BE 447 ENTREPRENEURSHIP 1. 1.1.2 Definitions of Entrepreneurship “ Entrepreneurship” and “entrepreneur” as concepts have been defined in various ways.

BE 447 ENTREPRENEURSHIP 1

1.1.2 Definitions of Entrepreneurship “ Entrepreneurship” and “entrepreneur” as concepts have been defined in various ways. Here we review some of these definitions. The examination of these definitions will help to broaden our understanding of these concepts. Where deemed necessary, an attempt has been made to briefly elaborate the definitions. 2

Schumpeter (1934) defined an entrepreneur as someone who acts as an agent of change by bringing into existence a new combination of the means of production. Such new combinations include process, product and organisational innovations. 3

The means of production include capital, equipment, premises, raw material, labour and— more recently—knowledge. Knowledge can be considered as the capacity to understand and use information and processes. Kirzner (1973), on the other hand, saw an entrepreneur as a seeker of imbalances, which he/she seeks to remove by any means of his/her entrepreneurial activity. 4

Casson (1982) defines an entrepreneur as someone who specialises in making judgmental decisions on co-ordination of scarce resources. This signifies that an entrepreneurial endeavour is undertaken by an individual, not by a group. Schumpeter, who is a pioneer in entrepreneurship, defined an entrepreneur as a person, who sees an opportunity, seizes that opportunity and creates a new product, changes a production process or, otherwise, creates a new marketable contribution to the economy. 5

He termed this activity an innovation and claimed that innovation is the sole domain of the entrepreneur. Since Schumpeter’s definition, the concept of innovation has continued to dominate the field of entrepreneurship. 6

Dewhurst and Burns (1989) assert that an entrepreneur is a person opportunity, who acquires motivation, drive and ability to mobilise resources to meet the market after perceiving such a market. Dollinger (1999) defines entrepreneurship as the creation of an innovative economic organisation or network of organisations for the purpose of gain or growth under conditions of risk and uncertainty. 7

Entrepreneurship is defined as new combinations such as doing new things or doing things already being done in a new way (Schumpeter: 1934). 8

Kirzner (1973) conceives entrepreneurship as the ability to perceive new opportunities. Drucker (1985) considers entrepreneurship as an act of innovation that involves endowing the existing resources with new wealth producing capacity. 9

Stevenson, Roberts and Grousbeck (1985) perceive entrepreneurship as the pursuit of an opportunity without concern for current resources or capabilities Rumell (1987) considers entrepreneurship as the creation of new businesses, not necessarily duplicating the existing ones since some element of novelty is crucial here. 10

Low and Macmillan (1988) have considered entrepreneurship as the creation of new enterprises. Gartner (1988) considers entrepreneurship as the creation of organisations, or the process by which new organisations come into existence. Timmons (1997) looks at entrepreneurship as a way of thinking, reasoning and acting, which is opportunity-obsessed, holistic in approach and leadership-balanced. 11

Venkataraman (1997) defines entrepreneurship research as an attempt to understand how opportunities aimed at bringing into existence future goods and services are discovered, created and exploited by whom and to what effect. Morris (1998) asserts that entrepreneurship is the process through which individuals and teams create value by bringing together unique packages of resource-inputs to exploit opportunities in the environment. 12

This endeavour results in a variety of possible outcomes including new ventures, products, services, processes, markets and technologies. Sharma and Chrisman (1999) define entrepreneurship as encompassing acts of organisational creation, renewal or innovation that occur within an existing organisation. Cole (1959), as cited in Landstrom (2005), defines an entrepreneur as an individual or group of individuals who initiate, maintain or expand a profit-oriented business unit for the production or distribution of economic goods or services. 13

Morrison (1998) defines entrepreneurship in terms of two key concepts of innovation and creativity. Entrepreneurship is thus defined as the process of doing something new (creative) and something different (Innovative) for the purpose of creating wealth for the individual and adding value for the society. Creativity and innovation have been used complimentarily in the field of entrepreneurship. 14

Kuratko (1995), as cited in Collins and Shaw (2001), defines an entrepreneur as an innovator or developer who recognises and seizes opportunities, converts those opportunities into workable/marketable ideas, adds value through time, effort, money or skills, assumes risks of the competitive market place to implement these ideas and realises the rewards from these efforts. In a way, this definition provides a direction of the entrepreneurial process that ought to be followed. 15

Another definition comes from Drucker (1985), as cited in Landstrom (2005), who sees Entrepreneurship as an act of innovation that involves endowing the existing resources with new wealth producing capacity. In fact, this definition negates creativity as an entrepreneurial act. 16

From these definitions, we can develop our operational definition of entrepreneurship as constituting people who have the ability to see and evaluate business opportunities, gather the necessary resources, take advantage of them and initiate appropriate action to ensure success. 17

Successful entrepreneurs ought to have the vision or ability to see opportunities. The evaluation of opportunities and gathering of resources calls for willingness to take calculated risks (which may be both personal and financial), and then do everything possible to reduce the chances of failure. It is from the importance of the vision in achieving this end that entrepreneurship has been conceived as the ability to create and build a vision even if an entrepreneur does not have capital from the outset. 18

Taking up an action is fundamentally a human creative act. Entrepreneurship is thus connected with the application of energy to initiate and build an enterprise or organisation, rather than just watching or analysing issues connected with doing so. According to Hitt et al (2002), a typical entrepreneur is the founder of a new firm rather than a manager of an established one, although entrepreneurial behaviour can be exhibited by an employee. In a later case, the one who exhibits entrepreneurial behaviour in an already established organisation is termed as an intrapreneur. 19

1.2 Nature of Entrepreneurship: Myths and Realities about entrepreneurs 20

1.2 Nature of Entrepreneurship: Myths and Realities about entrepreneurs Nature of entrepreneurship and development of theories have its origin from the myths that surfaced the entrepreneurship discipline. Throughout the years many myths have risen about entrepreneurship. Myths are mistaken beliefs concerning something. Despite a portion of these myths having some validity, the reality has remained significantly different from the view of the proponents of those myths. We revisit the following popular myths and an attempt is made to dispel each: 21

(i)Entrepreneurs are doers not thinkers This myth advocates that entrepreneurs are action oriented and should not waste time thinking. The reality is however that both action orientation and imagination are important. The emphasis today on the creation of clear and complete business plans is an indication that “Thinking" entrepreneurs are as important as doing entrepreneurs. 22

(ii)Entrepreneurs are born not made A persistent notion is that most entrepreneurs are born with innate characteristics and prepare them for the life of new venture creation. Those who believe that entrepreneurs are born conclude that entrepreneurship can not be learned. This corollary myth would suggest that studying entrepreneurship is of little value. Casson (1982) argues that all entrepreneurial skills to some extent are innate. 23

However, not all of them are entirely innate. Some can be acquired from the environment or formally learned by training or simply by experience. He contends that, do we have to sit around powerless until some mother gives births to another Bill Gates in the USA or Reginald Mengi in Tanzania. Even for the so referred born entrepreneurs, the analytical and computational skills are enhanced in schools and universities. In addition, whilst they do have certain personal traits that they may be born with, they are also shaped by their history and experience of life. 24

This comprises their antecedent influences –the social environment they find themselves in for example their family, ethnic group, work, education etc and the culture of the society they are brought up in. Some cultures encourage entrepreneurial activity while others discourage it. Some tribes in Tanzania such as Chaga and Kinga have been associated with higher levels of entrepreneurial enthusiasm. It is known that some people grew to becoming entrepreneurs with the potentials advantages emanating from the fact that they grew in entrepreneurial families. 25

They question is whether being born from entrepreneurial families is enough. The answer is clear from empirical observation that some people are born from entrepreneurial families but are not entrepreneurs by themselves. What is more, the situations entrepreneurs find themselves in can influence their decision. For example if they are thrown out of work they may have little option but to try to start up their own business. 26

Nevertheless, family background plays positive role in two ways: If an entrepreneur has previous experience of the effect of entrepreneurship from a family member they are more prepared for the consequences of their own activities. Family support of entrepreneurship can make a positive contribution to its sustenance Family could also help in enabling access to funds and markets. 27

According to Wickham (2004) at least 3 factors contribute to the social development of entrepreneurs. They include Innate (intelligence, creativity, personality, motivation, personal ambition etc). Acquired (including learning, training, experience in incubator organization, mentoring, role models etc). Social (birth order, experiences in family life, Socio economic group and parental occupation, society and culture, economic conditions etc). 28

On the other hand entrepreneurship as a discipline has models, process and case studies that allow the subject to be studied and the knowledge to be acquired. This being the case it is proposed that entrepreneurs are both born and made (iii) Entrepreneurs are always inventors The proponents of this myth argue that to become an entrepreneur, he/she must discover something that never existed before. The idea that entrepreneurs are always inventors is a result of misunderstanding. 29

Although many inventors are also entrepreneurs numerous entrepreneurs encompass all sorts of innovative activities which are beyond but inclusive of inventors. Innovators could be inventors, duplicators, adopt extensions or synthesizers. (iv) Entrepreneurs are academic and social misfits The belief that entrepreneurs are academically and socially ineffective is a result of some business owners having started successful enterprises after dropping out of school, quitting a job or as a reaction to their inability to cope with the situation. 30

Accordingly entrepreneurs are considered as social misfits at heart. Often entrepreneurs relate their inability to fit into established firm as a factor in driving them to start their own ventures. As result the entrepreneur is driven to create his/her own situation. It is this that provides the motivation to innovate and build new organizations. 31

While the idea of social misfit provide insight into the motivation of some entrepreneurs any generalization of this sort is dangerous. Today the entrepreneurs is considered a hero- socially and academically. No longer is a misfit, the entrepreneur now viewed as a professional. 32

(v) Entrepreneurs must fit the 'profile' The proponents of this myth argue that entrepreneurs must fit a package of a ‘fit for all’ characteristic. Whether a definable and validated set of entrepreneurial characteristics exist is more controversial. Many entrepreneurs have presented checklists of characteristics of the successful entrepreneur. These lists were not complete and validated. Burn (2001) contends that even if it is possible to identify personal characteristics of owner managers and entrepreneurs it is not always possible to link directly with a particular sort of business. 33

This suggests that standard entrepreneurial profile is hard to compile. The environment, the venture itself and the entrepreneur have interactive effects which results in many different types of profile. (vi) All entrepreneurs need is money This myth suggest that to become a successful entrepreneur all that is needed is money. It is true a venture needs capital to survive; yet having money is not the only solution to avoid failure. 34

If the talents are there money will follow, but it does not follow that entrepreneurs will succeed if he/she has money. As a matter of fact, failure due to lack of proper financing often is an indicator of other problems such as managerial incompetence, lack of financial understanding, poor investments, poor planning etc. Money is thus a resource but not an end in itself. Even those with sufficient money to launch the venture find that entrepreneurship requires skills in marketing, manufacturing, planning and managing human resources to name a few. 35

Money does not assure successes and in some cases it may be a problem because with excess capital entrepreneurs may encumber themselves with unnecessary assets and inefficient organizations. Too little capital is of course a more serious problem to overcome. Landstron (2005) considers entrepreneurship as a process through which individuals pursue and exploit opportunities irrespective of the resources they currently control. 36

(vii) All entrepreneurs need is luck The proponents of this myth argue that the success of entrepreneurs is simply determined by luck or similar forces. But the reality is that what is considered to be lucky is not lucky as such; instead it is just that entrepreneurs were in the right place at the right time. Perhaps in few cases that assumption is correct but most entrepreneurs make their luck by working hard. Thus luck happens when preparation meets opportunity. Prepared entrepreneurs who seize the opportunity when it arises often seems 'lucky''. They develop marketing, manufacturing and organizing skills needed to bring innovation into fruition. So what appears to be luck is preparation, determination, desire, knowledge, innovativeness etc. 37

(viii) Ignorance is bliss for entrepreneurs The argument put forward by those who support this view is that entrepreneurs are ignorant; that is why they keep on doing planning and evaluation. Worse scenario is that each time they do so they discover new problems. The reality however is different. The myth that too much planning and evaluation lead to constant problems, that overall analysis leads to paralysis, does not hold in today's competitive markets, which demand detailed planning and preparation. Thus careful planning is not ignorance of it rather it is the mark of an accomplished entrepreneur. 38

(ix)Entrepreneurs seek success but experience high failure rates Entrepreneurs fail miserably with the first venture. It is true that many entrepreneurs suffer a number of failures before they are successful. Entrepreneurship involves a learning process and ability to cope with problems and to learn from those problems. Failure can teach to those willing to learn. Businesses fail but entrepreneurs do not. Failure is often the catalyst that triggers the surviving entreprenur’s learning experience. The high failure rate can also be misleading because several businesses do survive. 39

(x)Entrepreneurs are gamblers Proponents of this myth argue that entrepreneurs risk highly. The reality is that entrepreneurs usually work in moderate 'calculated' risks. They do not deliberately seek to take more risk or to take unnecessary risk, nor do they shy away from unavoidable risk. Looking at them as gamblers can be misleading. Most Successful entrepreneurs work hard through planning and preparation to minimize the risk involved in order to better control the destiny of their vision. 40

( xi) Entrepreneurs are mavericks and misfits It is advocated that many entrepreneurs march to the different drummer. They are not always among the best students and they tend to be restless in structured jobs. Consequently they are likely to be unsettled wanders.It is true that entrepreneurs prefer independence and can rather be rebellious and both conditions can affect their performance both at work and in school. Most successful entrepreneurs however, are from ranks of above average students. Entrepreneurs are non conformists in a sense that they instigate change and challenge the status quo but they are not misfits. They alter the fundamental course of commerce and in so doing are clearly out of step with the rest of the parade and tend to lead the parade in a new direction. 41

(xii) Entrepreneurs work longer and harder than corporate managers The proponents of this myth argue that entrepreneurs work more than their corporate counterparts. The fact is that there is no evidence on this aspect. Some entrepreneurs work longer, some do not. Some have actually been reported to work less. (xiii) Entrepreneurs experience stress and pay a high price Proponents of this myth argue that being an entrepreneur is stressful and demanding. Nevertheless, there is no evidence that this is more stressful than numerous other demanding professional roles. Entrepreneurs have a high sense of accomplishments, are healthier and are much less likely to retire than those who work for others. 42

(xiv) Entrepreneurs should be young and energetic The argument put forward is that most successful entrepreneurs start at the age of 30’s. While these qualities may help, age is not a barrier. The average age of entrepreneurs starting high potential businesses is in the mid 30s and there are numerous examples of entrepreneurs who start businesses in their 60’s. What is important is possessing relevant know how, experience and contact that might facilitate recognizing and pursuing opportunity. 43

(xv) Entrepreneurs seek power and control over others This myth contends that entrepreneurs are` power mongers over others. Successful entrepreneurs are driven by quest for responsibility, achievement and results rather than power for its own sake. They thrive on a sense of accomplishment and of outperforming the competition, rather than a personal need for power expressed by dominating and controlling others. By virtue of their accomplishment they may be powerful and influential but these are more the outcome of the entrepreneurial process than a driving forcE 44

1.3. The model entrepreneur (i)Technical skills Relates to an understanding of the products or services on offer and the market and industry environment in which they exist. In addition it iinvolves such skills as communication, computational, organizing, coaching, being a team player and technical know how. Whilst successful entrepreneurs may not be a technical expert in their chosen field, they have intuitive feel for their chosen market place and develop business relations with those who have the necessary expertise. 45

(ii) Management competencies This are include those involved in starting, developing and managing any enterprise. They relate to managing key functions of the enterprise. Research indicates that the problems in young firms are most likely to arise in the areas of marketing, finance, and management of people. Moreover skills in delegation, decision making, marketing, control and regulations are required in launching and growing a venture. 46

(iii)Personal attributes Some of these skills that differentiate an entrepreneur from a manager include:- -Inner control (discipline) - Foresight -Risk taking -Innovativeness -Persistence, -Visionary -Change oriented etc. 47

1.4. Characteristics of Entrepreneurs (i ) Commitment and perseverance Starting a business venture requires total personal sacrifice. Entrepreneurs put a lot of physical and mental effort into developing their ventures. Total immersion into business by entrepreneurs can overcome obstacles and setbacks. Commitment is demonstrated by their intense dedication to the job. To overcome the business challenges of surviving in the start up, stay alive and finally grow means not giving up. 48

Entrepreneurs work long hours and regard their firm by far as the most important element of their lives, with possible exception of their families. The stronger commitment has enabled some entrepreneurs to overcome difficulties, which defeated other people who treat those difficulties as impossible to solve obstacles. Commitment also compensate for personal shortcomings. 49

(ii) Determination to finish a task quickly, succeed and grow Small business entrepreneurs’ expect quick and concrete result from their investment of time and capital. Most of them can singularly focus on a task and continue diligent effort until the task is finished and success accomplished. Most entrepreneurs can shut out the outside world such as television, radio, idle conversation and solely focus on the task at hand. This single mindedness can often lead to people to assume that entrepreneurs are unfriendly, rude and/or self centred because they often do not involve themselves in their surroundings and the people around them. However, it is this ability to be determined to succeed and grow that allows entrepreneurs to finish the task at hand. 50

(iii) Need for self-achievement and motivated Entrepreneurs are ambitious individuals with a strong passion to achieve. They have a strong need for achievement, far stronger than with the average owner manager. Running own business is a lonely affair without external push to motivate and encourage you. Therefore one has to be self-motivated. Entrepreneurs respond to challenges with enthusiasm. Achievement for the individual owner means different things depending on what type of person they are. 51

(iv)Personal goal set Entrepreneurs tend to set themselves clear and demanding goals. They are self-starters who appear to be internally driven by a strong desire to compete to excel against self-imposed standards. So they benchmark their achievements against these personal but challenging goals. 52

(v) Opportunity orientation Most entrepreneurs in exploiting change for profit, constantly search for new opportunities and are seldom satisfied with the way things are at any moment in time. They seek out opportunities to make money. Often they see opportunities while others see problems. On the other hand, some of the entrepreneurs see opportunities everywhere and have problems following through on any one before becoming distracted by another. 53

Some get bored by the routines and controls; they see other market opportunities and go for the excitement of another start up. Others become serial entrepreneurs, moving to set up and sell on one business after another. Successful entrepreneurs focus on opportunity and let their understanding of it guide other important issues. As businesspersons they are goal oriented in the pursuit of opportunities and they set ambitious but realistically doable goals. 54

The ability to keep focused on the end result and the ability to continue pursuing that end is a common characteristic of successful entrepreneur. This enables them to focus their energies, to selectively sort out opportunities and to know when to say No! The goal orientation also helps them to define priorities and provides them with measures of how well they are performing. 55

(vi)Initiative and responsibility Entrepreneurs do not need to be told what to do. Effective entrepreneurs actively identify the tasks for themselves and then follow them through without looking for encouragement or direction from others. They are willing to put themselves in a situation where they are personally responsible for the success or failure of the operation. They take control of the situation and then accept the end results. They do not rationalise the situation in an attempt to blame the lack of success on someone else or some other event. 56

(vii)Persistent problem solving Entrepreneurs are problem solvers. Moreover although they are persistent, but are realistic in recognising what they can and cannot do and where they can get help in solving difficult but unavoidable tasks. 57

(viii) Seeking Feedback Entrepreneurs are characterised by inquisitiveness. They are never satisfied by information they have at any time and constantly seek more. They are in particular interested to know how they are doing and how they might improve their performance. They actively seek out and use feedback to learn their mistakes. It is however, noticed that in some Tanzanian firms for example in some banks suggestion boxes are well and visibly placed. The challenge is whether really customers have time to propose and whether the few suggestions gathered are seriously used to correct mistakes. 58

(ix) Foresight Foresight has to do with the ability to see the future as it might be. Entrepreneurs have the ability to see how ideas could be turned into product. In order for entrepreneurs to make changes to products and production process, they must first possess the foresight and insight to see how those changes will impact the future. 59

(x)Internal Locus of Control This has to do with the extent to which an entrepreneur believes that he/she can exercise control of the environment and ultimately his/her destiny. Successful entrepreneurs are convinced that they can control their own destinies hence tend to believe in themselves. They do not believe that fate, luck, chance or similar forces will govern the success or failure of their venture. These are attributes of external locus of control. They believe that their accomplishments and set backs are within their own control and influence. They take personal responsibility. 60

In extreme cases this trait can lead to certain negative behaviours. It can show itself as a desire to maintain personal control over every aspect of the business. That can culminate preoccupation with details, overwork and stress. It also leads to unwillingness to delegate and mistrust to the subordinates as the business grows. Consequently this trait leads to subordinates being infantilised (Kets de Vries: 1985) as cited in (Burn: 2001). 61

(xi)Tolerance for Ambiguity True entrepreneurs are willing to live with far greater level of uncertainty. Generally they do not succumb to uncertainty. Start up entrepreneurs face uncertainty compounded by constant changes that introduce ambiguity and stress into every aspect of the enterprise. The greatest uncertainty in entrepreneurial life is determining when income comes in. The possibility of missing out some piece of business might affect their income. 62

(xii) Calculated Risk Taking. Coupled with the ability of the entrepreneurs to live with uncertainty is their willingness to take measured risks. The risks could be personal or financial. Financial risks means that the entrepreneur could loose all his or her money and personal assets should the venture fail. Failure could also mean that a person loses his/her status in society. Most people are generally risk averse hence they try to avoid risks and insure against them. 63

Setting up own enterprise is risky and entrepreneurs are more willing to take more risks with their own resources than most people. Risk taken by an entrepreneur is for change to make a new product or change to make a production process work more smoothly and efficiently. They also risk their reputation and personal standing if they fail. However, entrepreneurs are not extreme risk takers hence they tend to minimise risk whenever possible. 64

They decide to participate in a venture in a very calculated, carefully thought manner by avoiding taking unnecessary risks. Nevertheless, people who hesitate to take risk whenever necessary do not fit the characteristics of an entrepreneur. 65

(xiii)Integrity and Reliability Integrity and reliabilities help build and sustain trust and confidence. They are important for small business entrepreneurs’ success. In the case of Tanzania it is known that some retailing entrepreneurs tend to get trade credit support from wholesalers mainly because of trust that was built overtime. 66

(xiv)Resilience Not everything goes right all the time. Entrepreneurs need a willingness to accept failure, learn from it and act boldly in the shadows of doubts. They use failure as part of the learning process towards achieving success. This learning process is repeated until there is satisfactory outcome. Entrepreneurs do not accept failure, but see failed attempts as temporary set backs on the road to success. 67

They tend to act first and learn later from experiences of their actions. The trial and error nature of becoming a successful entrepreneur makes serious setbacks and disappointments an integral part of the learning process. For that reason most entrepreneurs have the attitude to keep trying until they succeed. They do not get disappointed, discouraged or depressed by a setback or failure. 68

Many of the entrepreneurs believe they learn more from their failures than from their earlier successes. Thus they do not tend to see problems as obstacles but rather as opportunities to solve as part of the drive towards success. 69

(xv)Proactive Entrepreneurs tend to be proactive in searching for opportunity rather than being reactive. They are pro active in a sense that they actively seek out opportunities rather than waiting for them to occur by chance. They act quickly and decisively to make the most of the opportunity before somebody else does. They are seen as restless and easily bored. They can easily be diverted by the most recent market opportunity and often seem to do things at twice the pace of others. 70

(xvi) High energy level The extra-ordinary work loads of entrepreneurial activities demand entrepreneurs to place a premium on energy. Many entrepreneurs seem to work many hours in a day and their work becomes their life. This causes a lot of strain to family relationships and indeed it is stressful. Suggestively, entrepreneurs ought to carefully monitor what they eat and drink, establish exercise routines and knowing when to get away for relaxation. 71

( xvii) Creativity and Innovativeness Innovation and creativity are considered as hallmark of entrepreneurship. Creativity is about developing new ideas, products or services. It is associated with the creation of a product or process that is useful, correct, appropriate and valuable. It has to do with the ability to see the end result of a production change in order to make the production process run more smoothly. In other words, creativity sees a need and the end result of efforts. 72

Innovation on the other hand, refers to doing something differently to the way others are doing it presently. It can mean an improved service or product, a new means of producing an existing product or a new way of getting the product to the consumer. It is the prime tool that entrepreneurs use to create or exploit opportunity. It consists of ability to seek new ways to do things or solve problems. Entrepreneurs as an agent of change bring about new resource combinations. 73

Entrepreneurs tend to be both creative and or innovative. They do things in new and different ways. Creativity and innovation means that the venture will have competitive advantage in the market. Briefly put, to create is to bring something into existence, while to innovate is to bring novelties The two traits are often used complimentarily. 74

( xviii)Vision Vision is the picture of the new world an entrepreneur wishes to create. It is a picture into which the entrepreneur fits an understanding of why people will be better off, the source of new value that will be created and the relation that exists. A vision is a mental image in that it is something that an entrepreneur carries around in their head. 75

Entrepreneurs know where they want to go. They have concept of what they want to achieve. They have the ability to be in the right place at the right time guided by their vision. Timing is everything. This is part of the fabric of their motivation. Innovation that is ahead of time can lead to failure. Innovation that is late, results in copycats products or services that are unlikely to be outstanding successes. 76

(xix)Self Confidence and optmision This is a belief in one self. It has to do with being confident in your own judgement and ability to start and run up your business. More precisely, optimism implies the belief that actions will lead to the best possible event or outcome. Most entrepreneurs have own confidence that their efforts will yield success. They are sure enough of themselves and their abilities to honestly believe that they can and will succeed at the tasks. 77

They believe that if they work hard enough and push the envelope of success, they will break through and succeed. Although entrepreneurs often face obstacles they believe in their ability and are confident in overcoming such obstacles. They have a self-belief that they can succeed. Nevertheless, the self-confidence attribute can be overdone and turn to an exaggerated opinion of their competence and even arrogance. Thus, there is a need to balance the need for it against the dark side of it. 78

(xx)Independence Independence has to do with a need to be your own boss. Entrepreneurs enjoy the freedom that comes from doing their own thing and making their own decisions. They are constrained by existing systems and challenge established procedures and assumptions. Thus they often produce something new rather than modifying what currently exist. 79

Entrepreneurs' frustration with rigid bureaucratic systems coupled with a sincere commitment to 'make a difference'' adds up to an independent personality trying to accomplish tasks on own way. However, independence means different things to different people. It may mean controlling your own destiny, doing things differently or being in a situation where you can fulfil your potentials. It has been said that once you run your own firm can not work for anybody else. 80

(xxi)Team building The desire for independence and autonomy does not preclude the entrepreneurs' desire to build a strong entrepreneurial team. Most successful entrepreneurs have highly qualified well- motivated team that helps handle the venture growth and development. In the Tanzanian context it is understood that some entrepreneurs employ relatives who do not fit competence and motivational requirements of their ventures. Nepotism has been often been cited in the literature as one of the reasons for venture failure. 81

(xxii) Leadership This reflects the personality of the lead entrepreneur. Consequently it can change from authoritarian to participative. However, the skills required are the same. These include the ability to select appropriate team members, communication, mediation, negotiation skills, motivation and empowerment and sharing of credit for achievement with team members and/ or employees. 82

(xxiii) Assertiveness Assertiveness means a commitment to outcomes. Entrepreneurs are usually clear as to what they want to gain from a situation and are not frightened to express their wishes. 83

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania. Entrepreneurship in the 1980's has become widespread in Tanzania. The impetus for such growth in the interest has been partly stimulated by among others various institutions. Even for established organizations it is recognised today that managers need not only managerial skills but also entrepreneurial skills. The following institutions have and continue to play critical role in stimulating entrepreneurial behaviour development in the country. 84

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania. (a) Schools/colleges – Teachers, lecturers and tutors etc can develop curriculum, which among others promote entrepreneurial behaviour. Attempts are made in Tanzania to impart entrepreneurial skills through various institutions. The effort to develop entrepreneurship as a discipline thus helps to refute this myth. Practically all business schools have at least one course in entrepreneurship. 85

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania Institutions such as the universities of (Dar es Salaam, Mzumbe and Tumaini) and colleges such as College of Businesses Education (CBE) and Tanzania Institute of Accountancy (TIA) as well as the institute of Accountancy (IAA) train entrepreneurship. The National Boards Of Accountants (NBAA) and The National Board for materials management (NBMM), the Vocational and education training Centre (VETA) to mention a few attempts to impart skills on entrepreneurship at different levels. 86

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania Some bigger institutions have even formed specific centers geared to providing entrepreneurship training. The University of Dar Es Salaam for example has formed the University of Dar Es salaam Entrepreneurship Centre (UDEC) with the immediate purpose of imparting entrepreneurship skills to the Tanzanian community. The Mzumbe University and The Institute of Finance Management have centers with similar purposes. 87

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania (b) Family Family as an institution plays a crucial role in developing entrepreneurial spirit among members of the families. Children are handled in such a way that entrepreneurial spirit is built through allowing them to think and act innovatively. 88

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania (c) Religions institutions Some religions propound attributes such as hardworking, trustworthiness, determination etc to their followers as desirable. In this way entrepreneurial spirit among the believers is enhanced. 89

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania (d) Employers Employers as an institution may hamper or stimulate the development of entrepreneurial spirit among employees. By creation of suitable and conducive environment employees may develop the risk taking, creativity and innovative spirit among the employees. For example promotion of freedom to develop ideas and support of those ideas can positively enhance entrepreneurial spirit. 90

1.4.2 Institutions Used in Developing Entrepreneurial Behaviour in Tanzania (e) Government Government can develop entrepreneurial behaviour through institutionalizing policies that promote entrepreneurial characteristics. The government of Tanzania for instance has formulated the SME (2003) development policy which is aimed at creating conducive environment for the development of entrepreneurial culture in the country. 91

1.4.3 Entrepreneurial culture Entrepreneurship is rooted in the prevailing culture and attitudes of society at one particular point in time. Entrepreneurial culture implies a set of values, norms and traits that are conducive to the growth of entrepreneurship. It is the corporate culture that focuses on the emergence of new opportunities, the means of capitalising on them and on the creation of structure appropriate for pursuing them 92

1.4.3 Entrepreneurial culture The culture shapes and makes entrepreneur, who then interact within the trunk of social structure, branching out to support the inputs required to bear the fruits of entrepreneurial behaviour. The attitude of a population towards entrepreneurship is a consequence of their cultural mindset, which is linked to their specific social, political and educational attributes. Furthermore culture is dynamic and susceptible to change overtime. 93

1.4.3 Entrepreneurial culture Hofstede (1980) as cited in Morrison (1998) supports cultural specificity to entrepreneurship. Framework for analysis includes 5 dimensions: (i) Power distance Power distance depicts the degree of inequality among people which the population of a country considers normal. For example coloured community of South Africa found itself in a socially marginalized position during the days of apartheid. 94

1.4.3 Entrepreneurial culture This impacted negatively on the entrepreneurial characteristics such as those of initiative and self-control. (ii)Individualism Individualism depicts the degree to which people in a country prefer to act as individuals rather than as members of a group. It is understood that the environment like the one in Tanzania where socialism and the spirit of togetherness have been emphasized historically hampers the entrepreneurial spirit. 95

1.4.3 Entrepreneurial culture The independent nature of entrepreneurs is adversely affected. Efforts to change that trend appear to bear fruitful results despite continued hangover of the dominant spirit. (iii) Masculinity Masculinity is surfaced by the degree to which such masculine values as assertiveness, competition and success are emphasised as opposed to such values as quality of life, warm personal relations, service etc. 96

1.4.3 Entrepreneurial culture Such masculine values as competitive spirit, aggressive selling skills, dogged determination, symbolism of material wealth etc have positive implications in the development of entrepreneurial culture. 97

1.4.3 Entrepreneurial culture (iv) Uncertainty avoidance The degree to which people in a country prefer structured over unstructured situations. E.g. Singaporeans experience a situation of near full employment with comfortable remuneration levels. The government controlled central provident fund saving scheme provides employees with nest egg for retirement. These two factors combine with a societal low tolerance for failure that results in a population that generally moved to avoid the uncertainty and lack of structure associated with entrepreneurial behaviour. 98

1.4.3 Entrepreneurial culture (v) Long term versus short-term orientation Long-term orientation implies a stress on virtuous living in this world, with thrift and persistence as key virtues. E.g. it is known that some people in Tanzania do not prioritise the creation of saving for the future, being content to enjoy life as it is now. So people remain with short term planning mentality. This is not conducive for business development particularly if this trend becomes pervasive. 99

1.5 Types of entrepreneurs Understandings of the different avenues in which an entrepreneur may adopt provide insight into the possible opportunities that entrepreneurs can invest in. Entrepreneurs have been classified in various forms: (i) Soloist This involves a self-employed person operating alone. Most retailers are referred to as soloist. (ii) Key partner This is one stage from the soloist as an autonomous individual but with a partner in the background, sometimes as a financial backer only. 100

1.5 Types of entrepreneurs (iii) Grouper These prefer working in small groups with other partners who share the decision-making. E.g. Craftsmen working in their own firm as equal (iv) Professional These are self-employed experts. Some entrepreneurs work as lawyers experts, financial consultants or business consultants (v) Inventor-researcher These consist of creative inventors who may or may not have the practical skills to turn creativity into innovation. 101

1.5 Types of entrepreneurs (vi) High Tech New technological development has created opportunities for those with the technical expertise e.g. in electronics or computers. (vii) Workforce builder This constitutes the delegator who manages the labour and expertise of others in an effective way. (viii) Inveterate initiator The start up expert who only really enjoys the challenge of initiating new enterprises then loses interest, often selling the business in order to start another. 102

1.5 Types of entrepreneurs (ix) Concept multiplier This includes someone who identifies a successful concept that can be duplicated by others. E.g. through franchising or licensing arrangement. (x) Acquirer Those that prefer to take over a business that already exists, rather than start from scratch. (xi) Speculator These are the property-based opportunities to buy and sell at a profit as well as collectables such as art, stamps and antique furniture. 103

1.5 Types of entrepreneurs (xii) Turn about artists This consists of an entrepreneur who buys a small business with problems but potential for profit. (xiii) Value manipulator These constitute the entrepreneur who acquirer asset at low price and who then through manipulation of the financial structure is able to sell at a higher price. (xiv) Life style entrepreneur Small business is a means to the end of making possible the good life. However this is defined. consistent cash flow is the primary business requirement rather than high growth, which might involve too much time commitment. 104

1.5 Types of entrepreneurs (xv) Committed manager In this category the small business is regarded as a life times work, something to be built carefully. Personal satisfaction comes from the process of nurturing the fledging firm through all its various stages of growth. (xvi) Conglomerator This consists of the entrepreneur who builds up a portfolio of ownership in small businesses. Sometimes he/she uses shares or assets of one company to provide the financial base to acquire another. 105

1.5 Types of entrepreneurs (xvii) Capital aggregator This is a business owner with the necessary financial leverage to acquire other substantial attractive businesses. (xviii) Matriarch or patriarch This constitutes the head of a family owned business that often employs several members of the family. (xix) Going public These are entrepreneurs who start up in business with the clear aim of achieving a quotation on the stock exchange, usually via an unlisted securities market in the 1 st instance. 106

1.5 Types of entrepreneurs (xx) The alternative entrepreneur This consists of alternative new age belief in a return to more environmentally sound life styles expressed in a wish to avoid conventional employment. Commercial activities have developed in areas such as health foods, alternative healing and medicines, alternative beauty products etc. 107

1.5 Types of entrepreneurs (xxi) Fabian entrepreneurs These are very cautious and sceptical while practicing any change. They neither have the will to introduce new changes nor the desire to adopt new methods innovated by the most enterprising entrepreneurs. Such entrepreneurs are shy and lazy. They are not interested in taking risk and they try to follow the footsteps of their predecessors. 108

1.5 Types of entrepreneurs (xxii) Drone entrepreneurs These are characterised by refusal to adopt and use opportunities to make changes in production. Such entrepreneurs may even suffer losses but do not make changes in production methods. They are laggards as they continue to operate in their traditional way and resist changes. Entrepreneurs may exhibit any one of the above mentioned forms of entrepreneurship. The impetus to do so results from the payoff of entrepreneurship. 109

1.6 The Payoff and dark side of Entrepreneurship 110

This part discusses the payoff and the disadvantages associated to entrepreneurship. 1.6.1 The payoff of entrepreneurship (i) Make Money Entrepreneurship provides for one’s financial needs. Launching one’s own business venture is a way of earning money/profit. In several cases, entrepreneurial ventures earn much higher than salaried employment. (ii) Be Your Own Boss Freedom to operate independently is another reward of entrepreneurship. Many people have a strong desire to make their own decisions, take risks and reap the rewards. 111 1.6.1 The payoff of entrepreneurship

(iii) Personal fulfilment Entrepreneurs frequently speak of the satisfaction they derive from their own businesses. Some of the entrepreneurs even refer to their work as constituting fun. Part of their enjoyment is derived from their independence, but some reflects an owner’s fulfilment in working with the firm’s products and services. The role of the entrepreneur even in a one-person business can often bring an individual a sense of dignity or significance that makes life worth living. 112 1.6.1 The payoff of entrepreneurship

These are destructive sources that exist within energetic drives of successful entrepreneurs. Certain negative factors envelop entrepreneurs and dominate their behaviour. Experience in Tanzania shows that many people fear risk, career disruption and being too busy. These factors may cause some people to fear joining the entrepreneurial career or when they do they may fear failing to be effective in their entrepreneurial pursuit. These negative factors are specifically classified in terms of the risks, stress and egocentric nature of entrepreneurs. 113 1.6.2 The Dark side of Entrepreneurship

(i) Risks It is an established fact that entrepreneurship exists under conditions of risk and uncertainty. Risks refer to variability of outcomes (or returns). It exists when there are uncertain outcomes but those outcomes can be predicted with a certain degree of probability. Indeed, some small businesses barely earn enough to provide the owner-manager with adequate income. If there is no risk, returns are certain. Starting or buying a new business involves risks, and the higher the rewards, the greater the risk entrepreneurs usually face. As a matter of fact, entrepreneurs confront at least financial, career, social and psychic risks: 114 1.6.2 The Dark side of Entrepreneurship

(a) Financial risk An entrepreneur risks to lose his or her entire invested capital if the venture fails. The financial risks involved include lost savings and temporary reduction in salary. In fact, the small business failure rate is relatively high. It has been reported that 24% of new businesses fail within two years and 51% shut down within four years. In some cases, the probability of failure reaches 75%. As a result, many people are reluctant to risk their savings, house property, salary or a reduction in their standard of living or in their financial security in order to start a new business venture. These are generally not entrepreneurs at heart because successful entrepreneurs must be prepared to make financial sacrifices. 115 1.6.2 The Dark side of Entrepreneurship

An entrepreneur has to ask himself/herself a number of key questions: - What is the worst that could happen if I open a business and it fails? -How likely is the worst to happen? -What can I do to lower the risk that the business will fail? -What is my contingency plan if the business fails? 116 1.6.2 The Dark side of Entrepreneurship

(b) Career development risk This is a risk that having stepped outside one’s profession for a few years re-entry becomes difficult. A question frequently raised by would-be entrepreneurs is whether they will be able to find a job or return to their old job should their business venture fail. This is often a great concern for managers who have a secure organisational job with a high salary and a good benefit package. In fact certain professions are structured to permit interruptions, while others are not easily turned ‘off and on at will’. For example, medicine is unlikely to tolerate interruptions in medical practice. 117 1.6.2 The Dark side of Entrepreneurship

(c) Risk in social relations The commitment of one’s leisure time and energies is all but inescapable in starting a new business venture. Starting a new venture consumes entrepreneur’s energy and time. Consequently, his or her other commitments may suffer. For example, old friends may varnish slowly because of limited interaction. Many marriages fail to survive the long absences of one partner from home. Vacations, weekend outings, social invitations vanish from the calendar. Nevertheless, despite such strain the asset side also exists in that your absence from home may create the opportunity for a wife or husband to go back to work full or part time or doing some work around the house. 118 1.6.2 The Dark side of Entrepreneurship

(d) Psychic and health risk The greatest risk faced by entrepreneurs concerns his/her well being. Losses caused by many other types of risks are recoverable. A new house, for example, can be built; spouse, children and friends can usually adapt to the changes. But some entrepreneurs who suffer financial catastrophes tend to be severely affected psychologically and drained emotionally, putting strain on their health. 119 1.6.2 The Dark side of Entrepreneurship

(ii) The stress Most entrepreneurs have made significant investments in entrepreneurial ventures, but have also left behind the safety and security of a steady employment and payment and have gauged everything they won to get into business. Thus, failure means a total financial and psychological blow that creates a high level of stress and anxiety. Stress can be viewed as a function of discrepancies between persons’ expectations and his or her ability to meet demands as well as discrepancies between the individual’s expectations and his or her personality. Indeed, when entrepreneurs’ work demands and expectations exceed their ability to perform as venture initiators, they are most likely to experience stress 120 1.6.2 The Dark side of Entrepreneurship

Sources of stress: (i)Loneliness Entrepreneurs spend long hours at work, this prevents them from seeking the comfort and counsel of their friends/ family members. (ii) Immersion in business Many entrepreneurs are married to their businesses. They work long hours, leaving little time for social activities or education. Most new entrepreneurs work for more than 60 hours a week, while some 12% of new start ups work at least 80 hours per week. Only 8% work as low as 39 hrs Many business owners start businesses with belief that they will own business only to discover later that the business owns them. 121 1.6.2 The Dark side of Entrepreneurship

(iii) People problems Entrepreneurs depend on other people such as employees, customers, bankers and professionals. Many entrepreneurs experience frustrations and disappointments with these people, especially when they fail to meet the entrepreneurs’ expectations. (iv) Need to Achieve Achievement brings satisfaction. Many entrepreneurs attempt to achieve too much but, at times, they fail to achieve enough. This can lead to stress. 122 1.6.2 The Dark side of Entrepreneurship

(v) Lower quality of life until the business is established Many business owners find that their roles as husbands and wives or fathers and mothers take a backseat to their roles as venture founders. Part of the problem is that most entrepreneurs start businesses at between 25 and 39 years just when they start to have fun. As a result, their marriages and friendships are too often the casualties of such business ownership. 123 1.6.2 The Dark side of Entrepreneurship

Dealing with stress It is important to note that if stress can be kept at manageable levels it could increase a person’s efficiency and improve performance. On the other hand, excessive stress could be combated by resorting to the following five ways: (a) Networking: This involves sharing experiences with other business owners. This reduces tension by getting support and by learning from others. (b) Getting away from it all: The best way to avoid being stressed out in business is to take a holiday or short break. Such measures allow for self renewal. 124 1.6.2 The Dark side of Entrepreneurship

(c) Communicating with employees: When entrepreneurs are in close contact with their employees, they can easily assess their concerns. As a result, they can find solutions to their problems before the situation got out of hand. This way they can avoid the kind of stress an entrepreneur can experience when things get out of hand. (d)Finding satisfactions outside the company: To counter the obsessive need to achieve, one may also get away from the business occasionally. This can allow one to gain new perspective. (e) Delegating: Entrepreneurs need to delegate effectively so that they create time for stress alleviation. Nevertheless, the appropriate delegatees must be identified and trained. 125 1.6.2 The Dark side of Entrepreneurship

(iii) The Entrepreneurial Ego Another aspect of the dark-side of entrepreneurship lies in an egocentric nature of entrepreneurship. It is an excellent thing to be a boss but many entrepreneurs realise that they must make decisions on issues on which they are not really knowledgeable. When there is no one to ask, the pressure builds up quickly. When individual entrepreneurs have to make sole-decisions on virtually everything concerning their businesses, they may experience the negative effects of the inflated ego. Thus characteristics such as those of internal locus of control and independence that propel entrepreneurs into success can lead to the negative consequences of egoism when carried to the extreme. After all, entrepreneurs tend to behave as the only ones who can make things happen. 126 1.6.2 The Dark side of Entrepreneurship

The following factors have destructive implications for entrepreneurs: (a) Excessive need for control The desire for control can lead to over-control, meaning a desire to let no one else have any authority. An entrepreneur wants to be in a position where he/she tells other people what to do and can never accept a submissive role. The total control syndrome may not matter so much for an entrepreneur managing a very small business and may well be a good thing for such a company. However, the danger is that he/she will continue this habit even when the business has grown to a size when a sole control may be totally inappropriate. 127 1.6.2 The Dark side of Entrepreneurship

(b) Sense of distrust Frequently an entrepreneur in a growing venture will become increasingly distrustful and can start seeing all things as working against him. Paradoxically, when the situation is bad, he/she may be at his/her best. For example, when he/she is asked to approve everything, he/she may be thinking that everything is under tight control and, therefore, in order. But incidences such as theft may occur without the entrepreneur’s knowledge. Success, on the other hand, can reinforce distrust. 128 1.6.2 The Dark side of Entrepreneurship

(c) Overriding desire for success An individual may be driven to succeed and take pride in demonstrating that success. Therein lies the seed of possible destructiveness. For example, an entrepreneur may seek success by demonstrating achievement through the erection of a huge office building, a luxurious car, and other luxuries. The danger here is that the individual might become more nurtured than the business itself. 129 1.6.2 The Dark side of Entrepreneurship

( d) Unrealistic optimism Sustained optimism for entrepreneurs is key factor in drive to success. However, when taken to extremes, this optimistic attitude can lead to self-deception. In turn, it can make entrepreneurs ignore trends and facts and delude themselves into thinking that everything will turn out fine, even when the trend suggests otherwise. 130

From this discussion, one can deduce that awareness on the payback and dark-side of entrepreneurship can allow the entrepreneur be conscious of both the rewards and the destructive elements. In fact, it is the awareness of the latter which can enable the entrepreneur to take control of those destructive factors so that they do not suppress his or her entrepreneurial motivation. 131 1.6.2 The Dark side of Entrepreneurship

Activities involved in the entrepreneurship development can be summed up in the following 5 steps: (i) Identify and evaluate the opportunity From an entrepreneurial perspective, an opportunity is a gap left in the market by those who currently serve it. This opportunity has the qualities of being attractive, durable and timely. The process of identifying a business opportunity revolves around the entrepreneurs being alerted to a business opportunity. Alertness thus is a constant search for needs in order to generate ideas. 132 1.8 The Entrepreneurial Process

Entrepreneurs may engage in deliberate searches for new business ideas. One is able to deduce ideas from: Hobbies or personal interests An entrepreneur’s skills, expertise or aptitude Chance Existing unresolved problems Everyday activities Suggestions from someone else Consumers Retailers, wholesalers, manufacturers and agents Working on other projects Existing businesses Existing franchises 133 1.8 The Entrepreneurial Process

Innovation Research institutes Industry and trade shows Newspapers and trade journals Industry and trade contacts Business networks and contacts Television and radio 134 1.8 The Entrepreneurial Process

(ii) Development of the idea Converting ideas into opportunities requires evaluation of each idea. This is done through both feasibility and viability studies. The focus is primarily on the ability of the entrepreneur to follow up the idea and match his or her skills with what is required, on the one hand, and the market and profit potential of the idea, on the other. The entrepreneur evaluates the idea and makes an intelligent decision whether to move it forward. Whether a potential entrepreneur commits time, energy, money and personal credibility to developing an independent venture idea depends upon several factors. These include the motivation to make a change, the extent to which the person feels this is something he/she could do (entrepreneurial self- efficacy) and, above all, the degree to which the concept seems promising and feasible. 135 1.8 The Entrepreneurial Process

(iii) Developing the business plan This stage involves designing a good business plan showing the road map of exploiting the identified opportunity. Business plan development is the most difficult phase of the entrepreneurial process. It involves developing a business model and a strategy that the entrepreneur will use to capitalise on the business opportunity. By business model, we mean the value chain that will be employed to fulfil the business opportunity. This model answers the question: Which combination of technology, manufacturing process and distribution channels, etc will be used to serve the business opportunity identified by the entrepreneur? A business plan is important in developing the available opportunity, determining the resources required, obtaining these resources and successfully managing the venture. 136 1.8 The Entrepreneurial Process

(iv)Determine the required resources, assemble and gain control over them Resources needed for the opportunity must be determined. This process starts with the appraisal of the entrepreneur’s present resources. Then the needed resources are acquired in a timely manner especially as and when the venture grows. Resources can be tangible or intangible. They comprise the capital available for investment in the venture, people who need to be employed in the venture and the physical assets the venture needs. 137 1.8 The Entrepreneurial Process

As a venture is moved forward, more resources are needed and ought to be acquired in a timely fashion. In fact, employees must be attracted; working models must be tested; and customer reaction must be gauged. Thus, each and every managerial decision or action that has the net result of producing a sustainable competitive advantage must be associated with the firm’s resources. It is indisputable that firm’s resources can produce sustainable competitive advantage. Indeed, the business model and strategy developed dictate which and how much inputs the entrepreneur will select to serve the identified business opportunity. 138 1.8 The Entrepreneurial Process

(v) Develop a structure to implement and manage the enterprise After resources have been acquired, the entrepreneur must employ them by implementing the business plan. It is when the venture actually takes off that many questions are actually answered. Such questions could be reflected in terms of the product’s performance and customers’ commitment to the product. 139 1.8 The Entrepreneurial Process

For some businesses it may be possible to start on a part-time basis. If orders materialise and customers are satisfied, the business may be developed gradually, financing growth from earnings and hiring key employees as the business grows. In contrast, businesses based on major product development or requiring substantial investment in physical facilities may require large investments before the first sale is made. For example, an entrepreneur planning to build a hotel cannot build one room and then rent it followed by expansion. In all these operations, the control system must be the business plan. In Tanzania, there are several school projects that are established in piecemeal, suggesting that it may be feasible to start some ventures on a small scale and let them grow. 140 1.8 The Entrepreneurial Process

2.0 ENTREPRENEURSHIP THEORIES 141

The value of theories in any discipline can never be underestimated. Entrepreneurship theories enable users to understand what is going and become efficient in their entrepreneurship endeavours. ‘Efficiency’ for the entrepreneur can be defined as recognising useful and helpful information and knowing where it can be obtained. For any entrepreneur, a good theory tells its users how things and events are related. 142 2.1 Overview and importance of theory

143 Content Introduction Schools of entrepreneurial thoughts Process approaches

144 Introduction Entrepreneurship is inter-disciplinary It involves diversity of theories One way of examining these theories is the school of thought approach that derives entrepreneurs into specific activities Another way is the process approaches

It also provides the probable direction of causality. On the whole, entrepreneurship theories broaden our understanding of entrepreneurship as a discipline. In this section, we discuss a number of theories related to entrepreneurship. 145 2.1 Overview and importance of theory

According to this view, entrepreneurship is interdisciplinary as it contains various approaches that can increase one’s understanding in the field. 146 2.2 Approaches to entrepreneurship

This approach divides entrepreneurship into specific activities. These activities may be divided into a ‘Macro’ or a ‘Micro’ view. (i) Macro view This presents a broad spectrum of factors that relate to the success or failure in contemporary entrepreneurial ventures. The entrepreneur has no control over these factors and they may or may not affect the performance of the entrepreneurial venture. 147 2.2.1 School of thought approach

There are 3 schools: (a)The environment school of thought (Contingency thinking) This deals with the external factors that affect a potential entrepreneur’s lifestyle. These factors can either have positive or negative impact on the potential entrepreneur’s lifestyle. 148 2.2.1 School of thought approach

Under contingency thinking, the characteristics needed in entrepreneurship are built up in the firm’s environment and the prevailing situation. Personality characteristics are formed by the interplay between the individual and the environment. 149 2.2.1 School of thought approach

Some of the external factors constraining or aiding the development of entrepreneurial tendencies include factors such as the work environment (e.g. cultural environments, educational opportunities, etc), economic conditions, accessibility and availability of venture capital, availability of personnel, examples of entrepreneurial action, supporting services and customer accessibility. 150 2.2.1 School of thought approach

For example, if a middle manager experiences freedom and support to develop ideas, the work environment will help promote that person’s desire to an pursue entrepreneurial career. Government, social group and economic contexts affect entrepreneurial lifestyle in several ways. The government focuses on the form of intervention policy that will be the most effective in the development of an entrepreneurial culture and with a capability of impacting entrepreneurial behaviour. 151 2.2.1 School of thought approach

Such policy focuses on education and training, the provision of supportive environment and infrastructure and specific measures aimed at supporting business innovation and development. The social group also affects entrepreneurial lifestyle. This factor focuses on the role of social influence in developing entrepreneurial tendencies. It is suggested that entrepreneurs often share common features and experiences of a social context, which distinguish them from other individuals. 152 2.2.1 School of thought approach

E.g, minority ethnicity, family businesses and female self-employment have been termed as antecedent influences. This thinking contributes to the social development model of the entrepreneur. The atmosphere of friends and relatives can influence the desire to become an entrepreneur After all, human nature is such that we can rarely remain untouched by daily exposure to a range of values, situations and experiences. 153 2.2.1 School of thought approach

Everyday individuals are meeting people and dealing with experiences which will influence their behaviour, attitudes and values. On the whole, people live in the real world, not in a vacuum. Ludurig Von Mises (1881-1973) developed a related theory. He is said to have developed a full theory of entrepreneurship. He starts out with the idea that when the economy is in a stable and repetitive equilibrium cycle, there is no place for entrepreneurship. 154 2.2.1 School of thought approach

Entrepreneurship is geared to the uncertainty of future demand and supply. The entrepreneur is thus exclusively driven by a desire to make money and he/she makes profit by figuring out what the customer wants. 155 2.2.1 School of thought approach

(b)The Financial/Capital School of thought The search for seed and growth capital is the entire focus of this entrepreneurial emphasis. This school of thought views the entire entrepreneurial venture from a financial management standpoint. Decisions involving finances occur at every major point in the venture process. Under this perspective, the success or failure of entrepreneurial endeavour depends on how best one can make appropriate decisions at every stage of developing the venture. 156 2.2.1 School of thought approach

Indeed, the failure to make the right financial consideration and decisions can make the venture doomed to failure. According school: Venture stages and financial decisions Venture stage Financial Consideration Decision 1. Start-up Seed capital Venture capital sources Proceed or abandon 2. On going  Cash management Maintain, increase or reduce size Iinvestments Financial analysis and evaluation 3. Declining  Profit question Sell, retire or dissolve operations Corporate budget Succession question 157 2.2.1 School of thought approach

If a venture requires a larger amount of capital than can be obtained from the financial sources during the start-up stage it may be desirable to simply abandon it. Under this school of thought, the entrepreneur can only proceed if capital obtained is adequate. This shows that a venture goes through 3 development stages: start-up, on-going and declining stage. In each of these stages, there are corresponding financial considerations and decisions that ought to be taken. Generally, failure to make appropriate decisions for each stage may result in failure. 158 2.2.1 School of thought approach

During the ongoing stage, the challenges for the entrepreneur shift towards cash management, investment decisions, financial analysis and evaluation. Here the entrepreneur is expected to properly manage cash and make correct investment decisions on the surplus. 159 2.2.1 School of thought approach

In fact, it is believed that financial analysis and evaluation will inform the entrepreneur on the trend of the enterprise. On the bases of these analyses, appropriate decisions can be made to maintain the size of the venture, increase its capacity or even reduce it, depending on the financial analyses done. 2.2.1 School of thought approach 160

In the final stage of the venture development stage of declining, the entrepreneur has to make decisions on whether to sell the venture, retire or dissolve the operations. This follows the trend of profit of the enterprise portfolio and the trend of the corporate budget. The entrepreneur may also have to consider who should take over the management and/or ownership of the venture. 161 2.2.1 School of thought approach

(c)Displacement School of Thought According to this school, individuals will not pursue a venture unless they are prevented from doing other activities. So people’s enthusiasm towards entrepreneurship depends on how painful they are displaced from doing other activities. There exist three major types of displacements: Political displacement Political displacement is caused by factors ranging from a political regime that rejects free enterprise by imposing government regulations and policies that limit or redirect certain industries. 162 2.2.1 School of thought approach

There exist three types of economic systems, namely socialism, capitalism and mixed economies, each of them posing different entrepreneurial potentials as resulting from the magnitude of displacement that respective type of economic system provides. In fact, a political system can reject the free enterprises by suppressing any entrepreneurship initiative altogether. For instance, Tanzania, a mixed economy, has rejected free enterprises in some crucial sectors such as electricity supply, but makes other sectors open to such free enterprise. 163 2.2.1 School of thought approach

Cultural displacement Cultural displacement deals with social groups precluded from professional fields. Ethnic background, religion, race and sex are all examples of factors that figure in the minority’s experience. Increasingly, this experience can steer various individuals from being standard business professions into running entrepreneurial ventures. In Tanzania, men are not expected to serve as masters of ceremony at a Kitchen Party 164 2.2.1 School of thought approach

Economic displacement Economic displacement can create the foundation for entrepreneurial pursuit. Economic displacements are concerned with the economic variations of recession and depression, job loss, capital shrinkage or simply ‘bad times’. In many countries, Tanzania inclusive, the nature of work is changing and the proportion of population with permanent work is falling. In fact, the concept of ‘job for life’ with its planned career structure is diminishing. 165 2.2.1 School of thought approach

This leads to increased numbers of persons who create new ventures and/or enter into self-employment as a necessity, or as a means to exploit opportunities. In a country such as Singapore, the opposite is true since employment opportunities are abundantly available. In Tanzania, on the other hand, many people joined self- employment as a consequence of retrenchment coupled with reduced employment opportunities in the formal sector. 166 2.2.1 School of thought approach

However, some entrepreneurs fail to carry out large-scale entrepreneurial ventures because they have less capital. They thus opt to establish and run small businesses. 2.2.1 School of thought approach 167

(ii)The Micro view These examine factors that are specific to entrepreneurship and are part of the internal locus of control. Under this view, the potential entrepreneur has control to adjust the outcome of each major influencing factor. There are 3 schools: 168 2.2.1 School of thought approach

(i) Entrepreneurial trait School of thought This school of thought advocates that successful entrepreneurs tend to exhibit similar characteristic, hence the possibility of a successful replication. For example, if entrepreneurs copied from others these emulators, would increase success opportunities. 2.2.1 School of thought approach 169

From this approach it is possible to argue that the supply of potential entrepreneurs is limited to people that have innate abilities and a set of characteristics making them special with particular insights not possessed by others. Factors such as pro-activity, innovativeness, locus of control, calculated risk-taker, achievement, creativity, ambiguity tolerance, determination and technical knowledge are usually exhibited by successful entrepreneurs. 170 2.2.1 School of thought approach

(ii) The venture opportunity School Venture opportunity school focuses on the opportunity aspect of venture development. The search for idea sources, the development of concepts and the implementation of venture opportunities are all key. This school believes in developing the right idea at the right time for the right market as key to entrepreneurial success. Another aspect of venture development is related to corridor principle. 171 2.2.1 School of thought approach

This principle states that entrepreneurial opportunity exists at all times, across all locations because the world is fundamentally inefficient. People make errors in decision-making, hence creating a world that is full of opportunities for entrepreneurial action. Essentially, opportunities cannot be exhaustively exploited. Fundamentally, new opportunities that lead entrepreneurs in different directions will always arise. 172 2.2.1 School of thought approach

The ability to recognise opportunities, when they arise, and take the necessary steps constitutes the key factor. In fact, proper preparations in the interdisciplinary business segments will enhance the ability to recognise business opportunities. Put simply, closely related experience precedes success. Active entrepreneurs on the lookout for changes are more likely to recognise opportunities when they occur than those who are not. 173 2.2.1 School of thought approach

( iii) The Strategic formulation school of Thought This school of thought emphasises the planning process in successful venture development. This approach views strategic formulations as a leveraging of unique elements on markets, people, products and resources. Consequently, entrepreneurs who are able to plan their ventures to exhibit the uniqueness of those attributes stand a higher chance of success. 174 2.2.1 School of thought approach

The hotel industry in Tanzania and elsewhere, for example, tend to provide uniqueness in terms of physical outlook and services. This author’s experience in some hotels evidenced hotel clients being served with soft drinks as the process of being accommodated continues. This is not what is done in other competing hotels. 175 2.2.1 School of thought approach

Another way of examining activities involved in entrepreneurship is through a process approach. The process approach involves all the functions, activities and actions associated with the perception of opportunities and the creation of organisations to pursue them. 3 traditional process approaches exist: 176 2.2.2 Process Approaches

( a)Entrepreneurship events approach Entrepreneurship events approach begins by criticising the ‘school of thought perspective’. Its primary argument is that entrepreneurship is not a series of isolated activities. Instead, it is a process by which individuals plan, implement and control their entrepreneurial activities. 177 2.2.2 process approaches

In addition, a number of elements potentially affect each event in the entrepreneurial process. The entrepreneurial events approach focuses on the process of entrepreneurial activity and includes the following factors: 2.2.2 process approaches 178

(i) Initiative At this stage, an individual or group comes to a state of readiness due to personal factors and perceptions of desirability and feasibility. Then the person or group begins to act. In fact, evidence of initiative usually includes scanning the environment for opportunities, searching for information and doing research. 179 2.2.2 process approaches

(ii)Organisation of resources Resources are brought together in an appropriate structure to exploit an identified opportunity. Levels of resource needs are estimated, alternatives for procurement are considered and timing of resource arrival is charted and eventually consolidated into a pattern of business activity that could be called an organisation. In some cases, existing resources are simply reorganised. 180 2.2.2 process approaches

(iii)Management of the organization At this stage, those who took the initiative, take over the management of the organisation. The business resource acquisition, transformation and disposal are routinised and systematised. (iv) Autonomous action The management of the new venture is characterised by free choice of strategy, structure and process. The initiators assume relative freedom to dispose of and distribute resources. 181 2.2.2 process approaches

(v)Risk taking The organisation’s success or failure is shared by the initiators’ supervisors and employees. As the venture grows, an entrepreneur releases part of the decision-making to some other trusted employees. 182 2.2.2 process approaches

(vi). Environment This includes opportunities, resources, and competitors that may affect the entrepreneurial events at different stages. For example, competitors may come in with a counter strategy which may call for new ways of thinking in the entrepreneurial process. In summary, the events could be reflected in the following process: Innovation  Triggering event  implementation  growth 2.2.2 process approaches 183

(b) Entrepreneurial Assessment approach This approach stresses making comprehensive assessments qualitatively, quantitatively, strategically and ethically with regard to the entrepreneur, the venture and the environment. The results of these assessments must be compared to the relevant stage of the entrepreneurial career—early, mid-career or late. 184 2.2.2 process approaches

This is termed as entrepreneurial perspective because it considers entrepreneurship within the contexts of education and the experience of the entrepreneur, the type of the venture and the environment in which that the venture operates. (c)Multidimensional approach In this view, entrepreneurship is considered as a complex, multidimensional framework that emphasises the individual, the environment, the organisation, and the venture process. 185 2.2.2 process approaches

The multidimensional approach essentially combines the entrepreneurial events and entrepreneurial assessment approaches. Thus, the entrepreneurial potentials depend on the attributes highlighted. 186 2.2.2 process approaches

187 2.3 Entrepreneurs vs. Managers Reward System - Doing what they like. Independence. Activity - Direct involvement. Risk - Moderate risk taker. Status - Not concerned about status symbols. Reward System - Corporate rewards. Promotion, staff, office, money. Activity - Delegates and supervises. Risk - Avoids risk. Status - Concerned about status symbols.

188 2.3 Entrepreneurs vs. Managers Mistakes - Deals and learns from them. Decisions - Follows dreams with decisions. Who serves - Customers and self. Relationships - Deal- making and reciprocity. Time orientation- long term Mistakes - Avoids or shifts blame. Decisions - Agrees with those above them. Who serves - Others. Relationships - Hierarchy. Time orientation - Short- term.

3. Developing an effective business plan This section discusses the meaning of a business plan, the benefits of business plan, reasons for not producing a business plan, the guidelines for preparing business plans and the elements of business plans and accounts for when a business plan necessary. 189

3.1 Introduction One of the most important steps in setting up a new business is to develop a business plan. This plan allows the owner-manager to crystallise the business ideas and to think through the problems the business venture is likely to face before the firm can actually cope with them. Designing and writing a business plan should be seen as the outcome of careful research process and subsequent planning procedure. 190

This business plan is part of the ongoing strategic planning for the entrepreneur and his or her small business. In fact, the business plan may serve as a basis for taking strategic decisions and also as a subsequent monitoring device. The plan allows entrepreneurs to set aims and objectives and, thereby, give themselves a yardstick against which to monitor their performance. It can also act as a vehicle for attracting external finance. 191

3.2 Definition of Business Plan A business plan is considered to be a written document that details the proposed venture. It can be defined as the description of the business and what the owner manager wants it to become over, say, a year to come A business plan contains targets, estimates and projections and describes how these will be achieved. It illustrates the current status, expected needs and projected results of the new business. 192

On the whole, the business plan serves as the entrepreneurs’ road map for a successful enterprise. It is the minimum document required by any financial source. It also allows the entrepreneur to enter the investment process. 193

3.3. Benefits of a Business Plan Benefits of a business plan to the Entrepreneur (i) The business plan forces the entrepreneur to look at the whole business. (ii) It also helps him or her to maintain a “proactive” attitude. (iii) The time, efforts, research and discipline needed to put together a formal business plan force the entrepreneur to view the venture critically and objectively. 194

(iv) The competitive, economic and financial analyses included in the business plan subject the entrepreneur to close scrutiny for his or her assumptions about the venture’success. (v) The business plan can help the owner manager crystallise and make his ideas focused, hence guiding the venture towards success. (vi) Since all aspects of the business venture must be addressed in the plan, the entrepreneur develops and examines the operating strategies and the expected results for the outside evaluators. Thus, the business plan may attract partners and qualified employees as well. 195

(vii) A business plan can help clarify and communicate the entrepreneur’s goals and objectives. (viii) It serves as a measurable benchmark against which to track performance. (ix) A business plan also provides the entrepreneur with a communication tool for outside financial sources. In this regard, the business plan acts as a vehicle for attracting external finance needed by the business. 196

( x) A business plan constitutes a framework for facilitating daily decision-making and for enhancing better management Benefits of business plan to the Financial Sources (i) A business plan provides details on the market potential and plans for securing a share of that market. (ii) Through prospective financial statements, a business plan illustrates the venture’s ability to service debt or provide an adequate return on equity. 197

(iii) A business plan identifies critical risks and crucial events with a discussion of contingency plans that provide opportunities for the venture’s success. (iv) A b/plan provides financial sources with a clear, concise document that contains the necessary information for a thorough business and financial evaluation. (v) A business plan provides a useful guide for assessing the individual entrepreneur’s planning and managerial ability. 198

3. 4 Guidelines for preparing business plan (i) Keep the plan reasonably short Depending on the target of the plan, a business plan should be short enough to sustain interest. If the business plan is just for an entrepreneur, it can be brief; if it is for raising funds, then it should be reasonably longer but not too long to include redundancies and irrelevancies for a reader keen on specific issues contained in the plan. 199

To avoid overweighing the main text (where necessary) appendices could be used. Readers of business plans are time-conscious and would refuse to waste time. \ Thus, entrepreneurs should explain the venture carefully and comprehensively albeit in a concise manner. The plan typically ranges between 25- 50 pages long. 200

(ii) Organise and package the plan appropriately A table of contents, an executive summary, an appendix, exhibits, graphs, logical arrangement of segments and overall neatness are elements critical to an effective presentation of a business plan. It is important to ensure that the document is error- free, has proper grammar, and financial accuracy. Indeed, errors damage credibility and can throw an entrepreneur away from competing plans if they are noticed. 201

(iii)A distinct vision Entrepreneurs should have a clear vision of what their ventures stand for. Entrepreneurs should attempt to create an air of excitement in the plan by developing trends and forecasts that describe what the venture intends to do and what the opportunities are or can be available. 202

(iv)Avoid exaggeration One should avoid inflating sales potentials, revenue estimates and the ventures potential growth. Support by some documentation and research are vital to the business plan’s credibility. 203

(v) Highlight critical risks The critical risks segment of the business plan is important in that it demonstrates the entrepreneur’s ability to analyse potential problems and develop alternative courses of action. Unfortunately, many entrepreneurs do not do well in this part for fear that they will fail to secure financial support. 204

(vi)Description of an Effective Entrepreneurial Team The management segment of the business plan should clearly identify the skills of each key person as well as demonstrate how all such persons can effectively work together as a team in managing the venture. (vii)Do not Over-diversify Focus the attention of the plan on one main opportunity for the venture. A new business should not pursue multiple ventures until it has successfully developed its main strength. 205

( viii)Identify the target market Prove that you know your target customers and the problem your product or service will solve for them. Substantiate the marketability of the venture’s product or service by identifying the customer niche of the target market. This segment of the business plan is pivotal to the success of the other parts. 206

(ix)Keep the plan written in the third person Avoid personalising the plan by keeping the writing of the plan objective. (x)Capture the readers’ interest As there are more business plans submitted to potential investors but with only A small percentage of these plans being funded, entrepreneurs need to capture the readers’ interest from the word go by stating the uniqueness of the venture from the outset. 207

One can use the title page and executive summary as the key tools for capturing the readers’ attention and, hence, creating a desire for them to read on. (xi) Competitor analysis A business plan that omits an analysis of competitors immediately raises a red-flag to potential lenders and investors. The plan should show that an entrepreneur understands his or her competition and its strengths and weaknesses. 208

3.5 Business Plan Contents 3.5.1 Elements of business plan A detailed business plan may have 10 sectors. It is, of course, preceded by a cover sheet which should present identification information, such as the business name, the street and postal address and the contact phone numbers. Also the readers should know immediately who the principal operators of the business venture are. 209

(i) Executive Summary An executive summary is the synopsis of the proposed enterprise. It may capture the investors’ interests or deprive them of any incentive to read further. Thus, the executive summary is very useful to the users of the business plan who could be potential funders or partner entrepreneurs in the business. 210

(i) Executive Summary Many readers of business plans such as bankers, venture capitalists and investors in general like to see a summary of the plan that features highlights of the entire business plan. Such a summary provides a brief overview of the main contents of the plan and helps put all the main information into perspective. The summary should be no longer than two pages. 211

(i) Executive Summary It should be written after the entire business plan has been completed so that it can effectively capture the whole essence of the business venture in brief. The summary should present the quality of the entire report by conveying a sense of plausibility, credibility and integrity. In short, the executive summary briefly touches on the venture itself, the envisaged products or services, market opportunities and characteristics, entrepreneurial team and the financial needs and projections. Business Descriptions This section attempts to establish the credibility of the owner-manager and his or her business in the eyes of potential investors. Thus it provides the background of the business, the list of key people, an introduction to the nature of the business, and specifies the industrial sector in which the business will be operating. Also a must to include is the name of the proposed business venture. The industry’s background should be presented in terms of the current status and future trends. Then, the new venture should be thoroughly described without raising any undue questions. Furthermore, the potential advantages a new venture possesses over the competition should be highlighted and discussed at length. This discussion may include issues pertaining to the patents, copyrights, trademarks, technological or market advantages. Marketing Segment In the marketing segment of the plan the entrepreneur must convince investors that a market for the product or service exists, that the sales projections can be achieved and that the competition can be beaten. One needs not to focus so much on the product per se but on the market. After all, market demand is a key to commercial viability. In many cases, the use of the SWOT analysis and the market research findings assist in providing inputs for this section. The SWOT analysis involves identification of the strengths, weaknesses, opportunities and threats for the business. It is important to define precisely the market segments that the business hopes to attract and estimate the market size, growth, share and competitive reaction. Then, the customers’ buying patterns need to be understood and, once more, the investor must be convinced of the uniqueness of the product or service that the business is offering. The cardinal rule here is that this product or service should have a ready market to exploit. It is important to identify current competitors and their strengths and weaknesses. Then develop a strategy to deal with such competitors. The marketing plan/strategy effectively sets out how the sales are to be achieved. This marketing strategy can only be developed on the basis of a thorough understanding of the market. It may include all aspects of the marketing mix: the pricing policy, promotion, product decisions and place decisions. The marketing segment is thus the most critical part because almost all subsequent sections of the plan depend on the sales’ estimates. The projected sales levels based on the market research and analysis directly influence the size of the manufacturing operations, the marketing plan and the amount of debt and equity capital required. The following are considered in the marketing segment: Market Niche and Market Share A market niche is carefully defined as a segment of a broader market. A market niche is a homogeneous group of clientele with common characteristics; that is all the people who have a need for newly proposed product or service. It defines the positioning of a product or service to create a distinct marketing focus. The writer of the business plan should address the following basic questions: - Who is going to buy the product or service? - Why will they buy the product or service? - What needs do they want the product or service to meet? - Is the customer reachable? -What are the channels of distributions? -Is the market growing or declining? -How big is the market? -Does it have boundaries? -Is the product or service unique in any way? -Is the market highly concentrated or fragmented? -What are the bases of customer purchase decisions: price, quality service, personal contacts, or some combinations of these aspects? In addition, the magnitude potentials for market share should also be cited. Next a list of potential customers, who have expressed interest in the product or service together with an explanation of their interest, should be included in the marketing segment. If it is an existing business, then the current principal customers should be identified and the sales trend should be addressed. The customer profile will include demographic information such as age, sex, family, income, occupation and location of the potential customers. Sales projections/forecast should be made for at least three years and the major factors affecting market growth (industry trends, government policy, population shifts, etc) should be described. A sales forecast constitute the financial projections of the amount of revenue that a business will generate from the sales of its products or services. Such a sales forecast has to consider the market awareness (e.g. what is the size of the market), customer knowledge, capacity, competition, external factors such as legal, political, and technological. A review of the previous market trends should also be included and any differences between past and projected annual growth rates should be explained. The sources of all data should be indicated. The writer of a business plan should estimate the market share and sales in units and value for each of the next three years. Competitive Analysis The start-up has to understand the nature of the competition it faces. This involves undertaking market research to collect detailed crucial information on the competitors and how the entrepreneur’s proposed product or service compares to theirs. It is useful to identify competitors and to analyse how the competition is likely to change when the new venture becomes established. The entrepreneur should also make an attempt to assess the strengths and weaknesses of the products and services of the competition. Any sources used to evaluate the competition should be cited. Moreover, comparison is to be made on the basis of the price, performance, service, warranties and other pertinent features. Each competitor’s share of the market sales, distribution and production capabilities should be discussed. Marketing Strategy The general marketing philosophy and strategy of the company should be outlined in the marketing strategy. This section describes the entrepreneur’s intended strategy. It builds on the market research and distinct characteristics of the business to explain how the venture will succeed. These aspects should be developed from market research and evaluation data and should include a discussion of: The kinds of customer groups to be targeted by the initial intensive selling effort The customer groups to be targeted by the later selling efforts Methods of identifying and contacting potential customers in the groups Features of the product or service (quality, price, warranty, etc) to be emphasised Any innovative or unusual marketing concepts that will enhance customer acceptance This marketing strategy should also describe the pricing policy, the promotion plan and the distribution plan. Pricing Policy Working out the right price can be one of the biggest challenges many small business owners face. The price needs to cover costs and enable the venture to make profit, but must also take into account what the competitors are charging and what the customers will be prepared to pay for the product or service. Well-defined prices are necessary to project sales volume and financial performance. Thus, the price must be right in order to allow the business venture to penetrate the market, maintain a market position and make profit. The set price also indicates quality and the product’s image and, depending on the channels of distribution, the price reflects the nature of the business. In this regard, a number of pricing strategies should be examined and when one has been settled upon, it should be convincingly presented. Inevitably, the pricing policy of the new venture should be compared with those of the major competitors. Attention should also be given to justifying any price increases over the competitive items on the basis of newness, quality, warranty or service. Promotion plan Advertising and promotional strategies must be consistent with the product/service. Promotion mix is determined by conscious decision, selection of various promotion tools from advertising, personal selling, public relations, point of purchase displays, sampling and direct mail solicitation among others. For manufactured products, aspects relating to the preparation of promotional literature, the plans for trade show participation, trade magazine advertisements and direct mailings, and the use of advertising agencies should be presented. Distribution This is the manner in which the envisaged products or services are taken to the consumer’s market. Firms with creative methods of distribution tend to demonstrate a distinct competence. Research design and development segment The start of any research design and the development with regard to cost, time and special testing should be covered in this segment. Investors need to know about the status of the project in terms of prototypes, laboratory tests and scheduling delays. New businesses that are developing products, which have not yet been marketed, need to give potential investors considerable information. Such information is not only on the stage of development the project has currently reached but also on the difficulties and risks that it faces on the market as well as on the time-scale involved in getting the product to the market. Even the existing products and services must also consider making improvements and new developments in the future. In this regard, sketches, drawings and models are important. It is equally important to identify the design or development work that still needs to be done. Manufacturing or operations segment If the business is concerned with manufacturing, this section is basically treated as the manufacturing or the production segment. If it is for the service industry, then it is treated as an operational segment. This segment should always begin by describing the location of the new business venture. The chosen operational site should be appropriate in terms of labour availability, wage rate, proximity to the suppliers and the customers and should have community support. In addition, local taxes and zoning requirements should be sorted out and the support of area banks for the new ventures should be addressed. Furthermore, production needs should be discussed in terms of the facilities required to handle the new venture (plant, warehouse storage and offices) and the equipment that needs to be acquired (special tooling, machineries, computers, and vehicles). The investors are also interested in learning about how the business will control the quality of its product. Lead times in crucial supplies, the number of sources available and how quickly the output can be increased or decreased should be addressed in this segment. Also, the cost data associated with any of the manufacturing factors should be included. Management Segment The importance of management in any enterprise cannot be overemphasised. In many ways, the development of any business plan to fruition is a manifestation of the management’s ability. After all, investors invest in people, not in business plans. This section is thus very important. Key personnel should be described in terms of their career experiences, positions and abilities together with their specific responsibilities and job description. Any advisers, consultants or members of the board should be highlighted in this section. Detailed CVs may also be included in the appendices. This is so because investors are interested in the track record of the high- level manpower as it signals the management’s ability to meet the intended targets contained in the business plan. Also a mechanism for retaining and motivating key managers ought to be discussed. It is worth noting here that for a substantial business to emerge, it is necessary to talk not only about individuals but also about teams of people with complementary skills. Ideally, these skills should cover all the functional areas of the proposed business venture. (vii)Critical Risks Segment Critical risk factors should be identified to help prevent unforeseen disasters. Every business is predicated upon certain assumptions and, when these assumptions are faulty, the business is affected. If success depends on entering the market without any competition and the competition suddenly appears, the venture is naturally threatened. This section thus concentrates on the problems and risks that the business venture may face. These problems and risks may include: Effects of unfavourable trends in the industry. The technology is not protectable. Design or manufacturing costs that have superseded estimates. Difficulties of long lead times encountered when purchasing parts or materials. Unforeseen new competition. Meeting sales targets is dependent on the recruitment of a regional sales force, which may not be forthcoming. Also suggestions for alternative courses of action should be included. Certainly, delays, inaccurate projections and industry slumps can all happen and people reading the business plan want to know whether the entrepreneur recognises these risks and has contingent plans to deal with such eventualities. In other words, they need to know the preparedness of the proposed business venture to cope when the times are hard. (viii)Financial Segment The business blueprint should also include a detailed financial plan for at least three years. This part has to demonstrate the potential viability of the undertaking. This has to do with the translation of these plans and strategies into financial statements and financing requirements. The purpose of this section is to outline the funds that the owner-manager requires and the terms and conditions he/she is willing to offer to obtain these funds. In this regard, three basic financial statements must be presented. These are pro forma balance sheet, the income statement and the cash flow statement. The Pro forma Balance Sheet - This projects what the financial condition of the venture will be at a particular point in time. It details the assets required to support the projected level of operations and how these assets are to be financed (liabilities and equity). Indeed, investors want to look at the Balance Sheet to determine whether the debt/equity ratios, working capital, current ratios, inventory turnover, etc are within acceptable limits to justify financing. The Income Statement - This illustrates the projected operating results based on profit and loss. (c ) The cash flow statement - This sets forth the amount and timing of the expected cash inflows and outflows. A detailed cash flow can direct the entrepreneur’s attention to the operational problems before any serious cash crises arise. Thus, investors are particularly interested in the contribution of the venture and any hints of the break-even analysis since the break-even level is an indication of a potential risk. Milestone Schedule Segment This segment provides investors with a timetable for the various activities to be accomplished by the proposed business venture. This is a step-by-step approach to illustrating accomplishments in a piecemeal fashion. These milestones can be established according to any appropriate timeframe such as quarterly, monthly or weekly. The co-ordination of the time frame should include activities such as: Product design and development Sales projections Management team establishment Production and operations scheduling Market Planning Incorporation of the venture Completion of design and development Completion of prototypes Hiring of sales representatives Product display Signing up of distributors and dealers Ordering production quantities of materials Receipt of first orders Payment of first accounts receivables The more detailed the schedule, the better the chances that the entrepreneur can persuade potential investors to accept the business plan. (x)Appendix and/or Bibliography This allows for additional documentation and does not belong to the main body of the business plan. Diagrams, blueprints, financial data, vitae for management team members and any bibliographical information that supports other segments of the plan can be included in this section as addendums. 3.7.7 When to prepare a business plan A business plan can be triggered by a number of events or reasons: (i) Start-up After the concept stage of the initial idea and a feasibility study, a new start-up may go through a more detailed planning stage whose target output is the business plan. (ii) Business purchase Buying an existing business does not negate the need for an initial business plan. (iii) Ongoing review Ongoing review of the progress in relation to the objectives of either the start-up or small business purchase is important in a dynamic environment. (iv) Major decisions Even if planning is not carried out on a regular basis, it is usually instigated at a time of a major change. It may be linked to a need for finance e.g. a need for major investment in equipment. 212

(ii) Business Descriptions This establishes the credibility of the owner-manager and his or her business in the eyes of potential investors. It provides the background of the business, the list of key people, an introduction to the nature of the business, and specifies the industrial sector in which the business will be operating. Also a must to include is the name of the proposed business venture. The industry’s background should be presented in terms of the current status and future trends. 213

Then, the new venture should be thoroughly described without raising any undue questions. Furthermore, the potential advantages a new venture possesses over the competition should be highlighted and discussed at length. This discussion may include issues pertaining to the patents, copyrights, trademarks, technological or market advantages. 214

(iii) Marketing Segment In the marketing segment of the plan the entrepreneur must convince investors that a market for the product or service exists, that the sales projections can be achieved and that the competition can be beaten. One needs not to focus so much on the product per se but on the market. After all, market demand is a key to commercial viability. 215

It is important to define precisely the market segments that the business hopes to attract and estimate the market size, growth, share and competitive reaction. Then, the customers’ buying patterns need to be understood and, once more, the investor must be convinced of the uniqueness of the product or service that the business is offering. 216

The cardinal rule here is that this product or service should have a ready market to exploit. It is important to identify current competitors and their strengths and weaknesses. Then develop a strategy to deal with such competitors. The marketing plan/strategy effectively sets out how the sales are to be achieved. This marketing strategy can only be developed on the basis of a thorough understanding of the market. 217

It may include all aspects of the marketing mix: the pricing policy, promotion, product decisions and place decisions. The marketing segment is thus the most critical part because almost all subsequent sections of the plan depend on the sales’ estimates. The projected sales levels based on the market research and analysis directly influence the size of the manufacturing operations, the marketing plan and the amount of debt and equity capital required. 218

(iv)Research design and development segment The start of any research design and the development with regard to cost, time and special testing should be covered in this segment. Investors need to know about the status of the project in terms of prototypes, laboratory tests and scheduling delays. New businesses that are developing products, which have not yet been marketed, need to give potential investors considerable information. 219

Such information is not only on the stage of development the project has currently reached but also on the difficulties and risks that it faces on the market as well as on the time-scale involved in getting the product to the market existing products and services must also consider making improvements and new developments in future. In this regard, sketches, drawings and models are important. It is equally important to identify the design or development work that still needs to be done. 220

(v) Manufacturing or operations segment If the business is concerned with manufacturing, this section is basically treated as the manufacturing or the production segment. If it is for the service industry, then it is treated as an operational segment. This segment should always begin by describing the location of the new business venture. The chosen operational site should be appropriate in terms of labour availability, wage rate, proximity to the suppliers and the customers and should have community support. 221

In addition, local taxes and zoning requirements should be sorted out and the support services such as banks for the new ventures should be addressed. Furthermore, production needs should be discussed in terms of the facilities required to handle the new venture (plant, warehouse storage and offices) and the equipment that needs to be acquired (special tooling, machineries, computers, and vehicles). 222

The investors are also interested in learning about how the business will control the quality of its product. Lead times in crucial supplies, the number of sources available and how quickly the output can be increased or decreased should be addressed in this segment. Also, the cost data associated with any of the manufacturing factors should be included. 223

(vi) Management Segment The importance of management in any enterprise cannot be overemphasised. In many ways, the development of any business plan to fruition is a manifestation of the management’s ability. After all, investors invest in people, not in business plans. This section is thus very important. Key personnel should be described in terms of their career experiences, positions and abilities together with their specific responsibilities and job description. 224

Any advisers, consultants or members of the board should be highlighted in this section. Detailed CVs may also be included in the appendices. This is so because investors are interested in the track record of the high-level manpower as it signals the management’s ability to meet the intended targets contained in the business plan. Also a mechanism for retaining and motivating key managers ought to be discussed. 225

It is worth noting here that for a substantial business to emerge, it is necessary to talk not only about individuals but also about teams of people with complementary skills. Ideally, these skills should cover all the functional areas of the proposed business venture. 226

(vii)Critical Risks Segment Critical risk factors should be identified to help prevent unforeseen disasters. Every business is predicated upon certain assumptions and, when these assumptions are faulty, the business is affected. If success depends on entering the market without any competition and the competition suddenly appears, the venture is naturally threatened. 227

This section thus concentrates on the problems and risks that the business venture may face. These problems and risks may include: Effects of unfavourable trends in the industry. The technology is not protectable. Design or manufacturing costs that have superseded estimates. Difficulties of long lead times encountered when purchasing parts or materials. Unforeseen new competition. 228

Meeting sales targets is dependent on the recruitment of a regional sales force, which may not be forthcoming. Also suggestions for alternative courses of action should be included. Certainly, delays, inaccurate projections and industry slumps can all happen and people reading the business plan want to know whether the entrepreneur recognises these risks and has contingent plans to deal with such eventualities. 229

In other words, they need to know the preparedness of the proposed business venture to cope when the times are hard. 230

(viii)Financial Segment The business blueprint should also include a detailed financial plan for at least three years. This part has to demonstrate the potential viability of the undertaking. This has to do with the translation of these plans and strategies into financial statements and financing requirements. 231

The purpose of this section is to outline the funds that the owner-manager requires and the terms and conditions he/she is willing to offer to obtain these funds. In this regard, three basic financial statements must be presented. These are pro forma balance sheet, the income statement and the cash flow statement. 232

(ix) Milestone Schedule Segment This segment provides investors with a timetable for the various activities to be accomplished by the proposed business venture. This is a step-by-step approach to illustrating accomplishments in a piecemeal fashion. These milestones can be established according to any appropriate timeframe such as quarterly, monthly or weekly. 233

The co-ordination of the time frame should include activities such as: Product design and development Sales projections Management team establishment Production and operations scheduling Market Planning Incorporation of the venture Completion of design and development 234

Completion of prototypes Hiring of sales representatives Product display Signing up of distributors and dealers Ordering production quantities of materials Receipt of first orders Payment of first accounts receivables The more detailed the schedule, the better the chances that the entrepreneur can persuade potential investors to accept the business plan. 235

(x)Appendix and/or Bibliography This allows for additional documentation and does not belong to the main body of the business plan. Diagrams, blueprints, financial data, vitae for management team members and any bibliographical information that supports other segments of the plan can be included in this section as addendums. 236

4.0 INITIATING VENTURE 4.1 Introduction Having developed the business plan, the entrepreneur is ready to start a venture whose establishment is guided by the developed plan. Starting a venture calls for an understanding of what is needed to start own venture and the motives for doing so. 237

The need to be aware of the various sources of business ideas is equally important to synthesize the identified opportunities. Furthermore, the entrepreneur needs to be aware of the common reasons for venture failure. The entrepreneur also needs to identify some possible sources for capital. 238

4.2 Creating and starting a venture The key question: What is needed to start own business. 4.2.1 Motive behind starting own venture The reasons for entrepreneurs starting up new ventures are numerous. Some are pushing factors in a sense that they force you into self-employment. Others are pulling factors in a sense that they invite or stimulate you to join the entrepreneurial activity.. 239

(i) Pull factors Desire for independence and opportunity to do what one enjoys best Owning a business provide entrepreneur with the independence and the opportunity to act according to what is important for them. The need for personal development: Starting own venture provides an opportunity to reach entrepreneurs full potential 240

Opportunity to contribute to society and to be recognized for one’s efforts The need for approval: some entrepreneurs enjoy to have final say on decisions Opportunity to reap unlimited profits: The rewards for succeeding in business can be very high. The promise of long-term financial independence can clearly be a motive in starting a new firm. Tax reduction: in some cases tax incentives by the authorities can trigger one’s interest in establishing a venture 241

Opportunity to reach full potential: Some people find their work unchallenging, boring and unexciting. But to most entrepreneurs there is little difference between work and play. Entrepreneurs’ businesses become the instrument for self expression and actualization. Thus, owning a business challenge all their skills, abilities and termination. Opportunity to make a difference: entrepreneurs start businesses because they see an opportunity to make a difference in a cause that is important to them. 242

Exploitation of market opportunity Turning a hobby or experience into business Push factors Push factors may originate from any of the following factors: Disagreement with one’s own boss: uncomfortable relations at work may push new entrants into small business. A response to crisis situation Following role models through copying other successful entrepreneurs 243

Being a misfit and not feeling comfortable in an organization for some reasons Lacking alternatives because of physical disability or illness Redundancy: An employee being declared redundant has proved a considerable push into entrepreneurship particularly when accompanied by a generous handshake. 244

4.2.2 Start up process (i) Idea formulation/Initiatives An individual or team having been brought to a state of readiness by personal factors and by perception of desirability and feasibility, begin to act. Ideas could be developed on the bases of skills, experience or qualifications gained from previous job or through a hobby. This accumulation of knowledge, skills and experience is termed as human capital. 245

In some cases frustrated employees take up an idea by themselves because their employer was not responsive to persuasion by the employee to take it up. The other source of idea comes from spotting gaps in the market that are not taken by existing businesses. Gaps in markets come from change in a number of things: -Recognition that a process or product could be done in a superior and different way -Products/services that one has seen but is not available in your area. 246

Experience of overseas countries. Changes in customer demands or fashions Changes in legislation. E.g. Changes in food hygiene regulations. Invention. New developments in technology e.g. Computers and E- commerce New ways of getting goods or services to markets e.g. direct selling via telephone or Internet. 247

Unmet or under-met needs New uses for old things Turn a hobby into a money maker. For example one liking gardening setting up a landscape gardening firm. Or one enjoying cooking may develop catering services for parties or wedding ceremonies. Social trends. For example where there are more single people, offering childcare services to single mothers could be desirable Watch the news. 248

4.2.2 Start up process (ii) Opportunity recognition Converting an idea into a business opportunity is the key element of the process of business creation. Moving from idea stage to the exploitation of opportunity requires many elements to be in place. The economic environment has to be conducive, the culture appropriate for risk taking and entrepreneurs must have confidence to take an idea suggested by opportunities. 249

Personal attributes also greatly matters in the ability to exploit the identified ideas. These attributes include: Stamina- Working long hours with few holidays require stamina for hard work. Commitment and dedication- you need to be disciplined and be willing to make personal sacrifices. Opportunism- You need to take opportunity as they appear Ability to bounce back- you need to be able to bounce back and ask the question again and again. You need to be persistent. 250

Motivation to excel- You need to be result oriented with high but realistic goals and a drive to achieve them. It can be very lonely running your firm, so you need to be self- motivated. Tolerance of risk, ambiguity and uncertainty- If someone is a kind of a person who cares certainty, regular routine and clear job opportunities that person cannot effectively own a venture. 251

(iii) Pre start up planning A further combination of factors will be important to the eventual success of new business creation. Amongst the most important are: -Research -Obtaining information to determine entry strategy -Raising sufficient finance The focus of the research and information should be oriented to the market. 252

Essentially market demand is the key to commercial viability and you need to start with basics as follows: - Describe the customers likely to buy the product. -Why will they buy it? -What needs do they want the product or service to meet -Is the customer reachable? -What are the channels of distribution? - Is the market for the product or service new or mature? -Is the market growing or declining -How big is the market? 253

-Does it have boundaries? -Is the product or service unique in any way? -Is the market highly concentrated or fragmented It is also important to seek information with regards to the quantity and quality of potential competition. (iv) Entry and launch Various decisions are made during the entry including decisions on timing of entry. While advantages exist to become first movers, moving too early can result in insufficient customers to make heavy investment worthwhile. 254

The issue of timing is also important if the protection of intellectual property right (IPR) is involved. The entrepreneur with a new product or process needs to decide whether and when to patent. Appropriate decisions also have to be made on the generic marketing strategies. This involves making appropriate decisions with regards to the marketing mix elements. This encompasses the product, price, place and promotion decisions. Resources needed depend on the size of the business and this is difficult to predict at the start up. 255

Deciding what resources are needed and how to acquire them are important strategic decisions for a start up. (v) Post entry development One of the most important issues that the business faces is the credibility. Being new, especially if markets are competitive, means that customers have to take quality on trust, that suppliers will be unwilling to give credit and the bank will be unwilling to extend significant credit facilities. 256

4.4 Assessment and Evaluation of Entrepreneurial Opportunities The new venture assessment begins with the idea and venture selection stage. As ideas develop into new venture start-ups the real challenge is for those firms to survive and grow. This calls for a need to have a clear understanding of: Pitfalls in selecting new ventures Critical factors for selecting ventures Common reasons for ventures failure Effective evaluation process for new ventures 257

4.4.1 Pitfalls in selecting new ventures Six important pitfalls: (i) Lack of objective evaluation Some entrepreneurs lack objectivity as they fall in love with an idea for a product of service. (ii) No real insight into the market Some entrepreneurs do not realize the importance of a marketing approach in laying the foundation for a new venture. Also, they do not understand the life cycle to be considered when introducing a new product 258

(iii) Poor financial Understanding It is not uncommon for the entrepreneurs to underestimate development costs by wide margins. It is not unusual for estimates to be less than half of what is eventually required. The subsequent performance turns out to be less than desirable scale thus creating diseconomies and uncompetitive ability. (iv)Lack of venture uniqueness Uniqueness is the special characteristics and design concepts that draw the customer to the venture, which should provide performance that is superior to competitive offerings. 259

(v) Inadequate understanding of technical requirements Failure to anticipate the technical difficulties with developing or producing a product can sink a new venture. An entrepreneur may acquire a certain product whose maintenance is unbearably costly. (vi) Ignorance of legal issues Some entrepreneurs may disregard legal requirements which may have consequence effect of the business closure. 260

4.4.2 Critical factors for new venture development Uniqueness Uniqueness may be reflected in the need for new process technology to produce products or services and on the need to service new market segments. Investment Depending on the nature of the venture, capital investment can vary considerably. Entrepreneurs have to answer such questions as follows to determine capital needed: Will industry growth be sufficient to maintain break even sales? Do the entrepreneurs have both industry and entrepreneurial track records that justify the financial risk of a large scale start up? 261

Sales growth Key questions to be answered include: What is the growth pattern and anticipated for new venture sales and profits? Are sales and profits expected to grow slowly or level off shortly after the start up? Product availability Essential to the success of any venture is product availability at the time the venture opens its doors. Products or service may still be in development and need further modification or testing and this may have negative effect on the company's image. 262

Customer availability The critical consideration is how long it will take to determine who the customers are and what their buying habits are. 263

4.4.3 Common reasons for venture failure (i) Product Failure of the venture may result from product design problems. (ii) Market/marketing Problems Market/marketing related problems may be surfaced through the following: Poor timing-premature entry in the market place contributes to failure Inappropriate distribution strategy-whether-direct sales or commissioned sales; the distribution strategy has to be geared towards the product and customer. Insensitivity to distribution requirements may dictate failure. 264

Unclear business definition - uncertainty about the exact business entrepreneur is in may cause the business to undergo constant change and to lack stabilization Over reliance on one customer – This may call for a need by entrepreneur to tolerate some undesirable gestures by this dominant customer. In some cases this situation can results into a failure to diversify. Small businesses entrepreneurs also tend to trade in only limited geographical areas. This ties their fortunes closely to the cycles of the local economy, with limited opportunity to compensate for any downturn. 265

(iii)Financial Difficulties (iv)Managerial problems - Concept of a team approach - Hiring and promotions on the basis of nepotism rather than qualifications - Poor relationship with parent companies and venture capitalists -Founders focused on their weaknesses rather than on the strengths or Incompetent support professionals - Owners at times give low marketing priority compared to the other functions of their business. 266

-Human resource problems Some human resource related problem concern inflated owner ego, employee related concerns and control factors. Entrepreneurs need to be aware of the reasons for failure so that they are able to consider appropriate ways to deal with them. One way to get support to deal with such situations could be through incubators. 267

4.7 Sources of capital for entrepreneurs Two broad sources: 4.7.1 Debt Capital Debt capital is the financing that a business owner has borrowed and must repay the principal amount with interest. Short term borrowing (at most one year), is often required for working capital and is repaid out of the proceeds from sales. Long term debts (one to five years or more years) on the other hand are used to purchase property, or equipment, with purchased assets serving as collateral for loan. The use of debt to finance a new venture involves a payback of the funds plus a fee (interest for the use of the money). 268

Debt places a burden of the principal payment and interest of the entrepreneur but play crucial role in changing the productive capacity of the firm. Several types of debt financing exist that include commercial banks, trade credit, accounts receivable financing, factoring and finance companies. 269

4.7.2 Equity Capital Equity capital represents the personal investment of the owner or owners in a business. This is money invested in the venture with no legal obligation for entrepreneurs to repay the principal amount or pay interest on it. It requires no repayment in the form of debt. It however, requires sharing the ownership and profits with the funding sources. 270

Since no repayment is required, equity capital can be much safer for new ventures than debt financing. Yet the entrepreneur must consciously decide to give up part of the ownership in return for this funding as it involves the sale of some of the ownership in the venture. Thus, equity financing forces the entrepreneur to relinquish some degree of control. 4.7.2.1 Sources of equity capital: Equity capital can be raised through own capital, friends and family, angels, partners, public stock offering, venture capitalist and retained capital: 271

(i) Entrepreneurs own capital This is the money that the entrepreneur owns. It may be derived from personal savings or it may be a lump sum resulting from a capital gain or a redundancy package or inherited money. Overall owners of small firms rely more on their own capital and less on external debts capital than owners of larger firms. 272

(ii) Friends and Family members; An entrepreneur may attract investment support on an informal basis from their family and friends who might be willing to invest in a business venture. (iii) Business Angels; When entrepreneurs are in short of seed capital they may look for private informal investors. These private investors or angels are wealthy individuals, often entrepreneurs themselves, who invest in business start ups in exchange for equity stake in the firms. 273

They are people who have been successful in business and as a result have some excess money to play with. They provide small amounts of equity capital to small firms to close equity gap. They usually seek investment opportunities in ventures where their knowledge or business skills are appropriate. Usually these angels invest to a point, which is attractive for a venture capital firm. Many have preferences about sectors or stages such as seed, start up, expansion, management buy-out or buy-in. 274

They often are trying to perpetuate the system that made them successful. Business angels would be more patient than formal sector, less likely to like to be involved directly in the firm and be willing to invest small amounts of capital in line with needs of entrepreneurs and the owners of small firms. In many cases they would invest in their own geographical locale. 275

(iv) Partners The other source of equity capital is through partnership. Entrepreneurs may attract partners to expand the capital foundation of a business. Nevertheless, this form involves giving some personal control over operations and sharing profits with others. (v) Public stock offering; Going public is a term used to refer to a corporation's raising capital through the sale of securities on the public markets. 276

(vi) The Venture Capitalists Venture Capitalists are valuable and powerful source of equity funding for new ventures. Entrepreneurs often complain that it is ‘lonely at the top’. If so, a venture capitalist can serve as a form of security blanket when needed. Traditionally, venture capital firms have been partnerships composed of wealthy individuals who make equity investment for prospective fast growing entrepreneurial ventures. 277

They provide equity and loan finance to businesses with growth potential and high rate of return. They are therefore primarily looking for growth firms in which to invest. Usually they do not want to take control away from the entrepreneur so the deal usually involves a mixture of equity (less than 50%), preference share and loans. Venture capitalists are experienced professionals who provide a full range of financial services for new or growing ventures. 278

Services they provide include the following: Capital for start ups and expansion Provide a strategic overview Market research and strategy for businesses that do not have their own marketing departments. Management consulting functions and management audit and evaluation. Provide access to a large network of business contacts such as prospective Customers, suppliers and other important business people. 279

Assistance in negotiating technical agreements Help in establishing Management and Accounting controls Help in employee recruitment and development of employee agreements Help in risk management and the establishment of an effective insurance program Counseling and guidance in complying with a myriad of government regulations. 280

( vii) Retained capital Another source of equity capital is retained capital. The profits that a venture generates are potentially available to be reinvested in its development. 281

5.0 SMALL BUSINESS GROWTH 282

283 5.1 Models of Small Business Growth Questions What is business growth? What are the indicators of growth? What are the stages of growth?

284 5.1 Models of Small Business Growth Growth simply means increase in size Both quantitative and qualitative indicators are used to measure growth Indicators of growth Outcome indicators -profit Output indicators Capacity based indicators Qualitative indicators

285 5.2 Types of Growth Quantitative-Horizontal growth Quantitative-Vertical growth Qualitative growth Passive growth Planned growth

286 5.3 Life Cycle Stages of the Venture New venture development Start-up activities Growth of the venture Stabilization of business Innovation or decline

Business Life Cycle and Entrepreneurship I nception Survival Growth Consolidation Maturity Entrepreneurial New Entrepreneurial stage needed Sales Time Entrepreneurial Approach

288 5.4 Constraints to Growth Lack of growth motivation Most SMEs are survivalists Lack of growth strategy Limited ability of the owner managers Environmental constraints Etc

289 5.5 Models of Small Firms Growth A large majority of firms do not grow beyond 10 employees Why do some firms grow but not others? Why do some firms grow at a higher rate then other?

290 5.5.1 Views of Small Firm Growth Biological Growth is a natural process It occurs whenever conditions are favourable. The ultimate goal of the owner manager is to develop the business into a large enterprise This view is inspiration behind stage and ecological theories

291 5.5.1 Views of Small Firm Growth Stage Models Business experience similar problems (crises) at different stages in their development Whether they grow it depends on their owners ability to resolve the crises successfully As the business grows from small to large personal supervision becomes inadequate As the business grows the crisis of delegation will occur, then the crisis of organization and then the crisis of professionalization

5.5.1 Views of Small Firm Growth Ecological Perspective Survival and growth depend on the carrying capacity of the environment and capacity of the firm to create fit with the environment Resource dependency- Carrying capacity of the environment Resources exchange- capacity of the individual firm to create a fit with the environment

5.5.1 Views of Small Firm Growth Economic View Growth depends on the capacity of the firm to seek and adjust to a bigger size. 1. Resource Based View Growth is a function of the resources that a firm acquire and develop Competitive advantage and growth emerge through resource accumulation which are unique, valuable, not easy to purchase, steal, imitate or substitute Resources include: human capital, technology, networks, brands etc.

5.5.1 Views of Small Firm Growth 2. Production oriented View Firms that grow are the ones which are able to identify the key criteria upon which to compete in certain segments and can build a competitive advantage in this key and design an appropriate quality/price relationship Firms that grow are the ones that in addition to overcoming growth constraints are able to design appropriate price/quality relationship

5.5.1 Views of Small Firm Growth Human Motivation Growth is a result of conscious human action Maslow’s hierarchy of needs – Entrepreneurs are motivated to grow by their needs Expectancy – Owner managers would seek growth if it is consistent to their ability and if they believe in their ability to generate growth.

5.5.1 Views of Small Firm Growth Planned behaviour – Intention towards target behaviour (growth) is a product of: Perceived attractiveness, perceived social norms about growth and perceived behavioural control on growth.

Challenges and barriers to growth of MSMEs Group Assignment 1.Identify the major challenges and constraints of business growth in Tanzania. 2.What are the measures that can be used to promote business growth?

298 6.0 CONTINUITY AND SUCCESSION OF SMALL BUSINESSES Content Meaning of family business Merits and demerits of family businesses Theories of family business Succession practices in small firms

299 6.1 What is family Business An organization, which is owned, managed and controlled by family members It involves - Family ownership and control - Family influence in decision making - Family members as employees - Intention to transfer the family firm to the next generation

300 6.1 What is family Business The 'family' factor of a family business is an important characteristic that distinguishes family from non- family firms. The family factor - family members (spouse, child, nuclear and extended family members) who are involved in ownership, control and management of the business. Ownership and control -the family has legal control over ownership of the business and majority (over 50%) of financial control lies within the family members.

301 6.3 Some research information about family businesses Family businesses comprise of majority of small enterprises in both DCs and LDCs over 80% of small enterprises in Tanzania have family orientation and were established to provide employment and income to family members Most SMEs operate as family founded, family owned or family managed businesses

302 6.3 Some research information about family businesses In Sub-Saharan Africa, the ownership of small businesses is concentrated in the hands of family members and most of them are managed unprofessionally Most entrepreneurs in Tanzania integrate the businesses so strongly with their families Companies that develop from families – they are likely to involve family members in the business

303 6.3 Some research information about family businesses the extended family problems add pressure to entrepreneurs and limit the performance of these enterprises Statistics on the scope and significance of family businesses in Tanzania are basically non-existent There is lack of data on the profile of family firms and their contribution to the economy.

304 6.4 Advantages of family businesses Focusing on long-run objectives. Less bureaucratic and impersonal. Preserving the humanity of the working environment. Greater independence of action. Leadership stability. Family culture creates strong ties and allows shared vision in the business. Information sharing. Financial benefits

305 6.5 Disadvantages of Family Businesses Less access to capital market Confusing organization Lack of succession plan Financial strain Nepotism Conflicts among family members may affect business Pursuance of non economic goals Autocratic leadership Altruism

306 6.6 Theories of family business System theory Agency theory Stewardship theory A Complementary Framework- Stewardship and Agency theories Organizational control theory Resource based theory

307 System Theory of Family Businesses A family business has three overlapping sub-systems; family, business and individual family members. The interaction of these sub-systems creates unique systemic conditions that impact the performance of the family business The prevailing view is that the family and business are two complex social systems that, when combined, differentiate family from non-family businesses. Limitations Lack of a dependent variable Failure to distinguish family objectives from business objectives Ignores the role of external factors

308 Agency theory As the firm grows separation of ownership and management occurs Separation of ownership and control increases agency costs to the firm(Jensen and Meckling, 1976) In family firms- convergence of family and business reduces agency cost

309 Agency theory Limitations Separation of ownership and control can be an efficient form of economic organization The labour market for managers takes the role of assuring that they act in the best interests of the firm. Lack of separation of ownership and management can offset the positive long-term orientation of the business Conflict within the family can create costs from sibling rivalry, autocratic behaviour, and nepotism that offset the benefits of reduced monitoring costs

310 Agency theory Failure to recognize that human beings do inherently behave in a self-interested manner Unrealistic assumption that wealth creation is a single investment financing decision Application of agency theory outside of principal- agent relationships may not be feasible It only addresses economic responsibilities between principals and agents, while being silent on other responsibilities

311 Stewardship Theory Managers are steward/warden to their principals Management is committed to the organizational objectives Managers are as diligent and committed, as owners would be in managing the business Management should be considered as good stewards and the role of the owner would be to be mentor managers

312 Stewardship Theory Weakness Not suitable when there is possibility of different choice of interest between the principal and a manager

313 A Complementary Framework- Stewardship and Agency theories “ Model of Man in the family”:- Shared family behaviour determines the behaviour of the family business When financial goals prevail in a family – Agency relationship When non-financial goals prevail-steward-principal relationships Weaknesses: Does not reveal the factors determining model of man in the family. Does not suggest how model of man affects firm’s performance

314 Resource Based Theory A family creates unique resources to the firm Interaction of a family and business system leads to the creation of resources that can act as a source of advantage or constraint in these firms The interaction of a family and business systems leads to the creation of idiosyncratic internal distinctive resources

315 Resource Based Theory Family firms have the following features which act as resources to them; They are long-term investors They have a unique working environment that fosters greater employee loyalty. These firms have lower human resource costs They are more effective than other companies Family members are more productive than non- family employees They communicate more efficiently with greater privacy

316 Resource Based Theory These firms have lower transaction costs, They have a more trustworthy reputation They involve efficient decision-making channels They have lower agency cost They have patient capital They have less managerial politics The family’s relationships with external stakeholders are stronger Family objectives and business strategies are inseparable, creating a more unified long-run strategy

317 Resource Based Theory On the other hand, family firms involves: Unique agency problems that associate with them as a result of the interdependence of the family, business and individuals within the firm The agency costs in these firms arise from the altruism, familial contract created when family ties exist between owners and agents, nepotism and utility maximization by the family to the detriment of company profits Lack of separation of ownership and management can offset the positive long-term orientation of the business and different perspectives may cause conflict of interest

318 Resource Based Theory Weakness implicit assumption that, wealth creation through competitive advantage is the sole goal of family firms Fail to explain the resources required to preserve business as a family institution

319 SUCCESSION PRACTICES IN FAMILY FIRMS Research shows that most family businesses die after death of the owner Only 30% of family businesses survive into a second generation Only 16% of them make it to a third generation The life expectancy of family business is 24 years One of the major problems of family business is the lack of proper succession plan.

320 Meaning of succession Succession is transition of ownership/ managerial decision making in a firm Replacement of decision is critical to continued success Choosing of a successor should be done when the entrepreneur is in charge

321 Qualities of a good successor Has necessary technical knowledge of the business Has the right business skills Has ability to manage and maintain relationships Has the ability to lead business Will be acceptable to all stakeholders

322 Developing an effective succession plan Select the successor Create a survival kit for successor Groom the successor Promote the environment of trust and respect Let it go

323 For discussion Many businesses in Tanzania do not pass into second and third generations! Why does this happen! What should be done?

324 Problems and issues in succession Few African are willing to prepare for their exit Most businesses are run as extensions of the lives of the owners Children are often encouraged to study and develop interest in the professions rather than in business

325 Problems and issues in succession The culture does not encourage non- family members to inherit the business The culture does not encourage people to sell their businesses

326 Problems and issues in succession For discussion What should be done to enhance succession practices in family firms?

BE 447 ENTREPRENEURSHIP 1. 1.1.2 Definitions of Entrepreneurship “ Entrepreneurship” and “entrepreneur” as concepts have been defined in various ways.

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BE 447 ENTREPRENEURSHIP 1. 1.1.2 Definitions of Entrepreneurship “ Entrepreneurship” and “entrepreneur” as concepts have been defined in various ways.

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Presentation on theme: "BE 447 ENTREPRENEURSHIP 1. 1.1.2 Definitions of Entrepreneurship “ Entrepreneurship” and “entrepreneur” as concepts have been defined in various ways."— Presentation transcript:

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