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Chapter 2@2016 4MEng

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0% found this document useful (0 votes)
31 views12 pages

Chapter 2@2016 4MEng

Uploaded by

yiheyis mulatu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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4/9/2024

Chapter-2 What does mean Business?


 Business refers to any activity or organization engaged in the
Creation of new venture
production or sale of goods or services to earn a profit.
♠ Business idea versus Business opportunity
 It encompasses a wide range of commercial, industrial, and
♠ Development of technology based venture
professional activities conducted by individuals or groups.
♠ Innovation in Technology based Business
 In essence, business involves the exchange of goods or services
♠ Feasibility study and business plan
for money or other valuable considerations, with the goal of
generating revenue and achieving sustainable growth.

 It can take various forms, including sole proprietorships,


partnerships, corporations, and franchises, and operates within a
framework of economic, legal, and social environments.
Negash L.

Basic criterias somebody come to own business Cont.………

1. Entrepreneurial Spirit: A strong desire and drive to create and 6. Legal Structure: Choose a legal structure for your business based
on factors like liability, taxation, and ownership structure, register
manage a business. the business, and comply with relevant laws and regulations.
2. Identifying Opportunity: Recognizing a market need or gap that can 7. Adaptability: Flexibility to adjust strategies and operations in
response to changing market conditions and circumstances.
be addressed with a product or service.
8. Financial Management: Basic understanding of finances and
3. Risk Tolerance: Willingness to take calculated risks and embrace
ability to manage budgets, cash flow, and profitability.
uncertainty associated with business ownership.
9. Networking: Building relationships with stakeholders, including
4. Resourcefulness: Ability to leverage resources effectively, including
customers, suppliers, investors, and mentors.
financial, human, and intellectual capital.
10. Execution: Capacity to turn ideas into action and effectively
5. Problem-Solving Skills: Capability to overcome challenges and find
execute business plans.
solutions to complex issues.

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What is Business Idea? Development of New Business


♣ Is the response to solve an identified problem or to meet perceived
needs in the environment.
♣ It is a concept that has the potential to make money.
♣ It is tied around a product service but has no commercial value yet.
♣ Good business idea is a precondition for initiating a new business
venture.
♣ Novel idea is the first step in transforming the entrepreneur’s desire
and creativity into a business opportunity.
Types of Business Ideas
Three types of business ideas
⸙ Old idea: It is copying of an existing business idea.
⸙ Modified idea: It is an old idea plus modification(s).
⸙ New idea: It is the invention of new idea.
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A successful business idea must meet the following


Why You Generate Business Ideas?
three conditions:
♣ To start a new business.  It must offer benefit to the customer by solving a problem or
fulfilling a need.
♣ Respond to market needs.
 Customers buy products and services for just one reason; to
♣ Respond to changing customer wants and needs. satisfy a need. So, if your business idea cannot satisfy customers,
♣ To stay ahead of the competition. it won’t be successful. Every successful business idea must have
a unique selling proposition.
♣ Using technology to do things better.
 It must have a market that is willing to accept it.
 A promising business idea must offer a product or service that
would be accepted by a large market. It must also have feasible
arrangements for catering to that large market as well as unique
values that differentiates it from the competition.
 It must have a mechanism for making revenue.
 A successful business idea must show how much money can be
earned from it and how the money will be earned.

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Sources of Business Ideas Brainstorming


♠ Brainstorming is one of the best-known
 Hobbies/Personal interests.
techniques available for creative problem-
 Personal skills and experience.
solving. Or
 Media.
 Business exhibitions. ♠ It is a technique by which a group attempts to
 Surveys. find a solution(s) to a specific problem by
 Customer complaints.
amassing ideas spontaneously.
 Natural scarcities and pollution.
 Changes in Society. ♠ Is a source for generating ideas.
 Being creative. ♠ The aim is to arrive with as many ideas as
 Novel ideas from overseas (Global).
possible.
 Potential imports (technology transfer).
 Brainstorming. ♠ Begins with a question or problem statement.

♠ Typically involves a group of people.

Rules of Brainstorming
 No criticism. Why to evaluate business idea?
 Free wheeling is encouraged.
♠ To decide what is important
 Quality of idea is desired.
 Combination and improvements of ideas are encouraged. ♠ Identify strength and weakness of the idea
Evaluating a Business Idea ♠ Make best use of limited resources
Business idea should be evaluated in terms of: ♠ Minimize risk and maximize returns and so on.
 Present market:-The size of the currently available market.
 Market growth:-Rapid growth and high return on invested capital.
 Costs:-It will include; Costs of raw material inputs, Labor costs, Selling
costs, Service, warranty, and customer complaints
 Business risks:- It considered the following factors: Market stability in
economic cycles, Technological risks , Import competition Size and
power of competitors, Legislation and controls and Time required
generating profit

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What is Business Opportunity? Three ways to identify business opportunity


♣ It is a favorable set of circumstances that creates a need for a new
product, service or business.
♣ It is a proven concept that generates on-going income.
1) Changing environmental trends
♣ It is a business idea that has been researched upon, refined and packaged
into a promising venture that is ready to launch.
2) Solving a problem
Business Opportunity has been found to meet the following criteria: 3) Finding gaps in market place
♣ It must have high gross margins.
♣ It must have the potential to reach break-even cash flow within 12 months First Approach: Changing environmental trends
– 36 months. ♣ The most important trends are:
♣ The startup capital investment must be realistic and within the range of
 Economic trends.
what you can provide.
 Social trends.
♣ You must have the strength and ability needed to drive the business to
success.  Technological advances.
♣ Your level of enthusiasm for the business must be very high.  Political action and regulatory change.
♣ It must have the potential to keep on improving with time.
♣ It must have a low level of liability risk.

Trends Suggesting Business Opportunity Second Approach: Solving a Problem


Gaps  Many companies have been started by people who by trying to
solve the problems, create the business ideas.
 Entrepreneurs can capitalize by modifying product created by
advances in technology.

Third Approach: Finding Gaps in the Marketplace

Specific Example

 In 2000 Tish Cirovolv realized there were no guitars on the market


made specifically for women.

 To fill this gap, she started Daisy Rock Guitars, a company that
makes guitars just for women.

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Developing a Business Concept Cont’d


Business Concept: is a clear and concise description of a
♠ You've just come up with a business opportunity. business opportunity. It contains four elements:
What to do next? Customer,
♠ Define the business opportunity by writing a clear Product or Service,
and concise business concept. Value / Benefit, and
Distribution
♠ Business concepts need to be tested in the market.
1. Customer: it is one who pays. who are your customers?
2. Product or Service: What does the customer need?
3. Value / Benefit: the benefit that the customer gets from
the product or service
4. Distribution: How will the customer get access to your
product/service?

Business idea versus opportunity Feasibility Analysis/Study


 So, a major difference between an idea and an opportunity is
that you can sell a business opportunity, but you cannot sell an
 It is the process of determining whether an idea is a viable
idea. foundation for creating a successful business.
It is obvious that investors invest in business opportunities, not  It answers the question should we proceed with this business idea
business ideas. or not?
 It Serves as a filter for screening out ideas that lack the potential for
 Now how do you turn a business idea into an opportunity? building a successful business.
Well, you can turn a business idea into a business opportunity by  It is particularly useful when an entrepreneur generates multiple
conducting market research and feasibility study on your idea, writing ideas and must make a best choice.
a business plan and assembling a business team that will work with you  It gives the entrepreneur a picture of market, sales, and profit
on your idea potential of a particular business idea.

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Importance of Feasibility Study or analysis Cont.…


♣ Explores the viability of alternative business concepts. ♣ Economic feasibility analysis-how much capital should needed, to
♣ Transforms an idea into successful business venture. start the business. Or it relates to the budget for a project and how
money will be spent. It also known as cost or benefit analysis.
♣ Helps to avoid unnecessary waste of resources.
♣ Technical feasibility analysis- relates to how deliver a products or
♣ Avoids launching a business that is likely to fail.
services. It also relates to whether hardware and software within a
Types of Feasibility analysis / Study business can cope with a proposed new business.
Economic analysis-money/budget ♣ Operational feasibility analysis- defines the legal and corporate
Market analysis-place structure of the business. It also relates to whether the participants will
Operational analysis-people be able to handle the new business. It includes the technical skills or
Scheduling analysis-Time experiences of employees.
Technical analysis-equipment or (hardware or software) ♣ Schedule feasibility analysis- relates to the amount of time allocated
to the development of the new business.
♣ Market feasibility analysis- study of anticipated future market
potential, competition, sales projections, potential buyers.

Financial Feasibility Analysis Elements of Financial Feasibility Analysis


⸙ It involves assessing the financial feasibility of a proposed
business venture. The major elements in a financial feasibility analysis include:
⸙ It deals with: a) Capital requirements – start-up capital required to launch the
business.(Investment Cost)
 Total start-up cash needed
b) Estimated earnings
 Financial performance of similar businesses  Forecasted income statements.
 Overall financial attractiveness of the proposed  Cash flows
venture c) Return on investment – is to determine how much investors can
⸙ An entrepreneur should conduct a more through financial expect their investments to return.
analysis when creating a full-blown business plan.

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How to form and develop Technology based Innovation in Technology based Business
ventures?  Innovations are the ability of doing new things.
 Entrepreneurship studies have identified three critical factors Types of Innovation
linked to successful creation of technology ventures:
 Technology,
 Talent and
 Capital.
 However, these by themselves will not be sufficient for the
successful development of technology based ventures; sound
national policies and strategies are always at the heart of such
development programs.
 Government policies is very important to form and develop
technology base venture by training people, by supporting
financially, by establishing science and technology institute.

 Product innovation/ Service innovation : doing a new or  Incremental Innovation is the one leading to a relatively small
improved products/ services, or occurs when new ways of deviation from current practices. It is introduced to improve old
delivering products/ services are developed products or procedures, without intervening to the existing structure
e.g. The use of Automatic Telling Machines (ATMs) in banks to replace human and strategy of the enterprise.
tellers.
 Radical Innovation brings about fundamental changes in the
 Process innovation: occurs when new processes are developed activities of an enterprise and expresses a significant deviation from
specifically for making a new or improved product. current practices. It gives momentum to new business activities,
 Administrative Innovation is the introduction of a new strategies and structures and introduces totally new products
administrative system or a new administrative process; it does not
introduce a new product or service but influences indirectly their
introduction or the production process thereof.
 Technological Innovation refers to the creation, improvement
and expansion of the procedures sustained by the products. Or
 Technological innovation may refer to the adoption of a new
idea relating to a new product or service, or the introduction of
new elements in production processes or service provision of an
enterprise.

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Cont.. Cont..
The process of innovations can also be classified as Market-pull and
Technology-push innovation:
Market-pull innovations: advancement of technology oriented
primarily toward a specific market need
 Occur when customers are technologically sophisticated
 Occur more frequently with older technologies
 Tend to be incremental innovations
Technology-push innovations: advancement of technology
oriented primarily toward increased technical performance
 Require that the firm’s scientists, engineers, and inventors have
direct experience with users
 Occur more frequently with new and emerging technologies
 Tend to be the major source of breakthrough innovations

Business Plan Techniques of economic feasibility analysis


♠ It is a written documents of an entrepreneur’s proposed the business
venture. They are sometimes known as capital budgeting techniques
Techniques include:
It includes the 1. Breakeven Point: It is the level of sales at which total revenue equals total
costs, resulting in neither profit nor loss. It's the moment when a business
 Operational, Financial details, Marketing opportunities & covers all its expenses and begins to make a profit.
strategy, and Managers’ skills & abilities. 2. Net Present Value (NPV): It is a financial metric used to evaluate the
♠ It explains how a new business is to be created. profitability of an investment by calculating the present value of expected
♠ It is a carefully elaborated plan on how a new business venture will future cash flows minus the initial investment cost. A positive NPV indicates
be implemented. the investment is expected to generate value and increase the wealth of the
investor.
♠ It explains how an existing business is to be expanded or
3. Internal Rate of Return (IRR): It used to assess the profitability of an
restructured.
investment by calculating the discount rate at which the net present value of
all cash flows from the investment equals zero. It represents the effective
annualized rate of return earned on the investment.
4. Payback Period: It is the amount of time it takes for an investment to
generate enough cash flows to recover its initial cost. It measures the time
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required for an investment to "pay back" or recoup its initial investment.

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1. Breakeven point is the level of operation at which a business neither Break even analysis:-The calculation is as follows:
earns a profit nor incurs a loss.
The fundamental accounting equation
 Profit = Revenues - Costs
 Revenue = SP*units sold, Example
 Total Costs = FC + VC*units manufactured A small street side cafe offers fresh traditional coffee to the general
public. Total variable costs per coffee (including coffee beans, water,
where, SP = selling price, FC = fixed cost, VC = unit variable costs.
firewood, sugar) amount to ETB 1.60 per cup. The cafe has fixed costs
 We are assuming that units manufactured equal units sold per week of ETB 360.00, being the rental of the place. The selling price
 The breakeven point is the point where profit is zero, so Profit /Loss is ETB 4.00.
= 0 = Revenue - Cost Break- Even in unit = [fixed costs / (Sales - variable cost)]
= SP*units sold - FC - VC*units sold = [360/ (4-1.6)] = 150 units
= (SP - VC)*units sold - FC
units sold(Q) = FC/(SP - VC)

Cont. Decision criteria for NPV


2. Net Present Value (NPV) Method :- is a method used NPV > 0, Accept the project – it maximizes investors wealth
to determine the current value of all future cash flows generated by a NPV < 0, Reject the project
project, including the initial capital investment.
 It is widely used in capital budgeting to establish which projects are NPV = 0, Indifferent
likely to turn the greatest profit. Illustration:-A firm is considering investing in a project which
n
Ct costs $6,000 and has the following cash flows
NPV    Io
t 1 (1  K )t

Where; Ct = cash flow at the end of period t


K = required rate of return
The cost of capital is 10% and the project has no salvage value.
n = useful life of project
Using the NPV method advise the firm on whether to invest in the
Io = initial cost of project project.
NPV = present value of cash flow – present value
of initial cost.

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3. Internal Rate of Return (IRR)


Cont.………

Generally, it is the rate of interest at which the present value of expected


cash inflows from a project equals to the present value of expected cash
37 outflows of the project.

A project is accepted if the internal rate of return exceeds the required


Cont. rate of return.
Steps in the IRR trial and error calculation method If IRR > RRR ==>Accept
 Compute the NPV of the project using an arbitrary selected discount
rate. If IRR = RRR ==>Accept
 If the NPV so computed is positive then try a higher rate and if negative
try a lower rate. If IRR < RRR ==>Reject
 Continue this process until the NPV of the project is equal to zero We first select an arbitrary discount rate say 15% and compute the NPV
 Use linear interpolation to determine the exact rate
Linear interpolation is given by

Where; LR = Lower rate and HR = higher rate


Illustration:-A project has the following cash flows

The cost of the project is $1500 and Determine whether project is acceptable since, NPV at 15% is positive but not large, we select a slightly
if the cost of capital is 18% using the IRR method. higher rate, say, 18%.

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Cont.….. Cont.

Since NPV at 18 is negative, IRR therefore lies between


15% and 18%, and since zero NPV will be between
38.19 and -68.23, to get the correct (exact) IRR we have
to interpolate between 15% and 18% using interpolation
formula.

4. Pay back period Cont.………


This is the number of year taken to recover the original (initial) investment  Cash flow refers to the movement of money into and out of a business,
from annual cash flows. Or it is an amount of time it takes to recover our reflecting the inflow and outflow of cash from various activities such as
initial investment. operations, investments, and financing. It provides insight into a company's
liquidity, financial health, and ability to meet its short-term obligations.
Illustration:-Assume a company wants to invest in two mutually exclusive
 Here, the “Years Before Break-Even” refers to the number of full years until projects of 1000 Br each generating the following cash flows. If the required
rate of return is 10%. Which of the projects should the company invest in?
the break-even point is met. In other words, it is the number of years the
project remains unprofitable.

 Next, the “Unrecovered Amount” represents the negative balance in the year
preceding the year in which the cumulative net cash flow of the company
exceeds zero.

 And this amount is divided by the “Cash Flow in Recovery Year”, which is the
amount of cash produced by the company in the year that the initial investment
cost has been recovered and is now turning a profit. 43

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Cont.…….

45

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