Chapter One

Introduction to Entrepreneurship
1.1. philosophy of Entrepreneur and Entrepreneurship
What is entrepreneurship? And who is an entrepreneur?. Here let us took into the historical
development of entrepreneurship so as to grasp the meaning of the word entrepreneurship.
During the ancient period the word entrepreneur was used to refer to a person managing large
commercial projects through the resources provided to him.
In the 17th Century a person who has signed a contractual agreement with the government to
provide specific products or to perform service was considered as entrepreneur. In this case the
contract price is fixed so any resulting profit or loss reflects the effort of the entrepreneur. In the
18th Century the first theory of entrepreneur has been developed by Richard Cantillon. He said
that an entrepreneur is a risk taker. If we consider the merchant, farmers and /or the professionals
they all operate at risk. For example, the merchants buy products at a known price and sell it at
unknown price and this shows that they are operating at risk.
The other development during the 18th Century is the differentiation of the entrepreneurial role
from capital providing role. The later role is the base for today’s venture capitalist. In the late
19th and early 20th Century an entrepreneur was viewed from an economic perspectives. The
entrepreneur organizes and operates an enterprise for personal gain. In the middle of the 20 th
Century the notion of an entrepreneur as an inventor as established.
“The function of the entrepreneur is to reform or revolutionize the pattern of production by
exploiting an invention or more generally untried technological possibility for producing new
commodities or producing an old one in a new way or opening a new outlet for products by
reorganizing a new industry.”
The concept of innovation and newness are at the heart of the above definition. From the
historical development it is possible to understand the fact that the perception of the word
entrepreneur was evolved from managing commercial project to the application of innovation
(creativity) in the business idea.
Definition
 Who is an entrepreneur?
 What is an entrepreneurship?
o There is no single and universally accepted definition and understanding exists for
these terms.
1.1.1. Definition of Entrepreneurs

o Some of the definitions given to an entrepreneur are:

 An entrepreneur: - is the individual who propelled (derived) by an idea, personal goals
and ambition, brings together the financial capital, people, equipment and facilities to
establish and manage a business enterprise. (1990)

Alemayehu Fanta (BSc, MPA, MA) Page 1

  An entrepreneur: - is either the originator of a new business or a manager who tries to
improve an organizational unit by initiating productive changes.
 An entrepreneur: - is a person who is able to perceive opportunities and create innovate
and capable of marshalling the resources to bring the opportunities as perceived to
function.
 An entrepreneur is someone who perceives an opportunity and creates an organization
to pursue it with the intention of being profitable
On the other hand the term defined from the economist, psychologist and capitalist philosophers’
point of view.
 To an economist an entrepreneur is one who brings resource, labor, materials, and other
assets into combination that makes their value greater than before and also one who
introduces changes innovations.
 To a psychologist an entrepreneur is a person typically driven by certain forces need to
obtain or attain something, to experiment, to accomplish or perhaps to escape the
authority of others.
 For the capitalist philosopher an entrepreneur is one who creates wealth for others as
well, who finds better way to utilize resources and reduce waste and who produce job
others are glad to get.
1.1.2. Definition of Entrepreneurship

Entrepreneurship: - is the dynamic process of creating incremental wealth. The wealth is

created by individuals who assume the major risks and provide value for some product or
service.
Entrepreneurship: - is the process of creating something different with value by devoting the
necessary time and effort, assuming the accompanying financial and social risk and receiving the
resulting rewards of monetary and personal satisfaction. (1990).
 Entrepreneurship can also be defined as the process of creating something different and
better with value by devoting the necessary time and effort by assuming the
accompanying financial, psychic and social risks and receiving the resulting monetary
reward and personal satisfaction. In this case an individual should come up with
something different and better in order to the named as entrepreneur.
In general, the process of entrepreneurship includes five critical elements. They are:
1. The ability to perceive an opportunity.
2. The ability to commercialize the perceived opportunity i.e. innovation
3. The ability to pursue it on a sustainable basis.
4. The ability to pursue it through systematic means.
5. The acceptance of risk or failure.
 The important reason behind the variations in the definition are:
1. Difference of the authors training and experience, and
2. The socio-economic base in which they define entrepreneurship

1.1.3. Basic concept of entrepreneurship

Alemayehu Fanta (BSc, MPA, MA) Page 2
In order to apply the process of entrepreneurship the entrepreneur should identify or develop
business ideas. A business idea is some one’s opinion regarding what may or may not be a good
business. There are three types of business ideas. They are:
 Old idea – Here an individual copies an existing business idea from someone.
 Old Idea with Modification – In this case the person accepts an old idea from
someone and then modifies it in some way to fit a potential customer’s demand.
 A new Idea – This one involves the invention of something new for the first time

The next concept is opportunity because the above business ideas are meaningless in the
absence of opportunity. An opportunity is the gap in the market which presents the possibility of
new value being created. It is also the chance of doing things both differently from and better
than how they are being undertaken at the moment.

The last concept is innovation.

innovation. Innovation is a way of doing something differently and better.
I.e. it is a means of exploiting a business opportunity. It is also a new combination of three things
(raw materials, labor and capital). In short innovation is invention (act of creating something)
plus commercialization (putting the new creativity into the market place. The relationship
between business idea and innovation is only new and modified ideas are innovative. An old idea
is not innovative because it is an imitation of existing business concept.

1.2. The Role of Entrepreneurship in the economy

The entrepreneur is the catalyst that plays a crucial role in developing a country’s economy.
Following are some contributions of the entrepreneur
Creation of job opportunities: - the hard work of the entrepreneur often results in the formation
of a small business that opens job opportunities to many others in addition to the entrepreneur
herself. According to the US small business administration, small business, many of which are
entrepreneurial, comprise more than 99% of employers, employ 51% of all private sector
workers and provide about 74% of new jobs in the USA.
Better production methods and products: - entrepreneurs often introduce better production
methods in terms of processing speed, quality of output, energy consumption, etc. Improved
production methods in turn result in better goods and services. The improvement may be in terms
of price, quality, location, ease of use, packaging, effectiveness of the product, etc.
Identification of business opportunities and markets: - entrepreneurs always keep their eyes
open to identify and exploit market opportunity; they devote themselves to satisfying the market
gat. However, in reality situation that opens the opportunity for others to establish their own
similar business and meet rest of the markets need.
Abolition of monopoly and enhancement of competition: - entrepreneur often bring an end to
monopolies that have existed for long. Such entrepreneurs discover the key knowledge or secrete
technology that has endured a monopoly. Or they create alternative method that can supply
similar or substitute goods and service. Similarly, by supplying substitute goods and service,
Alemayehu Fanta (BSc, MPA, MA) Page 3
entrepreneurs foster keener completion in many markets, which naturally results in lower prices
for consumers.
Development of complementary goods producers: - complementary goods are products that
are used together. Tea and sugar are good examples. For instance, the entrepreneur that
establishes a local car manufacturing company that will sell its cars locally will indirectly
contribute to the set of a number of local car repair shops.
Increase in per capital output and income: - entrepreneurial business activities result in
increases income for the entrepreneur, her employees and other related business. The supply of
goods and services in the economy will also be increased. This eventually leads to an increase in
per capital output and income in the economy.
Generation of foreign currency: - entrepreneurs that are in the export business generate
significant amount of foreign currency (dollar) to their home countries. This situation indirectly
contributes to the development of the countries’ economy by making more foreign currency
available for increased volume of imports.
Better utilization or resources:- some entrepreneurs become successful by inventing methods
and process that enable the production of goods out of resource that have been ignored and
labeled as “useless”. Such initiative leads to improved use of neglected resources and
conservation of the ones already in use.
Positive externalities:- externalities are the good (e.g new road constructed) or bad (pollution)
by products of a business which the near by community will enjoy or be exposed to. The
entrepreneur, while establishing her business, may develop infrastructure such as streets,
electricity and water wells that will be shared by the community as well.
Business opportunity for suppliers: - the entrepreneur needs to acquire inputs such as
employees and raw materials to produce goods and service. In most cases the entrepreneur will
not be able to supply these inputs for the business on her own. Therefore, these resources have to
be supplied by other business, a situation that results in a business opportunity for suppliers

1.3. Entrepreneurship: Creativity and Innovation

Entrepreneurship is often associated with the function of innovation and creativity. The terms
creativity and innovation are often used interchangeably, but there is some difference which exist
between them.
 Creativity: - is the ability to bring something new in to existence, but it is not the
activity.
 Innovation: - is the process of doing new things & it implies actions. Innovation is the
means to transform creative ideas into useful application, so, creativity is a pre-requisite
to innovation.
 Innovation requires persistence in analytically working out the details of product design
or service, marketing, obtain finance & plan operations.
Therefore:
Alemayehu Fanta (BSc, MPA, MA) Page 4
Invention the creation of something new results in a new knowledge.
Innovation the transformation of an idea results a new products or service applications.
The innovation process: - is translation of creative ideas into a useful application. That is:
Analytical planning Organizing resources Implementation Commercial application
 Analytical planning: - refers to identifying product design, market strategy, etc.
 Organizing resources: - refers to obtaining the required materials, technology, capital,
human resources, etc.
 Implementation: - refers to accomplishing the plan with the help of the appropriate
resource.
 Commercial Application: - refers to providing value to customers, reward for
employees, revenue for sellers and others.
Types of innovation
There four basic types of innovation that extend from modification/incremental/improvement/of
existing products up to totally new/radical innovation products.
These are:
1. Invention: - the creating of a new product, often one that is novel or untried.
2. Extension: - is the expansion of a product or process that already exists. Such concepts
make use of different application of already existing product.
3. Duplication: - is the replication of an already existing product. The duplication, how
ever is not simply copying but adding the entrepreneur’s own creativity to enhance or
improve the concept to win competition.
4. Synthesis: - is the combination of existing concepts & factors into a new formation. It
involves taking a number of ideas or items already invited & finding ways to form a new
application.
The numbers from 2 -4 are incremental innovation that refers to an improvement in an
existing design & these are evolutionary incremental changes but the first one is radical
revolutionary change.
Blocks to creative thinking
Despite the need for creative thinking there are many barriers to this situation. These include: -
 Lack of resource & Support
 Fear of criticism
 Fear of taking risk & failure
 Difficulty in forecasting or anticipating
 Negative altitude towards creativity
Creativity needs a motivating climate/environment/ to flourish. Some of these factors are:
 Provision of cross – training in different functional areas.
Alemayehu Fanta (BSc, MPA, MA) Page 5
  Freedom of though
 Provision of adequate financial resources
 Creating team – work spirit
Generating business ideas & opportunities
A good business idea is a pre-requisite for a successful business venture. It is also needs to be
developed & transformed into important business opportunity. Finding a good idea is the first
step in transforming the entrepreneur’s desire & creativity in to a business opportunity.
Source of new ideas
There are many useful sources of new business ideas. Some of them are: -
1. By observing the market, we can observe the demand & supply position of various
products, & a number of ideas can be generated.
2. Entrepreneur should pay an increasing attention of the customer, since the focal point of
the idea for the new product & services is for satisfaction of customers.
3. An entrepreneur’s can discover good ideas by keeping in touch with developments in
advance nations. Some times entrepreneur visit foreign countries in search of ideas for
new products or services.
4. Development banks, investment corporations, technical consultancy organizations,
export portion agencies etc can provide and assistance in technical, financial, marketing
and other areas of business.
5. Hobbies/Interests: - a hobby is a favorite leisure-time activity or occupation. Many
people in the process of trying to achieve their hobbies or interest have founded business
opportunities.
Method of Generating New Ideas
There are many different idea- generating methods. In fact, many techniques can be combined
but now we focus on some of the major methods.
1. Conducting Research
An entrepreneur’s can primarily generate new ideas by conducting targeted research. It is
necessary to estimate future demand and take into account anticipated change in fashion, income
levels, technology etc.
2. Focus Group
This method consists of a moderator leading group of people through an open and in-depth
discussion rather than simply asking questions to solicit participant response.
In addition to generating a new idea, the focus group is an excellent method for initially
screening ideas and concepts.
3. Brain Storming

Alemayehu Fanta (BSc, MPA, MA) Page 6

One of the most popular form of generating new business ideas is brainstorming, which takes in
consideration the formation of group activity.
It is based on the fact that people can be stimulated to greater creativity by meeting with others
and participating in organized group experiences. The entrepreneurs can gather a group of people
to discuss and generate new ideas.
When using this method, the following over all rules needs to be followed:
o No criticism is allowed – no negative comments
o Quantity of ideas is desired – the greater the number the more the likelihood of
useful ideas emerging.
o Combinations and improvements of ideas are encouraged – ideas of other can be
used to produce still another new idea.
Screening Ideas
Once the ideas emerged from idea source they need further development, screen and evaluation,
Business ideas need to be screened since some may stand out as much more suitable than others.
 Hence, in the process of screening business ideas, first, write down at least ten business
ideas on what people would like to buy.
 Secondly make the first selection of three business ideas from the list of possible business
ideas.
 Ideas or opportunities should pass the screening process and be able to converted in to
implementation. To screen business ideas the following factors have to be considered: -
1. Marketability/Demand
Market analysis is a key to the success of new business or project. Ideas generated from different
sources should be evaluated and screened based on marketing ability of the ideas. The
marketability screening involves analysis of demand and level of supply in the total market
(competition).
2. Profitability of the idea if implemented
Potential benefits associated with each idea should be considered while evaluating the ideas
generated from various sources.
3. Availability of raw materials and resources
The raw materials needed for successful application of the opportunity must be assessed. This
process starts with and appraisal of the entrepreneur’s present resources.
 In addition, possible sources of the row materials at a reasonable cost, in timely manner,
and effort must be considered.

4. Easy of Implementation

Alemayehu Fanta (BSc, MPA, MA) Page 7

The generated ideas can be evaluated based on whether the idea is converted into real business
easily. The entrepreneur should consider procedure of registration, needs of providing different
documents, registration, needs of providing different documents, legal requirements, needs of
employing qualified employers or persons etc.
5. Financial Requirements
Do we have adequate finance to implement and manage the business successfully?
6. Risk exposure criteria
Whether or not the product can imitate by others, Whether or not there is an aggressive or
superior competitor in the market
7. Government Priority and support: Do the business found under the government list of
priority for promotion of investment and employment generation? Is there any possibility of
government support, such as tax reduction, reduce rate of interest or other supports such as
market access, technical or advisory service?

Chapter Two: Small Business

Alemayehu Fanta (BSc, MPA, MA) Page 8

General overview of small business
2.1.1. The essence of small business
Because of their unique economic and organizational characteristics, small enterprises are well
placed to have important economic, social, and political roles in:
 Employment creation,
 Resource utilization,
 Income generation, and
 Helping to promote change, in a general and peaceful manner.
They respond creatively to a rapidly changing economic and social environment adjusting to
shifts in:
 Customers’ demands,
 Compositors’ action, and
 Public expectations.
2.1.2. Definition of Small Business
There are no lower limits to the size of small enterprise which include the formal and informal
enterprise which include the formal and informal sectors represented by:
 Self-employment,
 Family undertakings,
 Sole owners,
 Partnerships,
 Companies, and
 Cooperatives.
The criteria used to measure the size of the business are vary. Some criteria are applicable to all
industrial areas, while others are relevant only to certain types of businesses.
Examples of criteria used to measure are:
 Number of employees,
 Sales volume,
 Asset size,
 Insurance to force,
 Volume of deposits.
The general criteria for defining the small business;
 Functioning of the business is supplied by one individual or a small business,
 Except for the marketing function, firms operations are geographically localized
typically, it operates in only one or one city or community.
 Compared to the biggest firm in the industry, the business is small,
 The member of employees on the business is usually fewer than 100.
Small business enterprises basically include family business engaging three or four family
members and cottage industries or independent workers in the non-structured or informal sector
of the economy.
It may include small building constructors, maintenance and repair services, trade and transport.
2.1.3 Types of (Fields) of Small Business

Alemayehu Fanta (BSc, MPA, MA) Page 9

Small firms operate in all industries, but they differ greatly in their nature and importance from
industry to industry. Let us see the condition of small firms in each industry.
1. Mining and Agriculture:
Small-scale mining is one major area of industry that involves the production of basic raw
materials. There are several small firms that produce with only a few employees. Example, coal,
several quarries or excavations, and gravel companies.
In the agricultural sector, especially in our country, there are numberless small farm lands and
small enterprises that provide a means of living to majority of the population. Private investors
are encouraged to invest their capital in agricultural sector including farming, animal breeding,
horticulture, poultry, bee keeping and diary.
2. Manufacturing:
In our economy today there many small firms in manufacturing industry such as in the areas of
bakeries, flour mills, oil industries, shoe factories, book binding plants, small machine shops,
carpenter workshop, bottling works, and clothing,
3. Wholesaling.
The whole seller’s primary function is to act as an intermediary between manufacturers and
retailers or industrial users by assembling ,storing, and distributing products. Small businesses
are dominate in the whole-sailing and they sell a wide range of products such as drugs, groceries,
hardware, fruits vegetables, grain and farm products, farm implements supplies, machinery,
industrial supplies and electrical appliances.
4. Retailing:
Retailers are merchants who sell goods to ultimate consumers-the customers who buy for
individual or family use.
 Small businesses who flourish in the field of retailing include: corner drug stores,
groceries, meet shops, clothing stories, shoe shops, flourmills, machine spare
parts vendors, restaurants, music shop, jewelry stores, and stationary stories.

5. Service Industries:
There are small businesses in diversified service industries including business services, such as
accounting firms, advertising agencies, private employment agencies, and managerial
consultants; personal services, such as barber, beauty shops, dry cleaners, photographic studio,
and travel agencies; automobile repair services; entertainment and recreation services, and hotels
and motels
6. Contract Construction: In addition to general constructors, there are small firms who
play an important role in contracting for work in such specialized fields as electrical,
plumbing, and painting jobs.
7. Transportation and other Public Utilities:
The required investment is no great in the industry of transportation and other public utilities.
Even though the big business is dominant in this field, some small firms exist to operate,
including taxis, local buses, community newspaper, publications, and periodicals publications.

2.2 . Special contribution of small business (economic social and political aspect)

Alemayehu Fanta (BSc, MPA, MA) Page 10

As part of the business community, small enterprises unquestionably contribute to our country’s
economic welfare. The economic impact of small enterprises can be measured by their
contribution to output, employment, income, investment, export and other indicators. Special
contributions of small enterprises will be discussed as under:
1. Providing New Jobs:
As the population and the economy grow, small businesses must provide many of the new Job
Opportunities. Small businesses produce the major share of the new jobs in most countries. New
jobs, therefore, come from the birth of new firms and their subsequent expansion. Thus,
governments in most countries are currently interested in the effects of small enterprises sector
on job creation.
2. Introducing Innovation:
They should have to introduce the opportunities for developing and adapting appropriate
technology that are the accessible way of enjoying the benefit of innovation. Studies indicate
that many inventions and innovation have been conducted in small enterprises; b/c small
businesses cannot exist if they do not increase their productivity at reduced cost of production.
Innovation contributes to productivity by providing better products and better methods of
production.

3. Stimulating Economic Competition:

Many economists beginning with Adam Smith have expanded the values inherent in economic
competition. In a competitive situation, the individual business person driven by self-interest in
motivated to act in a society desirable manner. It is competition that acts as a regulator to
transform selfishness into service. When producers consist of only a few big businesses, the
customer is at their mercy. They may set very expensive prices, withhold technological
development, exclude new competitors, or otherwise abuse their position of power. But, as far as
there are many small enterprises in an economy, the creation of healthy and constructive
completion is inevitable. Small businesses may compete among themselves in several ways in
order to capture the markets, by lowering the prices of its products; the quality of its products; or
offering its services. As a result, the society as consumer will benefit from healthy business
competition.

4. Aiding Big Businesses:

The fact that some function is more skillfully performed by small enterprises enables them to
contribute to the success of large ones. Two functions the small business can perform more
efficiently than big business are; the distribution function and the supply function. Distribution
function is observed in the activities of wholesale and retails shops. Big business delivers their
products to small business to be distributed to consumers. Effective and efficient small
businesses distribute the products of big business and thus their transaction period will be
accomplished in a shorter period of time. Small businesses thus promote special subcontracting
arrangements and acting as ancillaries to large scale enterprises. In addition, small firms can
easily adapt and they are acting flexibility to market changes.

Alemayehu Fanta (BSc, MPA, MA) Page 11

 5. Producing Goods and Service Efficiently:

In considering the efficiency of small business, for example, we can easily recognize that big
business is better in manufacturing automobiles but the small business is better in repairing them.
The continued existence of small business in competitive economic system is itself evidence of
small business efficient operation.

2.4. Causes of small business failure

Thus the causes of failure may broadly be grouped upon two classes;
I. External causes, and
II. Internal causes.
I. External Causes:
Related to the external causes of business failure, the following circumstances are important:
a. Intense competition may cause the existence of a business impossible.
b. Change in demand may also lead to the failure of the business. With coming of the
substitute, demand for the commodity in question may be adversely affected. with the
coming of the safety blade, for example, the sale of ordinary blades for saving had been
adversely affected.
c. Sometimes legal decisions may also bring end of a business
 If such decisions impose restrictions on the production and consumption of a particular
commodity, the business person engaged in its sale will have to face adverse
consequences.
d. Natural calamities, like flood, earth quake, and fire may also lead to the destruction of
the business.
III. Internal cause: Generally, majority of the businesses fail because of internal factors
that may be roughly classified into the following three categories:
a. Inefficient management and control
 Inefficient management and control result in unnecessary excessive expenditure, lead
to reduction of profits ultimately results in losses.
b. Insufficient Resources: Unavailability of sufficient resources, such as lack of capital
and unsatisfied staff, hinders the proper conduct of business. In the absence of sufficient
capital, for example, the business person has to give up several profitable transaction that
later on become the cause of loss of the business.
c. Fraud and Cheating: Fraud and cheating on the part of either the owner or the
employees may also lead to failure of a business.
2.5. Challenges and Opportunities Of Ethiopian Entrepreneurs (Current Period)
In the present, although the free market economic policy encourages the development of
entrepreneurship there are also many unfavorable factors. Some of these major problems are:
i) Access to Land: Land is a major source of capital in the Ethiopian economy. The
promulgation that has made the chance of micro, small and medium entrepreneurs and
startups in general to get land on aviation gloomy. It is then a major constraint to new
establishment and expansion of entrepreneurs.

Alemayehu Fanta (BSc, MPA, MA) Page 12

ii) Financial Limitations: The very limited service of the public financial institution has made
it inaccessible to the great majority of the business community. The existing high collateral
requirements and the non-inclusion of machinery as a collateral, and in general the absence
of local financial credit system with a relate relaxed requirements have barred the great
majority of small entrepreneurs form access to credit. On the other side banks currently
provide only short-term finance. These and others problems of access to credit is more acute
at start-ups and the informal sectors at large with their very limited financial capacity, too
week to meet the requirements of the banks at any standard.
iii) Business Taxes
The present tax policy of the government discourages the entrepreneurs. The private
businesses are required to report and pay sales and excise taxes every thirty days. Under the
prevailing standard of the private sector’s working methods, the frequency seems very
problematic not only to payers but also to the receivers’
The discretionary tax assessment method and the procedures are also problematic. It is also
learnt that business experience such as worker’s training, research and development and
some marketing expenses are not yet routinely allowed to be subtracted from taxable income.
This practice would discourage entrepreneurs from investing in such areas which are crucial
factors in the development of entrepreneurship and the private sectors. A sales tax of 12
percent is also considered too high by the private sector.
iv) Bureaucratic Procedures
A lengthily procedure is a common feature one word the growth of entrepreneurship and the
private sector. In this area, lack of clear coordination within and between departments as well
as intra organizations coupled with lengthy procedures frustrate private entrepreneurs.
Bureaucratic delays and administrative inefficiencies in process of applications for
registration of new business are also part of the problem.
v) Technology
Lack of domestic technology is also one serious problem. The absence of modern indigenous
technologies forces the businessmen in Ethiopia to depend on imported technologies.
vi) Market Problem
The availability of market for the products produced by the local entrepreneurs is low due to
the negative attitude of the society towards domestic products. Moreover, both Ethiopian and
foreigners import variety of products in the name of the frequent exhibitions, free of custom
and other charges. The price of such products is usually less that the price quoted by local
producers producing similar products.
vii) Poor infrastructure
The lack of or poor communication and transportation facilities, the absence or limited water
and electricity services, lack of information on business opportunities and the lack of or little
business advocacy ad up to the major hurdle the private sector faces.
To sum up, the most common problems of the Ethiopian entrepreneurs are absence of
technology, shortage of working capital, inadequacy and high price of raw materials, non
availability of qualified staff, managerial incapability, bureaucratic red tape, illegal imports,

Alemayehu Fanta (BSc, MPA, MA) Page 13

weak market for domestic products, non-existence of strong institutional support and
inaccessibility to resources. Note also that some of these problems are getting improvements or
solutions.
Even though there are many problems which hindered the development of entrepreneurship there
are also some favorable factors for entrepreneurial activities in Ethiopia. The private sector had
been neglected for a long time and it is now given the opportunity to manage its own destiny. As
part of the economic reform programme necessary to revive the economy the liberalization
policies are considered positive move in the right direction. The measures are welcomed
particularly by the peasants who now have the right to sell their produce at competitive price.
The package incentives which include exemption of investors /entrepreneurs from paying
import duties and various taxes are expected to attract and promote entrepreneurs. The
availability of untouched natural resources labor resource, and favorable physical environments
are additional opportunities for Ethiopian entrepreneurs.
Summary
The historical development of entrepreneurship was very slow in the Ethiopian business
environment. This is due to the fact that the Ethiopian entrepreneurs have been challenged by so
many problems starting from the past. In the past there was no favorable government policy
which supports the development of entrepreneurship, private sector had no access to foreign
exchange, there was restriction on private sectors, they suffered from shortage of skilled labor
and the private sector was not given support through training and apprenticeship programmes.
In the present periods there are also some problems discouraging the development of
entrepreneurship. To mention some: access to land, limited financial institutions, business taxes,
lack of domestic technology and poor infrastructure. In spite of all the above problems the
incentive package, demand potential for all products and the availability of different untouched
resources are the major factors favoring entrepreneurial activities during the recent periods.

Chapter three: Business planning

2.1. Concept of planning:

Alemayehu Fanta (BSc, MPA, MA) Page 14

PLANNING is making decisions today about future actions. It involves selecting missions and
objectives and the actions to achieve them; it requires decision making. That is, choosing future
courses of action from among alternatives. No real plan exists until a decision – a commitment of
human or material resources – has been made. Before a decision is made, all we have is a
planning study, an analysis or a proposal, but not a real plan.

 Planning bridges the gap between where we are to where we want to be in a desired
future.
 Planning identifies goals and alternatives. It maps out courses of action that will commit
individuals, departments and the entire organization for days, months and years to
come.
 Planning is the first managerial function that all managers engaged in because it lays
the groundwork for other managerial functions( organizing, staffing. Leading and
controlling).

Types of planning: Plans can be classified on different bases or dimensions. These are:
- Scope/breadth dimension,
- Time dimension, and
- Use/repetitiveness

1. Scope/Breadth Dimension
Scope refers to the comprehensiveness of the plan, or it refers to the level of management where
plans are formulated. This dimension creates hierarchy of plans. Based on scope/breadth we can
classify plans into: Strategic, Tactical and Operational.

A. Strategic Plan: is organization wide plan that is formulated or developed by top-level

management in consultation with the board of directors and middle level management. It
applies to the entire organization.
o Develops the direction for the entire organization.
o Is primarily concerned with solving long-term problems associated with external
environmental influences.
o Establishes overall objectives and positions for an organization in terms of its
environment.
The following are distinguishing characteristics of strategic plan.
1. It requires looking outside the organization for threats and opportunities.
2. It requires looking inside the organization for strengths and weaknesses
3. It takes a longer view, i.e. it covers a relatively long time horizon > 5 years.
4. It tends to be top management responsibility, but it reflects a mentality useful at
all levels.
5. It is expressed in relatively general non-specific terms.

B. Tactical Plan:
It refers to the implementation of activities and the allocation of resources necessary for the
achievement of the organization’s objectives. is an intermediate plan that helps to reduce long
Alemayehu Fanta (BSc, MPA, MA) Page 15
range planning into intermediate one by increasing the amount of specificity and making the
actions goal oriented. Tactical plans are specific and more goal oriented than strategic plans.
Middle level management in consultation with lower level management develops them.

C. Operational Plan:
It is
is concerned with the day to day activities of the organization and is made at the lower level
management in consultation with middle level management. Operational plans spell out
specifically what must be accomplished to achieve specific/operational goals. It is concerned
with the efficient, day-to-day use of resources allocated to a department manager’s area of
responsibility. Operational plans have relatively short time frame (< 1 yr). It is the most detailed
(more specific) and narrowest plan compared to the above two; because it is to be implemented
day-to-day.

2. Time Dimension
Time dimension refers to the time periods for which the planning is intended. Based on the
length of time a plan covers, we do have three types of plans: Long-range (five years or more),
medium-range (between one and five years) and short-range plans (one year or less).Time
dimension and scope dimension are the same except the former is about the length of time that
the plan covers and the later about the level of management where the plan is formulated.

All strategic plans are long-range plans.

All tactical plans are medium-range plans.
All operational plans are short-range plans.

3. Use Dimension
Use dimension refers to the extent to which plans will be used on a recurring basis, i.e. based on
how repeatedly/frequently a given plan is used. Based on this dimension we do have two types of
plans: standing plans and single use plans.
plans.

Standing Plans are plans that provide an ongoing guidance for performing recurring activities.
They are plans which are formulated to be used again and again for the day-to-day operation of
the organization. That is, repetitive situations or actions require the development of such plans.
Once established, standing plans allow managers to conserve time used for planning and
decision-making because similar situations are handled in a predetermined, consistent manner.
The major types of standing plans are policies, rules and procedures.
procedures.

a. Policies:
Policies: is a general guide that specifies the broad parameters within which organization
members are expected to operate in pursuit of organizational goals. Policies are general
statements or understandings which guide or channel thinking and actions in decision-making to
achieve organizational objectives. Not all policies are “statements”, they are often merely
implied from the actions of managers.
b. Rules:
Rules: spell out specific required action or non-actions, i.e., actions that must be or must not
be taken, allowing no discretion, in a given situation.
c. Procedures:
Procedures: are statements that detail the exact manner in which certain activities must be
accomplished. They provide detailed step-by-step instructions as to what should be done.

Alemayehu Fanta (BSc, MPA, MA) Page 16

Procedures prescribe exactly what actions are to be taken in a specific situation and specify the
chronological sequence of activities.

Single use plans:

plans: are plans aimed at achieving a specific goal that, once reached, will most
likely not recur in the future and dissolved when these have been accomplished. Are designed to
accomplish a specific objective usually in a relatively shorter period of time and it is non
repetitive. They are detailed courses of action that probably will not be repeated in the same
form in the future.
a. Programs: is a comprehensive plan that coordinates a complex set of activities related
to a major non-recurring goal.
b. Projects: is a plan that coordinates a set of limited scope activities that do not need to
be divided into several major projects in order to reach a major non-recurring goal.
C. Budgets: are statements of expected results expressed in numerical terms.

2.2. The concept of business plan

A business plan is a comprehensive set of guidelines for a new venture. Thus a business plan is
an outline of potential issues to be addressed and set of guidelines to help entrepreneurs to make
better decisions. This plan would present basic business ideas and all related operating,
marketing, financial and managerial considerations. It is a layout for ideas and it describes where
you are, where you want to go, and how you propose to get there. The business plan may present
a proposal for launching an entire business at the outset. Sometimes it may be reviewed for a
major expansion of a firm that has already started the operations.
Purpose of a business plan
One of the important steps in setting up and new business is to develop a perfect business plan.
Business plans do not have to be long and elaborate. The well conceived plan offers a sound
basis for operation. A business plan can be used at different times for the benefit of several
groups of people.
A business plan must need to get answer to the following questions: -
1. When do we need business plan?
2. Whom do we need business plan?
3. Why do we need business plan?
1. When do we need a business plan?
Business plan are developed for the following situation:--
a. At the time of starting a new business
b. During the takeover of an existing business:- Buying an existing business
c. During the ongoing progress of business:- it is important in a dynamic
environment
d. When taking major decision:- for example, when the need for a major investment
areas.
2. Whom do we need a business plan?
a. Owners: - take a keen interest in the planning process

Alemayehu Fanta (BSc, MPA, MA) Page 17

 b. Managers: - Managers are those who run the intended business
c. Lenders: - the major banks encourage the preparation of business plans to justify
overdraft and loans.
3. Why do we need a business plan?
a. Assessing the feasibility and viability of the business: - will it work and become
commercially and financially viable?
b. Setting objective and Budgets: - the overall direction and financial target with
believable budget.
c. Assessing the required fund for the project
d. Setting Objectives and Budgets
What is the overall direction and financial target set by the plan having a clear financial vision
with believable budgets is a basic requirement of everyone involved in a plan.
The Benefits of business plan
A business plan is valuable to the entrepreneurs, because: -

- A business plan helps an entrepreneur to avoid a project from failure by dealing

effectively with uncertainties that may arise.
- It is an operation tool for guiding the venture towards success
- It helps the entrepreneurs to develop and examine operating strategies and expected
results for out side evaluators.
- It provide measurable standard for comparing forecasts with actual results.
- It is an important tool for seeking venture capital from Banks or investors.

3.3. Preparing a project feasibility study

A business project, whether an entirely new venture or an expansion of an existing one is
undertaken in order to accomplish and objective or produce and sell product or service for profit.
A feasibility study is a way of testing proposed activities to see if they can work successfully. It
is a study prepared to ascertain if the project as initially designed, will have a good chance of
making profit if implemented. A feasibility study should arrive at definitive conclusions on all
the basic aspects of a project after considering various alternatives. The objective of a full
feasibility study is to provide a basis for a final investment decision. Therefore it should define
all project features as precisely as possible. On the other hand a feasibility study should be
detailed and precise enough to enable decisions to be taken for instance on project financing.
A complete set of feasibility study is the best input for developing the business plan.
Feasibility Studies are undertaken to: -
 Review and update resources and market studies
 Review the available technology
 Provide financial and economic analysis
 Indicate infrastructural requirements
 Investigate the proposed location and potential activities.

Alemayehu Fanta (BSc, MPA, MA) Page 18

 3.4. Developing Business plan
The business plan is the document which the entrepreneur prepares, based on the feasibility
study, to attract investment. Business planning is a three stage process. It involves
 understanding where you are;
 deciding where you want to go; and
 Planning how to get there.
Besides, it entails thorough SWOT (Internal Strengths and weaknesses and external
opportunities and threats) analysis. Business plan preparation follows a definite pattern of
practical step-by-step tasks. These tasks range from introducing the business plan itself (Task
1) to presentation of the business plan to a banker or other source of finance or assistance.
Notice here that the tasks of business plan are supplementary to one another.
If you want a bank, or anyone else, to put money into your business, or if you are thinking of
putting money into it yourself, there are a number of questions that you must be able to
answer. Most bankers and other investors demand a written business plan before they will
invest any money, and many entrepreneurs like to have a written plan themselves, even if
nobody else ever sees it. The business plan pulls together all your analysis and decisions
into one important document, i.e., marketing analysis, financial analysis, and
organizational plan. In a nutshell, the business plan is normally used to persuade investors
to fund your idea.
Outline of business plan
Task 1: Introduction to the business plan
This is your first and perhaps easiest task in writing a business plan. In this element of your
business plan you are to introduce your company to the reader and explain the purpose of
your business plan. It should be used to briefly familiarize the reader with who you are, what
the goals of your business are, and when these goals will be accomplished. If you are presenting
your plan to a banker, you may state how much you intend to borrow, and what you intent to
do with the funds.
Contents of this section:
(a) Mission: the mission for the business, the formal mission statement that defines the
business.
(b) Overview of key objectives:
- Financial objectives: the turn over the profit targets for the period of the plan, the
growth desired over the previous period.
- Strategic objectives: achievements in the market and gain to be made in market
positions
Sample 1: Boss Indicus café, is CVMA Employees credit association business whose
principal business is Providing of a café services( products). The specific area of the firm’s
interest is café service provision to CVMA employees and students, such as tea, coffee, similar
service products. The purpose of this business plan is to outline the firm’s goals for the next five
years and to detail the actions required to implement its goals. Boss Indicus café gals are to:

Alemayehu Fanta (BSc, MPA, MA) Page 19

 1. Provide services and at meantime to increase profits through expanded sales to student
cafe in CVMA by July, 2017.
2. Identify alternative sources of supply by December, 2017
3. Seek additional financing to cover expanded production and sales by June, 2017

Task 2: Description of business: This section of the Business plan provides background and
other information on how your business was started and how it is presently doing or, if a
proposed business in operation, how and when you plan to start it.

Contents of this section

The following topics should be covered:
1. Name of Business: Legal name and trade name, if any.
2. Date and place of registration or incorporation, if any.
3. Date actual operations began or planned to begin.
4. Brief history: Discuss the type of business, the major events in the past operations, and
discuss the results, mentioning sales history when relevant.
5. Form of business organization: Corporation, partnership or proprietorship.
6. Names of owner, partners or major investors

Task 3: Description of products or services: In this section of the business plan you discuss the
product and/or services that you will be selling.

Contents of this section: These four topics should be found in this section of the business
plan:
1. Description of Products and/or Services: Explain what it is that you are selling. Be
specific
2. Status of the Products and/or Services: Are your products and/or services available for
sale now? If not, what needs to be done to develop them?
3. Do your products and/or services have any competitive advantages because of patents,
copyrights, trademarks, franchise or dealership rights, and the like? If so, explain the
advantages and state how long this proprietary position is likely to last.
4. Comparison to Competitive Products and/or Services: Identify those products and/or
services which you think will be competing with yours.
Task 4: Customer
The purpose of your market research is to identify your market area (i.e., the geographical area
where the majority of your customers are located), market size, (i.e., how much money people
spend in a year on your kind of product or service in your area), and market trends (i.e., what is
expected to happen to this market in the future).
Contents of this section:

Alemayehu Fanta (BSc, MPA, MA) Page 20

Determine in detail who your customers are, or are likely to be. Be as specific as possible. Try to
categorize them, and then describe the characteristics of each category
Task 5 Competition: You can learn exceptionally important lessons about your business by
noting how your competitors operate their businesses. Find out as much as you can about them.
Try to learn as much as you can from their successes and their failures. Competition can be
inspiring rather than threatening if it is fully researched and understood.
Contents of this section: Following are some of the subjects that you should include in this
section of your business plan:
 Description of Competitors: Identify those businesses which will be competing with
you
 Size of Competitors: Determine the assets and sales volume of the major competitors
 Profitability of Competitors: Try to determine how profitable the business is for those
companies already in the field.
 Operating Methods: For each of the major competitors, try to determine their relevant
operating methods. For example, what pricing strategy does each firm use? In addition to
price, you may also want to consider:
a. Quality of product and/or service;
b. Hours of operation;
c. Ability of personnel;
d. Servicing, warranties, and packaging;
e. Methods of selling; distribution channels;
f. Credit terms; volume discounts;
g. Location;
h. Advertising and Promotion;
i. Reputation of company and/or principals;
j. Inventory levels

Task 6: Location :
Contents of this section: If location is not a critical factor in your marketing strategy, it does not
need to be discussed in this part of the business plan. Instead, you should describe your location
in the “production plan” section.
Task 7: pricing
Contents of this section: In this task, you have to consider your pricing policy. Pricing is often
one of the things that a small businessman spends too little time on. Pricing decisions are often
made only on the basis of competition , Cost or Consumer Perceptions
Task 8: Marketing Methods
Contents of this section: In this section, you have to think about how you are going to market
your goods or services. You must also answer the following questions about your product or
service, and put the answers in your plan. Timing, Advertising, Location, People
Task 9: Key personnel

Alemayehu Fanta (BSc, MPA, MA) Page 21

Contents of this section: In this section of the workbook you are asked to identify the key
people in your business. Key personnel include the owner(s) and other difficult to replace
management people. However, if you have a non-managerial person who is also critical to the
success of the business, he should be included in this element
Task 10 : Materials and sources of supply
Contents of this section: The purpose of this section of your business plan is to determine what
materials you will need and where you will get them.
Task 11: Manufacturing and production: Explain the process and equipment used to make
your product
Task 12: Sales forecast
Contents of this section: One of the most difficult endeavors for a new business is to predict the
volume of sales when the door’s open. For the existing entrepreneur, the question is how much
can be gained by expansion or diversification. The question thus arises: what approach will
produce a realistic sales forecast? Unfortunately, there is no good answer to that. The following
are some approaches that you can use in order to come up with a reasonable estimate.
 Rules of thumb
 Comparison to similar businesses
 Your experience
 Pre-Selling
Task 13: Forecasting costs
Now that you have projected your sales, you need to calculate your costs so that you can
determine if your business is going to make a profit. Costs can be divided into two categories:
 Startup costs and
 On-going operating costs.
Start-up Costs. Start-up costs are those expenses you must incur before your business can open.
Start up costs typically include the following:
 Furniture and equipment.
 Land and building-relation expenses.
 Deposits
 Initial inventory
 Legal and professional fees
 Licenses and Permits
 Insurance premiums
 Advertising and Promotion and Others

Operating Costs
Once you have your sales forecasts, you need to work out the costs you will incur in operating
your business. These forecasts will enable you tell if your business is going to make a profit or
loss during a certain period. If you are in manufacturing, all production costs should be
estimated. If you are a service business, operational costs should be budgeted. General and
administrative expense such as salaries and legal and accounting expenses, should be included.
Alemayehu Fanta (BSc, MPA, MA) Page 22
Task 14: Forecast of cash flow
Contents of this section: Many businesses fail because owners do not accurately estimate the
amount of money they will need to start and operate the business. A cash flow budget is a plan
which shows how you think cash will flow into the business (cash receipts) and out of the
business (cash payments) month by month during a future period. A business must have enough
cash flowing into pay the day-to-day expenses like: wages, suppliers, rent and electricity
Task 15: The Appendix
Contents of this section: he last section of the business plan is the appendix and contains
supporting documentation. These documents will be used to lend credibility, or provide backup
information and evidence for statements or claims you have made in the business plan.
Examples of Supporting Documents:
1. Space leases; outlay sketches of premises
2. Incorporation papers; other legal documents
3. Special licenses, permits required
4. Curriculum vitae/Resumes of key personnel
5. Personal financial statements of owners.
6. Company financial statement etc.

Task 16 : Presentation: Now you have completed your business plan: what are you going to do
with it? Your most immediate purpose may be to present it to a banker or other source of finance
or assistance

Chapter Four: Product and service concept

4.1. Concept of Products (Goods, Services, and Ideas)
What is Product?
Product is anything that can be offered to a market for attention, acquisition, sue or consumption
that might satisfy a want or need. Products include more than just tangible goods. Broadly

Alemayehu Fanta (BSc, MPA, MA) Page 23

defined, products include physical objects, services, persons, places, organizations, ideas or
mixes of these entities.
Service:- any activity or benefit that one party can offer to another that is essentially intangible
and does not result in the ownership of anything.
Nature and Characteristics of a service
Four special characteristics of services:
i. Service intangibility
This means services cannot be seen, tasted, felt heard or smelled before they are bought.
ii. Service inseparability major characteristics of services are produced and consumed at
the same time and cannot be separated from their providers, whether the providers are
people or machines.
iii. Service variability:- a major characteristics of service:- their quality may vary greatly,
depending on who provides them and when, where, and how provides them.
iv. Service perish ability:- they cannot be stored for later sale or use. the perish ability of
services is not a problem when demand is steady. However when demand fluctuates, service
firms often have difficult problems
The product- service continuum
Companies in one extreme offer a pure tangible good while others in the other extreme offer pure
services. Between these two extremes, combinations of goods and services are possible, which
forms product service continuum.

GGG GGS G&S GSS SSS

Pure tangible Major tangible Hybrid Services with goods. Pure service. Eg
goods good with offer. Eg Eg air lines giving doctor,
accompanying services). Eg .car restaurants transportation service examination
service. eg soap, with repair & patronize with tangible goods finance service
toothpaste maintenance both food & like food, drinks etc
service, warranty services

Levels of Product
Products have three levels: core product, actual product and augmented product.
1. Core product:- this is the most basic level of a product, which addresses the question:
what is the buyer really buying? It stands at the center and consists of the core, problem
solving benefits that consumers seek when they buy a product or service.

Alemayehu Fanta (BSc, MPA, MA) Page 24

 2. 2. Actual Product:- the next level to be built is actual product around the core product. It
may have as many as five characteristics: a quality level, features, design, a brand name,
and packaging.
3. Augmented Product:- is built around the core and actual products by offering additional
consumer services and benefits.

Product Classifications
Products and services fall in two broad classes based on the types of consumers that use them:
A. Consumer Product:
A product bought by final consumer for personal consumption is called consumer product. These
include:
I. Convenience product is a consumer product that the consumer usually buys frequently,
immediately & with minimum of comparison & buying effort. It can be:
 Staples:- are products that consumer buy on regular basis, such as salt, tooth
paste.
 Impulse Products:- are purchased ( suddenly and in span of sight) with little
planning or search efforts. Eg. Candy baas, magazines…….

Alemayehu Fanta (BSc, MPA, MA) Page 25

  Emergency Products:- products which are bought when their needs is urgent.
Eg. Umbrellas- during rainstorms.
II. Shopping products:- consumer goods that the customer buy after comparing the product
suitability, quality, price & style.
 The consumer spends much time and effort in collecting information.
III. Specialty Products:- consumer products with unique characteristics or brand identification
for which a significant group of buyers is willing to make a specials purchase effort.
IV. Unsought product:-. Consumer product that the consumer either doesn’t know about or
know about but does not normally thinks of buying

4.3. Product development process: New – product development strategies

A firm can obtain new products in two ways:

Alemayehu Fanta (BSc, MPA, MA) Page 26

Acquisition:- buying a whole company, a patent, or a license to produce some one else’s product.
New-product development:- it is the development of original products or product modifications,
and new brands through the firm’s own R & D efforts. New products continue to fail at a
disturbing rate due to some of the reasons:
• The overestimation of market size
• Wrong design of the product
• Incorrectly positioning in the market
• High price, poor advertisement
• Hard fight of competitors than expected
• Fragmented markets, capital shortage, social and government constraints.
Key Success Factors: Unique superior product, higher quality, new features, higher value in
use. Well-defined product concept prior to development. Generally, to create successful new
products, a company must understand its customers, markets, and competitors and develop
products that deliver superior value to customers.

Major stages in new product development

There are eight stages
1. Idea generation
2. Idea screening
3. Concept development and testing
4. Marketing strategy development
5. Business analysis
6. Product development
7. Market testing
8. Commercialization
I. Idea Generation: Idea generation involves the systematic search for new product ideas.:
Major sources of new-product ideas include:
Internal Sources: Formal research and development, i.e. by picking the brains of scientists,
engineers etc. Brainstorming the new product idea by executives sales people (daily contact with
customers), Production personnel etc.
External Sources: Customer, distributors, competitors, trade associations, private research
organizations etc
II . Idea Screening
Idea screening involves screening new product ideas in order to spot good ideas and drop poor
ones as soon as possible.
To screen ideas ask questions like:
• Is the product truly useful to customers and society?
• Is it matched well with the company's objectives and strategies?
• Do we have people skills and resources to make it succeed?
• Does it deliver more value to customers than competing products?

Alemayehu Fanta (BSc, MPA, MA) Page 27

 • Is it easy to advertise and distribute?
III. Concept Development and Testing: An attractive idea must be developed in to product
concept.
A. concept Development: Any product idea can be turned into several product concepts.
The questions to be raised are:-
• Who will use this product? (infants, children, teen-agers…..
• What primary benefit should this product provide?
• When will, the consumer use the product? (break fast, mid morning, lunch
B. Concept Testing
Concept testing involves testing new-product concepts with a group of target consumers to find
out if the concepts have strong consumer appeal and getting consumer’s reactions. The
concepts may be presented to consumers symbolically or physically.

IV. Marketing Strategy Development

Involves designing an initial marketing strategy for a new product based on product concept.
The marketing strategy statement has three major parts.
• The first part describes the target market; the planned product positioning; the sales,
market share, and profit goals for the first few years.
• The second part outlines the product’s planned, price, distribution, and marketing
budget for the first year.
• The third part describes the planned long run sales, profit goals, and marketing mix
strategy.
V. Business Analysis
Business analysis involves a review of the sales, costs, and profit projections for a new product
to find out whether these factors satisfy the company’s objectives.
VI. Product Development
Product development involves developing the product concept in to a physical product in order
to assure that the product.
 The goal of this phase is to produce a prototype that consumers see as exemplifying the
key attributes described in the product statement.
Within prototype is ready, they must be put through rigorous functional and consumer test.
I. Functional tests: are conducted under laboratory and field conditions to make sure that
the product performs safely and effectively.
II. Consumer testing: can take a variety of forms, from bringing consumers in to a
laboratory to giving them samples to use in their homes
VII. Market Testing: This is the stage of new-product development in which the product and
marketing program are tested in more realistic market settings. positioning strategy, advertising,
distribution, pricing, branding and packaging and budget levels. Testing can be:
1. Standard Market Testing : Small number of representative cities are selected, and
conducts a full marketing campaign in these cities and uses store audits, consumer
and distributor surveys.
Advantages:
 The results are used to forecast national sales and profits.
 Discover potential product problems,
Alemayehu Fanta (BSc, MPA, MA) Page 28
  Fine(tune) marketing program.
Disadvantages
 Can be very costly and may take long time
 Competitors can monitor test market results or even interfere with them by cutting their
prices in test cities, increase their promotion and buy-up products being tested.
 It gives competitors a look at the company’s new product well before it is nationally
introduced, i.e. gives time to competitors to develop defensive strategies.
.2. Controlled Test Marketing
 In this method, a research firm manages a panel of stores that will carry new product for a
fee.
 The company with a new product specifies the number of stores and geographical
locations it wants to test.
 The research firm delivers the product to the participating stores and controls shelf
position; number of facings, displays, point-of- purchase promotions and pricing.
Advantages
 It costs less than standard test markets and take less time.
Disadvantages
 However, the panel consumes used by research services may not be representative of
their products’ market or target consumes
 allow competitors to get a look at the company’s new product.
3. Simulated Test Marketing: Some qualified consumers/shoppers are identified and the
consumers are given small amount of money and are invited to a real or laboratory store
where they may keep the money or use it to buy items. The company or research firm shows ads
and promotions for a variety of products including a new product being tested to a sample of
consumers without singing out for attention.
Advantage
- Much less cost and takes less time
- Does not allow competitors to take a look at the company’s new product.
Disadvantage
- It is not as accurate or reliable as larger real-world tests.
VIII. Commercialization: Commercialization involves introducing (launching) a new product
into the market. This demands high costs like:
- Build or rent a manufacturing facility.
- Advertisement, sales promotion and other market efforts.
- The company launching a new product must first decide on timing of introduction and
then where to launchings.
4.4. Product protection:
4.4. 1. Patents: A patent is a right granted to the owner of an invention that prevents others from
making, using, importing or selling the invention without his permission.
 The exclusive right granted by a government to an inventor to manufacture, use, or sells
an invention for a certain number of years.
 An invention or process protected by this right.
 an official document conferring such a right; letters patent.

Alemayehu Fanta (BSc, MPA, MA) Page 29

4.4.2. A trademark (brand name) is a word, phrase, symbol, and/or design that identifies and
distinguishes the source of the goods of one party from those of others. A service mark is a
word, phrase, symbol, and/or design that identifies and distinguishes the source of a service
rather than goods. Some examples include: brand names, slogans, and logos. The term
"trademark" is often used in a general sense to refer to both trademarks and service marks.
Unlike patents and copyrights, trademarks do not expire after a set term of years. Trademark
rights come from actual use. Therefore, a trademark can last forever - so long as you continue to
use the mark in commerce to indicate the source of goods and services. A trademark registration
can also last forever - so long as you file specific documents and pay fees at regular intervals.

4.4.3. Copyrights:
Copyrights: a person's exclusive right to reproduce, publish, or sell his or her original
work of authorship (as a literary, musical, dramatic, artistic, or architectural work..
Chapter Five: Marketing and New venture development
The marketing concept holds that achieving organizational goals depends on determining the
needs and wants of target markets and delivering the desired satisfactions more effectively and
efficiently than competitors do. The marketing and selling concepts are often confused. The
primary differences are:
 The selling concept takes an “inside-out” perspective (focuses on existing products and
uses heavy promotion and selling efforts).
 The marketing concept takes an “outside-in” perspective (focuses on needs, values, and
satisfactions).
5.1. Marketing Research an Introduction:
Every marketer needs marketing research, and most large companies have their own marketing
research departments. Marketing research involves a four-step process.
 The first step consists of the manager and researcher carefully defining the problem and
setting the research objectives. The objective may be exploratory, descriptive, or causal.

 The second step consists of developing the research plan for collecting data from primary
and secondary sources. Primary data collection calls for choosing a research approach
(observation, survey, experiment); choosing a contact method (mail, telephone, personal);
designing a sampling plan (whom to survey, how many to survey, and how to choose
them); and developing research instruments (questionnaire, mechanical).
 The third step consists of implementing the marketing research plan by collecting,
processing, and analyzing the information.
 The fourth step consists of interpreting and reporting the findings. Further information
analysis helps marketing managers to apply the information and provides advanced
statistical procedures and models to develop more rigorous findings from the information.
Some marketers face special marketing research considerations, such as conducting research in
small-business, non-profit, or international situations. Marketing research can be conducted
effectively by small organizations with small budgets. International marketing researchers follow
the same steps as domestic researchers but often face more challenging problems. All
organizations need to understand the major public policy and ethics issues surrounding
marketing research.
Alemayehu Fanta (BSc, MPA, MA) Page 30
Uses & Application of Research in Marketing:
Decision-making is crucial process in all types of the organization. This decision-making
requires then information that is collected and acquired through the marketing research process
this information can be regarding customers companies or competitor or the other environmental
factors. Major uses of the marketing research in the organizations are as following:
 Measurement of market potential.
 Analysis of market share.
 Determination of market characteristics
 Sales analysis
 Product testing.
 Forecasting.
 Studies of business trends
 Studies of competitors' products.

THE MARKETING RESEARCH PROCESS

Before researcher can provide managers with information, they must know what kind of problem
the manager wishes to solve. Marketing research process has following steps:
 Defining the problem and research objectives\
 Developing the research plan,
 Implementing the research plan, and
 Interpreting and reporting the findings.

Step 1 Defining the Problem and Research Objectives

The marketing manager and the researcher must work closely together to define the problem
carefully and agree on the research objectives. Marketing managers must know enough about
marketing research to help in the planning and to interpret research results. Defining the problem
and research objectives is often the hardest step in the process. After the problem has been
defined carefully, the manager and researcher must set the research objectives. The three general
types of objectives are:
1). Exploratory research where the objective is to gather preliminary information that will help
to better define problems and suggest hypotheses for their solution.
2). Descriptive research is where the intent is to describe things such as the market Potential for
a product or the demographics and attitudes of customers who buy the product.

3). Casual research is research to test hypotheses about cause-and-effect relationships. The
statement of the problem and research objectives will guide the entire research process. It is
always best to put the problem and research objectives statements in writing so agreement can be
reached and everyone knows the direction of the research effort.

Step 2 Developing the Research Plan In developing the research plan, the attempt is to
determine the information needed (outline sources of secondary data), develop a plan for
gathering it efficiently, and presenting the plan to marketing management. The plan spells out
specific research approaches, contact methods, sampling plans, and instruments that researchers
will use to gather new data. The firm should know what data already exists before the process of

Alemayehu Fanta (BSc, MPA, MA) Page 31

collecting new data begins. The steps that should be followed are. Developing the research plan
involves all of the following:
1. Determining Specific Information Needs
2. Gathering Secondary Information
3. Planning Primary Data Collection
1). Determine specific information needs. In this step research objectives are translated
into specific information needs. For example, determine the demographic, economic, and
lifestyle characteristics of a target audience.
2). Gathering secondary information.
a). Secondary data is information that already exists somewhere, having been collected
for another purpose. Sources of secondary data include both internal and external sources.
Companies can buy secondary data reports from outside suppliers (i.e., commercial data
sources). Information can be obtained by using commercial online databases. Examples include
 Advantages of secondary data include:
1. It can usually be obtained more quickly and at a lower cost than primary data.
2. Sometimes data can be provided that an individual company could not collect on its own.
Some problems with collecting secondary data include:
1. The needed information might not exist.
2. Even if the data is found, it might not be useable.
3. The researcher must evaluate secondary information to make certain it is relevant,
accurate, current, and impartial. Secondary data is a good starting point; however, the company
will often have to collect primary data.
b). Primary data is information collected for the specific purpose at hand. A plan for primary
data collection calls for a number of decisions on research approaches, contact methods,
sampling plans, and research instruments.

Research Approaches: Research approaches can be listed as:

 Observational research where information is gained by observing relevant people,
actions, and situations. Observational research can be used to obtain information that
people are unwilling or unable to provide.

 Survey research is the gathering of primary data by asking people questions about their
knowledge, attitudes, preferences, and buying behavior. Survey research is best suited or
gathering descriptive information. Survey research is the most widely used form of
primary data collection The major advantage of this approach is flexibility while the
disadvantages include the respondent being unwilling to respond, giving inaccurate
answers, or unwilling to spend the time to answer.

 Experimental research involves the gathering of primary data by selecting matched

groups of subjects, giving them different treatments, controlling related factors, and
checking for differences in-group responses. This form of research tries to explain cause
and affect relationships. Observation and surveys may be used to collect information in
experimental research. This form is best used for causal information.

5.2. Marketing Intelligence:

Alemayehu Fanta (BSc, MPA, MA) Page 32

No matters what type of marketing organization we refer to, marketing managers need a great
deal of information to carry out their marketing so as to provide superior value and satisfaction
for customers. However, despite the growing supply of information, managers often lack enough
information of the right kind or have too much information of the wrong kind. To overcome
these problems, many companies are taking steps to improve their marketing information
systems.

A marketing information system (MIS) consists of people, equipment and procedures to gather,
sort, analyze, evaluate and distribute needed, timely and accurate information to marketing
decision makers. MIS works in the following way:
 A well-designed marketing information system (MIS) begins and ends with the user. The
MIS first assesses information needs by interviewing marketing managers and surveying
their decision environment to determine what information is desired, needed, and
feasible to offer.

 The MIS next develops information and helps managers to use it more effectively.
Internal records provide information on sales, costs, inventories, cash flows, and
accounts receivable and payable. Such data can be obtained quickly and cheaply, but
must often be adapted for marketing decisions.

 Marketing intelligence supplies marketing executives with everyday information about

developments in the external marketing environment. Intelligence can be collected from
company employees, customers, suppliers, and resellers; or by monitoring published
reports, conferences, advertisements, competitor actions, and other activities in the
Marketing research involves collecting information relevant to a specific marketing
problem facing the company.

 Finally, the marketing information system distributes information gathered from internal
sources, marketing intelligence, and marketing research to the right managers at the
right times. More and more companies are decentralizing their information systems
through networks that allow managers to have direct access to information.

5.3. Competitive analysis

The competitive analysis is a statement of the business strategy and how it relates to the
competition. The purpose of the competitive analysis is to determine the strengths and
weaknesses of the competitors within your market, strategies that will provide you with a distinct
advantage.
The first step in a competitor analysis is to identify the current and potential competition. There
are essentially two ways you can identify competitors. The first is to look at the market from the
customer's viewpoint and group all your competitors by the degree to which they contend for the
buyer's dollar. The second method is to group competitors according to their various competitive
strategies so you understand what motivates them.
Once you have grouped your competitors, you can start to analyze their strategies and identify

Alemayehu Fanta (BSc, MPA, MA) Page 33

the areas where they are most vulnerable. This can be done through an examination of your
competitors' weaknesses and strengths. A competitor's strengths and weaknesses are usually
based on the presence and absence of key assets and skills needed to compete in the market.
To determine just what constitutes a key asset or skill within an industry, David A. Aaker
suggests concentrating your efforts in four areas:
1. The reasons behind successful as well as unsuccessful firms
2 . Prime customer motivators
3. Major component costs
4. Industry mobility barriers
According to theory, the performance of a company within a market is directly related to the
possession of key assets and skills. Therefore, an analysis of strong performers should reveal the
causes behind such a successful track record. This analysis, in conjunction with an examination
of unsuccessful companies and the reasons behind their failure, should provide a good idea of
just what key assets and skills are needed to be successful within a given industry and market
segment.
Through your competitor analysis you will also have to create a marketing strategy that will
generate an asset or skill competitors do not have, which will provide you with a distinct and
enduring competitive advantage.
Once you've established the key assets and skills necessary to succeed in this business and have
defined your distinct competitive advantage, you need to communicate them in a strategic form
that will attract market share as well as defend it. Competitive strategies usually fall into these
four: Product, Distribution, Pricing and Promotion

5.4. Marketing strategies:

Marketing is a process that revolves around the customers and in order to meet the requirements
of the customer. Marketers formulate and design the marketing mix that is also known as 4Ps (–
(four marketing activities) such as product, Price, Place and Promotion that a firm can control to
meet the needs of customers within its target market ).
The marketing mix variables are:
1. Product: Goods, services, or ideas that satisfy customer needs,
2. Price: Decisions and actions that establish pricing objectives and policies and set
product prices. There are different types of pricing strategy:

A. Market-Skimming pricing- setting a high price for a new product to skim maximum
revenues layer by layer from segments willing to pay the high price; the company makes
fewer but more profitable sales. It makes sense only under certain conditions:
 The product’s quality and image must support its higher price and enough buyers
must want the product at that price
 The costs of producing a smaller volume can not be so high that they cancel the
advantage of charging more
 Competitors should not be able the market easily and undercut the high price

Alemayehu Fanta (BSc, MPA, MA) Page 34

 B. Market – Penetration pricing – This involves setting a low price for a new product in
order to attract a large number of buyers and large market share. The high sales volume
results in falling costs, allowing the company to cut its price even further.
Conditions for penetration Strategy
 The market must be highly price sensitive.
 Production and distribution costs must fall as sales volume increases.
 The low price must help keep out the completion, and it must maintain its low price
position.
3. Place: The ready, convenient, and timely availability of products and finally the
4. Promotion: Promotion can be defined as activities that are used to inform customers
about the Organization and its products.
There are four component of marketing communication(promotion). These are:
 Personal selling
 Sales promotion
 Advertising
 Publicity
These four elements of marketing communication put together are referred to as promotion mix.
Therefore, marketing enterprises normally adopt all the four elements though the relative
importance placed on different element of promotion mix differs from enterprise to enterprise.
The four elements of promotional mixes are:
1. Personal selling
Authors define personal selling as an oral presentation in a conversation (talk) with one or more
prospective purchasers for the purpose of making sales. It is one to one communication b/n the
salesman and the intending buyer, which provide an opportunity to both buyers and sellers to
clarify on the number of points which is not the case in other form of promotion such as
advertising.
Personal selling plays a crucial role in securing sales under the following situations.
 Sales of high unit volume
 When large volume purchases are involved by single buyer
 When market is concentrated
 When the product is first introduced to the market.
 Play important role in international marketing
2. Public relation or publicity
Publicity refers to activities that are undertaken to promote a company and or its offer by
planting news about it in media, but not paid for by the sponsor. Publicity differs from
advertisement in that:
In advertisement the company by and large has control over the message will be used by the
media. but in publicity the company has less control over the message In publicity the media is

Alemayehu Fanta (BSc, MPA, MA) Page 35

not paid for the presentation of the message, while in advertisement the sponsor bear the cost.
Publicity has some advantage
 Practically no cost or very low cost.
 It has more credibility (reliability)
3. Sales promotion
Sales promotion includes short term incentives to encourage purchase and sales of product or
service. The purpose of sales promotion is to supplement and not succeed by other promotion
tools like : Advertising, personal selling and Publicity. Nowadays many organizations use sales
promotion tools to gain success in a fast changing world.

4. Advertizing in the global situation

Advertising is defined as any sponsored, paid communication of ideas, goods or services placed
in mass medium vehicle. Advertising always involves an identified sponsor who pays for the
advertisement and he is called the advertiser. In advertising message is communicated through
mass media like radio, TV, news paper, magazine, direct mail etc. Advertising plays a more
important role in the marketing of consumer products than industrial products. Frequently
purchased, low unit volume products generally require heavy advertising support. Eg. Coca-
Cola. Pepsi Cola etc

Alemayehu Fanta (BSc, MPA, MA) Page 36

Chapter six: Organizing and financing the new venture
6. Project financing (Business Financing)
Project financing is an innovative and timely financing technique that has been used on many
high-profile corporate projects. Project financing is emerging as the preferred alternative to
conventional methods of financing infrastructure and other large-scale projects worldwide.
Project financing discipline includes:
 Understanding the rationale for project financing
 how to prepare the financial plan
 assess the risks
 design the financing mix, and
 Raise the funds.
 In addition, one must understand the logical analyses of why some project financing
plans have succeeded while others have failed.
A knowledge-base is required to validate Business (projects) feasibility:
 regarding the design of contractual arrangements to support project financing
 issues for the host government legislative provisions
 public/private infrastructure partnerships
 public/private financing structures
 credit requirements of lenders, and how to determine the project's borrowing capacity
 how to prepare cash flow projections and use them to measure expected rates of return
 tax and accounting considerations
Financiers are concerned with minimizing the dangers of any events which could have a negative
impact on the financial performance of the project, in particular, events which could result in:
(1) The project not being completed on time, on budget, or at all
(2) The project not operating at its full capacity
(3) The project failing to generate sufficient revenue or
(4) The project prematurely coming to an end.
The minimization of such risks involves a three step process.

Alemayehu Fanta (BSc, MPA, MA) Page 37

  The first step requires the identification and analysis of all the risks that may bear upon
the project.
 The second step is the allocation of those risks among the parties.
 The last step involves the creation of mechanisms to manage the risks.
If a risk to the financiers cannot be minimized, the financiers will need to build it into the interest
rate margin for the loan.

Risk identification and analysis

The project sponsors will usually prepare a feasibility study, e.g. as to the construction and
operation of a mine or pipeline. The financiers will carefully review the study and may engage
independent expert consultants to supplement it. The matters of particular focus will be whether
the costs of the project have been properly assessed and whether the cash-flow streams from the
project are properly calculated. Some risks are analyzed using financial models to determine the
project's cash-flow and hence the ability of the project to meet repayment schedules. Different
scenarios will be examined by adjusting economic variables such as
 Inflation
 Interest rates
 Exchange rates and
 prices for the inputs and output of the project.
Various classes of risk that may be identified in a project financing will be
 Construction phase risk - Completion risk
 Operation phase risk - Resource / reserve risk
 Market / off-take risk
As stated previously, each project financing is different. Each project gives rise to its own unique
risks and hence poses its own unique challenges. In every case, the parties - and those advising
them - need to act creatively to meet those challenges and to effectively and efficiently minimize
the risks embodied in the project in order to ensure that the project financing will be a success.
Once the risks are identified and analyzed, they are allocated by the parties through negotiation
of the contractual framework. Ideally a risk should be allocated to the party who is the most
appropriate to bear it (i.e. who is in the best position to manage, control and insure against it) and
who has the financial capacity to bear it. It has been observed that financiers attempt to allocate
uncontrollable risks widely and to ensure that each party has an interest in fixing such risks.
Generally, commercial risks are sought to be allocated to the private sector and political risks to
the state sector. .
6.2. Sources of Finance
a) Equity
A generally applied financing pattern for an industrial project is to cover the initial capital
investment by equity and long-term loans to varying extents, and to meet working capital

Alemayehu Fanta (BSc, MPA, MA) Page 38

requirements by additional short and medium term loans from national banking sources. The
minimum net working capital requirements should be financed from long-term capital. In
situation where institutional capital is scarce and available only at high cost, equity capital covers
the initial capital investment and net working capital.
Anyway, a balance needs to be made between long-term debt and equity.
1. The higher the proportion of equity the less the debt service obligations and the higher
the gross profit before taxation.
2. The higher the proportion of loan finance, the higher the interest payable on liabilities.
Therefore, in every project, the implications of alternative patterns and forms of financing must
be carefully assessed: a financing pattern should be determined that is consistent with both
availability of resources and overall economic returns.
Issuing two types of shares can raise equity: Ordinary shares and preference shares. Preference
shares usually carry a dividend at least partly independent from profit, without or with only
limited voting rights.
They can be convertible to common shares, they can be cumulative or non – cumulative in terms
of dividend or can be redeemable or non-redeemable, with the redemption period varying
between 5 and 15 years. Dividends on ordinary shares with full voting rights, however, depend
on the profitable operation of the company.
b) Loan Financing
Since it is relatively easy for a sound project to obtain loans, the process of project financing may
well start by identifying the extent to which loan capital can be secured, together with the interest
rate applicable. Such loan capital need to be separately defined.
- Short and medium term borrowings from commercial bank for working capital or
suppliers credit and
- Long-term borrowings from national or international development finance
institutions
Short Term Loans: Short-term loan from commercial banks and local financial institutions are
available against hypothecation or pledging of inventories. Bank borrowing for working capital
can be arranged on a temporary basis. If the cash flow suggests that sufficient liquid funds are
available, such bank borrowings should be reduced or entirely eliminated, without harming the
liquidity of the project.
Working capital needs should even be partly net out of long-term fund, since the largest portion
of working capital is tied in inventories (raw material, work progress, finished goods and spare
parts).
Long Term Loans: Loan financing is usually subject to certain regulations (convertibility of
shares and declaration of dividends). Certain ratios in the capital structure of the company need
to be maintained. Investment may also be financed partly by issues of bonds and debentures.
An important source of finance is also available at government-to-government level in
developing countries. This can be a bilateral credit or tied credit, which may be related to the

Alemayehu Fanta (BSc, MPA, MA) Page 39

purchase of machinery and equipment from particular country or sources. In addition to share
capital and loan finance, an important financial category at the operational stage is the internal
cash generated by the project itself. This can take the form of accumulated reserve (retained
profits and depreciation).
c) Supplier Credits
Imported machinery and spares can often be financed on deferred credit term. Machinery
suppliers in developed countries are willing to sell machinery on deferred – payment terms with
payments spread over 6 to 10 years
d) Leasing:
Instead of borrowing financial means it is sometimes possible to lease plant equipment or even
complete production units that is productive assets are borrowed. Leasing (borrowing of
productive assets) requires usually a Down payment and the payment of an annual rent, the
leasing fee. These are, however, contained in balance sheet of the lessor and not in the lessee –
which is off – balance sheet financing.
The problem is basically to decide which alternative should be preferred, leasing or purchasing
of capital assets. To evaluate the two alternatives, the discounted cash flow should be applied.
The initial down payment, the current leasing fees and additional payments under the leasing
agreements are part of the cash outflow (replacing the investment costs).
Since the duration of leasing contracts is in general much shorter than the technical and
economic life of an asset, it is necessary to include the residual value (cash inflow) of the leased
asset when comparing with loan financing. The inflow for the lessee would usually not be the
book value, but either the book value or the market value (minus the lessors cost of setting the
used items) which ever is lower.
If the investor has a choice between loan and leasing financing, he would compare the
discounted cash flow for both flow arrays to determine which alternative would bring the higher
yield.

Alemayehu Fanta (BSc, MPA, MA) Page 40

Chapter seven: Managing growth and transaction
Growth strategies fall into different categories: Concentration strategies, market penetration,
Market development, product development, integration strategies, diversification
strategies, Stable growth strategy, Decline and closure strategy. Each category contains
several specific types of strategies.
Concentrated Strategy
Concentration strategies center on improving current products and current markets without
changing any other factor. In pursuing such a strategy, a firm essentially attempts to exploit
available opportunities with current products in current markets by doing what it is already
doing; only on better ways. The chart shows the change grid for concentrated growth strategies.
Chart 1. Strategy Change Grid for Concentrated Growth Strategy

Product Market Industry Industry Level Technology

Current Current Current Current Current

Market Penetration
Market penetration involves seeking growth for current products in current markets, normally
though more aggressive marketing efforts. The strategy change grid for a market penetration
strategy appears in Chart 2.
Chart 2. Strategy Change Grid for Market penetration

Product Market Industry Industry Level Technology

Current Current Current Current Current

Market Development Strategy

Alemayehu Fanta (BSc, MPA, MA) Page 41

Market development Strategy consists of marketing present products with only cosmetic
modifications. To customers in New or related market areas by adding different channels of
distributions or by changing the content or fits advertising or its promotional media. The thrust
under a market development approach is to expand the markets of the current business. This can
be done by gaining a larger share of the current market, expanding into new geographic areas, or
attracting new market segments. Coca-Cola has continued to follow a market development
strategy since its inception. It amassed its impressive market share though large-scale adverting
programs and has continued to expand into new geographic areas.In other words market
development involves seeking growth by entering new markets with current products. Chart 3.
Presents the strategy change grid for market development strategies.
Chart 3. Strategy Change Grid for Market Development

Product Market Industry Industry Level Technology

Current New Current Current Current

Product Development Strategy

The thrust under a product development approach is to alter the basic product or service or to add
a closely related product or service that can be sold through the current marketing channels. The
telephone companies’ introduction of numerous styles of phones and additional services, such as
call forwarding and call holding, is an example of a product development strategy.

Product Market Industry Industry Level Technology

New New New New New

Chart 5. Strategy Change Grid for Integration

Product Market Industry Industry Level Technology

New New New New New

Backward Vertical Integration Strategy

In backward vertical integration, a company seeks growth by acquiring ownership or increased
control of supply sources. In internal backward integration, the firm creates its own source of
supply, perhaps by establishing a subsidiary company. The external approach entails the
purchase or acquisition of an existing supplier.

Alemayehu Fanta (BSc, MPA, MA) Page 42

Backward integration is attractive when suppliers are experiencing fast growth or have great
profit potential. It is also attractive if there is uncertainty regarding availability, cost, or
reliability of deliveries of future suppliers. Its additional benefit is converting a current cost
center into a potential profit center.
Along with the benefits, backward integration can bring problems. They range from the often-
large capital requirements and increased complexity in the management process to organization
inflexibility and imbalances in capacity at each production stage.
Forward Vertical Integration
When pursuing forward vertical integration, a firm seeks growth by acquiring ownership or
increased control of channel functions closer to the ultimate market, such as sales and
distribution systems. A firm can accomplish forward integration internally by establishing its
own production facility (if it is a supplier of raw material), sales force, wholesale system, or
retail outlets. It can achieve external forward integration by acquiring firms that already perform
the desired function.
Thus, vertical integration is a growth strategy that involves extending an organization’s present
business in two possible directions. Forward integration moves the organization into distributing
its own products or services. Backward integration moves an organization into supplying some
or all of the products or services used in producing its present products or services.
Horizontal Integration
Horizontal integration occurs when an organization adds one or more businesses that produce
similar products or services and that are operating at the same stage in the product-marketing
chain. Almost all horizontal integration is accomplished by buying another organization in the
same business. Once concern with employing horizontal integration is that such a strategy
eliminates the competition that has existed between the two organizations and may result in legal
ramifications.
Chart 5. Strategy Change Grid for Integration

Product Market Industry Industry Level Technology

New New New New New

Classification of Diversification Strategies

Most diversification strategies can be classified as either concentric diversification or
conglomerate diversification. Concentric diversification occurs when the diversification is in
some way related to, but clearly differentiated from, the organization’s current business.
Conglomerate diversification occurs when the firm diversifies into an area(s) totally unrelated to
the organization’s current business.
Concentric Diversification

Alemayehu Fanta (BSc, MPA, MA) Page 43

Concentric diversification involves seeking growth by appealing to new markets with new
products that have a meaningful technological or marketing fit or synergy with existing products.
Chart 7. illustrates the change grid for a concentric diversification strategy.
Chart 7. Strategy Change Grid for Concentric Diversification

Product Market Industry Industry Level Technology

New New Current or new Current or New Current or new

Conglomerate Diversification
Conglomerate diversification involves seeking growth by appealing to new markets with
new products that have no technological relationship to current products. Conglomerate
diversification is a growth strategy that involves adding new products or services that are
significantly different from the organization’s present products or services. Conglomerate
diversification can be pursued internally or externally. Most frequently, however, it is achieved
through mergers, acquisitions, or joint ventures.
Chart 8. Strategy Change Grid for Conglomerate Diversification

Product Market Industry Industry Level Technology

New New New New New

Stable Growth Strategies

Stable growth strategy can be adapted if the organization is satisfied with its past performance
and decides to continue to pursue the same or similar objectives and to serve its customers with
basically the same products or services.
Definition of stable growth strategies:
A stability strategy (or neutral strategy) dictates that the company keeps on doing what it has
been doing to maintain competitive position. Firms most likely to pursue a stability strategy are
1) small, privately owned firms, 2) large, dominant firms, and 3) heavily regulated firms. This
strategy is also common after periods of rapid growth. A stable growth strategy is a relatively
low-risk strategy and is quite effective for successful organizations in an industry that is growing
and in an environment that is not volatile. For many organizations stable growth is probably the
most effective strategy.
Decline Strategies
Decline Strategies (Defensive Strategies) are generally short-run reactions to poor management
or to unexpected environmental events, such as competitors’ actions. They are appropriate when
a firm needs to regroup to improve efficiency after period of fast growth, when long-run growth
and profit opportunities are unavailable in an industry, during periods of economic uncertainty,

Alemayehu Fanta (BSc, MPA, MA) Page 44

or when other opportunities are simply more attractive than those being pursued. Three
strategies for declining industries can be adopted.

Closure Strategies
When all else fails, management can simply close down the firm. The two basic closure
strategies are liquidation and declaring bankruptcy.

Liquidation
Liquidation occurs when the entire firm ceases to exist, either through sale or dissolution.
Although liquidation can occur because of court-ordered bankruptcy proceedings, planned
liquidations can occur in an orderly manner. For example, a firm might decide that it cannot
compete successfully in the current industry and recognizes that it does not have the resources
necessary to pursue other promising strategies. To minimize losses, the firm might attempt to
liquidate immediately by selling out the entire business.
Bankruptcy
A strategy that deserves special attention is bankruptcy. Bankruptcy basically means that a firm
is unable to pay its debts. Bankruptcy is very different for the firm is protected from creditors
and other contract holders until it can rehabilitate itself. Courts control the assets of the firm.
Management can make few asset-related decisions without the court’s concurrence
7.2. Growth Strategies through External Resources
7.2.1. Merger
A merger occurs when two or more firms combine to form a single or a new company. Mergers
are often the results of firms mutually agreeing to combine and create a new name and a new
organizational structure and make other changes. In a merger the shareholders of the
organization come together, normally willingly, to share the resources of the enlarged (merged)
organization, with shareholders from both sides of the merger becoming shareholders in the new
organization.1
7.2.2. Acquisition
An acquisition is a ‘marriage’ of unequal partners with one organization buying and subsuming
the other party. In such a transaction the shareholders of the target organization cease to be
owners of the enlarged organization unless payment to the shareholders is paid partly in shares in
the acquiring company. The shares in the smaller company are bought by the larger. Acquisition
refers to the purchase of another company and absorbs it to existing operations often as operating

Alemayehu Fanta (BSc, MPA, MA) Page 45

subsidiary or division. The observe forms may retain its identity, if identity is important strategic
element. In other situation acquired firm takes it as individual identity.
Reasons for Acquisitions and mergers.
Organizations seeks acquisition and mergers for many reasons. One of the primary reasons is the
potential benefit that can occur to the stockholders of both companies. For example, if the
earnings of two companies are valued differently in the stock market (i.e. they have different
price earnings ratios), a merger or acquisition can increase the market value of the stock of both
organizations. This result is achieved if the acquiring company reports an increase in its earnings
per share and if the multiple applied to its earnings rises as a result of the merger or acquisition.
It is also called absorption of weaker units by a stronger unit. An existing strong company, if
empowered by its memorandum, may take over the business of one or more existing weaker
companies. Such merging or union is also called complete consolidation. After the merger, all
merging companies lose their individuality. A new company is formed to take over the existing
business of all the amalgamating companies. After the amalgamation, all combining units are
automatically liquidated.

Advantages of Mergers & Acquisition/Amalgamation:

 Internal competition among the merging units is eliminated –no more inter-company
rivalry.
 Economies of large-scale business can be easily maximized – both in production and
distribution.
 Financial strength of one huge enterprise offers much greater stability and continuity of
life etc.
Disadvantages of Mergers & Acquisition/Amalgamation:
 The goodwill of each merging company is lost when it losses its identity.
 The resulting huge enterprise may lose flexibility and adaptability.
 It may create evils of monopoly.
7.2.3. Joint ventures
Joint ventures occur when two or more firms join forces to accomplish something that a single
organization is not suited for. The ownership of both firms remains unchanged. In other words, a
joint venture occurs when two or more organizations pool their resources for a given project or a
business product. There are a number of reasons why a joint venture may be attractive to the
respective participants. For instance, foreign
foreign investors may join with local investors to create a
joint venture in which they share ownership and control. Forming a joint venture might be
necessary or desirable for economic or political reasons. The foreign firm might lack the
financial, physical or managerial resources to undertake the venture alone. Or the foreign
government might require joint ownership as a condition for entry.

Joint ownership has certain drawbacks. The partners might disagree over investment,
marketing or other policies. I.e. one partner might want to reinvest earnings for growth, and the
other partner might want to withdraw these earnings.

7.2.4.. Licensing
Alemayehu Fanta (BSc, MPA, MA) Page 46
Licensing is a simple way for a manufacturer to become involved in international marketing.
The licensor license a company to use a manufacturing process, trademark, patent, or other item
of value for a fee or royalty. The licensor thus gains entry into the market at a little risk. The
license gains production expertise or a well-known product or name without having to start from
scratch.
There are several forms of licensing arrangements:
Management contract
The company can sell a management contract to the owners of a a business (hotel, airport,
hospital, clinic or other organization to mange these businesses for a fee. Management
contracting is a low risk method of getting into a business or market, and it yields income from a
beginning. Management contracting prevents the company from competing with its clients.
Contract manufacturing
The firm engages local manufacturers to produce the product. Contract manufacturing has the
drawback of giving the company less control over the manufacturing process and the loss of
potential profits on manufacturing. However, it offers the company a chance to start faster, with
less risk and with the opportunity to form a partnership or to buy out of the local manufacturer
later.
7.2.5. Franchising
A company can enter a foreign market through franchising, which is a more complete form of
licensing. Here the franchiser offers a franchisee a complete brand concept and operating system.
In return, the franchisee invests in and pays certain fees to the franchiser.

Alemayehu Fanta (BSc, MPA, MA) Page 47

Chapter Eight: forms of Business organization
means that competitors might have access to information that they would not otherwise.
Nothing, in the over regulated word of today, is ever simple. Before a new business is launched
thought should give some to the legal problems that need to be dealt with. The first issue is the
legal form for the business. The four most popular are: the sole proprietorship, partnership,
limited liability company and share company.
8.1. Sole Proprietorship
This is the business owned by one individual. The individual is the business, and the business is
the individual. The two are inseparable. A sole trader is the simplest form of business to start –
all that is needed is the first customer. It faces fewer regulations than a limited company and
there are no major requirements about accounts and audits, although the individual will pay
personal taxes which will be calculated based upon the profits made by the business.
There are two important limitations, however. The first is that a sole trader will find it more
difficult to borrow large amounts of money than a limited company because lending institutions
prefer the assets of the business to be placed within the legal framework of a company, because
of the restrictions then placed upon the business. It is, however, quite common for a business to
start life as a sole trader and incorporate later in life as more capital is needed.
The second disadvantage is that the sole trader is personally liable for all the debts of the
business, no matter how large. That means creditors may look both to the business assets and the
proprietor’s assets to satisfy their debts. However, this disadvantage should not be over
emphasized because of the widely adopted practice of placing some family assets in the name of
the spouse or another relative and because, even as a limited company, a bank is likely to ask for
a personal guarantee from the proprietor before giving a loan.
8.2.. Partnerships
Some professions such as doctors and accountants, are required by law to conduct business as
partnerships. Partnerships are just groups of sole traders who come together, formally or
informally, to do business. As such it allows them to pool their resources, some to contribute
capital, other their skills. Partnerships, therefore, face all the advantages of sole traders plus some
additional disadvantages.

Alemayehu Fanta (BSc, MPA, MA) Page 48

The first of these disadvantages is that each partner has unlimited liability for the debts of the
partnership, whether they incurred them personally or not. Clearly partnerships require a lot of
trust. The second disadvantage is that the partnership is held to cease every time one partner
leaves or a new one joins, which means dividing up the assets and liabilities in some way, even if
other partners end up buying them and the business never actually ceases trading.
Generally, if you are considering a partnership you would be well-advised to draw up a formal
partnership agreement. It is very easy to get into an informal partnership with a friend, but if you
cannot work together, or times get hard, you may regret it. Partnership agreements cover such
issues as capital contributions, division of profit and interest on capital, power to draw money or
take remuneration from the business, preparation of accounts and procedures when the
partnership is held to cease. Solicitors can provide a model agreement which can be adapted to
suit particular circumstances.
8.3. Limited Companies (Private limited and Share Company)
A company registered in accordance with the provisions of the Companies Acts is a separate
legal entity distinct from its owners or shareholders, and its directors or managers. It can enter
into contracts and sue or be sued in its own right. It is taxed separately through Corporation Tax.
There is a separate legal existence between management and ownership, with a board of
directors elected by the shareholders to control the day-to-day running of the business. There
need be only two shareholders and one director, and shareholders can also be directors.
The advantage of this form of business is that the liability of the shareholders is limited by the
amount of capital they put into the business. What is more, a company has unlimited life and can
be sold on to other shareholders. Indeed there is no limit to the number of shareholders.
Therefore a limited company can attract additional risk capital from backers who may not wish
to be involved in the day-to-day running of the business. Also, because of the regulation they
face, bankers prefer to lend to companies rather then sole traders, although they may still require
personal guarantees. Clearly this is the best form for a growth business that will require capital
and will face risks as it grows.
Nevertheless there are some disadvantages to this form of business. Under the company’s acts, a
company must keep certain books of account and appoint an auditor. It must file an annual return
with companies’ house which includes accounts and details of directors and shareholders. This
takes time and money and
8.4. FRANCHISE:
A franchise is a business whose entrepreneur (the franchisee) provides a product or service under
a legal contract with the franchise owner (the franchiser). The franchiser provides the business’s
distinctive elements (eg. Name, signs, facility design). The franchisee pays the franchiser a fee or
a share of the earnings to operate the business. The franchisee is then able to operate using the
franchiser’s trade name. The Franchisee is part of a chain and uses the company’s logo, layouts,
equipment, standard product, business system, and is supported with organizing, training,
merchandising and management from the franchiser.

Alemayehu Fanta (BSc, MPA, MA) Page 49

The franchise type of business offers the franchisee an established product, company advertising,
an image. This lowers the risk of failure. But the franchise can severally limit a person’s
freedom and way of doing business. A franchiser can dictate minute details of the business: the
color of the store layout, the receipt, price and royalty rate.
There are three basic types of franchising
a) Trade name franchising: - It is related with a brand name. The franchisee purchases the
right to become identified with the franchiser’s trade name without distributing particular
products exclusively under the manufacturer’s name.
b) Product distribution franchising: - It involves licensing the franchisee to sell specific
products under the manufacturer’s brand name and trade mark through a selective;
limited distribution network.
c) Pure/Comprehensive/business format franchising: - It involves providing the franchisee
with a complete business format, including a license for a trade name, the products or
services to be sold, the physical plant, the methods of operation, a marketing strategy
play, a quality control process, a two way communications system and the necessary
business services.

8.5. Joint Venture

This is a business undertaking in which foreign and domestic companies share the costs of
building, production or research facilities in foreign countries. It may sometimes be the only way
to enter certain countries where by law, foreigners cannot own business. It also helps companies’
pool technological knowledge and share the expense and risk of research that may not produce
marketable goods. It is the participation of two or more companies in an enterprise in which each
party contributes assets, owns the equity to some degree and shares the risk or in other words it is
a partnership between a domestic firm and a firm in a foreign country.

Alemayehu Fanta (BSc, MPA, MA) Page 50

Chapter Nine: Ethical issues governing Entrepreneurship. Fundamental points should be
considered when doing a business are:
Leadership quality
The culture of an ethical business is defined starting from the very top of the organizational
chart. For a business to be ethical, its leaders must demonstrate ethical practices in any situation.
The true test of this leadership is in the decision-making process when there is a choice between
what is ethically responsible and what will result in profit or gain. Leaders who can consciously
choose the path that is ethically correct, as opposed to one that is purely financially driven, have
successfully created an ethical culture in the business. When the culture is solid at the top of the
organization, it trickles down to all areas and employees.

Values
An ethical business has a core value statement that describes its mission. Any business can create
a value statement, but an ethical business lives by it. It communicates this mission to every
employee within the structure and ensures that it is followed. The ethical business will institute a
code of conduct that supports its mission. This code of conduct is the guideline for each
employee to follow as he carries out the company's mission.

Integrity
Integrity is an all-encompassing characteristic of an ethical business. The ethical business
adheres to laws and regulations at the local, state and federal levels. It treats its employees fairly,
communicating with them honestly and openly. It demonstrates fair dealings with customers and
vendors including competitive pricing, timely payments and the highest quality standards in the
manufacture of its products.

Respect
Ethics and respect go hand in hand. An ethical business demonstrates respect for its employees
by valuing opinions and treating each employee as an equal. The business shows respect for its
customers by listening to feedback and assessing needs. An ethical business respects its vendors,
paying on time and utilizing fair buying practices. And an ethical business respects its
community by being environmentally responsible, showing concern and giving back as it sees
fit.

Alemayehu Fanta (BSc, MPA, MA) Page 51

Loyalty
Solid relationships are a cornerstone of an ethical business. Loyal relationships are mutually
beneficial and both parties reap benefits. Employees who work for a loyal employer want to
maintain the relationship and will work harder toward that end. Vendors and customers will
remain loyal to a business that is reliable and dependable in all situations. An ethical business
stays loyal to its partnerships even in challenging times. The result is a stronger relationship
when emerging from the challenge.
Concern
An ethical business has concern for anyone and anything impacted by the business. This includes
customers, employees, vendors and the public. Every decision made by the business is based on
the effect it may have on any one of these groups of people, or the environment surrounding it.

Alemayehu Fanta (BSc, MPA, MA) Page 52