Bahir Dar Bahir Dar Institute of Technology (BiT)Faculty of Mechanical and Industrial Mechanical and Industrial

EngineeringEngineeringIndustrial Engineering ProgramIndustrial Engineering Program

lecture note on Entrepreneurship for Engineers

2015

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Contents updated

Part 1Part 2Part 3Part 4Part 5Part 6

Introduction to EntrepreneurshipStarting Technology based new

venturesEntrepreneurial cycle (process of

business dev’t)Choosing The Legal Form of

OwnershipOperations of Business startupRisk and insurance of Business

enterprises

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Chapter oneEntrepreneurship

1.1 Meaning of the terms entrepreneur, entrepreneurship and owner manager;

1.2 The entrepreneurship process1.3 Characteristics of Entrepreneurs 1.4 Motivation for starting a business1.5 Success factors for entrepreneurs 1.6 Kinds of Entrepreneurship 

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What is Entrepreneur?Entrepreneurs are action-oriented, highly

motivated individuals who take risks to achieve goals.

Entrepreneurs are people who have the ability

to see and evaluate business opportunities, to gather the necessary resources to take

advantage of them; and to initiate appropriate action to ensure success.

Meaning of the terms Entrepreneur, Entrepreneurship, Owner-Manager

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Economists may view entrepreneurs as those who bring resources together in unusual combinations to generate profits.

Psychologists tend to view entrepreneurs in behavioral terms as those achievement- oriented individuals driven to seek challenges and new accomplishments.

Peter Drucker states, as “Entrepreneur is someone who always searches for change responds to it, and exploits it as an opportunity.”

Example: It is the entrepreneur who only knowsOpening of new university near the societyOpening of Hotels near tourists’ attraction-center

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What is Entrepreneurship?“ Entrepreneurship is the dynamic process of creating

incremental wealth. This wealth is created by individuals who assume the major risks in terms of

equity, time and /or career commitments of providing value for some product or service.

The product or service itself may or may not be new or unique but value must somehow be infused by the

entrepreneur by securing and allocating the necessary skills and resources” Robert Ronstadt

Entrepreneurship is very rarely a get rich-quick proposition; rather, it is one of building long-term value and durable cash flow streams.6

What Is An Entrepreneur & Entrepreneurship ?

ENTREPRENEURA vision-driven individual who assumes significant personal and financial risk to

start or expand a business.

ENTREPRENEURSHIP

The pursuit of opportunity throughinnovation, creativity and hard work

without regard for the resources currently controlled.

Who is an Entrepreneur?Manager’s Opportunities

PerceivedCapability

Future GoalsChange Status Quo

Possible

Blocked

SatisfiedmanagerEntrepreneur

Frustratedmanager

Classicbureaucrat

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The Entrepreneurship Process

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The Entrepreneurial Process...• It is opportunity/marketopportunity/market driven• It is driven by a lead entrepreneurlead entrepreneur and an

entrepreneurial teamentrepreneurial team• It is resource

parsimonious/saving/economicalparsimonious/saving/economical and creativecreative

• It depends on the fitfit and balancebalance among these

• It is integratedintegrated and holisticholistic

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The entrepreneur versus the owner manager (similarities and differences)

Entrepreneura.Entrepreneurial function is the organization of

production: Entrepreneurship is an economic concept. Economics

describes four factors of production, namely, land, labor, capital and entrepreneurial ability (organizational skill).

b. Decision-making and calculated risk bearing:c. An entrepreneur has an all-round personality:d. High levels of achievement motivatione. Innovative, creative, imaginative soulf. The entrepreneur is the owner of the business

who enjoys the position of an employer.

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Owner Manager They may or may not be entrepreneurs. They own and manage a small enterprise, in a way,

which fits with their personal motivations. They are more intent on survival than seeking

innovative change and growth.1. Limited scope for innovativeness, creativity and

imagination2. Managerial jobs are transferable

-As a manager in the business organization, his job is transferable from office to office, from one unit and location to another location 3. Managers do not bear-risk -Risk bearing capacity is an entrepreneurial quality

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Characteristics of Entrepreneurs /personal competencies

1.Need for Achievement:- vision 2.Willingness to take risks:-financial, careers, family , 3.Self-Confidence:- internal and external locus of control4. Innovation:-. The entrepreneurial manger is constantly looking

for innovations, not by waiting for a flash of inspirations, but through an organized and continuous search for new ideas

5.Total Commitment6. All-rounders7.A need to seek refuge:- escape from environmental

factor

a. The “Foreign Refugee” b. Corporate Refugee. c. Other Refugees13

Other types of “ refugees” mentioned are the following:1.The parental (paternal) refugeeWho leaves a family business to show the parent that “I can do it

alone”.

2.The feminist refugeeWho experiences discrimination and elects to start a firm in

which she can operate independently male chauvinist.

3.The housewife refugeeWho starts her own business after her family is grown or at

some other point when she can free herself from household responsibilities.

4.The educational refugeeWho tires of an academic program and decide to go into

business.

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Motivation for starting a businessድስከስ

The reason for small firm formation can be divided between “pull” and “push” influences.

I.“Pull” Influence Some individuals are attracted towards small

business ownership by positive motive such as a specific idea which they are convinced will work. ”Pull” motives include:

a. Desire for independenceb. Desire to exploit an opportunityc. Turning a hobby or previous work experience in to a

business d. Financial Incentive The promise of long-term financial independence can

clearly be a motive in starting new firm, although it is usually not quoted as frequently as other factors.15

“Push” Independence

Many people are pushed into founding a new enterprise by variety of factors including:

1.Redundancy==>Being without a job (idleness)2.Unemployment (or threat of)3.Disagreement with previous

employer==>Uncomfortable relation at work has also pushed new entrants into small business.

The dividing line between those “pulled” and those “pushed” is often blurred.

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Outcomes of EntrepreneurshipEconomic growthNew industry formationJob creationSuccess factors for entrepreneurs Most new ventures succeed because their founders are capable individuals. 1.The entrepreneurial team 2.Incremental growth of product or services 3.Marketing and timing: Market potential is

critically influenced by timing of new products

or services. 17

Drawbacks of entrepreneurship

a. Limited resource:- entrepreneurship mostly starts from small investment or contribution of owners are more than one individual

b. Lack of experience:- most of entrepreneurs have no experience and this may lead to in efficiency

c. Disagreement between member: if the owner of entrepreneur is more than one person, disagreement between them can be created. This disagreement can limit the operation of the business.

d. Uncertainty of income:- opening and running a business provide no guarantee that an entrepreneur will earn enough money to survive

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e. Risk:- starting or buying a new business involves risk and the higher rewards the greater the risk entrepreneurs usually face. This is why entrepreneurs tend to have evaluate risk very carefully

f. Lower quality of life until the business gets established:- the long hour and hard work needed to launch a business can take their tall in the rest of the entrepreneurs life

g. Complete responsibility:- it is great to be the boss but many entrepreneurs find they must make decision on issues about which they are not knowledgeable. When there is no one to ask the pressure can build quickly the realization that, the decisions they make are the cause of success or failure.

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Elements involved in Entrepreneurship

1.RISK:- Simply stated risk is “a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped from applied to a business risk translates in to the possibility of losses associated with the assets and the earning potential of the firm. ”

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Business risks can be classified in to two broad category market risk and pure risk.

Entrepreneurs face a number of different types of risk. These can be grouped in to basic areas.

a. Political risk:-b. Business risk:-c. Economic risk:-d. property riske. Personal risk

Reading Assignment….21

2.InformationInformation gives the following importance to the

businessmen’sTo know the position of their competitors that is

their strength and weaknesses, business strategy they use and their long term plan.

To know threats and opportunity in doing businessHelps to design long term objectives and goals

indicate capital requirement (labor, capital and machinery)

Helps to know market position locally and internationally.

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Sources of informationInformation are obtained from two main

methods of data collection. That is primary data collection and secondary data collection

1.Collection of primary data:Observation methodInterview methodThrough questioner Other methods which includes warranty cards, consumer panels, etc

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2. Collection of secondary data:-Secondary data are available in

Various publication of the central state and local government

Various publications of foreign government or international bodies and their subsidiary organization.

Technical and trade journalsBooks, magazines and newspapersReportsPublic records and statistics, historical

documents.24

By way of caution, the entrepreneur before using secondary data must see that the process following characteristics

1.Reliability of data a. Who collected the data? b. What were the sources of data? c. Were they collected by using proper methods? d. At what time they collected. Etc.

2.Suitability of data:- the data that are suitable for one enquiry may not be suitable for another enquiry, then the researcher has to check the suitability of the data properly.

3.Adequacy of data25

Kinds of EntrepreneurshipFounding Entrepreneurs /Founders/ : Generally

considered to be the “Pure” entrepreneurs, funders may be inventors who initials business as an the basis of new or improved products or services. Founders refer to entrepreneurs who bring new firms into existence.

General managers : As new firms become well established, founders become less innovators and more administrators. Thus, we recognize another class of entrepreneurs called general managers. General Managers preside over the operation of successful ongoing business firms. They manage the week to week and month – to month production, marketing and financial functions of small firms

Franchisees :A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.

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Kinds of Entrepreneurship1.Women Entrepreneurs.2.Founders and other Entrepreneurs.

a. Founding Entrepreneurs /Founders/b.General mangers andc.Franchisees

3.High-Growth and low-Growth Firms a.Marginal Firms b.Attractive Small Companies and c.High potential ventures.

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Assignment One: 1.What are the challenges for you not to

start your own business? [max 1page]2.Discuss the role of entrepreneurship in

the economy of a country. [max 2page]

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Chapter Two Starting Technology Based New

Venture

Outlines:Introduction Important aspects of Technology in BusinessFormation, development, and growth of

technology-based new enterprisesTechnology transfer for business developmentInnovation in Technology based business 29

Starting Technology based new venture

Introduction

Advances in technology are the only source of permanent increases in productivity. Technological changes are basically the results of innovations which in turn are the outputs of innovative Entrepreneurs.

Firms become innovative when they successfully incorporate a technological change new to enterprise as well as to the economy, and a change has diffused into the economy in addition to being adopted by the firm.

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Important aspects of Technology in Business Technology Intelligence for BusinessThe role of technology in the development of new

products and processes and its contribution to productivity enhancement has not gone unnoticed by firms. Additionally the role of technology for business processes is a multi-fold factor for its success.

Technology intelligence is technology-related information that is useful and utilized by firms during strategic decisions.

Intelligence gathering may be deployed at the macro level, industry or business level, and/or at the program or project level. The process of gathering external data and analyzing it to derive intelligence for major strategic decisions is referred to as mapping the technology environment.

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Important aspects of Technology in Business …Conceptually, this process consists of four

interlinked steps: (1) scanning the environment, (2) monitoring specific environmental trends, (3) forecasting future environmental changes,

and (4) assessing current and future environmental

changes for their impact on organizational strategy.

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Important aspects of Technology in Business …

Technology and Competition

Technological change includes both the processes of innovation and diffusion. Although technological change results in the emergence of new products and processes into the marketplace, it simultaneously results in the eradication of the existing order. Competitive rivalry is dynamic and is constantly being influenced by characteristics of competitive domains.

Resource requirements, collateral assets, institutional setting, and speed are all important characteristics of competitive domains that frequently influence the development of technological strategies. Just as technology evolves over time, these characteristics also change with the evolution of the innovation.

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Important aspects of Technology in Business …

Appropriation of Technology The appropriation of technology refers to the

acquisition of technology in both of the following two ways: in-house research and development and from external sources by acquisition or strategic alliances. Technology appropriation serves the function of creating new businesses, altering the rules of rivalry in existing competitive domains, or supporting existing businesses.

Choosing to adopt a portfolio of technology appropriation projects involves some basic principles.

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Important aspects of Technology in Business …Finally, external sourcing needs to be considered

as an alternative implementation mode. However, external sourcing should only be used when it is a speedier or a less-costly alternative for the appropriation of a specific technological capability relative to internal R&D, without compromising the competitive advantage of the firm.

First, technological opportunity and appropriatebility of the project are determined by the competitive impact of technology.

Second, firms should undertake projects only in areas where they are competitively strong.

Third, risks and rewards need to be considered in terms of the portfolio.

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Important aspects of Technology in Business …

Deployment in New Products The development of new products has always been a

considerable generator of sales and profits for businesses. New products range from products that are entirely new to the world to repositioning of already-existing products.

The process of developing new products is characterized by two phases: the strategic phase and the operational phase. The strategic phase is critical in the process in that it determines the profit potential and ultimate success of the product.

Furthermore, the strategic phase offers top management greater leverage in influencing the success of the development process. The operational phase is just as crucial in that it results in the actual production of the new product.36

Important aspects of Technology in Business …

A continuum of research and development is an important process before new products are physically exist for the market.

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Formation, development, and growth of technology-based new enterprises

Introduction

The innovative capacity of an entrepreneur and more accurately, of companies operating in that field, is a key determinant of its capability to enhance the economic development and to upgrade the standard of living of a country. It is widely accepted that one of the indicators of this innovative capacity is the rate of creation of New Technology-Based firms (NTBF).

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Introd.Cont’dThe nurturing of small firm formation and growth has

become increasingly important to the health of developed economies in general, and to the creation of new innovative industrial sectors in particular.

Technology incubators, which play a role in accelerating the commercialization of R&D outputs and the transfer of technology, have contributed to startups of high technology-based enterprises in the newly industrializing economies of developing and developed economies of the world.

Strengthening and promoting technology based ventures through incubation programmes for new technology based enterprises is necessary for them to survive in a competitive society.

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How to form and develop Technology based ventures?

Entrepreneurship studies have identified three critical factors linked to successful creation of technology ventures:

technology, talent and capital.

• The strategic focus of new ventures is to facilitate the effective fusion of innovative technology, strong scientific, entrepreneurial and management talent, and investment capital to create a successful venture. However, these by themselves will not be sufficient for the successful development of technology based ventures; sound national policies and strategies are always at the heart of such development programs.

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How to form and develop Technology based ventures? … Government policies:

Credit programmes with State-subsidized ratesShare programmes by Government venture-capital companiesGrants by the Government, especially for creating jobs and for

researchSecurity programmes by the Government for taking over part of the

risk of the credit institutions for enterprisesAdvisory services.

Other support activities for enterprises with both public and private sector involvement, include:

* Business consulting services: Assistance with business development, developing business plans, tax advice, and so forth;

*Technical consulting services: More specialized services are provided such as networking assistance between enterprises and science and technology organizations, technology transfer, the exchange of similar experiences and the identification of potential for cooperation41

Cont’dFinancing support activities: Offer optimal

conditions to enterprises, especially SMEs, in terms of rent and costs of spaces, infrastructure and services. Offer also assistance with accessing and using financial sources such as corporate financing, business angels, venture capital, and so forth;

Intellectual property assistance: Assistance with developing and patenting new and improved technology, including bringing it to the market for profit;

International assistance: Assistance with the global networking of incubation and innovation centres for information exchange and technology transfer

The focus in all the assistance is to increase the self-reliance of the enterprises so that they can survive SUSTAINABLY.

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Factors contributing to the Success of High Technology based Enterprises

The main catalytic factors for the success of high technology-based enterprises are :

national policies,research and development institutions technological entrepreneur developmentinnovative finance support systems &

protecting intellectual propertyscience and technology parks promoting and developing strategic business

alliances and networking standardization, quality control and marketing.

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Factors to success of TBNE …Some methods of ensuring such catalytic factors for developing

economies are: a. Technocratic leadership should be given, a national vision on the

creation of knowledge-based enterprises should be boldly articulated and incentives for innovation and risk-taking should be provided;

b. The microeconomic framework, together with a master plan prepared in consultation with local communities, entrepreneurs and stakeholders, should stimulate innovation and markets for new goods and services;

c. Commensurate investments should be made in scientific research and technology development, engineering and management consultancy, technical education and continuous learning, entrepreneurial development, quality assurance and environmental preservation, transport and communications infrastructure;

d. Long-term plans should be formulated for developing convergent enterprise support systems encompassing the full range of small business development services, anchored possibly in a business incubator and technology park;

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e. A proactive supervisory board and a carefully selected and trained management team are critical to success. They should make efforts to mobilize broad community support and networks of external professional service providers;

How to form and develop Technology based ventures? …

Fig. Technology based business development process45

How to form and develop Technology based ventures? … Although there are different ways to formulate the

formation and development process of a NTBF, there are four fundamental growth stages that most entrepreneurs should focus on:

Stage 1: Conception and development The primary focus of the entrepreneur is on the product

development, the securing of adequate financial backing and the identification of market opportunities.

Dominant problems of NTBF at this point include construction of a product prototype and selling of the business idea to investors.

In this stage, there are many problems or barriers related to conception that reduce the chance for new ventures. Barriers related to: Lack of opportunities , Lack of well qualified entrepreneurs and Lack of entrepreneurial culture

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How to form and develop Technology based ventures? … Developing the new idea includes writing a business

plan that evaluates all aspects of the economic viability of the business venture including a description and analysis of the business prospects.

Stage 2: Commercialization In this stage, the major focus of new ventures is on

commercializing the product itself. The dominant problems at this point include acquiring adequate facilities, establishing a vendor network, and developing product support capability. All this ends at a series of typical problems as the following ones:

Some of the programs carried out by the different administrations are oriented to:

§ Simplify proceedings for the creation of a new company

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How to form and develop Technology based ventures? … § Accessibility to different resources (financial and

facilities) and services in advantageous conditions. § Training entrepreneurs to enable them its new

challenges § Creating incubators which are organized in order to

support and facilitate processes of enterprise creation. Stage 3: Growth This stage is characterized by high growth in both

sales and employees. The major problems of the firm at this stage are to produce, sell, and distribute the product in volume while attaining profitability.

Important barriers are related to the lack of financial resources to maintain the rapid growth of the enterprise and difficulties in managing internally the effects of the growth

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How to form and develop Technology based ventures? … Programs to overcome above-mentioned problems have

to do with: Training entrepreneurs in new managing techniques; special

attention to internationalization. Processes of clustering companies of the same industry in order to

facilitate the interchange of experiences and best practices Access to financial resources

Stage 4: Stability The growth rate of the firm slows to a level consistent with

market growth. The major problems of the firm at this point are to maintain growth momentum and market position. Therefore, the entrepreneur should focus on the introduction of second-generation product for acquiring new opportunities and the expansion of the business into new geographic territories and markets. Therefore the programs that can be carried out have to do with: Enhancing the innovative capacity of firms. Facilitating their internationalization 49

Drive for acquire new technology

Cost: Technology can cut costs in many ways: reducing material, labor or distribution costs. Example: material costs can be reduced by replacing lower cost material or by reducing the material required to make a product.

Speed of delivery: The key competitive priority may be the speed of delivery, as measured by lead time required to deliver a product. Example, Automated guidance vehicle(AGV), Electronic Data Interchange(EDI)

Quality: Technologies help to improve the quality and reduce the production costs.

Flexibility and customization: The global market place of 1990s is characterized by short product lifecycles, increased product veriety, and extensive customization. To retain and increase market share in such competitive environment, firms have to be more flexible in their operations.

* Increased production volume *Higher living standards

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Examples:

Successful innovation depends on the development, acquiring and integration of new knowledge in the innovation process. In order to successfully innovate, a firm usually combines different innovation activities. In addition to doing own research and development, firms typically are engaged in the acquisition of knowledge on the technology market and cooperate actively in R&D with other firms and research organizations.

Technology in service

Office automation Image processing systemElectronic data interchangeDecision support system and expert system Networked computer system and expert system

Technology in manufacturing

Numerically controlled (NC) machinesIndustrial robotsComputerized Aided Design (CAD)Computer Integrated Mfg (CIM)Automated Materials Handling (AMH)Flexible Manufacturing System (FMS)

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Technology transfer for business development

Technology transfer is the process by which existing knowledge, facilities or capabilities are utilized and marketed to fulfill public and private needs.

It is the process by which basic science research and fundamental discoveries are developed into practical and commercially relevant applications and products.

Technology transfer processes constitutes technology transfer, technology promotion, technology deployment, technology innovation, technology development, technology research, technology assessment, technology information and communication, technology investment, technology collaboration and technology commercialization

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Steps in Technology Transfer

It is clear that any technology transfer process has three parallel components that need to be taken into consideration.

Science and Technology: which is responsible for ensuring that a particular idea or invention is assessed for its technological feasibility and translated into a marketable product for commercialization.

Marketing: The marketing component covers the business angle, assessing the market conditions and developing a business plan. It is also concerned with the business planning in terms of developing a comprehensive marketing strategy - to ensure a clear market capture for the new product.

Financing: This is the third component that identifies and procures funds for seed capital, expansion, market penetration etc. in order to make sure that the return-on-investments is good.

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Steps in Technology Transfer…

Each of the above components requires the inputs of different organizations in a market, bringing to the process different resources and skills that will eventually lead to the success of the technology and product being developed.

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Innovation in Technology based Business Innovation refers both to the output and the process of

arriving at a technically feasible solution to a problem triggered by a technological opportunity or customer need. Innovation process is driven by the exchange of technical, market, and other environmental information in the face of a high degree of uncertainty. Innovations are new ways to achieve tasks.

It is useful to distinguish between process innovations and product innovations

Product innovation: results in new or improved products. An example of this might be a new type of razor blade that is sharper and lasts longer than previous blades.

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Innovation in Technology based Business …Process innovation: occurs when the manufacturing

processes are improved to make the production of existing products cheaper, or when new processes are developed specifically for making a new or improved product.

Service innovation: occurs when new ways of delivering services are developed e.g. the use of automatic telling machines (ATMs) in banks to replace human tellers, drive through take-out lines.

The innovation process, which leads to useful technology, requires:

– Research – Development (up-scaling, testing) – Production – Marketing and – Use • Experience with a product results in feedback and leads

to improved innovations. 56

Innovation in Technology based Business …The process of innovations can also be classified as Market-

pull and Technology-push innovation: a. Market-pull innovations: advancement of technology

oriented primarily toward a specific market need a) Occur when customers are technologically sophisticated b) Occur more frequently with older technologies c) Tend to be incremental innovations b. Technology-push innovations: advancement of

technology oriented primarily toward increased technical performance

a) Require that the firm’s scientists, engineers, and inventors have direct experience with users

b) Occur more frequently with new and emerging technologies

c) Tend to be the major source of breakthrough innovations

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Innovation in Technology based Business …

The

Figure 2.6 Market-pull and Technology-push innovation processes

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Summary on Technology, Products, and Markets

Market Pull

Technology

Products

Markets

Technology Push

Market Feedback

Modifies Technology and

Products

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Promotion and Commercialization of technology-based innovation

The process of taking an invention from idea to business concept and then to market is called technology commercialization.

Consequently, products must be developed faster, prototyped earlier, and brought to market in record time.

The promotion of technology appears to be essential to the process of industrialization. Though transfers of technology can temporarily be beneficial, potentialities of technology promotion are believed to lie in a systematic utilization of research and development.

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Entrepreneurship and Technological Change

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Summary… Technology, Entrepreneurship and Innovation

The role of the Engineer in Entrepreneurship

Engineers drive technological entrepreneurship, as inventors, researchers, designers, and as managers

Engineers make up the largest percentage of: Most start-up founders and early employees Chief Executive Officers

Engineers are often the first hires and an important part of the technical (and management!) team

“Technically, engineers are well-qualified in many respects for this activity, but often lack the necessary business skills and entrepreneurial mentality.”

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Summary… Technology, Entrepreneurship and Innovation…

Entrepreneurship and Innovation

“Innovation is the specific tool of the entrepreneur”

Peter F. Drucker

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Summary… Technology, Entrepreneurship and Innovation…

What is Technological Innovation?“An Innovation is an idea, practice, or object that is

perceived as new by an individual or other unit of adoption…if an idea is new to an individual, it is an innovation.”

Rogers, Diffusion of Innovations, 4th Edition, 1995

“Creativity is thinking up new things. Innovation is doing new things.”

Theodore Levitt

“Innovation: the process of bringing new goods and services to market, or the result of that process.”

Public Investments in University Research: Reaping the Benefits, Advisory Council on Science and Technology 64

Summary… Technology, Entrepreneurship and Innovation…

What is importance of Technological Innovation?

“Business has only two basic functions – marketing and innovation.”

Peter F. Drucker

1.Innovation provides competitive advantage

2.Innovation provides a better quality of life How?

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Summary questions 1. What is technological entrepreneurship?2. What is the impact of entrepreneurship on society?3. What is the role of the engineer in new ventures?4. What is technological innovation?5. Describe Creativity, Innovation, Technology and

entrepreneurship6. Discus The process of innovation (market pull and

technology push innovations)7. Discuss technology transfer, promotion and

commercialization of technology based innovation8. What are the Drives for acquiring new technology9. Factors contributing to the Success of High

Technology based Enterprises

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Reading assignment*Steps in Technology Transfer …for Group 1*Promotion and Commercialization of technology-

based innovation…G2

Assignment-2Write about Intellectual Property Rights

(min 2pages)

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Part Three: Setting a Business Enterprise

3.1 The process of Business Development (Entrepreneurial cycle)

3.2 What is basic business idea 3.3 Steps in business setting3.4 Conducting Feasibility study and

Developing a Business Plan

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The process of Business Development

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What is basic business idea?It is logical to think of a goal for the unit in long

run rather than to look for the immediate tomorrow. This long-term thinking is called basic business idea

Businessmen/businesswomen should think of long-term goal and the profit when they start a business.

The basic business idea, which is at the top of the hierarchy, is to meet the broadest needs of the customers, and has the long life perhaps from 5-50 years. 71

The basic business idea facilitates choice of product under an overall plan.

Thus, entrepreneur may think of being in the entertainment film, in automobiles, in medicines, in services, in industries, etc.

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In a dynamic business scheme, one has to carefully assess and evaluate the basic business idea and the business opportunities in terms of

Its ability to generate quick returnsIts ability to permit quick changes in the products/services

Its ability to achieve the founders long term goals

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What project an entrepreneur should have?

A project is a complex of economic activities in which the key players commit scarce/limited resources in the expectation that the benefits gained will exceed these resources.

Also, a project, broadly defined, in a way of using resources: a decision between undertaking and not undertaking a project is a choice between attentive ways of using resources.

 The project should have to consider the SWOT and should be designed accordingly.

The SWOT approach compels individuals to think or reason out systematically and analytically the important factors strengths, weakness, opportunities, and threats.

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Strength: is an inherent capacity, which an organization can use to gain strategic advantage over its competitors.

Weakness: is an inherent limitation or constraint, which creates a strategic disadvantage

Opportunity: refers to any factor that offer promise or potential for moving closer or more quickly towards the firms goal

Threat: is any factor that may limit or impede the business in the pursuit of its goals

Discussion classify them as internal and external factors to the firm.

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To be a successful entrepreneur, one major determinant factor is the choice of a good business idea. To select the best business idea, the following general steps needs to be pursued.

*Define objective, identify problem, select best alternative, analyze the possible alternatives

a.Identify your problemb.Define your objectivesc. Identify, develop and analyze the possible

alternatived.Select the best alternative in light of the specific

criteria set to the better fulfillment of the objective.

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Idea generation, innovation, opportunity….

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Steps in business setting1. The first key to success in any

manufacturing activity is to select the right product. These must be examined with a view to assess:

…a.The marketing aspectsb.Technical aspectsc. Financial aspects

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2. Having selected a product, a detailed project report to be prepared. This will cover the following aspects.

…a.A detailed estimate of demand is to be made.b.Technical specifications of the process should be

carefully studied.c.The equipment required and their sources are to

be specifiedd.Requirement of space.e.The total cost of the project to be worked out, the

means for financing it identifiedf. The economics of the entire scheme at projected

operating level is to be assessed.

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3. Implementation of the detailed project report. Includes:a.Deciding on form of ownership and registrationb.Obtaining finance ,Obtaining licensec. Establishing necessary infrastructures

4. Once all the required authorizations and sanctions have been obtained, simultaneous action is to be taken for the following. Pre-commissioning requirement

…a.Ordering machinery from suppliersb.Obtaining utilities like power and water connections

after constructions of shed, if necessary.c. Recruitment of staff,d.Arranging supplies of materialse. Arranging for distribution of the products

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5. Once these are complete, the plant is ready for commissioning trial run may be made. Commissioning of plant, Includes:

a.Trial run of machineriesb.Promotional activity for the productc. Introduce the product to the market and obtain

feedback

6. The unit is then ready for commercial production.

a. Commercial production

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Conducting feasibility study and developing business plan…

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Conducting Feasibility studyAssessing the Feasibility of a New Venture

As the name implies, a feasibility study is an analysis of the viability of an idea. It focuses on helping answer the essential question of “should we proceed with the proposed project idea?” All activities of the study are directed toward helping answer this question.

Entrepreneurs with a business idea should conduct a feasibility study to determine the viability of their idea before proceeding with the development of the business. Determining early-on that a business idea will not work, saves time, money and heartache later.

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Assessing the Feasibility of a New Venture…

A feasible business venture is one where the business will

generate adequate cash-inflow and profits, withstand the risks it will encounter, remain viable in the long-term and meet the goals

of the founders.

The venture can be a new start-up business, the purchase of an existing business, franchise, an expansion of current business operations or a new enterprise for an existing business.

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Elements in Evaluating New Ventures

Market Opportunity Industry Trends & Regulatory Matters Proprietary approach …is the intellectual property

stand alone or platform IPTechnology impact - what is the nature and

outgrowth of the technology? Financials - is the model articulated for how products

will be sold, who will buy them, how much revenue is projected and by when?...

Team - does the team have the requisite skills to move all aspects of the company forward?

SWOT is a series of steps one has to consider in evaluating a business opportunity and arriving at a decision on starting a business or not.

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Guidelines of business feasibility study

I. Description of the Business

II. Market Feasibility: Enterprise description, Enterprise competitiveness, Market potential, sales projection, Access to market outlets …

III. Technical Feasibility: Determine facility needs, Suitability of production technology, Availability and suitability of site, Raw materials, HR …

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Guidelines FS…

IV. Financial Feasibility: Estimate the total capital requirements, Estimate equity and credit needs and determine sources, Budget expected costs and returns of various alternatives…

V. Organizational/Managerial Feasibility: legal structure of the business, Business founders,

VI. Study Conclusions: it contain the information you will use for deciding whether to proceed or not with creating the business

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DEVELOPING A BUSINESS PLAN

WHAT IS A BUSINESS PLAN?A business plan is a comprehensive set of guidelines

for a new venture. A business plan is also called a feasibility plan that

encompasses the full range of business planning activities, but it seldom requires the depth of research or detail expected for an establishment enterprise.

A business plan would present your basic business idea and all related operating, marketing, financial and managerial considerations.

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What ever the name, it should lay out your idea, describe where you are, point out where you want to go, and how you propose to go there.

The business plan may present a proposal for launching an entirely new business. More commonly, perhaps; it may present a plan for a major explanation of a firm that has already started operation

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THE PURPOSE OF BUSINESS PLAN

1.It can help the owner/manager crystallize and focus his/her idea.

2.Although planning is a mental process, it must go beyond the realm of thought. Thinking about a proposed business becomes more rigorous as rough ideas must be crystallized and quantified on paper.

3.It can help the owner/manager set objectives and give him a yardstick against which to monitor performance.

4.It can also use as a vehicle to attract any external finance needed by the business. Eg. To get fund…

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5.It can convince investors that the owner/manager has identified high growth opportunities.

6. It entails taking a long-term view of the business and its environment.

7. It emphasizes the strengths and recognizes the weaknesses of the proposed venture.

8. The plan can uncover weakness or alert the entrepreneur to sources of possible danger

PURPOSE…

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WHEN THE BUSINESS PLANS ARE PRODUCED?

DiscussAt the start up of a new business: After the concept

stage of initial ideas and feasibility study, a new business startup may go through a more detailed planning stage of which the main output is the business plan.

Business purchase: A detailed plan, which tests the sensitivity of changes to key business variables, greatly increases the prospective purchasers understanding of the level of risk they will be accepting, and likelihood of rewards being available.

On going: Ongoing review of progress, against the objectives of either a startup or small business purchase, is important in a dynamic environment.

Major decisions: at a time of major change, For example, the need for major new investment in equipment or funds to open a new outlet. It may be linked to failure, such as a recovery plan for an ailing (or in bad condition) business.

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WHO PRODUCED THE BUSINESS PLAN?

oManagers:, Owners:, Lenders:

WHY THE BUSINESS PLANS ARE PRODUCED?Assessing the feasibility and viability of the business/project: it

is in every ones interests to make mistakes on paper, hypothetically testing for feasibility, before trying the real thing.

Setting objectives and budgets: having a clear financial vision with believable budgets is a basic requirement of everyone involved in a plan.

Calculating how much money is needed: a detailed cash flow with assumptions is vital ingredient to precisely quantify earlier the likely funds required.

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THE FORMAT OF A BUSINESS PLAN 1. Where are we now? An analysis of the current situations of the market

place, the competitions, the business concept and the people involved. It will include any historical background relevant to the positions to date.

2. Where do we intend going? Qualitative expression of the objectives, quantifiable

targets will clarify and measure progress towards the intended goals.

3. How do we get there?Implementing of accepted aims is what all the parties to

a plan are interested in as a final result.97

COMPONENTS OF BUSINESS PLAN (OUT LINE OF A BUSINESS PLAN)

1. Identification of the business a. Introduction - relevant history and background - Proposed date for commencement of trading /beginning of a

plan b. Names -name of the business and trading name

- name of the managers/owners

c. Legal identity -company/partnership/sole-trade/cooperative

- details of share or capital structure d. Location -address-registered and operational

- brief details of premises.

e. Professional advisers, -Accountants, solicitors, bank

I.Analysis of the current situation (where are we now?)

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2. The key people a. Existing management- Outline of

background experience , skills and knowledge. -Names of the management

team b. Future requirement -gaps in skills and

experience and how they will be filled ,- future recruitment intentions

OUT LINE OF A BUSINESS PLAN…

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3.The nature of the business a. Product(s)or service(s)-Description and

applications -Key suppliers -Planned developments of product or service b. Market and customers –Definition of target market, classification of

customers - Trend in market place c. Competition- description of competitors; strength

and weakness of the major competitors.

OUT LINE OF A BUSINESS PLAN…

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II. FUTURE DIRECTION (where do we intend going?)

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III. IMPLEMENTATION OF AIM (how do we get there?)

1. Management of resourcesa) Operation:-premises, materials, equipment,

insurance, management information system.b) People/Human resource/- employment practices,

recruitment, team management, training etc

2. Marketing plana)Competitive edge- unique selling point of business

(Critical products or service characteristics or uniqueness in relation to competitors)

b) Marketing objectives - specific aims for product or service in the market place

c) Marketing methods- product, pricing, promotion, distributions=4ps

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3. Money: financial analysisa. Funding requirement- start up capital, working capital,

asset capital, timing of funds required, security offered.b. Profit and loss:-- 3 years forecast, sales variable costs,

profit, overheads, net profitc. Cash flow:-- 3 years forecast, receipts, payments,

monthly and cumulative cash flowd. Balance sheet - use of funds, source funds

Assignment 2: write the difference b/n feasibility study and business plan briefly with examples

(min 2pages); DL=next week

OUT LINE OF A BUSINESS PLAN…

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Part Four: Choosing The Legal Form Of an Ownership

4.1 Introduction 4.2 Forms of Ownership and legal

requirement4.3 Advantage and disadvantage for

each types of ownership

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Introduction Entrepreneurs have a vision about what a

business might be like. When thinking about the positives, the vision is probably one of good fortune and success. But, as you can imagine, unfavorable things may happen. Revenues may not be enough to pay all the bills, accidents can happen, and many other contingencies may mean the entrepreneur has financial responsibilities that must be met.

The legal form under which the firm operates can have an impact on the financial position of the entrepreneur.

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Introduction…There are several ways of going into business and becoming an entrepreneur. You can:Purchase an existing businessEnter a family businessPurchase a franchiseStart your own business

Let us see the advantages and disadvantages of these alternatives

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ways of going into business …Buying an existing business

AdvantagesExisting businesses already have customers, suppliers, and

procedures.Seller of the business may be willing to train the new

owner.There are existing financial records.Financial arrangements may be easier.

DisadvantagesBusiness may be for sale because it is not making a profit.Problems may be inherited with the purchase of an existing

business.Many entrepreneurs may not have the capital needed to

purchase an existing business.107

Introduction…Entering a family business

Advantages There is a certain sense of pride and accomplishment that comes from

being part of a family endeavor. A business can remain in the family for generations. Some people enjoy working with relatives. The efforts of running a family business give one the benefit of knowing

that their efforts are helping those whom they care about.Disadvantages

Senior management positions are often held by family members who may not be the best qualified.

It may be difficult to retain qualified employees who are not members of the family.

Family politics may affect decisions regarding the business. It is often difficult to separate business life and private life in family-run

businesses. It is often difficult to set policies and procedures and to make decisions.

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Introduction…Franchise OwnershipA franchise is a legal agreement that gives an

individual the right to market a company’s products or services in a particular area.

The two parties to a franchise agreement are the franchisor, the parent company of a franchise agreement that provides the produce/service, and the franchisee, the distributor of a franchised product/serviceAdvantages of purchasing a franchise business

An established product or service is being provided.Franchisors often offer management, technical, and

other assistance.Equipment and supplies may be less expensive.A guarantee of consistency attracts customers.109

Introduction…Franchise Ownership….Disadvantages of purchasing a franchise business

The cost of franchises may be high, which can reduce profits.Franchise owners are limited in the decisions they can make

regarding the business.The performance of other franchises impact on the franchisee.The franchise agreement may be terminated by the franchisor.

Operating Costs of a FranchiseThe initial franchise fee is the fee the franchise owner pays in

return for the right to run the franchise.Start-up costs are the costs associated with beginning a

business.Royalty fees are weekly/monthly payments made by the owner

of franchise.Advertising fees are fees paid to support advertising of the

franchise as a whole.110

Introduction… Starting Your Own Business For whatever reason, running an existing business or

operating a franchise may not be right for you. This means to be an entrepreneur you will have to establish a business of your own.

Advantages of Starting Your Own Business IndependenceSatisfactionChallenge of creating something newTriumph when business is profitableDisadvantages of Starting Your Own BusinessRISKSUncertainty of demand for the product/serviceNeed to make decisions daily

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Forms of ownership and legal requirements

Though it is difficult to know precisely when and how business began, it is certain that the form of business ownership are as old as business itself. Those forms have been modified over the course of time to keep pace with business needs and the custom of society.

Ownership of business is represented by the right of individual or a group of individuals to acquire legal title to property (assets) for the purpose of controlling them and to enjoy the gains of profits from such possession and use.

Once you decide to start your own business, you must decide what type of ownership the business will have.

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The most common forms currently in wide use by small business are:

Sole proprietorship PartnershipCorporations and Cooperatives

A business that is owned exclusively by one person is a sole proprietorship.

A business owned by two or more people is a partnership. A business with the legal rights of a person and which may be

owned by many people is a corporation.Each form of ownership has a characteristic

internal structure, legal status, size and field to which it is best suited.

Each has key advantages and disadvantages. 113

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1) Sole proprietorshipIt is an individual or single ownershipThe sole proprietorship is a form of business organization

in whicho An individual introduces his capital,o Use of his own skill and intelligence in the management

of its affairs ando It is solely responsible for the results of its operation.

This form is known also as individual or single proprietorship, sole ownership or individual enterprise.

Example: Photo studio, bookshop, bakeries, small town restaurants, retail stores, radio and watch repair shops, and other elementary forms of business where personal service is important.

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Advantages of Sole proprietorships

a. Ease and low cost of formation and dissolution:-there are no restrictions on either starting or terminating small business operations.

b. Direct motivation and personal carec. Freedom and promptness of action The sole proprietor can take his own decision and there is

none to question his authority. the sole proprietor can take prompt/quick decisions especially when an emergency arises. 

d. Business confidentialitye. Single Tax:-The proprietorship does not pay tax as a

business; the profits from the business are the personal income of the owner and are declare on his individual income tax return.

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Disadvantages of sole proprietorship

a. Limited resources and size:-the capacity and skill are very limited. Lending institutions and suppliers may not be willing to cooperate because it is neither safe nor dependable which results in making the business to remain limited in size.

b. Limited Managerial Skill:- in complex and difficult condition which requires different expertise knowledge

c. Unlimited liability:-The sole proprietor will be legally liable for all debts of the business , a source of courage and real devotion, limit his activities only in specified areas

d. Uncertain future/Death of the owner terminates the business/

e. Difficulty in hiring and keeping high achievement employees

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2. PartnershipThe association of two or more persons to

carry as co-owners of a business where the relationship is based on agreement is called partnership.

This form of a business requires the existence of two or more persons entering into a contractual relationship.

This contract, which is an agreement between the parties, is known as a memorandum of association or article of partners’ deed.

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Kinds of Partners1.A general partnerAssumes unlimited liability and is usually active in managing the business.

Most partners are general partners.2.A limited or special partnerAssumes limited liability, risking only his /her investment in the

business. Limited partners may not be active in management, and their names are not used in the name of the business. 

3.A secret partnerTakes an active role in managing a partnership but whose identities are

unknown to the public. i.e the general public does not know of this person’s partnership status.

4.A silent partnerAs opposed to a secret partner, a silent partner, his identities and

involvement, is known to the general public, but is inactive in managing the partnership business

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5.Senior partnersAssume major roles in management because of the

long tenure (possession), amount of investment in the partnership, or age. They normally receive large shares of the partnership’s profits.

6.Junior partnersAre generally younger partners in tenure, have only

small investment in the firm, and are not expected to make major decision. They assume limited role in the partnership’s management and receive a smaller share of the partnership’s profits.

See others…

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Advantages of partnership 1. Ease of starting2. Increased source of capital:-Partnership can offer creditors less

risk than a sole proprietorship; it is often an attractive investment.3. Combined managerial skill4. Definite legal statusToday’s partner can be assured that a competent lawyer can answer

virtually any questions he/she might have about this form of ownership. i.e lawyers can provide a sound legal advice about partnership issues.

6. Motivation of important employees7. Reduced risk

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Disadvantages of partnership1.Unlimited liability2. Risk of implied authority The fault and miss judgment made by a single

partner binds the firm and the remaining partners. Thus, they are liable for the debts made by the partner.

3. Lack of harmony…agrmnt or synchronizatn

4. Lack of continuity/instability/If any one of the general partners dies, withdraws

because of mentally or physically incapable (injured), the partnership ends.

5. Investment withdrawals difficulty /frozen-investment/

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3. CorporationA corporation is an artificial person authorized and recognized

by law, with distinctive name, a common seal, comprising of transferable shares of fixed values, carrying limited liability and having a perpetual or continued or uninterrupted succession life.

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Characteristics of Corporation1. Separate legal entityIt can sue or be sued.It has the right to manage its own affairs.Shareholders cannot be liable for the acts of the corporation 2. Limited liability Since the corporation has separate legal entity its debts are its

own. The assets and liabilities, rights and obligations incidental to the company’s activities are assets and liabilities, rights and obligations respectively of the company and not of its members.  

3.Transferiablity of shares It is easy to transfer ownership in a corporation. A stockholder may

sell stock to another person and transfer the membership and membership interest freely without consulting other stockholders.

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4.Perpitual existence Death, insanity, retirement and withdrawal of shareholders will not

affect the company.5.Common sealA corporation has a common seal with the name of the company

engraved on it, which is used as a substitute for its signature through it acts through its agents.

6.Separation of ownership from management7.Supervision8.Written ConstitutionOn the creation of a company, the promoters must file certain

documents with the Registrar of Companies. These include the Article of Association and the Memorandum of Association.

 

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Advantages of a corporation

1. Financial strength2. Limited liability3.Scope of expansion

Corporations have greater potential than sole proprietorship or partnerships

4. Managerial efficiencyCorporations enjoy the advantage of efficient

management by hiring specialist’s skilled persons to become members of the board of directors to mange the corporation

5. Ease in transferring ownership6. Legal entity status A corporation can purchase property, make

contracts, sue and be sued in the corporate name.

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Disadvantages of a corporation

1. Difficulty of formationIt is time consuming and cumbersome/not

managable to establish corporations unlike the other forms of businesses.

2. Lack of owner’s/manager’s personal interestThese forms of organizations are managed by

directors, hired officials, and employees who may not be expected to have such an interest in the success of the business as the individual owner or partner would have in his own business.

3. Delay in decision-making…it needs official meeting of managers or board

4.Lack of secrecy….openness…lack of privacy5.Double taxation

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Cooperative It is an organization owned by members/customers

who pay an annual membership fee and share in any profits (if it is profit making organization).

It has to adopt the following principles:Members have an equal vote in decisionsMembership is open to every one who fulfills

specified conditions (e.g. Number of hour worked)Assets controlled and usually owned jointly by

membersProfit shared equally between members with

limited interest payment on loans made by members;

Members benefit from participation, not investment 128

5.Other forms of businessFranchisesA franchise is a business in which the owner of the

name or method of doing business (called the franchisor) allows a local operator (called the franchisee) to set up a business under that name.

Management buy-outs and buy-insIn recent years the traditional separation of

shareholders and management has been eroded by the growing popularity of management buy-outs’. This is where a group of members pool their resources to buy the business they have been running, usually from as larger, parent company. A management buy-in is where a group of managers buys into an existing firm, usually replacing those who have been running it.

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Brief summary of the common business forms of ownership

1. Ownership

2. Liability of Owners

Sole Proprietorship Individual

Partnership No Limit On Number Of Partners

Corporation No Limit On Number Of Shareholders

Sole Proprietorship Individual Liable For Business Liabilities

Partnership- General

Partnership- Limited

All Individuals Liable For All Business Liabilities

Limited Partners Liable For Amount of Capital Contribution

Corporation Shareholders Liable For Amount Of Capital Contribution

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Brief summary …

3. Cost To Start

4. Continuity Of Business

Sole Proprietorship Trade Name Filing Fees

Partnership- General

Partnership- Limited

Partnership Agreement, Legal Costs, Trade Name Filing Fees

More Comprehensive Partnership Agreement

Corporation Created By Statute, Articles Of Incorporation, Filing Fees,

Taxes, Fees for States In Which Corporation Registers To Do

Business

Sole Proprietorship Death Dissolves Business

Partnership- General

Partnership- Limited

Death/Withdrawal Of 1 Partner Terminates Business Unless

agreement Stipulates Otherwise

Death/Withdrawal Has No Effect On Continuity

Corporation Death/Withdrawal Of Owner Has No Effect On Continuity

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Brief summary … 5. Transferability Of Interest

6. Management Control

Sole Proprietorship Complete Freedom To Sell/Transfer

Partnership- General

Partnership- Limited

General Partners Can Transfer Only with Consent Of All Other

General Partners

Limited Partners Can Sell Interest Without Consent of General

Partners

Corporation- Regular

Corporation- S

Shareholders Can Sell/Buy Stock At Will. Some Transfers Might Be

Restricted.

Shareholder Can Only Sell Stock To An Individual.

Sole Proprietorship Owner Makes All Decisions

Partnership- General

Partnership- Limited

All Partners Have Equal Control, Majority Rules

Only General Partners Have Control Of Business

Corporation Majority Shareholders Have Control. Day-To-Day Control With

Management132

Brief summary … 7. Distribution Of Profits

8. Tax AttributesSole Proprietorship = Owner

No Double TaxNo Capital Stock/Retained Earnings Penalty

PartnershipLimited Partners = Share Of Profits But No LiabilityIncome Distributed Based On Agreement

Corporation = Separate EntityMore Deductions/Expenses AvailableDouble Taxation Of Dividends

Sole Proprietorship Owner Receives All Profits/Losses

Partnership Distributed According To Agreement & Capital Contribution

Corporation Shareholders Received Profits Through Dividends

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Summary… Generally, the most attractive form of business

ownership meets the specific needs of the business and its owners in these eight areas:

1.Tax considerations2.Liability exposure3.Start-up and future capital requirements4.Control5.Managerial ability6.Business goals7.Management succession plans8.Cost of formationBusiness owners may need to make concessions due

to the trade-offs associated with eight these factors. 134

summary…

It is important that every new business enterprise should be registered under one of the legal forms of business ownership.

The entrepreneur should therefore decide the form of business ownership that would be appropriate for his/her new business venture.

135

Part five: Operations of Business Startups

5.1 Strategic Planning 5.2 Business physical operations, 5.3 Marketing Operations, 5.4 Business Financial Operations 5.5 Accounting Operations

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Part five-1: Strategic plan and Business physical operations

5.1.1 Strategic plan 5.1.2 Business physical

operations

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Introduction Business operations are those activities

involved in the running of a business for the purpose of producing value for the stakeholder. The outcome of business operations is the harvesting of value from assets owned by a business.

Business operations include three fundamental management imperatives that collectively aim to maximize value harvested from business assets (this has often been referred to as "sweating the assets"): •Generate recurring income

•Increase the value of the business assets •Secure the income and value of the business The three imperatives are interdependent. 138

Introduction….Generally business operations lay their

foundation on management functions. The most important management functions are:

Planning & decision making Organizing & Staffing Directing/leading Controlling

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Strategic planningPlanning is the process of setting objectives for the future

and developing courses of action to accomplish them. Its purpose is to facilitate programs and improve

performance. It allows integrated, consistent, and purposeful action.

Planning must be based on prudent /careful, discreet, practical/ forecasts and reasonable premise.

It is the process by which managers set objectives, assess the future and develop courses of action to accomplish these objectives. Planning is deciding in advance

i. What to do , ii. How to do it, iii. When to do it and iv. Who is to do it

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Business physical operationsBusiness operations include the location

of your business and the processes, resources, and other tools you will need to transform inputs (raw materials, labor, and capital) into outputs (goods or services).

As a business owner, it is essential to make certain that all operations function well and integrate with one another effectively.

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Buss.phys.operations….Location and FacilityWhich of the following physical operations do you need

to consider for your business? Should I lease or buy my physical facility? Should I

build a new facility or buy an existing one? Where should I locate my business to reach the greatest number of customers and to provide efficient access to employees and vendors?

When making the decision, consider your goals and the desired end result. Would it be better to lease (or rent) an existing facility so you would not be tied to a location and therefore, able to move as your business expands? Or, would you want to find a facility large enough to house your existing business, with room to expand in the future?

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Buss.phys.operations….Operational / Production Equipment and Maintenance

Should I lease or buy my office equipment? If I do lease, should I lease all of the equipment or

only certain pieces? Along with the equipment, how should I

manage the maintenance? Which is more cost effective – buying or leasing? What are the advantages and disadvantages of

each?

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Buss.phys.operations…. Employees If I need employees, how many and in what job functions? Should I hire the employees full-time, part-time, or on an

―as needed basis? Do I need a sales force? What are the advantages and disadvantages of the

various options?Professional AssistanceBusiness Regulations and Guidelines

Business formation (Business Registration: Permits and Licenses:)

Taxes144

Reading Assignment…

Read more on Strategic plan and Business physical operations

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Part five-2 : Marketing in Business enterprises

5.2.1 The Marketing Perspective 5.2.2 Marketing Mix-product, price,

place, and promotion, 5.2.3 Marketing segmentation and

market research, 5.2.4 Factors affecting the Business

Environment

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THE MARKETING PERSPECTIVE

Definition of Market:Market is a group of potential customers

having needs to satisfy, ability to buy & willingness to pay in order to satisfy these needs.

ORA social & managerial process by which

individuals & groups obtain what they need & want through creating & exchanging products & value with others.

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The main concepts of marketingMarketing activities are integrated Organizations are market orientedMarketing focuses on selected marketsCustomer satisfaction is the core of marketing Marketing is greater than selling Marketing starts early before production &

continues after selling…T/F…why?

148

THE MARKETING MIX A marketing organization has to concentrate

on four important aspects known as the 4P’s of marketing.

The marketing manager has to combine these 4 P’s (PRODUCT, PRICE, PROMOTION and PLACE.) in such a way that the combination provides satisfaction to the customer and profit to the manufacturer.

When these elements (4 P’s) are combined together they are called as “The Marketing Mix”.

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1.The product mix: Includes:Product planning and developmentBranding Packaging Labeling

2.The price mix: IncludesPrice polices

Skimming pricing (Pricing above the market)

Penetration pricing (Pricing below the market)

Premium pricing (Pricing with the market)

DiscountsQuantity discount Seasonal

discountTrade discount Cash discount

Credits

3. Place mix (Physical distribution mix):Channels of

distributionTransportationWarehousing

4. Promotion mix: IncludesAdvertisingPersonal sellingSales promotionPublicity

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I. THE PRODUCT MIXProduct: Is any commodity that satisfies the needs & wants of

customer. It is a bundle of tangible & intangible attributes, which satisfy the

needs, & wants of customers. In today market, a product can be

oA person (soccer players), Organization (privatized firms),

oPlaces (leased land), Objects (items), o Idea (business plans or project proposal), oServices (medication or barber), or mixes of these elements.

So, a product can be defined as anything, which comprises of benefits in forms of physical, service, and symbolic attributes to maximize buyers’ want satisfaction.

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1.Product planning and development

Product planning includes three major types of decisions:Development and introduction of new

productsModifications of existing products in keeping

with the changing tastes and preferences of the target customers and

Elimination of unprofitable or obsolete products

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2. Branding• Brand name: the part of a brand, which consists of word,

letters and/or numbers, which can be vocalized. … identification to the product Eg. OMO, Coke

Brand mark: the part of a brand that can be recognized but is not utterable/complete. It can appear in the form of symbol, design, distinctive coloring or lettering.

Trademark: a brand or part of a brand that has been given legal protection so that the owner has exclusive rights to its use. After companies identify their trademark, they entail a term “™” or “®”

Trade Name: Trade name is the name of the business organization. A trade name may also be used as a brand name. In such a case it performs a dual function. It gives identification to the product as well as the manufacturer

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Branding… A modern example of a brand is Coca Cola which belongs to the

Coca-Cola Company. The Coca-Cola logo is an example of a widely-recognized trademark and global brand.

Examples of global brands include Facebook, Apple, Pepsi, McDonald's, Mastercard, Gap, Sony, Nike, Adidas and Kangoo Jumps.

BRAND refers to names, logos and slogans. for example COKE, NIKE, CALVIN KLEINit is what makes a product or service different from its competitors

TRADEMARK is something you can do to brands. If you trademark a brand, then you own the "intellectual property" of that brand and you are the only person allowed to use that Brand name, slogan etc.If others want to use that brand, they must ask your permission or pay some money.

The logo for this website, Wikipedia®, which is a registered trademark of Wikimedia Foundation, Inc.

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Importance of a brandThe brand makes it easier for the seller to process orders and track

down problems.

The seller’s brand name and trademark provide legal protection of unique product features.

Branding gives the seller the opportunity to attract a loyal profitable set of customers and helps to increase the control and share of the market.

Branding helps the seller to segment markets and expand the product mix.

Good brand help to build the corporate image because it advertises the quality and size of the company.

Brands make it easy for customers to identify products or services.

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Requirements of a good brand

Be easy to pronounce, recognize and remember

Be distinctive.

Suggest something about the product’s benefits or characteristics

Suggest about the product qualities such as action or use.

Be large enough to be applicable to new products that may be added to the product line.

Have a possibility of registration and legal protection.

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3.Packaging Packaging is a marketing process concerned with

the design and production of the container or wrapper for a product.

The container or wrapper or covering is called the package.

Importance of packaging

1.Packaging serves several safety and utilitarian purposes

2.Packaging may implement a company’s marketing program.

3.Well-packaged products may increase profit possibilities in that it stimulates customers to pay more just to get the special package. 157

4.Labeling

1.Brand label: simply the brand alone applied to the product or to the package.

2. Grade label: a label, which identifies the quality with, a letter, number or word.

3. Descriptive label: it gives objective information about the use, construction, care, performance or other features of the product. Sometimes it is called informative label.

Eg. medicines

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II. THE PRICE MIX

WHAT IS PRICE?Is the amount of money consumers have to pay

to obtain the product.Price has operated as the major determinant of

user choice traditionally. Although non-price factors have become more

important in recent decades price still remains one of the most important element determining market share and profitability.

Different companies set the price haphazardly/arbitrarily as based on cost. 159

METHODS OF PRICING

1.Cost plus pricing/ Mark Up pricing/…cost+profit=price

2. Skimming pricingThe following conditions should be satisfied1.A sufficient number of buyers have a high current

demand.2.The high initial prices do not attract more

competition to the market.3.The high price communicates the image of a

superior product. 3.Penetration pricing: below market price

4. Premium pricing: with market

1.Which one do you think is better for new start-up business?160

The major objectives of pricing are: Achievement of target returnMaximization of profit Increase of sales volumeMaintenance or increase of market shareStabilization of prices & Meeting competition

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Direct channel

1.Door-to-door selling  2.Manufacturers’ sales branches3.Direct mail

Indirect channel 1.Merchant Middlemen:-

• Whole seller:- Eg. Petram PLC and East Africa Trading are wholesalers of consumer products.

• Retailer:- Eg. Hadiya supermarket, and several Kiosks are found closer to sell the items to residential houses.

2. Agent MiddlemenCommission agent, Brokers, Selling agents, Eg. -Sony Glorious, is an agent to Sony Electronics products, -Equatorial business is agent to Samsung.

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Channel levels

Manufacturer

Consumer

Zero-levelManufact

urer

Retailer

Consumer

One-levelManufact

urer

Retailer

Wholesaler

Consumer

Two-levelManufact

urerAgent

Wholesaler

Retailer

Consumer

Three-level

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IV. PROMOTION MIXIs sometimes known as marketing communication.

Means activities that communicate the merits of the product & persuade target customers to buy it.

Promotional objectives:Informing the productIncreasing salesStabilizing sales / profitPositioning the product

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The promotional mix consists of four major tools

Advertising: such as informative Ad, Persuasive Ad and Reminder Ad

Personal selling – Oral presentation in conversation with one / more consumers for the purpose of making sale

Sales promotion – Includes: gifts, games, sampling, coupons, and window displays.

Publicity – Any information about the organization, its personnel or its products that appears in any medium on a non - paid basis.

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MARKET SEGMENTATIONMarket segment is a group of individuals or organizations within

a market that share one or more common characteristics. The process of dividing a market in to segments is called market

segmentation. Qn. Why segmentation?Bases for market segmentation1.Geographic segmentation:- Region Urban, Suburban, Rural, Market

density, Climate, Terrain (land, topography), City size, Country size, State size

2.Demographic segmentation:- Age, Gender, Race, Ethnicity, Income, Education, Occupation, Family size, Family life cycle, Religion, Social class

3.Psycho graphic segmentation:- Personality, Attributes, Motives, Lifestyles

4.Behavioral segmentation:- Volume usage, End use, Benefit, Expectations, Brand loyalty, Price sensitivity

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MARKET RESEARCH

1.Marketing research is the systematic recording and analysis of data about problems relating to marketing.

American Marketing Association

2.Marketing research is the application of scientific method to the solution of marketing problems.

Luck, Wales, TaylorIt is important for any business to conduct it before

established ,ongoing business and futurity….

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FACTORS AFFECTING THE BUSINESS ENVIRONMENT

1.The macro environment (far environment)i. Economic forces A. Rising income B. Inflation C. Recession:-A recession is a period of economic

activity when income, production, and employment tend to fall-all of which reduced demand. Thus businesses are expected to design different strategies that enable them overcome the problems of inflation and recession.

ii. Legal and political factors A. Federal and state laws B. The development of regional markets C. The creation and expansion of the global market

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iii. Social forces

A. Demographic forces i. Population growth ii Age distribution B. Cultural forcesC. The consumer movement:-Is a connection of

individuals, organizations and groups whose objective is to protect the rights of consumers

iv. Technological forces

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2.The microenvironment (The near environment)

The microenvironment refers the competitive situation of an industry.

The competitive environment refers to the number of competitors a firm must face, the relative size of the competitors, and the degree of interdependence within the industry.

Competition in an industry arises from i. The power of buyers ii. The power of suppliers iii. The threat of new entrants iv. The threat of substitutes v. The intensity of rivalry/competition

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Porter claims that five forces determine competitiveness. These are shown in figure below:

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 Economies of scale (i.e. the average size of business varies from industry to industry .For example, the average size of chemical firms is very large, where as the average size of retail firms is relatively small. The most fundamental reason for these differences in the extent of economies of scale in an industry. i.e how the total cost per unit produced changes as more units are produced.)

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Part five-3: Financing and accounting in business

5.3.1 Financial requirement 5.3.2 Sources of finance, 5.3.3 Control of financial resource 5.3.4 Financial analysis and accounting

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DEVELOPING FINANCIAL PLAN

Project implementation requires bringing together the inputs of land, labor, machinery, staff etc.

 Finance is required to assemble these inputs.

Proper financing of business is essential for success in both small and large enterprises.

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Financial planning is the process of formulating policies and strategies relating to the procurement, investment and administration of funds for an enterprise.

While formulating a financial plan, the entrepreneur has to answer the following questions:

How much money is needed? Where the money comes from? When should the money be available?

These three questions are concerned respectively with the estimation of financial needs, sources of finance, and the time of raising funds.

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Estimation of Financial needs

This leads us to know our investment cost and operation cost.

The following technique helps us to understand the different types of costs and procedure how to calculate the costs.

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Estimation of Financial needs… Investment Costs Fixed Investment Land and site preparation Technology (lump sum and initial payments) Equipment • Production • Auxiliary • Costs for environmental protection technology,

waste disposal, internal infrastructural services • Spare parts, wear-and tear-parts, tools Civil works • Site preparation and development • Buildings • Outdoor works • Engineering and design costs (unless included in

equipment).178

Estimation of Financial needs…

Civil works …cont’d • Incorporated fixed assets (intangibles) • Project design costs (engineering etc.) (unless included

above groups). • Transport, handling costs and charges • Insurance duties Pre-production expenditures • Cost of previous studies • Preliminary and capital

issue • Project and site management • Pre-production marketing

costs • Pre-production implementation costs • Personnel recruitment, training, administration and

overheads. • Trial runs, start-up and commissioning • Interests on loan, accrued during construction179

Estimation of Financial needs… Production and Marketing Cost Items A. Factory Costs Material inputs (usually direct variable costs),

in particular raw materials and factory supplies.

Human resource costs (wages, salaries, mostly direct costs, either fixed or variable, depending on type).

Products rejected or returned Effluent and waste treatment, environmental

protection costs. 180

Estimation of Financial needs…

B. Factory overheads (direct and indirect fixed costs of production)

Services (supervision, quality control, indoor climate control, internal transport, consulting engineers etc.)

Royalties (fixed and variable costs). Rents, leasing fees for production buildings,

machinery and equipment (fixed variable costs). Research and development costs Product storage costs (direct and indirect

costs).

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Estimation of Financial needs…

C. Administrative overheads (usually indirect, basically fixed costs)

Salaries, wages (management, administrative staff etc.) Office supplies, materials

Rents, leasing fees for office buildings and equipment Services (communications, transports etc.)

D. Operating Costs (A+B+C) E. Depreciation Costs (usually indirect fixed

costs) F. Cost of financing G. Production costs (D+E+F)

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Estimation of Financial needs…

H. Marketing costs Direct marketing costs Packaging,

storage Costs of sales (sales force, commissions,

discounts, returned products, royalties etc.) Promotional costs (advertisements, samples etc.) Distribution costs (transport, interim storage, insurance

etc.) Indirect marketing costs Overhead costs of the marketing department

(personnel, communications, materials and services, marketing research, general promotional activities etc.)

I. Total costs of products sold (G+H) 183

Business/Investment Appraisal Techniques

After knowing the costs it is necessary to check feasibility/profitability by using investment appraisal criteria, like:

Net Present Value (NPV) Internal Rate of Return(IRR) Benefit-Cost-Ratio (BCR). Break-Even-Analysis

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Business/Investment Appraisal Techniques…

BREAK-EVEN ANALYSIS Break-even analysis is a tool to determine the

level of production / sale at which the business will cover both fixed and variable costs.

It indicates the minimum amount of revenue that a business must earn in order to cover the total cost incurred so that it does not incur any loss, i.e. TOTAL SALES ARE AT LEAST EQUAL TO TOTAL COST The point of equality of total revenue and total costs is a point of zero profits and zero losses.

The break-even analysis principally determines the viability of the business.

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Business/Investment Appraisal Techniques…

BREAK-EVEN ANALYSIS …cont’dIt is a useful tool in that it provides answers to

the following questions: 1. Does it make sense at all to engage in a

business? Is the expected profit stable and big enough to allow for unforeseen risks, and for drawings for you as owner?

2. At what level of production will the business be able to cover all its costs? What is the minimum price required for the product to be viable at different levels of production?

3. What happens if financial assumptions of costs or prices are changing? What are the best, worst and probable scenarios of the project? 186

Business/Investment Appraisal Techniques…

BREAK-EVEN ANALYSIS …cont’dDIAGRAMMATIC PRESENTATIONThe break-even can be presented

diagrammatically. It gives an overview of the compact picture of the operating activity.

For the break-even analysis, costs are categorized into variable and fixed costs

BREAKEVEN QUANTITY = Fixed Costs/ (Price/unit –

Variable cost/unit)

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Graphical representation of the breakeven analysis

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….While formulating a financial plan, the entrepreneur

has to answer the following questions: How much money is needed? Where the money comes from? When should the money be available?

These three questions are concerned respectively with the estimation of financial needs, sources of finance, and the time of raising funds.

….Discuss about source of finance and how we can get from them?

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SOURCE OF FINANCE

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A. Internal sources (Equity capital)

Owners capital or owners equity represent the personal investment of the owner or owners in a business, and it is sometimes called risk capital because these investors assume the primary risk of losing their funds if the business fails.

It requires no repayment in the form of debt and much safer for new ventures than debt financing.

It also requires sharing the ownership and profits with the funding sources.

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Source of equity capital:1. Personal savings

• The first place entrepreneurs should take for start up money is in their own pockets or on their pool of personal savings.

• It is the least expensive source of funds available.• As a general rules, entrepreneurs should expect to

provide at least half of the start up funds in the form of equity capital.

• If the entrepreneur is not willing to risk his own money, potential investors are not likely to risk their money in the business either.

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2. Friends and relatives:

• After emptying their own pockets, entrepreneurs should turn to friends and relatives who might be willing to invest in the business venture.

• Because of their relationships with the founder, these people are most likely to invest. But having them invest can lead to controversy if their participation is not clear to everyone.

• To avoid such problems, and entrepreneur must honestly present the investment opportunity and the nature of risks involved to avoid alienating friends and family members if the business fails.

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3. Angels (private investors )• After dipping into their own pockets and convincing friends and relatives to

invest in their business ventures, many entrepreneurs still find themselves short of the seed capital they need. Frequently, the next step on the road to business financing is private investors

• These private investors (or angels) are wealthy individuals, often entrepreneurs themselves, who invest in business start ups in exchange for equity stakes in the companies.

• Due to the inherent risks in start up companies, may venture capitalists have shifted their investment portfolios away from startups toward more established firms.

• Angles will often finance the deals that no venture capitalists will consider most angles have substantial business and financial experience and prefer to invest in companies at the start up or infant growth stage

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4. Partners:

• Before entering into any partnership arrangement, however, the owner must consider the impact of giving up some personal control over operations and of sharing profits with one or more partners.

• Whenever an entrepreneur gives up equity in his/her business (through what ever mechanisms), he/she runs the risk of losing control over it.

• As the founder’s ownership is a company becomes increasingly diluted, the probability of losing control of its future directional and the entire decision making process increases.

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5. Venture capital companies• venture capital companies are private, for profit organizations

that purchases equity positions in young businesses they believe have high growth and high profit potential.

• They provide start up (seed money) capital to new ventures,• Development funds to businesses in their early growth stage,

and • Expansion funds to rapidly growing ventures that have the

potential to go public or that need capital for acquisitions.

• Two factors make a deal attractive to venture capitalists: high returns and a convenient (and profitable) exit strategy.

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6. Public stock sale (going public)

• In some cases, entrepreneurs can go public by selling shares of stock in their corporation to outside investors.

• This is an effective method of raising large amounts of capital, but it can be an expensive and time-consuming process filled with regulatory nightmares

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B. External source (Debt capital)

• Borrowed capital or debt capital is the external financing that a small business owner has borrowed and must repay with interest.

• Small enterprises have few choices than large firm

for obtaining debt financing.

• Although borrowed capital allows entrepreneurs to maintain complete ownership of their business, it must be carried as a liability on the balance sheet as well as be repaid with interest at some point in the future or with in the time stipulated in the contract

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1. Commercial banks

In most cases commercial banks give • Short-term loan (repayable with in one year or

less) and • Medium term loan (maturing in above one year

but less than five years) as a working capital. • Long term loans (maturing in more than five

years) for the purchase of property or equipment or as a project loan, with the purchased asset or the project itself serving as collaterals.

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unsecured and secured loans from bank

Banks provide unsecured and secured loans. An unsecured loan is a loan in which collateral is not

requested. That is the loan is granted against personal guarantee

or corporate customers of the bank. Unsecured loans will have high interest charges but

this may not be necessarily applicable by all banksSecured loans are those with security pledged to the

bank as assurance that the loan will be paid. There are many types of security a bank will consider, such as a guarantor another credit worthy person or company that agrees to pay the loan in the event the form of tangible assets pledged as collateral.

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To secure a bank loan, an entrepreneur typically will have to answer a number of question, together with descriptive commentaries

What do you plan to do with the money (credit facility)?

How much do you need? When do they need it?.How long will you need it? How will you repay the loan?

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Bank lending decisionDue to previous bad loan decisions banks are more

cautious in lending money since they cannot afford to incur more bad loans.

For this reason the small business owner needs to be aware of the criteria bankers use in evaluating the credit worthiness of loan applications.

Most bankers refer to the five Cs of credit in making lending decision. The five Cs are:

*capital *capacity/cash flow *collateral *character *condition

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Capital: a small business must have a stable capital base before a bank will grant a loan.

Capacity(cash flow):The bank must be convinced of the firm’s ability to meet its regular financial obligations and to repay the bank loan.

Collateral : collateral includes any assets the owner pledges/guarantee to the bank as security for repayment of the loan.

Character (owner’s character): honesty, competence, polish determine, willingness to negotiate with the bank and give a position response for bank enquiry

Conditions: Banks consider factors relating to the business operation such as potential growth in the market, competition, location, of ownership, and loan purpose.

The higher a small business scores on these five Cs, the greater its chance will be of receiving a loan. The wise entrepreneur keeps this in mind when preparing a business plan and presentation.

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2.Trade credit

• It is credit given by suppliers who sell goods on account.

• This credit is reflected on the entrepreneur’s balance sheet as account payable and in most cases it must be paid in 30 to 90 or more days interest free because of its ready availability

• Getting suppliers to extend credit in the form of delayed payments usually is much easier for a small business than obtaining bank financing.

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3.Equipment suppliers

• Most equipment vendors encourage business owners to purchase their equipment by offering to finance the purchase

• In some cases, the vendors will repurchase equipment for salvage value at the end of its useful life and offer the business owner another credit agreement on new equipment.

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5. Accounts receivable financing

• Short term financing that involves either the pledge of receivables as collateral for a loan or the sale of receivables (factoring).

• Account receivable bank loans are made on a discounted value of the receivables pledged.

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6. Credit Unions: non profit organizations but borrow for memebers

7. Insurance Companies: 8. Bonds

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Reading AssignmentFinancial analysis and accounting (reading ass..or c @end slides s-175???)

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Part Six:- Introduction to Risk and Insurance of Business Enterprises

6.1 Definition of Risk, 6.2 Classifying risks, 6.3The process of Risk

Management 6.4 Insurance of the Small Business

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The concept of business riskRisk exists whenever the future is unknown.

Because the adverse effects of risk have plagued mankind since the beginning of time, individuals, groups and societies have developed various methods for managing risk. Since no one knows the future exactly, everyone is a risk manager for himself. I.e., not by choice, but by sheer necessity.

Before we define risk for our purpose it would be advisable to consider the various definitions given by different scholars and practitioners to comprehend the basic concept of risk

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The term risk used in different ways. The following definitions given by different scholars and practitioners in the field:

Risk is the channel of loss Risk is the possibility of loss Risk is uncertainty Risk is the dispersion of actual from expected result Risk is the probability of any outcome different from the

one expected

Generally, risk is an uncertain event or condition that, if it occurs, has a positive or a negative effect on a business objective. A risk has a cause and, if it occurs, a consequence. But usually it has bad/negative connotation

Qn. In what condition do you think risk has positive effect?

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CLASSIFYING RISK

Generally, Business risks can be classified into two broad categories:

1.Market risk is the uncertainty associated with an investment decision. An entrepreneur who invests in a new business hopes for a gain but realizes that the eventual outcome may be a loss.

 2.Pure risk is used to describe a situation where only loss or

no loss can occur-there is no potential gain.A pure risk exists when there is a chance of loss but no

chance of gain/profit. Example: Owner of an automobile faces the risk of a collusion loss. If collusion occurs, he will suffer a financial loss. If there is no collusion, the owner will not gain

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CLASSIFYING RISK BY TYPE OF ASSETRisk may be grouped according to the type of asset-

Physical or human-needing protection. 1.Property risksProperty-oriented risks involve tangible and highly visible

assets. Many property-oriented risks are insurable; they include:

Fire , Natural disasters, Burglary, Business swindles (or fraudulent transactions) and, Shoplifting.

2.Personnel risksPersonnel-oriented losses occur through the actions of

employees. The three primary types of Personnel-oriented risks are:

Employee dishonesty, Competition from former employees, Loss of key executives

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3.Customer risks Customers are the source of profit for small business, but they

are also the source of an ever-increasing amount of business risk. Much of these risks are: On-premises injuries and Product liability

On-premises injuries: Customers may initiate legal claims as a result of on-premises

injuries. e.g. When a customer breaks an arm by slipping on icy steps while

entering or leaving a store; Inadequate security, which may result in robbery, assault, or other

violent crimes; Customers who are victims often look to the business to recover their losses.

Product liability: A product liability suit may be filed when a customer becomes ill or

sustains physical or property damage from using a product made or sold by a firm.

How we are going to manage risks?

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RISK MANAGEMENTThe complexity of the business environment

calls for or demand for a special attention to a risk:

Some of the factors, which increase the complexity of environment, are:ዲስከስInflationGrowth of internal operationMore complex technologyIncreasing government regulation

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What is risk management? Many definitions…Risk management is a systematic way of protecting

business resources and income against losses so that the organization’s aims are reached without interruption, creating stability and contributing to profit.

OR

Risk management is the identification, measurement and treatment of liability, property and personal pure risks that the business organization is facing in order to reduce and prevent the unfavorable effects of risk at minimum cost.

OR It is the science that deals with the techniques of

forecasting future losses so as to plan, organize, direct and control the adverse effect of risk. i.e., Risk management is defined on the base of managerial functions.216

Risk management and Insurance managementWhat is the difference in b/n?Risk management is broader than insurance

management in that it deals with both insurable and uninsurable risks. Insurance management for most part it is restricted to the area of those risks that are considered to be insurable.

Naturally only pure risks are insurable . Speculative or market risks are not. Even all pure risks are not insurable

The emphasis in the risk management concept is on reducing the cost of safeguarding against risk by whatever means.

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Interviews and self-assessment Facilitated workshops SWOT analysis Risk questionnaires and risk surveys Scenario analysis Using technology Other techniques2.To estimate the frequency and size of loss,

i.e., to estimate the probability of loss from various sources. It is also called as risk measurement.

Risk measurement means i. Determination of the chance of an occurrence or

relative frequency.ii.Determination of the impact of losses upon financial

affairs.iii.The ability to predict the losses that will actually occur

during the budget year.

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3.To decide the best and most economical method of handling the risk if loss. (risk response development)

i.e. Selection of the proper tool for handling risk• Identifies and evaluates possible responses to risk.• Evaluates options in relation to entity‘s risk appetite, cost vs.

benefit of potential risk responses, and degree to which a response will

reduce impact and/or likelihood.• Selects and executes response based on evaluation of the

portfolio of risks and responses4. Implementing the decision (risk response control)Implementation follows all of the planned methods for

mitigating the effect of the risks. Purchase insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and retain the res

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5.Revaluating the decisionInitial risk management plans will never be

perfect. Practice, experie nce, and actual loss results will necessitate changes in the plan and contribute information to allow possible different decisions to be made in dealing with the risks being faced.

Once the risk manager has identified and measured the risks facing the firm, the next task is to seek for appropriate tools and decide how best to handle them. Risk can be handled through the following tools:

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Tools of Risk Management1. AvoidanceOne way to handle a particular pure risk is to avoid the

property, person or activity with which the risk is associated.

Two approaches of risk avoidance:i. Refusing to assume an activity e.g. For instance, a firm can avoid a flood loss by not

building a plant in a place where flood is frequently affecting. In case of refusing, we are discontinuing the activity

ii. Abandonment of previously assumed activities: e.g. A firm that produces a highly toxic product may

stop manufacturing that product. 222

2. Retention/AcceptanceBearing all the risk by that person/organization.

Types of retentioni. Planned/conscious/ active risk retention

It is characterized by the recognition that the risk exists, and tacit agreement to assume the losses involved.

The decision to retain a risk actively is made because there are no alternatives more attractive.

Self-insurance is a special case of active retention. Self-insurance is not insurance, because there is no transfer of the risk to an outsider.

oE.g. A firm may keep some money to retain the risk.

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ii. Unplanned/Unconscious/ Passive Retention

Passive risk retention takes place when the individual exposed to the risk does not recognize its existence.

In this case, the person so exposed retains the financial consequence of the possible loss without realizing that he does so.

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225

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4. Separation /Diversification Separation of the firm’s exposures to loss instead of

concentrating them at one location where they might all be involved in the same loss. Separation==>Dispersion/Scattering the exposure

in different places. “Don’t put all your eggs in one basket”

Example: Instead of placing its entire inventory in one warehouse, the firm may elect to separate this exposure by placing equal parts of the inventory in ten widely separated warehouses.

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5. TransferIt is also called as shifting method. When a business organization cannot afford to

cover the loss by itself, it may look for/transfer institutions.

Insurance is a means of shifting or transferring risk.

The following matrix can determine which risk management be used.

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INSURANCE FOR BUSINESSInsurance is defined as protection against risks.

And there are many risks associated with starting a business. To protect your business and yourself, consider the following insurance options.

Insurers are professional risk takers. They know the probability of different types of risk happening.

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INSURANCE FOR BUSINESS…

1. Basic principles for a sound insurance programBasic principles in evaluating an insurance program include:

Identifying insurable business risks Limiting coverage to major potential losses and Relating premium costs to probability of loss

2.Requierments for obtaining insurance

1. There must be a sufficiently large number of homogenous exposure units to make the losses reasonably predictable.

o Insurance is based on the operation of the law of large numbers.

o There must be a large number of exposures and those exposures must be homogenous.

o Unless we are able to calculate the probability of loss, we cannot have a financially sound program.

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2. The loss produced by the risk must be definite and measurable.

The loss must have financial measurement or financial implication.

The risk must be calculatedExample: For instance a person may purchase disability

insurance. How do we know that the person is unable to do? Thus, the risk must be definite and measurable.

3. The loss must be fortuitous or accidental.i.e. the loss must be the result of a contingency, i.e., it

must be something that may or may not happen. It must not be something that is certain to happen. 

Wear and tear or depreciation, which is a certainty, should not be insured. No protection is given by insurance.

We should not be certain as to the occurrence of a loss231

4. The loss must not be catastrophic All or most of the objects in the group should not

suffer loss at the same time because the insurance principle is based on a notion of sharing losses.

Example: Damage which results from war, flood, windstorm and so on would be catastrophic in nature and hence do not have insurance.

5. The loss must be large loss. The risk to be insured against must be capable of

producing a large loss, which the insured could not pay without economic distress.

Incase the loss occurs, it must be severe that must be transferred to the insurer. Those recurring and minor types of losses are not transferred to the insurance company.

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6. Reasonable cost of transferi.e: the probability of loss must not be too high because the cost of transfer tends to be excessive.

To be insurable, the chance of loss must be small. The more probable the loss, the more certain it is to occur.

The more certain it is, the greater the premium will be. But to make insurance attractive, the premium has to be for less than the face of the policy. For instance, a life insurance company to issue a birr 1000 policy on a man aged 99. The net premium would be about birr 980.

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Benefits of Insurance Policy to a business concern:-

Protection: - it provides protection against risk of loss and a sense of security to the businessmen.

Diffusion of risks: - as the burden of loss is spread over a large number of people.

Credit standing: - of the firm is enhanced as the businessman can easily transfer some of his risks to an insurance company.

Continuity and certainty of business: - if all the risks were to be borne by the businessmen themselves, the business operations would have been uncertain and halting in character.

Better utilization of the capital of the firms: - as the Insurance companies take over the risk, it enables the business firm to invest and optimally utilize its capital

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Further readings….Risk Management in the Internet Age

Risk in New Product Development, New Market and Innovation Management

Types of Business Insurance

reference: Entrepreneurship for Engineers (Teaching Material), 2014.

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The end

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Risk management is the identification, measurement and treatment of liability, property and personal pure risks that the business organization is facing.

It is the science that deals with the techniques of forecasting future losses so as to plan, organize, direct and control the adverse effect of risk.i.e., Risk management is defined on the base of

managerial functions.It is the reduction and prevention of the unfavorable

effects of risk at minimum cost through its identification, measurement and control.

It is a discipline / a profession that systematically identifies and analyzes the various loss exposures faced by a firm or an organization and employees and the best method of treating the loss exposures consistence with the goals an objective of the organization.237

5. Combination Risks are pooled when the number of independent

exposure units under observation is increased. Unlike separation, which spreads a specified

number of exposure units, combination increases the number of exposure units under the control of the firm.

In the case of firms, combination results in the pooling of resources of two or more firms. The new firm has more building, more automobiles, and more employees than either of the original companies. This leads to financial strength, thereby minimizing the adverse effect of the potential loss.

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6. Neutralization Neutralization, which is very closely related to

transfer. It is the process of balancing a chance of loss

against a chance of gain. Eg. An excellent example is the process of making

commitments on both sides of transaction in such a way the risks compensate each other.

The following matrix can determine which risk management be used.

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ACCOUNTING FOR SMALL BUSINESS

Proper financial and accounting records make it possible for the owner to exercise effective control of funds and overall performance of his/her business.

Such records also make it possible to know whether the firm is earning profits or loss.

Accounts also help to know the financial position of the business at any time and at the end of the fiscal year.

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BUSINESS TRANSACTION AND ACCOUNTING EQUATION

A business transaction is the occurrence of an event or of a condition that must be recorded.

The payment of a monthly telephone bill, The purchase of merchandise on credit andThe acquisition of land and a building are

examples of business transactions

A particular business transaction may lead to an event or a condition that result in another transaction.

For example, the purchase of merchandise on credit will be followed by payment to the creditor, which is another transaction

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The accounting equation

Assets are the properties owned by a business enterprise or any thing of value owned by a business enterprise.

The rights or claims to the properties are referred to as equities.

The sum of assets is equal to that of the sum of equities. Equities may be subdivided into two principal types:

o the rights of creditors ando the rights of owners.

Rights of creditors represent debts of the business and are called creditor’s equities or liabilities.

The rights of owner or owners are called owner’s equity or owner’s capital

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Expansion of the equation to give recognition to the two basic types of equities yields the following, which is known as the accounting equation:

oAssets = equitiesoAssets = creditor’s equities + owner’s equityoAssets = liabilities +capital

It is customary to place “liabilities“ before “owner’s equity” in the accounting equation because creditors have preferential rights to the assets.

 

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Assets: any physical thing (tangible) or right (intangible) that has a monetary value is an asset. Assets are customarily divided into two:

Current assets: are cash and other assets that may reasonably be expected to be realized incase or sold or used up usually within one year or less, through the normal operations of the business.

Example: cash, accounts receivable, notes receivable, supplies, prepaid expenses, stock (inventory), etc

Plant assets: are tangible assets used in the businesses that are of a permanent or relatively fixed nature. It is also known as fixed assets.

Example: equipment, machinery, building, vehicles and land

Assets

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Liabilities:Liabilities: are debts owned to outsiders (creditors) .

Liabilities are frequently described on the balance sheet by titles that include the word “Payable”.

1.Current liabilities: are liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets.

Example: notes payable, accounts payable, salaries payable, interest payable, taxes payable.

2.Long-term liabilities: are liabilities that will be due for a comparatively long time (usually more than one year) it is also known as fixed liabilities.

As they come within the one-year range and are to be paid, such liabilities become current.

Example: Mortgage payable245

Owner equityOwner equity: is the residual claim against the assets

of the business after the total liabilities are deducted. For a corporation, owner’s equity is frequently called stockholders equity, shareholder’s equity or stockholder’s investment.

Capital: is the owner’s equity in a sole proprietorship (and partnership)

 Capital stock: represents the investment of the stockholders.

Retained earnings: represents the net income retained in the business.

Drawings: represents the amount of withdrawals made by the owner of a sole proprietorship (and partnership)

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Dividends: represents the distribution of earnings to stockholders.

Revenue: is the amount charged to customers for goods or services sold to them It is an increase in capital that resulted from the normal operation of the business. Example: Professional fees, commissions revenue, fares earned, interest income, etc

Expense: costs that have been consumed in the process of producing revenue are expired costs or expenses. It resulted in a decrease in capital. Example: Wages expense, rent expense, supplies expense, utilities expense, etc

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Preparation of financial statements

Financial statements: After the effect of the individual transactions has been determined, the essential information is communicated to users. The account statements that communicate this information are called financial statements.

The principal financial statements are the income statements the statement of owner’s equity, the balance sheet and the statement of cash flow.

The financial statements prepared for sole proprietorship, partnership and corporation are almost the same.

The major difference is in the capital section of the balance sheet. The capital section of these enterprises indicates the name of the

owner, the name of the partners and the capital stock (common stock) and/or the preferred stock in their respective order.

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Income statement: a summary of the revenue and the expenses of a business entity for a specific period of time, such as a month or a year.

ABC tradingIncome statement

For month ended December 31, 2004 Sales 10,000Operating expenses:  Wages expense 3,000  Rent expense 2,000  Suppliers expense 2,000  Utilities expense 750  Miscellaneous expense 250Total operating expense (8,000)Net income 2,000

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Statement of owner’s equity is a summary of the changes in the owner’s equity of a business entity that have occurred during a specific period of time such as a month or a year.

ABC tradingStatement of owner’s equity

For month ended December 31, 2004 Investment during the month 15,000 Net income for the month 2,000 Less withdrawals 500 Increase in owner equity 1,500 Mr. X, Capital, December 31,2004 16,500

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Balance sheet: is a list of the assets, liabilities and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a month or year.

ABC tradingBalance sheet

December 31, 2004 Assets Cash 10,000 Supplies 1,000 Land 8,000 Total asset

19,000 Liabilities Accounts payable 2,500 Owner’s equity Mr. X, capital 16,000 Total liabilities and capital 19,000251

Statement of cash flowsIt is a summary of the cash receipts and cash

payments of a business entity for a specific period of time, such as a month or a year.

It is customary to report cash flows (cash receipts and cash payments) in three sections:

1. Operating activities 2. Investing activities, and 3. Financing activities

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ABC tradingStatement of cash flows

For month ended December 31,2004

Cash flows from operating activities: Cash received from customers 10,000 Less cash payments for expense and payments to creditors (7,300) Net cash flow from operating activities 2,700

Cash flows from investing activities: Cash payments for acquisition of land (8,000)

Cash flows from financing activities: Cash received as owner’s investment 15,000 Less cash withdrawal by owner (500) Net cash flow from financing activities 14,500

Net cash flow and December 31,2004 cash balance 9,200

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January Projections

1. ABC projects a beginning cash balance of $20,000.2. Cash receipts. Product manufacturing will not be completed

until February, so there will be no sales. However, service income of $4,000 is projected.

3. Interest on the $20,000 will amount to about $100 at current rate.

4. There are no long-term assets to sell. Enter a zero.5. Adding 1, 2, 3, and 4 the Total Cash Available will be $24,100.6. Cash payments. Product will be available from manufacturer

in February and payment will not be due until pickup. However, there will be prototype costs of $5,000.

7. Variable (selling) expenses. Estimated at $1,140.8. Fixed (administrative) expenses. Estimated at $1,215.9. Interest expense. No outstanding debts or loans. Enter zero.10. Taxes. No profit previous quarter. No estimated taxes would

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11. Payments on long-term assets. ABC plans to purchase office equipment to be paid in full at the time of purchase $1,139.

12. Loan repayments. No loans have been received. Enter zero.13. Owner draws. Owner will need $2,000 for living expenses.14. Total cash paid out. Add 6 through 13. Total $10,494.15. Cash balance. Subtract Cash Paid Out from Total Cash

Available ($13,606).16. Loans to be received. Being aware of the $30,000 to be paid

to the manufacturer in February, a loan of $40,000 is anticipated to increase Cash Available. (This requires advance planning.)

17. Equity deposit. Owner plans to add $5,000 from personal CD.18. Ending cash balance. Adding 15, 16, and 17, the result is

$58,606.

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February Projections1. February Beginning Cash Balance. January

Ending Cash Balance ($58,606).2. Cash receipts. Still no sales, but service income

is $2,000.3. Interest income. Projected at about $120.4. Sale of long-term assets. None. Enter zero.5. Total cash available. Add 1, 2, 3, and 4. The

result is $60,726.6. Cash payments. $30,000 due to manufacturer,

$400 due on packaging design.7. Continue as in January. Don’t forget to include

payments on your loan.256

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Common Accounting TransactionsLet’s suppose that Lykun and Gelila have opened a local feed and

pet supply store. During their first month of business several accounting transactions take place. Owner Investments – Lykun and Gelila file articles of incorporation and receive their charter and business license and begin their business as LGM, Inc. They have $75,000 of cash to invest in their new business. The first balance sheet of LGM, Inc. would show the asset Cash and the Equity of the owners

As of right now, LGM has no liabilities and assets equal equity. The labels Cash and Net Worth are called accounts. Accounts are used to classify similar transactions.

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Purchase of Assets with Cash – LGM decides to purchase a small land for $10,000 and building for $40,000. This transaction doesn’t change LGM’s total assets, liabilities, or equity, but it does change the composition of the assets. A key point to remember is that the purchase of an asset doesn’t affect owner’s equity. The transaction decreases Cash and increases two new accounts called Land and Buildings:

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Purchase of Assets by Incurring a Liability – Assets may be purchased with credit instead of with cash. However, by using credit the business agrees to pay the liability at a later date. Let’s suppose that LGM buys pet supplies for $1,000 on credit. The transaction increases the assets (Pet Supplies) and increases the liabilities of LGM, Inc. Assets purchased on credit are still recorded for the full amount at the time of purchase. It should be pointed out that this type of transaction increases both sides of the accounting equation to $76,000. The liability creates a new account called Accounts Payable:

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Payment of a Liability – Shortly after purchasing the pet supplies, LGM decides to pay $500 of the $1,000 owed for the supplies. As a result, both assets (Cash) and liabilities (Accounts Payable) decrease, but Pet Supplies is unaffected. Payment of a liability doesn’t affect equity or the asset purchased with credit. Both sides of the equation are still equal although they now have a new value of $75,500:

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Revenue – Revenues equal the price charged for the sale of goods or services. LGM, Inc. earns money (Revenue) by selling feed and pet supplies. Sometimes these supplies are paid to LGM immediately in the form of cash and sometimes a customer asks for a credit account and agrees to pay within 30 days. In either case, the sale is recorded when it is earned. Suppose LGM sells horse feed to a customer for $2,000 and is paid in cash. This transaction increases both assets (Cash) and owner’s equity (Net Worth):

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Now suppose that LGM sells $1,000 of steer ration to a 4-H member and agrees to wait for the payment until after the local youth show and sale. Because the money has been earned now, a bill or invoice is sent to the youth and the transaction is recorded now. Revenues are recorded when they are earned, not necessarily when payment is received. This revenue increases both assets and owner’s equity as before but a new asset account (Accounts Receivable) is also created:

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Collection of Accounts Receivable – Let’s say that immediately after the youth show and sale the 4-H member comes in and pays $500 of the $1,000 that he/she owes. The asset Cash increases and the asset Accounts Receivable decreases. The transaction doesn’t affect owner’s equity because the revenue was already recorded in transaction 6 above. It should be noted that the balance for Accounts Receivable is $500 indicating that another $500 is still to be paid to LGM:

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Expenses – Expenses are recorded when they are accrued just as revenue is recorded when earned. Expenses may be paid in cash immediately or later on. If an expense is going to be paid later on, a liability (Accounts Payable or Wages Payable) is created. In either case, owner’s equity decreases. Suppose that LGM, Inc. pays $1000 to rent some equipment for their office and $400 in wages to a part-time worker. Each of these transactions reduce assets (Cash) and equity (Net Worth):

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Let’s also assume that LGM has not paid a $400 bill for utility expenses incurred the previous month. In this transaction, the effect on owner’s equity is the same as when the expense is paid in cash, but instead of a decrease in assets there is an increase in liabilities (Accounts Payable):

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Break even analysis One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-even analysis.

The break-even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred.

The break-even point can be expressed in terms of unit sales or dollar sales. That is, the break-even units indicate the level of sales that are required to cover costs.

Sales above that number result in profit and sales below that number result in a loss. The break-even sales indicates the dollars of gross sales required to break-even.

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Break-even analysis is based on two types of costs: fixed costs and variable costs.

Fixed costs are overhead-type expenses that are constant and do not change as the level of output changes.

Variable cost are not constant and do change with the level of output. Because of this, variable expenses are often stated on a per unit basis.

Once the break-even point is met, assuming no change in selling price, fixed and variable cost, a profit in the amount of the difference in the selling price and the variable costs will be recognized.

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One important aspect of break-even analysis is that it is normally not this simple. In many instances, the selling price, fixed costs or variable costs will not remain constant resulting in a change in the break-even.

And these changes will change the break-even. So, a break-even cannot be calculated only once. It should be calculated on a regular basis to reflect changes in costs and prices and in order to maintain profitability or make adjustments in the product line.

There are three basic pieces of information needed to evaluate a break-even point:

Average Per Unit Sales PriceAverage Per Unit Variable CostAverage Annual Fixed Costs

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Profit = revenue-cost Profit=(revenue)-(fixed cost (Cf) + variable cost)

Revenue =(selling price (P))* quantity sold (Q)) Variable cost = (quantity sold * variable cost per unit (Cv))In break even point the profit is assumed to be zero 0= (P*Q)-(Cf + (Q*Cv)) (P*Q)-(Q*Cv)=Cf Q(P-Cv)=Cf Q=Cf/P-Cv The basic equation for determining the break-even units is= Average Annual Fixed Cost (Average Per Unit Sales Price - Average Per Unit Variable

Cost)

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Example: A local livestock producer utilizes compost waste to develop an organic fertilizer product. The fertilizer is prepared for retail sale in 50 pound bags. The retail sales price is $5.00 per bag. The average variable cost per bag is $2.80 and average annual fixed costs are $60,000. These three pieces of information are:

Average Per Unit Sales Price = $5.00 per bagAverage Per Unit Variable Cost = $2.80 per bag

Average Annual Fixed Costs = $60,000.00

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The above assumption can be utilized to calculate the number of bags that must be sold in order to break-even as well as the total dollar of sales needed to break-even. Using the formulas explained earlier, the following calculations can be made:

Break-Even Units: $60,000.00 ÷ ($5.00 - $2.80) = 27,273 bags

Break-Even Sales: $60,000.00 ÷ 1 - ($2.80 ÷ $5.00) = $136,365

Therefore, no profits are made from the sale of this product until more than 27,273 bags are sold or more than $136,365 in gross sales is generated.

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ILLUSTRATION 4: Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of Rs. 0.75 per unit and a selling price of Rs. 1.25 per unit. Fixed costs are Rs. 12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of Rs. 5,000. Variable cost would increase to Rs. 1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment? What are the break-even points (Rs. and units) for the two processes? Develop a break-even chart.

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SOLUTIONProfit = TR – TC Option A: Current EquipmentBEP Sales in value (Rs.)BEP Sales in Quantity (Units)Option B: Adding New EquipmentBEP Sales in value (Rs.)BEP Sales in Quantity (Units)Profit = 50000 * (1.25 – 0.75) –12000 = Rs.13000.Option B: Add equipment:Profit = 70000 * (1.25 – 1.00) – 17000 = Rs.500.Therefore, the company should continue as is with

the present equipment as this returns a higher profit.

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FACTORS AFFECTING THE BUSINESS ENVIRONMENT

1.The macro environment (far environment)i. Economic forces A. Rising income B. Inflation C. Recession:-A recession is a period of economic

activity when income, production, and employment tend to fall-all of which reduce demand. Thus businesses are expected to design different strategies that enable them overcome the problems of inflation and recession.

ii. Legal and political factors A. Federal and state laws B. The development of regional markets C. The creation and expansion of the global market

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iii. Social forces

A. Demographic forces i. Population growth ii Age distribution B. Cultural forcesC. The consumer movement:-Is a connection of

individuals, organizations and groups whose objective is to protect the rights of consumers

iv. Technological forces

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2.The microenvironment (The near environment)

The microenvironment refers the competitive situation of an industry.

The competitive environment refers to the number of competitors a firm must face, the relative size of the competitors, and the degree of interdependence within the industry.

Competition in an industry arises from i. The power of buyers ii. The power of suppliers iii. The threat of new entrants iv. The threat of substitutes v. The intensity of rivalry

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Porter claims that five forces determine competitiveness. These are shown in figure below:

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 Economies of scale (i.e. the average size of business varies from industry to industry .For example, the average size of chemical firms is very large, where as the average size of retail firms is relatively small. The most fundamental reason for these differences in the extent of economies of scale in an industry. i.e how the total cost per unit produced changes as more units are produced.)

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Decision Making Process Where to invest to get profit, What to do about an employee who is always late, What subject will have top priority in meeting, etc.

Decision-making is not a separate, isolated function of management but it is an integral component of every managerial function (i.e. in planning, organizing, staffing, directing, & controlling).

Decision-making:-It is the process of selecting or choosing, based on some criteria, the best alternative among alternatives

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Types of Decision

Programmed decisions :-Are the decisions that managers make in response to repetitive & routine problems.

These decisions are “Programmable” because they are based on organizational established policies, procedures & rules

Examples: i. In Collage Enrolment, ii. In Payroll processing

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Non-programmed decisions: Are those made by managers in a naval, complex, or/and extremely important problem situation.

They are called non-programmed because established policies, rules & procedures can’t be employed & it is decision maker’s insights, judgment & creativity, which have paramount importance.

They are going to deal with unusual types of problems or /exceptional or special types of problems/.

They are time consuming in defining, identifying, evaluating & selecting one alternative.

They are broad, long-range & made by higher-level personnel.

The conditions for non-programmed decisions are uncertain.

Strategic decisions, general are non-programmed decisions, requiring subjective judgments.

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Steps in the process of rational decision-making:

Identify & Define the problemProblem is anything that hampers the achievement of goals.

Problem is a necessary condition for a decision, i.e., there would be no need for decisions if problems did not exist.

Establish decision criteria Identifying those characteristics that are important in making

the decision.Develop Alternatives

Develop & list as many possible alternatives solutions to the problem as you can.

Formulate Goals

Evaluate Decision Situations

Analyze Alternatives

SelectAlternatives

Implement Decision

Evaluate & Follow up287

Analyze the alternativesWhat are the advantages & disadvantages of

each alternative?Select the best alternative

Select the best alternative that suits to solve our decision problem. In selecting the best alternative, factors such as risk, timing & limiting factors should be considered adequately.

Implement the solution Putting the decision into action.

Establishing a control & Evaluation SystemOngoing actions need to be monitored.Following up decisions

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Decision Making Under Different Conditionsa. Decision under certainty Example: If you decide to invest your money in saving

account in the Commercial Bank of Ethiopia, You are certain that you will earn ten percent.

b. Decision under uncertainty Example: A corporation that decides to expand its

operation in a strong country may know little about its culture, laws, economic environment, or politics. The political situation may be so volatile that even experts cannot predict a possible change in government.

c. Decision under risk Example: If we gamble by tossing a fair coin, the

probability that a tail will turn up is 50%.

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