What is a basic business idea? An entrepreneur should keep in view of future long term goals. The long term thinking is called basic business idea. An entrepreneur perceives an opportunity for marketing a product or service. Then he establishes a business unit on the basis of his perception. Finally, he manages his enterprise expanding, growing or diversifying over a period of time. The basic business idea, which facilitates a choice of the products at different stages of the project, allows for diversification and expansion. The entrepreneur should monitor the dynamic business environment and select basic business idea that; 1. generate quick returns 2. Permits changes in the products. The general business atmosphere guides the choice of basic business idea. A basic business idea results from the identification of business opportunities in the market. To be successful in business, the entrepreneur should carry out SWOT analysis, be sensitive to the market changes, monitor the demand and supply, study consumer behaviour and choose the basic business idea. Steps in setting up a small scale unit In order to establish an entrepreneurial system, an entrepreneur needs to take the following steps: 1. Search for business ideas 2. Select the best idea 3. Test for feasibility 4. Assemble the necessary input (plan) resources 5. Establish the enterprise. 1. Search for business idea The task of promotion begins with the search for a suitable business idea or opportunity. The idea may generate from various sources e.g. success story of a friend or relative, demand for certain projects, chances of producing a substitute for an imported article, visits to trade fairs and exhibitions, study of project profiles and industrial potential surveys, meeting with government agencies etc. The idea may relate to the
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starting of a new business or to take over of an existing enterprise. The idea should be sound and workable. It should yield a reasonable return on investment. The promoter has to be imaginative and foresighted to discover a business idea. 2. Idea screening & selection Once business ideas are discovered, screening and testing of these ideas is done, some of the common criteria or screening business ideas are I Marketability or demand . The greatest mistake people make when starting a new business is that they try to sell products they like. For example, people who like reading what to start book stores – This may be human nature, but it is a backward approach to starting a business. The first law of marketing is you need to offer what people want to buy not what you want to sell ! customers may not buy what you like rather they may buy what they want, so, your business ideas should be evaluated from the point of customers, interest or its marketability They first step in starting a new venture boning with listening to the marketplace. The following points can be used to generate a list of areas where people’s needs are not being met enough or at all A. Is there a market for the idea? B. Are there any customer’s or people with money are able to buy the product ? C. Can you provide what they need or want? Market analysis is a key to the success of new businesses or projects. Market analysis of the product is all about estimation of demand of the product. Thus, ideas generated from different sources should be evaluated and screened based on marketability of the ideas. The marketability screening basically when you think about a business idea, you are thinking of the possibility of marketing the idea or converting it in to real business, in doing so, you should anticipate the future demand of the product or the service. ll. Profit ability of the idea if implemented
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Actually when we think the marketability of the idea, we are calculating the profitability of the idea if implemented in a certain time span .Potential benefits associated with each idea should be considered while evaluating the ideas generated before lll. Availability of raw material and resources The raw material needed to successfully meet the opportunity must be assessed. This process starts with an appraisal of the Er’s present resources in addition , to assess the availability of raw materials , it needs to Possible sources of the raw materials at reasonable cost and effort shall be considered. The entrepreneur should also take in to account whether such resources can be imported or locally available . If the raw material is to be imported, other factors like currency exchange rate and transportation should further be considered. Availability of resources in a timely manner is also a factor that should be considered. Moreover the availability of national labor supply also affects the ideas IV. Personal goals and competence of the entrepreneur In evaluating or screening the idea generated you have to give concise answers to the following questions Do you really want to enter in to a business? Do you have what it takes? Are you motivated enough ? Do you have the experience, know – how , contacts or other desirable attributes required? V. Ease of implementation The generated ideas can be evaluated based on whether the idea is converted in to real business easily. The entrepreneur should consider the points Procedures for registration , whether the business can be started with in a short registration period or reasonable preparatory period or not , Need of provided different documents to different bodies
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Legal requirements , and Need of employing qualified persons for the purpose of acquiring the recognition or official approval VI. Financial requirements Actually, the profitability of each idea should be evaluated based on the Finance required to implement and manage the business successfully. Hence, ideas, which are expected to generate better profit, may not be selected best, rather financial requirements and the financial capacity of the entrepreneur should be considered. For instance ideas that require sophisticated technology for implementation may be invalid for the entrepreneur who has limited finance and the mechanism of finding out external sources is questionable. Vii . Risk exposure criteria Whether the product can easily copied or imitated if found very profitable by others. Whether the business may suffer from unforeseen factors such as unavailability of raw materials Viii. Government priority and support Business idea can also be evaluated from the point of view having government support. In the process of checking the business idea from the government priority side you have consider the following points Is the envisaged business under the government’s list of priorities of investment and employment generation? Is the possibility of getting government support such as tax exception or reduction, loan on reduced rate of interest or other support such as market access, technical or advisory services? . 3. Test idea . The following considerations are significant in the evaluation and testing of business ideas. a) Technical feasibility It refers to the possibility of producing the product. Technical feasibility of an idea is judged in terms of availability of necessary technology, machinery and equipment,
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labour skills and raw materials. The advice and assistance of technical experts may be necessary to judge the technical feasibility of various business ideas. b) Commercial viability A cost-benefit analysis is required to ascertain the profitability of the ideas. An elaborate study of market conditions and prevailing situation is made to assess the viability and prospects of the proposed project. This is known as feasibility study of the project. A number of calculations have to made about the likely demand, expected sales volume, selling price, cost of production, break even point etc. The services of market analysts and financial experts may be necessary for this purpose. In order to judge the workability and profitability of the proposed business, feasibility analysis has to be conducted. After preliminary evaluation of the idea, the promising idea is subjected to a thorough analysis. Full investigation is carried out in the technical feasibility and economic viability of the proposed project. Financial and managerial feasibility of the idea are tested. After the evaluation of a business idea is completed, the findings are presented in the form of a report known as ‘feasibility report’ or project report. This report helps in the final selection of the project. It is also useful for procuring licenses, finance etc from governmental agencies. c. Market feasibility This section covers the highlights of the following points A. market description – aberif description of the market to describe the buyers and users of the product and areas of dispersion. B. Demand analysis – refers to Consumption in the past five to ten years Major users of the product Projected consumption for the next five years C. supply analysis – supply for the past five years broken down as to source down as to source whether imported or locally produced. For imports, specify firm where goods are imported , price and brand ,
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For locally produced goods, indicate firm producing them, their production capabilities, brand, and market share, factors affecting trends in the past and future supply should be analyzed and forecasted. D. Competitive position To find out if our idea for a product or service is different enough to make people start buying it, we must first get some information about our competitors Selling price - this includes a price study indicating the past import and domestic prices, the high and low prices with in the year and the effect of seasonality Competitive ness of the quality of the product , Methods of transportation and existing rate General trade practices, this is a description of the existing marketing practices of competitors. E. Proposed marketing program it includes:- 1. description of proposed product/ service characteristics for tangible products – example , size, color, etc quality of service ( for services o packaging ( when applicable ) 2. description of the proposed market target market target, market targets may be classified on the bases of geographical location age sex income level ( class A, B,C ) educational attainment Religious affiliation Others 3. Proposed prices – by considering factors affecting price i.e. estimated cost of production, paying ability of customer’s price i.e. estimated cost of production, paying ability of customers, competitor’s price, and the like the study proposes the selling price of the products.
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4. Proposed channel of distribution – the distribution methods selected to be used. 5. proposed promotional strategy- the promotional activities to be carry out 4. Assemble the necessary input requirement s Once the promoter is convinced of the feasibility and profitability of the project, he assembles the necessary resources to launch the enterprise. He has to choose partners/collaborators, collect the required finance and acquire land and buildings, plant and machinery, furniture and fixtures, patents, employees etc. Decisions have to be made about the size, location, layout etc of the enterprise. The form of ownership organization has to be selected. The main inputs required for launching an enterprise are as follows; A) Information and intelligence In the turbulent business environment, information and intelligence have become the key input in entrepreneurial success. An entrepreneur requires relevant data on the following aspects: 1. Size and nature of demand for the product or service 2. Volume and sources of supply 3. Price cost volume relationship 4. Sources of raw materials 5. Type and suppliers of technology, machinery and equipment 6. Number and type of personnel required and their resources 7. Amount and sources of funds required for the enterprise 8. Nature and degree of competition 9. Government policies and regulations concerning the industry 10. Export import conditions for the product/service. B) Finance A business enterprise requires finance for fixed assets (fixed capital) as well as for current assets (working capital). Once the amount of funds required are established, the entrepreneur has to identify the sources from which the funds are to be raised. He has also to decide the relative proportion between the funds raised from different sources (e.g. shares, debentures, loans etc). This decision is known as the capital structure. It is a very crucial decision because it influences the real worth of the enterprise and the return
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of the owners. After deciding the capital structure, the funds are raised. Systems are created for the efficient management and control of working capital and earnings. C) Personnel People are the most valuable asset of an enterprise and an entrepreneur has to make the following decisions concerning the personnel: 1. Number of personnel required for management, technical and other positions in the enterprise. 2. Qualifications and experience required in the personnel to perform the jobs effectively 3. Sources of recruitment 4. Procedure and methods of selecting the best candidates 5. Methods of orientation and training. 6. Criteria for evaluating the performance of employees. 7. Policies for the transfer and promotion of staff. 8. Policies and methods of remunerating the personnel. 9. Facilities to be provided for the safety, health, welfare of the staff. 10. Participation of personnel in the management of the enterprise. 5. Establish the enterprise The form of ownership is to be decided upon and the company formed and registered. Following this, action is directed towards obtaining finance, necessary licenses, and necessary infrastructure is to be taken. This would involve dealing with various government bodies and other institutions like: Financial institutions- for finance Sales tax, Income tax authorities- for respective registration Licensing authority- for obtaining industrial license and licenses for raw material procurement. Municipal Authorities and Electricity- for requisite utilities. Directorate of Industries, Municipal Authorities etc- for land, factory and shed etc Once all the required authorizations and sanctions have been obtained, action is to be taken for the following; Ordering machineries from suppliers Obtaining utilities like power and water connections
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Recruitment of staff Arranging supplies of materials Arranging for distribution of the product The plant is ready for commissioning. Trial run may be made at this stage. Promotion efforts may be made to pave the way for introducing the product. When the first few batches of the product are introduced in the market, information regarding its acceptance is to be gathered. On the basis of feed back obtained, the process/product has to be modified until acceptable output is obtained. Then the unit is ready for commercial production. What project an entrepreneur should have? According to the Encyclopedia of Management, “a project is an organized unit dedicated to the attainment of a goal- the successful completion of development project on time, within budget, in conformance with predetermined programme specifications. According to Project Management Institute, USA, “a project is a system involving the co-ordination of a number of separate department entities through the organization, and which must be completed within prescribed schedules and time constraints. Project classification 1. Quantifiable and non-quantifiable projects Little and Mirrelees divide the project into two broad categories: quantifiable and non-quantifiable projects. Quantifiable projects are those in which a plausible quantitative assessment of benefits can be made. Non-quantifiable projects are those where such an assessment is not possible. Projects concerned with industrial development, power generation, and mineral development are forming part of quantifiable projects. The non-quantifiable projects category comprises health, education, and defense. 2. Sectoral projects According to Planning Commission, a project may fall in the following sectors; a) agriculture and allied sectors b) irrigation and allied sectors c) industry and mining sector d) transport and communication sector
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e) social services sector f) miscellaneous sector This sector classification of projects is quite useful for resource allocation at macro levels. 3. Techno-Economic projects Techno-economic projects classification includes; a) Factor-intensity oriented The factor intensity is used as base for classification of projects such as capital intensive or labour incentive which depends upon the large scale investment in plant and machinery or human resources. b) Causation oriented classification The causation-oriented projects are determined based on its causes namely demand based projects. The non-availability of certain goods or services and consequent demand for such goods or services or the availability of certain raw materials, skills or other inputs is the dominant reason for starting the project. c) Magnitude oriented classification The size of investment forms the basis for magnitude-oriented projects. Projects may thus be classified based on its investment such as large-scale, medium-scale, and small-scale projects. 4. Financial institutions classification The projects are classified according to their age and experience and the purpose for which the project is being taken up. They are as follows; b) new projects c) expansion projects d) modernization projects e) diversification projects The projects listed above are generally profit-oriented and the services oriented projects are classified as under; a) welfare projects b) service projects c) research and development projects
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d) educational projects Definition of small industry The term “small scale industries” has been defined in three ways. The conventional definition includes cottage and handicraft industries which employ traditional products, largely in village households. The handloom textile industry is an example. The operational definition for policy purposes includes all those undertakings having an investment in fixed assets in plant and machinery, whether held on ownership terms or by lease or hire-purchase, not exceeding Birr 1200000. Ancillary units and tiny units also come under the umbrella of small scale industries. A tiny unit is one whose investment in fixed assets in plant and machinery does not exceed Birr 100000. An ancillary undertaking is one whose investment in plant and machinery does not exceed Birr 1500000 and is engaged in the; a) manufacture of parts, component sub-assemblies, tooling’s or intermediate or b) Rendering of services of supplying 1/3 percent of their total service or production. The third definition of small scale industries relates to national income accounting. This includes all manufacturing and processing activities, including maintenance and repair services, undertaken by both household and non-household small-scale manufacturing units, which are not registered under the Factories Act. A small industry is defined as “a unit engaged in manufacturing, servicing, repairing, processing and preservation of goods having investment in plant and machinery, at an original cost not exceeding Birr 1200000. Characteristics of small scale industries 1. Capital investment is small. 2. Most have fewer than 10 workers 3. Generally engaged in the production of light consumer goods, processing etc. 4. Located in rural and semi-urban areas 5. All of these firms are privately owned and are organized as sole proprietorship. 6. Fixed assets form the largest component of small units. 7. Most of the funds come from the entrepreneur’s savings
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8. Small scale industrial activity has been growing at a faster rate even than large scale enterprises. 9. Very few of the small scale industries have grown up to medium and large scale industries. 10. Small scale industries activity is beehive of entrepreneurship. 11. Exploitation of natural resources is another characteristic of small scale industries. 12. Small scale industries are quality conscious.