GAGE UNIVERSITY COLLAGE

FACULTY OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
Handout/Teaching Material
Chapter two
ENTREPRENEURSHIP AND BUSINESS DEVELOPMENT (MGMT1012)
Set by: Digafe mesfin
 CHAPTER-2

BUSINESS PLANNINGA

2.1. Introduction

In the previous chapter, we dealt with the concept of Entrepreneurship. This unit will help you to
understand the concept of opportunity identification and evaluation, business idea development
and how to prepare a business plan. Virtually to start any type of business or expand the existing
one needs to work on opportunity identification and evaluation, business idea development and
then prepare business plan. Lack of proper opportunity identification and evaluation, idea
development process and business planning are the most often cited reasons for business failure.
The various sections and sub-sections of this chapter will also summarize opportunity identifying
and evaluating processes, business idea development process, and the feasibility study,
importance and preparation of a business plan.

Chapter Objectives: After completing this chapter, students will be able to:

 Identify opportunity in the environment;

 Evaluate the opportunities in the environment;
 Generate business idea;
 Explain the concept of business planning;
 Identify components of business plan; and
 Develop business plan.

2.2. Opportunity Identification and Evaluation

It is initial stage in the entrepreneurial process.

It is the identification and refinement of a viable economic opportunity that exists in the
market.
It can be divided into five main steps namely:
1) Environmental Scanning

Environmental scanning is the process of gathering information about events and their
relationships within a business organization's internal and outside business
organization's external environments.
The basic purpose of environmental scanning is to help management determine the
future direction of a business.
It is performed to get a business idea and opportunities.

2) Opportunity Identification

It is ability to see, to discover and exploit opportunities that others miss.

It is the process of seeking out better ways of competing that result from technological
change, market shift, government regulation, & competition.
In developing countries, problems may be changed to business opportunities.

3) Opportunity Development

It involves systematic research to refine the idea to the most promising high potential
opportunity that can be transformed into marketable items.
It is the process of combining resources to pursue a market opportunity identified.
Having recognized the opportunity, timely adaptation of that opportunity to suit actual
market need is key to new venture success.

4) Opportunity Screening and Evaluation

It is a critical element of the entrepreneurial process, as it allows the entrepreneur to

assess whether the specific product or service has the returns needed for the resources
required.
It can tell whether the specific product or service has the returns needed to justify the
investment and the risk to be taken.
Business factors for opportunity evaluation

According to experts, evaluating the opportunity must consider the following business factor.

 Product or Service: Competitive advantage/benefits do the product/ service has: its

differentiator and ability of company to produce a product/ service.
 Market Opportunity: includes market demand, industry characteristics (growth
rates, change, entry barriers), expected market share of the product, competition exists in
the market, and distribution channels.
 Costing and Pricing: addresses cost to develop the product and commercialize it,
sources of funds, pricing, costs, and economies of scale compare with competitors.
 Profitability: includes Acceptability of return on investment, cash flow patterns, and
payback period.
 Issues of Risk: possibility of risks factors (real and perceived) inherent with the
product/service. It addresses industry based risks e.g. is the market on a decline,
unreliable forecasts & inadequate cash flow, inability to grow with the demand or cope
with shrinking sales, and inability to control Supplier activities.
 Capital Requirements: amount of capital (people, operating expense and assets) is
required to start.

5) Evaluating of the Entrepreneurial Team

Team factors for opportunity evaluation

 Focus: capability and experience of the team to create products to suit that market need
 Selling: necessary selling and closing skills that the teams have.
 Management: necessary management and technical skills that the team have and
commitment & motivation of management.
 Ownership: commitment of members.
2.3. Business Idea Development

A business idea is a short and precise description of the basic operation of an intended business.
There are three types of business ideas. They are:

1. Old Idea – here an individual copies an existing business idea from someone.

2. Old Idea with Modification – In this case the person accepts an old idea from
someone and then modifies it in some way to fit a potential customer’s demand.
3. A New Idea – This one involves the invention of something new for the first time

2.4. Business Idea Identification

Before you start a business, you need to have a clear idea of the sort of business you want to run.
The business idea will tell you:

Customers need that fulfilled by a business: this means business idea should have a
demand/need by customers.
Types of good or service that a business sells: deciding type of good or service that
your business will sell depending on your skills and the needs of the customers.
Identify potential customers: any business cannot succeed without customers.
Therefore, it is essential that you know who your customers will be.
Strategy for Selling Goods or Services: It is a way/ a means of selling goods or
services to customers. It can be either directly to customers or indirectly through
retailers/wholesalers.
Relation between Business and Environment: Business can only be sustainable in the
long run if it works in harmony with the social and natural environment.

In general, a good business idea will be compatible with the sustainable use of natural resources
and will respect the social and natural environment on which it depends. And all business ideas
are not equally worth.
2.5. Methods for Generating Business Ideas

Every business idea should be based on knowledge of the market and its needs. There are
different approaches to generating business ideas. These are:

 Focus Groups: is defined as a group of individuals providing information in a

structured format. A moderator leads the group of about 8 to 14 participants through an
open, indepth discussion rather than simply asking questions to solicit participants’
responses. The group is stimulated by comments from other group members in creatively
conceptualizing and developing a new product or service to fill a market need.
 Brainstorming: allows a group of individual to be stimulated to greater creativity by
interacting with each other and participating in organized group experience. For this
approach to be successful there should be no negative comment or criticism, quantity of
ideas should be encouraged, the wider the idea, the better and combinations and
improvements of ideas are encouraged.
 Problem Inventory Analysis: is a method for obtaining new ideas and solutions
by focusing on existing problems. In this approach, the customers or consumers are
provided with a list of problems in a general product category. Thereafter, they are asked
to identify and discuss product in each category that have a particular problem. This
method is effective when an improved service/product is desired.
 Learn from successful business owners: is all about learning from people in
the same area regarding to where they get business ideas & money to start their business,
how they develop their ideas into successful businesses, & how they generate profit and
fit their business activities with local environment.
 Attribute Listing: is an idea-finding technique that has the entrepreneur list the
attributes of an item or problem and then look at each from a variety of viewpoints.
 Draw from Experience
Own Experience: is all about looking list of own interests, past
experiences and networks so as to generate any possible business ideas.
 Other People’s Experience: is important to understand their experience
trying to find goods and services that are unavailable or not exactly what they
need.
 Survey of Local Business Area: is all about looking visiting the closest industrial
area, markets and shopping centers in around local area in order to identify any gaps in
the market.
 Scanning the Environment: is all about using the creativity of an individual to
find more business ideas through analyzing the environment. For example, think about:
 Natural resources: is all about thinking of what is abundantly/richly available in the
environment.
 Skills of people in the local community: existence of people with specific skills
creating unique items.
 Import substitution: investigating the possibility of operating a business that can
easily make the imported goods locally.
 Waste products: is all about thinking the possible use of waste materials for the
production of other useful and marketable items.
 Publications: is all about finding a business idea from publications in internet and
other printed material.
 Trade fairs and exhibitions: is all about attending trade fairs & exhibitions for
different goods or services to new business ideas that had not previously considered.

2.6. Business Idea Screening

Idea screening is the process to spot good ideas and eliminate poor one. To screen the business
idea generated, three approaches are discussed as follow:

1) Macro screening: is aimed screening down ideas to 10. And the common criteria are:

 Are my own competencies (see strength detector) sufficient?

 Can I finance it to a large extent with my own equity?
 Will people buy my product/service (i.e. is it needed and can people afford it)?
2) Micro Screening: is aimed screening down ideas into 3. The common criteria used for
screening are:

 Market demand;
 Availability of raw materials;
 Availability of personal skills;
 Availability of financial resources etc.

3) Scoring the Suitability of Business Idea: is most appropriate when deciding on

starting a business. When there are more than one possible business ideas and one needs to
decide which one to follow, we use score business ideas (e.g., BI1, BI2, BI3) by assigning a
rating from 1 to 3 for each question, with 3 being the strongest. After we score the ideas we sum
the total and select the idea with the highest score. While to answer the above questions, there
are four important groups that you should talk to:

 Potential customers: is essential to understand whether or not the proposed product is

important to them.
 Competitors and suppliers: reveal the challenges of competition that would be face,
as well as other issues related to potential suppliers.
 Financial institutions: find out the lending requirements to determine whether
borrowing for a new business is possible.
 Key informants and opinion leaders: are people who gives a better insight into the
feasibility of own business idea.

Finally, after selecting the best business idea with the highest score the next step is preparing a
business plan for the proposed business.

2.7. Concept of Business Plan

Planning is the first and the most crucial step for starting a business. A business plan is a road
map for starting and running a business. A well-crafted business plan identifies opportunities,
scans the external and internal environment to assess the feasibility of business and allocates
resources in the best possible way, which finally leads to the success of the plan.
The objectives of a business plan are to:

 Give directions to the vision formulated by entrepreneur.

 Objectively evaluate the prospects of business.
 Monitor the progress after implementing the plan.
 Persuade others to join the business.
 Seek loans from financial institutions.
 Visualize the concept in terms of market availability, organizational, operational and
financial feasibility.
 Guide the entrepreneur in the actual implementation of the plan.
 Identify the strengths and weakness of the plan.
 Identify challenges in terms of opportunities and threats
 Clarify ideas and identify gaps in management information about their business,
competitors and the market.
 Identify the resources that would be required to implement the plan.
 Document ownership arrangements, future prospects and projected growths of the
business venture.

WHEN to Prepare the Business Plan?

Business plans are produced:

At the startup of new business: in order to know the feasibility of the business.
Business purchase: to assess the level of risk that will be face, and the likelihood of
rewards being available by purchasing of the business.
Ongoing: In order to responds to the inevitable changes because the environment is
dynamic.
Major decision: for the need for major new investment in equipment, or funds to open
a new outlet.
WHO Prepare the Business Plan?

Three types of people will be interested in a business plan: the managers who run or intend to run
the business on a day to day basis; the owners, or prospective equity investors; and the lenders
who are considering loans for the enterprise.

 Manager: are involved in small business planning both as producers and recipients of
the plan.
 Owner: the managers of a small enterprise may also be the owners and take a keen
eager/ interest in the planning process.
 Lender: it is true that the major banks all encourage the production of business plans
to justify overdrafts and loans, offering advice on putting together business plans. Other
lenders of money, from private individuals to venture capital companies, will also expect
to make their investment decision after the presentation of a formal business plan.

2.8. Developing a Business Plan

2.8.1 Business Planning Process

The various steps involved in business planning process are discussed here below:

1) Preliminary Investigation: before preparing the plan entrepreneur should:

 Review available business plans (if any).

 Draw key business assumptions on which the plans will be based (e.g. inflation, exchange
rates, market growth, competitive pressures, etc.).
 Scan the external environment and internal environment to assess the strengths,
weakness, opportunities and threats.
 Seek professional advice from a friend/relative or a person who is already into similar
business (if any).
2) Opportunity Identification and Idea Generation

It is the first stage of business planning process. It involves generation of new concepts, ideas,
products or services to satisfy demand. Entrepreneurship is not just limited to innovation
(generation of an entirely new concept, product or service, but it also encompasses incremental
value addition to the concept/product/ services offered to the consumer, shareholder and
employee).

3) Environmental Scanning

Once a promising idea emerges through idea generation phase the next step is environmental
scanning, which is carried out to collect the information about the possible opportunities, threats
from the external environment and strengths and weaknesses from the internal environment of
the business enterprise. Thus, before getting into the finer details of setting up business it is
advisable to scan the environment both external and internal

4) Feasibility Analysis

It is done to find whether the proposed project (considering the above environmental scanning)
would be feasible or not. It is carried out to assess the feasibility of the project itselfin a
particular environment in greater detail. It addresses the following feasibility aspects:

 Technical feasibility: It refers to the possibility of producing the product. Technical

feasibility of an idea is judged in terms of availability of necessary technology,
machinery equipment, and labor skills, raw materials. The advice of technical experts
may be necessary to judge the technical feasibility of various business ideas.
 Commercial viability: A cost-benefit analysis is required to ascertain the profitability of
the ideas. An elaborate study of market conditions & prevailing situation is made to
assess the viability and prospects of the proposed project. A number of calculations have
to made about the likely demand, expected sales volume, selling price, cost of
production, breakeven point etc.
 Financial feasibility: ascertained the availability sufficient funds required to implement
the proposed business.
  Managerial feasibility: ascertained the availability management with right capability
and commitment because the success/failure of a business is highly determined by quality
of management.
 Legal Feasibility: refers to investigating the viability of the new business idea with legal
requirements.
 Environmental Feasibility: ascertained the agreement of new business idea with the
environment.

5) Report Preparation

After environmental scanning and feasibility analysis, a business plan report is prepared. It is a
written document that describes step-by- step, the strategies involved in starting and running a
business.

2.8.2. Essential Components of Business Plan

A. THE COVER PAGE

The purpose of a cover page is to tell readers what they are about to read and how to reach the
business Your cover should bear the words "Business Plan" and should include:The legal name
of the business;

The entity's logo

The date of preparation or modification of the document, and the period it covers.
The address; the telephone number; the fax number; the E-mail address

B. TABLE OF CONTENTS

Table of contents provides readers with a quick and easy way to find individual sections in the
plan. Be sure to list headings for major sections as well as for important subsections. If your
table of contents is more than one page long, reconsider the length of the entries, the length of
your plan and the number of documents you have attached.
C. EXECUTIVE SUMMARY

The executive summary is probably the most significant part of the entire business plan.
It is what most readers will read first.
The Executive Summary appears first in the final plan, but should only be written after
you have completed all other sections of the business plan.
Lenders or investors in particular read executive summary before looking at the rest of a
plan in order to determine whether they are interested in this business and want to learn
more about it.

Important points regarding executive summary are as follows:

 It should be between one and two pages long, and should take only a few minutes to
read.
 In drafting your executive summary, you may include a few sentences from other
important sections.
 The words should be chosen carefully and should be comprehensive and interesting to
read.

The contents of the executive summary include: purpose of the business plan, type of business,
corporate structure, markets and clients, financial features and requirements, and major action
plans.

D. BACKGROUND (BUSINESS DESCRIPTION)

This section of your business plan may consist of a few pages of background information that is
specific to your particular business. The reader should be given a rapid overview of what your
business is, how it started, how it developed over the years and where it is heading. This will be a
useful preparation before the details are set out later. You should also briefly describe how the
business is organized and the resources and infrastructure required for running it. The business
background section generally covers:

Main products, markets and clients

Location and premises
 Key data (personnel, total production, revenues)
Legal form, ownership and management
Historical development and track record of the business
Business strategy and mission
General organization/operating units

E. PRODUCTS AND SERVICES

In this section of your business plan, describe your products or services, emphasizing any
distinguishing features that may give you a competitive advantage. Discuss what market demand
your products or services will meet, and outline the plans for future development.

The following specific information should be included.

Product description and history

Product attributes
Research and Development
Product Life Cycle
Costing and pricing
Production process
Quality assurance and control
Sourcing

F. MARKETING PLAN

Identify and describe your market – who your customers are and what the demand is for
your products & services
Who are the main competitors? What are their strengths? What are their weaknesses?
How do you intend to capitalize on their weaknesses?
Explain your sales strategy, specific to pricing, promotion, products and place (4Ps)

a) Product: refers to goods /services produced for sale. The product/service should relate to
the needs and wants of the customers. What product/service do you produce and sell, what
makes the product different from other competitors (quality, brand, packaging etc.
b) Pricing refers to the process of setting a price for a product/service. Your prices must be
low enough to attract customers to buy and high enough to earn your business a profit. To set
your price you need to know your costs, know how much customers are willing to pay. Know
your competitors price, know how to make your prices more attractive.

c) Place: Place means the different ways of getting your products or services to your
customers. It is also referred to as distribution. If your business is not located near your
customers, you must find ways to get your products/services to where it is easy for customers to
buy.

You can distribute your products to your customers through;

 Selling directly to the consumers of the products.

 Retail distribution and wholesale distribution.

d) Promotion: promotion means informing your customers of your products and services and
attracting them to buy them. Promotion includes advertising, sales promotion, publicity and
personal selling.Use advertising to make customers more interested in buying your products or
services.Some useful ways of advertising include signs, boards, posters, handouts, business
cards, pricelists, photos and newspapers.

G. OPERATIONAL/PRODUCTION PLAN

 Describe briefly how you will operate your business.

i. List the machines, equipment and tools required.

 Describe the cost, capacity and supplier of required machines and equipment.

ii. Production strategy

 Outline the materials requirement, its cost, and sources of R.M and suppliers
name.Production techniques and costs, Quality control, Inventory control

iii. Describe the type of location and facilities you’ll have.

iv. Outline the estimated cost of product/service: Direct Material cost+ Direct labor cost+

Overheads

H. ORGANIZATION AND MANAGEMENT

Most lenders and venture capitalists base their investment decisions mainly on the
strength of the company's management.
They believe that the management has the necessary experience, track record,
competence and reputation, they will be more inclined/motivated to finance the business.
In general, there is a common belief that the qualifications of the management are one of
the most important criteria for a lender or investor in deciding to invest in a venture.

For the above reasons, the management section of your business plan should:

 Show that the key members of the management team have been identified, are available
and keen to join the team;
 Demonstrate that they have the required talents, skills and experience to achieve the
objectives and goals.
 Depending on the structure and type of business, management functions and
input/support to management are provided by the following groups:
 Shareholders, Board of directors, Executive management, Middle management,
External support services
I. ASSESSMENT OF RISK (RISK MANAGEMENT STRATEGY)
 Every new venture will be faced with some potential hazards, given the particular industry
and competitive environment. Thus:
 Indicate the potential risk to the new venture.
 Discuss what might happen if these risks become reality, meaning the impact of each
risk on the new venture if it is materialized.
 State the strategy that will be employed to prevent, minimize, or respond to risk.
 Major risks a new venture could result from a competitor’s reaction, weakness in the
marketing, production or management teams and advance in technology.
J. FINANCIAL PLANNING

Financial planning is a key element of your business plan. It is as important for you as it is for
your lender or investor.

The two most important features of your financial planning are:

 An indication of how profitable your business is expected to be in the future, and possible
financial risks involved;
 A definition of additional funds required for developing your business, i.e.
 How much money you need,
 When you will need it, and
 when you will pay it back.
 Prepare financial statement: the financial statements presented in your business plan
(historical and projected) are the principal tools that will be used to analyze the performance
of your business.

a) Financial History

If you are preparing a business plan for an existing business, you should include the following
financial information for the last two to three years (or from the inception of the business if it is
less than three years old):

 An income statement, which lists the sales revenues, expenses and net profit of your
business;
 A balance sheet lists the type and book value of your business's assets, liabilities and
shareholders' interest;
 A cash flow statement, which lists the cash you generated, the cash you spent, and the
cash balance at the end of the period (per month or quarter for the last year, and per year
for the years before);
 The financial ratios derived from your income statement and balance sheet.
b) Income statement projections

The income statement is also called the profit and loss statement. It shows your revenues from
sales, expenses and net profit (or loss). The net profit (or loss) is equal to revenues minus
expenses. An income statement for a business plan should be broken down by month or by
quarter for the first year.

c) Cash flow projections

An income statement shows the profit (or loss) made during an accounting period. It contains
non-cash items such as accruals, income not yet received in cash, etc. A cash flow statement
shows a company’s in-and-out flow of cash and how cash is generated to cover outgoing
payments.

d) Balance sheet projections

The balance sheet is a statement of your company's relative wealth or financial position at a
given date (say 31 December of each year). It is often referred to as a “snapshot” because it gives
you the picture of the business at a specific moment, but does not in itself reveal how the
business got there or where it is going next. If your business plan is for a start-up business, you
will need to include an “opening” balance sheet. If your business already exists, include the
balance sheets of the last two to three years. The balance sheet of a company limited by share
capital consists of the following categories of items:

i. Assets: include all the physical and monetary items that are necessary for operating your
business. Assets are generally divided into two groups, long-term assets and current
assets (short-term).
ii. Liabilities: Liabilities are obligations/debts of your company to third parties. They are
claims that creditors have on your business. Liabilities are generally divided into two
groups, long-term liabilities and current liabilities (short-term).
iii. Shareholders' equity: Shareholders' equity (or net worth) represents those assets that
were placed at the disposal of the business by the owners of the company. It enters a
business in one of two ways: through investments by the owners (shareholders) or
through profits retained in the business.

End of chapter two