UNIVERSITY OF DAR ES SALAAM
COMPUTING CENTRE
Diploma in Business Information Technology
BIT 05208- ENTREPRENEURSHIP STUDENT MANUAL
By: Prepared by Mujuni A; University of DSM Computing Centre (UCC)
By Prepared by Mujuni A., University of DSM Computing Centre (UCC)
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By Mujuni, A, University of DSM Computing Centre (UCC)
1. CHAPTER ONE: INTRODUCTION –ENTREPRENEIURSHIP
1.0 Historical background
The word “entrepreneur” originates from a thirteenth-century French verb, entreprendre, meaning “to
do something” or “to undertake.” By the sixteenth century, the noun form, entrepreneur, was being
used to refer to someone who undertakes a business venture. The first academic use of the word by
an economist was likely in 1730 by Richard Cantillon, who identified the willingness to bear the
personal financial risk of a business venture as the defining characteristic of an entrepreneur.
In the early 1800s, economists Jean-Baptiste Say and John Stuart Mill further popularized the
academic usage of the word “entrepreneur.” Say stressed the role of the entrepreneur in creating
value by moving resources out of less productive areas and into more productive ones. Mill used
the term “entrepreneur” in his popular 1848 book, Principles of Political Economy, to refer to a
person who assumes both the risk and the management of a business. In this manner, Mill provided a
clearer distinction than Cantillon between an entrepreneur and other business owners (such as
shareholders of a corporation) who assume financial risk but do not actively participate in the day-to-
day operations or management of the firm.
1.1: What is entrepreneurship?
Entrepreneurship is a broad term and does not have a single definite definition.
It can be defined as the capacity and willingness to develop, organize and manage a business
venture along with any of its risks in order to make a profit. The most obvious example of
entrepreneurship is the starting of new businesses.
It can also be broadly defined as a way of thinking, reasoning, and acting that results in the
creation, enhancement, realization, and renewal of value for an individual, group, organization,
society.
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In economics, entrepreneurship combined with land, labor, natural resources and capital can
produce profit. Entrepreneurial spirit is characterized by innovation and risk-taking, and is an
essential part of a nation's ability to succeed in an ever changing and increasingly competitive
global marketplace.
Entrepreneurship is a dynamic process of creating incremental wealth. The wealth is created by
individuals who assume the major risks in terms of equity, time and career commitment or
provide value for some product or service.
1.2 Who is an entrepreneur?
An entrepreneur is someone who exercises initiative by organizing a venture to take benefit of an
opportunity and, as the decision maker, decides what, how, and how much of a good or service
will be produced.
An entrepreneur is different from a business man who buys and sells good and services for profit.
Not all business men are necessarily entrepreneurs.
An entrepreneur is someone who organizes, manages, and assumes the risks of a business or
enterprise. An entrepreneur is an agent of change. Entrepreneurship is the process of discovering
new ways of combining resources. When the market value generated by this new combination of
resources is greater than the market value these resources can generate elsewhere individually or
in some other combination, the entrepreneur makes a profit. An entrepreneur who takes the
resources necessary to produce a pair of jeans that can be sold for thirty thousand shillings and
instead turns them into a denim backpack that sells for fifty thousand shillings will earn a profit
by increasing the value those resources create. This comparison is possible because in
competitive resource markets, an entrepreneur‟s costs of production are determined by the prices
required to bid the necessary resources away from alternative uses.
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Entrepreneurs are found in all professions-education, medicine, research, law, architecture,
engineering, social work, distribution and the government.
1.3 What is intrapreneurship?
Practice of entrepreneurship in an established firm. Intrapreneurship applies the 'start up' style of
management (characterized by flexibility, innovation, and risk taking) to a secure and stable firm.
The objective is to fast track product development (by circumventing the bureaucracy) to take
advantage of a new opportunity or to assess feasibility of a new process or design.
1.4 : Are Entrepreneurs born or made?
Nurture or nature?
Entrepreneurship researchers point to two major contentions. There are those who argue that
entrepreneurship is a function of individual personality traits. That there exist a number of
recognizable behaviors, and attributes that are commonly associated with the “enterprising”
person, and which may further distinguish between entrepreneurs and non-entrepreneurs or
between successful entrepreneurs and unsuccessful enterpreneurs. These are innovativeness,
creativeness, proactive ness, need for achievement, risk taking independence. Etc.
On the other hand, those in the second strand, argue that entrepreneurship is an environmentally
determined phenomenon. That the display of enterprising behaviors and attitudes will be
stimulated or otherwise, by different environments.
1.5 Conclusions
There is now an overwhelming literature, (including proponents of the trait approach) that point to
the common conclusion, and to which we also subscribe to, that entrepreneurship is not a
biological trait. More specifically, entrepreneurs can be developed and that even the much
advocated entrepreneurial traits and behaviors such as need for achievement and risk-taking can be
learnt. That the mix and degree of enterprising attributes will vary between persons, but more
importantly the enterprising behavior can be developed by exposure to stimuli and therefore can be
learned.
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2.0: GENERAL ENTREPRISING TENDENCIES/TRAITS [GETS]
Generally, an entrepreneur possess the following Traits/behaviors
2.1: Creativity behavior/skills
Creativity is defined as the tendency to generate or recognize ideas, alternatives, or possibilities
that may be useful in solving problems, communicating with others, and entertaining ourselves
and others (Robert E. Franken, Human Motivation)
Creativity is generating new ideas and concepts, or making connections between ideas where
none previously existed.” – (Mitchell Rigie and Keith Harmeyer, SmartStorming)
Three reasons why people are motivated to be creative:
i. need for novel, varied, and complex stimulation
ii. need to communicate ideas and values
iii. need to solve problems
2.1.1: Characteristics of the creative personality
a) Creative individuals have a great deal of energy, but they are also often quiet and at rest.
b) Creative individuals tend to be smart, yet also naïve/immature at the same time.
c) Creative individuals have a combination of liveliness and discipline, or responsibility and
irresponsibility.
d) Creative individuals alternate between imagination and fantasy on one end, and rooted sense
of reality at the other.
e) Creative individuals are also remarkable humble and proud at the same time.
f) Generally, creative people are thought to be rebellious and independent.
g) Most creative persons are very passionate about their work, yet they can be extremely
objective about it as well.
h) The openness and sensitivity of creative individuals often exposes them to suffering pain yet
also a great deal of enjoyment
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2.2. Innovation (innovative behavior/skills)
- What is „innovation?‟
Is the process of translating an idea or invention into a good or service that creates value or
for which customers will pay.
To be called an innovation, an idea must be replicable at an economical cost and must satisfy
a specific need. Innovation involves deliberate application of information, imagination and
initiative in deriving greater or different values from resources, and includes all processes by
which new ideas are generated and converted into useful products.
In business, innovation often results when ideas are applied by the company in order to
further satisfy the needs and expectations of the customers. In a social context, innovation
helps create new methods for alliance creation, joint venturing, flexible work hours, and
creation of buyers' purchasing power. Innovations are divided into two broad categories:
(1) Evolutionary innovations (continuous or dynamic evolutionary innovation) that are
brought about by many incremental advances in technology or processes and
(2) revolutionary innovations (also called discontinuous innovations) which are often
disruptive and new.
There is little consensus on exactly how to define innovation. Whilst it is widely understood
and accepted that innovation is a major source of an organization‟s competitive advantage.
Actual definitions of innovation vary often so as to better meet the requirements or
characteristics of a particular study. What is common in most definitions of innovation is a
focus on novelty and newness and that it creates profit or adds economic value to the
organization responsible for it.
In the 1930‟s Joseph Schumpter put forward five types of innovation definitions:
i. Introduction of a new product or a qualitative change in an existing product
ii. Process innovation new to an industry
iii. Opening of a new market
iv. Development of new sources of supply for raw material
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v. Other inputs and changes in the industrial organization
2.2.1 Creativity vs. Innovation compared
The main difference between creativity and innovation is the focus. Creativity is about
unleashing the potential of the mind to conceive new ideas. Those concepts could manifest
themselves in any number of ways, but most often, they become something we can see, hear,
smell, touch, or taste. However, creative ideas can also be thought experiments within one
person‟s mind.
Innovation, on the other hand, is completely measurable. Innovation is about introducing
change into relatively stable systems. It‟s also concerned with the work required to make an
idea viable. By identifying an unrecognized and unmet need, an organization can use
innovation to apply its creative resources to design an appropriate solution and reap a return
on its investment.
Organizations often chase creativity, but what they really need to pursue is innovation.
Theodore Levitt puts it best: “What is often lacking is not creativity in the idea-creating sense
but innovation in the action-producing sense, i.e. putting ideas to work.”
Creativity is the capability or act of conceiving something original while innovation is the
implementation of something new. When people come up with new ideas, this display of
creativity but there is no innovation until you take the risk of implementing it. Many
organizations depend on the combination of these two elements in establishing and
maintaining a competitive advantage.
Creativity can be described as one's ability to come up with a clever/practical way of solving
a problem, or of doing something, by thinking outside the box. Innovation is the
implementation of a creative idea, the action of solving a problem or creating something in a
way no one has thought of before. Innovation usually stems from creativity.
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2.2.2 How to become more creative and innovative
Lots of people mistakenly think that creativity is related to genes and that some people are
born to innovate while others aren't but that's completely wrong. By altering your life style
and making some changes to your belief system you can become more creative and
innovative even if you currently lack them both.
Without being creative and innovative you will become stuck in a fixed life routine and you
might never be able to solve your problems since you will always be trying the same methods
that don‟t work. Here are five steps to become more creative and innovative
Here the steps you need to do in order to become more creative and innovative:
i. Change your routine: Research has shown that fixed routine is a great creativity killer. In
order to become more creative and innovative you need not to stick to the same routine each
day. Change anything you can change in your daily activities, try to do the same things in a
different way or even try things you never tried before
ii. Dedicate free time for creative thinking: Even if you changed your routine you might still
not be that creative because of being bound by rules. In order to become really creative you
need to dedicate some free time for creative thinking where you are not bound by any rules
iii. Get rid of your limiting beliefs: One of the things that kills creatively and prevents
innovation is limiting beliefs. Limiting beliefs prevent you from seeing possibilities and the
result is being stuck in a certain reality without trying to change it
iv. Overcome fear of failure: In order to become more creative and innovative you need to
keep trying and failing. Creativity is all about doing few wrong things until you come across
the right thing. If you fear failure or if you fear taking risks then you will always be stuck in
your comfort zone and you will never become creative
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v. Learn to observe: Sometimes observing other people can inspire you and lead you to
innovate and become creative. Contrary to common beliefs you wont be stealing people's
ideas when you observe them but instead you will be adding pieces of information from
here and there together until you come up with something totally new
2.2.2: Proactive behavior
Action and result oriented behavior, instead of the one that waits for things to happen and then tries to
adjust (react) to them. Proactive behavior aims at identification and exploitation of opportunities and
in taking preemptory action against potential problems and threats, whereas reactive behavior focuses
on fighting a fire or solving a problem after it occurs.
Proactive behavior refers to the first kind of person - those who make things happen. Many scholars
believe that everyone has the potential to be the kind of person who makes things happen. That is,
everyone can display more or less proactive behavior, depending on their motivation in the situation.
Proactive Behavior Reactive Behavior
Goes the extra mile Does the minimum
Exceeds expectations Meets expectations
Takes calculated risks Risk Adverse
Independent thinker Needs to be told
Anticipates problems Solves problems
Seeks new solutions Relies on status quo
Questions/Challenges Assumes
2.2.3: Need for achievement behavior /orientation
Need for achievement (N-Ach) refers to an individual's desire for significant accomplishment,
mastering of skills, control, or high standards. The term was first used by Henry Murray[1]
and
associated with a range of actions. These include: "intense, prolonged and repeated efforts to
accomplish something difficult. To work with singleness of purpose towards a high and distant goal.
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To have the determination to win". The concept of NAch was subsequently popularised by the
psychologist David McClelland.[2]
This personality trait is characterized by an enduring and consistent concern with setting and meeting
high standards of achievement. This need is influenced by internal drive for action (intrinsic
motivation), and the pressure exerted by the expectations of others (extrinsic motivation). Measured
by thematic appreciation tests, need for achievement motivates an individual to succeed in
competition, and to excel in activities important to him or her.[3]
Need for Achievement is related to the difficulty of tasks people choose to undertake. Those with low
N-Ach may choose very easy tasks, in order to minimise risk of failure, or highly difficult tasks, such
that a failure would not be embarrassing. Those with high N-Ach tend to choose moderately difficult
tasks, feeling that they are challenging, but within reach.
People high in N-Ach are characterized by a tendency to seek challenges and a high degree of
independence. Their most satisfying reward is the recognition of their achievements. Sources of high
N-Ach include:
i. Parents who encouraged independence in childhood
ii. Praise and rewards for success
iii. Association of achievement with positive feelings
iv. Association of achievement with one's own competence and effort, not luck
v. A desire to be effective or challenged
vi. Intrapersonal Strength
vii. Desirability
viii. Feasibility
ix. Goal Setting Abilities
2.2.4: Networking behavior
The role of networks in fostering business performance and economic growth has been widely
acknowledged by entrepreneurship scholars in the recent years. Networks are deemed to have the
potential to address challenges related to Smallness, Newness and Isolation of the enterprises.
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Why be concerned about entrepreneurial networks? (the rationale for networking)
i. People with strong social support networks enjoy better physical and mental health than
those without such networks. Not only are people with good support networks less likely
to become ill, but when they do, they recover faster.
ii. People with large personal networks tend to live longer than those with small networks.
iii. Personal happiness and satisfaction depend in large part on the quality of relationships
with other people.
iv. Building good working relationships is the main cause of success for managers who take
charge of a new situation
v. Close relationships with customers save money. It costs three to five times as much to get
a new customer as it does to keep an existing one!
vi. Strong partnerships with suppliers yield lower costs and higher quality products and
services
vii. Business effectiveness, in general, depends more on “human-related activities”, such as
building relationships, interpersonal skills, and communication, than on technical skills
and abilities
viii. Managers with large personal networks get higher-paying positions than managers with
small networks
ix. Managers with larger, well-diversified networks get promoted faster and at younger ages
compared with their peers with underdeveloped networks
x. Professionals who find jobs through personal contacts (instead of classified
advertisements or other impersonal means) find better, more satisfying jobs that they stay
with longer
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xi. Relationships are fundamental human need
xii. Repeated interactions encourage cooperation, trust, & ties
xiii. Networks make the world small
xiv. It supports accumulation, and deployment of physical and soft resources, which
entrepreneurs can not do without (Aldrich and Zimmer, 1986)
1.3.8: Comparison of Traditional Managers and Entrepreneurs
BASIS TRADITIONAL MANAGERS ENTREPRENEURS
1. Primary motives Promotion of traditional rewards e.g.
Office, staff and power
Independence, opportunity to
create and money.
2. Activity Delegates and supervises more than
direct involvement
Direct involvement
3. Risk Careful Moderate risk taker
4. Status Concerned about status symbols Not concerned about status
symbols
5. Decision Usually agrees with those in upper
management positions
Follow dreams with
decisions
6. Failure and
mistakes
Tries to avoid mistakes and surprises Deals with mistakes and
failures
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2. CHAPTER TWO: INFLUENCES ON ENTREPRENEURIAL BEHAVIOUR –
THEORETICAL EXPLANATIONS
Entrepreneurial behavior is considered a function of the individual motivations, ability and
environmental influences. A number of theories have been proposed to explain these phenomena.
These are:
i. Psychological explanations of entrepreneurial behavior
ii. Sociological explanations of entrepreneurial behavior
iii. Socio-economic background factors (demographic factors)
iv. Environmental factors
2.1 PSYCHOLOGICAL EXPLANATIONS OF ENTREPRENEURIAL BEHAVIOR
Some psychologists have attempted to identify individual characteristics capable of successfully
predicting entrepreneur behavior. These efforts have culminated into models which are posited as
capable of accounting for differences between entrepreneurs and other members of society in terms
of a single trait or a constellation of traits. These are sometimes referred to as 'born' models, in the
sense that they tend to view entrepreneur behavior as a disposition of in-born qualities.
2.1.1 Need for achievement (N’Arch)
McClelland (1961), the pioneer of trait models, suggested that individuals with high need for
achievement (n’Ach) were more likely to choose entrepreneurial careers than others. He defined
n‟Ach as "the desire to do well for the sake of an inner feeling of personal accomplishment". A
person endowed with such a need will spend time considering how to do a job better or how to
accomplish something important to them.
High achievers are said to like situations where they can take personal responsibility for finding
solutions to problems.
They like rapid feedback on their performance so that they can judge whether they are improving
or not.
They avoid what they perceive as very easy or very difficult tasks as they dislike succeeding by
chance.
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They prefer striving to achieve targets which present both a challenge and are not beyond their
capabilities. This ensures worthwhile effort and results in feelings of accomplishment and
satisfaction.
2.1.2 Locus of control
- Rotter (1966) proposed a model to measure 'locus of control' the extent to which people believe
that they control their own destinies. People with an internal locus of control are those individuals
who believe themselves to be in control of their destinies.
- In contrast, those with an external locus of control sense that, fate, in the form of events outside
their control or powerful people, has a dominating influence over their lives.
- Individuals with a strong internal locus of control are, according to this model, more likely to
engage in entrepreneurship. The reasoning behind this model is that people who believe that they
control their destinies would be more willing to venture into the uncertainties and challenges
involved in running a business compared to those that believe that most of what happens to them
is outside their control.
2.1.3 Psychodynamic model
- The Psychodynamic model was proposed by Kets de Vries (1977). He posed entrepreneurial
behavior as an outcome of a family background often filled with images of endured hardships.
- Such experiences may leave the adult troubled by a burdensome psychological inheritance
centered around problems of self-esteem, insecurity and lack of confidence and with repressed
aggressive wishes towards persons in control.
- The entrepreneur thus becomes a deviant, drifting from job to job unable to 'fit in' and
develops a non-conformist stand.
- The refusal to accept authority structure and social norms results into an inability to work
smoothly with others which in turn leads to the setting up of an independent economic unit as
an act of " innovative rebelliousness".
2.1.4 Risk taking propensity
- According to this theory, the level of risk preference low, moderate, high can influence an
individual's decision to start a business.
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- Risk taking propensity is defined as a generalized tendency to choose more risky alternatives
(Bird, 1989).
- Reuss (1970) suggested that "venture spirit and willingness to take risks" is the major trait of
entrepreneurship.
- Bird (1989) suggests that characteristics that dispose people to orientation towards risk
taking include optimism; tolerance to ambiguity; high need to achieve; fearlessness;
impulsiveness; a decision cognitive style; beliefs about ones control; a personal history in
which risk was rewarded; and having family conditions that support risk taking, such as a
working spouse or a social supportive system.
2.1.5 Innovation
- Many social scientists have singled out innovation as the true mark of an entrepreneur
(Schumpeter, 1934; Stevenson and Sahlman, 1989; Stanworth et al, 1989). This is in line
with the view of the entrepreneur as an agent of change, bringing about new resource
combinations.
- Stanworth and Gray, (1991) draw a distinction among the terms innovation, creativity and
change.
i. To create is to bring in something into existence...so a craftsman may be very creative.
ii. To innovate is to bring novelties (derived from Latin word novus for "new”), so it is
likely to be concerned with broader processes of change within an organization.
iii. While all innovations are concerned with change, not all changes are innovations
(Stanworth and Gray, 1989). Hence, buying new equipment would be a change,
but not an innovation referring the 'organized tour' of business.
2.1.6 Psychological models: conclusion
The principle weaknesses of the trait approach have been summarised by a number of experts. Chell
(1985), a leading expert in the area of entrepreneurship, says that there would appear to be a great
deal which is equivocal and inconclusive about the trait approach to entrepreneurship. Later, she
asserted that "there appears to be very low correlation between the assessment of the trait and actual
behaviour" (Chell, 1986).
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• Several observers have questioned the rationale for predicting entrepreneur behavior using the
specific traits discussed above. They contend that some of the more obvious and possibly decisive
attributes have been left out. Lynn (1969) suggested that one of the underlying personality traits of
the entrepreneur could be anxiety or neuroticism. Ray (1993) has added physical appearance and
likeability. He goes on to argue that other theories may be better placed to explain entrepreneurial
behavior than personal traits. Among these he mentions sports psychology and activation theory of
tourism. Of the latter, he says that entrepreneurs may be high activation people, who prefer
unstructured tours, while managers, small business owners and franchisees are the low‑ activation
people, preferring the 'organized tour' of business.
2.2 SOCIOLOGICAL EXPLANATIONS OF ENTREPRENEURIAL BEHAVIOR
While psychological models attempt to explain behavior in terms of qualities within an individual,
sociological theories suggest that entrepreneur behavior is a function of the individual's interaction
with society. That is, entrepreneurs are 'made' by society. This section explores four main
sociological models.
2.2.1 The social marginality model
- This model is based on two premises. The first premise is that the meaning of any economic
action (including starting a business) is the satisfaction of wants. It follows then that there
would be no economic action if there were no needs to be satisfied.
- The other premise is that it is society that shapes the desires we observe. Our choices are
therefore fenced by social habits and conventions (Schumpeter, 1934). Stanworth and Curran
(1976) used the above reasoning to explain the process of entry into entrepreneurship.
- Stanworth and Curran (1976) suggest that individuals who perceive a strong level of
incongruency between their personal attributes and the role they hold in society (eg. teachers,
policemen, nurses, lawyers, etc) will be motivated to change or reconstruct their social reality.
This can take many forms. Some people may reconstruct their reality by joining political
parties, religious organisations, charities, etc. Others may change careers. Self employment
offers another possibility.
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2.2.2 Inter-generational inheritance of enterprise culture via role modeling
- This theory purports that entrepreneur practice is largely inherited. Accordingly, offsprings of
entrepreneurial families are more likely to be involved in businesses than others.
- Several explanations can be offered to support this theory. A person who grows up around a
family that runs a business is likely to benefit from the skills, accumulated experiences and
connections of the existing firm.
- She or he is also likely to have better access to advice, credit, established markets, sources of
inputs, etc. The fact that these will make it easier to start a business may be a big
encouragement to those associated with businessmen.
- Birley (1984) has suggested that a strong grounding in the business and ownership ethic at an
early age is a useful and powerful driving force for children as they begin to choose future
careers.
2.2.3 Small firms as role models
There has been a notion that those who form small businesses are likely to have previously worked in
small firms and to have used them as a role model (Chell, 1985). For one thing, it may become easier
for the potential entrepreneur to envision a role comparable to that of his boss.
Also, the owner manager may sometimes act as a mentor, playing the role of convincing, assuring,
and sometimes instructing subordinates in the process of starting their own ventures (Shapero and
Sokol, 1982). In some cases, the existing business may assure some support to the new one, say, as a
market or a source of materials or credit.
2.2.4 Sociological models: conclusion
Although sociological models seem to be more closely related to entrepreneur behavior than are
psychological characteristics, they have their own share of criticisms. The most notable weakness of
these models is that each tends to explain a certain group of entrepreneurs, leaving out the rest.
Another weakness is that they do not tell us why people exposed to the same social situation will
choose careers differently, with some selecting self employment.
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Related to this is the possibility that it helps to see someone lesser than oneself establish the
credibility for an act; an employee may be convinced that if the owner manager can do it, he should
be able to do it equally or even better.
2.3. SOCIO-ECONOMIC BACKGROUND FACTORS (DEMOGRAPHIC FACTORS)
The entrepreneurship research literature mentions a number of socio‑ economic background factors
that are considered to influence propensity to start a business. These factors include age, ethnicity,
marital status, education and experience. This section reviews these factors.
The entrepreneurship research literature mentions a number of socio-economic background factors
that are considered to influence propensity to start a business. These factors include age, ethnicity,
marital status, education and experience. This section reviews these factors.
2.3.1 Age
Given the usual demands of the process of starting a new business, one would expect the middle aged
person to be better placed than young or old one to successfully enter into entrepreneurship. Young
people may have the energy required to launch new ventures, but lack the financial means to do so.
Older people have money, but lack the energy to start independent ventures and willingness to
change their lifestyles. Middle aged people have some money, and energy and are more willing to
change their lifestyles. However, many of them are likely to be 'forced' into some form of self
employment after retirement.
2.3.2 Ethnicity
Ethnic origin of a person is said to influence the choice between paid employment and self
semployment. Shapero (1982) argues that ethnic groups that have produced high numbers of
entrepreneurs are also displaced groups. This argument is based on the social marginality thesis,
which contends that marginal groups have a higher propensity of becoming self employed.
2.3.3 Marital status
Studies in the UK have shown that the self-employment rate is much lower for single persons than for
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those in other categories. Marital status is closely related to age and stages of life; married people are
likely to be middle or old aged, while single people will mostly be younger.
Even when age is controlled for, the rate of self-employment remains lower for singles (Burrows,
1991). This appears to be in line with the social development model, which recognized the influence
of social support system in one's propensity to become an entrepreneur.
2.3.4 Education
Two conflicting hypotheses have been proposed regarding the role of education in the entrepreneurial
process. The first is that formal education can operate as an impediment to entrepreneurship because,
rather than develop creative free thinkers, it fosters conformity and low tolerance for ambiguity,
leading to thought and behavior processes that refuse to admit tolerance, and social values that
preclude "getting one's hands dirty" (Ronstadt, 1984).
The alternative argument is that education develops competencies required in an entrepreneurial
venture as it fosters creativity, curiosity, open mindedness and good interpersonal skills. As well,
technical education is important to careers and ventures using or creating advanced technology (Bird,
1989).
2.3.5 Socio-economic background factors: conclusion
Social economic background factors are fairly good in explaining the entry into entrepreneurship.
They however have the weakness of being closely related, to such an extent that it may sometimes be
difficult to know which factors are most important in determining behavior. The factors are the
easiest to research as they are merely classification variable, which are found even in secondary
sources of information. Like all other individual characteristics, they cannot fully explain differences
in behavior between entrepreneurs and those in other careers or between successful and unsuccessful
entrepreneurs.
2.4 ENVIRONMENTAL FACTORS
So far, our discussion has focused around individual characteristics that impact on the propensity to
become self employed. However, persons with similar characteristics may engage in different
occupations, depending on the type of environment they face. This is why the there are significant
By Mujuni A., University of DSM Computing Centre (UCC) 19
spatial variations in the rate of formation of small businesses in various parts of the world as well as
within different countries
2.4.1: Barriers to entry
- The ease of entry as determined by the resources required to successfully launch a venture
depends on the types of industries in the localities, with an industrial climate biased towards
small, independent or autonomous units of employment being more favorable.
- Probability of establishing a small business in localities dominated by industries with high
barriers to entry, such as steel, ship building, chemicals and aircraft manufacturing is expected
to be lower, compared to those with less domination by heavy industries.
2.4.2: Plant size structure
The plant size structure is likely to influence the opportunities for passing over skills, experiences and
role modelling in a locality. Generally, workers in smaller firms have closer contact with customers
as well as the owner manager than ones in larger firms. As noted before, workers in such an
environment are more likely to be self-employed than their counterparts in larger firms.
2.4.3 Occupational structure
As indicated in the discussion of social class influence, the majority of those who form small
businesses come from small employer, employee, manager and skilled worker backgrounds. Regions
with more people involved in these occupations are therefore more likely to form a large number of
businesses than those with different types of jobs.
- Again, Storey (1994) notes that the evidence from empirical studies in UK on this relationship
is ambiguous. A positive relationship was found in studies in West Anglia, but such
association was not found either in East Midland or North East of England.
2.4.4 The Economy
Economic factors that are considered responsible for spatial variations in small firm formation
include availability of information, access to finance, availability of premises, ownership structure,
regional specialization and demand.
By Mujuni A., University of DSM Computing Centre (UCC) 20
2.4.5 Access to information
According to Sweeny (1987), information tends to be local, and most regular contacts are normally
within 30 minutes of a person's travelling time. The implication of this is that the amount and quality
of information is mainly dependent on the wealth of stock of knowledge in the locality. Knowledge
comes in the form of conferences, exhibitions, contact with potential customers, suppliers, small
business owner managers and informal reading.
Localities rich in information are typically administrative centers, and regions with dynamic or
progressive industries. Regions dominated by mature technology, externally owned firms, declining
level of best practice as well as those relying predominantly on extractive industries tend to have poor
access to information and hence lower rates of small firm formation.
2.4.6: Demand
Most small businesses serve restricted geographical markets. As a result, there will be more
opportunities in more affluent or populous areas than others. A few firms may be sufficient to exploit
all opportunities in a rural locality. Therefore, the rate of small firm formation in rural areas will be
lower compared to urban ones.
2.4.7 Ownership structure
Areas dominated with subsidiaries of large companies are likely to have fewer opportunities for new,
small businesses than ones with single unit ones. This is because while small single unit firms will
source their products locally, subsidiaries have less freedom in choosing the source of inputs.
By Mujuni A., University of DSM Computing Centre (UCC) 21
CHAPTER THREE: STARTING A NEW BUSINESS VENTURE
3.1: Important steps to Starting a Business
i. Make A Business Plan
Too many entrepreneurs fail to plan when they start a new business. A detailed written business plan
is an essential first step. Research the market and its size. Determine whether there is a demand for
the product or service. Consider the advertising and marketing budget required to acquire customers.
Accurately estimate the costs and pricing of the product or service. Outline the steps necessary to get
from the idea to the marketplace.
ii. Choose a Business Location
iii. Consult With Experts
Many entrepreneurs don't talk to consultants or other business owners because they fear having their
ideas stolen. This often keeps them from seeking and getting the advice they need to start a new
business successfully. Seasoned business owners in similar businesses and experienced consultants
can help you avoid common pitfalls and perhaps raise questions you haven't considered. They can
also become part of your network to help you along the way once you start your new business. The
local chamber of commerce, trade organizations, and the SBA's small business development center in
your area are good sources for finding the experts you need.
iv. Find Reliable Advisors
Industry experts, a good small business CPA and and a business attorney should be important
members of your team. You should also develop a relationship with your banker. These professionals
can help you be aware of market changes, financial and tax issues, business entity and liability issues.
They may also be able to help you find and vet potential investors, should you need them.
v. Finance your Business: Find government backed loans, venture capital and research grants to
help you get started.
By Mujuni A., University of DSM Computing Centre (UCC) 22
vi. Establish a Relationship With Your Core Customers
Sometimes entrepreneurs focus too much on the service, product or process of starting a new
business and not enough on the customer. Talk to the people your new business is aimed at. Be sure
you understand their needs and expectations. Analyze how your product or service will satisfy those
requirements better than what is already available to them. What you learn from potential buyers can
help you tweak your ideas for maximum satisfaction. Once you've successfully addressed the needs
of your core customers, you can look for ways to adapt and modify your new business for a wider
market.
vii. Be Ready To React Quickly To Market Changes
Every market has fluctuations. The successful new business owner recognizes this fact from the
beginning. Build in contingent plans to address these fluctuations. New technologies, processes and
product improvements come along every day. Keep current with industry news that might affect your
new business. Most entrepreneurs will tell you that the business they actually run is very different
than what they thought it would be when they began. A business that can't quickly adapt to these
inevitable changes is likely to be one of the 66% that fail.
viii. Determine the Legal Structure of Your Business; Decide which form of ownership is best for
you: sole proprietorship, partnership, Limited Liability Company (LLC), corporation, S
corporation, nonprofit or cooperative.
ix. Register a Business Name ("Doing Business As"): Register your business name with your
state government.
x. Get a Tax Identification Number
Learn which tax identification number you'll need to obtain from the IRS and your state revenue
agency.
3.2: Environmental Assessment:
- The environment is the most comprehensive component in the venture creation process. It
includes all the factors that affect the decision to start a business, for example, government
regulation, competitiveness, and life cycle stage.
By Mujuni A., University of DSM Computing Centre (UCC) 23
- Within specific industries and in specific geographic regions, environmental variables and the
degree of their impact will differ. The new venture process begins with an idea for a product,
service, or business.
- In order to succeed in business undertaking, an entrepreneur should scan the environmental
concerned before entering the venture.
- An environmental assessment is synonymously used along with the term “environmental
scanning”. This is very vital for any business undertaking venture. When entrepreneur performs
an environmental assessment she/he will use the tool termed as SWOT Analysis.
3.1.1: External Environment Analysis (Opportunities and Threats)
- Once the business undertaking has identified its customer tend to be, important values it holds,
type of products/services it produces renders, and entrepreneur, it should know the part of the
environment it needs to monitor to achieve her goals. Business entity has to monitor the external
macro environmental forces. When these macro environmental forces are supportive to the
business ideas, they are categorized as „opportunities‟. But when they are potentially hindering
the implementation of the business ideas, they categorized as „threats‟. Examples of external
environment factors/forces are:
OPPORTUNITIES THREAT S
A: Political forces i. Presence of stable political stability Presence of unstable political stability
ii. Presence of favorable employment
legislation
Absence of favorable employment
legislation
iii. Presence of good government
orientation and stability
Presence of poor government
orientation and instability
iii. Presence of good foreign trade
policies
Presence of poor foreign trade policies
iv. Presence of good tax laws and
policies
Presence of poor tax laws and policies
iii. Presence of fair competition laws
and policies
Absence of fair competition laws and
policies
By Mujuni A., University of DSM Computing Centre (UCC) 24
OPPORTUNITIES THREAT S
B: Economic
forces
i. It is relatively easy to access fund
and capital for starting business
Unavailability of capital to finance
business startups
ii. Raw materials and commodities are
readily available and cheap
Raw materials and commodities are
hardly available, at very high prices
iii. Energy costs are relatively low
and supply is reliable
Energy costs are very high and supply
erratic and unreliable
iv. Stable Exchange rates
Fluctuating Exchange rates
Low unemployment rate, and high
workforce skill levels.
High unemployment rate, and low
workforce skill levels.
C:
Natural/environme
ntal forces
ii. Rare occurrences of natural
disasters like floods, earthquakes, and
volcanoes
high occurrences of natural disasters like
floods, earthquakes, and volcanoes
D: Demographic
forces
i. Huge total population is a potential
market
Sparse total population
ii. Favorable population distribution unfavorable population distribution
iii. Favorable population density unfavorable population density
iv. Favorable age group distribution unfavorable age group distribution
v. Favorable birth and death rate unfavorable birth and death rate
vi Favorable life expectancy at birth unfavorable life expectancy at birth
3.1:2 Internal factors analysis (Strength and weakness)
When the following factors are present in the business enterprise, we call them strengths. But when
they are absent/ lacking, we call them weaknesses. Some of the common internal strengths and or
weakness are
Sn Strengths Weakness
1 Availability of distinctive competences Absence of distinctive competences
2 Adequate internal financial resources Inadequate internal financial resources
3 Availability good competitive skills Absence of competitive skills
4. Availability of proprietary technology Lack of proprietary technology
5 Presence clear strategic direction No clear strategic direction
6 Presence of managerial depth and
talents
Lack of managerial depth and talents
7 Resilience to competitive pressure Vulnerable to competitive pressure
8 Access to economies of scale Lack of access to economies of scale
9 Presence of competitive advantage Presence of competitive disadvantage
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3.3: Sources of Business Ideas
Business ideas are all around you. Some business ideas come from a careful analysis of market trends
and consumer needs; others come from chance/coincidence. If you are interested in starting a
business, but don't know what product or service you might sell, exploring these ways of getting
business ideas flowing will help you choose.
i. Examine your own skills set for business ideas.
Do you have a talent or proven track record that could become the basis of a profitable business?
The other day I spoke to a man who had spent years managing cleaning services at a hospital. Today
he runs his own successful domestic and business cleaning service. An ex-logger I know is now
making his living as an artist; he creates "chainsaw sculptures" out of wood. And the examples of
professionals who have started their own agencies or consulting service businesses are legion.
To find a viable business idea, ask yourself, "What have I done? What can I do? Will people be
willing to pay for my products or services?"
ii. Keep up with current events and be ready to take advantage of business opportunities.
If you read or watch the news regularly with the conscious intent of finding business ideas, you'll be
amazed at how many business opportunities your brain generates. Keeping up with current events
will help you identify market trends, new fads, industry news - and sometimes just new ideas that
have business possibilities.
iii. Invent a new product or service.
Think back 30 years ago. Was there a huge demand for anti-virus software, Internet Service
Providers, or desktop computers? No! The key to coming up with business ideas for a new product or
service is to identify a market need that's not being met..
Look around and ask yourself, "How could this situation be improved?" Ask people about additional
services that they'd like to see. Focus on a particular target market and brainstorm business ideas for
services that that group would be interested in.
By Mujuni A., University of DSM Computing Centre (UCC) 26
iv. Add value to an existing product.
The difference between raw wood and finished lumber is a good example of putting a product
through an additional process which increases its value, but additional processes are not the only way
value can be added. You might also add services, or combine the product with other products. For
instance, a local farm which sells produce also offers a vegetable delivery service; for a fee,
consumers can have a box of fresh vegetables delivered to their door each week.
What business ideas can you develop along these lines? Focus on what products you might buy and
what you might do to them or with them to create a profitable business.
v. Investigate other markets.
Some business ideas aren't suited to local consumption - but appeal greatly to a foreign market. My
own little town is surrounded by acres of wild blueberries. For years the bushes produced berries that
mainly fed bears and birds; B.C. has a thriving blueberry industry that doesn't leave room for a wild
blueberry market. But one entrepreneur realized that there is a high demand for products such as
these in Japan - and those same wild blueberries are now being harvested and shipped. Finding out
about other cultures and investigating other market opportunities is an excellent way to find business
ideas.
vi. Buy a Franchise or an Existing Business
Many times, the fastest and easiest way to start a business is to simply buy an existing business or
franchise. Franchises are attractive because they‟ve already proven successful and you are simply
buying into their system. Existing businesses are attractive because you can pick and choose the right
business and most of the legwork has already been done.
3.4 Business Incubation
"Business incubation is a unique and highly flexible combination of business development processes,
infrastructure and people designed to nurture new and small businesses by helping them to survive
and grow through the difficult and vulnerable early stages of development."
Business incubation provide SMEs and start-ups with the nurturing environment needed to develop
By Mujuni A., University of DSM Computing Centre (UCC) 27
and grow their businesses, offering everything from virtual support, rent-a-desk through to state of
the art laboratories and everything in between. They provide direct access to hands on intensive
business support, access to finance and experts and to other entrepreneurs and suppliers to really
make businesses and entrepreneurs to grow.
Business incubation provides a nurturing, instructive and supportive environment for entrepreneurs
during the critical stages of starting up a new business. The goal of incubators is to increase the
chance that a start-up will succeed, and shorten the time and reduce the cost of establishing and
growing its business. If successful, business incubators can help to nurture the companies that will
form the true creators of a region‟s or nation‟s future wealth and employment.
Incubators serve as a launching pad for young and small businesses. Start-ups, which are innately
dynamic entities, need access to support, and incubators are a means of providing this.\
3.5 Importance of Business Incubators
Business incubators support the development of start-ups by providing them with advisory and
administrative support services. According to the National Business Incubation Association, an
incubator's primary objective is to produce successful and financially viable firms that can survive on
their own. Early incubators focused on technology companies or on a combination of industrial and
service companies, but newer incubators work with companies from diverse industries.
i. Finance: Incubators help start-ups save on operating costs. The companies that are part of an
incubator can share the same facilities and share on overhead expenses, such as
utilities, office equipment rentals, and receptionist services. Start-ups can also take
advantage of lower lease rates if the incubator is located in low-rent industrial parks.
Incubators may also help start-ups with their financing needs by referring them to
angel investors and venture capitalists, and helping them with presentations. Start-ups
may have better luck securing financing if they have the stamp of approval of
incubator programs.
ii. Management: In addition to financial help, start-ups also need guidance on how to compete
successfully with established industry players. Incubators can tap into their networks
of experienced entrepreneurs and retired executives, who can provide management
guidance and operational assistance
iii. Synergy: The close working relationships between an incubator's start-ups create synergies.
Even after the start-ups leave an incubator, the connections and networks established
through these relationships can endure for a long time. Start-up entrepreneurs can
provide encouragement to one another, and employees may share ideas on new
By Mujuni A., University of DSM Computing Centre (UCC) 28
approaches to old problems. Start-ups may plan joint marketing campaigns and
cooperate on product development initiatives..
iv. Economy: By helping new businesses prosper, incubators assist in creating long-lasting jobs
for their host communities. In a March 2003 Association for Small Business and
Entrepreneurship conference paper hosted by the University of Central Arkansas
Small Business Advancement National Center, Northwestern Oklahoma State
University professor Patti L. Wilber and her colleague cited research to write that
start-ups in incubation programs have greater viability and show superior financial
performance over the long term. They create long-lasting jobs for new graduates,
experienced mid-career personnel, and veteran executives. This benefits communities
and drives economic growth.
stressful process and go a long way towards ensuring the busines you start lasts and thrives.
3.5 Common reasons for business failures
When you're starting a new business, the last thing you want to focus on is failure. But if you address
the common reasons for failure up front, you'll be much less likely to fall victim to them yourself.
Here are the top 7 reasons why businesses fail and tips for avoiding them.
i. You start your business for the wrong reasons.
Would the sole reason you would be starting your own business be that you would want to make a lot
of money? Do you think that if you had your own business that you'd have more time with your
family? Or maybe that you wouldn't have to be answerable to anyone else? If so, you'd better think
again. On the other hand, if you start your business for these reasons, you'll have a better chance at
entrepreneurial success:
You have a passion and love for what you'll be doing, and strongly believe -- based on
educated study and investigation -- that your product or service would fulfill a real need in the
marketplace.
You are physically fit and possess the needed mental stamina to withstand potential
challenges. Often overlooked, less-than-robust health has been responsible for more than a
few bankruptcies.
You have drive, determination, patience and a positive attitude. When others throw in the
towel, you are more determined than ever.
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Failures don't defeat you. You learn from your mistakes, and use these lessons to succeed the
next time around. Head, SBA economist, noted that studies of successful business owners
showed they attributed much of their success to "building on earlier failures;" on using
failures as a "learning process."
You thrive on independence, and are skilled at taking charge when a creative or intelligent
solution is needed. This is especially important when under strict time constraints.
You like -- if not love -- your fellow man, and show this in your honesty, integrity, and
interactions with others. You get along with and can deal with all different types of
individuals.
ii. Poor Management
Many a report on business failures cites poor management as the number one reason for failure. New
business owners frequently lack relevant business and management expertise in areas such as finance,
purchasing, selling, production, and hiring and managing employees. Unless they recognize what
they don't do well, and seek help, business owners may soon face disaster. They must also be
educated and alert to fraud, and put into place measures to avoid it.
Neglect of a business can also be its downfall. Care must be taken to regularly study, organize, plan
and control all activities of its operations. This includes the continuing study of market research and
customer data, an area which may be more prone to disregard once a business has been established.
A successful manager is also a good leader who creates a work climate that encourages productivity.
He or she has a skill at hiring competent people, training them and is able to delegate. A good leader
is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make
transitions, and envision new possibilities for the future.
iii. Insufficient Capital
A common fatal mistake for many failed businesses is having insufficient operating funds. Business
owners underestimate how much money is needed and they are forced to close before they even have
had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues
from sales.
It is imperative to ascertain how much money your business will require; not only the costs of
starting, but the costs of staying in business. It is important to take into consideration that many
By Mujuni A., University of DSM Computing Centre (UCC) 30
businesses take a year or two to get going. This means you will need enough funds to cover all costs
until sales can eventually pay for these costs. This business startup calculator will help you predict
how much money you'll need to launch your business.
iv. Location, Location, Location
Your college professor was right -- location is critical to the success of your business. Whereas a
good location may enable a struggling business to ultimately survive and thrive, a bad location could
spell disaster to even the best-managed enterprise.
Some factors to consider:
Where your customers are
Traffic, accessibility, parking and lighting
Location of competitors
Condition and safety of building
Local incentive programs for business start-ups in specific targeted areas
The history, community flavor and receptiveness to a new business at a prospective site
v. Lack of Planning
Anyone who has ever been in charge of a successful major event knows that were it not for their
careful, methodical, strategic planning -- and hard work -- success would not have followed. The
same could be said of most business successes.
It is critical for all businesses to have a business plan. Many small businesses fail because of
fundamental shortcomings in their business planning. It must be realistic and based on accurate,
current information and educated projections for the future.
Components may include:
Description of the business, vision, goals, and keys to success
Work force needs
Potential problems and solutions
Financial: capital equipment and supply list, balance sheet, income statement and cash flow
analysis, sales and expense forecast
By Mujuni A., University of DSM Computing Centre (UCC) 31
Analysis of competition
Marketing, advertising and promotional activities
Budgeting and managing company growth
vi. Overexpansion
A leading cause of business failure, overexpansion often happens when business owners confuse
success with how fast they can expand their business. A focus on slow and steady growth is optimum.
Many a bankruptcy has been caused by rapidly expanding companies.
At the same time, you do not want to repress growth. Once you have an established solid customer
base and a good cash flow, let your success help you set the right measured pace. Some indications
that an expansion may be warranted include the inability to fill customer needs in a timely basis, and
employees having difficulty keeping up with production demands.
If expansion is warranted after careful review, research and analysis, identify what and who you need
to add in order for your business to grow. Then with the right systems and people in place, you can
focus on the growth of your business, not on doing everything in it yourself.
By Mujuni A., University of DSM Computing Centre (UCC) 32
CHAPTER FOUR: FORMS OF BUSINESS OWNERSHIPS
4.1 The Sole Proprietorship
A sole proprietorship is a business that is owned and operated by one person.
The enterprises has no existence apart from its owners
The individuals have a right to all of the profits and bear all of the liability for debts and
obligations of the business.
The individuals also has unlimited liability i.e. his/her business and personal assets
stand behind the operation. If the company cannot meets its financial obligations the
owner can be forced to sell the family house, and whatever assets there are in order
to satisfy the creditors.
To establish a sole proprietorship, a person needs merely to obtain whatever local and state licences
are necessary to begin operations .If the proprietor should choose a fictitious or assumed name
,he/she must also file a “ certificate of assumed business name “ with the country . Because of its
ease of formation, the sole proprietorship is the most widely used legal form of organization.
4.1.1 Advantage of Sole Proprietorship
i. Easy to form - There is less formality and fever restrictions associated with established a
sole proprietorship than with any other legal form .The proprietor needs little or no
governmental approval ,and it usually is less expensive than a partnership or corporation.
ii. Sole ownership of profits - The proprietor is not required to share profits with anyone.
iii. Decision–making and control vested in one owner .the are no co-owners or partners who
must consulted in the running of the operations
iv. Flexibility - Management is able to respond quickly to business needs in the form of day to
day management decisions as governed by various laws and goods sense.
v. Related freedom from government control - Except for obtaining necessary licences, there is
very little governmental interference in the operation.
vi. Freedom corporate business taxes - Proprietors are fixed as individual taxpayers and not as
businesses.
4.1.2 Disadvantages of Sole Proprietorship
i. Limited capital - In a sole proprietorship business, the owner arranges for the required
capital for the business. It is difficult for a single individual to raise a huge amount of
capital. The owner‟s own funds as well as borrowed funds sometimes become insufficient
By Mujuni A., University of DSM Computing Centre (UCC) 33
to meet the requirement of the business‟s growth and expansion. Venture capitalists and
banks generally do not lend money to sole proprietorships.
ii. Unlimited liability - In case the sole proprietor fails to pay the expenses arising out of
business activities, his personal properties may have to be used to pay for those. This
generally discourages the sole proprietor from taking risks. He thinks cautiously while
deciding to start or expand the business activities.
iii. Lack of continuity - The existence of a sole proprietorship business is dependent on the life
of the proprietor. Illness, death etc. of the owner brings an end to the business. The
continuity of business operation is therefore uncertain.
iv. Limited size - There is a limit beyond which it becomes difficult for a sole proprietor to
expand the business activities. It is not possible for a single person to supervise and
manage the affairs of the business if it grows beyond a certain limit.
v. Lack of managerial expertise - A sole proprietor may not be an expert in every aspect of
management. He/she may be an expert in administration, planning, etc., but may be weak
in marketing. Again, because of limited financial resources it is also not possible to employ
a professional manager. Thus, the business lacks benefits of professional management.
4.2 The Partnership
A partnership is an unincorporated business that is carried on by two or more people who intend
to share the business profits. Partnerships have at least five important features
A partnership can be created by an express agreement or it can be created if the
people are simply acting in a way that seems like a partnership.
The partners can be held responsible for the actions and business debts of the
other partners.
All the assets of the business are personally owned by the partners.
There are two main types of partnerships: general partnerships, where all the
partners share the profits and losses of the business; and limited partnerships,
where the limited partners are not involved in the daily operations and are only
responsible for losses up to the amount they contributed to the business.
Partners are not considered employees of the business. Because of this, partners
are not eligible for employment insurance if the business fails
Each partner contributes
Property
Money
Labour, and or
By Mujuni A., University of DSM Computing Centre (UCC) 34
Skills
4.2.1 Advantages of Partnership
i. Partnership allows two or more people to work together and bring different skills and
resources to the business.
ii. A partnership is fairly easy to establish. The actual registration of a partnership is not
expensive or complicated. However, it is a good idea to decide how the partnership will
be run and put it into a partnership agreement
iii. If the partnership suffers a loss but the partners have other employment income, the loss
can be used to reduce their taxable income, thereby lowering the income tax payable by
the partner.
4.2.2 Disadvantages of Partnership
i. The partnership is not considered to be separate from its owners; the partners are
personally responsible for liabilities of the partnership. If the business fails, the partners
will be personally responsible to pay all of the debts and obligations of the partnership
ii. Each partner is an agent for the business and for the other partners; each partner is
personally responsible for the actions of the other partners. If one of the partners makes a
bad business decision, or acts negligently which results in the partnership owing a debt,
all of the other partners are personally responsible to pay it back.
iii. A partnership is based on the individual partners, and it is not a separate legal entity, if
one of the partners dies, the partnership ends. This means that the remaining partners
have to re-establish the partnership
iv. Partnership is not a separate legal entity, it is difficult to buy or sell a partnership interest.
Buying or selling a partnership interest will involve rewriting the partnership agreement
and determining exactly how the partnership will change
v. Although the resolution of disagreements amongst partners is generally covered under a
partnership agreement or case law, it usually is very difficult. There is no Act that exists
which sets out rules for settling partnership disputes. If the disagreements are not
resolved by the partners themselves, they will usually have to turn to outside help which
can be time consuming and costly
4.2.3 Partnership agreements
A partnership agreement establishes rules about how the business is going to be run.
It usually includes such things as who the partners are, what bank the business will use, how the
profits or losses of the business are to be divided among the partners, what the capital
contribution of each partner will be, what the role and responsibilities of each partner will be, and
how the partnership can be dissolved.
By Mujuni A., University of DSM Computing Centre (UCC) 35
Establishing these business details at the beginning of a business relationship can help avoid
disagreements in the future.
A standard partnership agreement contains the following information:
i. Name and purpose of the partnership
ii. Partners characteristics ,as they can be active ,or not active
iii. Division of income
iv. Division of expenditure
v. Employee management
vi. Business Handling Methods
vii. Terms and Rights of continuing partnership
viii. Regulations and Methods and accounting
ix. Duration of agreement
x. Required and prohibited acts
4.2.4 Types of partners
a. General Partner - A person who joins with at least one other to own and operate a
business for profit -- and who (unlike a corporation's owners), is personally liable for
all the business's debts and obligations. A general partner's actions can legally bind the
entire business
b. Active Partner - is the one who is active in business
c. Secret Partner - someone who is active in the business but not known or disclosed
d. Dormant Partner - A person who is inactive in the business and is not or disclosed as
partner
e. Silent Partner - A partner who is inactive in the business but may be known to be a
partner
f. Nominal Partner - A person who discloses himself or herself as partner, or permits
others to make such representation by the use of his/her name or by other means.
g. Sub Partner - A person who is not member of the partnership but who contacts with
one of the partner to participate in the interest of that in the firms operation.
h. Limited Partner - A partner who risks his/her agreed investment in the business. As
the long as this does not participate in the management and control of the enterprise
By Mujuni A., University of DSM Computing Centre (UCC) 36
4.3. Corporations
Corporations are one of the three main forms of business.
The other two main forms of business are sole proprietorships and partnerships.
The main feature that makes corporations different from sole proprietorships and partnerships is
that corporations are legal entities separate from their owners.
As a result, the corporation is responsible for its own debts, assets, and lawsuits.
The legal responsibility of the shareholders, directors, officers and employees of the corporation
is limited, which means that, with few exceptions, these people cannot be held personally
responsible for the debts and obligations of the corporation.
This is the reason that one of the words Limited, Incorporated, Corporation, or one of their
abbreviations must be included in the full legal name of the corporation. These words give notice
to the public that the business is a corporation and therefore its owners, directors, officers and
employees have limited liability.
Corporations are owned by shareholders, who own a percentage of the entire corporation through
their shares. Shares can generally be bought and sold fairly easily, unless restrictions have been
placed on the transfer of shares
4.3.1 Advantages of Corporations
i. The advantage of limited personal liability for the people who own and run the
corporation. This means that the shareholders of the corporation cannot be held
responsible for the debts and obligations of the corporation unless they provided a
personal guarantee. By comparison, in a sole proprietorship or a partnership, the owner
or partner is personally liable for all of the obligations of the business. This means that
the owner's personal assets, including their home, car, and personal savings can be taken
to pay for the debts of the business.
ii. A corporation has an unlimited life. Because the corporation is a separate legal entity, the
corporation will continue to exist even if the shareholders die or leave the business, or if
the ownership of the business changes.
iii. The corporate form of business makes it easier for a business to grow and expand.
Through the issuance of shares, corporations may be able to access the money they will
need for expansion. This makes the corporate form of business more suitable for large
business ventures than sole proprietorships or partnerships.
iv. There may be tax advantages to running your business as a corporation. Examples of
corporate tax advantages are tax deferral strategies and income splitting. Corporate
taxation is a complicated matter and it is important that you talk to an accountant or a tax
lawyer to determine which tax advantages apply to your situation and how best to
structure your business.
By Mujuni A., University of DSM Computing Centre (UCC) 37
v. A corporation may appear more stable and sophisticated to the public. This may help you
acquire new business
4.3.2 Disadvantages of Corporations
i. First, you will have to file two tax returns, one for the business and one for your personal
income. Unlike sole proprietorships and partnerships, any losses from the corporation
cannot be deducted from the personal income of the owner.
ii. Second, the registration and set up fees for a corporation are higher than the set up fees
for a sole proprietorship or a partnership. Incorporating a business is also a more
complicated process than starting a sole proprietorship or partnership. You should
contact a lawyer to help you incorporate your business.
iii. Third, the Government requires corporations to maintain proper corporate records, called
a minute book. A minute book contains the corporate bylaws and minutes from annual
meetings.
To determine whether you should incorporate your business, you should consult a lawyer who
can help you evaluate your specific situation.
4.4 Legal Matters pertaining business ownership
In any new venture there will be some legal terms which will be guiding the whole process of the
venture operation. Concentration will be made on copyrights, trademarks law and patent
documents
Why legal issues?
Gives fair competition and conducive atmosphere for those parties involved in business
competitive environment.
Provides a room for compensation if the other party infringes their legal rights.
Legal issues are important to settle any litigation involved in conduct of the business
and thus provides a confidence for their entrepreneur to involve themselves into the
business with no doubt at all.
Protect the rights ( Legal rights ) of the owner of an intellectual property against
infringement of the same on the other party
4.4.1 Intellectual Property Rights
Include Patents, copyrights and trademarks, as well as trade secrets and related rights. These rights
are usually collectively called "intellectual property" or IP.
By Mujuni A., University of DSM Computing Centre (UCC) 38
4.4.1.1 Patents
A patent is a legal right to keep others from making, using or selling an invention. This legal right is
granted by a government for a limited period of time.
Types of Patents
i. Patents of Invention
These are probably the most important type of patent.
Such patents are commonly referred to as simply "patents," but they are referred to as Patents of
Invention in this article to differentiate them from the other types of patent discussed below.
Patents of Invention protect new technology and how new technology works.
For example, if you make an improvement to an internal combustion engine, a computer, or a can
opener, you would most likely seek a Patent of Invention.
Patents of Invention can protect such diverse things as articles of manufacture, new chemical
compounds and methods of making things.
ii. Design Patents
These protect how things look.
For example, if you design a new case for a handheld computer and want to protect that new
design, then you would seek a Design Patent.
Design Patents protect the appearance of articles, while Patents of Invention tend to protect how
the articles function or how they are made.
iii. Utility Model Patents
These are similar to Patents of Invention and in some countries they are called Petty Patents.
Utility Model Patents protect functional aspects of products.
Utility Model Patents have historically been unavailable for the protection of the processes of
making product.
They differ from Patents of Invention in a number of ways and there is no general rule for
distinguishing Utility Model Patents from Patents of Invention other than by the fact that the
period of patent monopoly for a Patent of Invention is longer than for a Utility Model Patent.
In some countries, Utility Model Patents have a lower standard of inventiveness associated with
them. In yet other countries, Utility Model Patents have more lenient novelty rules.
The long and the short of it is that Utility Model Patents tend to protect the same sort of
technology as Patents of Invention, but generally offer a shorter period of protection for one
reason or another.
By Mujuni A., University of DSM Computing Centre (UCC) 39
In some countries you can get both a Utility Model and a regular patent on the same invention,
and the Utility Model can then be important since it often goes to grant faster than a Patent of
Invention.
4.4.1.2 Copyright
- Copyright is a form of intellectual property that gives the author of an original work exclusive right
for a certain time period in relation to that work, including its publication, distribution and adaptation,
after which time the work is said to enter the public domain.
- Copyright applies to any expressible form of an idea or information that is substantive and discrete
and fixed in a medium. Some jurisdictions also recognize "moral rights" of the creator of a work,
such as the right to be credited for the work. Copyright is described under the umbrella term
intellectual property along with patents and trademarks.
- Copyright has been internationally standardized, lasting between fifty to a hundred years from the
author's death, or a shorter period for anonymous or corporate authorship. Some jurisdictions have
required formalities to establish copyright, but most recognize copyright in any completed work,
without formal registration. Generally, copyright is enforced as a civil matter, though some
jurisdictions do apply criminal sanctions.
4.4.1.3 Trade Marks
- A trademark or trade mark[1] is a distinctive sign or indicator used by an individual, business
organization, or other legal entity to identify that the products or services to consumers with which
the trademark appears originate from a unique source, and to distinguish its products or services from
those of other entities. A trademark is designated by the following symbols:
i. ™ (for an unregistered trademark, that is, a mark used to promote or brand goods);
ii. SM(for an unregistered service mark, that is, a mark used to promote or brand services)
iii. ® (for a registered trademark).
A trademark is a type of intellectual property, and typically a name, word, phrase, logo, symbol,
design, image, or a combination of these elements. There is also a range of non-conventional
trademarks comprising marks which do not fall into these standard categories.
The owner of a registered trademark may commence legal proceedings for trademark
infringement to prevent unauthorized use of that trademark. However, registration is not required.
The owner of a common law trademark may also file suit, but an unregistered mark may be
protectable only within the geographical area within which it has been used or in geographical
areas into which it may be reasonably expected to expand.
The term trademark is also used informally to refer to any distinguishing attribute by which an
individual is readily identified, such as the well known characteristics of celebrities. When a
trademark is used in relation to services rather than products, it may sometimes be called a service
mark, particularly in the United States.
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