to borrow from banks as the owner/business may not have collateral. There is no continuity. The death or illness of the owner can end the business. The owner suffers alone (in terms of making decisions and sometimes in running the business alone). Partnership A partnership is a business formed by two or more people, with a maximum of twenty people, who enter into a partnership agreement (also called partnership deed). The owners of a partnership are called partners. The partnership agreement can either be verbal or written. However, partners are usually advised to put their partnership agreement in writing to avoid unnecessary disputes in future. 6 A partnership agreement may include the following: Name and line of business Date of commencement of the partnership Capital to be contributed by ach partner Duties of each partner Profit sharing ration – how the profits will be shared among the partners. How to resolve conflicts How to create a new partnership in the event of death or departure of a partner (e.g. automatic method) How to share the assets if the partnership is dissolved. Advantages of a partnership All the business profit is shared by the partners. It can bring together people with different skills, experience and knowledge which can be needed for the business to succeed. The cost of starting the business is low as partners share this cost. It is easy to raise more capital from many people. The risk of running a business is shared by many partners (in terms of losses and business failure, if any). If one partner falls ill, other partners can fill the gap. Disadvantages of a partnership Just like a sole proprietorship, a partnership has unlimited liability. Partners can lose their personal property if the business fails to pay its debts. there is usually conflict of interest among partners. 7  There is a lot of mistrust among partners. Decision making is usually slow and this delay in making decisions comes about because all partners have to be consulted and have to agree. The sharing of profits makes ach partner go with less money than if it was to be taken by one person. The death of a partner can end the business. Limited company A limited company is created by two or more people through a process of incorporation. The owners of a limited company are called shareholders. A limited company has the following characteristics: It has a perpetual existence. The death or retirement of a shareholder does not end the business. The owners (shareholders) have limited liability. They cannot lose personal property to pay for the debts of a company. They can only lose the money they have put in the business. It is incorporated at registration. The business is a separate person/entity which can employ people, own businesses, can sue and be sued in its own name. For an entrepreneur to register a limited company, he/she may require help from a legal expert or practitioner. Advantages of a limited company It is easier to finance this form of business. A limited company can sell shares and raise money or it can easily borrow from banks since it is likely to have collateral. 8  A limited company has greater status and credibility which helps it to easily do business with various stakeholders. Shareholders are not personally liable for the debts of the business. They cannot lose their personal money or property for the settlement of the company’s debts. All they can lose is the amount they have put into the business. Disadvantages of a limited company The cost of starting a limited company is high, and it has the greatest complexity of legal requirements. Profits are shared among the many shareholders, and each on may go with less money than if it was all taken by one owner. The tax burden is high. The business pays tax on profits and shareholders also pay tax on dividends (dividends are part of the profits that shareholders are given to take home). Cooperative A cooperative is a voluntary association of a group of people who decide to work together for a common goal or purpose. The owners of a cooperative are called members. A cooperative has a democratic form of governance where the members own and control it. There is equitable distribution of earnings in a cooperative. Cooperatives are formed for economic gains, marketing or other strategic reasons such as cost sharing. In a cooperative, all the members have one vote each in the decision making process. Usually, a management committee is elected to oversee the day-to-day operations of a cooperative. Cooperatives around the world operate according to the same core principles, which are as follows: Voluntary and open membership – they are voluntary and open to all without gender, social, racial, political or religious discrimination. 9  Democratic member control – they are controlled by their members who actively participate in setting policies and making decisions. Members’ economic participation – members contribute equally to, and democratically control, the capital of the cooperative. Autonomy and independence – cooperatives are autonomous, self- help organisations controlled by their members. If a cooperative enters into an agreement with other organisations or raises capital from external sources, it is done so based on terms that ensure democratic control by the members and maintains the cooperative autonomy. Education, training and information – cooperatives provide education and training for members, elected representatives, management and employees so that they can contribute effectively to the development of their cooperative. Members also inform the general public about the nature and benefits of cooperatives. Cooperation among cooperatives – cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures. Concern for community – while focusing on members’ needs, cooperatives work for the sustainable development of communities through policies and programmes accepted by the members. There are different types of cooperatives that have been formed, serving in different industries. These include consumer, producer, purchasing, services, or a hybrid of these. NB: Cooperatives are owned and democratically controlled by its members, who also have to buy from it or participate in is activities – the members are owners, workers, and customers. Cooperatives return surplus revenue to members proportionate to their use of a cooperative (e.g. how much they bought from it). Cooperative business is motivated by service to their members, not by profit. 10  Cooperatives pay tax on income kept within the cooperative for investment and reserves. Surplus revenue from the cooperative are returned to individual members wo pay taxes on their income. Advantages of cooperatives They tend to enjoy favourable taxes. The liability of members may somehow be said to be limited to the extent of their members’ contributions. The cost of registering a cooperative is low. Members share losses and risks. Disadvantages of cooperatives Cooperatives are said to have poor performance records. There is a lot of political interference and internal politics. Decision making is rather slow since every decision requires the participation of all members. The procedure for its formation and registration is rather slow. Registration procedure In Zambia, registration of business name and incorporation of limited companies is done by the Patents and Companies Registration Agency (PACRA), whose headquarters are at PACRA House along Haile Selassie Road in Longacres, Lusaka. Registration of business names For the registration of a sole proprietorship or a partnership, the procedure is simple and straightforward. An applicant is required to pay a fee for the forms and name search. The filled-in forms are then submitted to the Patents and Companies 11 Registration Office. The officers at Patents and Companies Registration Office can actually assist an applicant fill in the forms appropriately. Once the forms have been submitted to PACRA, they are scrutinised and, if successful, the applicant is informed of the approval and issued with a Certificate of Registration. Incorporation of a limited company The incorporation of limited companies goes through the following stages: Submission of proposed business name to PACRA Approval of proposed name by PACRA Preparation of Articles of Association for submission to PACRA [Articles of Association should be submitted in four (4) copies] Issuance of Certificate of Incorporation and shares Registration of co-operatives Usually co-operatives are registered with the Registrar of societies whose offices are within the same premises as the National Archives Headquarters, along Government Road, near Ridgeway Post Office. The procedure for registration is rather long and follows the following steps: Submission of proposed name and constitution, and filing in forms Clearance with the Zambia Police and the local municipality Submission of duly endorsed forms to the Registrar of Societies Issuance of Certificate of Registration 12 TYPES OF ENTERPRISES An enterprise is a business undertaking that is created to offer goods and/or services to the satisfaction of the customers whilst offering its owners a livelihood (employment) and profits for its growth and sustainability. There are many forms that enterprises take, and the following are just some of the types of enterprises. (a) Manufacturing/production enterprise – this is an enterprise that combines various raw materials and/inputs to come up with an end physical product. For example, a tailoring shop, a bakery, a carpentry shop, etc. (b) Construction enterprise– this is an enterprise that builds something, mainly a large structure. Examples include enterprises building houses, schools, hospitals, stadiums, factories, roads, rail lines, airports, bridges, etc. (c) Service operation enterprise – this is an enterprise that produces an intangible product referred to as a service. A service is produced as it is consumed. Examples include telephone service providers, transport enterprises, health care service providers (hospitals and clinics) financial service organisations (banks, insurance companies, building societies), secretarial service providers, internet service providers, educational institutions, etc. (d) Retail or wholesale enterprise (trading enterprise)–this is an enterprise that buys already produced goods from manufacturers and resell them to consumers. (e) Mining enterprise–this is an enterprise involved in extracting metals and minerals from the ground, quarrying of stones and lime, etc. (f) Agriculture enterprise – this is an enterprise involved in cultivation of the soil to grow crops, fruits, vegetables, flowers, the rearing of animals and poultry, as well as fish farming. DIFFERENCES BETWEEN AN EMPLOYEE AND AN ENTREPRENEUR The following are the major differences that exist between an employee and an entrepreneur. 13 (a) Ownership An entrepreneur owns the business where he/she has invested money, and therefore is his/her own boss who is not answerable to anyone but to himself/herself. On the other hand, an employee is hired to work for the entrepreneur and is not the owner of a business, and is answerable to his/her employer (the entrepreneur) (b) Security Since an entrepreneur is his/her own boss, he/she is much more secure than an employee. An entrepreneur creates jobs for himself/herself and others, and is therefore assured of employment and income. An employee is less secure as he/she can lose employment and income at any time. (c) Independence in decision making An entrepreneur makes decisions independent of any outside influence in the running of his/her business. An employee is dependent on his/her employer for instructions and thinking. (d) Uncertainties An entrepreneur controls all the resources in an enterprise and makes his/her own decisions. As such, he/she determines his/her destiny and is more certain of the future. An employee may not control all the resources of the business and may not participate in all decision making processes of the business, and is therefore not certain of his/her future. (e) Income An entrepreneur, as the owner of the business, will get an income (salary) as he/she is likely to be working for his/her business, as well as all the profits made in the business. An employee, on the other hand, is only entitled to his/her salary and any bonus that may be given. 14 (f) Gender Any person, male or female, can start any business of his/her choice and become an entrepreneur. However, there are certain jobs for certain employees that are only given to persons of a certain gender. (g) Age discrimination Any person of any age can start a business and become an entrepreneur. There are no age restrictions to becoming an entrepreneur. Employees, on the other hand, may be required to be of a certain age if they are to be employed (minimum and maximum age). 15 ECONOMIC TRENDS IN ZAMBIA Before independence and after independence, the Zambian economy has gone through the following changes. 1 Pre-independence stage (1924 to 1964) The country was called Northern Rhodesia and was under colonial rule. Most of the economic activities were modelled to serve the colonial masters. Indigenous Africans were mainly used as cheap labour. There was no attempt to promote entrepreneurship whatsoever for indigenous Africans. 2 Post-independence stage I: (1964 to 1980) Zambia inherited a rich treasury and was among the richest countries in Africa. Zambia also had rich copper reserves and obtained good copper prices on the London Metal Exchange. At this time, oil prices were generally low. This led to massive infrastructural development and the provision of free education, medical services, water and sanitation. The Zambian government came up with the policy of Zambianisation where almost all major industries and companies were controlled by the state and managed by indigenous Zambians. There was also the Leadership Code which did not promote the culture of entrepreneurship. 16  The state controlled the industries by creating conglomerates such as: ○ Industrial Development Corporation (INDECO) ○ Zambia Industrial and Mining Corporation (ZIMCO) ○ Mining Development Corporation (MINDECOI) ○ Financial Development Corporation (FINDECO) Each conglomerate had companies under it, and all these conglomerate and companies were top-heavy organisations that drained a lot of money, although they created a lot employment for many Zambians. Most of these enterprises were loss-making organisations. 3 Post-independence stage II: (1980 to 1991) In the early 1980s, the Zambian economy started to decline and the increase in unemployment made the government start inculcating the culture of entrepreneurship and self-employment. The following organisations were created for this purpose: ○ Small Industrial Development Organisation (SIDO) ○ Village Industrial Service (VIS) ○ Small Enterprise Promotion (SEP) During the period of 1964 to 1991, the following are a summary of the economic policy pursued by Zambia: The country pursued a commandist, socialist economic policy. Industries were nationalised. 17  The economy was controlled or run by the state through INDECO, ZIMCO, MINDECO and FINDECO. The state controlled and protected monopolies (Zambia Airways, United Bus Company of Zambia, Postal and Telecommunications Corporation, ZESCO, etc.). There were trade restrictions, price controls, and foreign exchange restrictions. This economic policy resulted in the following: No competition in the economy. Absence of creativity, innovation, entrepreneurship, and initiative. High levels of inefficiency, ineffectiveness and poor performance of state-run companies and the economy in general. Poor quality goods and services. Severe shortages of essential commodities and constant queuing for essential commodities. Continued decline in economic performance. Zambians developed the dependence syndrome. 4 Post-independence stage III: (1991 to date) After 1991, the Zambian economic policy changed, and the following is a summary of this new economic policy: Zambia pursued a liberalised, free market economic policy. There was a transfer of economic control from state to private owned through privatisation. 18  There were closures of organisations that were not making profits such as UBZ, ZA, etc. There were massive retrenchments, liquidations and redundancies. The public sector was down-sized, giving rise to the need for inculcating entrepreneurship through training curriculum charts. There was a rise in the 'survival instinct' in most Zambians. This led to the rise in self-employment initiatives. This led to the birth of entrepreneurship and entrepreneurial tendencies. There has been an increase in innovation, creativity and imagination in a free and liberalised economy, and this has led to increased competition. There has been an increase in the need for entrepreneurial skills training to cope with rising levels of entrepreneurship. Therefore, the informal sector has grown. NATURAL RESOURCES AS THEY RELATE TO ENTREPRENEURSHIP The extent to which a country is endowed with natural resources may contribute greatly to a country’s level of entrepreneurship. By their nature, natural resources are a building block for entrepreneurial activities. There are several entrepreneurial activities that arise from the efficient and effective use of natural resources. Examples include: Land resources ○ Farming ○ Clay for pottery ○ Stone for masonry 19  ○ Stone for minerals and gemstone mining ○ Sand for glass ○ Stone for cement and ultimately for making blocks Water resources ○ Fishing ○ Reeds for mats, baskets ○ Water for domestic use, construction, etc. ○ Irrigation Forest resources ○ Saw milling ○ Wood ○ Furniture manufacturing ○ Window frames, door frames, and doors ○ Curios, carpentry tools ○ Honey production ○ Wild fruits ○ Flowers ○ Herbal medicine ○ Thatching 20  Wildlife ○ Tourism and conservation activities ○ Food - meat Human resources ○ Mental labour ○ Physical labour It can be observed from the above examples that the list of entrepreneurial activities that emanate from natural resources is endless. The learning point for an entrepreneur is that natural resources must be critically examined and exploited as sources of a variety of entrepreneurial activities. ROLE OF ENTREPRISES IN ECONOMIC DEVELOPMENT AND GROWTH Enterprises, whether small or large, play an important role in the economic growth and development of Zambia. The major roles are as follows. (a) Creation of employment. Small and large enterprises in the private sector have contributed to the creation of employment in Zambia. The owner will create employment for himself/herself and others that will be needed to work in the enterprise. It is estimated that 80% of all jobs in Zambia are in the private sector. (b) Contribution to the national treasury. Small and large enterprises pay taxes, levies, rates and licensing fees to both the central and local government, thereby contributing to the national treasury. These include direct income tax, Value Added Tax (VAT), market levies, 21  licensing fees, and so on. The money generated is used to develop the country. (c) Earning foreign exchange. Some enterprises export their goods and services to foreign countries and bring into Zambia the much needed foreign exchange (foreign currency). (d) Provision of goods and services. Enterprises provide various goods and services needed by Zambians for their livelihood. (e) Technology transfer. Enterprises buy machinery, equipment, tools and bring skills from other countries into Zambia. At the same time, they also take these machinery, equipment, tools and skills to remote areas of Zambia. Therefore, entrepreneurs help to transfer technology into Zambia and also to rural parts of Zambia. (f) Supplementing government effort. Most enterprises supplement government effort by providing facilities such as private hospitals and clinics, private schools, waste management, and so on. (g) Inculcating a culture of entrepreneurship. Existing entrepreneurs provide inspiration and act as role models to future entrepreneurs. In this way, the culture of entrepreneurship is imparted to upcoming entrepreneurs in Zambia. (h) Utilisation of local raw materials. Most entrepreneurs add value to the available local raw materials which are used instead of importing them from abroad. 22 GOVERNMEN POLICY ON MICRO AND SMALL ENTERPRISE DEVELOPMENT Policy instruments supporting micro and small enterprise development A policy is a definite course or method of action selected from among alternatives, and in light of given conditions, to guide and determine present and future actions. Government policy relates to industrial, trade and commercial policies that date back to 1994. The policy has specific objectives on various economic sectors such as the following. (a) Manufacturing policy The major policy objectives for the manufacturing sector are: To achieve efficient and sustainable growth and development by focusing on value added linkages which maximise the use of local raw materials to foster long run inter-sectorial relationships To support and strengthen those potentially internationally competitive industries that emerge on the basis of stronger internal linkages (b) Commerce and trade policy To liberalise the sector by phasing out state trading, reform company legislation, encourage private sector participation with no interference on the market mechanism To create a more competitive and dynamic business environment, and establish a competition commission with statutory powers to look at issues such as pricing, mergers, takeovers and franchising To create and further develop a market economy with a liberalised import and export regime which will support enterprise growth by promoting the export of non-traditional goods so as to diversify and expand the export base 23  To pursue the principles of fair trade, competition and reciprocity of trade relations by using anti-dumping and countervailing measures to counter unfair trade practices To support the goal and ideas of African Economic Integration (c) Agricultural policy To encourage and empower farming as a business To provide many initiatives among small-scale farmers so that they can do better and improve productivity for sustainable livelihood. Initiatives include ASIP (Agricultural Structural Investment Programme), credit schemes, etc (d) Investment policy To create a dynamic, competitive, stable and predictive environment in which the private sector can make efficient investment decisions To attract both local and foreign investors to boost the growth of the industrial sector To provide incentives in order to encourage investment (e) Small scale enterprises/informal/rural industries policy To encourage local government to review their infrastructure services and licensing regulations to support small scale enterprises To provide legislation and incentives that promote rapid growth of the sector To facilitate retraining of retrenched people in entrepreneurial skills in order to accommodate them in the small-scale sector To encourage the private sector to build industrial estates To decentralise business registration process to enable the sector operate efficiently and have access to incentives 24  To review and harmonise all existing laws and regulations in order to remove impediments to operations of the sector To promote measures which will make the informal sector graduate into small-scale enterprises To encourage the diffusion of industries into rural areas and provide appropriate incentives to enterprises that locate in such areas STATUTORY OBLIGATIONS RELATING TO ENTERPRISE DEVELOPMENT Every business or enterprise has specific obligations to comply with as it runs its operations. These are rules of conduct, regulations, social control, order, method, procedure, systems, compulsions and provisionsfor individuals, collective and public interests enforced by government through its institutions. Purpose of law on business compliance Law providing for legal compliance of business are provided to serve various purposes: Auxiliary function (additional, supplementary) Regulatory function Restrictive/protective function Creative function Types of law The following is a summary of laws and regulations that require compliance by a business in Zambia. (a) The income Tax Act (Cap. 323) This law provides for the following: 25  Tax obligations of a business on both income and profit A grace period within which a business may not pay tax Proper accounts to be kept by a business Registration of partnership/company with the income tax Tax on income for employees (PAYE) Social insurance: Pension, NAPSA (b) The Companies Act (Cap. 388) The Act sets out the following: Annual returns and names of directors of a company Advice to the Registrar of Companies Advice of changes that occur during the course of company’s operations, such as change of company name, directorship and share capital (c) The Customs and Excise Act (Cap. 322) This Act provides for the following: Items on which customs and excise duties are chargeable on imported and locally produced goods When, in the process of business transactions, the duty is chargeable and payable Specification of goods or classes of goods to be imported into and exported from Zambia, and which goods are prohibited (d) The Trades Licensing Act (Cap. 393) TheAct provides for the following: 26  Specification of various trading activities and regulation of hours of business Licenses and permits to be held for operating businesses in certain categories, e.g., bottle stores, transport contractors, mines, etc. (e) The Employment Act (Cap. 268) TheAct provides for the following: Individual contractual obligations between the employer and employee Enforcement of contact of service Appointment of officers in the labour department Protection of wages of employees and control of employment agencies (f) The Factories Act (Cap. 441) The Act provides for safety and health standards for the welfare of employees in factories and related undertakings (g) The Workers’ Compensation Act (Cap. 271) The Act provides for the following: Provisions for group insurance schemes for specified categories of employees in the course of their employment Defines obligations of employees for such schemes (h) The Zamia National Provident Fund Act (Cap. 273) The Act provides for the following: 27  Assurance and pension schemes for specified categories of employees as a social security scheme Sets out the obligations of the employer in the scheme Makes provisions for several financial aspects covering business operations of all sizes, including the recent provisions on the crdi guarantee scheme (i) The Bank of Zambia Act (Cap. 360) The Act provides for the following: Provisions for several financial aspects covering business operations of all sizes Provision on the credit guarantee scheme covering small-scale business enterprises, in conjunction with commercial banks and other financial institutions (j) The Small Enterprise Development Act (Cap. 425) The Act provides for the following: Definition of micro and small enterprises The creation and objectives of the SED (Small Enterprise Development) board The kind of assistance Industrial relations court Settlement of collective disputes Industrial action Workers participation in decision making in the enterprise through works councils (k) The Industrial and Labour Relations Act (Cap. 269) This Act provides for the following: 28  Collective relations between the employer and employee Collective bargaining Trade unions and employer associations Industrial relations court Settlement of collective disputes Industrial action Workers participation in decision making in the enterprise through works councils (l) By-laws By-laws are specific regulations enacted by a civic authority (municipal council) to organise and regulate the conduct of certain activities and business operations, and which apply in a certain area. SUPPORTSYSTEMS FOR ENTREPRENEURS Every enterprise, no matter its size, requires some form of support system to enable it operate effectively and efficiently. The support system consists of various stakeholders in the enterprise’s environment. A support system is a network of personal and professional contacts available to an enterprise for practical and moral support when needed. Some of the key stakeholders that make up the support system for an enterprise in Zambia include the following. (a) Financial institutions An enterprise may, during the course of its existence, require some financial support from both the micro-financial institutions and commercial banks. For example: CETZAM Micro Financing Limited Pride Zambia 29  AMZ (Angora Microfinance Zambia Limited) Finca Zambia Women’s Co-operative Trust ECLOF (Ecumenical Church Loan Fund) Micro Bankers Trust E-MFI (Empowerment Micro Finance Institution Limited) Pulse Financial Services Limited Several commercial banks (b) Business associations A lot of non-governmental organisations are emerging. These associations are support groups for enterprise development as they constitute resource centres through which enterprises can get business counselling, marketing, training and consultancy support services. These associations have the capacity to even organise donor support in terms of grants. These associations include the following: District Business Associations Centres for Informal Sector Employment Promotions (CISEP) Zambia Chamber of Small and Medium Business Association 30 DEVELOPING ENTREPRENEURIAL COMPETENCES AND ATTITUDES In this discussion we will cover the following: Developing self-motivation Developing business ideas Identifying business opportunities Mobilising resources Networking for enterprise development Implementing business decisions Communicating in various business situations DEVELOPING SELF-MOTIVATION Entrepreneurial traits and characteristics A trait is a distinguishing genetically determined attribute of an individual. A characteristic is also a feature belonging to an individual and which is typical of a person and serves to identify that individual, and which has been acquired through social learning. To be an entrepreneur is a lifestyle, and is more than a job or career. As such, entrepreneurs tend to have certain traits and characteristics which include the following: (a) Initiative. An entrepreneur does things before being asked or forced by events. An entrepreneur does this so as to extend the business into new areas. (b) Seeing and acting on opportunities. An entrepreneur seizes unusual opportunities to obtain an order, financing, equipment, land, work space, or assistance. 31 (c) Persistence. An entrepreneur takes repeated or indifferent actions to overcome obstacles. (d) Information seeking. An entrepreneur does personal research on how to provide a product or service. An entrepreneur also consults experts for business and technical advice. An entrepreneur will also personally undertake market research, analysis or investigation. (e) Concern for high quality work. An entrepreneur has a strong desire to produce or sell a better quality product or service than his/her competitors. (f) Commitment to work. An entrepreneur puts in a lot of effort to complete a job, and accepts full responsibility for problems in completing a job for a customer. An entrepreneur has a strong concern for satisfying a customer. (g) Efficiency oriented. An entrepreneur looks for or finds ways to do things fast and at less cost. An entrepreneur uses information or business tools to improve efficiency. (h) Systematic planning. An entrepreneur plans by breaking a large task down into smaller sub-tasks. He/she evaluates alternatives and takes a logical and systematic approach to activities. (i) Problem solving. An entrepreneur generates new ideas and innovative solutions to solve problems facing the enterprise. (j) Self-confidence. An entrepreneur has an attitude that allows him/her to have positive but yet realistic view of himself/herself and his/her situation. He/she trusts in his/her ability to complete a task or meet a challenge, and sticks with his/her judgement in the face of opposition or lack of early success. 32 (k) Recognising own limitations. An entrepreneur acknowledges his/her own limitations and engages in activities that will improve his/her own abilities. (l) Expertise. An entrepreneur seeks to possess strong technical know-how and skills in the area of his/her business. (m) Persuasion. An entrepreneur has strong confidence in the products or services that are made and provided by his/her enterprise and communicates to positively influence others, without duress, about the enterprise and its products or services. (n) Use of influence strategies. An entrepreneur uses influential people as agents to accomplish his/her objectives. (o) Assertiveness. An entrepreneur confronts problems with others directly and reprimands or disciplines those failing to perform as expected. (p) Monitoring. An entrepreneur personally supervises all aspects of a project to ensure that work is completed as planned or that it meets standards of quality. (q) Credibility, integrity, and sincerity. An entrepreneur acts to ensure honesty or fairness in dealing with others. (r) Concern for employees’ welfare. An entrepreneur takes action to improve the welfare of employees. 33 (s) Recognising the importance of business relationships. An entrepreneur acts to build rapport or friendly relationships with customers and other business stakeholders. (t) Building capital. An entrepreneur develops a tendency to save money in order to plough it back into the business and build a strong capital base. (u) Concern for the image of products or services. An entrepreneur expresses awareness that clients spread knowledge of the products/services or the enterprise by word-of-mouth and these clients can be useful 'ambassadors.' (v) Time conscious. An entrepreneur sets goals for himself/herself and tries to accomplish them within the set time framework. (w) The need to achieve. This is evident in an entrepreneur’s desire to achieve some standard to excellence and success in performance. An entrepreneur has a strong desire for significant accomplishments, mastering of skills, control, and to have high standards. An entrepreneur exhibits prolonged and repeated efforts to accomplish something difficult. (x) Risk taking. An entrepreneur has an inclination to take calculated, moderate and intelligent risks. An entrepreneur tends to avoid both excessively high risks as well as low risks. (y) Hopeful about the future. Even in a situation where there a lot of disappointment and frustration, an entrepreneur does not lose hope and expects the future to be better. (z) Independence. An entrepreneur exhibits a great deal of independence in his/her day-to-day behaviour. An entrepreneur does not want to work for another person or organisation. 34 Discovering oneself and positive thinking To succeed in business, one ought to be positively and constructively ambitious. To be positively ambitious means to have that personal conviction that you can make it if you have the right attitude and psychological preparedness (“If others have made it, why can’t I”?). On the other hand, to be to be constructively ambitious means setting very realistic and achievable targets. With increased competition and liberalisation of most economies, business has increasingly become very difficult to run and manage, and constantly different problems keep coming. This, therefore, means that entrepreneurship calls for the need to persevere during difficult times. Perseverance is the art of looking at problems and difficulties as challenges and seeking to find solutions to those challenges. Entrepreneurship calls for positive thinking. Only those entrepreneurs who are positive about whatever they do and always seek to find solutions to any problems and difficult they encounter will eventually succeed in whatever they spire to do. Perseverance builds a strong character which normally leads to the generation of a variety of ideas from which solutions to any problems or difficulties may be sought. Perseverance and positive thinking are, therefore, very essential to business success. It is difficult to discover one’s full potential if you do not try. It is, therefore, only by trying and trying again, even in the face of poor results, that one discovers themselves and forge ahead. These are critical requirements in entrepreneurship. Imagination, innovation and creativity of an entrepreneur 35 Goal setting A goal or objective is a quantified statement of what an entrepreneur wants to achieve over a specified period of time. A critical requirement in developing entrepreneurial competences and skills is to forecast into the future and set goals or objectives. An entrepreneur will only succeed in business if he/she can set goals and objectives that are SMART (specific, measurable, achievable, relevant, and time bound). Objectives must be: Specific – stating exactly what has to be achieved (although not how the job should be done). Measurable – the objective must be quantified so that it can be known if the objective has been achieved. Achievable – the objective should be set such that it requires more effort to attain it, but not which is impossible to attain. Relevant – he objective must relate both to the roles of those who are to achieve it and to the wider purpose of the enterprise. Time bound – there should be a target deadline and time frame for achieving the objective. Purpose of goals and objectives When you set goals and objectives, they enable you to:  Be aware of what you want to achieve  Add to what you already have  Improve performance and increase results in whatever you may be doing  Influence others to achieve  Create a sense of pride and satisfaction of yourself  Build confidence in yourself  Think positively  Be imaginative, creative and innovative 36 DEVELOPING BUSINESS IDEAS AND OPPORTUNITIES All businesses we see today came from ideas that some people had somewhere. A business idea is a concept or response to a particular problem which, if properly worked on and planned for, can translate into a business enterprise. Sources of business ideas There are various sources of business ideas, some of which are discussed below. (a) Your own job, trade or experience This involves an entrepreneur coming up with a business based on the job he/she is doing, or based on an area in which he/she specializes and has experience. For example: A nurse or doctor can start a clinic, home-based care centre, a drug store, an old-aged care centre, and so on. A teacher can start a school/college, publish books, a tuition centre, and so on. (b) Shortages in your area An entrepreneur can come up with business ideas by looking at those products and services that are not readily available in the area in which he/she lives or in any other areas of interest. An entrepreneur can then conduct a simple survey to find out if there is demand for these products or services which are not found in that area. Once the survey has shown that there is demand for such products or services, an entrepreneur must act promptly and strategically to provide them. (c) Shortcomings in existing products or services This involves an entrepreneur observing and identifying those products or services that are being provided by others in the area in which he/she lives but have shortcomings (the product or service has a fault or there is failure to meet a certain standard), and then use his/her imagination to improve and change the quality, image or nature of the product or service. The changes made to the product or service may be as follows: 37  Improve its appearance, function, colour, or packaging Offer a better service of the current services you pay for Modify and existing product into a new one by making it look luxurious, make it simpler, or make it smaller, change the shape Add or subtract a few features to the product or service to make it suitable in terms of use or price. For example, selling cooking oil from a pump, or selling mealie meal in smaller packages (Pamela). (d) Your own hobbies, talents and interests An entrepreneur may require to identify his/her hobbies, talents and interests and develop them so that a business is created around that. Therefore, one’s hobbies, talents and interests can be sources of viable business ideas. For example: A person with the hobby or interest in baking can start a bakery, or bake cakes for weddings, birthdays or other events. A person with a football talent can play professional football and generate money to establish a football academy where upcoming players can pay to be developed into professional footballers. (e) Extraordinary use for ordinary things (Somebody’s waste is another person’s treasure) This involves the entrepreneur examining common products which are used daily, or those items that others want to throw away, and figuring out how these could be put to special or extraordinary use. It means turning waste into something useful for someone. For example: Foam mattresses or rubber can be used to make duvets Cut pieces of cloth at the tailor’s shop can be used to make a mat or carpet Soya meal can be used to make vegetarian products like vegan sausage. 38 (f) Man’s basic needs Man’s basic needs include the need for food, clothing and shelter. These are daily needs that people must satisfy. Therefore, an entrepreneur can identify business ideas based on the daily needs of people. For example: For the need for food, one can start bee keeping and making honey products, gardening, farming, bakery, restaurant, animal husbandry (rearing goats, cows, etc.) and so on. For the need for clothing, one can start making traditional attire, make tie and dye clothes, start a tailoring shop, or sell second hand clothes, and so on. For the need for shelter, one can establish a hardware shop, electrical installation, selling cement, block making, construction business, and so on. (f) Establishing an agency or becoming a middleman This may require an entrepreneur identifying a local or international firm that may want an agent for their products. Therefore, the entrepreneur will establish an agency and sell goods made available to them and earn commission. Information on companies looking for agencies could be gotten from the Zambia Investment Centre, Export Board of Zambia, Ministry of Commerce and Industry, and the Internet. Alternatively, an entrepreneur can start his/her own wholesale or retail shop where goods could be sold to the local businesses or final consumers and earn a profit. (g) Changes in social customs This requires an entrepreneur to observe any society and see how it is changing and capitalise on these changes to start a business. For example: Changes in women’s role in society (educated and working) has brought about the need for maids, kindergartens, fast foods outlets, and so on. Changes in dressing 39  Changes in health care Changes in diet (e.g. towards vegetarian diet), and other social and cultural changes (h) Necessity, the mother of invention Some individuals, when faced with uncommon problem or special problem have always sought special answers, and come up with an invention or solution to the problem. This then inspires this person to venture into entrepreneurship by using the invention or solution to solve other people’s problems. For example, the Sondashi Formula for HIV/AIDS. (i) Government incentives This requires an entrepreneur to keep an ear to the ground to learn about any government incentives that may present business opportunities, and taking advantage of them by establishing a business based on these incentives. For example, the government of Zambia once removed customs duty on imported buses and many proactive entrepreneurs went into passenger transport business. (j) Listening to complaints Listen to complaints consumers are making to other businesses or your business and create a solution to those complaints. (k) Research This involves an entrepreneur finding out special needs or wants of certain groups of customers and coming up with the business that would satisfy these identified needs or wants. This may require an entrepreneur to prepare a questionnaire and collect relevant data about the needs and wants of potential customers. (l) Reproduce the idea The entrepreneur here would require to apply a successful idea that was implemented by others to new settings. (m) Create new value for a product This requires the identification of what other uses can the already existing assets be put to. For example, using one’s taxi vehicle for advertising. 40 (n) Brainstorm This involves generating as many ideas as possible from a group of people without initially checking the usefulness of these ideas. Afterwards, these generated ideas are carefully assessed for their potentiality, and one may turn out to be a gold mine. (o) Commercialise research recommendations and inventions This requires an entrepreneur to identify any research ideas from research institutions and turning them into business. It may also involve identifying any inventions that might or might not be patented and translating them into business. (p) Combine uses into one product This involves an entrepreneur thinking of ways in which he/she can combine two or more products into one for the convenience of customers. For example: Creating a pen with functions of a musical instrument Creating a pencil that has an eraser Combining a broom and a mop into one product (q) Visualisation This requires an entrepreneur to use his/her imagination to create a picture of a product, service or business in his/her mind, and then working hard to ensure it is realised. This may mean coming up with completely new inventions that have not existed before. (r) Time framing This requires an entrepreneur to identify those services others are offering in a relatively long period of time and then figuring out how the same services can be offered by the entrepreneur in a shorter time without affecting the quality of that service. (s) Technology application Technological developments these days are so fast and abundant that one can come up with so many ideas of unique applications. 41 (t) Creation of opposites If a product is small make it big, if it is long make it short, if it is slow make it fast, if it is for very one make it for one person, if it is tall make it short, and vice versa. (u) Travel This involves coming up with a business idea from other places where the entrepreneur travelled and saw or used that product or service. The product or service would then be offered to the local people probably for the first time. Selecting the business ideas Having prepared a reasonable list of ideas, you must examine each business idea so that you end up with a short list of business ideas with the highest chance of success. You can use the scoring suggested below. Simple Scoring Method for Business Ideas Score: Yes = 1 and No = 0; Allocate scores to each question. If the answers to all the questions is YES the total score is 12 and 0 if all your answers were No. You may select a business idea if it scores above 5 and review it or reject it if it scores below 5. 42 Business Idea Assessment Form Name of the Business Idea: ………………………………………………………………………………. No. Focus Question Yes No Score 1. Personal Does the business suit your personal characteristics characteristics? 2. Knowledge and skills Do you have knowledge and skills that will help you run this type of business? 3. Experience Do you have experience that will help you to run this business? 4. Business Knowledge Do you know about the products and services in this business? 5. Business Support Do you know where to get advice and information about this business 6. Customers Are you knowledgeable of the potential customers for this particular business? 7. Competition Will this be the only business of this kind in your area? 8. Profitability Do you have reasons why you think this business will be profitable? 9. Human Resources, Do you know the type of equipment, Premises, Equipment materials, premises or qualified staff and Materials required for this business? 10. Finances Are you sure you will be able to get the finances to provide what is needed in the business? 11. Resources Do you know where will you get the resources to start this type of business? 12. Business Growth Do you know whether this business has potential for growth? TOTAL SCORE 43 After the business ideas identification, listing and assessment, you are now ready to go further to develop this business idea into business opportunities through spending time assessing, researching, developing and planning. ENVIRONMENTAL SCANNING or IDENTIFYING BUSINESS OPPORTUNITIES Environmental scanning is the process of obtaining and analysing all important information about the environment in which the business is or want to get into. Once an entrepreneur has come up with a business idea, the idea must be subjected to some scanning in order to determine whether it is workable and suitable. The Importance of Environmental Scanning Environmental scanning is important for the following reasons:  It enables an entrepreneur to 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 the business.  An entrepreneur is able to identify potential opportunities and threats for the business arising from these trends, situations, and events.  It allows the entrepreneur to achieve an accurate understanding of the business’s strengths and weaknesses.  It presents a support for the study of future opportunities. Techniques of Environmental Scanning There are a number of techniques an entrepreneur can use to carry out an environmental assessment. This discussion will cover the following techniques:  BPEST Analysis  Porter’s Model of Five Competitive Forces  SWOT analysis  Value Chain Analysis 44 BPEST Analysis BPEST analysis is concerned with the environmental influences on a business. The acronym stands for the Business, Political, Economic, Social and cultural, and Technological issues that could affect the strategic development of a business. Identifying BPEST influences is a useful way of summarising the external environment in which an enterprise operates. However, it must be followed up by consideration of how a business should respond to these influences. The discussion below lists some possible factors that could indicate important environmental influences for a business under the PEST headings: BPEST (a) Business Sate of industry: known or projected Market: current and projected demand, Buyer behaviour Competition: Market share; New comers, New products Suppliers: Reliability; Alternatives Bank Funds, Donor Funds Business Associations (b) Political / Legal Environmental regulation and protection Taxation: corporate; consumer International trade regulations Consumer protection Employment law Government organisation/attitude 45  Competition regulation (c) Economic Economic growth (overall; by industry sector) Monetary policy: (money supply; interest rates; exchange rates) Fiscal policy: (taxation, public borrowing; public spending) Government spending (overall level; specific spending priorities) Policy towards unemployment (minimum wage, unemployment benefits, grants) Taxation (impact on consumer disposable income, incentives to invest in capital equipment, corporation tax rates) Exchange rates (effects on demand by overseas customers; effect on cost of imported components) Inflation (effect on costs and selling prices) Stage of the business cycle (effect on short-term business performance); boom, recession, depression, recovery Economic "mood" - consumer confidence (d) Social and cultural Income distribution (change in distribution of disposable income) Demographics (age structure of the population; gender; family size and composition; changing nature of occupations) Labour / social mobility Lifestyle changes (e.g. Home working, single households) Attitudes to work and leisure Education 46  Fashions and fads Health & welfare Living conditions (housing, amenities, pollution) (e) Technological Government spending on research Government and industry focus on technological effort New discoveries and development Speed of technology transfer Rates of technological obsolescence Energy use and costs Changes in material sciences Impact of changes in Information technology Porter’s model of Five Competitive Forces Michael Porter's famous model of Five Competitive Forces provides a simple perspective for assessing and analysing the competitive strength and position of an enterprise. The 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 five competitive forces are:  The threat of new entrants to the industry  The threat of substitute products or services 47   The bargaining power of customers  The bargain power of suppliers  The rivalry of current competitors (industry rivalry) Porter’s Model: Five Competitive Forces Threat of new entrants Bargaining power of Industry rivalry Bargaining power of suppliers buyers/customers Threat of substitutes Source: Michael Porter, How Competitive Forces Shape Strategy, Harvard Business Review, March/April, 1979 (a) The threat of new entrants to the industry – a new entrant into an industry will bring extra capacity and more competition, hence reducing the profits earned by current businesses in the industry. (b) The threat of substitute products or services – a substitute is a product or service produced by another industry satisfying the same needs of the customers. Customers may switch to substitutes and reduce the profitability of the industry. (c) The bargaining power of customers - customers want better quality products or services at lower prices. Meeting this want may result in the lowering of profitability. 48 (d) The bargain power of suppliers – suppliers can apply force to obtain higher prices for their products and services and erode profits made by businesses in the industry. (e) The rivalry of current competitors – the higher the rivalry, the more likely the possibility of lowering prices and high investment in marketing to beat competition which may results in low profitability. SWOT analysis SWOT Analysis is a common strategic planning tool developed to compare internal strengths and weakness with the external opportunities and threats. S = Strengths W = Weaknesses O = Opportunities T = Threats Sample SWOT analysis STRENGTHS WEAKNESSES Good product image Insufficient financial resources Effective decision making Lack of management systems and Strong leadership policies Committed and caring staff Unclear communications and linkages Qualified and experienced staff Too reliant on donor funding Office equipment is available Lack own premises Availability of transport Uncommitted staff OPPORTUNITIES THREATS Cause-related organisations are trendy  Increasing competition Ageing population will increase clients  Government trend toward privatisation of public More opportunities for collaboration services Current era of partnership networks  Law suits in courts 49 Simple rules for successful SWOT analysis  Be realistic about the strengths and weaknesses of your business when conducting SWOT analysis.  SWOT analysis should differentiate between where your business is today, and where it could be in the future.  SWOT should always be specific.  Avoid vague 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 complications and too much analysis.  SWOT is subjective. 50 Value Chain Analysis Value Chain Analysis is a tool for working out how an entrepreneur can create the greatest possible value for his/her customers, as well as the best route to profit maximisation. In business, an entrepreneur pays 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, 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 an entrepreneur identify the ways in which to create value for his/her customers, and then helps the entrepreneur to think through how he/she can maximise this value: whether through nice products or useful services. Michael Porter suggested that the activities of a business could be grouped under two headings: (a) Primary activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and (b) Support activities which, whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others (outsourced). 51 Linking Value Chain Analysis to competitive advantage What activities an enterprise undertakes is directly linked to its achieving the competitive advantage. For example, an enterprise that wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. Primary activities are as follows: Inbound logistics – are all activities dealing with receiving and storing externally obtained materials. Operations – this involves the manufacturing of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products). Outbound logistics – these are all activities connected to getting finished goods and services to buyers. Marketing and sales – these are activities involved with informing buyers and consumers about products and services (benefits, use, price etc.). Service – are all activities related to maintaining product performance after the product has been sold. 52 Support activities are as follows: Procurement -This covers how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers). Human Resource Management - activities concerned with recruiting, developing, motivating and rewarding the workforce of a business. Technology Development - activities concerned with managing information processing and the development and protection of "knowledge" in a business. Infrastructure - Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management Steps in Value Chain Analysis Value chain analysis can be broken down into a three orderly steps: (a) Break down a market/organisation into its key activities under each of the major headings (primary or secondary). (b) Examine the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage. (c) Develop strategies built around focusing on activities where competitive advantage can be sustained. Process of Environmental Scanning Steps to conducting the environmental scanning:  Clearly state the purpose of collecting information.  Decide on how the information will be collected: desk or field study or both.  Identify who is responsible for the process. 53  Decide who will collect information.  Identify the sources of information.  Identify methods of collecting information.  Assemble existing information on issues and needs.  Reflect on the strengths and limitations of that information.  Select data gathering techniques to fill in information or audience gaps, detect emerging issues, and verify existing information.  Collect: scanning information from other organisations.  Assemble the information.  Analyse and translate the information into actionable. Questions to ask in an attempt to scan the environment and select a viable business idea What products or services does your business idea entail? Do you have the necessary competencies, management ability, experience and know-how to run a business that will produce these products or services? Who are the proposed target customers for these products and services? What makes you feel your proposed target customers need those products or services? Are you capable of making, through consultations, to determine the demand patterns for those proposed products or services? Is the demand for the proposed products or services high and continuing? What will it cost you to produce those products or services? Are the prices of those products or services going to be affordable to your customers? 54  What is the level of competition pertaining to the proposed products or services? If the level of competition is high, what will be your proposed competitive advantage? What will it take (resources) to run such a proposed business? Are you capable of mobilising the required resources? Is the political environment conducive for that business idea? Is the economic environment conducive for that business idea? Is the social and cultural environment conducive for that business idea? Is the technology for the proposed business there? Is the legal environment conducive for that business idea? Where will the resources be mobilised from, and at what cost? Can you afford to mobilise these resources at a cost? Will the business be profitable and sustainable? Are there so many people entering or exiting this type of business? Are suppliers of raw materials and other inputs for the business readily available? Does the proposed business idea have close substitutes? Where will the business be located, and is the area conducive? If 70% of the above questions can be answered with relative ease and objectively, it can safely be assumed that the environment is ripe for such a business idea to be translated into an actual business enterprise. After successfully undertaking an environmental scanning exercise, the next step would entail doing a detailed feasibility study. 55 FEASIBILITY STUDY Feasibility study is an examination to see whether the selected business idea is viable or practical. The feasibility study aims at answering 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 analyses 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 the goals of an enterprise. 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. A feasibility study is conducted before preparing the business plan. Once an entrepreneur has carried out a feasibility study, then he/she can proceed to write a business plan. 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 done good by further reading more about it, but can it work? Investment Assessment Techniques Feasibility study can be achieved by using investment techniques. These include: Payback period Net present value Internal rate of return 56 Payback period This determines the number of 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. Cash Investment Payback period = Annual Cash Inflow For example: 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 = K50,000,000/K12,500,000 = 4 years. Net Present Value The method is a process of calculating the present value of cash inflows and outflows of an investment proposal using the cost of capital as the suitable discounting rate and finding the net present value by subtracting the present value of cash outflow from the present value of cash inflows. For example: A business project costs initially K25,000,000 and generates year end cash inflows of K9,000,000; K8,000,000; K7, 000,000; K6,000,000 and K5,000,000 from year one to year five. The required rate of return is 10%. Net Present Value 57  Year Cash Inflow Discounting Factor Present Value of at 10 % Cash Inflow (ZK) (ZK) 1 9,000,000.9091 8,181,900 2 8,000,000.8264 6,611,200 3 7,000,000.7513 5,259,100 4 6,000,000.6830 4,098,000 5 5,000,000.6209 3,104,500 Total Present Value Cash Inflow 27, 254, 700 Less Investment (Initial Capital Expenditure) 25, 000, 000 Net Present Value 2, 254,700 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 net present value (NPV) is zero. This method may require iterations (repeated calculations until the IRR is found). For example: A project costs K 16,200,000 to start and the project is expected to generate cash of K 8,000,000; K 7,000,000; and K 6,000,000 over a three year period. The enterprise’s cost of capital is 13%. What is the IRR? 58 Cash Inflows Present Value at 20% Discount Rate Year Cash Inflows Discount factor at 20% Present value (PV) 1 8,000,000.8333 6,666,400 2 7,000,000.6944 4,860,800 3 6,000,000.5787 3,472,200 Total Discounted Cash Inflows 14,999,400 Less cash outlay 16,200,000 NPV (- ) -1,200,600 Note this is a higher rate; we try at a lower rate. Cash Inflows Present Values at 18%, 16%, and 14% Discount Rate Year Cash Discount Present DF @ PV DF @ PV Inflows Factor Value 16% 14% (18%) 1 8,000,000 0.8475 6,780,000 0.8621 6,896,800 0.8772 7,017,600 2 7,000,000 0.7182 5,027,400 0.7432 5,202,400 0.7695 5,386,500 3 6,000,000 0.6086 3,651,600 0.6407 3,844,200 0.6750 4,050,000 Total PV 15,459,000 15,943,400 16,454,100 Less cash outflow 16,200,000 16,200,000 16,200,000 59 NPV -741,000 -256,600 +254,100 The rate we are looking for lies between 14% and 16%. So lets us try to calculate the Present value at15%. Year Cash Inflow Discount Factor @ 15% Present Value 1 8,000,000 0.8696 6,956,800 2 7,000,000 0.7561 5,292,700 3 6,000,000 0.6575 3,945,000 Total Discounted Cash Inflows 16,194,500 Less cash outlay 16,200,000 NPV -5,500 Let us try once more to calculate the present value at 14.98% Year Cash Inflow Discount Factor @ 14.98% Present Value 1 8,000,000 0.8697 6,957,600 2 7,000,000 0.7564 5,294,800 3 6,000,000 0.6580 3,948,000 Total Discounted Cash Inflows 16,200,400 Less cash outlay 16,200,000 NPV 400 It can therefore be concluded that the IRR is about 15%. 60 Acceptance Rules No. Method Acceptance Rule 1 Payback Period Accept business project if the payback period is shorter than one set up by management 2 Net Present Value Accept a business project if the present value of cash inflows over a number of year is positive 3 Internal Rate of Return Accept business project if the internal rate of return is higher than or equal to the cost of capital NB: Cost of capital = minimum required return on new investment. RISK TAKING One of the major requirements in entrepreneurship is that an entrepreneur should take risks. A risk is the probability that the actual result is negatively different from the planned event. Risk arises when an activity has two possible outcomes (such as profit and loss). In business, there are several cases when the actual results are not as good as planned and in such cases losses may occur. When an entrepreneur knows that there are chances of failing to produce good results but he/she goes ahead to try, then such an entrepreneur is said to be taking a risk. In business, it is said that the higher the risk, the higher the returns. 61 Entrepreneurs who succeed are those who take risks because in the process of taking risks, they begin to learn from their mistakes and eventually take calculated risks, which even produce higher results. It is, therefore, clear that taking calculated risks is a very crucial ingredient for successful entrepreneurship. A calculated risk is a chance taken by an entrepreneur after a carful estimation of the probable outcomes. It is planned with forethought. Types of risk Risks in business come in many forms. The following are the main types. (a) Business risk Business risk is largely associated with the choice of enterprise that an entrepreneur makes, and in which he/she is to make an investment. There are various enterprises taking so many forms and each one of them has different profitability levels, advantages and disadvantages. The choice of investing in one of them carries its own risk that an entrepreneur takes. For example, starting a farm has different type of business risk as compared to emerald mining. (b) Operating risk Operating risk arises from the operating activities of an enterprise in terms of material resources, time management, human resource used and type of management applied. This type of risk includes such things as the possibility of poor management of finance, poor marketing skills, poor planning skills, incorrect pricing, which are are high risks areas for businesses especially for small and medium sized businesses. Operating risk also includes staff turnover, sudden changes in technology, and materials supply disruptions. 62 (c) Financial risk Financial risk refers to the extent to which an enterprise has been financed using borrowed resources, or an enterprise’s use of borrowed funds in its operations. It also includes the chance of loss of cash, loss of a financial investment, high taxes and high interest rates due to borrowed funds. (d) Environmental risk Environmental risks are those risks arising from fire, riots, weather, thefts and sudden government policy change. (e) Entrepreneur’s Risk This type of risk refers to how committed an entrepreneur is to his/her own business. Many budding entrepreneurs backslide to job seeking when this type of risk seems to be high. Lack of experience in the business is another cause of high entrepreneur’s risk and business failure. (f) Market Risk Market risk relates to the emergence of competitors in the industry, inflationary pressures, exchange rate instability, low demand for locally produced goods, and poor distribution systems. These are risk areas that an entrepreneur should manage under market risk. Types of entrepreneurs based on risk Entrepreneurs come in three forms in terms of risk, namely: 63 (a) Risk averse – are those entrepreneurs who avoid taking risks anyhow. These entrepreneurs tend to prefer to take on the projects with the lowest risk even if the returns are low. (b) Risk indifferent – are those entrepreneurs who take risks depending on the projected return. When the projected return is high, they are ready to take risks. When the projected return is low, they do not take the risks. (c) Risk takers – are those entrepreneurs who are always prepared to take risks no matter what. Because of their tendency to take higher risks, these entrepreneurs tend to be more successful than other types of entrepreneurs. MOBILISING RESOURCES FOR AN ENTERPRISE An entrepreneur is required to mobilise all the resources needed for his/her enterprise to start its operations or for it to continue to run smoothly, effectively and efficiently and be able to make a profit. The following are the resources that an entrepreneur would require to mobilise for the enterprise: (a) Human resources (labour) The human resource is the most important resource because this is the resource that combines other resources in the right proportions in order for 64 the enterprise to be able to produce the required results. The human resource, therefore, must be mobilised by the entrepreneur through the following tips: An entrepreneur must always employ the right number of workers – not too many and not too few. Where there is overemployment of workers, production suffers because there is too much idling and expecting the other workers to do the work, and the wage bill is unnecessarily high. Where there are few workers than needed, there is work overload, frustrations, too many mistakes, low morale and consequently poor quality of goods made or services provided. An entrepreneur must ensure that each worker has clearly defined responsibilities and roles. An entrepreneur must always seek to provide a highly motivating environment. Workers are normally motivated by: ○ Interesting work ○ Full appreciation for work done ○ Promotion and growth ○ Good wages ○ Good working conditions ○ Fairness and understanding ○ Job security ○ Being informed of the goings-on An entrepreneur must always seek to keep his/her workers constantly updated with the best ways of doing work through constant training both internal (on-the-job training) and external (outside training). An entrepreneur must involve his/her workers in decisions that directly affect them so that decisions made are collectively binding and accepted. A culture of teamwork must be cultivated. 65  An entrepreneur must ensure that at recruitment stage, the right workers with the right skills, training and experience are employed for the right job. An entrepreneur must match the worker and the job. An entrepreneur must set high standards of performance. An entrepreneur must ensure that there is communication among and with all the workers. An entrepreneur must maintain good supervision. An entrepreneur must reward people for performance. (b) Financial resources Financial resources are the means by which an enterprise acquires and sustains the other resources for smooth, effect