CHAPTER 3: BUSINESS FORMATION

1.1 INTRODUCTION

A business formation deals with the formalization and actual implementation of business ideas in
to practice. In today’s economic development/transformation, small businesses are creating new
jobs even as large businesses continue eliminating jobs and they are more flexible than large
ones in the products and services they offer. This chapter discusses the issues of business
development and the different legal forms of business. In addition, the concept of MSEs in the
Ethiopian and international context are discussed. The importance/roles of MSEs and a business
formation deal with the formalization and actual implementation of business ideas in to practice.
This chapter discusses the issues of business development and the different legal forms of
business. In addition the concept of MSEs in the Ethiopian and international context are
discussed. The importance/roles and set up of MSEs are discussed very well. Besides the success
and failure factors of MSEs and the common problems of MSEs in Ethiopia are discussed.

3.2 The Concept of Small Business Development

Specifying size and standard to define small business is necessarily arbitrary, because people
adopt different standards for different purposes. Based on socio- economic conditions, countries
define small business differently. But all may use size and economic criteria as a base to define
small business. Size criteria include number of employees and the startup capital. Size does not
always reflect the true nature of an enterprise; in addition, qualitative characteristics are used to
differentiate small business from other business. The economic/control definition covers market
share, independence and personalized management.
Micro and small enterprises (MSEs) cover a wider spectrum of industries and play an important
role in both developed and developing economies. Ethiopia is no exception and MSEs occupy a
prominent position in the development of the Ethiopian economy. While the small entrepreneurs
can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the
vagaries(change) of the market, they have to face many problems like lack of finance, poor
operations management, lack of experience, poor financial management, etc,. The process of

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setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a
difficult task and involves scanning the environment and the use of creativity and innovation.
3.3 Forms of Business (A Short Explanation)
There are three basic legal forms of business formation with some variations available depending
on the entrepreneurs’ needs.

The three basic legal forms are:-

1) Proprietorship,
2) Partnership, and
3) Corporation, with variations particularly in partnerships and corporations.

Legal Forms of Business Description

1) Proprietorship Form of business with single owner who has

unlimited liability, controls all decisions, and receives all
profits.
2) Partnership Two or more individuals having unlimited liability who have
pooled resources to own a business
3) Corporation Separate legal entity that is run by stockholders having limited
liability

These three basic legal forms are compared with regard to ownership, liability, start-up costs,
continuity, transferability of interest, capital requirements, management control, distribution
of profits, and attractiveness for raising capital.
It is very important that the entrepreneur carefully evaluate the pros and cons of the various legal
forms of organizing the new venture. This decision should be made before the submission of a
business plan and request for venture capital.
The comparison for the three basic legal forms against the aforementioned factors is briefly
presented in the table below:-

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LLP- Limited Liability Partnership

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3.4 Definition and Role/Importance of MSEs in Developing Countries

3.4.1 Definition of MSEs

Small businesses are playing an important role in the industrial economy of the world. These are
particularly important in the developing economies. Small business is predominant even in
developed countries such as USA, Japan etc.
There is a difference between small business owners and entrepreneurial ventures as well. An
entrepreneurial venture often is a growth-oriented innovative company with product or service
offerings that are new to the market. Small businesses could be entrepreneurial ventures. Most
entrepreneurial ventures start as a small business.
However, some discernible characteristics still differ them. Most small businesses’ owners work
with known products and services aimed at incremental growth, and their innovation is focused
on sales, marketing, and market expansion. Entrepreneurial ventures incorporate a different set
of strategies. These entities are aimed at rapid growth and apply innovation and creativity at
every node of the business process. They work with new offerings, and they face a lot more
uncertainties; hence, their strategy calls for continuous work on mitigating uncertainty and risk
reduction.
Specifying size and standard to define small business is necessary because people adopt different
standards for different purposes. For example, legislators may exclude small firms from certain
regulations and specify ten employees as the cut-off point. Moreover, a business may be
described as “small” when compared to larger firms, but “large” when compared to smaller ones.
For example, most people would classify independently owned gasoline stations, neighborhood
restaurants, and locally owned retail stores as small business.
Similarly, most would agree that the major automobile manufacturers are big businesses. And
firms of in-between sizes would be classified as medium on the basis of individual viewpoints.
There are two approaches to define small business. They are: Size Criteria, and
Economic/control criteria.
1. Size Criteria
Even the criteria used to measure the size of businesses vary; size refers to the scale of operation.
Some criteria are applicable to all industrial areas, while others are relevant only to certain types
of business. For instance, some of the criteria used to measure size are: number of employees;

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volume, and value of sales turnover, asset size, and volume of deposits, total capital investment,
volume/value of production, and a combination of the stated factors.
Even though the number of employees-is the most widely used yardstick, the best criterion in
any given case depends upon the user’s purpose. To provide a clearer image of the small firms,
the following general criteria for defining a small business are suggested by Small Business
Administration (SBA).
• Financing of the business is supplied by one individual or a small group. Only in a rare
case would the business have more than 15 or 20 owners.
• Except for its marketing function, the firm’s operations are geographically localized.
• Compared to the biggest firms in the industry, the business is small.
• The number of employees in the business is usually fewer than 100.
This size criteria based definition of MSEs varies from country to country. All over the world,
number of employees or capital investment or both has been used as the basis for defining MSEs.
2. Economic/Control Criteria.
Size does not always reflect the true nature of an enterprise. In addition, qualitative
characteristics may be used to differentiate small business from other business. The
economic/control definition covers:
▪ Market Share,
▪ Independence, and
▪ Personalized Management.
▪ Geographical Area of Operation.
All four of these characteristics must be satisfied if the business is to rank as a small business.
I) Market Share: - The characteristic of a small firm’s share of the market is that it is not large
enough to enable it to influence the prices of national quantities of goods sold to any
significant extent.
II) Independence: - Independence means that the owner has control of the business
himself/herself. It, therefore, rules out those small subsidiaries which though in many ways
fairly autonomous, nevertheless have to refer to major decisions (e.g., on capital investment)
to a higher level of authority.
III) Personalized Management: - It is the most characteristics factor of all. It implies that the
owner actively participates in all aspects of the management of the business, and in all major

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 decision-making process. There is little delegation of authority and one person is involved
when anything material is involved.
IV) Technology: - Small business is generally labor intensive and only few are technology
intensive.
V) Geographical Area of Operation: - The area of operation of a small firm is often local.
Generally, small business is a business that is privately owned and operated, with a small number
of employees and relatively low volume of sales.
3.4.2 Role/Importance of MSEs in Developing Countries
Micro and Small Enterprises (MSEs) cover a wider spectrum of industries and play an important
role in both developed and developing economies. Ethiopia is no exception and MSEs occupy a
prominent position in the development of the Ethiopian economy. Over the years, the number of
MSEs is growing from time to time and they need a strong support on Scio- economic and
political ground. Some of the contributions are hereunder.
1) Large Employment Opportunities: MSEs are generally labor-intensive. For every fixed
amount of investment, MSE sector provides employment for more persons as against few
persons in the large scale sector. Thus in a country like Ethiopia where capital is scarce and
labor is abundant, MSEs are especially important.
2) Economical Use of Capital: MSEs need relatively small amount of capital. Hence it is
suitable to a country like Ethiopia where capital is deficient.
3) Balanced Regional Development/ Removing Regional Imbalance/: Generally small
enterprises are located in village and small towns. Therefore, it is possible to have a
balanced regional growth of industries. Ethiopia is a land of villages.
4) Equitable Distribution of Wealth and Decentralization of Economic Power: It removes
the drawbacks of capitalism, abnormal profiteering, concentration of wealth and economic
power in the hands of few etc.
5) Unregulated Growth of Large-scale industries results in concentration of economic·
power in the hands of a few; and consequently, gross inequalities in the distribution of
income and wealth will occur. On the other hand; income generated in a large number of
small enterprises is dispersed more widely and its benefit is derived by the large segments
of the society. This is due to wide spread ownership and decentralized location of small
scale enterprises. In this way, small & medium scale enterprises bring about greater

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 equality of income distribution. It is also argued that most of the micro and small scale
units are either proprietary or partnership concerns. As a result, relations between workers
and employers are more harmonious in micro and small enterprises than in large
enterprises. Micro and small enterprises also encourage competitive spirit and generate the
impetus to self-development.
6) Dispersal over Wide Areas- MSEs has a tendency to disperse over wider areas and they
play a key role in the industrialization of a developing country.
7) Higher Standard of Living: MSEs bring higher national income, higher purchasing power
of people in rural and semi-urban areas.
8) Mobilization of Locals Resources/Symbols of National Identity: The spreading of
industries even in small towns and villages would encourage the habit of thrift and
investment among the people of rural areas.
Small scale businesses are locally owned and controlled, and can strengthen family and other
social systems and cultural traditions. They are perceived as valuable in their own right as well
as symbols of national identity.
9) Innovative and Productive /Simple Technology: New but simple techniques of
production can be adopted more easily by MSEs without much investment.
Small businesses are highly innovative though they do not maintain their own research and
development.
10) Less Dependence on Foreign Capital/ Export Promotion: MSEs use relatively low
proportion of imported equipment and materials. The machinery needed for these industries
can be manufactured within the country. Micro and small scale enterprises are opening up
fresh avenues in the export market in our world. Realizing the importance of the small and
medium- scale sectors in the economy; the Ethiopian government has adopted several
measures to speed up the growth of micro and small size enterprises.
11) Promotion of Self Employment: MSEs foster individual skill and initiative and promote
self-employment particularly among the educated and professional class.
12) Protection of Environment: MSEs help to protect the environment by reducing the
problem of pollution.
13) Shorter Gestation Period: In these enterprises the time-lag between the execution of the
investment project and the start of flow of consumable goods is relatively short.

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 14) Facilitate Development of Large Scale Enterprises: MSEs support the development of
large enterprises by meeting their requirements of inputs of raw materials, intermediate
goods, spare parts etc. and by utilizing their output for further production.
15) Individual Tastes, Fashions, and Personalized Services: Small businesses have the
flexibility to adapt quickly to changes in the business or technological environment.
16) More Employment Creation Capacity: Economic planners have realized the necessity of
encouraging micro and small enterprises because they require less capital but generate
more employment. The micro and small scale sectors have the capacity to generate a much
higher degree of employment than the large-scale sector. This is because micro and small
scale enterprises are labor intensive and thus create more employment with a given level of
capital. More production needs more capital in such a situation. The micro and small
firms will stand in good position because they are less capital intensive and more labor
intensive.

3.5 Classification of Micro and Small Enterprises

1. In Case of Manufacturing Enterprise (Manufacturing, Construction and Mining):

a) A Micro Enterprise is one in which the investment in plant and machinery (total asset)
does not exceed birr100, 000 (one hundred thousand); and operates with 5 people
including the owner.
b) Small Enterprises is one in which the investment in plant and machinery (a paid up
capital of total asset) of birr100, 000 (one hundred thousand) and not more than Birr 1.5
million; and operates with 6-30 persons.
2. In Case of Service Enterprise (Retailing, Transport, Hotel and Tourism, ICT and
Maintenance):
a) A micro enterprise is one with the values of total asset is not exceeding Birr 50,000(fifty
thousands); and operates with 5 persons including the owner of the enterprise.
b) Small Enterprises is one in which the total asset value or a paid up capital of birr100, 000
(one hundred thousand) and not more than Birr 1.5 million; and operates with 6-30
persons.
More clearly, the improved definition of MSE is presented in the table below.

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When ambiguity is encountered between manpower and total assets as explained above, total
asset is taken as primary yardstick.
Priority Sectors and Sub-Sectors for MSEs Engagement In Ethiopia
1. Manufacturing Sector- This is the one which comprises textile and garment;
leather and leather products; food processing and beverage; metal works and engineering
wood works including furniture and ornaments service; and agro-processing.
2. Construction Sectors- This is the one which comprises sub-contracting; building materials;
traditional mining works; cobble stone; infrastructure sub-contract; and prestigious goods
3. Trade Sectors- This is the one which comprises whole sale of domestic products; retail sale
of domestic products and raw materials supply.
4. Service Sectors- This is the one which comprises small and rural transport service; café and
restaurants; store service; tourism service; canning/packing service; management service;
municipality service; project engineering service; product design & development service;
maintenance service; beauty salon; and electronics software development; decoration and
internet café.
5. Agriculture Sector (Urban Agriculture) - This is the one which comprises modern
livestock raring; bee production; poultry; modern forest development; vegetables and fruits;
modern irrigation; and animal food processing.

• Levels of MSEs in Ethiopia

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Start-up: - Start up level refers to enterprises that incorporate people who are interested to
establish MSE and those who completed the required profession/skill from various institutions
and innovated by legally either in the form of association or private. It is a level where an
enterprise begins production and service under legal framework or legal entity.
Growth Level: - An enterprise is said to be at growth level when an enterprise become
competent in price, quality and supply and profitable using the support provided. At this level,
the enterprise man power and total asset is larger than at startup level; and use book keeping
system.
Maturity Level: - Maturity level means when an enterprise able to be profitable and invest
further by fulfilling the definition given to the sector and using the support provided.
Growth- Medium Level: - An enterprise is said to be transformed from small to medium level
of growth is when it enabled to be competent in price, quality and supply using the support given
to the level.

3.6 Setting up Small Scale Business

Steps for Setting up the Entrepreneurial Venture

The entrepreneurial process of launching a new venture can be divided into three key stages of:
Discovery; Evaluation; and Implementation. These can be further sub-divided into seven steps as
shown below:

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Discovery: The first stage of discovery is to identify opportunities that may form the basis of an
entrepreneurial venture. It requires creative thinking to indentify issues that can benefit from an
entrepreneurial vision. This stage can be divided into two steps:
Step 1 Discovering your entrepreneurial potential - the first step is to know more about
your personal resources and attributes through some self-evaluation– what will
you bring to the venture? What are your strengths and challenges? These will
affect the type of venture you choose.
Step 2 Identifying a problem and potential solution – a new venture has to solve a
problem and meet a genuine need.
Evaluation: By the end of first stage of discovery, you should have selected an idea worthy of
further detailed investigation. The next stage evaluates if this all adds up to a feasible business in
two further steps:
Step 3 Evaluating the idea as a business opportunity– find out information about the
market need. Is the solution to this problem really wanted by enough customers?
Investigate the feasibility of the proposed solution (technically, economically,
socially, and legally).
Step 4 Investigating and gathering the resources – How will the product/service get to
market? How will it make money? What resources are required?
Exploitation: By the end of the second stage of evaluation, you should have identified an
opportunity that has reasonable prospects of success, and analyzed what is required to launch it.
The next stage is to make the final preparations and launch it into the market. It can be developed
in three further steps:
Step 5 Forming the enterprise to create value – set up a business entity and protect any
intellectual property. Get ready to launch the venture in a way that minimizes risk
and maximizes returns.
Step 6 Implementing the entrepreneurial strategy – activate the marketing, operating, and
financial plans.
Step 7 Planning the future – look ahead and visualize where you want to go.
Environmental Analysis: Entrepreneurship does not exist in a vacuum. It is affected by and
affects the environment.

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As the economies are getting internationally integrated, for an analysis of the environment of
entrepreneurship you would be required to develop an understanding of macroeconomic, and
industry/sector specific factors.
a) Macro Environment
The macro environment of an entrepreneur consists of the political, technological, social, legal
and economic environments. All of these are not immediate part of the entrepreneur’s venture
yet they have an impact on his/her enterprise.
b) Sectoral Analysis
After having understood the general environment in which the business has to take birth, it is
important to study the sector or industry conditions in which the entrepreneur proposes to launch
a venture. This will help to put the proposed venture in the proper context. The purpose of
industry analysis is to determine what makes an industry attractive- this is usually indicated
either by above normal profits or high growth rates. For such analysis one should study the
history of the industry, the future trends, new products developed in the industry, forecasts made
by the government or the industry. It is also advisable to study the existing or potential
competition, threat of substitutes and entry barriers. Sometimes there might be bilateral
agreements between countries regarding some sectors or government policy that is sector
specific or some event that throw up challenges.
There might be certain constraints regarding availability of technology, manpower or raw
materials, which are industry specific. Similarly, there might be certain strengths of a particular
sector, which might outweigh some negative general trends. For instance, currently the cement
and steel sector are on an upward swing with a favorable climate in the housing sector as well as
government’s thrust on the construction sector.
SWOT Analysis
At this stage, conducting a SWOT analysis will help the entrepreneur to clearly identify his/her
own strengths and weaknesses as well as the opportunities and threats in the environment.
Strengths are positive internal factors that contribute to an individual’s ability to accomplish
his/her mission, goals and objectives. Weaknesses are negative internal factors that inhibit an
individual’s ability to accomplish his/her mission, goals and objectives. An entrepreneur should
try to magnify his strengths and overcome or compensate for his/her weaknesses.

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Opportunities are positive external options that an individual could exploit to accomplish his/her
mission, goals and objectives. Threats are negative external forces that hinder an individual from
accomplishing his/her mission, goals and objectives. These could arise due to competition,
change in government policy, economic recession, technological advances etc. Threats in the
environment can arise from competition, technological breakthroughs, change in government
policies etc. S/he might possess certain unique skills or abilities, which along with his/ her
knowledge and experience can provide him/ her cutting edge.
An analysis of the above can give the entrepreneur a more realistic perspective of the business,
pointing out foundations on which s/he can build future strengths and remove obstacles. The
hierarchical approach to the development of business idea is given below.

The entrepreneur has to use the opportunities provided by the environment, combine these with
his/her unique strengths in terms of knowledge, skills, experience etc. and then take a decision to
launch a particular product or service. The proposed product / service should be compatible with
the capability of the entrepreneur, resources available in the environment and the need of the
society.
3.7 Small Business Failure and Success Factors
3.7.1 Small Business Failure Factors

What Is Business Failure?

Even though business owners launch their ventures with the best of intentions and work long,
hard hours, some businesses inevitably fail. Dun & Bradstreet, a financial research firm, defines

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a business failure as a business that closes as a result of either (1) actions such as bankruptcy,
foreclosure, or voluntary withdrawal from the business with a financial loss to a creditor; or (2) a
court action such as receivership (taken over involuntarily) or reorganization (receiving
protection from creditors).
Causes of Business Failure
The rates of business failure vary greatly by industry and are affected by factors such as type of
ownership, size of the business, and expertise of the owner. The causes of business failure are
many and complex; however, the most common causes are inadequate management and
financing.

Inadequate Management: - Business management is the efficient and effective use of

resources. Lack of experience is one of their most pressing problems. Small business owners
must be generalists; they do not have the luxury of specialized management. On the one hand,
they may not be able to afford to hire the full-time experts who could help avert costly mistakes.
On the other hand, their limited resources will not permit them to make many mistakes and stay
in business. As a small business manager, you will probably have to make decisions in areas in
which you have little expertise.
Entrepreneurs are generally correct in pointing to internal factors as the reason for the failure of
their businesses; these factors are the cause of 89 percent of such failures. Internal problems are
those more directly under the control of the manager, such as adequate capital, cash flow,
facilities/equipment inventory control, human resources, leadership, organizational structure, and
accounting systems.
The manager of a small business must be a leader, a planner, and a worker. You may be a “top
gun” in sales, but that skill could work against you. You might be tempted to concentrate on
sales while ignoring other equally important areas of the business, such as record keeping,
inventory, and customer service.
Inadequate Financing: - Business failure due to inadequate financing can be caused by
improper managerial control as well as shortage of capital. On the one hand, if you don’t have
adequate funds to begin with, you will not be able to afford the facilities or personnel you need
to start up the business correctly.

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There are a lot of ways to fail in business. You can extend too much credit. You can fail to plan
for the future or not have strategic direction. You can overinvest in fixed assets or hire the wrong
people. Identifying mistakes that can be made is merely one component of the problem. Figuring
out how to avoid them is the hard part.
Other common causes of business failure include Neglect, Fraud, and Disaster.
• Neglect occurs whenever an owner does not pay a due attention to the enterprise. The
owner who has someone else managing the business while s/he goes fishing often finds
the business failing because of neglect.
• Fraud involves intentional misrepresentation or deception. If one of the people
responsible for keeping the business’s books begins purchasing materials or goods for
himself or herself using the business's money, the business might find itself bankrupt
before too long.
• Disaster refers to some unforeseen happening. If a hurricane hits the area and destroys
the property in the company's yard, the loss may require the firm to declare bankruptcy.
The same is true for fires, burglaries, robberies, or extended strikes.
Business Termination versus Failure
There is a difference between a business termination and a business failure. A termination occurs
when a business no longer exists for any reason. A failure occurs when a business closes with a
financial loss to a creditor.
Reasons for a termination abound. The owner may have an opportunity to sell her business to
someone else for a healthy profit, or be ready to move on to a new business or to retire, or s/he
may have simply lost interest in the business. The market for the business’s product may have
changed or become saturated. Perhaps the owner has decided it would be more appealing to work
for someone else.
Mistakes Leading to Business Failure
No one likes to think about failing, yet many small business owners invite failure by ignoring
basic rules for success. One of the most common mistakes is to neglect to plan for the future
because planning seems too hard or time-consuming. Planning what you want to do with your
business, where you want it to go, and how you’re going to get there are prerequisites for a sound
business. Of course, that doesn’t mean you can’t change your plans as circumstances dictate.

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Your plan should provide a road map for your business, showing you both the expressways and
the scenic routes and the detours.
Another common mistake is failing to understand the commitment and hard work that are
required for turning a business into a success. Having to work long hours and do things you don’t
enjoy because no one else is available to do them are part and parcel of owning a small business.
Yet, when you have the freedom of being your own boss, the hard work and long hours often
don’t seem so demanding!
Still another mistake that small business owners make, particularly with rapidly growing
businesses, is not hiring additional employees soon enough or not using existing employees
effectively. There comes a point in the growth of a business when it is no longer possible for the
manager to do it all, but s/he resists delegation in the belief that it means s/he is giving up
control. It is important to recognize that delegating tasks to others isn’t giving up control—it’s
giving up the execution of details.
The last type of mistake involves with finances. Inaccurate estimates of cash flow and capital
requirements can swamp a business quickly. Figuring the correct amount of money needed for
starting a business is a tough balancing act: Asking for too little may hinder growth and actually
jeopardize survival, whereas asking for too much might cause lenders or investors to hesitate. An
important rule to remember in terms of arranging financing or calculating cash-flow projections
is to figure the unexpected into your financial plans. In this way, you can have more of a cushion
to fall back on if things don’t go exactly according to plan. After all, without the right amount of
capital, it’s impossible to succeed.

3.7.2 Small Business Success Factors

Small business success factors can be seen the same as the efforts exerted in reversing the factors
of failure. There are several positive steps in addition to planning that business owners can take
to improve a firm’s chance for success.
From the discussion about factors of failure, we can conclude that a proper attitude is important
to ensure a customer orientation for quality and service; the owner must have a purpose for being
in business and want to provide customers with value for their money; and having a variety of
basic business skill is important (such as the ability to keep accounting records.) So, by

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understanding why business fail, entrepreneurs can discover ways to tilt the scales towards
success. These success factors are categorized as:-
1. Conducive Environment;
2. Adequate Credit Assistance;
3. Markets and Marketing Support.
1. Conducive Environment
Successful small enterprises do not emerge, and thereafter survive and grow unless the
environment is conductive. Political, economic, technological and socio-cultural factors in the
environment impinge upon the life of the small enterprises and generate much of the needs
required for their existence.
2. Adequate Credit Assistance
Small enterprise development cannot be ensured without arrangement for financing. Adequate
and timely supply of credit is critical for new entrepreneurs to emerge especially from a wide
base. A great majority of micro and small business activities have come about because of special
financing programs offered to them.
Thus, requirements are less strict in terms of lower interest rates than the prevailing commercial
rates; less collateral requirements and lower equity ratio; various assistance schemes such as
preparing the project study; etc.
3. Markets and Marketing Support
Market for a small enterprise in a developing country can be quite a problem. The small business
entrepreneur will be in competition not only with locally mass-produced goods but even imports.
Small enterprises can brand together and sell their products as one body through closely-knit
associations or organizations. The government too can take an active part in marketing specific
products or assisting small groups of entrepreneurs in selling their products.

3.8 Main Supporting Packages for MSEs Development in Ethiopia

When entrepreneurs are deciding to involve and develop MSEs in Ethiopia, they are more likely
entitled with some supporting packages which include awareness creation about the sector;
provision of legal services, to form legal business enterprises; providing Technical and business
management training; financial support based on personal saving, 20/80 (the beneficiaries are

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save 20% and the MFIs provide Loan 80% of the projects); facilitate working premises; industry
extinction services and BDS provision; bookkeeping and audit services.

3.9 Problems of Small Scale Business in Ethiopia

Small-scale businesses have not been able to contribute substantially to the economic
development, particularly because of financial, production, and marketing problems. These
problems are still major handicaps to their development. Lack of adequate finance and credit has
always been a major problem of the Ethiopian small business.
Small-scale units do not have easy access to the capital because they mostly organized on
proprietary and partnership basis and are of very small size. They do not have easy access to
industrial sources of finance partly because of their size and partly because of the fact that their
surpluses which can be utilized to repay loans are relatively small. Because of their size and
partly because of the limited profit, they search for funds for investment purposes. Consequently,
they approach traditional money lenders who charge extra high rate of interest hence small
enterprise continue to be financially weak.
Small scale enterprises find it difficult to get raw materials of good quality at reasonable prices in
the field of production. Furthermore, the techniques of production, which the enterprises have
adopted, are usually outdated. Because of their poor financial position they are not able to buy
new equipment, consequently their productivity suffers.
Small business’s owner can avoid some of the common pitfalls that lead to business failure by
knowing the business in depth; developing a solid business plan; managing financial resources;
understanding financial statements; and learning to manage people effectively.

3.9 Organizational Structure and Entrepreneurial Team Formation

3.9.1 Designing the Organization

Generally, the design of the initial organization will be simple. In fact, the entrepreneur may find
that he or she performs all the functions of the organization alone. This is a common problem
and a significant reason for many failures.
All the design decisions involving personnel and their roles and responsibilities reflect the formal
structure of the organization. In addition to this formal structure, there is an informal structure or
organization culture that evolves over time that also needs to be addressed by the entrepreneur.

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For many new ventures, predominantly part-time employees may be hired, raising important
issues of commitment and loyalty. However, regardless of the number of actual personnel
involved in running the venture, the organization must identify the major activities required to
operate it effectively.
The design of the organization will be the entrepreneur’s formal and explicit indication to the
members of the organization as to what is expected of them. Typically, these expectations can be
grouped into the following five areas:-
• Organization structure- This defines members’ jobs and the communication and
relationship these jobs have with each other. These relationships are depicted in an
organization chart.
• Planning, measurement, and evaluation schemes- All organization activities should reflect
the goals and objectives that underlie the venture’s existence. The entrepreneur must spell
out how these goals will be achieved (plans), how they will be measured, and how they will
be evaluated.
• Rewards- Members of an organization will require rewards in the form of promotions,
bonuses, praise, and so on. The entrepreneur or other key managers will need to be
responsible for these rewards.
• Selection criteria- The entrepreneur will need to determine a set of guidelines for selecting
individuals for each position.
• Training- Training, on or off the job, must be specified. This training may be in the form of
formal education or learning skills.

3.9.3 Building the Management Team and a Successful Organization Culture

In conjunction with the design of the organization, the entrepreneur will need to assemble the
right mix of people to assume the responsibilities outlined in the organization structure.
Some of the issues identified in the organization design will be revisited here since they are not
only critical to the building of the team but are just as important in establishing a positive and
successful organization culture.
This strategy must be maintained through the stages of start-up and growth of the enterprise.
There are some important issues to address before assembling and building the management
team. In essence, the team must be able to accomplish three functions:-

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 • Execute the business plan;
• Identify fundamental changes in the business as they occur; and
• Make adjustments to the plan based on changes in the environment and market that will
maintain profitability.

CHAPTER 4: PRODUCT/SERVICE DEVELOPMENT

4.1 INTRODUCTION
In Entrepreneur’s business, product/service development is the term used to describe the
complete process of bringing a new product or service in the market and it's an ongoing practice
in which the entire business is looking for opportunities as new products provide growth promise
to businesses that allow them to strengthen their market position. The new product development
process involves the idea generation, product design, and detail engineering; and also involves
market research and marketing analysis. Intense global competition, short product and
technology lifecycles, unpredictable consumer buying patterns and possible market stagnation
makes new product development a critical activity in most businesses. Hence, this chapter
explores the new product development process and at the same time sketch outs the product
development procedure in reality where consideration of real life situation and consumer insight
are the main concern. Besides, the chapter; considering (often entrepreneur), because of their
lack of understanding of intellectual property, ignore important steps that they should have taken
to protect these asset; will describe all the important types of intellectual property which have
become unique problems to the Patent and Trademark Office.

Chapter Objectives
After completing this chapter, students will be able to:
• Describe the Concept of Product and Services;
• List Product/Service Development Process; and
• Discuss the Intellectual Property Protection.

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4.2 The Concept of Product/Service

Many entrepreneurs find it difficult to identify a new product/service or a new market

opportunity. To start and expand a small venture, an entrepreneur needs to identify opportunities
for domestic and/or international expansion. As the new venture grows and matures a need for
different management skills can occur as well as for a new infusion of the entrepreneurial spirit
(corporate entrepreneurship). Entrepreneurs like Richard China or Mal Mixon, CEO of Invacare,
understands this axiom and effectively manages change by continually adapting organizational
culture, structure, procedures, strategic direction, and products in both a domestic and an
international orientation.
Organization's success is dependent on customer satisfaction and delight. Customer satisfaction
is achieved through the development of product and service, which have all attributes required
by the customer. A success product or services do not only have an attractive package design but
should be also able to provide robust performance. Thus, product design must be practical
enough for production and powerful enough to provide a competitive advantage.
The essence of product design is to satisfy customer and maximizes the value for the customer at
minimum cost. The merchandise or service should also be able to meet primary needs and desire
of the customer. This may not require development of new merchandise, but an enhancement to
existing merchandise or service.
Most companies apparently are introducing a wide variety of smaller, more efficient, and more
intelligent products, coupled with a leaner, more efficient approach to operation. The goal is to
create products and services by identifying an emerging trend and to match that trend with the
right technology and understanding of the purchasing dynamics.
A successful startup depends on its distinctive and compelling proposition. This is how
merchandise or services stand out from the competition and are compelling to the young
company‘s customers.
The merchandise or service will succeed most if it either eliminates an existing pain or adds
significant tangible benefits. It is easier to sell/deliver a new merchandise/service that eliminates
a well-known existing pain, as opposed to sell an item or service that doesn’t clearly solve a
potential client’s pain.
There also seems to be a popular myth that anyone can be successful by simply working on any
given idea or opportunity. This isn’t true! You can’t. Most businessmen are very knowledgeable

21
about the merchandise before they start, since even experienced operators will run into
unexpected troubles when they start their new business. Novices generally introduce more
problems than they can deal with, which only undercuts their ability to be lean, fast or effective.

4.3 Product/Service Development Process

Once the opportunity is selected, and a business model has been designed, the next step is to
develop a commercial version of the opportunity which in most cases is either a product or a
service. One of the essential characteristics of a successful business is exemplified by its ability
to continuously and rapidly develop new or improved versions of existing products that deliver
values more than customers expect (Palgrave, 2019.)
Product development is the process through which companies react to market signals, respond to
changes in customer demand, adopt new technologies, foray into new areas, and ensure
continuous growth. It is a core process in achieving strategic objectives, renewal of the company
business model and deterring competition from displacing the company from its market position.
Product/service development process is part of the overall new-venture creation process. Even
though there are many models that advocate what the product/service generation process should
look like, for this purpose we shall adopt four distinct stages.
These stages can be referred to as:
1. Idea Generation
2. Incubation
3. Implementation
4. Diffusion

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The various stages of new product development process are explained next:
1. New Idea Generation
The new product development process starts with search for ideas. Companies have to encourage
any new idea coming. The key to successful domestic and international entrepreneurship is to
develop an idea that has a market for the new product/service idea conceived.
Some of the more fruitful sources of ideas for entrepreneurs include consumers, existing
products and services, distribution channels, the federal government, and research and
development.
2. Idea Screening
In the 2nd stage, the purpose is to lessen the number of ideas to few vital/valuable ideas. The
ideas should be written down and reviewed each week by an idea committee who should sort the
ideas into three groups- Promising Ideas, Marginal Ideas, and Rejects: Each promising idea
should be researched by committee member.
3. Concept Development and Testing
Attractive ideas must be refined into fast able product concepts since people do not purchase
ideas but they buy concepts. Any product idea can be turned into several product concepts. The
questions asked probably include:-
▪ Who will use the product?
▪ What benefits should the product provide?
▪ When will people consume the produced?

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Concept Testing: - calls for testing product concepts with an appropriate group of target
consumers/customers, and then getting the consumers’ reactions. At this stage, the concepts can
be in words or picture description.
4. Marketing Strategy Development
After testing the new product the concerned body must develop a preliminary marketing strategy
plan for introducing the new product into the market. The marketing strategy will undergo
further refinement in subsequent stages.
The marketing strategy plan consists of three parts: (1) Market size, structure, behavior ;( 2)
Planned price, distribution strategy, and marketing budget of the 1st year; and (3) Long run sales
and profit goals, marketing mix strategy.
5. Business Analysis
After management develops product concept and marketing strategy, it can evaluate the
proposals’ business attractiveness. Management needs to prepare sales, cost and profit
projections to determine whether they satisfy the company's objective or not.
Estimated Total Sales: - Management needs to estimate whether sales will be high enough to
yield satisfactory profit.
Estimating Cost and Profits: - After sales forecast the management should estimate the expected
cost and profit at various levels of sales volume.
The company can use other financial measure to evaluate the merit of a new product proposal.
The simplest is breakeven analysis.
Activity
• You are required to read on Breakeven Analysis and familiar with how it will be applied for the
intended purpose.

6. Product Development
If product concept passes the business test, it moves to R&D or engineering to be developed to
one or more physical version of the product concept. Its goal is to find a proto type that the
consumers/customers see as embodying the key attribute described in the product concept
statement,

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Scientists must not only design the products’ required functional characteristics but also know
how to communicate its psychological aspects through physical cues and how will the
consumer/customer react to different colors, sizes, weight & other physical cues.
When the prototypes are ready, they must be put through regroups functions and
consumer/customer tests. Functional tests are conducted under laboratory & field conditions to
make sure that the product performs safely and effectively (Durability, Speed, Cost, etc)
Consumer testing can take variety of forms, from bringing consumers/customers into laboratory
to giving them samples to use in their homes.
7. Market Testing
After management is satisfied with the products’ functional and psychological performance, the
product is ready to be dressed up with the brand name.
The goals are to test the new product is more authentic consumer/customer settings and to learn
how large the market is and how consumers/customers and dealers react to handling, using and
repurchasing the actual product.
Most companies know that market testing can yield valuable information about buyers, dealers,
marketing program effectiveness, market potential & other matters.
Test Marketing yields several benefits include more reliable forecast of future sale, and
pretesting of alternative of future sale.
8. Commercialization
When (Timing):- In commercializing, market entry timing is critical. If the company hears about
a competitor nearing the end of its development work, it will face three choices. The 1st choice is
First Entry. Under this category, the firm usually enjoys the "first mover advantage" of locking
up key distributors & gaining reputation. The 2nd choice goes with Late Entry Strategy- which
has three advantages include:-
• The competition will have borne the cost of educating the market;
• The competing product may reveal fault that the late entrant can avoid; and
• The company can learn the size of the market.
The 3rd strategy- Parallel Entry- can be also chosen by the company to get in the market. The
strategy to work, a prospective businessman can take the advantage of opting for the latest
technology and production process and operate at higher volume of operation. This leads to
reduced production cost and production of quality goods and services. A new businessman can

25
thus provide improved quality goods and services at lower cost and further tap the market with
an innovative marketing approach.
Where (Geographical Strategy):- The company must decide whether to launch the new product
in a single locality, a region/several regions, in the national/international market.
To Whom (Target-Market-Prospect):- Within the rollout markets, the company must target its
distribution and promotion to the best prospect group. Prime prospects for a new
consumer/customer’s product would ideally have the following characteristics:
• They would be early adapters;
• They would be heavy users;
• They would be Opinion leaders; and
• Could be reached at low cost.
How (Introductory Markets Strategy):- To sequence and coordinate many actives involved in
launching a new product may/can use network-planning techniques such as Critical Path
Scheduling (CPS).
Activity:
• Please read on Critical Path Scheduling technique and try to relate it with the how strategy.

4.4 Legal and Regulatory Frameworks for Entrepreneurs

Since there are many options that an entrepreneur can choose in setting up an organization, it
will be necessary to understand all the advantages and disadvantages of each regarding such
issues as liability, taxes, continuity, transferability of interest, costs of setting up, and
attractiveness for raising capital. Legal advice for these agreements is necessary to ensure that
the most appropriate decisions have been made.
One of the challenges the novice entrepreneur will face as she goes into business understands the
regulatory environment which is made up of numerous laws and regulations. To operate as a
legal businessperson and protect the business from unnecessary suits and liabilities, the
entrepreneur needs to understand the various laws that govern his/her business. Following are the
key legal issues for the entrepreneur.

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4.5 Intellectual Property Protection/Product/Service Protection
4.5.1 What is Intellectual Property?

Intellectual Property which includes patents, trademarks, copyrights, and trade secrets represents
important assets to the entrepreneur and should be understood even before engaging the services
of an attorney. Too often entrepreneurs, because of their lack of understanding of intellectual
property, ignore important steps that they should have taken to protect these assets.

Intellectual property is a legal definition of ideas, inventions, artistic works and other
commercially viable products created out of one's own mental processes. In the same sense that
real estate titles establish ownership of tangible items, intellectual property is protected by such
legal means as patents, copyrights, and trademark registrations. In order to enjoy the benefits
arising from the exclusive ownership of these properties, the entrepreneur needs to protect these
assets by the relevant law. This is the reason why’ experts strongly recommend that those in
creative fields seek protection through official registration of their intellectual properties.

4.5.2 Patents

An entrepreneur who invents a new thing or improves an existing invention needs to get legal
protection for her invention through a patent right. A patent is a contract between an inventor and
the government in which the government, in exchange for disclosure of the invention, grants the
inventor the exclusive right to enjoy the benefits resulting' from the possession of the patent.
Utility Patent: A utility patent protects any new invention or functional improvements on
existing inventions.
Design Patent: This patent protects the appearance of an object and covers new, original,
ornamental, and unobvious designs for articles of manufacture. Like utility patents,
design patents provide the inventor with-exclusive right to make, use and/or sell an item
having the ornamental appearance protected by the patent. This patent is appropriate
when the basic product already exists in the marketplace and is not being improved in
function but only in style. These patents are particularly important to companies such as
shoe producers and product package design firms that need to protect their ornamental
designs.
A patent provides the owner with exclusive rights to hold, transfer, and license the production
and sale of a product/process. It is an intellectual property right and It is issued by government to

27
the inventor. This exclusive property right can be granted for a number of years depending on the
countries laws and type of property. Patents are property rights that can be sold and transferred,
willed as well as licensed and at times used as collateral.
What Can Be Patented Then?
• Processes: Methods of production, research, testing, analysis, technologies with new
applications.
• Machines: Products, instruments, physical objects.
• Manufactures: Combinations of physical matter not naturally found.
• Composition of matter: Chemical compounds, medicines, etc.
4.5.3 Trademarks

A trademark may be a word, symbol, design, or some combination of such, or it could be a

slogan or even a particular sound that identifies the source or sponsorship of certain goods or
services.
These are distinctive names, marks, symbols or motto identified with a company’s product or
service and registered by government offices. Unlike the patent, a trademark can last indefinitely,
as long as the mark continues to perform its indicated function. Trademarks unlike patents are
periodically renewed unless invalidated by cancellations, abandonment, or other technical
registration/renewal issues.

Benefits of a Registered Trademark

• It provides notice to everyone that you have exclusive rights to the use of the mark
throughout the territorial limits of the country.
• It entitles you to sue in federal court for trademark infringement, which can result in recovery
of profits, damages, and costs.
• It establishes incontestable rights regarding the commercial use of the mark.
• It establishes the right to deposit registration with customs to prevent importation of goods
with a similar mark.
• It entitles you to use the notice of registration (®).
• It provides a basis for filing trademark application in foreign countries.

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4.5.4 Copyrights

Copyright is a right given to prevent others from printing, copying, or publishing any original
works of authorship.
Copyrights provide exclusive rights to creative individuals for the protection of literary or artistic
productions. It protects original works of authorship including literary, dramatic, musical, and
artistic works, such as poetry, novels, movies, songs, computer software, and architecture. They
pertain to intellectual property. Usually copyrights are valid for the life of the inventor plus a few
decades.
4.6 The Intellectual Property System in Ethiopia

Ethiopia became a party to the convention establishing the world Intellectual Property
Organization (WIPO) in February 1998 right after some time the Country had joined the Nairobi
Treaty on the Protection of the Olympic Symbol in 1981. It is a member of the Treaty
establishing the Common Market for Eastern and Southern Africa (COMESA) which was
formed in 1994, the Partnership Agreement between members of the African, Caribbean and
Pacific (ACP) Group of States and the European Union (EU).
The Ethiopian Government established the Ethiopian Intellectual Property Office in the year
2003 containing the understated Objectives:-
• To facilitate the provision of adequate legal protection for and exploitation of
intellectual property in the country;
• To collect, organize and disseminate technological information contained in patent
documents and encourage its utilization;
• To study, analyze and recommend policies and legislation on intellectual property to the
government; and
• To promote knowledge and understanding of intellectual property among the general
public;
The existing laws and directives in Ethiopia in the field of Intellectual Property (IP) are the
Patent Proclamation and the Implementing Regulation, the Copyright and Related Rights
Proclamation and The Trademark Registration Directive.
According to the proclamation in order to be granted a patent, an invention must fulfill three
conditions- (1) it must be new- It should never have been published or publicly used before; (2)

29
It should be capable of industrial application- It must be something which can be industrially
manufactured or used; and (3) It must be "non-obvious”- It should not be an invention which
would have occurred to any specialist working in the relevant field.
The proclamation excludes the following from patentability:-
• Inventions contrary to public order or morality;
• Plant or animal varieties or essentially biological processes for the production of plants
or animals; and
• Schemes, rules or methods for playing games or performing commercial and industrial
activities and computer programs;
• Discoveries, scientific theories and mathematical methods; and
• Methods for treatment of the human or animal body by surgery or therapy as well as
diagnostic methods practiced on the human or animal body.
Rights of a patentee include making, using and exploiting the patented invention in any other
way. Any person who wants to use the patented invention has to get the authorization of the
owner/inventor. The patentee does not have import monopoly right over the products of the
patented invention in Ethiopia.
There are certain limitations of rights of the patentee included in the proclamation such acts
done for non-commercial purposes; the use of the patented invention solely for the purposes of
scientific research and experimentation; the use of patented articles on aircraft, land vehicles or
vessels of other countries which temporarily or accidentally enter in to the air space, territory or
waters of Ethiopia; acts in respect of patented articles which have been put on the market in
Ethiopia by the owner of the patent or with his/her consent; the use of the patented invention for
national security, nutrition, health or for the development of vital sectors of the economy, subject
to payment of an equitable remuneration to the patentee; the duration of a patent is 15 years
which may be extended for a further period of five years if proof is furnished that the invention is
properly worked in Ethiopia.
Trademark Directive is issued in the country in 1986 with the following objectives in that it
helps:-
• To centrally deposit trademarks which are used by local and foreign enterprises to
distinguish their goods or services;

30
 • To distinguish the products or services of one enterprise from those of other enterprises
and prevent consumers from being victims of unfair trade practices;
• To provide information on trademark ownership and right of use when disputes arise
between parties;
• To provide required information on trademarks to government and individuals; and
• Protection is granted after publication of cautionary notice;
Copyright is protected on the basis of the copyright and related rights proclamation issued in
2004. The proclamation gives protection to literary, artistic and scientific works which include
books, pamphlets, articles, computer programs and other writings; speeches, lectures, addresses,
sermons, and other oral works; dramatic, dramatic-musical works, pantomimes, choreographic
works, and other works created for stage production; musical works, with or without
accompanying words; audiovisual works and sound recordings works of architecture; works of
drawing, painting, sculpture, engraving, lithography, tapestry, and other works of fine arts;
photographic and cinematographic works; illustrations, maps, plans, sketches, and three
dimensional works related to geography, topography, architecture or science; derivative works;
and collection of works, collection of mere data (databases) whether readable by machine or
other form.
The Proclamation gives protection to:
• Works of authors who are nationals of or have their habitual residence in Ethiopia;
• Works first published in Ethiopia; or works first published in another country and
published within thirty days in Ethiopia;
• Audio-visual works whose producer has his headquarter or habitual residence in
Ethiopia; and
• Works of architecture erected in Ethiopia and other artistic works incorporated in a
building or other structure located in Ethiopia.
The author of a work shall be entitled to protection, for his work upon creation where it is an
original work; and written down, recorded, fixed or otherwise reduced to any material form.
Quality of the work and the purpose for which the work may have been created is not taken in to
consideration.
The rights of performers, producers of phonograms and broadcasting organizations are also
protected by law. Copyright is protected for the life of the author plus fifty years. Fifty years for

31
the rights of performers and producers of sound Recordings and 20 years for the rights of
broadcasting organizations.

4.7 Chapter Summary

 Entrepreneurs must always remember that marketing, advertising, or promotional activities
are completely worthless, regardless of how clever, expensive, or perfectly targeted they are,
unless one simple thing is accomplished--ask for the sale. This is not to say that being a great
salesperson, advertising copywriting whiz or a public relations specialist isn't a tremendous
asset to your business. However, all of these skills will be for naught if you do not actively
ask people to buy what you are selling.
 Your business is all about your customers, or clients, period. Everything you do in business
must be customer focused, including your policies, warranties, payment options, operating
hours, presentations, advertising and promotional campaigns and website. In addition, you
must know who your customers are inside out and upside down.
 Laws and regulations exist to protect competition, consumers, people in the workplace, and
intellectual property; to allow bankruptcy; and to establish contracts.
 Too often entrepreneurs, because of their lack of understanding of intellectual property,
ignore important steps that they should have taken to protect these assets. This informs will
describe all the important types of intellectual property which have become unique problems
to the Patent and Trademark Office.
 Patents, copyrights, and trademarks are legal way to protect intellectual property. A patent
grants an inventor the exclusive right to make, use, and sell
 Since all business is regulated by law, the entrepreneur needs to be aware of any regulations
that may affect his or her new venture and will need legal advice.

4.8 Questions for Review and Discussions

1. What advice would you give to a business colleague who is about to start a new high-tech
firm that has developed a new accessory for computer tablets? Would you recommend that
s/he seek a patent immediately?
2. Imagine that you have developed a unique formula for a soft drink that, upon entering a
person’s mouth, analyzes the drinker’s DNA to determine his/her favorite flavor, and then

32
 the drink instantly realigns its chemical composition become that flavor. Describe as how
you can best protect this trade secret? Will you patent it? Why or why not?
3. What factors should s/he consider in the process of debating whether a patent would
be appropriate?
4. What rights does owning a patent protect? How do you get this protection?
5. What tests must an invention pass to receive a patent?
6. What is the difference between a copyright and a trademark? Between a trademark and a
brand?

CHAPTER 5: MARKETING

5.1 INTRODUCTION

Business firms and non-profit organizations engage in marketing. Products marketed include
goods as well as services, ideas, people, & places. Marketing activities are targeted at market
consisting of product purchasers who may be individuals and groups that influence the success of
an organization.
The foundation of marketing is exchange. In which one party provides to another party
something of value in return for something else of value. In a broad sense, marketing consists of
all activities designed to generate or facilitate an exchange intended to satisfy human needs. The
concept of market is very important in marketing. The American marketing Association defines a
market as “The aggregate demand of the potential buyers for product or a product or services “.
33
Philip Kotler defines “A market as an area of potential exchanges”. Thus, a market is a group of
buyers and sellers interested in negotiating the terms of purchase/sale for goods or services. The
negotiation work may be conducted face-to-face at a certain place or it may be done through
other means of communication, such as correspondence, phone, cable, or it may be done through
business middlemen, e.g., brokers and commission agents. This chapter discusses about
marketing and its basic components.
Chapter Objectives:
By the end of this module, learners will be able to:
▪ Define marketing concepts.
▪ Analyze marketing philosophies.
▪ Describe the role of marketing in achieving the goals of a business enterprise.
▪ Assist in conducting marketing research.
▪ Make competitive analysis of the level,
▪ Implement marketing intelligence in their organization,
▪ Apply the various marketing mixes and strategies in their businesses.
▪ Understand and implement selling and customer service skills.

5.2 Meaning and Definitions of Marketing

Marketing can occur any time with one social unit (person or organization) who strives to
exchange something of values with another social unit. Thus, the essence of marketing is a
transaction or exchange. In this broad sense, marketing consists of activities designed to generate
and facilitate exchange intended to satisfy human needs or wants.
Business firms and non-profit organization engaged in marketing. Products marketed include
goods as well as services, ideas, people and places. Marketing activities are targeted at market
consisting of product purchasers and also individuals and groups that influence the success of an
organization. Marketing has been defined in various ways. The definitions that serve our purpose
best are as follows:
1. Marketing is a social and managerial process by which an individual or group obtain
what they need and want through creating, offering and exchanging of product of values
with others (Philip Kotler,2012).

34
 2. Marketing is the total business activity designed to plan, price, promote and distribute
want satisfying products to target market to achieve organizational goal (William
J.Stanton, 1984).
3. Marketing is the creation and delivery of standard of living to society (Paul. Mazor,
2005).
4. Marketing management is the process of planning and executing, the conception, pricing,
promoting and distributing of ideas, goods and services to create an exchange that satisfy
individual or group objectives (American marketing Association, 2015).
5. Marketing is the effort to identify and satisfy customers’ needs and wants. It involves
finding out who your customers are, what they need and want, the prices, the level of
competition. It involves the knowledge and all the processes you undertake to sell your
product.
The above definitions of marketing reset on the following core concepts: needs, wants and
demands; products (Goods, Services and Idea), value, cost and satisfaction: exchange and
transaction; Relationship and Networks; market; and marketers and prospects. Marketing
answers the following questions:
▪ Who are my customers?
▪ What are my customer’s needs and wants?
▪ How can I satisfy my customers’?
▪ How do I make a profit as I satisfy my customers?
Who are your customers?
Your customers are the people or other businesses that want your products/ services and are
willing to pay for them. They include;
▪ People who are buying from you now.
▪ People you hope will buy from you in the future.
▪ People who stopped buying from you but you hope to get them back.
What are my customer’s needs and wants?
An important point to note is that customers want to look at different products so that they can
choose what they like best. Some customers want a different design and others want high quality
and are willing to pay extra for that.
How can I satisfy my customers’?

35
You need to do everything to find out who your customers are and what they need and want in
order to satisfy them improve your sales and make a profit. You need to find out;
▪ Products/services your customers want.
▪ Price your customers are willing to pay.
▪ Location of your business in-order to reach your customers (Place).
▪ Promotion to use to inform your customers and attract them to buy your products or
services.

5.3 Core Concepts of Marketing

5.3.1 Needs, Wants and Demand

A person at any given time has a need. This need arises out of physical or psychological
imbalances. Marketing starts with human needs and wants. People need food, air, water, clothing
and shelter to survive. Beyond this, people have a strong desire for recreation, education and
other services. Let see terms related with this as follow:
 Need: - Human Need is a state of deprivation of some basic satisfaction. People require
food, clothing, shelter, safety and belonging and esteem.
 Wants: - Wants are desires for specific satisfiers of needs. Human wants are continually
shaped and reshaped by social forces and institutions including churches, schools,
families and business cooperation. Eg. A person needs food but wants spaghetti
 Demands: - Demands are wants for specific products that are backed by ability and
willingness to buy them. Wants become demand when supported by purchasing power.
Companies must therefore measure not only how many people want their product but,
more importantly how many would actually be willing and able to buy it.
 Product: - is anything that can be offered to satisfy a need or want. Products broadly
classify as tangibility and intangibility features.
 Value: - is the consumer’s estimate of the products overall capacity to satisfy his or her
needs.
 According to DeRose, value is “the satisfaction of customer requirement at the lowest
cost of acquisition, ownership and use”.
 Cost: - is the amount of money that are going to be expended or already incurred to
acquire a product.

36
  Exchange: - is the act of obtaining a desired product from someone by offering
something in return.
 Transaction: - is the trade of values between two parties.
 Market: - consists of all the potential customers sharing a particular need or want who
might be willing and able to engage in exchange to satisfy their need or want.

5.4 Importance of Marketing

On the average, about 50 cents of each dollar we spend as consumers goes to cover marketing
costs. The money pays for designing the products to meet our needs, making products readily
available when and where we want them, and informing us about producers. These activities add
want satisfying ability or what is called utility, to products.
A customer purchases a product because it provides satisfaction. That something that makes a
product capable of satisfying want is its utility. And it is through marketing that much of a
products utility is created. Then potential buyers must be informed about the products existence
and the benefits it offers through various forms of promotion. The kinds of utility that marketing
provides in the process are as follows:
1. Form Utility: Form utility is associated primarily with production- the physical or chemical
changes that make a product more valuable. When timber is made into furniture, form utility is
created. This is production, not marketing. However, marketing research may aid in decision
making regarding product design, color, quantities produced, or some other aspect of a product.
All of these things contribute to the product’s form utility.
2. Place Utility: Place utility exists when a product is readily accessible to potential customers.
So physically moving the products to a store near the customers add to its value.
3. Time Utility: Time utility means having a product available when you want it. Having a
product available when we want it is very convenient but it means that the retailer must
anticipate our desires and maintain an inventory. Thus, there are costs involved in providing time
utility.
4. Information Utility: Information utility is created by informing prospective buyers that a
product exists. Unless you know a product exists and where you can get it, the product has no
value. Advertising that describes a sales person answering a customer questions about the
durability of a product creates information utility. Image utility is a special type of information

37
utility. It is the emotional or psychological values that a person attaches to a product or brand
because of its reputation or social standing.
5. Possession Utility: Possession utility is created when a customer buys the product-that is,
ownership is transferred to the buyer. Thus, for a person to consume and enjoy the product, a
transaction must take place. This occurs when you exchange your money for a product.
Activity 5.1
Think of a recent purchase you made. How did the company provide you with the following utilities?
Form:
_____________________________________________________________________________________
_______________________________________________________________________
Time:
_____________________________________________________________________________________
_______________________________________________________________________
Place:
_____________________________________________________________________________________
_______________________________________________________________________
Ownership:
_____________________________________________________________________________________
_______________________________________________________________________

5.5 Marketing Philosophies

Large-scale marketing activities in the world did not take shape until the industrial revolution is
the latter part of the 1800s. Clearly, marketing activities should be carried out under a well-
thought out philosophy of efficient, effective and socially responsible marketing. There are five
competing concepts under which organizations can choose to conduct their marketing activities:
namely, the production concepts, the product concept, the selling/sales concept, the marketing
concept, the societal marketing concept and the Relationship Marketing Concept.

1. The Production Concept

The production concept is one of the oldest concepts in business. The production concept holds
that consumers will favor products that are widely available and low in cost. Managers of
production-oriented organization concentrate on achieving high production efficiency and wide
distribution. The assumption that consumers are primarily interested in product availability and
low price holds in at least two situations. The first is where the demand for a product exceeds
supply, as in many developing countries. Here consumers are more interested in obtaining the
product that in its fine points, and supplies will concentrate on finding ways to increase

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production. The second situation is where the product’s cost is high and has to decrease to
expand the market.
2. The Product Concept
Other businesses are guided by the product concept. The product concept holds that consumers
will favor those products that offer the most quality, performance or innovative features.
Managers in product oriented organization focus their energy on making superior products and
improving them over time. Under the concept, mangers assume that buyers admire well-made
products and can appraise product quality and performance. In such situation, customers are
ready to pay high prices for product extra features. Product-oriented companies often design
their products with little or no customer input. They trust that their engineers will know how to
design or improve the product.
3. The Selling Concept/Sales Concept
The selling concept (or sales concept) is another common approach. The selling concept holds
that consumers, if left alone, will ordinarily not buy enough of the organization product. The
organization must therefore undertake an aggressive selling and promotion effort. This concept
assumes that consumers typically show buying inertia or resistance and must be coaxed into
buying. It also assumes that the company has made available a whole battery of effective selling
and promotion tools to stimulate more buying.
The selling concept is practiced more aggressively with unsought goods, those goods that buyers
normally do not think of buying, such as insurance, encyclopedia, and funeral plots. Most firms
practice the selling concept when they have over capacity. Their aim is to sell what they make
rather than make what the market wants. Therefore, people are surprised what they are told that
the most important part of marketing is not selling; selling is only the tip of marketing iceberg.
4. The Marketing Concept
The marketing concept is a business philosophy that challenges the three concepts we just
discussed. Its central tents crystallized in the mid-1950s.
The marketing concept holds that the key to achieving organizational goals consists of being
more effective than competitors in integrating marketing activities toward determining and
satisfying the needs and wants of target markets.
The marketing concept has been expressed in many colorful ways:
“Meeting needs profitably”

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 “Find wants and fills them”
“Love the customers, not the product etc.”
Table 5.1 Selling and Marketing Concept Contrasted
Point of Difference Selling Marketing
Starting point Factory Market place
Focus Existing product Customer need
Means Selling and promotion Integrated marketing
End Profit through Volume Profit through satisfaction

5. The Societal Marketing Concept

The societal marketing concept holds that the organization should determine the needs, wants
and interests of target markets. It should then deliver the desired satisfactions more effectively
and efficiently than competitors in a way that maintains or improves the consumers and the
society’s well-being. The societal marketing concept holds that the organization’s task is to
determine the needs, want, and interests of target markets and to deliver the desired satisfactions
more effectively and efficiently than competitors in a way that preserves or enhances the
consumers and the society’s wellbeing.
The societal marketing concept questions whether the pure marketing concept is adequate in an
age of environmental problems, resource shortages, rapid population growth, worldwide
economic problems, and neglected social services. It asks if the firm that senses, serves and
satisfies individual wants is always doing what’s best for consumers and society in the long run.
According to the societal marketing concept, the pure marketing concept overlooks possible
conflicts between short-run consumer wants and long run consumer welfare.
Table 5.2: Summary of the Evolution of Marketing
Production ▪ Consumers favor products that are available and highly affordable
▪ Improve production and distribution
▪ ‘Availability and affordability is what the customer wants’
Product ▪ Consumers favor products that offer the most quality, performance and
innovative features
▪ ‘A good product will sell itself’
Sales ▪ Consumers will buy products only if the company promotes/ sells these
products
▪ ‘Creative advertising and selling will overcome consumers’ resistance

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 and convince them to buy’
Marketing ▪ Focuses on needs/ wants of target markets and delivering satisfaction
better than competitors
▪ ‘The consumer is king! Find a need and fill it’
Relationship ▪ Focuses on needs/ wants of target markets and delivering superior
marketing value
▪ ‘Long-term relationships with customers and other partners lead to
success’
6. Relationship Marketing
Relationship marketing is the practice of building long term satisfying relations with key parties-
customers, suppliers, distributors- in order to retain their long term preferences and business. The
ultimate outcome of relationship marketing is the building of a unique company asset called a
marketing network. In this case, customer experience rather than customer satisfaction is the
most critical component in relationship marketing.
Activity 5.2
Make a statement to describe each of the stages in the evolution of marketing. You may consider the
given examples before coming up with your own statements.
1. Production era
a. ‘Cut costs. Profits will take care of themselves’
2. Product era
a. ‘A good product will sell itself’
3. Sales era
a. ‘Selling is laying the bait for the customer’
4. Marketing era
a. ‘The customer is King!’
5. Relationship marketing era
a. ‘Relationship with customers determine our firm’s future’
6. Customer Relationship marketing
a. Create networking with customers and develop the relationship to the highest level.

5.6 Marketing Information Systems

Every firm must organize the flow of information to its marketing managers. Companies are
studying their manager’s information needs and designing marketing information system to meet
these needs.
A marketing information system consists of people, equipment and procedure to gather, sort,
analyze, evaluate and distribute needed timely and accurate information to marketing decision
makers. The marketing information system is illustrated as fig 5.1 below:

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Figure 5.1 Marketing information systems

The marketing managers to carry-out their analysis, planning, implementation, and control
responsibilities, they need information about development in the marketing environment. The
role of the information system is to assess the manager’s information needs, develop the needed
information, and distribute the information is a timely fashion to the marketing managers. The
needed information is developed through internal company records, marketing intelligence
activities, marketing research, and marketing decision support analysis.

5.6.1 Marketing Research

Marketing research is the systematic and objective identification, collection, analysis, and
dissemination of information for the purpose of assisting management in decision making related
to the identification and solution of problems and opportunities in marketing. Thus, systematic
planning is required at all the stages of the marketing research process. The procedures followed
at each stage are methodologically sound, well documented, and, as much as possible, planned in
advance. It uses the scientific method in that data are collected and analyzed to test prior thinking
or hypotheses.
Marketing research is objective. It attempts to provide accurate, impartial information.
Accordingly, marketing research involves the identification, collection, analysis, and
dissemination of information.

5.6.1.1 The Role (Significance) Of Marketing Research In Decision Making

There are three Functional Roles of Marketing Research. These are:
• Descriptive Function - the gathering and presentation of statements of fact.

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 • Diagnostic (analytical) Function - The explanation of data.
• Predictive Function - Specification of how to use the descriptive and diagnostic research
to predict the result of a planned marketing decision.

5.6.1.2 Marketing Research Components

Marketing researchers deal with many aspects of a market including the following:
 Market size: this deals with the number or value of units sold to a market in a given
period.
 Market Share: this one is about a specific corporation’s share of the market size out of
the whole market of a product or products of the same purpose.
 Market penetration: this is a marketing strategy which is used to know when a company
enters/penetrates a market with current products to get better market share by lowering the
price of a product.
 Brand equity research – this research is conducted to know how favorably consumers
view the brand.
 Buyer decision processes research – this part of marketing research activity is used to
determine what motivates people to buy and what decision-making process they use.
5.6.1.3 Customer Satisfaction Research
In this type of research there are different types of research that are used to assess about
customers.
 Distribution channel audits - to assess distributors’ and retailers’ attitudes toward a
product, brand, or company.
 Marketing effectiveness and analytics - Building models and measuring results to
determine the effectiveness of individual marketing activities.
 Mystery Consumer or Mystery shopping – here the researcher acts as a shopper. This
is often used for quality control or for researching competitors' products.
 Positioning research – this research is mostly conducted to answer questions like
✓ How does the target market see the brand relative to competitors?
✓ What does the brand stand for?
 Price elasticity testing – here the objective of the research is to determine how sensitive
customers are to price changes

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  Sales forecasting - to determine the expected level of sales given the level of demand
with respect to other factors like advertising expenditure, sales promotion etc.
 Segmentation research – this type of research helps to determine the demographic,
psychographic, and behavioral characteristics of potential buyers.
 Test marketing – this is a small-scale product launch used to determine the likely
acceptance of the product when it is introduced into a wider market.
5.6.1.4 Marketing Research Process
Since research is a process which consists of a number of steps to be accomplished in a logical
and systematic manner marketing research consists of the following related phases:
Step 1: Define the research purpose or objectives
The following questions help to establish objectives:
➢ Where potential customers buy the product?
➢ Why they purchase there?
➢ What is the size of the market? How much of it can your business capture?
➢ How does your business compare with competitors?
➢ The impact of promotion on customers.
➢ What types of products are desired by potential customers?
Step 2: Research Design Formulation
The research design is a blueprint for conducting the marketing research. More formally,
formulating the research design involves the following steps:
➢ Study period and place determination.
➢ Qualitative data collection methods.
➢ Methods of collecting quantitative data (survey, observation, and experimentation).
➢ Definition of the information needed.
➢ Questionnaire design.
➢ Measurement and scaling procedures.
➢ Sampling process and sample size.
➢ Plan of data analysis.
Step 3: Gather at this stage secondary data,
A data which is originally collected by others for their own purpose, but such data can be used
by the researcher when it is relevant to the current study. Secondary data:

44
 ➢ Is less expensive.
➢ Can be acquired within or outside the venture.
➢ But, may be out-dated and less valid.
Step 4.Gather Primary Data
Primary data collection techniques can be categorized as;
➢ Observational techniques-do not involve contact with respondents.
➢ Focus groups.
➢ Experimentation-investigates cause and effect relationships.
➢ Survey techniques- generate data by asking people questions and recording their
responses.
The following are examples of survey techniques.
A. Mail questionnaires: The researcher may send the questionnaires to research
Participants.
B. Telephone interviews: Using the telephone numbers from telephone directory, the
researcher may ask research participant via the telephone.
C. Personal interviews. The researcher may go to the research participants’ address and
may drop and pick the questionnaire or may interview the research participants.
Step 5: Data Processing and Analysis
Data processing includes the editing, coding, transcription, and verification of data. And data
analysis, guided by the plan of data analysis, gives meaning to the data that have been collected.
Research results should be evaluated and interpreted in response to the research objectives.
Step 6: Report Preparations and Presentation
At the end the research results will be written in a report form and presented to the concerned
parties. The report includes:
❖ The specific research questions identified,
❖ Describes the research approach,
❖ The research design,
❖ The data collection methods, and sampling procedures,
❖ The data processing and analysis procedures,
❖ The major findings and suggestions for actions.

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 ❖ In addition, an oral presentation should be made to management using tables, figures, and
graphs to enhance clarity and impact.

5.6.2 Marketing Intelligence

Market intelligence is the systematic process of gathering, analyzing, supplying and applying
information (both qualitative and quantitative) about the external market environment.
Intelligence is evaluated information. Marketing intelligence is used to determine:
❖ Current and future market needs,
❖ Changes in the business environment that may affect the size and nature of the market
in the future.
❖ Environment that may affect the size and nature of the market in the future.
5.6.2.1 The Importance of Marketing Intelligence
Marketing intelligence provides the following benefits;
▪ Market and customer orientation – promote external focus.
▪ Identification of new opportunities.
▪ Smart segmentation.
▪ Early warning of competitor moves.
▪ Minimizing investment risks.
▪ Quicker, more efficient and cost-effective information.
5.6.2.2 Ways to Undertake Marketing Intelligence
i. Unfocused scanning: Any information that may be useful is gathered without any
specific purpose in mind.
ii. Semi-focused scanning: no specific purpose. The manager is not in search of particular
pieces of information that he/she is actively searching but does narrow the range of media
that is scanned. For instance, the manager may focus more on economic and business
publications, broadcasts etc. and pay less attention to political, scientific or technological
media.
iii. Informal search: - limited and unstructured attempt to obtain information for a specific
purpose. For example, entering the business of importing frozen fish from a neighbouring
country may make informal inquiries as to prices and demand levels of frozen and fresh
fish.
iv. Formal search: - this is a purposeful search for information in some systematic way.
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Marketing intelligence is carried out by the manager him/herself rather than a professional
researcher. Scope of the search in this case is likely to be narrow and far less intensive (less
rigorous) than marketing research.

5.6.3 Competitive Analysis

Competitive analysis refers to determining the strengths and weaknesses of competitors and
designing ways to take opportunities or tackle threats posed by competitors.

5.6.3.1 Uses of Competitive Analysis

Competitive analysis is important for businesses since it has the advantages stated as follow:
 It helps management understand its competitive advantages/ disadvantages relative to
competitors.
 It generates understanding of competitors’ past, present (and most importantly) future
strategies.
 It provides an informed basis to develop strategies to achieve competitive advantage in
the future (e.g. how will competitors respond to a new product or pricing strategy?)
 It helps forecast the returns that may be made from future investments.
Competitive analysis is a method of gathering data about competitors from different sources. It
should answer the following questions:
▪ Who are your competitors?
▪ What customer needs and preferences are you competing to meet?
▪ What are the similarities and differences between their products/services and
yours?
▪ What are the strengths and weaknesses of each of their products and services?
▪ How do their prices compared to yours? How are they doing overall?
▪ How do you plan to compete? Offer better quality services? Lower prices? More
support? Easier access to services? How are you uniquely suited to compete with
them?
5.6.3.3 Steps of Competitive Analysis
Every business owner should have a complete understanding of the competitive landscape in the
market. Competition is defined as any business that provides a similar service or product in the
same market, region or industry. A strategic business owner not only knows who its competitor

47
is but also understands the best way to position ahead of its competitor. The following provides a
step-by-step process in creating your competitive analysis.
1) Identify your competitors: Determine both local and international competitors. Be sure to
define the competitive landscape broadly. Your competitor includes anything that could draw
customers away from your business.
2) Gather information about competitors: At this stage you need to know; what markets or
market segments your competitors serve; what benefits your competitors offer; why customers
buy from them; and as much as possible about their products and/or services, pricing, and
promotion strategies.
1) Gathering Information on Competitors
To gather information about your competitor you can go either to your competitors’ company
site or to the company's Web site (if any) using which you can learn about; promotion strategies
by visiting their business site; prices; your competitors’ customers; vendors or suppliers, and
their employees; trade shows; and publicly available information - from Newspapers, magazines,
press releases and online publications.
2) Analyzing the Competition
After studying the information you have gathered about each of your competitors, ask yourself
these primary questions:
 How are you going to compete with that company?
 Is there a particular segment of the market that your competitor has overlooked?
 Is there a service that customers or clients want that your competitors do not supply?
3) Develop a pricing: The last step in the process is to develop a pricing model that represents
what you are offering the market and the value you bring to your target buyers. There are
many factors that go into designing the appropriate pricing structure so you will need to do
some research and evaluate what price levels your market will bear, your cost basis for the
development of your product, how much you need to cover overhead and marketing costs
and lastly how much profit you think is appropriate for what you are offering. Do not
immediately think you have to price your products below your competition, people
appreciate the value in your product and set your price accordingly.

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The goal of your competitive analysis is to identify and expand upon your competitive
advantage. To make your competitive analysis effective, transfer the weaknesses of your
competitors into potential strengths for your business.

5.7 The Marketing Mix and Marketing Strategies

5.7.1 The 4 P’s Of Marketing/The Marketing Mix

These are marketing variables that the marketing manager can manipulate as controllable
variables. They include product, pricing, place (channel) and promotion.
1. Product: refers to goods/services produced for sale, the product /service should relate to the
needs and wants of the customers. Some important questions you need to ask yourself include:
a) What products/services do I sell?
b) Why did I decide to sell these products?
c) Do I have the products customers want?
d) Do any of my products not sell well?
e) Do I stock products that do not sell well?
✓ Always listen to what your customers like and don’t like. When their needs change,
change your products and services to satisfy the new needs.
✓ Do more market research in order to provide those products or services and increase
your sales.
✓ If your product is not selling well, think of new ideas like finding new customers.
2. Pricing: refers to the process of setting a price for a product/service. Your prices must be low
enough to attract customers to buy and high enough to earn your business a profit. To set your
price you need to:
▪ Know your costs.
▪ Know how much customers are willing to pay.
▪ Know your competitors price.
▪ Know how to make your prices more attractive
3. Place: means the different ways of getting your products or services to your customers. It is
also referred to as distribution. If your business is not located near your customers, you must find
ways to get your products/services to where it is easy for customers to buy. You can distribute
your products to your customers through:

49
 • Selling directly to the consumers of the products.
• Retail distribution and wholesale distribution.
4. Promotion: Refers informing your customers of your products and services and attracting
them to buy them. Promotion includes advertising, sales promotion, publicity (non-paid
promotion) and personal selling. Use advertising to make customers more interested in buying
your products or services. Some useful ways of advertising include signs, boards, posters,
handouts, business cards, pricelists, photos and newspapers.
You can use sales promotion (short term incentives) to make customers buy more when they
come to your business, you could also:
▪ Ensure you maintain attractive displays.
▪ Let customers try new products.
▪ Have competitions.
▪ Give demonstrations.
▪ Sell complementary products (products that go together)

5.7.2 What Is Marketing Strategy?

A marketing strategy is a process that can allow an organization to concentrate its limited
resources on the greatest opportunities to increase sales and achieve a sustainable competitive
advantage.
Marketing strategy is a method of focusing an organization's energies and resources on a course
of action which can lead to increased sales and dominance of a targeted market.
A marketing strategy combines product development, promotion, distribution, pricing,
relationship management and other elements; identifies the firm's marketing goals, and explains
how they will be achieved, ideally within a stated timeframe. Marketing strategy determines the
choice of target market segments, positioning, marketing mix, and allocation of resources. It is
effective when it is an integral component of the overall firm strategy, defining how the
organization will successfully engage customers, prospects, and competitors in the market arena.
1. Pricing Strategy
Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction
and utility, includes tangible (functional) and intangible (prestige) factors. It can even be barter.
Price is often the only element the marketer can change quickly in response to demand shifts.
It relates directly to total revenue TR = Price * Quantity

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 Profit = TR – TC
Where, TR=Total Revenue, TC=Total Cost
Pricing strategies are subject to incredibly complex environmental and competitive forces. A
company sets no single price, but rather a pricing structure that covers different items in its line.
This pricing structure changes through time as products pass through their life cycles.
To come up with this situations marketers use dynamic pricing strategies. The following are
some of pricing strategies mostly applicable in the real world scenario.
i) Price Skimming: this is a type of marketing strategy that firms use by charging the
highest possible price that buyers who most desire the product will pay. It attracts a
market segment that is more interested in quality, status, uniqueness etc. In this case,
consumers’ demand must be inelastic.
ii) Penetration Pricing: In this strategy, prices of products are reduced compared to
competitors’ price for the same product to penetrate into markets and to increase sales.
However, the quality of the product should not be lower as compared to other
competitors’ product. It should be again noted that the cost of production should be
lower to the extent that can enable the firm to get the desired profit. This is appropriate
when the demand is elastic.
iii) Cost-plus pricing: Any amount that is above unit cost may be considered.
iv) Mark-up pricing: A certain percentage of the selling price is added to unit cost.
v) Competition Oriented Pricing: Considers competitors prices primarily; but the
market type matters.
vi) Odd-even pricing: This is Psychological pricing method based on the belief that
certain prices or price ranges are more appealing to buyers. This method involves
setting a price in odd numbers (just under round even numbers) such as $49.95 instead
of $50.00. Although not supported by any research findings, its proponents claim that
the consumers see a $49.95 price as 'just in the price range of $40’rather than in the
$50.
2. Promotion Strategies
Promotion is the communication of the company and its products to customers. Promotional
strategy is choosing a target market and formulating the most appropriate promotion
mix to influence it. An organization’s promotional strategy can consist:

51
i) Advertising: It is any paid form of non-personal, one-way, mass communication about an
organization, good, service, or idea by an identified sponsor.
ii) Personal selling: This is the two-way flow of communication between a buyer and seller,
often in a face to face encounter, designed to influence a person’s or group’s purchase
decision.
iii) Public relations: Public relation is a form of communication that seeks to change the
perceptions of customers, shareholders, suppliers, employees and other publics about a
company and its products.
iv) Sales promotion: This promotion type involves short term incentives of value such as
discounts, free samples, and prizes to be offered to arouse interest of customers in buying
the good/service. Businesses may use one of the above promotional mix elements to arouse
the interest of customers and make them take action by informing, persuading and
reminding about the goods and services that they provide to the market.
3. Distribution Strategies
A successful product or service means nothing unless the benefit of such a service can be
communicated clearly to the target market. For product-focused companies, establishing the
most appropriate distribution strategies is a major key to success, defined as maximizing sales
and profits. Unfortunately, many of these companies often fail to establish or maintain the most
effective distribution strategies. Problems that researchers identified include:
 Unwillingness to establish different distribution channels for different products,
 Fear of utilizing multiple channels, especially including direct or semi-direct sales,
due to concerns about erosion of distributor loyalty or inter-channel cannibalization
 Failure to periodically re-visit and update distribution strategies.
 Lack of creativity, and
 Resistance to change.
As can be noted from the above points marketing channels are the most important actors for the
effective and efficient distribution of products.
Marketing Channels are individuals/organizations involved in the process of making the product
available for use or consumption by consumers. Channels are used to improve exchange
efficiency. It is divided into Direct and Indirect channels.
▪ Direct channels: In this type of channel, producers and end users directly interact.

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 ▪ Indirect channels: In this type of channel intermediaries are inserted between seller and
buyer. Intermediaries include Merchant Wholesalers, retailers, dealers, agents, brokers;
and manufacturer’s branches and offices.
Decisions about marketing channels, which help producers deliver goods and services to their
target markets, are among the most critical tasks facing management-because the channels that
are chosen intimately affect all of the other marketing decisions. For example, the company’s
pricing depends on whether it uses a direct channel, discount merchants, or high-quality
boutiques. Also, the firm’s sales force and advertising decisions depend on how much training
and motivation its dealers need.
The following factors should be considered to select the best channel under the condition of
using best distribution strategy.
▪ Company Factors: financial, human and technological capabilities of a company to do
its business activities.
▪ Market Characteristics: Geography, market density, market size, target market
▪ Product Attributes: perishability, value and sophistication of the product
▪ Environmental Forces: those forces that affect the business like competition,
technology and culture.

5.8 Selling and of Customer Service

Many employees have unclear understanding of what customer service really is. There are
indications everywhere that there are customer service problems that demand solutions. How
service providers do their jobs, how fast and accurately they process paper works, how
successfully they pursue accounts, and how effective they are in taking the next step to develop
customer loyalty, will determine an organization's success in serving customers. It is because of
these reasons that customer service delivery improvement programs fail in some instances.
Customer service is what happens between the customer determining his/her needs and receiving
the desired benefits. However, most service providers do not appropriately understand what
service delivery really means. For this reason, many organizations fail to improve the level of
their customer service delivery.

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5.8.1 The Concept of Service

Service refers to any activity undertaken to fulfil customer’s needs. It is any act or performance
that one party can offer to another that is essentially intangible and does not result in the
ownership of anything. Its production may or may not be tied to a physical product. Distinctive
features of services include intangibility, inseparability, variability, and perishability as opposed
to goods.
The feature of intangibility shows that pure services cannot be defined in terms of the physical
dimensions; or the customer cannot see or feel them before purchase. The concept of
inseparability, on the other hand, refers that production and consumption of services are
inseparable; the 'sale' occurs just before both.
There are also features of variability and perishability associated in service. Services are highly
variable, because they depend on who provides them, and when and where they are provided. In
addition to this, services are produced and consumed at the same point, and are totally perishable
right after use. Service cannot be reproduced as a concert object and it can vary from one
moment to the next. Based on this concept, service is characterized as; situational, difficult to
measure, subjective and influenced by the service provider.
Service is situational in the sense that what is good for one customer one day may be perceived
differently by the same customer another day. There is also difficulty associated in measurement
of service. This is because the higher one sets expectation by delivering service, the more the
customers expect the next time they deal with the service provider.
Service is also subjective in the sense that an acceptable service for one customer may not be
equally or totally acceptable by another customer. Finally, service is influenced by the service
provider. If the service provider sets expectations effectively, the customer will probably be
satisfied.

5.8.2 The Concept of Customer

Customer is a person or organization that buys a product or service either for use or for resale.
Customers can be internal (e.g. member of the organization) or external (customers coming from
outside). A thorough understanding of the concept of customer service enables organizations to
provide quality service by using proper service management approaches.

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5.8.3 Strategic Activities needed for Quality Customer Service Delivery

Organizations should identify important strategic activities to ensure consistent, efficient and
excellent customer service delivery using continuous improvement philosophy. Especially, the
following specific areas should be considered:
1. Establishing a clear customer service strategy.
2. Ensuring that correct people are in place, with the correct skills to deliver outstanding
personal service.
3. Establishing clear material service delivery processes.
4. Improving in terms of process improvement, quality monitoring and recovery
continuously.
5. Participatory Management.

5.8.4 Customer Handling and Satisfaction

Customer handling and satisfaction is a key for successful organizations. Managers and
employees should work hand-in-hand to improve their service delivery programs. Existing
customers must be satisfied with the existing service. Existing customers are also means of
potential customers. What is expected from successful service providers in this regard are the
following.
Poor service/defective service is the causes of loss and bankruptcy for many organizations. Many
organizations, especially business organizations worried about the reduction of sales or
profitability due to lost customers/ or gradual reduction of customers. Organizations invest huge
cost to increase market share by using advertisement or different sales promotion techniques. But
the first most important principle here is not losing a single customer.
Retaining existing customers, however, requires systematic handling. You have to make
customer satisfaction your religion. Understand the importance of satisfying existing customers.
Usually, organizations tried to increase sales by a much larger percentage than what they had
planned, because of sales lost due to defecting customers.
In addition to retaining existing customers, originations should also strive to increase the number
of customers. Organizations could possibly increase their market share by getting new
customers. Attracting new customers is directly related to keeping existing customers satisfied.

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The consequence of poor customer handling, therefore, is losing existing customers. Again,
organizations invest huge resources to acquire new customers, who are later lost, resulting in a
total loss of investment. There is unnecessarily spending money on advertising and marketing to
get customers. Customer retention and satisfaction comes not from words, but from putting time,
effort, and money to satisfy customers. Establish an information system to track lost customers
and record your day-to-day progress. Also take into account that the major reasons to lose
customers are:
o Poor service,
o Poor quality and
o Rude behaviour.
There are organizations that tend to lose a very high percentage of their customers every year.
The majority of these customers are not even aware of this phenomenon. But we have to
consider the fact that when we lose a customer, we don’t loose revenue and profits for just one
year, but for a number of years, that is for the lifetime of the customer. Organizations should
make the effort to retain every single customer. It is understandable when you lose a customer
because of reasons that are beyond your control, but unpardonable when you lose one for poor
service and an uncaring attitude towards the customer.

5.8.4.1 Considering Customers as an Invaluable Asset

The value of one customer is infinite, and you cannot possibly calculate it. This includes, sales to
him in his lifetime as well as to customers he generates for you through word of mouth. This
means, your most precious asset is your customer. We think of the immediate profit and ignore
the future profits expected over the lifetime of the customer.

5.8.4.2 Reducing Customer Complaints

Every single complaint should be treated as an opportunity to improve the quality of your
products and services. A complaining customer is a very fair person. Turn customer discontent to
your advantage. Consider also the following research findings about customer satisfaction:
▪ 91% of customers who have major complaints decide they will never come back. But if
the complaint is resolved quickly, 82% of them will return.

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 ▪ Quick complaint resolution drops customer defection rate from 91% to 18%. It is better
to have a complaining customer than no customer at all. It pays to resolve complaints
quickly.
▪ There is no investment like investment in customer satisfaction.
▪ Treat the cost of satisfying a customer as an investment rather than as an expense. You
will get unmatched returns through referrals, repeat purchases decreased operational costs
and increased profits.
▪ In the customer’s benefit lies our benefit.
Therefore, organizations should start tracking the cost of customer dissatisfaction to convince
employees and management about the importance of keeping customers satisfied. Your
competitive advantage will lie in retaining the customer longer than your competition. Because
of a few disloyal customers, you cannot lose your faith in all your customers.

5.8.4.3 Place Yourself in The Customer’s Shoes

You have the right to choose your customers but not the luxury to compromise on your level of
service. Get rid of the unwanted customer but do it with tact. Part with the unwanted customer
with a smile and a handshake. Place yourself in the customer’s shoes. ‘Do unto your customer as
you would have done unto you’.

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