Entrepreneurship Practice NOTES

Introduction
This course unit is to be an adventure, a personal journey, and a significant learning
experience for the student. The course gives students an opportunity to make creative
adjustments to meet personal needs and increase motivation.

Course Objectives
At the end of this course students should be able to:
 To enthuse students into practically start their own business
 Explore various ways of entry into business
 Practically write a business plan
 Enhance students’ levels of creativity and innovation
 Master key issues in managing finances of established entrepreneurial ventures
 Argument student’s knowledge of managing risks for start-ups

Delivery Methods
Lectures, Class discussions/presentations/brain storming/field study

Course content
1.0 INTRAPRENEURSHIP DEVELOPMENT
1.1 Definition and nature of intrapreneurship
1.2 Characteristics of intrapreneurs
1.3 Classification of intrapreneurs
1.4 The process of developing new corporate venture units
1.5 Organizational characteristics that encourage intrapreneurship
2.0 Business plan
2.1 Definition & meaning
2.2 Uses of a business plan to a business
2.3 Attractiveness of a business to potential financiers
2.4 Testing a workable business plan
2.5 Writing a business plan (Sections of a business plan)
3.0 Financing the new venture

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 3.1 Introduction to financial management of new ventures
3.2 Major sources of funds to the new venture
3.3 Factors that determine the choice between debt and equity
3.4 Specific sources of funds to the new venture
3.5 Specific to avoid when selling a business

4.0 Franchising as a form of business entry

4.1 Definition and meaning of franchising
4.2 Myths about franchising
4.3 Criteria for selecting a franchising
4.4 Types of franchising agreements
4.5 Benefits of franchising to the franchisor and franchisee
4.6 Limitations of franchising as a form business entry.
5.0 Creativity and innovation
5.1 Introduction to creativity and innovation
5.2 Characteristics of creative individuals
5.3 Characteristics of creative organizations
5.4 Strategies for creative thinking
5.5 Stifling creativity in organizations
5.6 Enhancing organizational creativity
5.7 Creative climate dimensions
5.8 Creativity training techniques
5.9 Meaning of innovation
5.10 Characteristics of innovative organizations
5.11 Forms of innovations
5.12 Challenges to innovations
5.13 Barriers to hinder creativity in organizations

6.0 Risk management in small business

6.0 meaning of risk management
6.1 Benefits of risk management in small business
6.2 Risk identification and mitigation

Course assessment
Course work (Business Plan) 40%
Final exam 60%

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Total 100%

REFERENCES
1 Gupta, C.B. and Srinivasan, N.P. (1996) Entrepreneurship Development,
Sultan & Chand & Sons Publishers, New Delhi, India
2 Holt, D (2001), Entrepreneurship: New Venture Creation, Prentice Hall
International, New Delhi, India
3 Kao, J. (1989) Entrepreneurship, Creativity and Organization, Prentice Hall
International, New Delhi, India
4 Kumar, S. (2003) Entrepreneurship Development, New Age International
publication.
5 Peters, H. & Peters, M. (1995) Entrepreneurship: Starting, developing and
managing a new enterprise. Richard Irwin Inc. London
6 Robert, D & Peters, H (1992), toward an organization model for
entrepreneurial education.
7 Thomas, W., & Scarborough, N.M. (2004) Effective small business
management: An entrepreneurial approach, Prentice Hall International, New
Delhi, India
8 Thompson, A. (2000) Understanding the proof of Business Concept, New Age
International publication.
9 Timmons, J.A., & Spinelli, S., (2003) New Venture Creation :
Entrepreneurship for the 21st Century Boston : 6th Ed, McGraw-Hill
10 Wickham, P.A (2004) Strategic Entrepreneurship 3rd Ed, London Pitman
Publishing.

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 INTRAPRENEURSHIP

Intrapreneurs are employees who work within a business in an entrepreneurial capacity,

creating innovative new products and processes for the organization. Intrapreneurship is often
associated with larger companies that have taken notice of the rise in entrepreneurial activity
in recent years; these firms endeavor to create an environment wherein creative employees
can pursue new ways of doing things and new product ideas within the context of the
corporation. But smaller firms can instill a commitment to intrapreneurship within its work
force as well.

In fact, small businesses, which originate as entrepreneurial ventures, are often ideally suited
to foster an intrapreneurial environment, since their owners have first-hand knowledge of the
opportunities and perils that accompany new business initiatives. "For larger companies,
intrapreneuring is a way to recapture the spirit that put them on the road to success in the first
place, " observed Nation's Business. "For smaller companies, it can be a way of maintaining
the entrepreneurial drive that gave them birth."

Intrepreneurship is a term which describes corporate entrepreneurship. When corporate

employees develop a new product or product line, this is as entrepreneurial as the case of an
individual entrepreneur. Corporate managers certainly can be innovative as anyone else, but
when employees create something new within the context of their jobs, there is no
requirement that an individual take a personal stake in making it a commercial success. There
is no assumption of risk, no assumption of profit, and no assumption of loss. However, many
managers are given the opportunity to pursue innovations, and, as we shall see later, many are
in farsighted corporations that encourage entrepreneurial activity.

The difference is that the “employee entrepreneur” is not personally responsible for the
commercial success of the innovation.
Risks and rewards are limited. Employees may get bonuses and points for success and
embarrassment for failure.

Intrapreneurship practices have developed in response to the modern world's rapidly

changing marketplace. "While businesses of varying sizes have long had internal units for
development of new products, many found such arrangements were inadequate in today's
business environment, " contended Nation's Business.

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RESEARCH AND DEVELOPMENT DEPARTMENT
Many firms keenly create conditions for creativity and innovations to flourish. They do this
by establishing Research and Development. Innovation developed through the R & D
departments of large corporations has a higher probability of success than innovation of
individual entrepreneurs. This is because the large corporations are able to commit
considerable resources which they invest at all levels including product development,
marketing and distribution.
At the level of R &D, when employees create something new because they are employed to
try and do exactly that, there is no personal responsibility for market success or failure of
their innovations. According to research by Hans Scholl Hammer entrepreneurship is not
taking place at this stage.

Features of Intrapreneurs
1. Intrapreneurs are innovators who are not responsible for the market performance of their
creations they are only employed to innovate for the employer enterprise. When they
innovate they bear no personal responsibility for the market success or failure of their
innovations.
2. Intrapreneurs are innovators who are under rewarded. They have no direct investment in
their innovations and there’s barely no financial risk. Ordinarily, they merely get a bonus
or promotion for their effort. For most organizations there is no tolerance for failure and
there are only reluctant rewards for success.
3. According to Gyford Pinchot (2006), intrapreneurs are corporate heroes. They are
courageous people “who make things happen, creating new commercial success in spite
of stodgy corporate policies and glacial pace of bureaucratic decision making.
4. Intrapreneurs are also seen as descriptive mavericks prone to shatter the status quo and
replace. “What is” with “what might be”.
According to Pinchot (2006) the intrapreneur is someone who violates policy, ignores the
chain of command, defies established procedure and yet comes up with a great new
product for the company.
5. Most intrapreneurs appear not to be motivated by money. The driving force seems to be
the pursuit of a vision to provide something of value. Wealth may come to those who
succeed, but the pursuit of wealth is not itself a primary goal.

CLASSIFICATION OF INTRAPRENEURSHIP

A researcher by the names Hans Scholl Hammer established 5 classifications of what is

termed intra-corporate entrepreneurship.
There include:

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1. Administrative Intrapreneurship
This type is associated with the traditional Research and Development (R &D) activity.
Here management recruits individual researchers and sets up teams to expressly champion
innovations and new inventions that can be commercialized.
Large corporations commit significant amounts of resources (e.g. in training) and Research
and Development. After positive research results are attained, other firm departments usually
take over; and in particular Marketing and production departments.

2. Opportunistic Intrapreneurship
In some companies some individual managers are allowed a semi-autonomous status and
hence deployed to pursue new business opportunities for their companies. Such managers are
free to operate their own budget and do not report through the normal organizational
hierarchy. In this case they report directly to a highly placed executive.
3. Acquisitive intrapreneurship
Here the company sets up a team of managers who go out in search of external opportunities.
These usually negotiate with new start up businesses and take them over. The aim therefore
is to argument the particular company’s growth strategy. The terms that represent different
forms of acquisitions include mergers, joint ventures, and takeovers. Currently (in USA) this
is the most common form of corporate intrapreneurship. Companies bargain with others –
usually smaller ones especially after knowing that such firms have a promising commercial
future.

4. Imitative intrapreneurship (Initiative)

This type of intrapreneurship is achieved through imitation. Here the firm gathers
information, and ideas about products of other firms and produces close versions of the same
product that compete and sometimes even out competes the original producer. E.g. Japanese
firms are known for indulging in such intrapreneurship involving American products, were
they finally come up with even better products that out compete original American products.

5. Incubative Intrapreneurship
Using this approach the company forms a new venture development unit (i.e. a company
within a company) which is accorded autonomy, seed capital and access to other corporate
resources. The NVD unit receives ideas either from an individual, R & D or from an acquired
enterprise or an imitation. The NVD unit then incubates the product idea by putting it through

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high- impact implementation testing. The Venture Development unit will unreservedly
subject the innovation to severe scrutiny bordering on torture. It will also test the market
proto types (an original version of a product that will be copied or developed).They will then
kill the innovation or push it for manufacturing.

CORPORATE NEW VENTURE DEVELOPMENT UNITS

These are divided into two different stages including the spontaneous team and the
formalization stage.

Stage One: The Spontaneous Team

The spontaneous team is the stage when an informal group goes through four phases before
company management becomes officially involved in the product development activities of
the new venture unit.

Phase I – solo phase

A single innovator continuously natures an idea until a point when she has enough confidence
in the idea and confides it to one or two close colleagues. During the solo phase, the
innovator is somewhat withdrawn, goes to the research lab at odd hours or works at home on
weekends, quietly building the idea.

Phase II – Network Phase

The innovator begins to seek advice and support from friends and experts.
Phase III – The bootleg Phase
At this phase an informal team begins to take shape. The team members begin to do serious
work including obtaining preliminary market information, designing production processes
and developing a prototype. Then a proposal is written for management.

Phase IV –The formal team

Upon receiving the proposal, company management formally gives team members authority
and mandate to; manage the project, budgets are allocated and resources are lined up for the
commercial development process.

I Solo Phase II III IV

Network Bootleg Formal team
Phase Phase Phase

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 Innovation seeks
advice or support
Individual An informal team Corporate support,
from colleagues to
initiations creative proposes ideas to provision of budget and
develop the idea
ideas to establish management for mandate for team to
innovations formal development pursue formal
and support development of
innovation

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STAGE TWO: FORMALISATION STAGE
FORMAL VENTURE DEVELOPMENT UNITS
Formal venture Development units are created when the firms’ management allows
employees with creative potential to come up as new product venture teams in the formal
organization structure.

As already noted some level of “solo phase” of incubation takes place initially but as soon as
the innovators have put enough substance and form on the idea they submit a feasibility
proposal to management.
The feasibility proposal is less than a business plan. It is a draft of notes and sketches, but
enough to show management that there is a feasible idea.
Once management recognizes the possibility as being viable, an entrepreneurial team is then
set up to take the idea to a more predetermined stage.
This stage will involve developing a proto type, conducting initial market research, product
testing and coming up with a cost/profit analysis of the product.
The team would regularly report to a top executive or to a parallel review committee that
monitors the activities of this very team.
In this phase, the team will have a budget known as seed capital. Team members operate
these funds autonomously. In this case if the project failed, this nature of funding would be
written off as necessary investment purposely to encourage creativity. On the other hand if
management is convinced that the product has a promising chance to perform in the market, a
detailed business plan would be requested for.

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 THE FEASIBILITY DEVELOPMENT PHASE

This phase starts with the writing of a detailed business plan. Management then approves the
product development budget. During the same phase some level of controlled production is
undertaken. The products made out of this exercise are then tested out in a selected specified
market. As results are gathered about the product, the business plan is refined. This phase is
very crucial as it is at this point that management chooses either to kill the project or give the
green light for implementation.

1. INITIATION 2.FEASIBILITY DEVELOPMENT

PHASE PHASE

Idea Generation by the Development team initiates phase 2

innovator with budget & company support

Ad hock team develops

Feasibility plan developed
Preliminary model
 Prototype built
 Market research
 Production costs
 Performance tests

Initial proposal written

Corporate review by
committee on product
innovation

Project approved for

phase 2 with team
Product assigned & budget Product Approved for
denied Corporate review by drawn. denied implementation
committee on
product innovation

PRODUCT LAUNCHING
This involves 3 typical approaches including:-
(i) Innovation Transfer

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 Here the new product or innovation is integrated into the existing structure and
operations. The new venture team is thus given formal authority to champion all levels of
activities relating to the innovation. The teams then spear heads activities in R & D,
production, marketing etc…

(ii) New Division Status

The company can decide to designate the project the status of a distinct new operating
division. Here a new organization in a way is created within the parent company.
(iii) Spin-offs
Here a new business entity is created. The new entity either becomes a subsidiary or an
autonomous company. Team members are often offered shares (stock options) thereby
gaining an important role in the ownership of the spin-off. However, the parent company
will still retain a strong equity position.

JUSTIFICATION FOR SPIN-OFFS

1. The parent company is able to have a strong hold on the spin-off to enjoy the status of
customer or supplier, to the spin-off.
2. It reduces the burden of “size” on the parent company.
3. If the team members are not to be offered part ownership, they can desert to set up their
own business or more to be competitors which may not be desirable.

ORGANIZATIONAL CHARACTERISTICS THAT ENCOURAGE

INTRAPRENEURSHIP

The single most important factor in establishing an "intrapreneur-friendly" organization is

making sure that your employees are placed in an innovative working environment. Rigid and
conservative organizational structures often have a stifling effect on intrapreneurial efforts.
Conservative firms are capable of operating at a high level of efficiency and profitability, but
they generally do not provide an environment that is conducive to entrepreneurial activity
(and organizations that do not encourage creativity and leadership often alienate talented
employees). But as Erik Rule and Donald Irwin stated in Journal of Business Strategy,
companies that establish a culture of innovation through: 1) formation of intrapreneurial
teams and task forces; 2) recruitment of new staff with new ideas; 3) application of strategic
plans that focus on achieving innovation; and 4) establishment of internal research and
development programs are likely to see tangible results.

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Other keys to instilling an intrapreneurial environment in your business include the
following:

1. Support from ownership and top management. This support should not simply consist
of passive approval of innovative ways of thinking. Ideally, it should also take the
form of active support, such as can be seen in mentoring relationships. Indeed, the
small business owner's own entrepreneurial experiences can be valuable to his firm's
intrapreneurial employees if he makes himself available to them.
2. Recognition that the style of intrapreneurialism that is encouraged needs to be
compatible with business operations and the organization's overall culture.
3. Make sure that communication systems within the company are strong so that
intrapreneurs who have new ideas for products or processes can be heard.
4. Intelligent allocation of resources to pursue intrapreneurial ideas.
5. Reward intrapreneurs. All in all, intrapreneurs tend to be creative, dedicated, and
talented in a variety of areas. They are thus of significant value even to companies
that do not feature particularly innovative environments. Their importance is
heightened, then, to firms that do rely on intrapreneurial initiatives for growth. Since
they are such important resources, they should be rewarded accordingly (both in
financial and emotional terms). For while intrapreneurs may not want to go into
business for themselves, they still have a hunger to make use of their talents and a
wish to be compensated for their contributions. If your small business is unable or
unwilling to provide sufficient rewards, then it should be prepared to lose that
entrepreneur to another organization that can meet his/her desires for professional
fulfillment.
6. Allow intrapreneurs to follow through. Intrapreneurs who think of a new approach or
process deserve to be allowed to maintain their involvement on the project, rather than
have it be handed off to some other person or task force. Ensuring that the individual
stays involved with the initiative makes sense for several important reasons. The
entrepreneur’s creativity and emotional investment in the project can be tremendously
helpful in further developing the process or product for future use. Moreover, they
usually possess the most knowledge and understanding of the various issues under
consideration. Most importantly, however, the small business enterprise should make
sure that its talented and creative employees have continued input because not
allowing them to do so can have a profoundly morale-bruising impact.

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13
 THE BUSINESS PLAN
Future outcomes are a function of today decisions. Although there is a high degree of
randomness and uncertainty associated with the future; you can increase the probability of a
successful outcome by planning ahead.

According to Alexander Fleming, “The unprepared mind cannot see the outstretched hand of
opportunity”.

A business plan is a written document prepared by the entrepreneur that describes all the
relevant external and internal elements involved in starting a new venture.
It is often an integration of functional plans such as marketing, finance, manufacturing and
human resources. It also addresses both short term and long term decision making for mainly;
the first three years of operation.

Business plans are documents used for planning out specific details about your business.
They can range in size from a simple few sentences to more than 100 pages with formal
sections, a table of contents and a title page. According to Entrepreneur Magazine, typical
business plans average 15 to 20 pages. Comprehensive business plans have three sections--
business concept, marketplace and financial--and these are broken down into seven
components that include the overview or summary of the plan, a description of the business,
market strategies, competition analysis, design and development, operations and
management, and financial information. Even small one-page business plans have importance
and purpose for the success of the business however

Muhammad Yusus (2011) asserts that; the success of the Grameen Bank model (business
plan) of micro financing has inspired similar efforts in a hundred countries throughout the
developing world and even in industrialized nations, including the United States. Many, but
not all, microcredit projects also retain its emphasis on lending specifically to women. More
than 94% of Grameen loans have gone to women, who suffer disproportionately from poverty
and who are more likely than men to devote their earnings to their families. For his work
with the Grameen Bank, Yunus was named an Ashoka: Innovators for the Public Global
Academy Member in 2001.[27] In the book, Grameen Social Business Model, Rashidul Bari
shows how Grameen Social Business Model(GSBM)- has gone from being theory to become
an inspiring practice adopted by leading universities (e.g., Glasgow), entrepreneurs (e.g.,

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Franck Riboud) and corporations (e.g., Danone) across the globe. Through Grameen Bank,
Rashidul Bari claims that Yunus demonstrated how Grameen Social Business Model can
harness the entrepreneurial spirit to empower poor women and alleviate their poverty.
One of the conclusions of Yunus' concepts is that the poor are like a “bonsai tree,” and they
can do big things if they get access to the social business that holds the potential to empower
them to become self-sufficient

The business plan serves two essential functions;

 Guiding the company by charting its future course and defining its strategy for
following it
 Attracting lenders and investors who will provide needed capital

Importance of a business plan

Clarify Direction
The primary purpose of a business plan is to define what the business is or what it intends to
be over time. Clarifying the purpose and direction of your business allows you to understand
what needs to be done for forward movement. Clarifying can consist of a simple description
of your business and its products or services, or it can specify the exact product lines and
services you'll offer, as well as a detailed description of your ideal customer.
Future Vision
Businesses evolve and adapt over time, and factoring future growth and direction into the
business plan can be an effective way to plan for changes in the market, growing or slowing
trends, and new innovations or directions to take as the company grows. Although clarifying
direction in the business plan lets you know where you're starting, future vision allows you to
have goals to reach for.
Attract Financing
The Small Business Administration states, "The development of a comprehensive business
plan shows whether or not a business has the potential to make a profit." By putting statistics,
facts, figures and detailed plans in writing, a new business has a better chance of attracting
investors to provide the capital needed for getting started.
Attract Team Members
Business plans can be designed as a sale tool to attract partners, secure supplier accounts and
attract executive level employees into the new venture. Business plans can be shared with the

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executive candidates or desired partners to help convince them of the potential for the
business, and persuade them to join the team.
Manage Company
A business plan conveys the organizational structure of your business, including titles of
directors or officers and their individual duties. It also acts as a management tool that can be
referred to regularly to ensure the business is on course with meeting goals, sales targets or
operational milestones.

Highlights Strengths and Weaknesses

The business plan provides a chance to analyze your company's strengths and weaknesses,
the opportunities it can embrace and the threats it faces. The SWOT analysis names each of
your competitors and discusses their relative strengths and weaknesses. The analysis can also
highlight how your company fits into your industry.
Structure and Management
The business plan gives investors insight into the company's management. The principle
members of management are profiled to show what each brings to the table. This part of the
plan can show you areas where your organization is weak or could use new or more talent.
The plan also describes the legal structure -- whether your company is a sole proprietorship, a
partnership or some form of corporation.
Identifies Goals
A business plan includes a description of the business that describes its long- and short-term
goals. This description allows you to see how and why your company meets a need in the
industry. For example, at the beginning of the 20th century, there were thousands of buggy-
whip makers. Those who failed to realize that they were in the larger business of "vehicle
acceleration" were gone by the beginning of the 21st century. The few who remain
downsized and survive in a market niche.
Inspires Investor Confidence
While some investors might like a gamble, most don’t, and all have a vast distaste for losing
money. A business plan includes financial statements and projections certified by
independent accountants that can to quell investor concerns. This information can also
provide you with a financial view of strengths and weaknesses in your business that you can
use to stave off disaster or capitalize on potential

Attractiveness of the business plan to the Financiers

The business plan must have features that will attract and not repel the attention of potential
financiers

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Research by MIT Enterprise Forum (1992) has shown that the following features of a
business plan enhance the possibility of receiving funds from financiers;
i. It must be arranged appropriately with an executive summary, a table of contents, and
chapters in the right order
ii. It must be in the right length and have the right appearance i.e. not too long and not
too shot, not too fancy, flower and not too plain or dull
iii. It must give a sense of what the founders and the company expect to accomplish
between three and five years in future
iv. It must explain it in quantities and qualitative terms the benefits to the user of the
company’s product and services
v. It must present heard evidence of the marketability of product or services
vi. It must justify financially the means chosen to sell the product or services
vii. It must explain and justify the level of product development which has been achieved
and described in appropriate detail, manufacturing process and associated costs
viii. It must portray the partners where relevant as a team of experienced managers with a
complimentary business skills
ix. It must suggest as high and overall rating as possible of the ventures product
development and team sophistication
x. It must contain believable financial projections with key data, explained and
documented
xi. It must show how investors can cash out in three to five years with appropriate capital
appreciate
xii. It must be presented to the most potentially receptive financiers to avoid wasting
precious time and funds
xiii. It must be easily and concisely explainable in an oral presentation

It is extremely essential to know that financiers and investors are more market oriented than
product oriented. Entrepreneurship is about identifying new products and new ways of
presenting existing product but only if there is an identifiable customer need

What to Avoid in Writing a Business Plan

Think of your business plan as a resume or CV for your endeavor. The purpose of the
business plan is to impress investors, display your expertise and entrepreneurship, and lay the
groundwork for a business that will grow and be successful. Your business plan is one of the

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most important documents that you will create. Take the time to write it properly. To assist in
this process, learn what to avoid when writing the plan.

Types and Poor Organization

Your business plan is a professional document; it should look like one. Just as you would not
wear jeans and T-shirt to a job interview, your business plan should not look like it was
printed on the back of a box wrapper. Take time to make sure the language is clear and
concise, and free of grammatical errors and typos. Print the business plan on high-quality
paper and organize the information in a logical manner. In terms of organization, business
plans typically follow this format: executive summary, market analysis, company description,
organization of the company, sales plan, product line, and financial projections. Do not tinker
too much with this organization; people familiar with business plans will expect them to be
organized like other plans. And keep in mind that the people reading your business plan will
consider the plan as an extension of you and how you will run your business.
A poorly drafted, poorly presented business plan will reflect negatively on you and may be
the difference between securing funding and leaving empty handed.

Keep the Business Plan Flexible

Keep in mind that even a well-polished business plan is not set in stone. Your business plan is
an evolving document. Avoid phrasing things in definite and concrete terms when they are, in
actuality, subject to market and economical forces. This does not mean your entire document
cannot contain definite statements. Your company description and the overall organization of
your business are two areas you can probably define with concrete details. The financial
analysis (for the first five years of your business) and your analysis of the market, however,
are two areas where you should build in space to rewrite and rethink your projections as times
change. Remember to review your business plan periodically; just because your wrote one a
year ago does not mean that the same information still applies. Keep it current and keep it
flexible.

Faulty Research
Finally, be careful about what sources you use when writing the details of your business plan.
Do not rely on faulty or shoddy research; take the time to examine every critical area of your
business and back your projections up with fresh data. Double-check your facts (especially

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when analyzing your competition and the market for your business). The business world is
ever-changing. Your competitors are constantly looking for an edge in the market. Using
faulty or old data will hold your business back. It also demonstrates something less than due
diligence on your

A business plan must pass three tests;

The reality test – proving that;
A market really does exist for your product or service. You can actually build or provide it
for the cost estimates in the plan

The competitive test – evaluates;

A company’s position relative to its customers. Management’s ability to create a company
that will gain an edge over its rivals.

The value test – providing that;

A venture offers investors or lenders an attractive rate of return or a high probability of
payment.

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SECTIONS OF A BUSINESS PLAN
The business plan typically has the following sections;
I. Title page
II. Introductory page
III. Table of contents
IV. Executive summary
V. Vision and mission statement
VI. Industry analysis
VII. Company preview/Description of the venture
VIII. Product or service plan
IX. Marketing plan
X. Management or Human Resource Plan
XI. Assessment of risk
XII. Production and operation plan
XIII. Financial plan
XIV. Appendix of supporting document (contains backup data)

Title page (Front page)

The title page provides a name, nature of business, addresses, telephone number and email
numbers of the venture and its management. It provides dates for preparation. And in case the
plan is prepared by the consultant the address is also indicated.

Introductory page
This is an extension of the cover page and it contains the following;
 The name and address of the company
 The name of the entrepreneur(s) and a telephone number
 A paragraph describing the company and the nature of business
 The amount of financing needed. The entrepreneur may offer a package, that is, stock,
debt, etc. However, many venture capitalists prefer to structure this package in their
own way.
 A statement of confidentiality of the report. This is for security purposes and is
important for the entrepreneur

Example of Introductory page

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 BUYONJO CLEANING SERVICE LTD
KAMPALA UGANDA
Co-owners: K. N. Nable and L.M. Martha

Description of business:
This business will provide cleaning service on a contract basis to small and medium-sized
businesses. Services include cleaning of floors, carpets, draperies, and windows, and regular
sweeping, dusting, and washing. Contracts will be for one year and will specify the specific
services and scheduling for completion of services.

Financing:
Initial financial requested is 60,000,000 shs loan to be paid off over 3 years. This debt will
cover office space, office equipment and supplies, two leased vans, advertising, and selling
costs.
This report is confidential and is the property of the owners listed above. It is intended only
for use by the persons to whom it is transmitted and any reproduction or divulgence of any of
its contents without the prior written consent of the company is prohibited.

Table of Contents
It provides page numbers of key sections of the business plans

The Executive summary

It should fit on lesser than three pages; and it’s an overview of the total business plan. It is
written after all the other sections are completed. It highlights the significant points at large.
It should be presented in attractive motivated language in order to persuade users to continue
to read the plan. Thus, it would highlight in a concise and convincing manner the key points
in the business plan, that is, the nature, financing needed, market potential, and support as to
why it will succeed.

The executive summary should outline;

 Business name, address, and contact information
 Summaries your financial request
 Brief description of your company including history, industry and target market

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  Describe products and services and marketing mix to reach your customers
 Explain how your company will succeed in the future
 Brief description of management capabilities
 Describe your funding requirements including how the money will be spent and
repayment proposal

Vision statement
These are relatively brief statements that tell the lender why the business is in operation and
where the management team, or owners, plans to be in future.

This is a concise statement describing the intended strategy and business philosophy for
making the vision happen.
The vision statement should tell the reader what business the firm is in, or plans to enter, and
what the most important business goals are. That is, it should tell where the firm is going.
Some examples are given below;

Uganda cooperative alliance

The attainment of a cooperative movement that is economically viable, efficient, sustainable
and member sensitive

AgChoice Farm Credit

AgChoice Farm Credit will be the first choice for financial services that help customers
succeed.
DeLaval
Whenever dairy farmers have a need they should think first of DeLaval. We aim to always, be
there, always be available, and always work on their behalf.

Mission statement
The mission statement provides a concise (brief) overview of the firms operation, including
its collective values, its unique circumstances or industry position, what product(s) it sells,
and why it is in business. As the business evolves, the mission statement can be adapted to
reflect the changing the face of the firm. The mission statement can provide more detailed
information than the vision statement.

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Agway cooperative
Agway is a farmer-owned business dedicated to improving the profitability of its members.
We achieve profitability for our members by being the most effective partner on every farm
serve, by adding value to what farmers produce, and by using our capabilities to win non-
farm customers.

Land O’ Lakes
We are market and customer driven cooperative committed to optimizing the value of our
member’s dairy, crop, and livestock production.

Silvera and Sons Ltd

We seek to serve coffee importers and enthusiasts by exceeding minimum acceptable quality
standards and by providing the highest quality product at the lowest possible price. We value
our relationships with current and future customers and hope to communicate our
appreciation to them through our outstanding, guaranteed product quality, personal service,
and efficient delivery. Our commitment to our customers and the country of Brazil will be
reflected through honest and responsible business.

It should be a brief, big picture statement including whist you sell and mention the industry
you compete.
It should not exceed 3-4 lines

Industry Analysis
It gives out the industry outlook, including future trends and historical achievements, should
be included. The entrepreneur should also provide insight on new product developments in
this industry.
Competitive analysis is also an important part of this section. Each major competitor should
be identified, with appropriate strengths and weaknesses described, particularly as to how
they might affect the new venture’s potential success in the market.
Any forecasts made by the industry or by government should be noted. A high growth market
may be viewed more favorably by the potential investor. Some key questions an entrepreneur
should consider include;
 What are total industry sales over past five years
 What is anticipated growth in this industry
 How many new firms have entered this industry in the last three years

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  What are new products that have been recently introduced in this industry
 Who are the nearest competitors
 How will your business operation be better than this
 Are each of your major competitors sales growing, declining, or steady
 What are the strengths and weaknesses of each of your competitors
 What is the profile of your customers
 What does your customer profile differ from that of your competitor

Company Overview
The type of company is explained; is it a retail company, service, etc
If the company already exists, the entrepreneur should provide background information on
the company. This will enable the investor to ascertain the size and scope of the business. For
a new venture,
 The proposed form of organization described,
 Is it a sole proprietorship?
 Is it a partnership?
 Is it a limited liability?
This section should have the following structures;
 Company name
 Business location
 Company objectives
 Primary product or service of the Business Studies current status. If it is a new
business;
 Is it a franchise? Is it an expansion company (where applicable)
 Legal form of an organization
Location of any business may be vital to its success, particularly if the business is retail or
involves a service. Thus the emphasis in the business plan is a function of the type of
business.
Factors considered in choosing location include; parking, access from roadways to facility,
access to customers, suppliers, or distributors, delivery rates, and town regulations or zoning
laws.
Some of the important questions that might be asked by an entrepreneur are as follows;

24
  What are your product(s) and/or service (s)?
 Describe the product(s) and/or service(s), including patent, copyright, or trademark
status
 Where will the business be located?
 Is your building new? Old? In need of renovations? (If renovation needed, state costs)
 Is the building leased or owned? (State the terms.)
 Why is this building and location right for your business?
 What office equipment will be needed?
 Will equipment be purchased or leased?
 What is your business background?
 What management experience do you have?
 Describe personal data such as education, age, special abilities, and interests.
 What are your reasons for going into business?
 Why will you be successful in this venture?
 What development work has been completed to date?

Product or service plan

Describe in some detail each product or service to be sold.

Discuss the application of the product or service and describe the primary end use as well as
any significant secondary applications. Articulate how you will solve a problem, relieve pain,
or provide a benefit or needed service.

Emphasize any unique features of the product or service and how these will create or add
significant value; also, highlight any differences between what is currently on the market and
what you will offer that will account for your market penetration. Be sure to describe how
value will be added and the payback period to the customer- that is, discuss how many
months it will take for the customer to cover the initial purchase price of the product or
service as a result of its time, cost, or productivity improvements.

Include a description of any possible drawbacks (including problems with obsolescence) of

the product or service.

25
Define the present state of development of the product or service and how much time and
money will be required to fully develop, test, and introduce the product or service. Provide a
summary of functional specifications and photographs, if available, of the product.

Discuss any head-start you might have that would enable you to achieve a favored or
entrenched position in the industry.

Describe any features of the product or service that give it an “unfair” advantage over the
competition. Describe any patents, trade secrets, or other proprietary features of the product
or service.

Discuss any opportunities for the expansion of the product line or the development of related
products or services. [Emphasize opportunities and explain how you will take advantage of
them.]

Marketing Plan
It describes how the product(s) or service(s) will be distributed, priced and promoted.
Specific forecasts for products or services are indicated in order to project profitability of the
venture. The budget and appropriate controls needed for marketing strategy decisions are also
highlighted in this section.
Information in this section needs to support the assertion that the venture can capture a
substantial market in a growing industry and stand up to competition.
The entrepreneur should be able to show the following in the marketing plan;

A. Customers
 Discuss who the customers for the products or service are or will be. Potential
customers need to be classified by relatively homogeneous groups having common,
identifiable characteristics (e.g., by major market segment). For example, an
automotive part might be sold to the replacement market, so the discussion needs to
reflect to market segments.
 Show who and where the major purchasers for the products or service are in each
market segment. Include national regions and foreign countries, as appropriate.
 Indicate whether customers are easily reached and receptive, how customers buy
(wholesale, through manufacturers representatives, etc), where in their organizations
buying decisions take. Describe customers purchasing processes, including the bases
on which they make purchases decisions (e.g., price, quality, timing, delivery,

26
 training, service, personal contacts, or political pressures) and why they might change
current purchasing decisions.
 List any orders, contracts, or letters of commitment that you have in hand and list
potential customers. Indicate how fast you believe your product or service will be
accepted in the market.
 If you have an existing business, list your principal current customers and discuss the
trends in your sales to them.

B. Marketing mix
 Product – Quality of components or materials, style, features, options, brand name,
packaging, sizes, service availability and warranties
 Price – Quality image, list price, quantity, discounts, allowances for quick payment,
credit terms, and payment period.
 Channels of distribution (place) – use of wholesalers and /or retailers, type of
wholesalers or retailers, how many, length of channel, geographic coverage,
inventory, and transportation.
 Promotion – Media alternatives, message, media budget, role of personal selling, sales
promotion, (displays, coupons, etc.), and media interest in publicity

For services, more 3p’s are also considered;

 Physical evidence – it relates to appearance of facilities; clean, up-to-date etc. They
are tangible goods that help to communicate and perform the service.
 Process and procedure – Flow of activities by which services are consumed; policies,
procedures, mechanization, employee discretion, customer involvement, customer
direction and flow of activities
 People _ All people directly or indirectly involved in the consumption of a service,
knowledge of workers, employees, management and other customers (customer
involvement, behavior, customer contract)

C. Market size and trends

 Show for five years the size of the current total market and the share you will have, by
market segment, and/or region, and/or country, for the product or service you will
offer, in units, shillings, and potential profitability.

27
  Describe also the potential annual growth for at least three years of the total market
for your products or services for each major customer group, region, or country, as
appropriate.
 Discuss the major factors affecting market growth (e.g. industry trends, social
economic trends, government policy, and population shifts) and review previous
trends in the market. Any differences between past and projected annual growth rates
need to be explained.

D. Competition and competitive edges

 Make realistic assessment of the strengths and weaknesses of competitors. Asses the
substitute and/or alternative products and services and list the companies that supply
them, both domestic and foreign, as appropriate.
 Compare competing and substitute products or services on the basis of market share,
quality, price, performance, delivery, timing, service, warranties, and other pertinent
features.
 Compare the fundamental value that is added or created by your product or service, in
terms of economic benefits to the customer and to your competitors.
 Discuss the current advantages and disadvantages of these products and services and
say why they are not meeting customer needs.
 Indicate any knowledge of competitors’ actions that could lead you to new or
improved products and an advantageous position. For example, discuss whether
competitors are simply sluggish or non responsive or are asleep at the switch.
 Identify the strengths and weaknesses of the competing companies and determine and
discuss each competitor’s market share, sales, distribution methods, and production
capabilities.
 From what you know about the competitors operations, explain why you think they
are vulnerable and you can capture a share of their business. Discuss what makes you
think it will be easy or difficult to compete with them. Discuss in particular your
competitive advantages gained through such “unfair” advantage as patents.

C. Estimated market share and sales

 Summarize what it is about your product(s) or service(s) that will make it salable in
the face of current and potential competition. Mention, especially, the fundamental
value added or created by the product(s) or service(s).

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  Identify any major customers (including international customers) who are willing to
make, or who have already made, purchase commitments. Indicate the extent of those
commitments, and why they were made. Discuss which customers could be major
purchasers in future years and why.
 Based on your assessment of the advantages of your product or service, the market
size and trends, customers, competition and their products, and trends of sales in prior
years, estimate the share of the market and the sales in units and dollars that you will
acquire in each of the next three years. Remember to show assumptions used.
 Show how the growth of the company sales in units and its estimated market share are
related to the growth of the industry, the customers, and the strengths and weaknesses
of competitors. Remember, the assumptions used to estimate market share and sales
need to be clearly stated.
 If yours is an existing business, also indicate the total market, your market share, and
sales for two prior years.

E. Ongoing market evaluation

 Explain how you will continue to evaluate your target markets; assess customer needs
and service; guide product improvement, pricing, and new product programs; plan for
expansions of your production facility, and guide product/service pricing.

The management plan

This section of the business plan includes a description of the functions that will need to be
filled, a description of the key management personnel and their primary duties, an outline of
the board of directors, a description of ownership position of any other investors, etc. you
need to need to present indications of commitment, such as the willingness of team members
to initially accept modest salaries, and of the existence of the proper balance of technical,
managerial, and business skills and experience in doing what is proposed.
A. Organization
 Present key management roles in the company and the individuals who will fill each
position ( if the company is established and of sufficient size, an organization chart
needs to be appended)
 Discuss any current or past situations where key management people have worked
together that could indicate how their skills complement each other and result in
effective management.

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B. Key management personnel
 For each key person, describe in detail career highlights, particularly relevant know-
how, skills, and track record of accomplishments that demonstrate his or her ability to
perform the assigned role. Include in your description sales and profitability
achievements (budget size, number of subordinates, new product introductions, etc)
and other prior entrepreneurial or general management achievements.
 Describe the exact duties and responsibilities of each of the key members of the
management team.
 Complete resumes/CVS for each key management member need to be included here
or as an exhibit and need to stress relevant training, experience, and concrete
accomplishments, such as profit and sales improvement, labor management success,
manufacturing or technical achievements, and meeting budgets and schedules.

C. Management compensation and ownership

 State the salary to be paid, the stock ownership planned, and the amount of equity
investment (if any) of each key member of the management team.
 Compare the compensation of each key member to the salary he or she received at his
or her last independent job.
D Other investors
 Describe here any other investors in your venture, the number and percentage of
outstanding shares they own, when they were acquired, and at what price.
E. Board of directors
 Discuss the company’s philosophy about the size and composition of the board
 Identify any proposed board m ember and include a one-or two-sentence statement of
each member’s background that shows what he or she can bring to the company.

Critical risks, problems and assumptions

The development of a business has risks and problems, and the business plan invariably
contains some implicit assumptions about them. You need to include a description of the
risks and the consequences of adverse outcomes relating to your industry, your company and
its personnel, your products market appeal, and timing and financing of your start up. Be sure
to discuss assumptions concerning sales projections, customer orders, and so forth. Be aware
that most investors will read the section describing the management team first and then this
section.

30
Do not omit this section. If you do, the reader will most likely come to one or more of the
following conclusions;
 You think he or she is incredibly naïve or stupid, or both
 You hope to pull the wool over his eyes
 You do not have enough objectivity to recognize and deal with assumptions and
problems.
Taking the initiative on the identification and discussion of risks helps you to demonstrate to
the investor that you have thought about them and can handle them

Identify and discuss any major problems and other risks, such as;
 Running out of cash before orders are secured
 Potential price cutting by competitors
 Any potentially unfavorable industry trends
 Design or manufacturing costs in excess of estimates
 Sales projections not achieved
 An unmet product development schedule
 Difficulties or long lead times encountered in the procurement of parts or raw
materials
 Difficulties encountered in obtaining needed bank credit
 Larger-than-expected innovation and development costs
 Running out of cash after orders pour in.
Indicate what assumptions or potential problems and risks are most critical to the success of
the venture, and describe your plans for minimizing the impact of unfavorable developments
in each case

Operating Plan
The manufacturing and operations plan needs to include such factors as plant location, the
type of facilities needed, space requirements, capital equipment requirements and labor force
(both full time and part time ) requirements. For manufacturing business, you need to include
policies on inventory control, purchasing, production control, and which parts of the product
will be purchased and which operations will be performed by your work force.
A service business may require particular attention to location (proximity to customers is
generally a must), minimizing overhead, and obtaining competitive productivity from labor
force.

31
A. Operating cycle
 Describe the lead/lag times that characterize the fundamental operating cycle in your
business.
 Explain how any seasonal production loads will be handled without severe dislocation
(e.g., by building to inventory or using part time help in peak periods).

B. Geographical location
 Describe the planned geographical location of the business. Include any location
analysis, and so on, that you have done.
 Discuss any advantages of site locate in terms of labor ( including labor availability,
whether workers ar unionized and wage rates), access to transportation, municipal and
government taxes and laws (including zoning regulations), access to utilities, and so
forth.

C. Facilities and improvements.

 For existing business, describe the facilities, including plant and office space, storage
and land areas, special tooling, machinery, and other capital equipment currently used
to conduct the company’s business, and discuss whether these facilities are adequate.
Discuss any economies of scale.
 For tart up describe how and when the necessary facilities to start production will be
required.
 Discuss whether equipment and space will be leased or acquired (new or used) and
indicate the costs and timing of such actions and how much of the proposed financing
will be devoted to plant and equipment.
 Explain the future equipment needs in the next three years
 Discuss how and when, in the next three years, plant space and equipment will be
expanded to the capacities required by future sales projections and any plans to
improve or add to existing plant space or move the facility; indicate the timing and
cost of such acquisitions.

D Strategy and plans

 Describe the manufacturing processes involved in production of your product(s) and
any decisions with respect to subcontracting of component parts, rather than complete
in-house manufacture.

32
  Justify your proposed make-or-buy policy in terms of inventory financing, available
labor skills, and other non-technical questions, as well as production, cost, and
capacity issues.
 Discuss who potential subcontractors and /or suppliers are likely to be and any
information about, or any surveys that have been made of, these subcontractors and
suppliers.
 Present a production plan that shows cost/volume/inventory levels of operation with
breakdowns of applicable material, labor, purchased components, and factory
overhead.
 Describe your approach to quality control, production control, and inventory control;
explain what quality control will use to minimize service problems and associated
customer dissatisfaction.

E. Regulatory and legal issues

 Discuss any relevant state, local, or foreign regulatory requirements unique to your
product, process, or service such as licenses, zoning permits, heath permits, and
environmental approvals necessary to begin operation.
 Note any pending regulatory changes that affect the nature of your opportunity and
timing.
 Discuss any legal or contractual obligations that are pertinent as well.

Financial Plan
It is basically an evaluation of an investment opportunity and needs to represent your best
estimates of financial requirements. The purpose of financial plan is to indicate the ventures
potential and present a timetable for financial viability. It can also serve as operating plan for
financial viability. It also can serve as an operating plan for financial management using
financial benchmarks. In preparing the financial plan, you need to look creatively at your
venture and consider alternative ways of launching or financing it.
As part of the financial plan, financial exhibits need to be prepared; to estimate cash flow
needs.
This analysis needs to cover three years, including the current and prior year income
statements and balance sheets; if applicable; profit and loss forecasts for three; pro forma
income statements and balance sheets; and a break-even chart. State the assumptions behind
such items as sales levels and growth, collections and payables periods, inventory
requirements, cash balances, and cost of goods need to be specified. Your analysis of

33
operating and cash conversion cycle in the business will enable you to identify these critical
assumptions

Pro forma income statements are the plan for profit part of financial feasibility of a new
venture. Because usually the level of profits, particularly during the startup years of venture,
will not be sufficient to finance operating asset needs, and because actual cash flows do not
always match the actual cash outflows on short-term basis, a cash flow forecast indicating
these conditions and enabling management to plan cash needs is recommended.
Pro forma balance sheets are used to detail the assets required to support the projected level
of operations and, through liabilities, to show how these assets are to be financed.
Break-even chart showing the level of sales and production that will cover all costs, including
those costs that vary with production level and those that do not, is very useful.

A. Actual income statements and balance sheets:

For an existing business, prepare income statements and balance sheets for the current year
and for the prior two years

B. pro forma income statements

 Using sales forecasts and the accompanying production or operations costs, prepare
pro forma income statements for at least the first three years.
 Fully discuss assumptions (e.g., the amount allowed for bad debts and discounts, or
any assumptions made with respect to sales expenses or general and administrative
costs being a fixed percentage of costs or sales) made in preparing the pro forma
income statement and document them.
 Draw on section X of the business plan and highlight any major risks, such as the
effect of 20% reduction in sales from projected or the adverse impact of having to
climb a learning curve on the level of productivity over time, that could prevent the
ventures sales and profit goals from being attained, plus the sensitivity of profits to
these risks.

C. Pro forma balance sheets

Prepare pro forma balance sheets semiannually in the first year and at the end of each of the
first three years of operation.

D. Pro forma cash flow analysis

34
  Project cash flows monthly for the year of operation and quarterly for at least the next
two years. Detail the amount and timing of expected cash inflows and outflows.
Determine the need for and timing of additional financing and indicate peak
requirements for working capital. Indicate how necessary additional financing is to be
obtained, such as through equity financing, bank loans, or short-term lines of credit
from banks, on what terms, and how it is to be repaid. Remember they are based on
cash, not accrual, accounting.
 Discuss assumptions, such as those made on the timing of collection of receivables,
trade discounts given, terms of payments to vendors, planned salary and wage
increases, anticipated increases in any operating expenses, seasonality characteristics
of the business as they affect inventory requirements, inventory turnovers per year,
capital equipment purchases, and so forth. Again these are real time (i.e., cash), not
accruals
 Discuss cash flow sensitivity to a variety of assumptions about business factors (e.g.,
possible changes in such crucial assumptions as an increase in the receivable
collection period or a sales level lower than that forecasted).

E. Break-even chart
 Calculate break even and prepare a chart that shows when breakeven will be reached
and any stepwise changes in breakeven that may occur.
 Discuss the breakeven shown for your venture and whether it will be easy or difficult
to attain, including a discussion of the size of breakeven sales volume relative to
projected total sales, and how the break-even point might be lowered in case the
venture falls short of sales projections.

F. Cost control
Describe how you will obtain information about report costs and how often, who will be
responsible for the control of various cost elements, and how you will take action on budget
overruns.

G. Highlights.
Highlight important conclusions, including the maximum amount of cash required and when,
the amount of debt and equity needed, how fast any debts can be repaid, etc

Appendices

35
This is part for supporting documents like; curriculum vitae (CVs) of management team, pro
forma invoices of suppliers of equipment, extracts of documents, supporting VAT claims,
memorandum of association, articles of association, certificate of incorporation, report from
consultants, copies of critical regulatory approval, licenses, special location factors, etc

END
COURSEWORK:
 You are required to write a business plan using the above guidelines NOT your
own guideline.
 The business plan will account for 80% of your total coursework marks.
 It should be submitted on ……………………. through the Class Coordinator.

36
 SOURCES OF CAPITAL FOR A NEW VENTURE

One of the most difficult challenges in new venture creation process is obtaining financing.
For the entrepreneurs, available financing needs to be considered from the perspective of debt
versus equity using internal versus external funds as funding source.

Debt Financing

Debt financing is a financing method involving an interest-bearing instrument, usually a loan,

the payment of which is only indirectly related to the sales and profits of the venture.

There are many sources for debt financing: banks, savings and loans, commercial finance
companies, and the Bonnabagagawale Schemes. State and local governments have developed
many programs in recent years to encourage the growth of small businesses in recognition of
their positive effects on the economy. Family members, friends, and former associates are all
potential sources, especially when capital requirements are smaller.

Traditionally, banks have been the major source of small business funding. Their principal
role has been as a short-term lender offering demand loans, seasonal lines of credit, and
single-purpose loans for machinery and equipment. Banks generally have been reluctant to
offer long-term loans to small firms. The SBA guaranteed lending program encourages banks
and non-bank lenders to make long-term loans to small firms by reducing their risk and
leveraging the funds they have available.

In addition to equity considerations, lenders commonly require the borrower's personal

guarantees in case of default. This ensures that the borrower has a sufficient personal interest
at stake to give paramount attention to the business. For most borrowers this is a burden, but
also a necessity.

Equity financing

This is a form of financing that does not require collateral and offers the investor some form
of ownership position in the venture. The investor shares in the profits of the venture, as well
as any disposition of its assets on pro rata basis. Key factors favouring the use of one type of
financing over another are the availability of funds, assets of the venture, and the prevailing
interest rates.

37
Usually entrepreneur meets financial needs by employing the combination of equity and debt
financing.

Factors that determine the choice between Equity and Debt Financing:

One of the toughest trades-offs for any young company is to balance the need for start-up and
growth capital with preservation of equity. Holding on to as much as you can for as long as
you can; is general good advice for entrepreneurs. Three central issues should be considered
when beginning to think about obtaining risk capital;
(i) Potential Profitability
(ii) Financial Risk
(iii) Voting control

1. POTENTIAL PROFITABILITY
Suppose an entrepreneur is to start a business requiring investing shs 200 million and she is
able to raise shs 100 million initially, he or she will need to raise the other 100m from outside
sources.
The available options would be to:
(a) Bring in a partners/part owners/equity
(b) Borrow from a financial institution(s)

Therefore a simplified balance sheet for each option would be as follows:-

Option A (equity financing)
Total Assets shs 200, 0000, 000/=
Finances by; Debt Nil
Equity shs. 200,000,000/=
Total debt and equity shs 200,000,000/=

Option B (Part debt financing)

Total Assets shs. 200,000,000/=
Financed by Debt shs. 100,000,000/=
Equity shs 100,000,000/=
Total Debt Equity shs. 200,000,000/=

38
Assume in option B money was borrowed at 10% interest rate with an operating profit of shs
22.8 million
The simplified income statements for each option look as below.

Option (A)
Operating Income shs. 22,800,000=
Interest expense Nil
Net Income shs. 22,800,000=

Option (B)
Operating Income shs. 22,800,000=
Interest expense shs. 10,000,000= (shs. 100m x 10%)
Net Income shs. 12,800,000=

Rate of Return for each option:

i.e. Net Income
Owners’ Investment

Option (A) shs. 22,800,000 = 0.11.4 or 11.4%

shs. 200,000,000=

Option (B) shs. 12,800,000/= = 0.128 or 12.8%

Shs. 100.000.000

Observations
1. Option (B) yields a higher rate of return than option (A)
In terms of rate of return, the entrepreneur is better off borrowing money i.e. 100 million at
10% interest rate than bringing partners/ new owners who will share the profit with him or
her.
2. The owner’s return on equity investment will increase as the firm uses more debt.

FINANCIAL RISK

39
Although debt may appear to favor a high return on the owner’s investment than equity it is
not always prudent for the entrepreneur to keep borrowing until return on equity and interest
are about equal. The reason is that debt is risky.
If for one reason or another the firm fails to make profit, financiers and other creditors will
demand their money back. If, as often happens, the financial challenges persists, the creditors
can force the firm into bankruptcy. Yet in the case of equity financing owners cannot demand
more than what has been earned.
Observations
1. Debt financing more increases potential returns when a company is performing really
well. If debts financing is used and things go well, they will go very well; but if things go
badly, they will go very badly.
2. Debt financing makes doing business more risky.

VOTING CONTROL
Financing through equity or debt has implications on the degree of control for owners. Part
owners even if they have minority ownership need accountability from the entrepreneur.
In some cases part-owners succeed in taking over the business gradually.
Therefore this is the reason why eventually many entrepreneurs tend to favor equity to debt
financing, if they have a choice.

SPECIFIC SOURCES OF FINANCING

The major sources of financing include;
1. Personal savings
2. Family relatives and friends
3. Private investors in the community
4. Business suppliers and Asset based lending
5. Commercial Banks
6. Government programmes
7. Microfinance Institutions and Agencies

INDIVIDUAL INVESTORS/FINANCIERS
Individual financiers are usually a source of financing in the early stages of the
entrepreneurial ventures.
The major sources include:
 Personal savings (Entrepreneurs)
 Relatives and friends

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 Business angels

1. PERSONAL SAVINGS
Few, if any, new ventures are started without the personal funds of the entrepreneur. Not only
are these the least expensive funds in terms of cost and control, but they are absolutely
essential in attracting outside funding, particularly from banks, private investors, and venture
capitalists.
These outside providers of capital feel that the entrepreneur may not be sufficiently
committed to the venture if he or she does not have money invested.
This level of commitment is reflected in the percentage of total assets available that the
entrepreneur has committed, not necessarily in the amount of money committed. An outside
investor wants an entrepreneur to have committed all available assets, an indication that he or
she truly believes in the venture and will work all the hours necessary to ensure success.

2. FAMILY, RELATIVES AND FRIENDS

This is quite a common source of financing.
Because it is based on personal relationships this money can come fairly quickly. Detailed
financial analysis need not precede disbursement.

Disadvantages
1. Interference
Relatives and friends who have provided funding want to influence decisions taken in the
business.
2. When the business fails or underperforms repayment of the loans may become difficult
leading to strained relationships.

Remedies
1. Loan conditions and agreements should be put in writing in order to clarify expectations
of all parties before actual disbursement.
2. The timing of any future dividends must be disowned in terms of equity investments
3. If a family or friend is treated the same as any investor, potential future conflicts can be
avoided.
4. It is also beneficial to the entrepreneur to settle everything up front and in writing. It is
amazing how short memories become when money is involved.

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5. All the details of the financing must be agreed upon before the money is put into the
venture.
6. The entrepreneur should consider the impact of the investment on the family member or
friend before it is accepted. Particular concern should be paid to any hardships that might
result should the business fail. Each family member should be investing in the venture
because they think it is a good investment, not because they feel obligated.

3. OTHER INDIVIDUAL INVESTORS/BUSINESS ANGLES

(a)Business Angels
These are experienced business people and professionals may, when they know about a
promising new venture, invest in it. This is “informal capital” because there are no formal
institutions or markets in which such investors can be traced.

These are alternatively referred to as Business angles according to Justin Longenecker

(2000). Business angles are wealthy individuals with substantial business and financial
experience and likely to be in 40’s and 50’s, so well educated and majority are men (96%)
who invest in small but growing business that do not look attractive to venture capitalists.
According to the Center for Venture Research at the University of New Hampshire, there
about 400,000 active angels in the USA who invest approximately? $ 30 billion every year in
over 30,000 new ventures.

Information about potential business angels can be obtained from accounting consultants,
Auditors, Lawyers and other professionals who have access and knowledge about financial
capacity of potential business angles.

(b) Venture capital

It is a type of capital which involves some degree of risk and even something of a gamble.
Specifically, the venture capital industry supplies capital and other resources to entrepreneurs
in business with high growth potential in hopes of achieving a high rate of return on invested
funds.
The whole investing process involves many stages, but throughout the investing process,
venture capital firms seek to add value in several ways;
 identifying and evaluating business opportunities,
 including management,
 entry, or growth strategies;

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  negotiating and closing the investment; and
 tracking and coaching the company;
 providing technical and management assistance; and
 Attracting additional capital from directors, management, suppliers and other key
stakeholders and sources.
The process usually takes up to 10 years.
The availability and cost of this capital depend on a number of factors;
 Perceived risk, in view of the quality of the management team and opportunity
 Industry, market, attractiveness of the technology, and fit
 Upside potential and downside exposure
 Anticipated growth rate
 Age and stage of development
 Amount of capital required
 Founders goals and strategy
 Relative bargaining positions of investors and founders given the capital markets at
the time.

(c) Mezzanine capital

It refers to capital that is between senior debt financing and common stock. In some cases it
takes the form of redeemable preferred stock, but in most cased it is subordinated debt that
carries an equity “kicker” consisting of warrants or conversion feature into common stock. It
is generally unsecured, with fixed interest rate and maturity is always 5 to 10 years.
Mezzanine investors generally look for companies that have a demonstrated performance
record, with high revues. Because the financing involve paying interest, the mezzanine
investor will carefully examine existing and future cash flow and projections.
As the name implies mezzanine focuses more on broad middle spectrum of business, rather
than on high-tech, high-growth companies; specialty in retailing, broadcasting, distributors
and business service.

(d) Private placement (Over the counter or OTC)

In this transaction, the company offers stock (shares) to a few private investors, rather than to
the public.
If the company’s management team knows of enough investors, then the private placement
could be distributed among small group of friends, family, relatives, or acquaintances or
through use of brokers to bring investors

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4. BUSINESS SUPPLIERS AND ASSET – BASED LENDERS
An entrepreneur can also get funding from trading partners. This type of funding takes two,
major forms:
 Inventories or Trade credit.
 Equipment loans and leases.

(a) TRADE CREDIT

This is represents the Accounts payable element in the current liabilities of a firm. The
ability of a new business to obtain trade credit depends on the quality and reputation of its
management and the relationships it establishes with its suppliers. Continued late payment or
nonpayment may cause suppliers to cut off shipments/ suppliers or supply only on cash on
delivery (COD) basis.

Features
(i) It is short term i.e. usually 30 days
(ii) It is unsecured therefore convenient for the start up entrepreneur.

Factors that determine the level of trade credit

1. Type of goods for example if perishable
2. Suppliers’ confidence in the entrepreneur

5. EQUIPMENT LOANS AND LEASES

An equipment loan is administered through a hire – purchase (so called because it has both
elements of hiring and buying) arrangement.

Typical terms of equipment loans and leases

(i) There must be down payment of between 10% - 30%
(ii) Contract period of - 1 year, 3 years etc.
(iii) During the loan period, the equipment cannot serve as collateral for another loan.
(iv) Equipment loan is commonly loaned to, starting businesses which include: computers,
photocopiers, fax machines, cooling equipment etc.

Advantages of this type of funding to the entrepreneur (Lessee)

(i) This permits extra cash to be available for other purposes.
(ii) Other lines of credit (e.g. bank loans) can be used for other purposes.

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(iii) Leasing provides protection against equipment obsolescence.

6. ASSETS-BASED LENDING
This is the case when a line of credit is obtained on the basis of the non liquid current assets
of the firm, primarily receivables and inventory (paying upfront)
The lender (usually a bank) makes cash available to a business before accounts receivables
payments are collected from the firm’s customers. This method of financing is called
factoring

The Factor bank advances a percentage of the standing Invoice e.g. 70%.
 The factor bank charges a small fee e.g. 2% for the value of the receivables) as servicing
fee.
 A normal interest charge is also levied on the advanced money until the receivables are
collected.
However Asset – based lending in which inventory is used as collateral usually involves a
loan advance up to 50% of the value of the inventory.

7. Government grants
The entrepreneur can sometimes obtain government of Uganda and Local Government grant
money to develop and launch an innovative idea. These grants are available in agriculture,
healthy and ICT.

8. COMMERCIAL BANKS FINANCING

Commercial Banks are the principal sources of debt capital to both small companies and large
businesses.
At times, they can be a source of initial capital although the typical practice is that banks
provide loans as working capital. Every entrepreneur needs to be aware the banks need time
to study credit situations.
Therefore hurried applications are unlikely to be considered.

TYPES OF BANK LOANS

(i) Lines of credit

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(ii) Term loans
(iii) Mortgages

(i) Lines of credit

These are alternatively called revolving loans. Here the bank agrees to lend the customer up
to a given maximum amount, for a period of time.
It is a formal or informal agreement between a bank and a borrower for a one year period.
Often the bank will charge a fee of a certain percentage of the line of credit for a definite
commitment to make the loan when requested.

Line of credit funds are used for such seasonal financings as inventory buildup and receivable
financing. These two items are often the largest and most financeable items on ventures
balance sheet.
(ii) Term loans
This is the traditional loan in Uganda. The bank loans out money for 1 to 5 years; depending
on the purpose of the loan. The important issue for the borrower is not to fail to match the
loan repayment terms with the expected cash flows from the business. Term loans provide
needed growth capital to companies. They are also substitute for a series of short term loans
made with hope of renewal by the borrower. Banks make these generally on the basis of
predictability of positive cash flow.

(iii) Mortgages
Mortgages represent a long term source of debt capital.

Chattel Mortgages
This is where certain items of inventory or other movable property serve as collateral. The
chattel remains with borrower unless there is default, in which the chattel goes to the bank

Real-estate mortgage
This is a mortgage whereby real property, such as land or a building serves as collateral. The
real estate mortgage can run up to even 20 years.

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THE CONCERNS OF BANKERS
In order to successfully obtain assistance from bankers, every entrepreneur must understand
the bankers’ perspective about lending.
All bankers have two fundamental concerns when they advance money.
1. How much Income the loan will generate for the bank, as interest income.
2. The likelihood that the borrower will default on the loan.
In order to minimize the risk of default a banker will design loan agreements on the basis
of the proverbial “5 Cs of credit”.
(i) Character of the borrower;
(ii) Capacity for the borrower to repay the loan;
(iii) Capital invested in the business by the borrower;
(iv) Conditions of the industry and the economy;
(v) Collateral available to secure the loan.

How Banks Evaluate Loan Requests

In putting together the best possible package to secure a business loan, it's important to know
what happens after you leave the bank and the lending officer evaluates your request.

An advantage to preparing an effectively organized loan application, including a well thought

out business plan is that it will significantly decrease the time spent waiting for an answer.
Much of the time spent in approving a loan can be traced to the banker having to ask the
potential borrower for more information or for clarification of the information that has
already been submitted.

In evaluating loan applications, there are five traditional C's of credit that are considered.

Character
Character is actually a check on your financial status and personal credit history, including
your previous loan payment record. The theory is that people are creatures of habit - if you
have repaid a loan on time before, you will repay this one as well. Conversely, if you have
defaulted on a previous loan, the danger is that you'll tend to default again.

Another facet of character is experience in the type of business you are trying to finance,
including level of responsibility, education, and business management training. Lenders are
particularly concerned that potential borrowers have a solid understanding of financial record
keeping, business credit, the importance of collecting accounts receivable, inventory control
and turnover, and marketing their product or service.

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If your prior business experience is not relevant to your current venture (for example, if your
career has been in the corporate world, and you want to start a restaurant), banks will be leery
about your ability to run the new endeavor successfully and thus repay the loan.

Capacity
Bankers usually look first to the cash flow of the business as the source of funds for repaying
the loan. Consequently, preparing a cash flow statement with future cash flow projections to
present with your loan request is important. Doing so indicates to the lender that you are
aware of the cash coming into your business, and are therefore better able to avoid a cash
shortage that would jeopardize making monthly payments.

Collateral
while cash flow is the primary source of loan repayment, lenders will want a backup or
secondary source as an exit or last resort, should your business not prove profitable.
Collateral - anything of value used as security for repayment of a debt or performance of a
contract - can be real estate, stocks and bonds, savings accounts, equipment, accounts
receivable, or the cash value of life insurance policies.

Psychologically, lenders feel that borrowers have more interest in repaying the loan if they
know that failure to do so will result in the lender taking possession of whatever has been put
up for collateral. A lender will also try

Conditions
Banks look at the general conditions of the industry and the economy, consumer issues,
growth rates and other environmental factors.

Collateral
This is seen by bankers as an alternative source of loan repayment in case the business fails.

The Entrepreneur’s responsibility.

On top of cultivating a “warm” relationship with the bankers e.g. networking, the
entrepreneur also needs to know the following when pursuing a loan:
 Before calling on a banker for a business loan, obtain an introduction from someone
who already has a good relationship with the banker. Cold calling is not appropriate
under these circumstances.
 Do not wait until there is dire need for money. Such lack of planning is not
perceived with favor by a prospective lender.

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  Do not expect a banker to show some enthusiasm as you have for your venture. A
banker is neither an entrepreneur, nor a venture capitalist.
 Develop alternative sources of (venture) capital including visiting several other
banks. However, be sensitive to how a banker might feel about your courting more
than one bank.

Questions a banker is likely to ask borrower entrepreneurs

1. What are the strengths and qualities of the entrepreneurs’ management team?
2. Does the borrower have a good Accountant?
3. How has the firm been performing financially?
4. What is the venture going to do with the money?
5. How much money is needed?
6. When is the money needed?
7. When and how will the money be paid back?
8. Does the borrower already have a banking relationship?
N.B Financial reports will ordinarily be required of borrower entrepreneurs by bankers.
 Three years of the firms audited historical financial statements, if available, including
balance sheets, income statements and statements of cash flow will be an added
advantage.
 The firm’s proforma financial statements – balance sheets, income statements, and
statements of cash flow-indicating the timing and expected amounts of the debt
repayment should also be available.

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ISSUES AN ENTERPRENEUR SHOULD CONSIDER WHEN NEGOTIATING A
LOAN
There are four issues and they include:
1. THE INTEREST RATE
Bank interest rates universally originate in two series.
a) The Prime rate
b) The Libor (London Inter-Bank offer rate)
The Prime rate – this is rate of interest charges by banks on loans to their most creditworthy
customers.
The Libor is London inter-bank offer rate– based banks charge other banks in London –
which is significantly lower than the prime rate. (Therefore in international banking language
if they say that the current interest rate is plus two, and the Libor rate is 6% then interest on a
loan would be 8%.

When one borrows the interest rate can be on a floating rate basis over the loan period.
This would imply that as the prime rate or Libor changes, the interest rate on the loan
changes. In some cases, however, the rate can be fixed for the duration of the loan.

2. LOAN MATURITY DATE

The loan term (or duration) should relate to the use for which the money is needed. Short-
term needs require short-term financing. Long-term needs require long term financing.

3. REPAYMENT SCHEDULE
With term loans, the repayment schedule can be designed in one of two methods:-
a) Equal monthly (or annual) payment that cover both interest on remaining balance, and
payment on principal.
b) Decreasing monthly (or annual) payments that cover both (equal) payments on
principal and interest on the remaining balance.

4. LOAN COVENANTS
Loan covenants are restrictions a banker may impose on a borrower. The borrower is
prohibited from engaging in certain activities. The bankers may believe such activities, if
allowed, would reduce the borrower’s ability to repay the loan.

Common loan covenants include:

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 a) Provision of timely and complete information.
The bank may require that the borrower business provides monthly of quarterly financial
statements. In addition, there may be a condition that the statements are certified or audited
by a public accounting firm.
The bank may also require that information be submitted any time a major change occurs in
the borrower’s business situation.

b) Salary limitations
To restrict management from diverting the borrowed funds bankers may impose ceilings on
the salaries of managers. The bankers may also prohibit transfer of funds from the business
to the owners.

c) Key ratios
To ensure adequate liquidity in the business, the bankers may put limits on certain financial
ratios.

Usually the current ratio =

i.e. (Current assets)
Current liabilities

And the debt ratio =

Debt
Total assets

d) Personal Guarantee
For small businesses, the banker may demand the personal guarantee of the
owner/entrepreneur.

Some of the reasons bankers give for denying applicants money include:-
1. Bank’s lack of familiarity with the business and its owners or with the industry in which
the business is operating.
2. Excessive business losses by the applicant.
3. Unwillingness on the part of the owners to guarantee the loan personally.

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 FRANCHISING
The word franchising comes from the French word Franchir, which means “to free”;
originally it meant “to free from slavery”. Today, it has several other meanings, depending on
the industry. These definitions include the following;

Franchise Association of USA defines it in this way;

“A franchise is a continuing relationship between the franchisor and the franchisee in which
the sum total of the franchisors knowledge, image, success, manufacturing, and marketing
techniques are supplied to the franchisee for a consideration”.

It is also defined as a marketing system revolving around a two-party legal agreement

whereby one party (the Franchisee’) is granted the privilege to conduct business as individual
owner but is required to operate according to methods and terms specified by other party
(Franchisor).

A franchising agreement is governed by a legal agreement known as a franchise contract.

Franchisees unlike independent owners do not have the freedom to change the way they run
their business. They have to stick to the formula for success that the Franchisor has designed
for them.

The ideal Franchising relationship is a ‘partnership’ which is based on trust and mutual
success.

MYTHS ABOUT FRANCISE

 The myths of success. Get-rich-quick schemes abound. Many lower income men and
women looking for a way to become rich without having to work for someone else
prefer franchising which is not solely true
 Franchising is least risky road to success for would be entrepreneurs. For example
business week in US 2004 claimed that “a franchise has four times greater chances of
succeed than an entrepreneur who launches a new independent business”. But
according to exhaustive study by Timothy Bates of Wayne State University in US,
found that, of those retailers who were in business by 2005; 45% of the young
franchised retailers had failed by 2001, but just…23% of the young independent
retailers had failed by 2001.

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 The myth of independence businesspersons. In many cases this simply is not.
Franchisees generally are not free to run their businesses as they see fit. They are
often hamstrung by the franchisors policies, standards and procedures.

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CRITERIA FOR SELECTING A FRANCHISE
Before buying a franchise, entrepreneurs first should make sure that the decision to become a
franchise is sound. Below is a step-by- step procedure that they should follow;
A. Doing self-analysis is the first step. This calls for entrepreneurs to identify and define
their skills and desires. It should be guided by the following pivotal questions;
1. Do I really believe in, and would I be happy with, this product or service?
2. Do I really want to be this kind of person, do this kind of work, and run this kind of
franchise?
B. Evaluating the Franchise opportunity itself; the following questions are crucial
1. Did your lawyer approve the franchise contract after studied it paragraph by paragraph
2. Does the franchise call upon you to take any steps which are, according to your lawyer,
unwise or illegal in your country, or town?
3. Does the franchise give you an exclusive territory for the length of the franchise or can the
franchisor sell a second or third franchise in your territory
4. Is the franchisor connected in any other franchise companies handling similar merchandise
or services?
5. If the answer to the last question is yes, what is your protection against this second
franchise organization?
6. Under what circumstances and at what cost can you pull out of the franchise contract?
7. If you sell your franchise, will you be paid for your goodwill, or will the goodwill you
have built into the business be lost to you?

C. On the franchisor; the following guiding questions are crucial for evaluation;
1. For how many years has the franchisor been in business?
2. Does the franchisor have a reputation for honesty and fair dealing among the local
entrepreneurs holding this franchise?
3. Has the franchisor shown you any certified figures indicating exact net profits of one or
more going franchises, which you yourself checked with the franchisee?
4. Will the franchisor help you with?
 A management training program
 An employee training program
 A public relations program
 Merchandising ideas
 Financing
5. Will the franchisor help you find a good location for your franchise?

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6. Is the franchisor adequately financed so that it can carry out its stated plan of financial help
and expansion?
7. Is the franchisor a one-man company or larger company with a trained and experienced
management team – so that it can carry out its stated plan of financial help and expansion
8. Exactly what can the franchisor do for you whom you cannot do yourself?
9. Has the franchisor investigated you carefully enough to assure itself that you can
successfully operate one of their franchises at a profit both to them and to you?

C. On you – the Franchisee

1. How much equity capital will you need to buy the franchise and operate it until your sales
revenues equal your expenses?
2. Where are you going to get the equity capital you need
3. Are you prepared to give up some independence of action to get the advantages offered by
the franchise?
4. Do really believe you have the ability, training, and experiences to work smoothly and
profitably with the franchisor, your employees, and your customers?
5. Are you ready to spend much or all of the rest of your business life with this franchisor,
offering its product or service to your public?

D. On your Market
1. Have you made any study to find out whether the product or service which you propose to
sell under franchise has a market in your territory at the prices you will have to charge?
2. Will the population in your territory increase, remain static, or decrease over the next five
years?
3. Will the demand for the product or service you are considering be greater, about the same,
or less in five years?
4. What competition exists in your territory for the product or service from non-franchise
firms and franchise firms?

TYPES OF FRANCHISING/Franchising Arrangements

1) Trade name franchising
The franchisee buys the right to become identified with the franchisors trade name without
having exclusively distributed the franchisors product. Franchisors supply product that
franchisee sells under franchised trademark or logo e.g. Diary corporation products in
Uganda

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2, Piggyback franchise
This is where two or more franchised businesses that share space to offer a more
comprehensive product or service to customers.

3, Conversion Franchises
These are independent businesses that become franchised units of existing franchises

4, Single-unit franchise
These are franchises that have the right to run franchise at only on site

5, Area Franchise
These are franchises that have the right to run franchise on territory basis; this allows
franchisee to develop entire city, state, or region.

6, Multi-unit franchise
These are franchises that have rights to open several franchise units at once.

7) Product Distribution franchising

This involves licensing the franchise to handle specific products under the franchisors brand
name and trade mark through a selective distribution network.

8) Pure franchising
This is also known as comprehensive or business formal franchising. It involves providing of
the franchisee with a complete business format including;
 License for a trade name
 Products or service to be sold
 The physical plant
 The methods of operations
 A marketing strategy plan
 A quality control process etc

BENEFITS OF FRANCHISING FOR THE FRANCHISOR

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Minimizing costs of growth. The franchisor achieves quick expansion of the distribution
system with minimal capital. The franchisor identifies franchise entrepreneurs who often use
their own capital to expand the franchise
Minimizing management costs. In the absence of a franchisor, the franchisee will have to
locate, recruit and develop more managers.
Speedy growth. By identifying franchisee entrepreneurs in all corners of the area of interest,
the franchisor gets opportunity to develop a network in a short time.

BENEFITS OF FRANCHISING FOR THE FRANCHISEE

Management training and support
One of the key causes of failure or early failure in business start up is poor management.
Franchisors are aware of this problem, therefore they offer initial and follow up training and
counseling for franchisees.
In initial training the basic operations of the franchisee business of the franchise are
inculcated or instilled including;
 Pricing and selling of product or service
 Purchasing or raw materials
 Preparation of paper work
Follow up training involves;
 Field support in customer service
 Quality control
 Inventory management
 General management
Franchisors must be careful not to mistake control for assistance. Control can mar the
relationship in the franchise arrangement.

Brand name appeal

Many franchisees inherit a brand name that is well known in the market due to past and
continual advertising by Franchisor Company. Customers are therefore instantly attracted
shortly after the franchise opens the branch. Opening a new business to sell a similar product
would cost the entrepreneur high start up and promotional expenses.

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Standardized quality of goods and services
Many products in the franchise tradition are products that enjoy a good reputation as items of
good quality. The franchise enjoys this advantage although the franchisor usually insists on
rigorous quality compliance standards.

Regular advertising programs

The franchisor will often fund and run a regular advertising program to the advantage of the
franchisee. There are cases however when the franchisee is required to contribute a small
percentage of his or her profits towards an advertising pool.

Financial Assistance
Many franchisors offer financial assistance indirectly. They may lease equipments and offer
goods on credit. Some franchisors write a business plan for the franchisee. Other franchisors
negotiate loans from banks on behalf of their franchisees.

Proven products and business formats

The franchisee adopts the methods and techniques of the franchisors already established
business i.e. the franchisee benefits from the expertise, experience and established products
of the franchisor.
The franchisee is saved the risk of trial and error.

Equally important the franchisor;

 Continually invests in researching and developing new products or service
 Continually engages in market research to establish changes in market trends that
influence the success of existing and future products

Centralized buying power

Franchisors achieve economies of scale by purchasing in large quantities. If franchisors sell
goods and materials to franchisee’s, they pass on to them cost savings from discounts and
through bulk buying.
An added advantage is that the franchisee is protected from the threat of other small
independent players who may want to compete but now face higher costs, therefore

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centralized buying power and its consequent economies provide an entry barrier for would be
competitors.

Site selection and territorial selection

Franchisors are experienced in making informed location analysis basing on factors such as;
 Traffic patterns
 Zoning regulations and laws
 Accessibility
 Location (Norman Scarborough, in his Small Business Management)
 Population density etc
A problem faced by franchisees is that often franchisors conquest a good location with
several outlets, which eat into sales of the other resulting in depressed profits for all of them
except the franchisor

Greater chances of success

Because a franchisor is an established organization with superior products and marketing
strategies, it enhances leverage of franchisee for success in business
Negotiation of leases
Computer applications
Legal services

LIMITATIONS OR DISADVANTAGES OF FRANCHISING FOR THE FRANCISEE

Not every personality type is suited to undertake a franchise business. The most important
disadvantage is the franchisee’s independence and autonomy.
Major disadvantages include;

Franchise fees and profit sharing

Typically the franchisor will impose a fee for the franchisees use of the formers trade name
products and services and business format or system. The charges can take the form of;
 Upfront payment
 Royalty fees
 Profit sharing mechanism.
Because franchisors royalties + fees are calculated as a percentage of sales revenue they get
paid even if the franchise fails to earn the profits.

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Strict adherence to standardized operations
Although the franchisee ‘owns’ the business, the terms of the franchise contract will require
that the franchisee operates the outlet according to principles spelt out in the franchisors
operating manual.
Therefore the franchisees autonomy is significantly reduced. In some cases, the franchisor
carries out periodic inspections to ensure compliance with the operating standards. While the
franchisee may find the operating standards rigid and bothersome, the franchisor has to
protect the public image of the firm’s products and its reputation.

Restrictions on purchasing
Franchisors know that business people get tempted to use inputs other sources in order to
reap benefits of low costs. Franchisors do not accept this because it will compromise the set
quality standards of product or service.
The franchise contract is likely to have a clause authorizing the franchisor to take any action
so as to maintain acceptable quality standards. In this respect franchisees will be required to
purchase products or equipment from the franchisor or another supplier approved by the
franchisor.

Limited product line

A typical franchise contract will stipulate that the franchisee can only sell the products
approved by the franchisor. The franchisee may end up being compelled to handle a product
that is not first moving or be prohibited from selling a fast moving item.

Unsatisfactory training programs

Franchisors normally change a technical assistance fee which theoretically is for the
franchisee to receive training, technical advice and other forms of support are not
forthcoming; or when they are provided, they are clearly inadequate.
Market saturation
It occurs when the franchisor sets up new franchises close to existing ones. Territorial
encroachment is a common and severe setback many franchisee faces.

Reduced freedom
A franchise contract binds the franchisee to handle and sell the product in accordance with
the franchisors prescribed formula.

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Besides franchisors also engage in frequent often in-depth inspections of the franchise
business. Some routines have to be followed such as the periodic provision of data on forms
prepared by the franchisor.
In some cases the franchisor enforces uniform dressing. All this takes a way considerable
freedom and autonomy from the franchisee.

Lack of independence
Continuing obligations
Lack of individual identity
Contract difficult to cancel

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 CREATIVITY AND INNOVATION

Innovation as the central theme in entrepreneurship is the generation of a new, idea and
converting it into a new product, service or process leading to national economic growth,
increased employment and the creation of profit.
No matter how attractive or complex an invention may look, it does not constitute a true
innovation if it does not create growth or profit.
Innovation includes technical, design, manufacturing, management and commercial activities
involved in marketing of a new or improved product.
Innovation also includes the commercial use of a new or improved process or the commercial
use of new or improved commercial use of piece of equipment.

Creativity is the ability to bring something new into existence. For management the
challenge is creating a culture of creativity and innovation, where new ideas have a place to
grow and develop into tomorrow’s success stories.

Drucker (1985) argued that innovation is the tool of entrepreneurship. In addition, both
innovation and entrepreneurship demand creativity. Creativity is a process by which a
symbolic domain in the culture is changed. New songs, new ideas, new machines are what
creativity is about Mihaly(1997). Creativity is the ability to make or otherwise bring into
existences something new, whether a new solution to a problem, a new method or device, or
a new artistic object or form. Wyckoff (1991) defines creativity as new and useful. Creativity
is the act of seeing things that everyone around us sees while making connections that no one
else has made. Creativity is moving from the known to the unknown. Culture exerts a
negative force on creativity according to Pearce (1974), however, "were it not for creativity,
culture itself would not be created.

Managers must understand how to deal with the dynamics of creativity and innovation to
ensure the continual generation of new ideas.
While creativity is the generation of something new i.e. an idea, a process, a technique or a
style; innovation is the process of implementing or applying the created new concept.

CHARACTERISTICS OF CREATIVE INDIVIDUALS

It is very difficult to identify traits and attributes of creative people, however the following
are considered to be key characteristics of creative people.

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1. Knowledge - Creative people spend a good number of years mastering their chosen field
of knowledge.
2. Education - Education does not increase creativity. Education that stresses logic tends to
inhibit creativity.

3. Intelligence - Creative people do not necessarily have high IQs. They do not always
achieve the threshold for high IQ does not really matter. Move importantly creative people
have been found to possess the following intellectual abilities.
 Sensitivity to problems
 Flexibility in forming associations between objects
 Thinking in images more than in words.
 Synthesizing information
4. Personality - Typically risk-takers who are independent
- Persistent.
- Highly motivated/self –motivated
- Open to new ideas
- Able to tolerate ambiguity.
- Self confident
- Able to tolerate isolation
- They have a strong sense of humor
Available research suggests that personality characteristics and self motivation are more
important than intelligence levels in identifying creative people in a group.
5. Childhood - Creative people have usually had a child hood marked by diversity.
Experiences such as family strains, financial and downs and divorces are common.
6. Social habits - Contrary to earlier beliefs, creative people are not introverts. They tend to
be outgoing and enjoy exchanging idea with colleagues.

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 Creative Organizations
CHARACTERISTICS
Open climate - changing, trusting
Empowered staff - take decision
Flexible structure - flatter decentralized
Integrated procedures - multidisciplinary teams
Knowledge sharing - Idea screening
External Partnership - Suppliers, customers
competitors

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STRATEGIES FOR CREATIVE THINKING
1. Use analogies/metaphors
2. Ask provocative questions
3. Think in terms of possibilities
4. Reward original thinking
5. Become a creative reader-self help
6. Learn to listen carefully
7. Study the process of innovation
8. Be receptive to the unexpected.
9. Don’t fall in the “one right answer trap”
From the point of view of the organization
(i) Creativity is an organization’s resource
(ii) Creativity can offer competitive advantage therefore creativity must be nurtured,
supported and above all, REWARDED; so that people can find new ways to work and new
ways to succeed. Experimentation must be encouraged, and factions in case of mistakes and
failure must be removed.

ROSABETH MOSS KANTER’S 10 RULES FOR STIFLING (OPPRESS)

INNOVATION
1. Regard any new idea from below with suspicion because it’s new, and because it’s from
below.
2. Insist that people, who need your approval to act, first go through several other levels of
management to get their consent.
3. Ask departments or individuals to challenge and criticize each others proposals.
(This saves you the job of deciding; you just pick the survivor).
4. Express your criticism freely, and withhold your praise (That keeps people on their toes).
Let them know they are to be fired anytime.
5. Treat identification of problems as a sign of failure, to discourage people letting you
know where something in their area isn’t working.
6. Control everything carefully. Make people count everything that can be counted
frequently.
7. Make decisions to reorganize or change policies in secret, and spring them to people
unexpectedly (That also keeps people on their toes).
8. Make sure that requests for information are fully justified and make sure that it is not
given out to managers freely. (You do not want data to fall in the wrong hands).

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9. Assign to lower –level managers, in the name of delegations and participation,
responsibility for figuring out how to cutback, lay off, move people, around and implement
threatening decisions you have made. And get them to do it quickly.
10. And above all, never forget that you, the higher-ups already know everything important
about this business.

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SELECTED PRESCRIPTIONS FOR ENHANCING ORGANISATIONAL
CREATIVITY

1. Developing acceptance of change

Organizational members must believe that change will benefit them and will benefit the
organization. This belief is more likely to arise if members participate with their managers in
making decisions and if issues like job security are carefully handled when changes are
planned and implemented.

2. Encouraging new ideas

Organization managers from top to the lowest –level supervisors must make it clear in
word and deed that they welcome new approaches. To encourage creativity managers must
be willing to listen to subordinates suggestions, implement promising ones or convey them to
higher -level management.

3. Permitting more interaction

A permissive creative climate is fostered by giving individuals the opportunity to interact
with members of their own and other groups. Such interaction encourages the exchange of
useful information, the free flow of ideas, and fresh perspectives on problems.
4. Tolerating failure
Many new ideas prove impractical or even useless. Effective managers accept and allow
for the fact that time and other resources will be invested in experimenting with new ideas
that may not work.
5. Providing clear objectives
Organization members must have a purpose and direction for their creativity. Supplying
guidelines and reasonable constraints will give managers some control over the amount of
time and money invested in creative behavior.
6. Offering recognition
Creative individuals are motivated to work hard on tasks that interest them.
But like all individuals they enjoy being rewarded for well done tasks.
By recognizing people in a tangible form such as giving them bounces or pay rises,
managers demonstrate that creative behavior is valued in the organization.

Teams and creativity

1. Teams are usually formed by members coming from the whole spectrum of organizations
functions including research, design, operations, sales and marketing.

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2. Because of forming inter-functional teams the usual constraints in communication between
departments and fractions are eliminated. Creative teams are therefore very useful in new
product development.

EKVALL’S CREATIVE CLIMATE

DIMENSIONS
Dimension More Creative Less Creative
Challenge Enjoyable, Energetic Alienated, Indifferent
Freedom Independent, initiative taken Passive, rule-Bound
Liveliness Excitedly busy Boringly slow
Openness Trusting, Failure accepted Suspicious, failure punished

Idea Time Off – task play Little off task play

Mood Happy/humarous Serious/dull
Conflicts Handled Contructively Handled destructively
Support People listen helpfully People are negative and
critical
Debates Contentious ideas voiced Little questioning
Risk Taking Fast decisions, risk acting on Cautious safe decisions and
new ideas committee bound

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MANAGING CREATIVITY AS A STRATEGIC MISSION

Creativity training techniques

1. Fluency techniques
These are designed to stimulate the generation of ideas.
(a) Brainstorming

Brainstorming is a group creativity technique designed to generate a large number of ideas

for the solution of a problem.

Ground Rules

There are four basic rules in brainstorming These are intended to reduce social inhibitions
among group members, stimulate idea generation, and increase overall creativity of the
group.

1. Focus on quantity: This rule is a means of enhancing divergent production, aiming to

facilitate problem solving through the maxim quantity breeds quality. The assumption
is that the greater the number of ideas generated, the greater the chance of producing a
radical and effective solution.
2. Withhold criticism: In brainstorming, criticism of ideas generated should be put 'on
hold'. Instead, participants should focus on extending or adding to ideas, reserving
criticism for a later 'critical stage' of the process.
3. By suspending judgment, participants will feel free to generate unusual ideas.
4. Welcome unusual ideas: To get a good and long list of ideas, unusual ideas are
welcomed. They can be generated by looking from new perspectives and suspending
assumptions. These new ways of thinking may provide better solutions.
5. Combine and improve ideas: Good ideas may be combined to form a single better
good idea, as suggested by the slogan "1+1=3". It is believed to stimulate the building
of ideas by a process of association.

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Method

Set the problem

Before a brainstorming session, it is critical to define the problem. The problem must be
clear, not too big, and captured in a specific question such as "What service for mobile
phones is not available now, but needed?". If the problem is too big, the facilitator should
break it into smaller components, each with its own question.

Create a background memo

The background memo is the invitation and informational letter for the participants,
containing the session name, problem, time, date, and place. The problem is described in the
form of a question, and some example ideas are given. The memo is sent to the participants
well in advance, so that they can think about the problem beforehand.

Select participants

The facilitator composes the brainstorming panel, consisting of the participants and an idea
collector. A group of 10 or fewer members is generally more productive. Many variations are
possible but the following composition is suggested.

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  Several core members of the project who have proved themselves.
 Several guests from outside the project, with affinity to the problem.
 One idea collector who records the suggested ideas.

Create a list of lead questions

During the brainstorm session the creativity may decrease. At this moment, the facilitator
should stimulate creativity by suggesting a lead question to answer, such as Can we combine
these ideas? or How about looking from another perspective?. It is best to prepare a list of
such leads before the session begins.

Session conduct

The facilitator leads the brainstorming session and ensures that ground rules are followed.
The steps in a typical session are:

1. A warm-up session, to expose novice participants to the criticism-free environment. A

simple problem is brainstormed, for example What should be the CEO's retirement
present? or What can be improved in Microsoft Windows?.
2. The facilitator presents the problem and gives a further explanation if needed.
3. The facilitator asks the brainstorming group for their ideas.
4. If no ideas are forthcoming, the facilitator suggests a lead to encourage creativity.
5. All participants present their ideas, and the idea collector records them.
6. To ensure clarity, participants may elaborate on their ideas.
7. When time is up, the facilitator organizes the ideas based on the topic goal and
encourages discussion.
8. Ideas are categorized.
9. The whole list is reviewed to ensure that everyone understands the ideas.
10. Duplicate ideas and obviously infeasible solutions are removed.
11. The facilitator thanks all participants and gives each a token of appreciation.

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The process
 Participants who have ideas but were unable to present them are encouraged to write
down the ideas and present them later.
 The idea collector should number the ideas, so that the chairperson can use the
number to encourage an idea generation goal, for example: We have 44 ideas now,
let’s get it to 50!.
 The idea collector should repeat the idea in the words he or she has written verbatim,
to confirm that it expresses the meaning intended by the originator.
 When many participants are having ideas, the one with the most associated idea
should have priority. This is to encourage elaboration on previous ideas.
 During a brainstorming session, managers and other superiors may be discouraged
from attending, since it may inhibit and reduce the effect of the four basic rules,
especially the generation of unusual ideas.

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Evaluation

Brainstorming is not just about generating ideas for others to evaluate and select. Usually the
group itself will, in its final stage, evaluate the ideas and select one as the solution to the
problem proposed to the group.

 The solution should not require resources or skills the members of the group do not
have or cannot acquire.
 If acquiring additional resources or skills is necessary, that needs to be the first part of
the solution.
 There must be a way to measure progress and success.
 The steps to carry out the solution must be clear to all, and amenable to being
assigned to the members so that each will have an important role.
 There must be a common decision making process to enable a coordinated effort to
proceed, and to reassign tasks as the project unfolds.
 There should be evaluations at milestones to decide whether the group is on track
toward a final solution.
 There should be incentives to participation so that participants maintain their efforts.

Types of brain storming sessions

Nominal group technique

The nominal group technique is a type of brainstorming that encourages all participants to
have an equal say in the process. It is also used to generate a ranked list of ideas.

Participants are asked to write their ideas anonymously. Then the moderator collects the ideas
and each is voted on by the group. The vote can be as simple as a show of hands in favor of a
given idea. This process is called distillation.

After distillation, the top ranked ideas may be sent back to the group or to subgroups for
further brainstorming. For example, one group may work on the color required in a product.
Another group may work on the size, and so forth. Each group will come back to the whole
group for ranking the listed ideas. Sometimes ideas that were previously dropped may be
brought forward again once the group has re-evaluated the ideas.

It is important that the facilitator be trained in this process before attempting to facilitate this
technique. The group should be primed and encouraged to embrace the process. Like all team

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efforts, it may take a few practice sessions to train the team in the method before tackling the
important ideas.

Group passing technique

Each person in a circular group writes down one idea, and then passes the piece of paper to
the next person in a clockwise direction, who adds some thoughts. This continues until
everybody gets his or her original piece of paper back. By this time, it is likely that the group
will have extensively elaborated on each idea.

The group may also create an "Idea Book" and post a distribution list or routing slip to the
front of the book. On the first page is a description of the problem. The first person to receive
the book lists his or her ideas and then routes the book to the next person on the distribution
list. The second person can log new ideas or add to the ideas of the previous person. This
continues until the distribution list is exhausted. A follow-up "read out" meeting is then held
to discuss the ideas logged in the book. This technique takes longer, but it allows individuals
time to think deeply about the problem.

Team idea mapping method

This method of brainstorming works by the method of association. It may improve

collaboration and increase the quantity of ideas, and is designed so that all attendees
participate and no ideas are rejected.

The process begins with a well-defined topic. Each participant brainstorms individually, then
all the ideas are merged onto one large idea map. During this consolidation phase,
participants may discover a common understanding of the issues as they share the meanings
behind their ideas. During this sharing, new ideas may arise by the association, and they are
added to the map as well. Once all the ideas are captured, the group can prioritize and/or take
action.

Electronic brainstorming

Electronic brainstorming is a computerized version of the manual brainstorming technique. It

is typically supported by an electronic meeting system (EMS) but simpler forms can also be
done via email and may be browser based, or use peer-to-peer software.

With an electronic meeting system, participants share a list of ideas over the Internet. Ideas
are entered independently. Contributions become immediately visible to all and are typically

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anonymized to encourage openness and reduce personal prejudice. Modern EMS also support
asynchronous brainstorming sessions over extended periods of time as well as typical follow-
up activities in the creative-problem-solving process such as categorization of ideas,
elimination of duplicates, assessment and discussion of prioritized or controversial ideas.

Electronic brainstorming eliminates many of the problems of standard brainstorming, such as

production blocking and evaluation apprehension. An additional advantage of this method is
that all ideas can be archived electronically in their original form, and then retrieved later for
further thought and discussion. Electronic brainstorming also enables much larger groups to
brainstorm on a topic than would normally be productive in a traditional brainstorming
session.

Some web based brainstorming techniques allow contributors to post their comments
anonymously through the use of avatars. This technique also allows users to log on over an
extended time period, typically one or two weeks, to allow participants some "soak time"
before posting their ideas and feedback. This technique has been used particularly in the field
of new product development, but can be applied in any number of areas where collecting and
evaluating ideas would be useful.

Directed brainstorming

Directed brainstorming is a variation of electronic brainstorming (described above). It can be

done manually or with computers. Directed brainstorming works when the solution space
(that is, the criteria for evaluating a good idea) is known prior to the session. If known, that
criteria can be used to intentionally constrain the ideation process.

In directed brainstorming, each participant is given one sheet of paper (or electronic form)
and told the brainstorming question. They are asked to produce one response and stop, and
then all of the papers (or forms) are randomly swapped among the participants. The
participants are asked to look at the idea they received and to create a new idea that improves
on that idea based on the initial criteria. The forms are then swapped again and respondents
are asked to improve upon the ideas, and the process is repeated for three or more rounds.

In the laboratory, directed brainstorming has been found to almost triple the productivity of
groups over electronic brainstorming.

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Individual brainstorming

"Individual Brainstorming" is the use of brainstorming on a solitary basis. It typically

includes such techniques as free writing, free speaking, word association, and drawing a mind
map, which is a visual note taking technique in which people diagram their thoughts.
Individual brainstorming is a useful method in creative writing and has been shown to be
superior to traditional group brainstorming

Question Brainstorming

This process involves brainstorming the questions, rather than trying to come up with
immediate answers and short term solutions. This technique stimulates creativity and
promotes everyone's participation because no one has to come up with answers. The answers
to the questions form the framework for constructing future action plans. Once the list of
questions is set, it may be necessary to prioritize them to reach to the best solution in an
orderly way. Another of the problems for brainstorming can be to find the best evaluation
methods for a problem.

(b) Brain writing

When to use it

Brainwriting is particularly useful with a group of people who are somewhat reticent and
would be unlikely to offer many ideas in an open group session such as Brainstorming.

It is also useful when everyone has different problems that they want to solve.

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It also works well with large groups - there is no real limit to the group size.

  X        Long
Quick
 

      X    Psychological
Logical
 

        X  Group
Individual

How to use it

Give everyone a brain writing sheet

Hand out sheets as below, with space for a problem definition at the top of the page, and
rectangles below into which ideas can be written have as many rows of rectangles as will fit
on one sheet of paper. Make the space in the rectangle big enough to contain an average
suggestion.

Problem:

Owner:

         

         

Identify problems

Each person writes a problem at the top of the page. It can be a different problem for each
person and it can be all the same for everyone, for example if you are all focused on the
same problem.

If the ideas are for an individual, then they may put in their name, so the page can
eventually find its way back to them.

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Write ideas

Now each person passes on the sheet to another person, who writes down one or more ideas
to solve the problem.

You can use different schemes here, including:

 Each person adds one idea.

 Each person adds one row of ideas (usually four or five).
 Each person adds as many ideas as they like.

Early ideas in particular should be very creative, as they are to act as stimuli for later
problems.

Keep going until you are done

The sheets are now passed on to the next person, who adds more ideas, using the existing
ideas as stimuli where possible.

The sheets are passed around until they are filled up. You can then add more sheets or stop
when a page is full.

Example 

Problem: Get to the airport on time

Owner: Jane Dow

Ride on a Grow your Do work at Never leave the

Take a taxi
clock own wings airport airport

Set alarm Hire a Order taxi Take the Take a later

on watch helicopter beforehand train instead plane

How it works

Brainwriting enables people who have ideas but are concerned about voicing them in a
broader group to anonymously make them visible. They thus do not have to 'compete' with
others to be heard.

It also helps that all ideas are visible and can be easily scanned to trigger new ideas.

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It can speed things up because everyone is offering ideas all of the time.

(c) Mind mapping

Here an idea is written in the center of a piece of paper. Then new or related ideas are
“grown” out of the basic idea. “We form a map of reality which points out what is to be
noticed and valued among the plethora of daily events” (McCaskey 1991).

A mind map is a diagram used to represent words, ideas, tasks, or other items linked to and
arranged around a central key word or idea. Mind maps are used to generate, visualize,
structure, and classify ideas, and as an aid to studying and organizing information, solving
problems, making decisions, and writing.

The elements of a given mind map are arranged intuitively according to the importance of the
concepts, and are classified into groupings, branches, or areas, with the goal of representing
semantic or other connections between portions of information. Mind maps may also aid
recall of existing memories.

By presenting ideas in a radial, graphical, non-linear manner, mind maps encourage a

brainstorming approach to planning and organizational tasks.

Though the branches of a mind map represent hierarchical tree structures, their radial
arrangement disrupts the prioritizing of concepts typically associated with hierarchies
presented with more linear visual cues. This orientation towards brainstorming encourages
users to enumerate and connect concepts without a tendency to begin within a particular
conceptual framework.

The mind map can be contrasted with the similar idea of concept mapping. The former is
based on radial hierarchies and tree structures denoting relationships with a central governing
concept, whereas concept maps are based on connections between concepts in more diverse
patterns.

Characteristics

 Mind maps are, by definition, a graphical method of taking notes.

 Their visual basis helps one to distinguish words or ideas, often with colors and
symbols.

 They generally take a hierarchical or tree branch format, with ideas branching into
their subsections.

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  Mind maps allow for greater creativity when recording ideas and information, as well
as allowing the note-taker to associate words with visual representations.

 Mind maps differ from concept maps in that mind maps focus on only one word or
idea, whereas concept maps connect multiple words or ideas.

 Mind maps are for a different purpose, being collections of words structured by the
mental context of the author with visual mnemonics to help in memory and
organization; therefore,

 Though the use of color, icons and visual links is informal, it is necessary to the
proper functioning of the mind map.

Mind map guidelines

In his books on Mind Maps author Tony Buzan suggests using the following guidelines for
creating Mind Maps:

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 1. Start in the center with an image of the topic, using at least 3 colors.
2. Use images, symbols, codes, and dimensions throughout your Mind Map.
3. Select key words and print using upper or lower case letters.
4. Each word/image is best alone and sitting on its own line.
5. The lines should be connected, starting from the central image. The central lines are
thicker, organic and flowing, becoming thinner as they radiate out from the centre.
6. Make the lines the same length as the word/image they support.
7. Use multiple colors throughout the Mind Map, for visual stimulation and also to
encode or group.
8. Develop your own personal style of Mind Mapping.
9. Use emphasis and show associations in your Mind Map.
10. Keep the Mind Map clear by using radial hierarchy, numerical order or outlines to
embrace your branches.

This list is itself more concise than a prose version of the same information and the Mind
Map of these guidelines is itself intended to be more memorable and quicker to scan than
either the prose or the list.

Uses of mind maps

A mind map is often created around a single word or text, placed in the center, to which
associated ideas, words and concepts are added.

Mind maps can be used for:

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  problem solving
 outline/framework design
 anonymous collaboration
 marriage of words and visuals
 individual expression of creativity
 condensing material into a concise and memorable format
 team building or synergy creating activity
 enhancing work morale

Despite these direct use cases, data retrieved from mind maps can be used to enhance several
other applications, for instance expert search systems, search engines and search and tag
query recommender. To do so, mind maps can be analyzed with classic methods of
information retrieval to classify a mind map's author or documents that are linked from
within the mind map.

Mind maps can be drawn by hand, either as "rough notes" during a lecture or meeting, for
example, or can be more sophisticated in quality. An example of a rough mind map is
illustrated. There are also a number of software packages available for producing mind maps.

Problems of Mindsets
 Visual Perception
 Tendency to impose order
 Insight problems “thinking outside the box”
 Conditional thinking
 Search for solutions in areas close to previous solutions
 Rigidity in thinking, lack of perception and poor self image
 Self fulfilling prophecy
 Beliefs guide decisions we make

(2) Excursion sessions

This is also called FORCED RELATIONSHIP. Here people are given paintings. They are
then asked to describe what they see. After this they are supposed to “force –fit” their
impressions about the paintings
(3) Pattern breakers
Here participants take a stroll with a camera. Taking snapshots as prompts.

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(4) Shake-up exercises
Are games or team activities to help employees have a laugh and relax? Here groups of
employees use the “fun” rooms to conduct meetings in a relaxed atmosphere.

Barriers to creativity
 People are the gatekeepers of change and resist variations from the status quo.
 Past success bestows an honored status on the belief in what used to work well and this
remains in place unquestioned.

Kriegel and Brandt’s Fourteen Scared Cows

Sacred cows trample creative, innovative thinking and inhibit quick response to change.

Definition: Scared cow 

An out modeled belief, assumption, practice, policy system or strategy generally invisible
that inhibits change and prevents responsiveness to new opportunities.

Kriegel and Brandt identified 14 common sacred cows that work against change readiness.

The Paper Cow

 The information age has brought us more paper than ever.
 A lot of time is put into preparing this material and most of it goes unread.
The following questions about every paper that crosses your desk should be asked and
addressed.

Why?

To determine if paper work is increasing your red time.

 Does this paper provide value to the client?
 Does it improve productivity?
 Does anybody read it or act on it?

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If you can’t satisfactorily answer one of these questions you have an outmoded practice or an
irrelevant piece of paper on your hands.

The Meeting cow

Organizations that thrive in changing environment find decision making by committee to be

anathema.

 Why
 Consensus takes forever.
 Meetings take long

Meetings need to be kept short and infrequent to best utilize the time and energies of every
one
 Calculate the cost of every meeting based on salaries, room and equipment rentals
 Make meetings move efficient by removing the chairs and force people to stand up.

The Speed cow

A high speed gear for accomplishing work is really a high speed trap
 it increases stress
 Causes accidents and mistakes
 Reduces the quality of what we create in business.

N.B. It may be fashionable to be busy extremely but it is not the most effective way to work.
The Expert cow
 We sometimes forget that experts get it wrong about as often as they get it right.
 When the environment is undergoing rapid change, experience and expertise can be a
major obstacle to change and innovation.

Rather than emulating experts, one needs to have a beginners mind.

Why?
 They ask embarrassing questions
  They have open minds and see with fresh eyes
 They notice the obvious and don’t know that certain things cant be done.

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 The Cash cow

One of the most dangerous sacred cows is the product line or customer group that has been a
roaring success.

Niches quickly turn to ruts and after awhile the rut can lead into a grave.

Companies that are succeeding today are broadening their niches and building on their
success.
How to widen your niche
 Look at your company’s competitive advantage and core competences and ask how those
same skills could be applied in a broader context.
 Look at it from your customer’s point of view.

‘The minute you are satisfied with where you are, you are not there anymore’

( Tonny Gwynn, seven time batting champion)

The Competitive cow

 Head to head competition and playing by conventional rules will not get you where you
want to go.

Sam Walton, founder and former CEO of Wal-Mart had 10 rules for success and it was his
tenth rule that set his company apart from his competitors “Break the rules”.
 If all your competitors are doing something one way, do it exactly the opposite, and that’s
where you will get the edge.

The Customer Cow

You cannot just satisfy your customers because everyone does that.
 Surprise them instead
 Give them something they don’t expect
 Go beyond the conventional market research to find out what customers experience when
they deal with your company.
 Have direct firsthand experience, stand in their shoes and be a customer.

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The Low Price cow

Price is no longer king. It is value.

 Customers have become very purposeful shoppers with well informed buying patterns
 Customers go to stores where they know they can get a good deal
 Customers are loyal to companies that give them an extra service

The Quick Reaction cow

 It is not enough to react anymore we have got to be pro-active.
 We are like surfers, to keep ahead we have got to focus on the horizon, look for the waves
we want to ride and start paddling long before they approach.
 To differentiate ourselves from competition we have to lead our customers. If you want to
be the first to enter a new territory you can’t wait for large amount of evidence.

No Mistakes cow

The no mistake ethic does more harm than good. 

 It fosters an atmosphere of caution, which undermines innovation, creativity and
originality.

What happens  
 When people are afraid to make mistakes, work gets bogged down in meetings and
approvals because they rely on what worked in the past.
 Avoiding fault becomes more important than solving problems.

The Down-sizing cow

 The aim of downsizing is to create a leaner and meaner company.
 However, it does not work at times. Morale is devastated and anxiety runs high.
 Companies that downsize usually ask the wrong question.

The Techno cow

People stay in touch because of modern technologies.

 In the US for example 33% of the workforce works at least part time from home.

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 Companies use video conferencing to do business
 It is important to note that personal contact is very advantageous and the company has to
set up ways for work teams to come together.

By coming together people are able to enrich their views of their jobs.

The Team cow

According to management professor Edward Lawler “Teams are the Ferraris of work
design”.
 They are high on performance but high to maintain and expensive.
 Throwing people into a room does not make them a team because not everyone is suited to
team play nor does every function need a team.
 Do not over use teams or use them for jobs that individuals can do better. Teams can
squash motivation and action.

Creating Team synergy

  Treat everyone’s participation as important
 Value everyone’s contribution regardless of first impressions
 Move out of fault finding mode
 Build bridges of understanding
 Stay open to different points of view
 Target ideas not the person
 Discuss ideas not the person.
 Confront non-contributing or obstructionist team members, but do it without blame or
hostility.
Managers should model behavior, people will respond openly to managers who respect
others, listen well and act honestly.

The Work till you drop cow

The cost of working marathon days is premature breakdown.
 You lose your sharpness and concentration
 You make errors and your creativity suffers
  Over working actually leads to physical break down

Studies show that when you shorten the workday, efficiency and productivity increase.

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 INNOVATION

Innovation is the process of bringing the best ideas into reality, which triggers a creative idea,
which generates a series of innovative events. Innovation is the creation of new value.
Innovation is the process that transforms new ideas into new value-turning an idea into value.
You cannot innovate without creativity. Innovation is the process that combines ideas and
knowledge into new value. Without innovation an enterprise and what it provides quickly
become obsolete.

The dictionary defines innovation as the introduction of something new or different.

Innovation is the implementation of creative inspiration. The National Innovation Initiative of
USA (NII) defines innovation as "the inter-section of invention and insight, leading to the
creative of social and economic value" Innovation is "value" - the creation of value adding
value to customer's satisfaction-"delighting the customers". Innovation is the basis of all
competition advantages, the means of anticipating and meeting customer's needs and the
method of utilization of technology.

Innovation is fostered by information gathered from new connections; from insights gained
by journeys into other disciplines or places; from active, collegial networks and fluid open
boundaries. Innovation arises from organizing circles of exchange, where information is not
just accumulated or stored, but created. Knowledge is generated a new from connections that
were not there before. Wheatley (1994).

According to Schumpeter Innovation is;

Introduction of new goods

New markets
New raw materials
New organisations

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Agreed Definitions
 The act introducing something new
 A new and unusual thing or product
 A creation resulting from the study and experimentation
 The act of starting something new for the first time
 The implementation of a new or significantly improved idea, good services, process or
practice that is intended to be useful

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General Meaning
Innovation is supposed to add value
Innovation leads to
– Growth
– Productivity
– Quality
– Efficiency

Fiona Fitzpatrick identified the following elements of innovation:

1. Challenge: What we are trying to change or accomplish-the "pull"

2. Customer focus: Creating value for your customers - the "Push"

3. Creativity: Generating and sharing the idea(s)- the "brain"

4. Communication: The flow of information and ideas -the "life blood"

5. Collaboration: People coming together to work together on the idea(s) - the "heart."

6. Completion: Implementing the new idea-the "muscle".

7. Contemplation; Learning and sharing lessons lead to higher competency-the "ladder"

8. Culture: The playing field of innovation includes:

* Leadership (sees the possibilities and positions the team for action-the role model)

* People (diverse groups of radically empowered people innovate -the source of innovation)

* Basic values (trust and respect define and distinguish an innovative organization-the
backbone).

* Innovation values (certain values stoke the fires that make the "impossible" possible-the
Spark).

9. Context: Innovation is shaped by interactions with the world.

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FORMS OF INNOVATION

In a start-up, the entrepreneur is regarded as the key actor in developing a business idea,
marshalling resources, and creating an enterprise to bring a new product or service to the
market. In a competitive business environment, the entrepreneur and the enterprise should
continue to seek out new opportunities and make the necessary arrangement to convert them
into new goods and services. Innovation should, therefore, impregnate the entire enterprise
for the creation and invention of competitive edge and relevancy in the market place.

Product Innovation

This involves the introduction of new goods or services that is substantially improved.

This might include improvements in the functional characteristics, technical abilities, ease of
use on any other dimensions.
Marketing Innovation
The development of new market methods with improvement in product design or packaging,
products protection or pricing.

Organisational Innovation

Involves the creation of new organisations business ways of running organisations or new
transitional behaviour
Business Model Innovation

Involves changing the way business is done in terms of capturing value

Financial Innovation

The development of new financial services, combining basic financial attributes (risk-sharing,
liquidity, credit in innovative ways.)
Innovation in terms of Impact

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DEGREES OF INNOVATION

There are three major degrees of innovation i.e. incremental, radical and fundamental
(Budworth 1996).

Incremental innovation

 This type of innovation entails continuous improvement of products, process and services.
Making small changes at one given time.
Refining and extending existing design.
Examples
 A simple product may be improved in terms of better performance or lower cost through
use of higher performance components/materials.
 Similarly innovation in process technology may lead to improved production methods
through small changes in production equipment or organization. The method in this case is
intended to produce technologically new or improved products or essentially to increase
the production or delivery efficiency of existing products.

Incremental innovations are achieved through learning by doing or learning by using on part
of the manufacturers and consumers/end users respectively.

The cumulative effect of these small changes can be large and will bring about growth in
productivity.
Incremental innovation does not include;
Making creative improvements,
Stopping doing something,
Buying more machines,
Changes in prices or productivity

Radical innovation
This type of innovation leads to change but does not lead to a new industry
It leads to establishment of a new dominant design, a high degree of change in human
behavior e.g. the introduction of desktop computers.

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Fundamental innovation
This type of innovation depends on major new scientific knowledge and normally opens up
completely new industries. 

Example:  The discovery of the transistors led to the discovery of the integrated circuit, which
in turn led to the development of cheap and reliable computers and other electronic devices.

Basic conditions for fundamental innovation include;

Strong science base
Strong Research & Department
Strong investment capabilities

MODELS OF INNOVATION
Three models have been identified
Technology push,
Demand pull,
Interactive

Technology push mode

Innovation is triggered as a result of basic research in science resulting into wide spread
marketing of new products or wide spread use of new processes
Innovation starts with an identified customer/market need
In this model science is a major driving force. Innovation is based on new technology or
bright idea

Demand pull model

Innovation is triggered in response to demand for the satisfaction of some classes of needs.
Scholars argue that innovations are exclusively demand driven.

Factors that lead to innovation from the demand side include

Unexpected change in customer tastes

Process needs

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Demographics
Changes in perception of customers

Interactive mode
Innovation is from complex interaction between supply and the demand
 On the demand side, you have potential and actual users, marketing organizations
 On the supply side you have R & D labs, scientific and technical institutions
 The evolving knowledge base of science and technology as well as the structure of market
demand play a central role in innovation in an interactive fashion (Rosenberg 1982)

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CHALLENGES OF INNOVATION

The place of innovation in commercial success is the development or adoption of new

concepts or idea that leads to any form of increased organizational or social benefit.
Innovation is vitally concerned with novel approaches, new ideas, and originality, and it the
means by which ideas are exploited for competitive advantage.

1. The need to investigate our latent natural resources for the possibility of transmitting them
into goods and services. This would require a scientific analysis of the various resources
available in the country, the identification of their properties, and a determination of the
extent to which those properties can be harnessed.

2. The need to develop new technology which can be used to process the raw materials which
may result from the investigation of natural resources suggested above and with a view to
producing goods and services from them.

3. The need to adapt existing technology so as make them accept local materials are
substitutes. A complete change from an almost total dependence on foreign research and
technology is source of products is called

While brain-power is the most valuable resource, great ideas are in short supply. Successful
entrepreneurs place high premium on attracting and keeping talent because wealth flows
directly from innovation. Creativity is the root of innovation. It is a process and a skill which
can be developed and managed throughout the entire enterprise.

One of the first steps in creating a culture of innovation is unleashing the creativity in you.
The challenge is getting to see the world with fresh ideas and to develop fresh solutions.
Speed innovating is a proven approach for helping you develop breakthrough solutions in the
shortest possible time.

Creative ideas are not enough for your business to survive. You need a process organization
and culture that will help you maximize your creative assets. This is innovation capability
that helps your pull together the best thinking within your business, enabling you to connect
the organization dots.

Shapiro (2004) argues that perpetual and pervasive innovation is the key to long -term
sustainable success in the relentless competition for customers. To survive any competition,
you must rapidly and repeatedly re-invent yourself.

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96
The road map to reinvention starts by applying the seven R's and these include;

1. Rethink your underlying assumptions.

2. Reconfigure how you carry out work.

3. Resequence when work takes place

4. Relocate where work is done to cut down on handoffs and delays.

5. Reduce the frequency of carrying our specific activities.

6. Reassign who does the work by asking if anyone else could achieve the same result more
effectively and efficiently.

7. Retool the technology that supports getting the work done. Could new software and
automated equipment transform our ways of working?

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The Startup Entrepreneur's Guide to Risk Management

Only 44% of small businesses stick around four years or more. One big reason so many go
away: Poor risk management.

The Risk Management Framework

Risk, in business terms, is the possibility of a loss or other adverse event that has the
potential to interfere with an organization’s ability to fulfil its mandate.

What is risk management?

Risk management ensures that an organization identifies and understands the risks to which
it is exposed. Risk management also guarantees that the organization creates and
implements an effective plan to prevent losses or reduce the impact if a loss occurs.

A risk management plan includes strategies and techniques for recognizing and confronting
these threats. Good risk management doesn’t have to be expensive or time consuming; it
may be as uncomplicated as answering these three questions:

1. What can go wrong?

2. What will we do, both to prevent the harm from occurring and in response to the harm
or loss?

3. If something happens, how will we pay for it?

Benefits to managing risk

Risk management provides a clear and structured approach to identifying risks. Having a
clear understanding of all risks allows an organization to measure and prioritize them and
take the appropriate actions to reduce losses. Risk management has other benefits for an
organization, including:

 Saving resources: Time, assets, income, property and people are all valuable resources
that can be saved if fewer claims occur.
 Protecting the reputation and public image of the organization.

 Preventing or reducing legal liability and increasing the stability of operations.

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  Protecting people from harm.

 Protecting the environment.

 Enhancing the ability to prepare for various circumstances.

 Reducing liabilities.

 Assisting in clearly defining insurance needs.

 Others

1. Raised awareness of significant risks.

The biggest danger to a business is failing to identify a risk until it's too late. This can be
costly in terms of reputation, security, money and internal morale. Early identification of
threats empowers a business to categorise and prioritise risks and to deal with them in a
timely and effective way.

2. Recognition of responsibility and accountability.

Having identified possible risks, a business can then assign the most relevant party (internal
staff or external experts as appropriate) to deal with them. A strong risk management process
will ensure that once assigned, a risk can be tracked to ensure it is dealt with on time and
effectively.

3. Identification of new opportunities

Identifying and dealing with risks often presents a company with new opportunities that
would have otherwise gone undiscovered. For example, where a problem in remedying
threats occurs a company is presented with the opportunity to review and strengthen internal
policy and procedures. Risk assessments will also present opportunities at an earlier stage to
explore new ways of doing things and alternative courses of action should a problem occur.

As part of a risk management process there should be opportunity for constant review to
discover ways to improve business practices and reduce future threats.

4. An action plan for effectively dealing with significant risks

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Unfortunately it's all too often the case that a company is unaware of a risk before it becomes
a significant threat to their business.

An effective risk management process will include an action plan. This will include well
thought out actions for implementation should risks threaten to become significant.

Apart from saving a company from valuable business losses, being prepared in this way plays
an important part in protecting their external reputation should 'fall out' from the risk become
public.

5. Enhanced corporate communication

The need to deal with risks in an effective manner instills a culture of communication
throughout an organisation. It is rarely the case that a risk is dealt with in isolation and will
call on interdepartmental teams to communicate with each other on a regular basis. It also
encourages better communication from management board to stakeholders with the news of
how risks are being better managed.

In order to identify risks and figure out how best to mitigate them, we first need a framework
for classifying risks.

All risks have two dimensions to them: likelihood of occurrence, and severity of the potential
consequences. These two dimensions form four quadrants, which in turn suggest how we
might attempt to mitigate those risks:

Risk Map

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Once we know the severity and likelihood of a given risk, we can answer the question: Does
the benefit of mitigating a risk outweigh the cost of doing so?

Quadrant A: Ignorable Risks

Cost effectiveness is an important consideration in deciding how we face up to risks. Risks

with relatively minor consequences and a relatively low likelihood of occurring -- those in
Quadrant A of our framework -- obviously aren't worth spending a lot of time worrying
about.

An example of a low-likelihood, minor-consequence risk might be the possibility of getting a

flat tire on your way to a routine meeting. Assuming you service your car regularly and you
drive on maintained roads, a flat tire might cause you to be late to a meeting once every ten
years. It's not a big deal.

Quadrant B: Nuisance Risks

The next category of risks are those we call "nuisance risks" -- little things that often seem to
go wrong, but whose impacts are easy enough to minimize through straightforward changes
in behaviour. There are countless examples of nuisance risks and simple solutions:

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  The printer runs out of toner while you're preparing the proposal for the customer
meeting that starts in 30 minutes. Solutions: don't wait until the last minute, and
always keep extra toner on hand.

 Your lead engineer gets the flu three days before the scheduled release date of your
first customer beta. Solutions: create a development process free of dependencies on
any one person, and build in contingencies for the fact that almost everything seems
to take twice as long and cost twice as much as you originally expect.

 You knock a mug of coffee into your laptop keyboard and coat your hard drive in
cream and sugar, making your marketing plan inaccessible. Solution: use software to
perform automated daily backups so that you'll lose, at most, a day of work if you
destroy your computer.

With a little common sense, nuisance risks shouldn't cause any lost sleep.

Quadrant C: Insurable Risks

Risks that could have major consequences but are relatively unlikely to happen are often
insurable. Insurance is the practice of spreading the cost of an improbable loss across a group,
so that no single individual bears the entire cost of a disaster. Everybody pays a premium to
the insurance company, and the insurance company pays claim benefits when one of its
customers experiences an insured loss.

Here are a few common forms of insurance and the risks they cover:

 Property & Casualty Insurance can mitigate losses from fire, theft, and natural
disasters;
 Key Executive Insurance can mitigate losses from the death or incapacitation of a
management team member;
 Liability Insurance can mitigate lawsuits resulting from product defects or on-site
injuries to visitors;
 Errors & Omissions Insurance can mitigate lawsuits from disgruntled customers; and
 Directors & Officers Insurance can mitigate lawsuits in cases of negligence,
harassment, or discrimination.

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Quadrant D: The Company Killers

Now we come to the Company Killers: the risks with both a relatively high likelihood of
occurrence and major consequences. These risks can sink start-ups and Fortune 500
companies alike. The survival of your venture depends on your ability to identify and
mitigate the company killers.

The thing that makes company killers so deadly is that there are so many of them.
Individually, they may seem manageable, but collectively, they represent a true challenge for
any entrepreneur.

Identifying & Mitigating the Company Killers-Major Risks

Companies flat line when the cash runs out and total current liabilities (i.e., bills due now)
exceed total liquid assets. Risk management is all about identifying and mitigating the
uncertainties -- especially the company killers -- that surround cash flows.

Uncertainty plagues businesses in countless ways, but we can group most company killers
into the following categories:

 Market Risks
 Competitive Risks
 Technology & Operational Risks
 Financial Risks
 People Risks
 Legal & Regulatory Risks
 Systemic Risks

These categories are neither exhaustive nor mutually exclusive. Some risks span several
categories. Let's look at some examples.

Market Risks

Market risks refer to whether or not there is sufficient demand for what you have to offer at
the price you set. Many inventors have died penniless, clinging to the belief that the market
would beat a path to his door if he designed the better mousetrap.

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Fortune 500 companies spend billions on market research, and every year, they introduce
products that are an instant flop. On the other hand, in 1943, the president of IBM allegedly
predicted, "I think there is a world market for maybe five computers."

Unless what you sell is a commodity, there is no easy way to know how the market will
receive any new product. Feedback from friends, surveys of potential customers, focus group
testing, and beta testing are all useful techniques for helping to gauge market acceptance.
However, nobody -- not you, not your best friend, not your venture capitalist -- can know for
sure whether people will spend money on your solution until you actually try to sell it.

One way for entrepreneurs to mitigate market risk is to avoid perfection. It's a fallacy to think
that any product will ever be "finished" in the sense that it will make all users completely
happy. When your product becomes good enough to make some customers reasonably happy,
get it into the market where it can start generating cash flow and feedback.

As Steve Jobs put it, "Real artists ship." Until real customers start using and talking about
your actual product -- as opposed to some mock-up you test in a focus group -- you have no
real way of knowing what you are doing right and what you are doing wrong. Release --
observe -- improve -- repeat.

Competitive Risks
Every venture has more competitors and fewer competitive advantages than it thinks. If there
is money to be made by satisfying a pressing need in the marketplace (is there any other way
to make money?), you can be sure that plenty of others are gunning for that same consumer
dollar.

Business is a contact sport, and some of your competitors will play rough. They'll copy your
business model. They'll try to out-innovate you. They'll try to out-spend you on marketing.
They'll start price wars. They'll start rumours about your product. They'll try to do an end-run
around your patents. They'll try to steal your trade secrets. They'll try to poach your best
people. Just because you're paranoid, it doesn't mean they're not out to get you.

To stay ahead of your competition, you must continuously ask yourself -- and your trusted
advisors -- what others might do to try to beat you, and then develop appropriate defenses.
Know your Strengths, Weaknesses, Opportunities, and Threats -- S.W.O.T analysis isn't just
a business school exercise. Figure out what you do better than all of your competitors --
whether it be price, features, quality, or some other advantage -- and focus on maintaining
your leadership in that category.

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Technology & Operational Risks

It's one thing to say you're going into the business of making and selling widgets. It's quite
another thing to master the actual mechanics of making and selling widgets.

Technology and operational risks broadly cover everything having to do with execution: Can
your team finalize the product design on a limited R&D budget? Will your product work as
intended? Can you find reliable vendors? Can you manufacture it? Can you optimize the
logistics of product distribution? Can you create an effective product support infrastructure?
Will your firewall prevent hackers from stealing customer credit card numbers? Do you have
a backup plan to keep your company running when an accident destroys some key equipment
in your data centre?

When it comes to execution, there's no substitute for experience. It's all about careful
planning and watchful management by people who know what they're doing. Businesses
started by rookie entrepreneurs blow up disproportionately because they don't know how to
avoid even some more obvious land mines.

Mistakes are inevitable; we all learn from our mistakes and become better over time.
However, research by Gompers, Kovner, Lerner, and Scharfstein (Performance Persistence
in Entrepreneurship, Harvard Business School, 2008) suggests that entrepreneurs with a track
record of success have a much higher probability of future success (30%) than first-time
entrepreneurs (18%). (The paper studied entrepreneurs who raised venture capital, and
defined "success" as having or registering for an IPO.) Learning from past mistakes is
important, but if you really want to increase your chances of success, then find some co-
founders who have succeeded in the past.

Financial Risks

The end of the road for any business is running out of cash. Some days, when you're an
entrepreneur, it seems like all roads lead there.

For start-ups, the biggest financial risk stems from not having a Plan B in case investors and
lenders say no (or don't say yes quickly enough). Many entrepreneurs fail because they make
the mistake of betting everything on being able to secure outside financing.

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It's true that many types of capital-intensive businesses do require significant start-up
funding. But if you're a rookie entrepreneur, the odds of finding an investor willing to take a
huge risk on you are slim. It may be more prudent to start a business that requires a more
modest amount of initial funding. You'll also want to have two separate business plans: one
for growing the business if you happen to succeed at finding an investor, and one for
bootstrapping the business if you have to go it alone.

If you do succeed at raising capital, the next trick is to figure out how to start generating
enough revenues to cover your costs before you run out of money. If you thought raising
capital was tough, you're in for a surprise.

Financial risks don't disappear once your business is up and running. Any number of things
can adversely affect the cash flows of operating ventures: Customers can default on your
invoices (credit risk). The cost of your raw materials could skyrocket (commodity price risk).
A strengthening dollar can reduce the net profits from your international customers, or a
weakening dollar can jack up the cost of your offshore manufacturing operations (exchange
rate risk). A spike in interest rates could raise the cost of your working capital (interest rate
risk). A plunge in the value of stocks or real estate you pledged as collateral could cause your
bank to cut your credit lines (asset price risk).

Entrepreneurs quickly discover that it's impossible to raise money when you need it, and
everybody wants to give you money when you don't need it. One way to mitigate financial
and other risks is to take funding when it's available and keeping it in reserve for a rainy day.

People Risks

People are, at the same time, the most crucial and least predictable element of any business.

The right combination of experience, contacts, and temperament among the founding team
can vastly increase a venture's odds of success. Failure to recruit, motivate, and retain the
right partners can spell doom.

Companies fall apart when it develops major rifts: when one faction wants to move one way,
while others seek a different result.

As an entrepreneur, one of your most important responsibilities is to establish a clear vision

and culture that the entire team can rally behind. Everybody needs to row in the same

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direction. Everybody needs to be able to tolerate each other for eighty hours a week. You
must manage strong egos, mediate personality clashes and disagreements, and rein in rogue
team members.

A company is only as strong as its weakest link. Don't let personal relationships cloud your
judgment: your old college roommate might be a good marketer, but she may not be the best
person to market your specific product to your specific target market. If you discover that a
member of your team isn't going to work out, you need to fix it quickly before the situation
gets worse.

Legal & Regulatory Risks

Lawyers get paid the big bucks to keep you out of trouble. So do other specialists, if you
happen to be in a heavily regulated industry like pharmaceuticals or air travel.

The list of possible problems with legal or regulatory roots is almost endless: tax
complications stemming from your choice of legal entity or state of incorporation; disputes
arising from poorly structured agreements; lawsuits filed by a competitor alleging
misappropriation of trade secrets by one of the hotshot programmers you recently recruited
from them.

The first step towards mitigating legal and regulatory risk is to learn enough about the subject
so that you can fully appreciate what you don't know. The Entrepreneur's Guide to Business
Law by Constance Bagley and Craig Dauchy is a great place to start.

The second step is to retain the right attorneys -- usually, one for corporate matters and
another for intellectual property matters.

You must manage them effectively and follow their counsel when it makes sense (many legal
decisions come with degrees of risk and reward that you need to balance). Finally, you must
keep your attorneys informed of what's happening in the business so that they can address
potential problems before they get out of control.

Systemic Risks

Systemic risks are those that threaten the viability of entire markets, not just a single firm
within a market.

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For example, rising default rates in the subprime mortgage market, and the subsequent
domino effect among financial institutions created by linkages embedded in mortgage-backed
securities and credit default swaps, have had a profound impact on the global financial
system.

There are plenty of less widespread, but no less real, examples: A spike in the cost of fuel is
squeezing the entire passenger airline industry. The availability of low-cost skilled labour in
emerging economies is challenging the viability of many domestic manufacturing businesses.
A suspected case of mad cow disease can corral beef sales for months or years.

Pragmatic Risk Management

Creating a pragmatic risk management plan is straightforward in concept, if not in execution.

Prepare a table with the following seven columns:

1. Risk Factor: List anything you can think of that could cause substantial harm to your
business.
2. Type: Assign the risk to one of the categories described above, e.g. market risk,
competitive risk, technology & operational risk, etc. Assigning a type can suggest
who might be best qualified to manage that particular risk (for example, your CFO
might be responsible for looking after your firm's financial risks).
3. Likelihood: Think of the relative likelihood of manifesting this particular risk factor.
Simple descriptors like high, medium, and low should be sufficient.
4. Consequences: Describe what would happen to the company if this risk factor
manifests itself.
5. Mitigation Tactics: List the things you can do either reduce the likelihood or
minimize the impact of the consequences if this risk factor manifests itself. Note that
just because a tactic is available, it doesn't mean you should employ it.
6. Mitigation Costs: For each mitigation tactic, think about the implementation cost.
7. Status: Once you have assembled the first six columns, you need to decide which
mitigating tactics, if any, you need to implement. Your choices will depend on your
personal risk tolerance -- there's no right or wrong answer. Whatever actions you do
take, you should document them in the Status column of your risk management plan.

As you develop your risk management plan, you should obtain input from your entire senior
management team, as well as from your advisors and board members. We've all made

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different mistakes and learned different lessons, so it will be helpful to obtain multiple
perspectives. Like your business plan, your risk management plan is a living document. You
should review and revise it regularly as your circumstances evolve.

Finally, although it's important to develop a risk management plan, you shouldn't obsess over
it. Anticipating every possible risk factor is neither possible nor practical. That's because no
matter how smart we are, and no matter how carefully we assess the situation, we can't think
of everything.

Consider the start-ups that manage to attract venture capital: these are promising firms, flush
with cash, operating in a "hot" and growing market, run by gifted entrepreneurs, with a
demonstrated ability to meet important milestones, carefully chosen through a highly
competitive selection process by experienced venture capital investors, watched over and
mentored by advisors and Board members who have "been there and done that." With all of
these factors going in their favour, the majority of VC-backed firms still fail!

Pragmatic risk management isn't about trying to anticipate and mitigate every possible source
of risk. It's really about two things:

 Engaging common sense to recognize and mitigate the most obvious risks in a cost
effective manner, using some of the techniques described in this article; and

 Developing a culture of responding to unanticipated developments -- that is, putting

out fires -- in a calm, rational way.

Don't let risk paralyze you. Entrepreneurs are, by definition, risk takers. Strong risk
management is an important source of competitive advantage. You can beat the odds and
build a thriving and rewarding venture by learning to recognize and mitigate risks.

Risk Options

Risk mitigation measures are usually formulated according to one or more of the following
major risk options, which are:

1. Design a new business process with adequate built-in risk control and containment
measures from the start.

2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature of
business operations and modify mitigation measures.

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3. Transfer risks to an external agency (e.g. an insurance company)

4. Avoid risks altogether (e.g. by closing down a particular high-risk business area)

Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk fall into one
or more of these four major categories:[9]

 Avoidance (eliminate, withdraw from or not become involved)

 Reduction (optimize - mitigate)
 Sharing (transfer - outsource or insure)
 Retention (accept and budget)

Ideal use of these strategies may not be possible. Some of them may involve trade-offs that
are not acceptable to the organization or person making the risk management decisions.

Risk avoidance

This includes not performing an activity that could carry risk. An example would be not
buying a property or business in order to not take on the legal liability that comes with it.
Another would be not flying in order not to take the risk that the airplane were to be hijacked.
Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the
potential gain that accepting (retaining) the risk may have allowed. Not entering a business to
avoid the risk of loss also avoids the possibility of earning profits.

Hazard Prevention

Hazard prevention refers to the prevention of risks in an emergency. The first and most
effective stage of hazard prevention is the elimination of hazards. If this takes too long, is too
costly, or is otherwise impractical, the second stage is mitigation.

Risk reduction

Risk reduction or "optimization" involves reducing the severity of the loss or the likelihood
of the loss from occurring. For example, sprinklers are designed to put out a fire to reduce the
risk of loss by fire. This method may cause a greater loss by water damage and therefore may
not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be
prohibitive as a strategy.

Acknowledging that risks can be positive or negative, optimising risks means finding a
balance between negative risk and the benefit of the operation or activity; and between risk
reduction and effort applied. By an offshore drilling contractor effectively applying HSE
Management in its organisation, it can optimise risk to achieve levels of residual risk that are
tolerable.

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Modern software development methodologies reduce risk by developing and delivering
software incrementally. Early methodologies suffered from the fact that they only delivered
software in the final phase of development; any problems encountered in earlier phases meant
costly rework and often jeopardized the whole project. By developing in iterations, software
projects can limit effort wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher
capability at managing or reducing risks.[11] For example, a company may outsource only its
software development, the manufacturing of hard goods, or customer support needs to
another company, while handling the business management itself. This way, the company can
concentrate more on business development without having to worry as much about the
manufacturing process, managing the development team, or finding a physical location for a
call centre.

Risk sharing/Transfer

Is briefly defined as; "sharing with another party the burden of loss or the benefit of gain,
from a risk, and the measures to reduce a risk."

The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you
can transfer a risk to a third party through insurance or outsourcing. In practice if the
insurance company or contractor go bankrupt or end up in court, the original risk is likely to
still revert to the first party. As such in the terminology of practitioners and scholars alike, the
purchase of an insurance contract is often described as a "transfer of risk."

Some ways of managing risk fall into multiple categories. Risk retention pools are technically
retaining the risk for the group, but spreading it over the whole group involves transfer
among individual members of the group. This is different from traditional insurance, in that
no premium is exchanged between members of the group up front, but instead losses are
assessed to all members of the group.

Risk retention

Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self insurance
falls in this category. Risk retention is a viable strategy for small risks where the cost of
insuring against the risk would be greater over time than the total losses sustained. All risks
that are not avoided or transferred are retained by default. This includes risks that are so large
or catastrophic that they either cannot be insured against or the premiums would be
infeasible. War is an example since most property and risks are not insured against war, so
the loss attributed by war is retained by the insured. Also any amount of potential loss (risk)
over the amount insured is retained risk. This may also be acceptable if the chance of a very
large loss is small or if the cost to insure for greater coverage amounts is so great it would
hinder the goals of the organization too much.

Thank you

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