course title: entrepreneurship course code: man 875 …

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UNIVERSITY OF NIGERIA

CENTRE FOR DISTANCE AND e-LEARNING (CDeL)

COURSE TITLE: ENTREPRENEURSHIP

COURSE CODE: MAN 875

CREDIT UNITS: 3

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Course Development Team

DR. E.K AGBAEZE Course Developer

Kalu E. U Ph.D Co-Course Developer

Professor B. G. Nworgu Instructional Designer

Professor J.U.J Onwumere Chief Course Editor

Ogbo Ann I. Ph.D Associate Course Editor

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Foreword

Since inception, University of Nigeria (UNN) has been at the vanguard of manpower training

as well as research and development in the country. UNN has a tradition of excellence for

which the institution is known within and outside the country. This excellence is seen in our

preference for distinguished academics as faculty members, the state of infrastructure for

teaching and learning, curriculum content and research output. The Open and Distance

Learning (ODL) courses offered by our Centre for Distance and e-Learning [CDeL] represent

another important milestone in our commitment towards creating a functional, globally

competitive & research-focused university which is not just an ivory tower, but responsive to

the needs of the society, while delivering world-class education and knowledge.

E-Learning is a significant change to training delivery at University of Nigeria. While no

single medium is best for every situation and type of training, eLearning provides substantial

advantages over other methods in several areas, including reduced cost and improved access

to education. Accordingly, UNN is moving aggressively to adopt and apply e-learning, where

it is the best platform to deliver quality training and education to individuals who may not

have access to formal institutions of learning.

In line with our dedication to excellence, this courseware is designed to deliver the same

quality of academic and professional training that the university is known for, to open and

distance learners through various interactive and engaging e-learning platforms. All the

modules in this courseware were written in conformity with the distance learning principles,

to facilitate comprehension and the application of the learning outcomes to real life business

situations. For all categories of learners, including those across different time zones, who

require flexibility with time and teaching techniques, this courseware will be particularly

very helpful and beneficial. The various activities in the study units promise to ensure that

the learning process is progressive, exciting and rewarding. Other more specific instructions

on how to use or derive more benefits from this courseware can be found in the study guide

section.

I am pleased to affirm the commitment of UNN to this online education program and to also

assure learners that all the facilities and resources required for its successful implementation

have been provided in alignment with our determination to place the University in the

forefront of research and development, innovation, knowledge transfer and human resource

development in the global academic terrain, while promoting the core values which will

ensure the restoration of the dignity of man. I take pride in the synergy of efforts of our staff

in the Centre for Distance and e-Learning and the co-operating faculties which have made the

development of this courseware a huge success and also recognize the particular

contributions that this courseware authors are making to the global extension of our mission.

I am therefore delighted to approve this learning resource for our ODL training program.

Professor Benjamin Chukwuma Ozumba

Vice-Chancellor

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Preface

Given the pervasive influence and alluring benefits of technology, universities, like other

organizations world-wide are leveraging on technology to bring about socially and

economically beneficial changes in all aspects of their operations. Nowhere is this fact more

evident than in the way the application of emerging information communication technology

(ICT) infrastructure has transformed the landscape of teaching and learning in universities;

improving the quality and cost-effectiveness of the learning experience offered their students.

For example, in recent years, the practice of distance education has been fundamentally

altered by the Internet and the World Wide Web (www). At the University of Nigeria,

Nsukka (UNN), Open and Distance Learning (ODL) initiative represents a significant new

trajectory in our determination to harness emerging information communication technology

(ICT) to achieve excellence in manpower training, research and development.

This courseware is therefore a product of painstaking effort to deliver world-class standard

online education to all categories of distance learners. It is divided into 12 study units, spread

across different modules. Within the study units, there are various engaging components,

such as learner activities, info-graphics, case studies, in-text questions, (ITQs) and in-text

answers (ITAs), self-assessment questions (SAQs) and notes on the SAQs designed to test

the progress of learners from time to time, Tutor Marked Assignments (TMAs)etc. All the

activities in every study unit are expected to be concluded within a period of one week. It is

important to work with the correct pace and timing. As much as possible, learners should not

carry over activities or tasks meant to be completed in one week into the next week as that

could build up pressure that might interfere with the learning processes and outcomes.

To get the most from this courseware, it is advisable to read every unit carefully, complete all

the tasks required and surf the internet for additional reading materials. While the content of

this courseware has been developed in a very simple and easy-to-understand language,

learners are encouraged to contact the tutor if they require additional assistance or run into

any difficulty.

For this purpose, our team of experienced professionals is always at hand to provide critical

support to learners who may encounter any form of challenges be they administrative or

technical. A technical team is always available to help with difficulties in accessing the

online learning platform, issues with uploading assignments and downloading

assignment/questions and other technical issues that may arise in the process of working

through this material.

Professor Boniface G. Nworgu

Director

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1. Course information

Course Title: Entrepreneurship

Course Code: MAN 875

Credit Units: 3

Semester Offered: Three

Course Study Time Requirement: 36 Hours

Course Type: Core

Email: [email protected]

[email protected]

2. Course Description

This course gives analysis and clarifications of entrepreneurship. This is achieved by discussing

introduction to entrepreneurship, socio-economic importance of entrepreneurship and types of

entrepreneurship. Entrepreneurial environment and process, business plan, raising capital are also

discussed so as to inculcate entrepreneurship skills into the students and making them ready to be self-

employed after graduation. In accomplishing this e-learning approach of delivery is utilized. The course

material is designed student friendly in a manner that compensates absence of physical contact. Students

will be evaluated by combination of Tutor Marked Assessments and Examination.

3. Purpose of the Course/Course rationale

This course is designed for Postgraduate Students. Its aim is to expose the students to the field of

entrepreneurship with detailed guide on how to start a business and run the business successfully.

This course is necessary in the programme as the optimal aim of any programme is producing self-

employable graduates.

COURSE STUDY GUIDE

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4. Course Goals

At the end of this course students should be able to:

1. Understand the concept of entrepreneurship, its socio economic importance and differentiate

it from other similar concepts;

2. Explain business environment, characteristics of the Entrepreneur and forms of business

ownership;

3. Discuss how to prepare business plan, how to raise capital for business and be able to

discover signs of business failure;

4. Understand the concepts of: business strategies, benchmarking and Entrepreneurship spirit.

5. Course Objectives:

i. To expose the students to the meaning of entrepreneurship;

ii. To give to the students a clear picture of how to become an entrepreneur;

iii. To make students equipped with entrepreneurial skills that can help them while in

practice.

6. Course prerequisites:

1. Introduction to Business;

2. Small Business Management.

7. Course Development Team

S/N Names of Team

Members

Roles

1 Dr. E. K Agbaeze Course Developer

2 Kalu E. U PhD Co-Course Developer

3. Professor B. G. Nworgu Instructional Designer

4. Professor J.U.J Onwumere Chief Course Editor

5. Ogbo Ann I. PhD Associate Course Editor

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8. Course Assessment

S/N Assessment Type Grade %

Continuous Assessment 30%

Examination 70%

9. Course work Breakdown

S/No Modules Brief Description Unit Title No.

1 Conceptual Clarifications This module contains

meaning of

entrepreneurship, its socio-

economic importance and

how entrepreneurship is

differentiated from other

similar concepts.

Unit 1.1:

Introduction to entrepreneurship

Unit 1. 2:

Socio-economic importance of

Entrepreneurship and types of

entrepreneurship

Unit 1.3:

Unit 1. 3 Motivation for entrepreneurial life

2 Environment,

Entrepreneurship

Characteristics and Forms

of Business Ownership

This module contains the

entrepreneurial

characteristics and

possible forms of business

ownership

Unit 2.1:

Entrepreneurial Environment and

Process.

Unit 2.2:

Characteristics, Disposition and

Theories of Entrepreneurship.

Unit 2.3:

Forms of Business Ownership

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3

Business Plan, Raising

Capital and Causes of

Business Failure


content of business plan,

how entrepreneurs can

raise capital for new

business ventures and

likely causes and

symptoms of business

failure.

Unit 3.1:

Business Plan

Unit 3.2:

Raising Capital for New Business

Venture

Unit 3.3:

Causes and Symptoms of

Business Failure

4

Business Strategies,

Benchmarking and

Entrepreneurship Spirit


concept of: business

strategies, benchmarking

and the spirit of

entrepreneurship

Unit 4.1:

Business Strategies

Unit 4.2:

Benchmarking

Unit 4.3:

The Spirit of Entrepreneurship

10. Course Sources

Uzoma, A.M. (1991) Entrepreneurial Development in Nigeria-A Tactical Approach for the

Organisation-Makers, Port Harcourt, New Age Educational Publishing Co. Ltd.

Wilken P.H., (1977) Entrepreneurship, New Jersey: Ablex Publishing

Corporation

Anyanwu, A. (1999) New Perspective of Entrepreneurial Development,Owerri, Kiet-Ken

Publishers.

Mbere, B. U. (1999) Infrastructural Sociology. Enugu: John Jacob’s Classical Publishers Ltd.

Sackman S.A. (ed) (1997) Cultural Complexity in Organizations, London: Saga.

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AnyanwuA.(1999) New Perspective of Entrepreneurial Development,Owerri, Kiet-Ken

Publishers.

Agbaeze E.K. (1995) Cultural Imperatives for Entrepreneurial Development in Item, Bende

L. G.A. Abia State, Being a Public Lecture Delivered to the Item Community on 26

December, 1995 during Okoko Day.

11. How to get the Most from this Course

To complete this course, you are required to read the study units and the recommended

textbooks and surf the internet for more materials. In this course, each unit consists of self-

assessment exercises to test your level of understanding from time to time. At a point in your

course, you are required to submit assignments for assessment. At the end of this course there

is a final examination. Pay attention to the time recommended for the completion of each

study unit and ensure that all tasks and activities are concluded on time. As much as possible,

try not to carry over assignments meant to be completed in a week to the next one as this may

build up unnecessary pressure on your schedule and could interfere with the learning process.

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TABLE OF CONTENTS

Course Development Team ii

Foreword iii

Preface iv

Study Guide v

Main Course ix

Module 1: Conceptual Clarifications 1

Unit 1: Introduction to entrepreneurship 2

Unit Summary 10

Self Assessment Question 10

Unit 2: Socio-economic importance of Entrepreneurship and types of Entrepreneurship 12

Unit Summary 24


Unit 3: Motivation for Entrepreneurial Life 26

Unit Summary 29


Module2: Environment, Entrepreneurship Characteristics and Forms of Business

Ownership 31

Unit 1: Entrepreneurial Environment and Process 32

Unit Summary 37


Unit 2: Characteristics, Disposition and Theories of Entrepreneurship. 39

Unit Summary 50


Unit 3: Forms of Business Ownership 52

Unit Summary 72


Module 3: Business Plan, Raising Capital and Causes of Business Failure 74

Unit 1: Business Plan 75

Unit Summary 89


Unit 2: Raising Capital for New Business Venture 91

Unit Summary 98


Unit 3: Causes and Symptoms of Business Failure 99

MAIN COURSE

xi

Unit Summary 110


Module 4: Business Strategies, Benchmarking and Entrepreneurship Spirit 112

Unit 1: Business Strategies 113

Unit Summary 126


Unit 2: Benchmarking 127

Unit Summary 135

Self-Assessment Question 135

Unit 3: The Spirit of Entrepreneurship 136

Unit Summary 148

Self-Assessment Question 148

References and Further Reading 150

Glossary 158

Appendix 159

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Module 1: Conceptual Clarifications - Entrepreneurship

Module Overview

The concept of entrepreneurship has several meanings as those who propounded the concept

viewed it from different perspectives. Different variables also make different individual

entrepreneurs in dissimilar circumstances. All entrepreneurs are not the same and not all

private enterprises can be termed entrepreneurship business.

In this module, you will be acquainted with the definition of entrepreneurship and its

importance to the socio-economic development of society; the reasons why people venture

into entrepreneurship and the possible drawbacks and the benefits. You will also learn the

differences between entrepreneurship and other similar concepts. The module has the

following units:

Study Unit 1: Introduction to Entrepreneurship

Study Unit 2: Socio-economic importance of entrepreneurship and types of entrepreneurship

Study Unit 3: Motivation for entrepreneurial life

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Study Unit 1: Introduction to Entrepreneurship

Expected Duration: 3 Hours

Introduction

Defining entrepreneur as a normal word makes it look like a derivative of enterprise which is

the fourth term in the factors of production; the word entrepreneur has a deeper meaning that

makes it multifaceted which demands further explanation. Unit 1 tries to cut-apart the term

entrepreneurship for your basic understanding. This leads you to learning about:

1. Development of Entrepreneurship

2. The concept of Entrepreneurship

3. Features of Entrepreneurship

4. Aspects of Entrepreneurs

Learning Outcomes of Unit 1

When you have studied this unit, you should be able to:

1.1 Give brief account of historical development of entrepreneurship

1.2 Define the concept of entrepreneurship

1.3 Explain the features of entrepreneurship

1.4 Discus aspects of entrepreneurs

1.5 Define the keywords in bold.

1.1 Development of Entrepreneurship

In today’s business world the conceptualization of the word entrepreneurship seems complex.

Authors are on the divide as to what the actual meaning is, simplifying the concept for better

assimilation entrepreneurship could be seen as the act and science of environmental scanning

with a view to identifying gap(s) in need(s) and mobilizing the necessary factors of

production to fill the gap(s) , and by so doing, make profits later, if not immediately. This

could manifest in the act of developing or running a business. It may also be seen as a

private initiative geared towards profiteering through taking advantage of windows of

opportunity in business in value creation and satisfaction. There may be other possible

definitions; however entrepreneurships in the final analysis deals with value creation,

satisfaction and profiteering. Entrepreneurial development and its creative response to need

have often been attributed to the enterprise of a minority groups, Notable among these are

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Marco Polo in the far East, Chinese in South-East Asia, the Leventis in West Africa, the Ibos

inEastern Nigeria, Asians in East Africa, Parsees in India. Surnarai in nineteenth century.

Japan and the non-conformists (specially the Quakers) in seventeenth century England,

Napoleon at a point castigated England as a nation of ‘shopkeepers.’ These people did not

share common race or beliefs that predispose them to entrepreneurial spirit. However, they

were minorities and their feelings of insecurity and denial to traditional route to prestige and

honour appears to have motivated them to seek economic emancipation and leadership

through innovation and creative responses to gaps in need among various segments of the

society (Elkan, 1988:171 — 188; Uzoma, 1991:3)

Hisrich and Peters (1998:7-8) further classify the development into five periods - the earliest

period, the middle ages, the 17th century, the 18th century, the 19th and 20th century. In the

earliest period, the entrepreneur was primarily a go-between, a linkage between the producer

and the consumers. An instance is Marco Polo, who established trade routes between

America and the Far East. As a go-between Marco Polo would sign a contract with a

producer to sell his goods, a venture capitalist would finance the contract including the

insurance. The capitalist become a passive risk bearer, the merchant - adventurer took active

role in trading, bearing all the physical and emotional risks. When the merchant adventurer

successfully sells the goods and completes the trip, the profit arising from the venture is

divided between the merchant adventurer and the capitalist;’ most of the time, 75% to the

“capitalist, and 25% to the merchant adventurer.

In the middle ages, the concept was used in describing persons in charge of large-scale

government projects. Such an individual bears no risk. He is merely in charge of government

architectural works like castles and fortifications, public buildings, abbeys and cathedrals. A

typical entrepreneur at this period was the cleric. The entrepreneur was first seen as a risk

bearer in the 17th century. At this period entrepreneurs entered into contractual obligations

with the government to provide services or supply certain products at a contractual rate. After

execution of the contract, the resulting profit or loss as the case may be became that of such

an entrepreneur. One notable contractor/entrepreneur at this time was the French man – John

Law of the Mississippi Company. This company eventually failed when Law attempted to

push the company’s stock price higher than the value of its assets. Richard Cantillion, an

economist and author in the I700s, after under-studying Law’s business, developed one of the

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earliest, theories of entrepreneurship - the theory of the entrepreneur as a risk bearer. He

observed that merchants buy at certain price and sell at an uncertain price, therefore,

operating at a risk” (Benson, 1993: 140 - 146). For this reason, Richard Cantillion is regarded

by some as the originator of the term.

The 18th century witnessed industrialization and factory system of production in most parts

of the world in particularly Europe. Most of the inventors and value creative minded

individuals had no money to finance their inventions. The entrepreneur in this changing

world situation, besides being a risk taker, was further differentiated from the capitalist. The

entrepreneur was then seen as an inventor not a capitalist (venture capitalist). Venture

capitalist is referred to as a professional money manager who makes risk investments from a

pool of equity capital to obtain a higher rate of returns on the capital investment. Reward for

capital is interest while the entrepreneur gets profit. Eli Whitney and Thomas Edison had

their inventions but no money to finance them. Both relied on external sources of finance to

enable them commercialize their inventions.

In the later part of the 19th century and early 20th, century, the entrepreneur was seen from

economic viewpoint. He was not very distinguishable from a manager. According to Bird,

Hayward and Allen (1993:57-77), “the entrepreneur organizes and operates an enterprise for

personal gains. He pays current prices for materials consumed in the business, for the use of

the land, for the personnel services he employs and for the capital he requires. He

contributes his own initiative, skill and ingenuity in planning, organizing and administering

the enterprise. He also assumes the chance of loss and gain consequent to unforeseen and

uncontrollable circumstances.” Chief Elechi D Ikoro and Andrew Carnegie are examples of

this definition. Both invented nothing, but created wealth through adaptation and

development of new technologies into existing products. Carnegie who descended from poor

Scottish family invented nothing but through unremitting competitiveness made the

American steel industry one of the wonders of the industrial world. Ikoro of Ikorotex Nigeria

Plc. also invented nothing rather through adequate environmental scanning and calculated

mass importation of textile materials contributed in no small measure in turning Aba into a

major textile market in Nigeria.

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The notion of an entrepreneur as an innovator was established in the middle part of the 20th

century. His major function within this period was seen as revolutionizing the patterns of

production through exploitation of inventions or an untried technological possibility for

production of new goods or an old one in a new way, sourcing supply or outlet for products

by re-organizing a new industry (Schumpeter, 1952:72).This definition introduces the

concept of innovation and newness as integral part of the definition of’ entrepreneurship.

Innovation, as the act of introducing something new is one of the most difficult tasks of

entrepreneurs. This involves three major activities, environmental scanning,

conceptualization and creation. Newness in the definition refers to production of entirely new

thing or a new way of doing an old thing.

The Egyptians designed and built pyramid of stone blocks, the Easterners in Nigeria

developed traditional means of refining fuel and mass destruction weapons during the

Nigerian civil war, between 1967 – 1970, while Edward Hanima reorganized the Ontario and

Southern railroad through the northern pacific trust.

Table 1.1.1: Development of Entrepreneurship Theory and Term Entrepreneur

Steam From

French

Means Between Taker or Go-Between

Middle Ages Actor and person in charge or large scale production projects

17 century Person bearing risks of profits (loss) in a fixed price contract with

government

1725 Richard Cantillion – person bearing risk is different from one who is

supplying capital.

1803 Jean Baptiste Say:- Separated profits of an entrepreneur from profits of

capital

1876 Francis Walker:- Distinguished between those who supplied funds and

received interest and those receive profit from managerial capacities.

1934 Joseph Schumpter Entrepreneur is an innovator and develops untried

technology.

1961 David McClelland-entrepreneur is an energetic moderate risk taker

1964 Peter Crucker – entrepreneur maximizes opportunity

1975 Albert Shapero: entrepreneur takes initiative organizes social and

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economic mechanisms and accepts risk of failure.

1980 Karl Vesper- entrepreneur seem differently by economists, psychologists,

business persons and politicians

1983 Gifford Pinchot – Entrepreneur is an entrepreneur within an already

established organization.

1985 Robert Hirsch – entrepreneurship is the process of creating something

different with value by devoting the necessary time and effort assuring

the accompanying financial psychological and social risks and receiving

the resulting rewards of monetary and personal satisfaction.

Source: Hirsch. RD. (1998) “Entrepreneurship and intrapreneurship methods for creating

new companies that impact on economic renaissance of an area,” in entrepreneurship,

intrapreneurship ‘and venture capital, Robert D. Hirsch (ed) Lexington Books, (l980) 1p. 96.

See also Hirsch, Peters and Shepherd (2008) Entrepreneurship, African Edition p. 6 - 11

1.2: Definition of Entrepreneurship

1.1 above gave you the historical background of entrepreneurship and the basic facts

that engendered the development of entrepreneurship. You should know that

entrepreneurship like most other concepts in social sciences has a variety of

definitions produced by differences in the perceptions of authors of the subject matter.

Let us explore these definitions:

1. Anyanwu (1999:216) sees the entrepreneur essentially as a path finder. He charts a

virgin course for others to follow. It may be necessary to point out that the entrepreneur,

besides investing his or her scarce resources, also performs managerial functions such as

planning, organizing, directing and controlling the affairs of the business enterprise. It is

important to note that the size and nature of the business is not material, big or small,

self- found or inherited. He sees entrepreneurship as a process of charting virgin course in

business with a view to profiteering through provision of the needful.

Activity 1.1.1: Development of Entrepreneurship

Think about any other definition that will be in agreement with that of economic viewpoint.

Record it in your study diary.

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2. Hutt (1988:2) opines that the term is of French origin “an –trapra-rier” meaning

literally a go-between or a between-taker. Economists like Jean Baptist and Joseph

Schumpeter see the entrepreneur as the fourth factor of production, and the co-

coordinator of the other three (land, capital and labour) with a view to profit for his

innovation and risk. Sociologists see the entrepreneur as a deviant, who is driven/ led by

a number of factors such as personality, family and society towards a particular pattern of

behavior.

3. Psychologists see entrepreneurs as innovative creators occasioned by need — need to

obtain or attain something, need to experiment, need to accomplish or perhaps need to

escape the authority of others. For a businessman with an itinerant knowledge of the

concept, an entrepreneur appears a threat, an aggressive competitor or an ally, a source of

supply, someone who creates wealth for others, who finds better ways to utilize resources

and reduce waste, and who produces jobs others are glad to get (Hisrich and Peters, 1998;

Vesper 1980).

4. Drucker (1983) sees the entrepreneur as a person who is willing to risk his capital and

other resources in business ventures from which he expects substantial rewards, if not

immediately then in the near future.

5. Dollinger (1995) sees entrepreneurship as innovative economic creative process or

network for the purpose of profit or growth under risk and uncertainty conditions.

6. Kuratko (2009) perceives entrepreneurship as visionary change and creative process

that relies on passion and energy in the development of business ideas and solutions to

problems for profit purposes.

7. Ronstudt (in Agu 2010:12) “Entrepreneurship is the dynamic process of creating

incremental wealth”

8. Timmons (1999) in Agu 2010:12) opines that the entrepreneurship is merely a mental

state of mind involving reasoning and acting, obsessed in opportunity for profiteering.

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9. Agu (2010) asserts that entrepreneurship is a process defined over a spectrum, starting

from the point where individuals come to the realization that business ownership as an

option is a viable alternative, proceeds to learn and, or develop the skills and talents

required for enterprise setting, develops ideas for business, and finally undertake the

initiation and development of a business.

10. Agbaeze (2007) sees the entrepreneur as an environmental scanner who looks for gaps

in need or unsatisfied need(s) and mobilizes the necessary factors of production to close

the gap or satisfy the unsatisfied need and assumes the necessary reward under conditions

of uncertainty. He thus concludes that entrepreneurship refers to process of conscious

need identification and satisfaction, through a creative and innovative engineering with a

view to profiteering in an ever changing risky socio-economic setting.

Now that you have been exposed to the various views captured by the definitions above,

how best can you reconcile the different streams of opinion?

1.3 Features of Entrepreneurship

Aside the definitions of entrepreneurship, always realize that there are some salient features

with which to identify it. Explore the views of Agbaeze (2007) as he identifies five features

of Entrepreneurship as follows:

i. Need identification and satisfaction through environmental scanning

ii. Creativity and innovative engineering

iii. Mobilization and investment of scarce resources

iv. Risk taking in risky unstable socio-economic setting

v. Inclination to profiteering. Profit is not calculated in terms of money in all cases in

particular in social entrepreneurship.

In-Text Questions 1.1.1

▪ Classify the development of entrepreneurship according to Hisrich and Peters

(1998)

▪ Hisrich and Peters (1998) classified the development of entrepreneurship into

five periods: (i) the earliest period, (ii) the middle ages,(iii) the 17th century,

(iv) the 18th century, and (v) the 19th and 20th century.

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Okpara (2003: 3-4); perceives the entrepreneur as an individual who has the zeal and ability

to find and evaluate opportunities. He further observes that they are calculated risk-takers,

who enjoy the excitement of challenges, not necessarily gamblers.

Each of the definitions above, views entrepreneur from slightly different perspective. They

emphasize similar notions such as creating wealth, risk taking, newness, profiteering through

value creation, operating a business and the likes. They are found in all professions:

management, accountancy, marketing, education, medicine, law, research, architecture,

engineering, social work and the 1ikes. Some of the entrepreneurs may not have had any

good formal education.

1.4 Aspects of Entrepreneurs

The literature pinpoints four primary aspects of entrepreneurs, irrespective of the field. These

are as follows:

• Entrepreneurship is a developmental or creation process: That is development of

something new and of value to both the entrepreneur and the audience (relative segment). It

may start small and progressively increase in size and form.

• Devotion of necessary time and effort: Entrepreneurship calls for conscious devotion

of quality time and energy in creation/innovation.

• Entrepreneurship involves risk taking: This is predicated upon the fact that the future

is often unseen, and unpredictable. There is no comprehensiveness in reasoning and decision

making; rather the entrepreneur operates under self-bounded rationality in a dynamic

environment with so many key players. The risk may be financial, social or psychic or a

combination of them.

• The entrepreneur expects reward either immediately or in the near future: The

reward for the investment of the resources may be financial or non-financial (independence,

personal satisfaction, social reason, etc.).

From the fore-going we can now define the entrepreneur as any person who creates valuable

product or service for business in the face of risk and uncertainties in the business

environment. Entrepreneurs are environmental scanners, who look for gaps in need,

(windows of opportunity), assembles the necessary factors of production to close the gap, by

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so doing creates wealth. It manifests in business creation or sustenance of an existing

business, with profiteering intentions.

1.5 Unit Summary

In Unit 1.1, you have learnt that:

1. Conceptualization of the word entrepreneurship seems complex and has several

definitions.

2. Development of entrepreneurship started even before the Middle Ages

3. Entrepreneurship deals with value creation, satisfaction and profiteering in the face of

risk and uncertainties of the business environment.

4. Entrepreneurs are found in all professions

5. Entrepreneurship according to Agbaeze (2007) has five fueatures

6. There are four primary aspects of entrepreneurs, irrespective of the field.

1.6 Self-Assessment Questions (SAQs)

At this stage, you have concluded unit 1.1; you are expected to attempt providing answers to

the following questions to show the extent you have achieved the learning outcomes of the

unit.

SAQ 1.1.1 (Tests Learning Outcome 1.1.1)

Compare the earliest period of development of entrepreneurship with that of the 19th and 20th

century.


Define entrepreneurship based on your understanding.


Identify five features of Entrepreneurship


Explain the four primary aspects of entrepreneurs


What are the similarities and differences if any between the definitions of Anyanwu (1999)

and Agu (2010)?

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Trace the development of entrepreneurship from the earliest times to the 18th century.

References for further studies

Uzoma, A.M. (1991) Entrepreneurial Development in Nigeria-A Tactical Approach for the

Organisation-Makers, Port Harcourt, New Age Educational Publishing Co. Ltd.


Corporation.

For further information on Introduction to Entrepreneurship visit this link below

http://www.bbamantra.com/introduction-to-entrepreneurship/

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Study Unit 2: Socio-economic importance of entrepreneurship

and types of entrepreneurship


Introduction

The impact of entrepreneurship on social and economic activities can never be over stressed.

Entrepreneurship is now accepted by numerous economies as the hub of economic growth.

As such, this Study Unit 1.2 explores the economic importance of entrepreneurship by

discussing the followings:

1. Role of the Entrepreneur

2. Entrepreneurship Functions

3. Types of Entrepreneurs

4. Entrepreneurship Differentiated from other Similar Concepts



2.1 Explain the role of entrepreneur

2.2 Highlight the entrepreneurship functions

2.3 Mention the features of entrepreneurship

2.4 Discuss how entrepreneurship differs from other similar concepts

2.1 Role of the Entrepreneur

You recall that in the unit 1 of this module, you were exposed to the definitional issues

surrounding entrepreneurship. You were also made to know the attributes of

entrepreneurship. Now let us see the roles that entrepreneurs play.

According to Dean, Michael and Robert (2009:18), the importance of entrepreneurship in

economic development involves more than just increasing per capital output and income, it

includes initiating and constituting change in the structure of business and society.

The role of the entrepreneur from this point of view will include:

1. Employment Generation and Fostering economic growth

2. Enlargement of productivity

3. Creation of new technology, product or services

4. Changing and rejuvenating market competition (Stoner, Freeman and Gilbert, 2005).

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1. Economic Growth: The birth of a new business in most cases is tantamount to creation of

fresh jobs. As the business expands, the economic activities expand further, thus widening

the economic growth. The multiplier effect of establishment of successful businesses in the

economy is enormous. It provides job for small families and their relations; others may also

be hired. This is probab1y why economists pay good attention to establishment of small

business firms for they have the capacity of creating new jobs and sustaining economic

growth. It is often said that more than four fifths of all new employment opening in America

comes from small business firms. This may not be very different in Nigeria in particular in

family owned and home based businesses.

2. Enlargement of productivity: Entrepreneurs create goods and services that are capable of

satisfying needs. The multiplicity of this creation enlarges productivity. Higher productivity,

calls for improving production techniques, and this is entrepreneurial function par

excellence. Two keys to higher productivity are research and development. The subsequent

investments as a result of the evidence based research lead to creation of goods and services.

The multiplier effect enlarges productivity.

3. Creation of New technologies, products and services: Entrepreneurs are usually thirsty

for creation and innovation. In a bid to have competitive advantage over each other’s

inventions, new technologies and products emerge. A simple creation may lead to a number

of other creations and subsequently new products. In the l8 century, James Watt in England

developed and perfected the steam engine in a bid to ease production process in the factory.

To take advantage of this invention and remove some of the bottlenecks associated with it, in

the mid 1760s. James Hargreaves invented the spinning Jenny, an invention linked to the

steam engine. Further in 1985, an English clergyman invented the power loom — a weaving

machine powered by the steam engine. Another example is the running battle among

producers of telecommunication gadgets in recent times.

4. Change and Rejuvenation of Market Competition: Entrepreneurs stir up the waters of

competition in the business arena. Ventures in small and medium scale enterprises serve as

agents of change in the market economy. Two possible types of technological changes

associated with products/services in the market place include quantum technological change

that results into quantum product innovations (a shift or jump from the existing product that

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results in an entirely new product), and incremental technology change — that is a change

that refines an existing technology and leads to gradual improvements of refinements in

products and services over time. In any of the cases, competition is rejuvenated. Firms are

worked up and competitions are renewed. Relay race is instigated by changes in

innovation(s) and counter innovation(s). Destructive creativity follows. Goods considered

good today tomorrow becomes absolute. Technology and taste breeds motivation; creativity,

and war in fine-turning core and augmented products.

In addition to the above, the importance of entrepreneurship to the socio-economic

developments of the society can never be over emphasized. Its impact can be depicted as

thus:

• It creates employment opportunities

• It creates wealth and the redistribution of wealth.

• It creates new technology and taste.

• Contributes to the gross domestic product and by extension gross national product

• Create new market and product, etc.

The Role of Small Businesses in the Nigerian Business Environment

1. They perform certain services better than large firms;

2. They distribute to consumers most of the goods and services made by the big firms;

3. They provide goods and necessary services to the big firms;

4. They generate ideas for improvement and creation of goods and services for the big

firms.

5. They serve as custodians of consumer products;

6. They provide custom design services through flexibility in their mode and hours of

operation.

7. They are the link between the big firms and the consumers.

8. They create employment for some members of households.

2.2: Entrepreneurship Functions

Activity 1.2.1: Role of the Entrepreneur

Think about any other role of entrepreneur that is not included above. Record it in

your study diary.

15

Entrepreneurship is a process of conscious need identification and satisfaction through a

creative and innovative engineering with a view to profiteering. In the process something

new and of value is created with a business motive to make profit. The functions of the

entrepreneur in this process include:

1. Need identification often through environmental scanning. A business idea thus

is developed.

2. Appraisal of business ideas through feasibility and viability studies. A decision to

embark on the production of a product/service is then taken.

3. Assembling of the necessary factors of production (capital, labour and land) to

produce or make available the product/service that has “need-product fit” for the

target audience.

4. Creation and innovation – bring to reality something new and of value to the

market place.

5. Management and marketing of the products/service in order to sustain the creation

and innovation. Getting to the top is not easy; however remaining there

comfortably is also very difficult. This calls for effective management and

marketing of the products.

3.3: Types of Entrepreneurs

It is obvious that entrepreneurs function in different ways, forms and style. This

distinctiveness underscores the classification of entrepreneurs. Specifically speaking,

entrepreneurs are classified on the basis of their forms, style or ways of operations as you can

see below:

Nwoye (2011:5) lists types of entrepreneurs as follows:

• Soloist: A self-employed person operating alone, for example, in a specific trade or

profession.

• Key Partner: One stage on from the soloist, as an autonomous individual, but with a

partner in the background, sometimes as a financial backer only.

• Grouper: Those who prefer working in small groups with other partners who share

the decision making; for example, craftsmen working in their own firm as equals.

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• Professional: Self-employed experts: e.g. traditional professionals (accountants,

solicitors, doctors, architects, etc.). Whilst not traditionally considered to be entrepreneurs

they do tend to work in small firms.

• Investor Researcher: Creative inventors, who may, or may not, have the practical

skills to turn creativity into innovations.

• High-tech: New technological developments have created opportunities for those

with the technical expertise, e.g. in electronics or computers.

• Work Force Builder: The delegator who manages the labour and expertise of others

in an effective way; e.g. in the building trade.

• Inveterate Initiator: The start-up expert, who only really enjoys the challenge of

initiating new enterprises, then loses interest, often selling the business in order to start

another.

• Concept Multiplier: Someone who identifies a successful concept that can be

duplicated by other, for example, through franchising or licensing arrangements.

• Acquirer: those that prefer to take-over a business that already exists rather than start

from scratch.

• Speculator: There are many property-based opportunities to buy and sell at a profit,

as well as collectables such as art, stamps and antique furniture which have spawned many

dealers as owner-managers of small firms.

• Turn-about artist: An acquirer who buys small businesses with problems, but has

potentials for profit.

• Value manipulator: An entrepreneur, who acquires assets at a low price and who

then, through manipulation of the financial structure, is able to sale at a higher price.

• Lifestyle entrepreneur: Small business is a means to the end of making possible the

good-life; however, this defined consistent cash flow is the primary business requirement

rather than high growth that might involve too much time commitment.

• Committed manager: The small business is regarded as a lifetime work; something

to be built up carefully. Personal satisfaction comes from the process of nurturing the

fledgling firm through all its various stages of growth.

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• Conglomerate: An entrepreneur who builds up a portfolio of ownership in small

businesses, sometimes using shares or assets of one company to provide the financial base to

acquire another.

• Capital aggregator: A business owner with the necessary financial leverage to

acquire other substantial attractive businesses.

• Matriarch or patriarch: The head of a family owned business which often employs

several members of the family.

• Going public: Entrepreneurs who start-up in business with the clear aim of achieving

a quotation on the stock exchange, usually via an unlisted securities market in the first

instance.

• Alternative: Alternative new age belief in a return to simpler, more environmentally

sound lifestyle has been expressed in a wish to avoid conventional employment. Commercial

activities have developed in areas product, and new age publications and audio tapes.

Other classifications of entrepreneurs also exist. For instance, Karl Vesper classified

entrepreneurs into eight (Hutt, 1998:23). They are as follows:

• Solo Self-employed Individuals: This refers to owner-managers of enterprises. This

owner-manager may also employ few assistants. In most cases they perform the jobs

themselves. A case in point is the “Go Slow” Beer Parlour in Okoko Item or the popular

Shoe Mender’s shop in the daily market and villages. These types of entrepreneurs are the

most numerous of all the entrepreneurs. Their ranks include the single store, or mobile tailors

popularly called in Igbo (Ndi Obioma), small store and repair shop owners, independent sale

representatives, attorneys, physicians and the likes. They dominate the business world in

Aba, Onitsha and other major cities in Nigeria.

• Team Builders: This refers to solo self-employed entrepreneurs or one-man business

that expands into larger companies. A good example is as demonstrated by Hutt (1988:29) of

a self-employed electrician who gradually hires additional employees until a full-scale

electrical contracting firm is established. Many of the Nigeria nation’s largest firms started

this way. For example the revered Engr. Ajulu Uzodike’s cherished, reliable and dependable

Cuties Cables that have made a big name in the Nigerian Cable market started as a humble

sole enterprise.. Another instance could be drawn from America where in 1927 J. Willard

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Morriott started a nine-stool root beer stand. Over the years, his root bear stand was built into

a cooperation that operates hotels and restaurants throughout the world and accounts for $4

billion in sales as at 1985 (Lestones, 1985:67).

• Independent Innovators: This refers to individuals who form companies to make

and sell their innovations. An example of such an individual is Edwin Land. Land invented

the first world’s polarizing sheet material. He subsequently created the Polaroid Corporation

to manufacture and sell his invention.

• Pattern Multipliers: This refers to entrepreneur who develops several separate units

of an effective business. In most cases such entrepreneurs design or develop an original

business and once the business becomes successful and profitable, he then gradually

establishes many others similar to elsewhere the first for profiteering. A typical example of

such an entrepreneur is the Ezeani-Tony Enukaeme’s, Tonimas Filling Station, makers of one

of the most reliable and utility based cost effective oil and lubricants in Nigeria. Their filling

stations and services-oriented outfits could be found in various major towns and crannies in

the country with similar customer oriented, synergistic services to the transport operators and

the general public. For the operators of Tonimas Filling Stations, they see customer

satisfaction as a major tool of market leadership. A further example of such entrepreneurs

include one who perfects a method of doing a business and sells it to others.

• Economy of Large Scale Exploiters: Entrepreneurs who take advantage of

economies of large-scale operations are referred to as economy of large scale exploiters.

Such entrepreneurs have lower average costs due to large volumes of operations. They may

also sell at lower prices and make profits from volume of sales or level of turnover. An

example of this type of entrepreneur is the discount store operator.

• Capital aggregators: Entrepreneurs who play major roles in the mobilization of

resources and commencement of operations of financial institutions that require large amount

of capital for a take-off are called capital aggregators. Examples of these include those who

undertake the establishment of banks, insurance companies, and the like.

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• Acquirers: Those who become entrepreneurs though purchase of existing businesses

is referred to as acquirers. Some people are specialists in the acquisition of existing

businesses. Such businesses for sale are usually advertised either in the newspaper or other

such media. You could even run into one through association.

• Buy-sell Artists: Most entrepreneurs are opportunists. Some of them do not intend to

own a business perpetually; rather they make their profits by buying a business, refurbishing

it, and selling same at higher prices. Typical examples are those who buy companies with

operational problems. They correct such problems, re-package such a business and re-sale

same for higher returns. Thus, making their profits without necessarily owning the business

for a long time.

You have seen the different types of entrepreneurs, If you were to set up a business as an

entrepreneur, which of the above types would you find appealing.

However, in strict economic theory, entrepreneurs are generally categorized into three sub-

groups, namely:

• A pure Entrepreneur: A pure entrepreneur is anyone who innovates, takes risks,

organizes and manages an enterprise. He is seen as the leading actor in the enterprise; he

possesses the business skills that embrace the making of policies and coordinating of other

factors of production. In general, a pure entrepreneur creates something new, something

different from the existing commodities/services; he transforms or transmutes values.

• Franchise Operator: This refers to those who are granted rights by other party(ies)

or organization(s) (Franchisor) to use or sell some product(s) and/or service(s) that are the

property of the Franchisor (pure entrepreneur). In return, the Franchisee pays an initial fee

and thereafter, a continuing royalty, license fees or lease charges on equipments and

buildings. In the Nigerian business environment, the straight product franchise is the most

prevalent. A good example of this is petrol business dealers.


▪ Mention the first five Entrepreneurial types as listed by Nwoye

▪ They are: Soloist, Key Partner, Grouper, Professional, Investor Researcher

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• Others: Other groups of entrepreneurs include all those who take over the

management of business ventures after the founder retires, dies or sells out the business.

From the classifications, it becomes clear that entrepreneurship as a process could be

classified in many ways. In same manner the opportunity for entrepreneurship cuts across

vocations and locations.

2.4 Entrepreneurship Differentiated from other Similar Concepts

There are some closely-related concepts to entrepreneurship that are most often used

interchangeably with entrepreneurship. You will be exposed to them as well as their dividing

lines with entrepreneurship.

1. Entrepreneurship and Management

Being a successful entrepreneur is the desire of most strong-willed individuals. However,

they are predisposed to activities that are somewhat adventurous and risky. Not many who

create something new or take over an existing business succeed in its effective and efficient

operationa1ization, aid substance there-after. In Item, Bende Local Government Area of Abia

State, when a hunter kills a very big animal in the night, by the day he will, require the

services of able bodied men and women to get it back to the village for celebration. If he tries

to do it alone, elders will remind him that it is a “kindred meat’ (anuikwunaibe), it’s a taboo

to do it alone. When creativity and innovation succeed, there is often the need to hire the

services of others to make it more profitable.

Entrepreneurs, who find new business, often have difficulty piloting the affairs of the

establishment as it grows. They may not have the expertise in running the venture profitably.

In order to ensure synergetic returns the need for management arises. Entrepreneurship

differs from management, Entrepreneurship is the act of noticing a gap in need and

mobilizing resources to make a product or service that satisfies that gap in need with a view

to profit. Management, on the other hand, encompasses all the activities involved in efficient

and effective combination of human and non-human resources of an organization in such a

manner as to minimize input while maximizing output in achieving organizational goals. It

includes the conscious decisions involved in planning, organizing, directing and controlling

resources in a rational and prudent manner in an organization.

Jones and George (2003: 660) observe that those who find new businesses often have

difficulty managing the organizations as they grow. When an entrepreneur has produced

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something that customers, want, entrepreneurship gives way to management as the pressing

need becomes to provide the product both efficiently and effectively. Frequently founding

entrepreneurs lack the skills, patience and experience in the difficult and challenging work of

management. Some entrepreneurs find it very hard to share authority because they are afraid

to risk their company by letting others manage it. As a result they become over loaded, and

the quality of their decision-making declines. Other entrepreneurs lack the detailed

knowledge necessary to establish state-of-the-art information systems and technology or to

create the operations management procedures that are vital to increase the efficiency of their

organizations production systems. Thus, to succeed, it is necessary to do more than create a

new product, an entrepreneur must hire managers who can create an operating system that

will let a new venture survive and prosper. Entrepreneurs, who ignore this, often derail in

trying to go it alone.

2. Entrepreneurship

Established organizations or business often have the financial resources, business skills and

distribution channels to commercialize innovations profitably. However, highly bureaucratic

structure inhibits creativity and this prevents new products/services or business from being

developed. A manager within such an established system, who uses the entrepreneurial

approach to management, is referred to as an intrapreneur. Intrapreneurship is an act of

entrepreneurship within existing business structure or entrepreneurship.

As an act of strategic management with focus on entrepreneurial development, firms

encourage risk-taking and profit oriented behaviour among its managers by organizing a

business into a number of separate profit centres. Each centre may be responsible for its own

profit through intra-group trading and counter-trading. In some cases such centres may

develop their own external sales and clients.

This approach has been used by a number of Nigerian University Vice Chancellors, by

establishing Distance Education programmes for adult working staff within and outside the

university, as it is in University of Nigeria Nsukka, University of Lagos, University of

Ibadan, Abia State University, Uturu and others. Some others establish management

consultancy units. They use basically the university resource personnel for the purpose of

impacting knowledge to the clients at a profit to the university via the centre. This is an act of

interpreneurship, intrapreneurship within entrepreneurship.

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3. Organizational Learning and Creativity

The intensity of competition in the developing countries today, particularly from the agile

small business firms, occasioned by technology and globalization has made it increasingly

important for on-going big firms to promote and encourage intrapreneurship through

organizational learning, creativity and product championship. Organizational learning refers

to the process through which managers seek to improve employees’ desires and abilities to

understand and manage the organization and its task environment so that employees can

make decisions that continuously raise organizational effectiveness. Organizational learning

appears pronounced among learning organizations in which the pilots or managers make

conscious efforts to maximize the ability of individuals and groups within the firm to think

and behave creatively. This maximizes the potential for organizational learning to take place.

Creativity lies at the heart of organizational learning. Creativity is merely a decision maker’s

ability to discover original and novel ideas that lead to feasible/viable alternative courses of

action. The importance of creativity among learning organizations cannot be over-

emphasized. Ensuring creativity among managers is such a pressing organizational concern

that many companies engage the services of experts to assist develop programs to train their

managers in the act of creativity thinking and problem solving.

The Process of Developing a Learning Organization Peter Senge, a learning theorist

identified five principles for creating a learning organization.

Figure 1.1: Senge’s Five-Step Principles for the Creation of a Learning Organization

Source: Jones G.R. and George J.M. (2003;23.8) Contemporary Management 2nd ed,

New York, McGi:aw - Hill Irwin.

23

1. Top Management must make Room for the Employee to Develop a Sense of Personal

Mastery: Super-ordinates must empower their subordinates and allow them to experiment,

create and explore what they want.

2. Encourage Employees to Develop and Use Complex Mental Models: Sophisticated

ways of thinking that helps them to discover fresh, better and enduring ways of performing a

task digging out the involvement and connotation of a particular activity through

experimentation and risk taking.

3.Promotion of Group Creativity: Team learning is preferred to individual learning. Complex

and non-programmed decision making is better done in subunits, groups or divisions.

4. Emphasis On, the Importance of Building ‘a Shared Vision. A model or figment that

guides organizational members in problem solving.

5. Management must Encourage Systems Thinking: Genuine relationship and inter-woveness

of the various sub units’ of the organization, including the effect of each unit’s action or

inaction on each other via the entire organization.

Caution - Developing a learning organization is neither a quick nor easy process. It requires

managers challenging management assumptions radically. To compete successfully in the

present and future centuries, managers need to be creative and innovative. This is made more

manifest in this day of competitive marketing and bench marking. Probably, this explains

university of Nigeria Nsukka persistent commitment towards organizational learning that

made her first among others in Nigeria in visibility and research.

4. Product Championship

A notable means of promoting entrepreneurship is by encouraging individuals within the firm

to play the role of product champions that is managers who take ownership of a project and

provide the leadership and vision that takes the product from the idea stage to the final

customer. Intrapreneurship encourages managers to become product champions and identify

new product ideas. Product champions are usually responsible for the development of

business plans for the products. However, such product champions may usually be required

to appear before a product development committee (in the University, the Senate) who

probes the strengths and weaknesses of the plan to decide whether it should be funded.

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5. Small Business Management

Can small business owners be referred to as “entrepreneurs” as well? This question may be

bugging your mind. That is, what size of an establishment or activities of an establishment

qualifies a person as an entrepreneur?

Always bear in mind that Entrepreneurship and small business management’ are related

terms, yet different. ‘Entrepreneurship is the process of resources mobilization to take an

advantage of an opportunity to provide customers with new or improved goods and services.

It is the source from which all businesses, big and small spring. On the other hand, in the

small Business Act of 1953, United States of America Congress defines a small business as

one that is independently owned and operated, and which is not dominant in its field of

operation. In most cases they are localized. (Tale, Megginson, Scott and Truebloos, 1978:1).

The process of operating a small business is called smal1 business management.

In drawing a distinction between big business and small business, some of the criteria used

are relative size; type of customers, financial strength and number of employees. Most

emerging enterprises start small and have at least three of the under-listed primary features.

1. The owner is usually the manager

2. The owner supplies most of the money used in starting cum running the business.

3. Most of such businesses are localized and serve their immediate and nearby towns.

4. The owner-manager takes most of the decisions associated with the enterprise.

5. The owner manager bears the bulk of the risk and rewards (psychic and financial) of the

business.

2.5 Unit Summary

In Unit 1.2, you should have learnt that:

1. The importance of entrepreneurship in economic development cannot be over

emphasized.

2. The functions of the entrepreneur involves creative and innovative engineering with

a view to profiteering

3. Entrepreneurs can be classified in various ways

4. Entrepreneurship is not the same with management

25




unit.


What are the major roles of an entrepreneur in stabilizing the economy of a state?


Which entrepreneurship function is most important and why?


Why do you think that entrepreneurs are classified in various ways?


What are the primary features of most emerging enterprises?


Differentiate between entrepreneurship and management

References for further studies


Publishers.

Mbere, B. U. (1999) Infrastructural Sociology. Enugu: John Jacob’s Classical Publishers Ltd.

For further reading click the link below

http://www.yourarticlelibrary.com/entrepreneur/entrepreneurship-characteristicsimportance-

types-and-functions-of-entrepreneurship/5228/

http://www.investopedia.com/articles/personal-finance/101414/

http://wizznotes.com/pob/establishing-a-business/role-of-an-entrepreneur

http://www.yourarticlelibrary.com/entrepreneur/entrepreneurship-characteristicsimportance-types-and-functions-of-entrepreneurship/5228/

http://www.yourarticlelibrary.com/entrepreneur/entrepreneurship-characteristicsimportance-types-and-functions-of-entrepreneurship/5228/

http://www.investopedia.com/articles/personal-finance/101414/

26

Study Unit 3: Motivation for Entrepreneurial Life


Introduction

Primarily an entrepreneur is self-employed. He sees a gap in need and brings together the

necessary manpower, materials, machines and money required to meet the need. Thus, he

creates an organization as a way of offering something new to the market. Entrepreneurs

have sound mental outlook on life. Instead of conditions controlling their attitudes, they use

their attitudes to control conditions. Entrepreneurship as a matter of fact is more than a job or

a career. It is a life-style. This unit therefore surveys the driving forces of entrepreneurship.

1 Why people often settle for entrepreneurial career paths

2. Entrepreneurship drawbacks

3. Working for others

1. Pitfalls of salaried employment

Learning Outcomes of Unit .3


3.1 Understand why people often settle for entrepreneurship career paths

3.2 Know the possible drawbacks in entrepreneurship business

3.3 Identify the reasons why individuals go for paid employment

3.4 Recognize pitfalls of salaried employment

3.1 Settling for Entrepreneurship Career Paths

Several reasons abound why people venture into entrepreneurship. They include: fostering

economic growth; creating new technologies, product, and services; increasing productivity,

and changing/rejuvenating market competition.

Budding entrepreneurs are influenced physically and psychologically by the environment in

which they live. Most Igbos who grew up in Alaba, Idumota, Onitsha, Aba talk business.

Their other friends in Kano. Kaduna and Maduguri do exactly the same. The individual’s

family financial and career circumstances also play a major role in fine-turning of choice for

27

entrepreneurship and thereafter accepting it as a career path. The individual’s personal

circumstances and priorities, his abilities and traits also play a role in this regard.

The empire builders, the men at the centre of action, the self-confident, task and result-

oriented individuals who parade as strategists in the business milieu often settle for

entrepreneurial career paths for variety of reasons which include the under listed:

• Desire for Power and Authority

• Desire for Independence and Autonomy

• Impressive

• Security:

• A way of life/Ego — reaching full potential

• Service to the Community

• Need to protect inherited wealth

• Plan for retirement from salaried employment

Others reasons include:

• Utilization of spare time

• To try venture out of long conceived business idea

• Inability to secure an employment

• The need to proof one’s ability

• Desire to develop and sustain a legacy.

• For fun and creation of wealth by environment scanning. Potential Drawbacks of

Entrepreneurship or self-employment

3.2: Entrepreneurship Drawbacks

For every coin there are two faces. Potential entrepreneurs should also beware of the

drawback are:

Activity 1.3.1: Settling for Entrepreneurship Career Paths

Think about the people that have highest percentage of entrepreneurship career path in

Nigeria. Record it in your study diary.

28

• Uncertainty of income: - the risk is high during infant years, you may live on

transferred earnings or suffer loses, including having problems in breaking into your target

market.

• No guaranteed vacation:- not to talk of sure vacation with pay.

• The entire investment may be los:- often by no fault of yours, may be by art of God,

including sudden change in government policy.

• The stress level may be high — the over proportional demand on time, energy,

resources and self may be stressful and damaging to an unprepared mind.

• Long hours of hard work, often odd hours

• The responsibility is absolute: - no stories, no passing the bulk, you are responsible.

• Self-employment as an entrepreneur requires great deal of self-disciple, dedication

and tenacity. The business in all cases may not be smooth. Many obstacles may be

encountered. Some may appear early while others may be later. This may be a source of

discouragement and disillusionment.

3.3: Working for Others

People work for others or become employee of organizations for variety of reasons. These

include:

• Risk aversion to personal savings if any

• Acquisition of training and experience for later life entrepreneurial career, fresh

medical doctors working for General Hospitals or lawyers getting attached to

renowned law firms.

• Pride in association with prestigious organizations, you see I am a lecturer in the

University of Nigeria, the first indigenous Nigerian University, or I work with

Central Bank of Britain etc.

• Less demanding work and responsibility – organized work. Provides self-

actualization need for professionals, work life balance, specified working hours

and so on. Some professionals technically inclined personnel long for challenges

to prove their skills and abilities; such challenges are often found in well-

established organization with organized structures.

29

• Providing security for individuals who are phobic of their financial and economic

standing including their self-ability/confidence.

3.4 Pitfalls of Salaried Employment

The following factors have been identified as the pitfalls of salaried employment.

• Subordination to the next level of authority and sacrifice of self independence

• Specified and limited earnings

• Qualified right to exercise personal judgment this leading to dulled initiative and

drive.

• Risk of being in the wrong place and often bossed by less suitable and often

uncompromising super-ordinates.

• Risk of possible termination of appointment at the instance of employer. This

could happen when the employee is unprepared to separate from the employer.

East or West, home is the best, which is your home? This depends on your person, your

circumstances, your trait, and desire. Entrepreneurship and salaried employment are both

options depending on your situation.

3.5 Unit Summary


1. People often settle for entrepreneurial career paths for several reasons.

2. Entrepreneurship is not an easy venture, it has some drawbacks

3. People work for others for certain reasons

4. Salaried employment has some pitfalls


▪ What should the potential entrepreneurs be mindful of?

▪ Potential entrepreneurs should beware of drawbacks.

30




unit.


What are the motivations for entrepreneurial life?


What are the possible draw backs an entrepreneur faces?


Do a short note on the underlisted:

- entrepreneurship

- small business management

- intrapreneurship


Why do people work for others?

References/ further studies

Uzoma, A.M. (1991) Entrepreneurial Development in Nigeria-A Tactical

Approach for the Organisation-Makers, Port Harcourt, New Age Educational Publishing Co.

Ltd.

https://www.entrepreneur.com/article/251591

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Module 2: Business Environment, Characteristics of the

Entrepreneurs and Forms of Business Ownership

Module Overview

Having learnt about the concept and socio-economic importance of entrepreneurship as well

as the motivations for entrepreneurial life; it becomes very necessary to understand the

business environment which is always challenging, characteristics of entrepreneurship, forms

of business a potential entrepreneur can go into. This module essentially makes an

exposition on the above topics by generating the following study units:

Unit 1: Entrepreneurial Environment and Process.

Unit 2: Characteristics, Disposition and theories of entrepreneurship.

Unit 3: Possible forms of business ownership

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Study Unit 1: Entrepreneurial Environment and Process.


Introduction

Entrepreneurship outfit cannot exist in nothingness; there must be an environment that is

inherent with so many variables that may even pose challenges to the entrepreneur. You are

to examine this unit by going through the following:

1. Entrepreneurial environment

2. Entrepreneurial process

3. The entrepreneurial four Ps



1.1 Understand the nature and features of the business environment

1.2 Discuss the entrepreneurial process

1.3 Mention the entrepreneurial four Ps

1.1 Entrepreneurial Environment and Process

Let it be known to you that entrepreneurs, irrespective of type from one man or solo self-

individuals to multi-national companies operate within the boundaries of organizations.

Organizations on the other hand operate within a system, referred to as business

environment. The environment of the entrepreneur/organization refers to forces and

conditions outside the entrepreneurs’ boundaries/control in the short run that has the capacity

to influence or impact on the entrepreneurial activities. These forces are generally,

multifaceted, turbulent dynamic and complex. The changes in the environment present to the

entrepreneur both opportunities and threats. How the entrepreneur responds to this, makes

the difference between success and failure. The environment of the entrepreneur is classified

into three sub-divisions. These are:

33

Figure 2.1: Business Environment

Take a look at fig. 2.1; you will see that the environment is made up of three segments with

some specified components:

i. Internal Environment - Structure, culture, human and non-human resources

ii. Task/Industrial Environment – Shareholders, suppliers, employees/labour

unions, competitors, trade associations, communities, creditors, special interest

groups and governments

Physical Resources

Natural Physical

Environment

Source: Thomas L. Wheelen and J. David Hunger (2010), Strategic Management and Business

Policy, Achieving sustainability, 12ed. New York, Prentice Hall p. 64.

Wildlife

climate

TECHNOLOGICAL

FORCES

SOCIO-CULTURAL

FORCES

SOCIAL ENVIRONMENT

ECONOMIC

FORCES

TASK/WORK/INDUSTRY

ENVIRONMENT

INTERNAL ENVIRONMENT

GOVERNMENT SHAREHOLDERS SUPPLIERS

SPECIAL INTEREST

GROUPS EMPLOYEES/

LABOUR

UNIONS

STRUCTURE CULTURE

RESOURCES

COMPETITORS

TRADE ASSOCIATIONS

COMMUNITIES

CUSTOMERS

POLITICAL –

CREDITORS

LEGAL

FORCES

34

iii. Social Environment – Economic forces, technological forces, political-legal

forces and socio-cultural forces.

Business entities are made up of inter-related parts which are intertwined with the outside

world. In the systems language, business organizations are but mere sub-systems that exist

within a supra-system. As a member of a system the entrepreneur merely draws its inputs

from the supra-system process/transforms such inputs to beget outputs. These outputs

become the products/services which the entrepreneur gives back to the society for profit.

Entrepreneurial activities are not carried out in a vacuum but in a fabric of inter-related

dynamic world setting. Business organizations are thus mere transformation systems

Figure 2.2: Business organizations as a transformation system

Inputs Outputs

Land, Premises Business Organizations Goods

Materials Entrepreneurial- Services

Labour setups. Processing Ideas

Technology units Information etc. Finance Managerial Skills, etc.

Source: Ian Worthington and Chris Britton (2003), the Business Environment 4thed,

England, F.T. Prentice Hall

Figure 2.2 speaks for itself. It showcases the inputs from the environment, the transformation

and the output that goes back to the environment/society.

Thus, the entrepreneurial firms are neither self-sufficient nor self-contained (not closed

systems). They are dependent on the external environment. The external environment has

both direct and indirect influence on the firm. The direct influence is through some of the

stakeholders. The stakeholders are classified into two: internal and external stakeholders.

The external stakeholders are competitors, suppliers, customers, special interest groups,

labour unions, financial institutions, the mass media, government and governmental agencies.

On the other hand, the internal stakeholder include: the shareholders (owners), the employees

(workers) and the board of directors (strategic managers).

35

Factors in the external environment that indirectly impact on the entrepreneurial

establishment has been broadly group into four by Fabey and Narayanan (Macro

environmental analysis in Stoner, Freeman and Gilbert 2007 101 – 105) namely:

i Social Values: – demographics, lifestyles, organization from the external environment

ii Economic Values: – economic conditions and trends

iii Political Variables: – political process and climate

iv Technological Variables - new developments in products and services, including

advancements in science and technology.

The entrepreneur needs to be conscious of these environmental factors as they affect the

entrepreneurial process, for the opportunity threats are enveloped in the environment. These

environmental factors also influence the entrepreneurial four Ps.

1.2: Entrepreneurial process

The Barringer and Ireland entrepreneurial process unfolds the map of the entrepreneurial

journey, making it vivid for the entrepreneurs what to experts in each stage in their journey.

It is a four step process summarized as shown below:

Decisional stage – Decision to become an entrepreneur

Idea generation stage – Developing successful business ideas

Actuating or

Implementation Stage – Moving from entrepreneurial ideas to operations or

entrepreneurial firms

Management Stage - Nurture, manage and growth of the entrepreneurial firm.

Nirjar citing Timmons and Spinelli (2014: 8 – 30) however grouped the process into nine

stages – namely:

Activity 2.1.1: Organizations operate within a system termed business environment

Think about how a new entrepreneur can face challenges in business environment in

Nigeria. Record it in your study diary.

36

Stage i - Entrepreneurial interest

Stage ii - Generate ideas for screening

Stage iii - Venture screening

Stage iv - Develop and refine the concept

Stage v - Determine the resources required

Stage vi - Acquire necessary financials

Stage vii - Developing the business plan

Stage viii - Implement and manage

Stage ix - Growth or exit

1.3 The Entrepreneurial Four Ps

The Economist Ma and Tan (2005) in Nirjar (2014:4), four entrepreneurial Ps are:

i. Pioneer: - Innovator or champion for innovation

ii. Perspective: - The entrepreneurial mindset

iii. Practice: - The entrepreneurial activities

iv. Performance: - The outcome of entrepreneurial actions and activities.

The four Ps are similar to the Barringer and Ireland (2013) model of entrepreneurial

process. However the four 4Ps capture the developmental stages of entrepreneurship to

product creation. Here the entrepreneur could be conceived as a situational analyst, who

plans, organizes, directs and creates “a product – need fit” with profit intent.

The entrepreneurial process as listed by various authors is mere reflections of their views.

These views could be compressed into seven – steps as shown in Figure 2.5


▪ Mention the two classifications of stakeholders.

▪ They are internal and external stakeholders. The external stakeholders are

competitors, suppliers, customers, special interest groups, labour unions, financial

institutions, the mass media, government and governmental agencies. On the other

hand, the internal stakeholder include: the shareholders (owners), the employees

(workers) and the board of directors (strategic managers).

37

Figure 2.5 Seven Step Approach to Entrepreneurship Process

1.4 Unit Summary

In Unit 2.1, you should have learnt that

1. Entrepreneurs operate within business environment

2. Entrepreneurship process has four stages

3. Entrepreneurial four Ps


At this stage, you have completed unit 2.1; you are expected to answer the following

questions to show how well you have accomplished the learning outcomes of the unit.


Can an entrepreneurial control all the variables in the environment?


What is the difference if any between internal and external environments?


Explain five variables in external environment.


How would you explain the entrepreneurial four Ps to a lay man?


Growth/Exist Management

Business Idea Generation

The Business Start-up

Resources Generation Implementation and Nurture of

the Business

Business Plan Development The Business Feasibility Studies

Entrepreneurship Development

38

Explain entrepreneurship business as a sub-system

References/For further studies

Hisich R.D. and Pofers M.P (1998): Entrepreneurs (Fourth Edition) Doston,

Irwin, McGraw Hill.

Ailsoppo M. (1975) Survival in Business the Dynamics of Success And Failure, London,

Business Books Ltd.

https://www.tutorialspoint.com/entrepreneurship_development/entrepreneurship_developme

nt_environment.htm

39

Study Unit 2: Characteristics, Dispositions, Theories of

Successful Entrepreneurship


Introduction

Business environment is seen as the interaction of internal and external forces that affect the

activities of businesses. Both entrepreneurship and other types of business outfits operate in

the same environment.t However, one can identify entrepreneurs by identifying who is an

entrepreneur in the environment. This unit therefore discusses:

1. Characteristics of Entrepreneurs

2. Dispositions of Entrepreneurship

3. Theories of Entrepreneurship

Learning Outcomes of Unit 2.2


2.1 Mention some characteristics of entrepreneurship

2.2 Explain the dispositions of entrepreneurship

2.3 Discuss theories of entrepreneurship

2.1 Characteristics of Entrepreneur

Authors are divided in opinion as to what the characteristics of a typical entrepreneur should

be but one generally agreeable fact you should know is that the entrepreneur is a creative,

innovative and action-oriented individual who scans, transmits environmental inputs to

outputs thereby creating valuable goods and services for consumption by the society. He is

the hub or driver of the entrepreneurial process.

Perception plays a major role in the defining the characteristics of an entrepreneur, however,

since the concept has a socio-psychological orientation, it will be proper to look at it from

various dimensions (sociological, psychological and economical).

Sociological Dimension – entrepreneurial behavioral pattern as a member of society

i. Creative and innovative goal oriented individuals

40

ii. Dynamic and unemotional with the capacity to adapt to change and changing

circumstances.

iii. They possess managerial abilities with the ability to influence human behaviour

and other organizational resources. Thus, has the capacity to efficiently and

effectively superintend over the four Ms of management (men, money, machines

and materials). They are unassuming with rare-zeal for learning and research.

iv. Calculated and selected socio-economic mixers.

Psychological Attributes – entrepreneurial behaviour pattern as occasioned by their psyche

or mental orientation

i. Entrepreneurs are high self-confident individuals

ii. Determined with high need for high standard of achievement and success they are

ambitious and self-motivated.

iii. Challenge motivated with hate for routine assignments.

iv. Independent minded, who under normal circumstances not only accept but seek

responsibility

v. Self-motivated with high level of intuition and initiative.

vi. Energetic

vii. Futuristic

viii. Inclined to immediate feedback in business relationship

Economic Features – entrepreneurial behaviourial pattern as influenced by self-interest for

profit making.

i. Calculated risk-takers-with a mix of intuition and rationality in decision making

ii. High degree of fore

iii. Casting abilities with a creative and innovative inclination.

iv. Profit orientation and aversive (stronger dislike) for non-profiteering ventures.

v. Action oriented with spontaneous cost-benefit analysis

vi. Expertise in need – product fit analysis and management.

Obi (2009:9) opines that recent researchers appear to agree that certain characteristics

distinguish successful entrepreneurs from those that fail. The favoured characteristics are

summarized as listed below:

i. They demonstrate high level of independence

41

ii. Have high self confidence

iii. Are highly determined and importunate

iv. Goal oriented

v. Proactive – Action oriented

vi. Always set high standard for themselves and are driven by the need to achieve

vii. Possess Great Spirit of creativity and innovation.

1. Entrepreneurial Disposition - attitude manifestation

Having seen the characteristics of the entrepreneurs, it is expected that this should reflect in

their behavioral disposition. Evidence based research in management thought and philosophy

show that successful entrepreneurs tend to behave alike. This is reflected in their attitudes.

These include the under listed:

i. They are generally ego busters and friendly

ii. They are financially conservative and disciplined

iii. Generally they are inclined to private sector life (Private sector initiative

inclination)

iv. They rely heavily in self-expertise in their choice of business; they are hardly

jumpstart business owners. (Obi, 2009).

1.2 Theories of Entrepreneurship

Thought and philosophy of entrepreneurship can hardly be discussed without reference to the

science and theory of entrepreneurship. Science explains phenomena. It is based on the

rationality of nature on the idea that relationship can be found between two or more sets of

events. The essential feature of science is that knowledge has been discovered and

systematized through the application of scientific method. Science refers to general truth in a

specific area of study.

Scientific method involves determination of facts through observation of events and

verifying the accuracy through continued observation. When generalization or hypotheses

Activity 2.2.1: Characteristics of Entrepreneur

Think about how an entrepreneur can be seen as creative and innovative action

oriented individual. Record it in your study diary.

42

are found and tested as having the capacity to explain reality and therefore ability to predict

what will happen in similar circumstances these are called principles. Principles are not cost

on stones. There do not totally eliminate doubt. There may be subjected to further research

and analysis. Without new facts they remain the principles. Principles enable man to

understand the world we live in (Koontz, O’Donnel and Weichrich, 1980). Theories are

systematic grouping of interrelated principles that pulls together significant knowledge about

a subject, thereby giving it a framework. The dependent and independent variables are

consequently brought to the fore. The principles are the building blocks of theory.

The historical evolution of entrepreneurship theory is a wide ranging, subject. It hardly could

be said at the moment that there is a lacuna in the theoretical frame - work needed to explain

the concept. One could organize the theoretical under-pinning from different perspective:

area by area, period by period, issue by issue, theorist by theorist and so forth.

The chronicle of entrepreneurship development and theory appears to date back to 1759

when Richard Cantillon an Irish economist of French descent introduced the concept to

economic theory as a specialist risk taker. In 1921 American economist Frank Knight

introduced the concept of insurable and uninsurable risk and avers that pure profit is the

reward of the entrepreneurs for bearing uninsurable risk. However, in 1934 the heroic

vision was put forward by Joseph A. Schumpeter who avers that the entrepreneur is a

creative and innovative personality that precipitates major structural changes in the economy.

This opinion seems to concentrate on high level type of entrepreneurship distinct from low

level entrepreneurship as described in the role of firms by Alfred Marshall in 1919.

Incidentally Alfred Marshall seems not to have specifically denoted except by connotation

the concept in his formal analysis of supply and demand chain. This lacuna by Alfred

Marshall was made up by Friedrich A. Von Hayek in 1937 and Israel M. Kirzner in 1973

who say that the entrepreneur provide price quotations as an invitation to trade. These views

were synthesized by Casson M. in 1982 who sees the entrepreneur as a middleman who buys

at a certain price and sells at uncertain price. To do this, needs to make decisions as to what

to buy or sale and at what prices. (Casson, Yeung, Basu and Wadeson, 2009:3).

This chronicle looks at entrepreneur both from the high level and low levels. With this view

in mind one considers it appropriate to look at the theories of entrepreneurship from both the

macro and micro perspectives.

43

Kuratko (2009) in Agu (2010) asserts that the macro perspective focus on broad array of

exogenous factors that relate to success or failure of the entrepreneur. This array of

exogenous factors is often outside the control of the entrepreneur. On the other hand, the

micro view concentrates on specifics factors that impact on entrepreneurial life. Such factors

are often interwoven with entrepreneurial phenomenon or entrepreneurs’ internal locus of

control. The distinctive difference is that the macro focus is on events from the outside

looking in while the micro concentrates on specific from the inside (personalized or

internalized personal qualities) looking outside.

Figure 3.1 Macro and Micro Perspectives to the Theories of Entrepreneurship

Source: Agu R.A., (2010), Frontiers of Entrepreneurship, Concepts, Theories and Practice,

Onitsha, Kawuriz and Manilas Publishers p. 37 See also Nirjar Abhishek, (2014),

Entrepreneurship Development, New Delhi, CBS Publishers and Distributor, p. 27 - 28.

Macro Perspective of Entrepreneurship Theory

From Fig. 3.1 above, you should see the theories under this approach as listed thus:

1. Sociological or environmental focused theories

2. Economic theories

3. Cultural theories

4. Displacement theories

Entrepreneurship Theories

Macro Perspective Micro

Perspectives

Sociological

Theories

Economic

Theories

Psychologica

l Theories

Venture

Opportunity

School of

Thought

Strategic

Formulation

School of

Thought

Displacement

Theories

Cultural

Theories

44

The Sociological or Environmental Theories

The theories under this sub-head are:

1. The religious beliefs theory

2. The social exchange theory

3. The marginal and tension theory

These theories are so grouped because of certain features they have in common. All of them

focus on external or exogenous factors that affect the life of the entrepreneur. These include

morals, values and institutional framework in the socio-political environment that influence

the actions or inactions of the entrepreneurs. They see the entrepreneur as a product of the

society with societal influences. They are not isolated from the society, as products of the

society, the society impacts on them significantly.

i. The Religious Belief Theory

Max Weber propounded this theory in his work published in 1958 titled protestant ethic and

the spirit of capitalism (Okpara 2000: 21). His major interest was in broad-sweep of

historical development of civilization through studies in sociology of religion and sociology

of economic life. He examined the world’s major religions such as Christianity, Buddhism

and Judaism in tracing the pattern of economic development from pre-feudal times. The

focus was in Western Europe and United Stated of America. He concluded that certain

religious beliefs create either positive or negative attitude towards profit generation and

wealth accumulation. He sees business empire builders and highly technically skilled persons

in the modern society as being overwhelmingly influenced by their religious belief and

inclinations. The theory is predicated on some major concepts.

a) Spirit of adventure

b) Spirit of capitalism

c) Protestant ethics

d) Profit inducement

Adventure spirit

Those who will become entrepreneurs are generally adventurous. They enjoy excitement

associated with adventure or doing new things. The innate force in them propels them into

45

doing certain things which under normal circumstances or in sober mood many would avoid

under normal circumstances.

Weber spirit in his studies concluded that certain religious beliefs create either positive or

negative attitude towards profit generation and economic wealth accumulation. He sees the

spirit of capitalism/preference for private enterprise life as being fostered by religious beliefs.

The adherence of religious beliefs that encourage capital acquisition, generally possess

entrepreneurial culture. This mindset encourages hard work that enables them to nurture

business and generate wealth for investment and re-investment.

Protestant ethics

Weber perceives majority of the successful entrepreneurs as protestants, that is those that

disagree with their environmental circumstances and want to make a difference. Their

attitudes and behaviours towards entrepreneurship are generally reflections of their

disagreement with their prevailing circumstances. Protestant ethics is a conscious “walk out”

out of status quo. This is also faith or religion related. Calvinistic logics or values are seen as

responsible f creation and multiplicity of business enterprises.

Profit Inducement

Profit refers to the reward associated with business engagement. The motivation for capital

accumulation through business activities is refered to as profit inducement. Weber is of the

view that the spirit of adventure, capitalism and Protestants logic or Calvinistic values

induces the zeal for profiteering. Those so induced generally end up in entrepreneurial

exploitation/and capital building.

ii. The Social Change Theory (Creativity and Technological Innovation Theory)

This theory was developed Everett Hagen. He perceives the entrepreneur as “a

creative problem solver, interested in things in the practical and technological realms and

driven by a duty to achieve” (Okpara 2000: 24). He further opines that the creative

personality in an individual is characterized by a high need for achievement and autonomy.

They are generally pure entrepreneurs rather than a jump and start or copy business concerns

businessmen. He further avers that economic development is an ecological process brought

about by technological creativity and innovation by entrepreneurs. It is his view that the

entrepreneur is a creative problem solver interested in solving practical problems, mostly

46

through the application of creative technology. A good number of them are energized by the

burning zeal (internal force) to make a unique contribution to the society.

iii) Marginal and Tension Theory

Rovert Park introduced the marginal and tension theory. The marginal man in this

context refers to a man that is condemned by faith to live in two societies with antagonistic

cultures like the Muslim and Christian traditions. In the circumstance because he lives in the

margin, he is tensed up and hardly accepted by any of the conflicting traditions, for he blows

neither hot nor cold. As an escape route he resorts to self-employment through acts of

entrepreneurship. This theory could be liken to the societal incorporation of relative sub-

groups theory by Frank Young. This theory unveils the effect of inter-group relationship on

entrepreneurial development. In his opinion non-incorporation of a relative sub-group in the

societal framework induces acts of entrepreneurship on the group. He sees a group becoming

relative in two circumstances.

1. If a group experiences low status recognition and denial of access to important social

network.

2. If the group possesses a greater range of institutional resources than other groups in the

society at the same system level.

Under the first circumstances, members of the group will work harder, and strive for

autonomy in those areas they are denied equal opportunity. In most cases they become very

successful. A case at hand is the Jews. Under the second condition, the group could use their

abundant resources to acquire or buy the entrepreneuria1 skills buy the entrepreneurial they

need. Young, thus, sees no relationship between personal factors and entrepreneurial

development value and society-wide phenomena on entrepreneurial advancement (Agu, 2010

and Okpara, 2000:21 – 27).

iv. Cultural Theories

The entrepreneur here is perceived by the proponents of the school as a product of culture.

That is, entrepreneurship is a cultural phenomenon. This school argues that the choice of

entrepreneurship is related to external factors beyond the individual’s control. Such external

factors include the influence of a person’s role model, family orientation, the society or

environment in which the person is brought up (e.g. is a child born in a Moslem dominated

47

community by Moslem parents likely to be a Christian? or a child born by Christian parents

in a Christian dominated society likely to be a Muslim? No).

Rejection experience could also be an inducement for entrepreneurship. The feeling of not

being in the main stream or being part of a system may contribute to the need to become an

entrepreneur. Minorities, immigrants, gender, ethnicity, religion, and segregation may

contribute to this. All Ghanaians in Nigeria known to this author are very industrious,

creative and of very high - entrepreneurial spirit. Consider the background and circumstances

of early Army Generals in Nigeria, the highly educated, the Christian Ministers, the early

successful entrepreneurs including those who emerged after Nigerian Biafran war.

McClelland, Schumpeter, Herbig and Miller, Young and Kunkel are among the major

proponents of this school of thought.

v. Displacement Theory

The theory is of the view that a man pushed out of a shed into the rain does not remain there,

but makes effort to relocate to another tent. The pushing out or displacement could come in

three ways

• Politically

• Culturally

• Economically

In any of the three cases when displaced the individual tend to seek private sector protection

through entrepreneurial activities. This is so when the man is reluctant to give zero-sum fight

back to the group.

vi Capital Theory

This theory sees capital or finance as the life blood of entrepreneurship. It concludes that

availability of fund or easy access to loan and proper financial management of same is a key

to entrepreneurial life.


▪ In the chronicle of entrepreneurship development, what did Richard Cantillon

introduced?

▪ Richard Cantillon introduced the concept to economic theory as a specialist risk

taker.

48

Economic Theories of Entrepreneurship

It is difficult to separate entrepreneurship theories from pure economic phenomenon for

the evolution of the concept has been traced back to economics. As a result of this, we may

look at the theory from economic perspective.

Two theories will be considered Schumpeter and Kizner’s economic theories of

entrepreneurship. Both theories see entrepreneurship as being propelled by economic

incentives profiteering through creativity and innovation and distortion on existing economic

orders. However, Schumpeter is of the opinion that equilibrium in the market setting is an

interaction between two forces – technology and economic forces, that the duo interact to

make the economy a producing organism. However, in a capitalist oriented economy,

economic logic takes precedence over technological consideration in the production process.

He concludes that true economic growth achievable in the economy through destruction of

the existing economic status quo and displacing them with better and new ways of production

by the entrepreneur. He thus avers that the entrepreneur is a creative destroyer. He destroys

and simultaneously replaces with enhance and better products/services. By so doing he

creates and rejuvenates market completion. This says is the true source of economic

development. He further assert that the entrepreneur relies heavily on use of self-initiative,

breaks away from old route and the resists impediments associated with the socio-political

environment in his rare zeal to make profit through creation and innovation.

Kirzner on the other hand sees the dynamic forces in economy like technology, taste,

population, income, distribution as forces that ensures that the economy is in a constant state

of disequilibrium. The role of the coordinator of other factors of production (entrepreneur) is

to constantly scan the environment to find the forces behind the shift and the economic

opportunities there-in and take advantage of them for profit. He concludes that the market is

in constant state of disequilibrium with opportunities hidden within them and it takes an

entrepreneur who is alert to continuously scan the environment to take advantage of the

changes and thus return the market to a state of equilibrium, by so doing makes his profit.

The process equilibrium and disequilibrium is a constant and ongoing process in the

capitalist economy. His interest is on equilibrating forces in the economy as against the dis-

equilibrating forces advocated by Schumpeter.

49

Micro Perspective

Micro-perspective is anchored on specific and often internalized (traits/in-born factors in the

entrepreneur that is responsible for his exploits. From the abundance of the inner-personality

of the entrepreneur, entrepreneurial activities manifest. Theories grouped under this include:

- Psychological theories

- Venture opportunist theory

- Strategic formation theory

The Traits/Psychological Theories

The traits model believes that entrepreneurs have certain internal (in-born) personality traits,

motives and values that propel them to the choice of entrepreneurship career. David

McClelland is a major proponent of this school of thought (Need for Achievement N- Ach

theory). Others include Alam J. and Hossan M.A, Shaver K. Fi and Scott L.L. the traits often

listed include the following:

Characteristics- Traits Associated with Entrepreneurs

1. High need for Achievement

2. High need for Independence and Autonomy (Self boss)

3. Risk taking propensity

4. Tolerance for ambiguity

5. Creativity

6. Intuition

7. Flexibility

8. Self confidence

9. Internal locus of control

10. Easy of adoptability

11. Dominance

12. Low need for conformity

13. Determined and Futuristic

14. Innovativeness (Ibrahim and Ellis 1990)

50

Venture Opportunities Theory

This school of thought merely sees the entrepreneur as an opportunist in an ever changing

business setting. The understanding is that to be successful as an entrepreneur one needs to

be agile and pro-active. Such individuals are generally able to detect product-need-gap and

come up with product-need-fit. This is done through development of the appropriate

business idea at the appropriate time with the appropriate strategy in the appropriate market

with appropriate mind set. When opportunity meets a prepared mind, the entrepreneur is said

to be an opportunist. In strict management language he could be referred to as an

environmental strategist. Agu (2010:49) relates this to the corridor principle which

“provides that new pathways will arise that the ability of the entrepreneurs to see and seize

the opportunities by taking the right actions are key factors in the entrepreneurial process”.

Forecasting, Planning and agility play major role in success of entrepreneurship.

Strategic Formation Theory

Strategic formulation theory anchors on strategic thinking and strategic management of

enterprises. It sees strategic thinking, strategic planning and being proactive as key to

success in business venture. It sees the business environment as turbulent, and as such,

requires careful planning and execution to be able to have an inch or operating advantage

over other competitors in the milieu. The mission and vision of the enterprise operators must

be faithfully aligned for the commission to be simplified. The contention here is that the

entrepreneur should be strategic. In the business environment he should carefully select an

industry, within the industry select a segment for targeting. The business segment must be

approached with the appropriate 4m input (man, machine, material and money) for

appropriate 4P output (product, promotion, place/distribution and price). The

appropriate mix of 4m input and 4P output is advocated. The advocates of this theory believe

that strategic planning is the first function of the entrepreneur. They contend that appropriate

human resources, technology and strategic planning constitute the sub-structure for

entrepreneurial success.

1.3 Unit Summary


2.2.1 Entrepreneurship has distinct characteristics

51

2.2.2 There are dispositions of entrepreneurship

2.2.3 Theories of entrepreneurship explains who is an entrepreneur





Briefly describe the chronicle development of entrepreneurship.


Classify theories of entrepreneurship based on Macro and Micro Perspectives


Explain briefly the environmental theories


Describe the spirit of capitalism in entrepreneurship


Differentiate between Marginal and Tension Theory and The Social Change Theory


Which characteristic are traits associated entrepreneurs

References/ further studies


Anyanwu A.(1999) New Perspective of Entrepreneurial Development, Owerri, Kiet-Ken

Publishers.

Agbaeze E.K. (1995) Cultural Imperatives for Entrepreneurial Development in Item, Bende

L.G.A. Abia State, Being a Public Lecture Delivered to the Item Community on 26


http://www.sjm06.com/SJM%20ISSN1452-4864/4_2_2009_November_137-282/4_2_239-257.pdf

http://www.investopedia.com/articles/personal-finance/101014/10-characteristics-successful-

entrepreneurs.asp

http://www.sjm06.com/SJM%20ISSN1452-4864/4_2_2009_November_137-282/4_2_239-257.pdf

52

Study Unit 3: Business Ownership


Introduction

The art of entrepreneurship is generally expressed through the ownership of a business

venture. Business ventures or organizations exist within the business environment and

entrepreneurs are distinctive by their characteristics. Forms of business ownership which is

the focus of this unit will be discussed under the followings headings:

1. Forms of Business Ownership

2. Hybrid forms of Business Organizations

3. Cooperative Societies (COOP)

Learning Outcomes of Unit 2.3


1. Explain different types of business ownership

2. Highlight forms of business organizations that are termed hybrid

3. Discuss about cooperative societies

3.1 Forms of Business Ownership

Whether one starts a virgin business (from the scratch) or buys an existing one, or buys a

franchise, depends on his circumstances. The design and structure of a business enterprise

could be simple or complex. The simplicity or complexity of the design depends on the form

of business. According to Musselman and Hughes (1977: 138) “one of the first and most

critical questions anyone starting a business must ask is, which is the best form of ownership

for me to use? Each of the several legal forms has its peculiarities, advantages and

disadvantages. Because of this, the future of an undertaking may well depend on the

appropriateness of the form that is selected. Unfortunately, many a new owner is not fully

aware of why it is so important to make the proper choice”

You are to acquaint yourself with the classical types of business ownership by looking at fig.

3.1 below:

53

Classical Types of Business Ownership

Private Companies Public Companies

Sole Proprietorship Partnership Limited Liability Unlimited

Companies Companies

Limited by Limited by

Shares Guarantee

From fig. 3.1, you can see both businesses that are collectively owned and the form that are

individually owned. Whichever type of ownership one falls for, several considerations guide

the choice. These considerations are seen in the next section of this unit.

Factors to Consider in choosing Type of Business Ownership

Any entrepreneur planning to start a business venture must certainly address certain issues.

Some of the issues to be addressed include the under-listed:

1. How difficult is it to organize the business venture?

2. What are the legal requirements including the cost?

3. Possibility of transferability of the ownership

4. The entrepreneur’s ability and capacity

5. Degree of control desired

6. Extent of business liability

7. Tax position of the business

8. Ease of organization and dissolution

9. Government regulations

10. Continuity of ownership as an on-going concern.

11. Reason for the venture – profit maximization, social or political, interest.

Ownership of a business is a prerequisite for having the will of an enterprise. The ownership

refers to legal title to and the rights to property. This includes rights to possession and

54

disposal of such enterprise. There are two major types of business ownership – private and

public. Private ownership exists when individuals exercise the right and responsibility of

ownership, on the other hand, public ownership exists when the general public or political

bodies like the federal, state or local governments exercise the said rights. There could also

be a mixed ownership, including partnership of individuals and public bodies also called

private-public partnership (PPP) (Udu 2012: 47).

Private ownership design operates a simple organizational structure with limited bureaucratic

organizational levels of authority. It is organized as either sole proprietorship or partnership.

The Sole Proprietorship

You are not unfamiliar with the term sole proprietorship which is also known as one man

business. It is the commonest and the oldest form of business organization not just in Nigeria

but also in history. In fact, this form of business ownership is as old as civilization itself. The

legal structure of this form of business is non-corporate; in effect it could be established

without any authorization from any governmental agency, except probably to obtain the

required (if any) license(s) from the appropriate local governing authority or state licensing

authority. In the eyes of the law, the business and the owner are the same.

By definition, Sole (individual or single) proprietorship is a business owned and managed by

one person.

Operational Advantages

The reasons for the popularity of sole proprietorship cannot be separated from its operational

advantages which are presented below:

1. It is relatively easy to establish and run

2 The owner has absolute commitment; he is responsible for all the profits and losses.

3. The owner has a free hand in the running of the establish

4. The business has only few legal obligations.

5. Dissolution of the business is easy to accomplish.

6. The owner of the business is usually taxed not the business; consequently there is no

room for double taxation.

7. Emp1oyees and customers are personally known by the entrepreneur.

55

8. Customers can receive personal attention and good service.

Disadvantages

Don’t you think there are shortcomings or demerits of running a one man business? Can you

imagine some of them? Look at the ones below and reconcile them with your point of view.

1. Unlimited liability for debts of the enterprise.

2. Difficulty in raising fund for the firm.

3. Employees have limited opportunity for growth; this also makes it difficult for the

firm to attract experienced and highly qualified personnel.

4. The burden of operational responsibility as the business grows could overwhelm the

sole proprietor.

5. Uncertainty of the life span. Death, permanent illness or bankruptcy of the sole

proprietor could lead to sudden death of the establishment.

6. The employees work for long hours; holidays are seldom observed.

Partnership

Sometimes we see partnership as an extension of the sole proprietorship with the primary

distinguishing factor being the fact that it is designed to have more than one owner. The

partnership is also a form of business that had a very early beginning.

In the opinion of The American Uniform Partnership Act, partnership is “an association of

two or more persons who carry on as co-owners of a business for profit”. The very popular

Partnership Act of 1890 which is a landmark Act that governs ordinary partnership defines

partnership as “the relation which subsists between persons carrying on a business in

common with a view to profit.” The legality of its creation rests on the common-law right of

voluntary association. Thus for a partnership to come into being, there must be an ‘expressed

intention to do so by all the partners.

Customarily, a partnership is guided by partnership agreement or article of partnership.

However, this is not a legal requirement. It is advisable that the agreement should always be

in writing. In the absence of an agreement, profits and losses generated from the business are

to be shared equally among the partners.

56

A typical partnership agreement (or deed of partnership) is expected to contain the

following information.

• Name of the partners

• Name, purpose and location of the business

• Duration of the agreement

• Nature of the partners (general, limited, active or silent)

• Contributions by partners (at the inception and thereafter)

• How business expenses are to be handled

• Individual partners authority in the conduct of the business

• The partnership records and method of accounting

• How the profits and losses are shared

• Method of payment of salaries and other cash withdrawals

• Sales of partnership interest

• Disengagement of a partner(s)

• Settlement of disputes

• Amendment of partnership agreement, etc.

• Method of determining a partner’s investment, if he wishes to withdraw.

Partnership is a common business arrangement in advanced countries. In Nigeria, it is not

very much favoured due to distrust and high level of illiteracy. Few partnerships in Nigeria

are mostly those formed by professionals like Management Consultants, Lawyers, Medical

Doctors, Surveyors, Architects, Accountants and the likes. There are two types of

partnership:

i. The ordinary partnership

ii. The limited partnership

In ordinary partnership all the partners have equal level of authority and responsibility.

Each active partner may also take part in the management of the venture. In the same manner

each of them is responsible for the debts of the establishment.

The limited partnership is an association of two kinds of partners - the general and the

limited. There may be any number of each, but there must be at least one of each kind. In

57

effect, it is not a partnership composed wholly of limited partners. One or more partner(s)

may have limited liability as long as at least one partner has unlimited liability. The limited

partner cannot be active or seen to be active in the management of the business venture. The

aim of the limited partnership is to allow a person to invest capital in business venture from

which he expects return without assuming liability for the debts of the firm beyond the

amount invested. Limited partnership, however, is not recognized in many countries, Nigeria

inclusive.

Kinds of Partners

Common law and statutes recognizes various types of partners in a general partnership.

They are as listed below:

Active Partner: An owner who contributes money and also takes an active part in the

organization and management of the business.

Secret Partner: An owner who takes an active part in the affairs of the partnership but does

not reveal his identity to the public.

Silent Partner: An owner who plays no active role in the business venture though he may be

known to the public as a partner.

Dormant Partner: An owner who contributes money and plays no active role in the business

venture, and at the same time, he remains unknown to the public.

Nominal Partner: This is not really one of the owners of the business; however, he suggests

to others by his actions or words that he is a partner. This is mostly done by allowing his

name to be identified with the partnership.

Senior Partner: This is a general (active) partner who has been with the partnership for a

long time and who owns large share of the partnership.

Junior Partner: A co-owner for a short period, he may not be required to assume

responsibility for major decisions of the establishment.

58

Advantages of Partnership

Comparatively, partnership is seen as a better business option than one man business. Some

of the reasons for this are presented below:

1. Minimal legal requirements are required for its formation and dissolution.

2. It offers the possibility of raising more capital resources than the sole proprietorship

3. The partners are taxed only, unlike corporations where both the business and the individual

owners are taxed

4. It is possible to utilize the combination of individual talents, judgment and skill of the

partners in the running of the business.

5. It is relatively free from governmental control.

Disadvantages

There are factors that make partnership not desirable to many. These represent the demerits

of it and are presented below:

1. There is the possibility of disagreement among partners as a result of the joint venture

and collective responsibility and authority, differences in education, gender, view-point,

orientation, and communication gaps may bread disagreement.

2. The liability of the partners is generally unlimited

3. It could be difficult for a partner to withdraw his interest/assets in the partnership.

4. The life span of a partnership business is often not stable.

5. Decision may take longer time to reach since each partner may want his opinion to

prevail.

Public Ownership Design

We have gone through private form of business ownership, be it one man or two or more

persons. Now you will be exposed to a corporate form of business ownership which is largely

seen as public enterprises.

Activity 2.3.1: Business Ownership

Think about the kind business ownership you intend to explore upon completion of this

programme. State what informed your choice and record it in your study diary.

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Public enterprises are commonly referred to as companies or corporations. The usage of the

concept varies among countries. Britain prefers the world `company’ while United States of

America uses the world `corporation’. (Anyanwu, 1999). In the context of this text we will

use the words as synonymous.

The United States Supreme Court sees a corporation as “an associations, of individuals

united for some common purpose, and permitted by law to use a common name, and to

exchange its members without dissolution of the association.” Corporations are granted

charter by the government of the country in which it operates. In 1819 in the famous

Deartmouth College case, the Chief Justice, John Marshall offered a definition of corporation

that has stood the test time. He asserts that a corporation is “an intangible reality: an

artificial but legal “person” who in spite of the twilight zone of semi-existence, can be held

responsible, for many of the same things, for which a real person can.”

Corporation is a symbol of big business just like sole proprietorship and partnership are

symbols of small business. Corporations have far more formal structures than either the

proprietorship or partnership. It has the right to buy, sell, own, manage, mortgage and

otherwise dispose properties. The owners are the stock or shareholders.

Chartered Companies

The evolution of chartered companies dates back to Britain. Britain in the past grants Royal

Charter to some companies specifying rights and privileges to trade. On incorporation the

charter incorporating the company clearly state the powers including conferring on the

membership of the company limited liability. In the present dispensation charter is conferred

to non-commercial companies only.

Statutory Corporations

Statutory companies or corporations are established by acts of parliament (or Decree). The

essence of their establishment is to provide public and quasi-public goods and services to the

public. They are mostly non-profit oriented. Public welfare is the yardstick for measurement

of their performance. When profit minded public/individuals criticize the statutory

companies on the grounds for not making profits, they do so out of ignorance of not

understanding their cardinal role in the society. Two different things – profit and non-profit

making establishments, are not to be measured by the same yardstick. The logic for the

establishment includes:

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i. Societal welfare

ii. Security reason

iii. Provision of capital intensive projects

iv. Employment generation

v. Provision of Public Services

vi. Protection of National Economy

vii. Co-ordination of efforts/activities

Indigenization Decree 1977 and CBN Report in Anyanwu 1999:5)

Statutory Corporations are classified into two: Monopolies and Regulatory, Welfare and

Service Agencies. The state monopolies are established for the purposes of rendering

essential economic activities to the citizens. Their services are general subsidized. Examples

include Electricity Distribution Companies (EDC Electricity Distribution Companies)

formally, Power Holding Company of Nigeria or Nigeria Electrify Power Authority. Virgin

Nigeria or Nigerian Airways, the Railway Corporation). The regulatory, welfare and service

agencies – as the name suggests, they are merely regulatory agencies concerned mainly with

ensuring that specified standards are maintained. Examples of this in Nigeria include the

Standard Organization of Nigeria (SON), the Nigerian Communication Commission and so

on.

Registered Companies

Registered companies refer to companies registered under the Companies and Allied

Matters Acts. (1990 Act and the subsequent legislations). The acts deal with regulation of

the business of such companies from coming into life (incorporation). Life journey

(operations and death (winding up). In Nigeria such companies come into existence through

fulfilling the specified legal requirements, registration and obtaining the certificate of

incorporation by the Registrar of Companies. There are three classifications of registered

companies under the act.

• Unlimited companies

• Limited companies by guarantee

• Limited companies by shares

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Unlimited Companies

Unlimited Companies are companies registered under the Companies and Allied Matters

Act with specified share capital but with liability of her membership as unlimited. The

implication is simply that though incorporated but the companies’ liabilities on event of

shock or business difficulties/failure are not divorced or separated from the

owners/shareholders, personal assets/belongings. It puts the shareholders in difficult

situation if the company fails. The company’s legal personality here is not differentiated from

the individual owners’ personality in time of trouble. In the Nigeria business environment

they are rare except probably in the non-profit making business set-ups.

Company Limited by Guarantee

They are generally nonprofit oriented business ventures. On incorporation of such

companies the owners clearly specify in the memorandum of association the limit of their

liability contributions both individually and collectively. In event of financial crisis the

members liability is restricted to the declared, amount otherwise called guarantee. The

amount guaranteed can hardly be called a share- capital. It is fashionable among charitable

organizations like religious bodies, Red-Cross Society, Bible Society of Nigeria, professional

bodies, orphanage homes and the likes.

Companies Limited by Shares

The limited liability companies are mainly profit oriented. As the name suggests the

liability of her membership is limited to shares not paid up at the point of crisis/failure by

each member, beyond this no obligation to the owners/shareholders. This type of company

generally is popular in Nigeria and is referred to as limited liability companies. Companies

limited by shares are classified into two-public and private companies.

Private Limited Company

Private Corporation are formed and owned by close private individuals. The essence is

usually for profit making. Two fundamental features of such companies are as listed below:

• The number of shareholders ranges from two to fifty only. This excludes past and

present employees of the establishment.

• The shares are not transferable without the consent of the other shareholders: neither can

the company invite the public to subscribe for her shares. Examples of such: companies

62

include Ekene Dili Chukwu Transport Limited, Flaab Nigeria Limited, COPA Nigeria

Limited, Ikorotex Nigeria Limited, etc.

Advantages of Private Limited Company

1. It provides a small firm with limited liability label.

2. Longer life and continuity is ensured.

3. Infiltration of outsiders is cumbersome.

4. It ensures high degree of personal contact between the directors, workers and

customers.

5. Though Limited, business secretes and confidentiality is easier to manage Public

Limited Liability Company (PLC)

Disadvantages

1. Highly qualified personnel’s are often reluctant to join the employee of the firms.

2. Their shares are not easily transferable.

3. Job security of their employees is questionable.

4. Its often difficult for them to resist capital for her shares are not sold over the counter.

5. It operates more like a family business rather than limited liability company.

6. The membership need not be more than fifty. This parts limit to its membership.

Public Limited Liability Companies are formed and owned by individuals and

organizations they need not be closely related. The law stipulates that the membership must

not be less than seven; however, there is no maximum. Its shares can be bought and sold over

the counter in the Stock Exchange, if there is a stock Exchange quotation for its shares. The

Company’s ba1ance sheet must be lodged yearly with the Registrar of companies; in

addit1on, it must be published yearly in a national newspaper.

Procedure for Formation of a Company

Once the decision for incorporation has been taken; what next they are usually noted by

inclusion of “PLC” after their name the entrepreneur do?

The incorporators will proceed as follows:

1. Complete an application form for charter from the Registrar of Companies.

2. File the application for incorporation; and

3. Pay the required fees.

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The application for incorporation is accompanied with two vital documents as enunciated in

the Companies and Allied Matters Decree of 1990. These documents are;

1. Memorandum of Association

2. Articles of Association

The Memorandum of Association is an aspect of the company’s charter that defines the

firm’s relationship with the outside world. It defines the scope and limits of the company’s

powers. Other information contained in the Memorandum includes:

1. The name of the company with Limited or “PLC” as the last word.

2. Address of the principal or head office.

3. The objects of the company.

4. Names and address of the incorporators

5. Indication in writing that the liabilities of the shareholders are limited and the like.

This document needs to be signed by at least two directors in the ease of private company or

seven in the ease of public company.

On the other hand the Articles of Association deal with the regulation governing the internal

management of the firm. The articles of association are derived from and controlled the

Memorandum of Association, Every public company is required to draw up both the

Memorandum of Association and Articles of Association, However, a private company may

draw up Articles of Association with the Memorandum but if it fails to do so, it will be

implied that it has adopted the articles as provided in ‘TABLE A” in the Companies and

Allied Matters Decree.

The Articles of Association specify the rules governing management of internal problems of

the firm. Issues covered in the articles, among others, include the following:

1. Procedure for summoning general meetings and the voting procedure in such meeting

2. The qualifications, powers and functions of the Directors.

3. Methods of declaring dividends and sharing of profits.

4. Auditing procedures and other domestic affairs of the company.

5. Method of issue, transfer or forfeiture of shares.

6. Method of dealing with alterations in the company’s capital. Other documents that are

submitted along with the Memorandum and Articles of Association include:

i. List of shareholders who have consented to become directors.

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ii. A written declaration by a lawyer that the provisions of the companies and Allied

Matters Decree of 1990 have been compiled with

iii. Official statement on the position of the Company’s Authorized and Nominal capital.

In addition, the promoters of the company will be required to pay the necessary fees and

stamp duties, which are determined by the amount of the authorized capital in the

Memorandum of Association.

After due inspection of the documentations and payment. The Registrar General, at the

Corporate Affairs Commission, could then issue the certificate of incorporation to the

company to commence business if he so considers it appropriate.

The certificate of incorporation when issued enables the company to commence business. It

is expected that this certificate be displayed at the company’s head office. The content of the

certificate include:

i. The name of the company and its registered number

ii. A statement that it has been registered in accordance with the law

iii. The, signature of the Registrar General (Okpara 2000:135).

It is after incorporation that the companies can issue their prospectus, inviting the public to

subscribe to its shares. This applies only to the public company.

Procedure for Registration

According to Igwe (2000:385-387), the procedure for registration is as contained in CAMA

Section 657. It provides as follows:

1. That every firm, individual or corporations which can be registered under the Act

shall within twenty eight days after incorporation of business in respect of which registration

is required or within three months of the operationalization of this Act furnish the Registrar

at the Registry in the state where the major business (head office) is domiciled a statement in

writing in the prescribed form, duly signed. The statement is required to contain the

following information.

a) The business name or the business names if it is carried on under two or more

business names, each of such business names.

b) General nature of the business (mission statement).

65

c) Full postal address of the head office or principal place of operation.

d) Full postal address of each and every other place of business.

e) In the case of a firm:

i) The partners present forenames and surname, any former forenames or surname,

the partners nationality and, if that nationality is not the nationality of origin, the

nationality of origin, the age, the sex, the usual residence and any other business

occupation of each of the individuals who are partners and

ii) The Corporate name and registered office of any corporation which is a partner.

f) In case of an individual - the present forenames and surname, the former forenames

and surnames of any, the nationality and if the nationality is not the nationality of

origin, the nationality of origin, the age, sex, usual residence and any other business

occupation of the individual.

g) Where a company is to be registered, the name and the registered office of the

Company

h) The date of commencement of operation of the business before or after

coming into effect of this Act.

2. If the registration to be effected, consist of individuals or a firm consisting of

individuals only, it is required that the certified photograph of the individuals be submitted to

the Registrar. The certification of the photographs must be in a manner as required by the

Registrar.

3. If the registration is that of a firm or an individual carrying on a business on behalf of

another individual, firm or corporation whether as a nominee or a trustee, it is required that

the under-listed particulars be furnished.

This is in addition to any other such provision.

a) The present forenames and surnames, any former forenames or surname, the

nationality and if the nationality is different from the nationality of origin, the

nationality of origin also has to be stated. In addition, the usual residence of every

individual on whose behalf the business is carried on.

b) The names of each firm or corporation in whose behalf the business is carried

on.

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4. If the registration to be effected is that of a firm, or an individual carrying on business

as a general agent for any’ concern carrying on business outside the Nigerian nation, and

having no place of business within Nigeria, it is further required that name, and full postal

address of each such concerns be provided. Where a firm or an individual is carrying on a

business as a general agent for three or more such concerns, it is required that it he so stated,

including the countries of operation of such concerns.

After due registration, the Registrar usually will issue a certificate of registration.

Registration of business name firms, companies or individuals under the Act are usually

simplified when handled by lawyers.

Winding-Up of a Company

Winding-up refers to bringing to an end the activities of a company. CAMA Section 401

asserts that winding-up may be affected:

a) By court

b) Voluntarily

c) By Supervision of the Court: Section 408, provides grounds for winding—up by the

Federal high Court as follows:

a) By special resolution of the company

b) The company is unable to pay its debts

c) Membership is reduced below two

d) If in the opinion of the court it is just and equitable

e) For a public company if it is in default in delivering the Statutory Report to

the Commission or in holding statutory meetings.


▪ Define a corporation

▪ A corporation is an intangible reality: an artificial but legal “person” who in spite of

the twilight zone of semi-existence can be held responsible, for many of the same

things, for which a real person can.

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3.2 Hybrid Forms of Business Organisations

There is hardly any business organization that is perfect when viewed from all angles.

Consequently crossbreeds and hybrids have emerged to take care of unequal circumstances.

These include

1. Franchise

2. Joint Venture

3. Cooperatives.

Franchise

One other way of entering into a business relationship is franchise. In the political milieu,

franchise refers to right to vote in a public election. However, in business, it refers to formal

permission or ‘right to sell a given company’s goods or services in a particular area. In law it

is a two-party legal agreement in which one party called the Franchisor provides the product,

service, trademarks and expertise in return for a consideration from the second party called

the Franchisee. The Franchisor is the originator or owner of the product while the Franchisee

merely markets the product of the Franchisor. The Franchisor is furnished with consideration

(pay) for the use of the product of his ingenuity by the assigned second party, the Franchisee.

Both parties generate their individual incomes from the product. In other words, Franchising

refers to a system of distribution in which semi-independent business owners (franchisees)

pay fees and royalties to a parent company (franchisor) in return for the right to become

identified with its trademark, to sell its products or services, and often to use its business

format and system.

Types of Franchise

There are three basic types of franchise, namely;

1. Trade name franchising

2. Product distribution franchising

3. Pure franchising

Trade Name Franchising

It refers to a franchisee purchasing the right to become affiliated with the franchisor’s trade

name/produce without necessarily distributing its products exclusively. On the other hand,

product distribution franchising involves granting a franchisee a license to sell products or

services of the franchise (the parent company) under the franchisor’s brand name through a

68

specific limited distribution network. The franchise thus lives on commission. Gasoline

service stations and automobile dealers are major examples of this system in Nigeria.

Pure franchising involves the franchisor selling to the franchisee complete business format.

It is also called comprehensive or business format franchising. By implication the franchise

or makes available to the franchisee the complete business format, including a license for a

trade name, product and services to be sold, the physical plant the methods of operation, a

strategic plan, quality control process, a two way communication system and the necessary

business services.

Thus, the franchisee buys the right to use all the elements of a fully integrated business

operation. This is fast food common in fast food restaurants, hotels, business service

companies and the like. Typical examples include Presidential Hotel, Mr. Biggs, the

Kingswav among others

The trade and product franchising forms are the traditional (oldest) and the most

conventional types of franchise. The system format (pure) franchising is re1atively new and

is often referred to as non-traditional franchising method. However, the most recent, and

which is still a subject of debate as whether it is really a type of franchising is collective type.

Collective - Type Franchise

This is the most recent classification of franchising. Some find it difficult to accord it a

separate classification, but recent events give room for this. Collective - type franchise

consists of a group of small business owners/managers who form a cooperative group to be

able to make a bulk purchase on behalf of their members, thus obtaining better bargaining

ability as well as volume discount.

Selection of a Franchise

A potential franchisee about to enter into franchise relationship is advised to consider the

following factors:

1. Soundness of the business concept

2. Objective and life style

3. Time span of the opportunity

4. Proven track record and support system including financial, training and development

support as well as local and national business environment.

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For a franchisee to undertake a franchise relationship, he must be certain of the soundness of

the business concept. This he will do by assessing the market acceptance of the product

through detailed market research cum analysis of the Franchise prospectus.

The franchisee has also to do self-keeping in mind his life. This includes an appraisal of his

weaknesses and strengths.

Time span of the opportunity has to be taken into cognizance. This is to ensure that the

opportunity does not fade with a short life cycle. The life span of the opportunity will, to a

great extent, determine the content and the handling of the franchise relationship.

The assessment of the financial statement provided by the franchisor as well as information

gathered from other franchisees and franchise organization is required. The positive and

negative aspects of the specific franchise need to be studied, including the general and

specific business environments as they effect the franchise outing.

The checklist for buying a franchise according to Ellis and Bakr (1990:121 – 3) is as shown

in figure

Table 2.1: Checklist for Buying a Franchise

S/N Process Critical Issues Basis and Sources of

Judgment

1. Business Concept Windows of opportunity. niches,

unique appeal of the product or

service and time span (life cycle)

Market research the franchise

prospectus. Trade for

2. Objective Life style. Expected rate of

return, strength and weakness

(self assessment)

Self-assessment

3. Franchise Support

System

Training and financial support,

local and national promotion

campaign, standard management

policies and accounting system.

Visits to different outlets

employees working in

Franchised outlets. other

franchisees, the franchisors

prospectus.

4.

Proven Track Record Rate of return, product quality

and appeal, market provision and

share, innovation

Financial statement provided

by the Franchisor. Franchising

associations and other

franchisees.

70

S/N To the Franchisor Advantages S/N To the Franchisee Disadvantages

1. Ability to expand and grow in short

span of time with minimal resources.

Little capital investment and human

resources are required.

1 The support system offered by franchisor

including financial training, marketing

selection of locating, design of layout.

National promotion and general guidance in

management,

2. Shared cost. cost items transferred

shared franchisees.

2 The proven and tested business concept

product or service is a built in protection to

many budding enterprises against the risk

involved in the start-up phase

3. assurance of consumer acceptance in

different locations and regions.

Having franchise a local is an

3. Economics of scale as a result of bulk

purchases and thus volume discount.

4. Ability to maintain control. The

franchise agreement allows the

Franchisor to exercise control over

certain critical aspects of the business

such as quality control.

4. A massive national or local campaign is

provided by the Franchisor.

5. 5. Ability to start with limited skills and

experience compared with independent

business. The Franchisee gats free advice on

the different aspects of the business on the

day to day operations.

Table 2.2 Disadvantages

S/N To the Franchisor S/N To the Franchisee

1. Difficulties in maintaining control over

large number of Franchisees in different

locations

1 ,Partial loss of independence, a trait

many entrepreneurs value.

2. Risk of losing image and credibility as a

result of poor selection of franchisees.

2 Contractual obligations may restrict

the franchisee’s freedom. For

example; royalty clause; profit

sharing plan, restriction on

expansion and/or buying back

provisions

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3.3 Cooperative Societies (COOP)

The industrial revolution and the factory system of production in Europe paved the way for

social reformers to introduce different theories about how the society should be managed.

The Qwenities led the crusade between 1800 and 1820. Their interest was on equality of

welfare and quality of life. They proposed the establishment of co-operative societies as

means of pooling resources together in order to have synergistic effect. They thus started a

cooperative movement. However in 1844 the first cooperative society emerged in Rockdale

called Equitable Society of Rockdale Pioneers, but in 1937 the Gbedun Cooperative Cocoa

sale Society came on board as the first formal registered cooperative society. 1844 Charles

Howarth draw the Rockdale cooperative society principles

Rockdale Principles

1. Voluntary and Open membership

2. Democratic control

3. Limited interest on share capital

4. Patronage Rebate

5. Political and Religious Neutrality

6. Cooperation among co-operatives

7. Continuous education of members

8. Cash sales basis only

9. Sale of unadulterated goods

(Udu and Okafor 2012: 66-69)

Cooperative Society defined as voluntary socio-economic association of persons, often with

limited resources to achieve an equitable commercial goal through establishment of

democratized joint business partnership for its membership.

Cooperative Societies in Nigeria are generally self-help organizations, created for the main

purpose of assisting consumers and producers, who in most cases are their members. They

also organize thrift or credit facilities for its membership. It is common in Agriculture and

Consumer products distribution; they are commonly found in rural areas. Typical examples

of co-operative societies are the consumer co-operative societies in Item, Bende Local

Government Area of Abia State Nigeria, University of Nigeria Enugu Campus Cooperative

Society and the likes.

72

Advantages

1. Members have a sense of duty and loyalty to it.

2. The products are cheap due to absence of middlemen.

3. Co-operatives have easy access to loans.

4. They enjoy economy of scale

5. Decision making is democratized

Disadvantages

1. Often managed by inexperienced and nonprofessional people.

2. It is often short lived.

3. Enforcement of order is often difficult

4. Possession of inadequate capital

5. Their fund is often used for political activities

6. Members are often compelled. to buy from the cooperative

7. There would be fraudulent attachment among the leadership. .

Joint Venture

This is a hybrid or special temporary partnership arrangement of business firms for the

purpose of synergy in a common area of business interest. Joint ventures are formed to take

advantage of a business opportunity that under normal circumstances may be difficult for an

individual firm to go alone. Aliens often go into joint venture with host nationals. Economy

of scale and common pool of resources are among their principal advantages. They are

temporary and often without long term plans. They live in the short run, sharing short run

profits/losses.

3.4 Unit Summary


2.3.1 There are different types of business ownership

2.3.2 Some forms of business organizations are termed hybrid

2.3.3 Cooperative societies are means of pooling resources together to make profit





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What factors influence the choice of form of business ownership?


List and explain six major contents of a typical partnership agreement


Differentiate between statutory corporations registered companies


How can youbring to an end the activities of a company?


Explain the concept of joint venture


Do a check-list for bringing a franchise.

References and further studies

Callaghan P. (ed) (1994) Business Advanced Level, 2nd ed, Great Britain, Bath Press.

https://www.allbusiness.com/forms-of-business-ownership-674-1.html

https://www.boundless.com/business/textbooks/boundless-business-textbook/small-business-

and-entrepreneurship-7/starting-a-small-business-58/types-of-ownership-280-7209/

.

https://www.allbusiness.com/forms-of-business-ownership-674-1.html

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Module 3: Business Plan, Raising Capital, and Causes of Business

Failure

Module Overview

Embarking on any business activity involves commitment of resources which entails an

element of risk. Consequently, it is important that one accurately assesses this risk before

committing one’s resources. This will largely help the prediction of the potential issues that

can guarantee successes even those that can pose challenges.

In order to be well-equipped after one has decided on the form of entrepreneurship to start;

there is the need to prepare a suitable business plan. This module throws light on this issue by

discussing some sub-topics like:

Study Unit 1: Business Plan

Study Unit 2: Raising Capital for New Business Venture

Study Unit 3: Causes and Symptoms of Business Failure

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Study Unit 1: Business Plan


Introduction

Entrepreneurship outfit cannot exist in nothingness; there must be an environment that is

inherent with so many variables that position challenges to the entrepreneur. This unit 3.1

examines business plan by delving into the followings:

1. Meaning of Business Plan

2. Writing of Business Plan

3. Types of Production Plan

4. Causes of Business Plan Failure



1.1 Know why business plan is important

1.2 Understand how to write business plan

1.3 Explain types of production plan

1.4 Know why some business plan fail

1.1 Meaning of Business Plan

A business plan is generally done after feasibility and visibility studies have shown that the

business adventure in view is feasible and viable. The building of air castle before the ground

castle in business is akin to making a business plan. To many business men, it is an

anathema and amounts to sheer waste of time but to strategic entrepreneurs, it is a pre-

requisite for business success.

Precisely Speaking, a business plan is a written document prepared by an entrepreneur that

describes all the relevant internal and external variables involved in starting a new business

venture or continuing with an existing one. It is often an integration of all functional business

plans such as the marketing, finance, production and human resources plans. In the short

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term, it may cover three years of operations or less. The plan could be referred to as the game

plan or road map. It addresses such questions as –

Where are we?

Where are we going to?

How will we get there?

It generally depicts the network of movements or travel plans for a business in motion or one

that is about to set sail.

Importance of Business Plan

A business plan is of great importance to the entrepreneurs, potential investors and

financiers. These classes of people may wish to familiarize themselves with the venture, its

goals and its objectives for various reasons. The business plan is important in many ways.

These include:

1. It provides guidance to the entrepreneur in organizing their planning activities.

2. It helps determine the viability/feasibility of a given venture in a designated

market(s).

3. It serves as a major instrument for identification of sources of finance and soliciting

for financial aids from financiers.

4. It helps in the establishment of accurate controls in the operations of the business.

5. It brings to the fore the weaknesses and the strengths of the venture within the

industry through a realistic self-assessment.

6. It provides the entrepreneur with a tool for assessing the window(s) of opportunity

and their economic feasibility and viability.

7. It provides the entrepreneur with the vehicle for analysis/assessment of the venture’s

opportunities in view of its capacity.

Characteristics of a Business Plan

Business plan that is worthy of acceptance as guide to the entrepreneur, investors, and

financial institutions should possess the following simple but important characteristics:

1. It should be concise, simple and clear: Given that you will not be there all the time to

explain the details to the readers, some of whom may be far away from you, you need to

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make the plan understandable to any person reading it for the first time. It must sound

convincing. Any plan that does not convey the necessary information to the desired audience

(target) cannot be said to have communicated and consequently does not worth its salt.

2. It should be accurate and supported with the necessary and convincing data and

figures: The investors and financiers think in terms of money. They want to know what you

will spend. What you will earn and what profit you will be making. Your underestimation or

miscalculation of your potential sales or degree of competition is likely to make your

predictions fallible. Your prediction for need of’ cash or competitors’ role and even earnings

may be e1Toneou. Always underestimate your likely earnings for sales rarely work out in the

real market economy as optimistically as they initially appear on paper. However, always

assume the worst when it comes to your expenses - for the unexpected drain on your finances

is capable of pushing you out of the business. Conservation is the rule in prediction of profits.

It is far better to return to your financiers later with an explanation that you may not need all

the money you initially requested than to run to them asking for more because of your

misjudgment. Surfacing huge profit margin does not necessarily make a business plan

acceptable to banks.

3. The plan should be realistic and truthful (RT): Financiers at some time in their

careers would have been presented with business plans that are simple; profitable but not

feasible. An inexperienced entrepreneur in Nigeria in the financial market who predicts that

his business is going to compete with First Bank Nigeria Plc. or Union Bank Nigeria Plc.

within months will be regarded as time wasting crank that has no good business plan or one

that contains blatant lies. It is good that you establish a relationship with your financiers that

are open, honest and based on mutual trust. A business based on lies, half-truths or

exaggerations has its foundations on sand.

Activity 3.1.1: Business Plan

Imagine what you will tell a lay person who approached you and asked whether he

needs a business plan to start his small and ordinary business. Record it in your

study diary.

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1.2: Writing of Business Plan

The length of time taken to develop a business plan is usually about three weeks depending

on the experience and expertise of the entrepreneur. However, the nature of this investment

or proposed business, or use of the plan will to a very great extent influence the time required

to do a good business plan. A good business plan needs to be comprehensive enough as to

give a potential investor a complete picture and understanding of the proposed business. It of

course, will enable the entrepreneur to put in writing his thinking and views about the

business. After all, planning is more of an art writing than just a thought.

The contents of a business plan are discusses below:

1. The Introductory Page

This refers to the title or cover page. It provides a brief summary of the plan. It sets out the

basic concept that the planner intends to develop. It brings to the fore the amount of

investment contemplated by the budding entrepreneur.

Sample of the Introductory Page

JCK ENTERPRISES

A Division of Emkavision Nigeria PLC

34 Umuchima Road Okigwe

Imo State Nigeria

0803534000

Co- Owners: COK Agbaeze, JCK Agbaeze, SAK Agbaeze and KOK Agbaeze

Description of Business

The business will provide cleaning services on contract basis to medium and large scale

governmental or non-governmental establishments. The services among others include

regular sweeping, dusting, washing, cleaning of floors, carpets, draperies, and windows.

Contracts will be a minimum of one year and will specify the specific services and

scheduling for completion of services.

Financing

The takeoff capital will be N2, 500,000.00 loan to be paid off within 6 years excluding the

first year. This amount will cover the office space, office equipment and supplies, two office

79

vehicles, advertising, salaries and other logistics. This report is the property of the co-owner

of Emka vision listed above. It is confidential. Any reproduction or divulgence of any of its

contents without the prior written consent of the said Emeka vision is prohibited.

2. The Executive Summary

It is a short sleeve view of the total business plan (long sleeve). It is usually, about three to

four pages. It serves as a stimulant to the potential investor. It highlights in a precise, concise

and persuasive manner the key points of the business plan. It includes the nature of the

business, capital requirements, market potentialities, and other necessary logistics. It is the

degree of conviction exhibited by the executive summary that will determine if the entire

plan is worth reading at all.

3. Industry Analysis

The entrepreneur while evaluating his envisaged establishment on a number of performance

indexes also needs an analysis of the industry. This will give him an overview of the industry

he is going to do business in, including the historical analysis of the industry and a forecast of

the likely future trend. He should know the customer, his competitors, the various segments

of the market and the specific segment he intends to target.

Critical issues to consider in the analysis include the under- listed.

1. The total industry sales over the past five years.

2. The anticipated growth in the industry

3. Number of new firms that have joined the industry within the last three years.

4. New products that have recently been introduced in the industry.

5. The leading and recent competitors.

6. How will the proposed business operation be better than the leading or recent

competitors?

7. What is the status of the sales value of the major competitor, steady, growing or

declining?

8. The weaknesses and strengths of the competitors.

9. The profile of the customers

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10. How does the customer(s) profile differ from that of the competitor(s).

4 Description of Venture

This provides a comprehensive overview of the goods, services and operations of the

venture. The size and scope could be ascertained from this holistic picture including the

location. To a great extent, the success of a business could be dependent on its location. This

is particularly important for a retail or service business. In the choice of location the

entrepreneur must take into account factors like parking, access from roadways to the

facility, access to customers, suppliers, distributors, delivery rates, the economic

demographic profile of the area, labour pool, sewage, pool, sewage, electricity, plumbing,

water and the town planning authorities regulations. Consider the location of the First Bank

Nigeria Plc. Enugu Main. Okpara Avenue, Firs Bank Plc Okigwe, the Genesis Restaurant,

Enugu or the ACB on Okpara Avenue Enugu. Basic issues to be addressed venture

description are as contained below.

Describing the Venture

1. What products and/or services does the business offer to the market?

2. Description of the products/services - patent, copyright, trademark status and the like.

3. State the location and site of the business.

4. State whether the building is old or new. If renovation is needed, what is the

estimated cost?

5. Is the building owned or leased (if leased what are the terms)?

6. Why is this building, site and location right for this business?

7. What skills or personnel including additions will be needed to run the business

effectively?

8. What office equipment will be needed, what is the estimated cost, and how will it be

procured?

10. What is the entrepreneur’s business background?

11. What is the entrepreneurs’ business management experience? What other experiences

does the entrepreneur possess?

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12. What are the entrepreneurs’ personal data - education, age, special abilities and

interests?

13. The entrepreneurs’ reasons for going into business.

14. What is the degree of readiness of the business in specific terms? What development

work has been completed as at date?

The venture description gives a microscopic view of the intended business venture as a

whole. All the above critical questions are answered here.

1.3: Types of Production Plan

Production or Merchandising Plan

If the intended outfit is a manufacturing business, this section will be entitled production plan

and describe the entire manufacturing process. Where an aspect of the process is to be

contracted, this should be stated including the names and locations of such contractors, why

such contractors were selected, the contract fees and the contracts that have been completed.

if any. The production plan should prescribe the physical plant layout, the machinery, the

equipment, the raw materials, suppliers’ names and location; ‘tariffs and future capital

equipment requirements. To intending investors this picture enables them to come to terms

with the financial needs of the budding, venture.

However, for retail or service business this is titled Merchandising Plan. The

merchandising plan describes the process of procurement of the merchandise, the stock or

inventory, control system, and the storage needs of the business. In brief the production or

merchandising plan addresses the issues raised below.

1. Will the entrepreneur be responsible for all or part of the manufacturing

operations?

2. Where some manufacturing is to be sub-contracted, what are the names and

specific addresses of such sub-contractor.

3. The rationale for the selection of the sub-contractors.

4. The cost of the sub-contracted manufacturing (include documented evidence of

the contracts).

5. Show the layout of the production process step by step.

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6. Immediate equipment requirements for the manufacturing.

7. Raw materials requirements for the manufacturing.

8. The suppliers of the raw materials and their costs.

9. The cost of manufacturing the products.

10. The estimate of future capital requirements of the venture.

Retail or Service Business

1. Source of procurement of the merchandise.

2. The stock or inventory management system.

3. Possible storage needs of the venture and promotion means.

The production plan gives a sequential picture of the transformation of the input into output.

It is a central function of the venture.

Marketing Plan

Marketing is the process of planning and executing the conception, pricing, promotion and

distribution of ideas, goods, and services to create exchanges that satisfy individuals and

organizational objectives (Schoel and Guiltinam, 1992:7). However, the creation of the

customer satisfaction or utility has to be at a reasonable profit, if not immediately, later. The

marketing plan is an important aspect of the business plan. It brings to the fore, the marketing

condition and strategies for distribution, pricing and promotion of the goods and services, of

the entrepreneur. The marketing plan is considered vital to potential investors because it

shows in clear terms the goals of the venture and how (strategies) the firm intends to achieve

the said goals. It is an annual event with careful scanning of monthly and weekly changes in

the business environment to ensure conformity with pre-determined plans. It is a road map to

short term decision making in consummation of exchange and the related functions.

The market plan attempts to answer the under listed ten questions.

1. Who are the firm’s customers, their location, their buying abilities, whom they

patronize and their rationale?

2. The promotional and advertising strategies of the firm and its effectiveness?

3. Price changes in the market, the initiators and their reasons?

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4. Attitudes of the market towards competitive products.

5. The distribution channels and. their functionality?

6. Who are the firms competitors, their locations ca address, what are their strengths and

weaknesses

7. What marketing techniques are used by the least and the most successful competitors

in the market.

8. What is the mission cum objectives of the firm? What are their philosophical

dispositions (vision statement)?

9. What are the company’s strengths and weaknesses?

10. What are the firm’s production capacities by products.

In summary, the marketing plan is an action-packed: strategy for using an organizational

resource to meet the marketing objectives of the firm with due recognition of the

entrepreneur’s strengths weaknesses opportunities and threats in the business environment.

Its concentration is on effective consummation of exchange that puts the firm at a viable and

feasible strategic advantage.

Organizational Plan

The Organization plan is an integral aspect of the business plan that describes the ownership

structure of the business. It pinpoints the form of the business ownership. (Sole, partnership

or corporation), 1ine of authority, and responsibilities of members of the new venture.

It also shows the ratio of or proportion of ownership of the business among the co-

entrepreneurs. The organizational structure or chart is also made manifest at this point. It

gives an investor the understanding of who controls the business and how he relates with

other members of the establishment. The key issues raised in the organization plan are as

shown below.

Organization Plan/Structure: Key Questions.

1. What is the form of business ownership: - sole, partnership or corporation?

2. If partnership who are the partners and the content of the partnership deed? .

3. If incorporated —

(a) Who are the major shareholders and how much shares do they have?

b) What type and how many stock of voting and non-voting have been issued?

c) Who are the directors?

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4. Who has cheque -signing authority and control?

5. What is the background of each of the members in the management team, and what

are the roles and responsibilities of each of them. .

6. What are the salaries, bonus and other forms of payment if any for each member of

the management team?

The Financial Plan

The Financial Plan is the monetary (naira) expression of the entrepreneur’s operational plans.

In other words, it ties together all the other previous plans by translating them (production,

marketing, and organizational plans) into monetary terms. It provides a. common

denominator for all the similar and dissimilar parts of the venture. This simplifies

communication and assessment of worth. It is financial projection that enables thee

entrepreneur to determine the economic viability and feasibility of the envisioned

establishment.

You should clearly note that a typical business plan should be made up of four statements

which are:

1. Budget

2. Income statement

3. The balance sheet

4. Profitability (Break-even chart,).

The Cash Budget

The cash budget is the most important of the four statements. This is because it accomplishes

two things, namely:

• It brings to the fore before the entrepreneur how much money he needs before he

can start business.

• It tells the entrepreneur how much money he needs after he had started business.


▪ What is the major aim of marketing plan?

▪ It brings to the fore, the marketing condition and strategies for distribution, pricing

and promotion of the goods and services, of the entrepreneur.

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The cash budget in effect enables the management to make sure that the money will be there

when the time comes to pay bills to avoid problems. It also acts as a signal enabling the

entrepreneur to pinpoint future cash shortages and surpluses. A shortage ‘signals a need to

raise money; otherwise production and marketing plans may, have to be adjusted. Further,

the cash budget as a financial tool helps management of the venture stay on the money track

and gives investors and creditors precise answers to strategic questions like:

1. How much money does the entrepreneur need to carry out the business?

2. When is it needed?

3. How will it be spent?

4. How soon can it be repaid?

Pro Forma Balance Sheet

This is required only if corporations; however, it may be considered necessary for other

forms of business ownership for the purposes of establishing credit with suppliers and

obtaining outside financing from banks and other lending institutions. A proforma balance

sheet reflects the position (envisaged) of the business at the end of the first year.

The pro forma balance sheet summarizes the projected financial position of the business in

terms of assets, liabilities and net worth as at a specific date. To have a convincing projected

balance sheet. Proforma income and cash flow statements will be required to help justify

some of the figures. Exhibit 5.1 is a hypothetical balance sheet of EMKA VISION NIGERL4

PLC.

The proforma balance sheet depicts the hypothetical condition of the Emeka vision business

venture at the end of the first year of operation. It summarizes the anticipated assets,

liabilities and net worth of the envisaged venture. !h the balance sheet, the asset represents he

items owed or available to be used in the business operations. On the other hand, the liability

represents the money that is owed to the business creditors.

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Exhibit 3.1.1

EMKAVISION CORNER STORES NIGERIA PLC PRO FORMA BALANCE SHEET AS AT THE END OF

THE FIRST YEAR

Assets

Current Assts N N

Cash 40,400

Accounts receivable 45,000

Goods inventory 10,450

Sup1ies 1,200

Total Current Assets 97,050.00

Fixed asses

Equipment 250,000

Less Depreciation 549,600 00,400.00

N297,450.00

Liabilities and Owner’s Equity

Current Liabilities

Accounts Payable 20,700.00

Current Portion of Long-Term Debt 15,800.00

Total Current Liabilities 36,500.00

Long - Term Liabilities

Notes Payable 211,200.00

Total Liabilities 247,760.00

Owner’s Equity

Comfort OjiugoChizurum 15,000

ChinweotitoAloy 13,000

Johnson OnyenucheyaChima 13,000

Retained Earnings 8,750

Total Owners’ Equity 49,750.00

Total Liabilities and Owners’ Equity 97,450.00

Further, the owners’ equity refers to the amount, owners have invested in the business (it

includes their retained earnings).

The proforma income statement mentioned in the financial plan refers to the business’

projected net profit derived from the projected revenues less projected cost of operations and

expenses. Before the firm is able to make profit, it must at first instance be able to break-

87

even. The breakeven point is the point where the business neither makes profit nor sustains

any losses.

Quantitatively speaking breakeven quantity is expressed as

BF(p) = TFC

SP-VC per unit (Marginal Contribution)

Once SP > VC per unit, some contribution is being made. The contribution, at a point will be sufficient to off-

set the cost of the fixed costs. Thus the firm will breakeven.

FORMULA FOR BREAK - EVEN ANALYSIS

BE = TR = TC

TR = SP x Q

TC = TFC+TVC

SP x Q = TFC+TVC.

TVC = VC per Unit x Quantity

This SP x Q = TFC + VC per unit TFC x Q

(SP x Q) - (VC per unit x Q) = Q(SP - VC per unit) = TFC

Q = TFC

SP - C per unit

Note:

BE = Breakeven

TR = Total Revenue

TC = Total Cost

Q = Quantity

SP = Selling Price

TFC = Total Fixed Cost

TVC = Total variable cost

The proforma cash flow refers to projected cash available derived from projected cash

accumulations minus projected cash disbursements while the pro-forma sources and

application of funds summarize all the projected sources of funds available to the venture and

88

how these funds will be disbursed. The sources and .application of fund: aid the entrepreneur

in understanding how the net income for the year was disposed of and the consequences on

the movement cash through the business. It shows the interrelationship between the assets,

liabilities, and stockholders’ equity to the working capital.

1.4 Causes of Failure of Some Business Plan

Planning is a continuous process. No plan is ever perfect. Plans need to be up-dated as

circumstances change. This is specifically so when we realize that the business environment

is dynamic. The measuring of the progress being made of implementing some plans is made

cumbersome by inadequacy of the plans. Plans fail due to one or combination of the reasons

listed below.

Some entrepreneurs rush into business without establishing a need gap (customer need) they

intend to close. Consequently, the product or service produced by the entrepreneur may not

be properly articulated or tailored toward a specific need of the customers.

Goals set by some planned actions are not specific or measurable. How then do you access its

suitability or otherwise including the degree of accomplishment?

Some goals set by the plan may be measurable but unreasonable. When goals are

unreasonable, their accomplishment is made difficult either because the implementers not

believe in them or they are viewed as unachievable or non-consequential. This feeling works

hardship on the morale of the workers.

Often the entrepreneur may have no insight into the threats available in his business segment.

Consequently, such threats may have been swept under carpet during the planning stage. The

entrepreneur finds himself unprepared and cannot wish it away, when the threats emerge.

Some entrepreneurs get into business they have no experience of, when technical issues arise

in such a business, the entrepreneurs find themselves failing like packs of cards.

Some of the entrepreneurs are elephants on paper, lacking total commitment with their family

in the realization of the declared plan objectives of their businesses. This often leads to delay

in analysis of situations, and lateness in decision making. Even when often made, the

decisions are made without all the facts being available to such decision makers.

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1.5 Unit Summary


3.1.1 Business plan is important in starting a business

3.1.2 The skill of writing business plan shapes business

3.1.3 There are many types of business plans

3.1.4 Business plan can fail





Why do say that business plan is important to a potential entrepreneur?


What are the factors that influence writing business plan?


What are the reasons why business plan fail?


What are the basic issues to be addressed on venture description?


Explain the following terms: Cash Budget, Break Even Point,


Analysis of the industry may not be relevant to an entrepreneur. Why?


Attempt a development of an introductory page or any business of your choice.


Why do you consider development of a business plan necessary before commencement of a

business?

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References and Further studies

Zimmerer ‘LW and Scarborough N.M. (2005), Essentials of

Entrepreneurship and Small Business Management (4th ed), New Jersey, Pearson Education

International.

Hisich R.D. and Pofers M.P (1998): Entrepreneurs (Fourth Edition) Boston,

Irwin, McGraw Hill.


https://en.wikipedia.org/wiki/Business_plan


https://en.wikipedia.org/wiki/Business_plan

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Study Unit 2: Raising Capital for New Business Venture


Introduction

Any new business requires capital for its take-off. Capital refers to any form of wealth

employed to produce more wealth. In this unit, you will be exposed to the following topics:

1. Types of Capital Required by the Entrepreneur

2. Sources of Fund available to existing and emerging Entrepreneurs



2.1 Understand Types of Capital Required by the Entrepreneur

2.2 Know sources of fund available to emerging entrepreneur

2.1: Types of Capital Required by the Entrepreneur

To a layman, capital is the money required to establish or run a business. How true do you

think this is? Technically, capital can be seen as all man-made productive wealth or

resources. The entrepreneur needs not just capital but enough of it to stay afloat in business.

Three basic different kinds of capital are desired by the entrepreneur.

1. Fixed Capital refers to capital used in procurement of assets of permanent nature or

fixed assets. They include assets like land, buildings, computers, equipment, and the

likes.

2. Working Capital refers to liquid and semi-liquid assets of the company. It is the

firm’s temporary funds that support short-term operations.

3. Growth Capital refers to funds required for financing of growth cum-expansion of

the business.

Other types of capital are:

EquityCapital is also called risk capital. It is the personal investment of the entrepreneur in

a business. The investors assume the primary risk of losing this capital should the business

hit the rock. This explains why it is often called risk capital.

92

DebtCapital refers to financing that the business owner(s) borrowed from outside. In most

cases it is repayable with interest. How do investors cope with these in the beginning of their

venture?

The beginnings of most things are usually difficult. The take-off of a new business requires

various kinds of resources. When good business ideas are originated, the dreams and ideas

may never see the light of the day, unless backed by effective financial support business will

to work the talk into reality. This is why it is advisable for a would-be entrepreneur to

understand.

1. How to estimate his financial requirement

2. How to raise the required fund and

3. How to service the debts if acquired.

After the determination of the financial requirement of’ the business, the entrepreneur

suddenly finds that it is frustrating to raise the required capital. This problem often stems

from the fact that most operators of new businesses are neither experienced nor sufficiently

educated. This is disheartening, in particular, when one realizes that small-scale industries

occupy a large and significant portion of the Nigerian economy. In fact “in the developing

economies they occupy about 85% (eight five percent) of the total number of enterprises’

(Okpara in Qnuoha, 1998:190). Further the shortage of financial resources in such economies

is caused by low level of personal income which further endangers the savings capacity.

2.2 Sources of Fund available to emerging Entrepreneur

In spite of evident large number of small scale businesses in Nigeria coupled with the

industry’s expected crucial role in grassroots mobilization, development even the existence

of many special credit schemes in the country; the emerging business firms hardly have

access to formal credit facilities. However, in these circumstances, they resort to informal

fund raising based on goodwill. The basic sources of fund available to emerging

entrepreneurs in the Nigerian business environment include the under-listed:

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1. Personal Funds-Saved or Inherited

An apprentice about to begin a business is likely to secure financial assistance by getting

financial aid (being settled) as the case may be from the entrepreneur (often called master)

who trained him. In addition to his personal savings, inherited funds or proceeds from sale of

inherited property such as land, houses, household property and other estate may constitute

his takeoff capital. This personal fund when raised forms the sub-structure upon which any

other financial sources may rest.

You also be aware that due to the uncertainty and risky nature of the business world, other

investors or creditors will always be interested in the amount of personal investment of the

entrepreneur before the final decision to invest on the new business or not. This is

understandable because a rational investor will not want to invest or” trade on too thin an

equity.”

2. Loan from Relatives and Friends

To succeed in securing this form of loan, the entrepreneur must be able to convince his

relatives and friends that he is dynamic, has some relevant experience and is of good and

proper character. This explains the fact that many successful businessmen enter into business

orbit on sheer influence of their parents, relations and friends, who give them the initial

financial and moral boost. However, it will be necessary to ensure that the terms of such

financial assistance is properly defined and stated in clear terms in order to avoid

unnecessary, but avoidable misunderstanding in the future. The loans should be made in a

business-like manner, after-all it is for a business transaction.

However, if some or all of such money advanced to the emerging entrepreneur are mere

unconditional assistance, it ought to be so specified, including expected mode of

repayment/non-repayment of the sum advanced as a loan in the true sense of business

transactions.

Activity 3.2.1: Types of Capital Required by the Entrepreneur

Think about what happens when an operator of new businesses is an orphan and has

no relatives. Record it in your study diary.

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3. Loan from Thrift Associations (ESUSU)

The thrift association is an informal financial market. It is often referred to as contribution or

pooling or rotating club. It is common among low-income group in the developing countries.

In Nigeria it is popularly known as “ESUSU”. In the thrift association, a certain number of

friends or colleagues, in the office, come together and agree on a specific sum of money to

contribute periodically (say monthly) over a specific period (say one year). For each period

(month) the money so contributed or pooled together or the lump sum, is advanced to a

member of the association. It will continue in that manner until every contributor to the pool

gets his own lump sum.

According to Okpara in Onuoha (1998:196), the ESUSU arrangement is helpful in business

finance as “it provides its members or contributors with a lump sum that could be employed

in their business.” Considering the fact that most of the contributors are usually friends or

workmates, it is easy for any one to obtain his/her collection well in advance of his or her

turn, in particular when he or she has an urgent need of fund for business or other pressing

commitments.

4. Trade Credit

In the words of Eze (1999:140) “business firms generally provide products or services to

each other on credit”; for instance with trade or business-to-business credit the merging

entrepreneur can have inventory for sale, sells the inventory before paying the supplier; with

this process the new business can go on in business without necessarily having all the capital

required for the smooth running of the firm. The firm could even pay in bits while selling the

stock already supplied. This however, forms to a great extent source of financing of small-

scale business..

5. Loans or Credit from Equipment Sellers

This is somehow elated to credit sales by business to business. It should be understood that

new business often needs fixed assets like machines, office equipment, delivery trucks, office

vehicles, furniture and fixtures. These require heavy initial capital outlays. According to

Uzoma (1991:85) “equipment sellers of this sort know such purchases are not done often,

consequently, purchases may attract generous credit terms from the sellers, a modest down-

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payment and t1e balance spread over a period of one, two or three years” may be negotiated.

The only danger here is that too much of it may up-set the firm’s liquidity.

6. Plant and Equipment Leasing

Leasing of equipment and plants initially for the business operations of the company could be

encouraged provided they are not underutilized and their services sufficient enough to offset

their cost plus some returns, for the firm. Leasing of equipment does not tie down the capital

of the firm. It equally does not affect the borrowing power of the establishment. In addition,

it may not require any collateral.

7. Selling Shares

Many business men are of the opinion that incorporation are for the big firms only. This is

not necessarily true. An experienced entrepreneur can get his business even at the virgin

point incorporated as a limited liability firm and sells shares to outsiders in order to raise

bigger fund for his business operations. A lucky entrepreneur may also involve ‘angels in his

start-up business. Angels in this context refers to wealthy individuals, often entrepreneurs

themselves, who invest in business startups in exchange for equity stakes in the new venture,

or just as goodwill in making another entrepreneur.

8. Mortgage Loans

An emerging entrepreneur, who is fortunate to own/inherit a properly cited building, could

mortgage it for a good sum of money. The re-payment could be spread over several years.

This will give sufficient relief for the entrepreneur to build up fund from his business and

subsequently pay back the loan in small installments.

9. Loans from Commercial Banks

Commercial Banks lending are often limited to ‘working capitals of going-concerns.

However, in some special circumstances, the bank could grant new business credit facility to

finance new business ventures. According to Siropolis (1977:5) the condition for this

depends on the entrepreneur’s character and the amount he has already put into the business

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as equity capital. This source of finance may not work well for virgin business set-ups. In any

case collateral is often required for this type of loans.

In the Nigerian setting there are at least five methods used by banks to extend credit facilities

to business. They are as listed below:

1. Loans

2. Overdrafts

3. Discounted Draft and Advances

4. Bank Guarantees

5. Letters of Credit

10. Taking in Partners

Emerging entrepreneur in difficulty to raise fund could invite one or two persons to join him

in the venture as partners, provided such invitees have sufficient money and/or experience, to

invest in the business. In this manner, the capital of the business could be enlarged. However,

the original entrepreneur may lose his monopolistic control over the

management/profits/losses of the firm. Depending on the circumstances, this could lead to

friction among the partners.

11. State Government Investment Corporation

According to Umoren (1987:18), “some state governments in the state have established

finance corporations to provide finance for agriculture, small and medium-scale industry and

housing”. The Abia State government established the vehicle loan scheme and poverty

alleviation scheme under Governor Orji ‘UzorKalu (many consider it a ‘mere paper tiger,

satisfying the interest of few politicians only) while the Imo State government established the

following credit schemes;

i. Fund& for small, scale industries - operated through the Imo State Ministry of

Commerce and industries.

ii. Special emergency loan schemes for small scale farmers.

iii. Development Finance and Investment Corporation (DFIC).

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12. Federal Development Institutions

The Federal government has put in place some establishments to encourage the development

and. sustenance of economic and entrepreneurial development in the country. These

establishments have specified guidelines for the granting of loans to the emerging and

established entrepreneurs. These institutions and banks are as listed below:

1. The Federal Government operated entrepreneurial development programme (EDP)

2. Graduate self-employment guarantee scheme- established to encourage small-scale

business among unemployed graduates.

3. The Nigerian Industrial Development Bank (NIDB)

4. The Nigerian Bank for Commerce and Industry (NBCI)

5. The Nigerian Agricultural Co-operative Bank NACB)

These federal establishments could be of assistance to entrepreneurs in the area of, fund

raising and technical advice, depending on circumstance of the entrepreneur’s firm. It is

however, regrettable that some of them are mere paper tigers in the area of fund raising for

the emerging entrepreneurs.

13. Merchant Banks

These are specialized banking establishments that provide specialized services such as the

acceptance of bills of exchange, portfolio management, corporate finance, equipment leasing

and long/medium term lending. The merchant banks are wholesale bankers, accepting large

amount of money as deposits. In most cases, they have few branches.

14. Money Lenders

Moneylenders are individuals with surplus cash, who engage in professional money lending

the law frowns at the, money’ lending business cönsequent1y, they operate under conditions

of secrecy. The operators of this venture do so in familiar environments where they have


▪ Mention five methods used by banks to extend credit facilities to business.

▪ They are: Loans, Overdrafts, Discounted Draft and Advances, Bank

Guarantees, and Letters of Credit

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good knowledge of the clients. The seeming advantage of this institution over commercial

banks is that there may not be many formalities in obtaining the loans (Namin, 1995:14).

However, the interest on such loans could be very high.

15. Hire Purchase

The Consumer Credit Act 1974 section 189 defines hire purchase as “an agreement, other

than a conditional sale agreement under which

a. goods are bailed or hired in return for periodical payments by the person to whom

they are bailed or hired and

b. the property in the goods will pass to that person if the terms of the agreement are,

complied with “(Borrie,1975:133).

Hire purchase arrangement could be a source of short, medium or long term loan depending

on the agreement and the nature of goods involved. The advantage is that it affords the bailey

the opportunity to take possession and keep utilizing the goods, on payment of small amount

‘of money pending when he will fulfill the stated conditions in the hire purchase agreement.

However, it could be an expensive means of obtaining financial ass4stance.

2.3 Unit Summary


2.1 Capital is required by the Entrepreneur to start a business outfit

2.2 a lot of sources of fund are available for emerging entrepreneur





Differentiate between loan from thrift associations and loan from relatives and friends


How do you think that Plant and Equipment Leasing can affect entrepreneurship outfit?


Will you advice any entrepreneur to source found from money lender?

SAQ 3.2.4(Tests Learning Outcome 3.2.4)

What type of capital do you think an entrepreneur requires starting a business?

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Study Unit 3: Causes and Symptoms of Business Failure


Introduction

A good number of entrepreneurs go into business with great zeal and ambition. However,

some of them suddenly fail. Business failure can be attributed to ineffective and inefficient

policies; even where there are good policies, they could be poorly implemented. This unit

throws light on why businesses fail with attention on the under listed topic:s

1. Causes of Business Failure

2. Symptoms of Business Failure

3. Averting Failure and Ensuring Success in Entrepreneurship: A Way Out



3.1 Know the causes of business failure

3.2 Identify the symptoms of business failure

3.3 Know how to prevent failure and ensure success in entrepreneurship

3.4 Know the causes of Business Failure

3.2 Causes of Business Failure

In Nigeria, the emerging entrepreneurs’ major problem lies in his management of his time,

material and human resources. In most Nigerian communities, there is usually high demand

for the entrepreneur’s (man) time by the community for communal services. How does the

entrepreneur, then, pay adequate attention to managerial functions, with due regard to

inventory control, customer/public demands/relations? In the view of Uzoma (199 1:33),

“the ostensible causes of failure such as inadequate sales, poor location, and excessive fixed

assets, are merely proofs of the venture owner’s or operator’s managerial inadequacy”.

However, there could be so many other reasons for failure; but the general reason for this is

“Lack of Managerial Expertise.”

Allsopp (1975:17) writing on the dynamics of success and failure in business identified

major causes of business failure as explained below:

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Competition

An entrepreneur should be conscious of the fact that he is not alone in the business arena. He

may just be one of the many dealers of the same product or service in same market

environment. If he does not keep his eyes open with his ears on the ground, he may be

bought off or sold out of the business. In periods like this, intensive competition, aggressive

marketing aimed at customer satisfaction, however at a profit, obviously will help. Where

constant environmental scanning, coupled with the necessary house dressing is not regularly

done, the business could be heading for a fall through the activities of competitors.

Lack of or Inadequate Capital

Within the life cycle of a business, the business may have two periods of financial

difficulties. It could be at the starting point or somewhere along the life. If at the beginning,

it will be advised that the business should be allowed to start at a very low scale and

develop subsequently. However, reliance on external sources of fund with the necessary

securities would assist. If the ‘business has already been developed, it should be noted that

effective/efficient utilization of the available fund is relatively more important than the tc1

fund available to t1 firm. In effect good financial planning and control should be considered a

tool for success.

Site and Location

Site refers to the specific positioning of a business in a locality, while location refers to the

totality of the area where a business is sited. Research findings indicate that a business could

fail as a result of poor site even in a relatively good location. In effect, entrepreneurs are

advised to do environmental scanning of the available sites and locations before sitting their

business outlets, or else the business runs a risk of failure due to its position in a site and/or

location.

Premature Expansion

Business expansion is a good development, but when it is premature, it becomes negatively

oriented. It simply follows that capital will be invested in fixed assets without the

accompanying returns on such tied up investments. This could at best be described as ostrich

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diplomacy. The fixed assets will be under-utilized; thus return on the total assets employed

will be minimal. This is capable of leading to business failure.

Inexperience

Experience simply refers to knowledge or skill acquired through the act of practice rather

than book reading Business, as an art and craft, requires a period of apprenticeship (practical

knowledge) before one could comfortably embark on it. The un-preparedness of an

entrepreneur to acquire this skill before launching into his business venture may lead to

business failure.

Lack of Connection

Business ventures do not exist in isolation; in fact no enterprise is an island unto itself.

Consequently, it follows that if a business is not properly related to its environment, it runs a

risk of failure, because in periods of crisis it will have no place to lean on for support.

Poor Management

Eze (1999:63) opines that lack of effective, competent and dedicated management could be a

major cause of entrepreneurial failure. He also asserts that the success or failure of any

business depends to a great extent how it is managed.

Poor Health

The entire management of a good number of small entrepreneurial ventures are often

anchored on one man (the owner manager). Such a man becomes the general manager, the

marketing, accounting, purchasing manager and the auditor. He is also the chief security

officer. All to himself, sickness or falling health situation of the “Jack of all trades” could

spell disaster for the business.

Changes in Government Policies

The Nigerian economy is made up of two sectors: the business and government sectors. Their

level of relationship is pervasive and covers a myriad of activities. In a brief manner, the

relationship could be said to be that of control and regulation, on one hand, and assistance on

the other hand. The control and regulation of government over business ventures are usually,

102

in the form of enactment of law and statutes. Government law could bring a business

enterprise to abrupt death depending on the circumstance.

There is the need for continuous monitoring of po1icies and intended decisions of

government by the private sector in order to remain operational within the framework of the

societal laws. For instance, consider the government take-over of schools in Nigeria before

the war or more recently, the liquidation of some commercial banks in Nigeria in the middle

1990s. The control and regulation of business by government are for good but it could spring

up dangerous signals to some firms. Figure 7.1 below demonstrates the relationship between

government and business.

The Act of God (Accidents)

Sheer accidents could lead to a business failure despite the enthusiasm and hard work

exhibited by the entrepreneur. For instance, the capsizing of a boat or ship and the like could

bring ‘an entrepreneurial dream to a halt.

Other Causes of Failure include:

i). Inadequate sales

ii). Heavy operating cost

iii). Inventory difficulties -

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iv). Excessive fixed costs

v). Bad debts

vi). Payment of dividends whether earned or not.

vii). Ignorance concerning the market and

viii). Difficulty in providing for management succession In Nigeria, other factors may

include:

(ix). Mix up between personal and business earnings

(x). Excessive involvement in traditional and non-business related activities

(xi). The extended family relation’s syndrome.

Jones (1996: 11 – 12) lists out why some start-ups fail what could be done to save their lives

as listed below:

Primary Reasons why Business Fail

• Undercapitalization – spending more than actual earning.

• Poor leadership[/direction – Poor management/influence

• Shaky Business Plan – Poor blue print/guide

• Miscalculated market potential – Poor analysis and mismatch strategy

• Ineffective marketing – Ineffective/poor marketing mix (4Ps)

Primary Strategies for Survival

• Hard stand on debts – effective credit/debt management

• Work out alternative payment plans where you can – liquid/cash flow management

• Realistic expansion management

• Cut expenses across the board

• Be conservative and often consider the worse situation

• Keep a positive attitude

• Re-treat or de-invest when necessary

Activity 3.3.1: Types of Capital Required by the Entrepreneur

Think about what happens when an operator of new businesses has neither experiencenor

sufficiently educated. Record it in your study diary.

104

3.2 Symptoms of Business Failure

Okpara (2000:244) opines that there are basically two types of business failure: Financial and

economic fai1ure. He asserts that:

A business is said to have financial failure if it is suffering from technical insolvency. This

means that the business is unab1e to meet its current legitimate obligations as they fail due,

even though its total assets exceed its liabilities. Economic failure results from a situation

where total revenue does not cover total expenditure. Hazel and Reid (1977) identify four

symptoms of business failure, which should attract the attention of the entrepreneur in the

course of development of his business estate. These warning signals are as, follows:

1. Deteriorating working capital

2. Declining sales

3. Declining profits

4. Higher debt ratio

In the Nigerian context other dangerous signals include:

5. High turnover of labour hands/absenteeism.

6. Shortening of business hours, occasioned by incessant closure of the business

premises.

A good number of these signals may converge at a time; however, the message remains that

the water is being troubled. We will attempt to offer an explanation of the above symptoms

below for non-business related reasons.

Deteriorating Working Capital

Deterioration of an entrepreneurial working capital is evidenced by progressive fall in the

entrepreneurs operating capital. Working or operating capital in this context refers to

physical cash, stock, accounts receivable etc. Besides the deteriorating state of the working

capital, it is also dangerous to notice that the bulk of working capital is gradually becoming

less liquid, that is not easily convertible to cash.

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Certain factors account for this dangerous state. They include:

1. Excessive investment in fixed assets from working capital

2. Payment of unearned salaries and dividends from working capital.

3. Losses occasioned by theft, fines, accidents etc.

4. Re-occurrence of operating losses.

5. Payment of long-term debt from working capital in excess of annual profits.

6. Unnecessary expenses from the working capital.

The above are serious signals of intended failure that must be watched closely.

Declining Sales

Declining sales is a serious business failure indicator. It will be recalled that operating costs

particularly overhead costs do not decline in proportion to sales. The overheads are fixed;

consequently declining sales wilt automatically lead to fall in profit margin or actual losses,

unless properly controlled.

However, once it is noticed, it is advisable for the entrepreneur to embark on the following in

order to brighten the situation.

1. Detailed environmental scanning cum marketing research aimed at improving sales.

2. Segmentation and targeting of profitable market segment/customers.

3. Aggressive advertising with focus on the target audience.

4. Reconsider your marketing mix....; develop new products; improve on your

packaging, pricing and distribution channels.

Declining Profits

The business environment is dynamic; consequently there could be series of changes from

time to time. Such changes include change in cost of production, taxes, theft, decline in sales,

loss of man hours occasioned by closure of business outlet, fines, penalty, change of taste,

loss of good customers and the like any of these factors could lead to decline in profit margin

or outright loss. Whenever this happens, may not be an indicator of failure, if the cause,

could be. traced and ratified immediately’ However, if it becomes consistent then it is a sure

sign of intending business failure. Some drastic measures have to be taken if the situation

106

must change. In managerial philosophy key ratios to be watched under such circumstances

include the following:

1. Net Profit to Net Sales = Net Profit before Taxes

Net Sales

2. Net Profit to Tangible Net Worth = Net Profit before Taxes

Net Worth

Once any of the above listed ratios falls below e accepted industry level for the

entrepreneur’s business within his locality, it is then clear that the business is about to fail,

except fresh blood is pumped into the system.

Higher Debt Ratio

Key ratios that indicate intending business failure include the under listed

1. Current Liability to Net Worth = Current Liabilities

Owners’ Equity

2. Debt to Net Worth = Total Liabilities

Net Worth

3. Fixed Assets to Net worth = . Fixed assets .

Owners’ Equity

4. Long Term Liability to Working Capital = Long Term Liabilities

Working Capital

The presence of high debt ratio is bad signal and the cause should be sought and ratified

immediately. However, if it becomes consistent, it is certainly an obvious sign of a business

about to fail. It should be understood that if current liabilities get out of hand and obligations

on outstanding bills and payments cannot be met, it points to leaning towards involuntary

bankruptcy. It could also be critical if the entrepreneur’s fixed, long-term liabilities get out of

hand.

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Financial Ratios

The ratios and percentages are valuable assets to the entrepreneur in appraising the financial

performance of his enterprise. The ratios could guide the entrepreneur in answering certain

basic questions about his firm and consequently assist him in planning and correction of

anomaly or irregularities in his business operations. The ratios are related to the relevant

industry ratios for comparative analysis.

Questions that could be answered by the ratio analysis include whether you are making

adequate or reasonable returns on your investment? The ratio of net profit to net worth (also

called return on investment (ROT) is used for this evaluation. The term “Return on

Investment” (ROT) could be misleading. In reality it is Ret-urn on Equity (ROE). Besides

this, other ratios should be considered for the purposes of profit planning and general

decision-making. Other questions that could be answered with the aid of ratio, analysis

include the following:

1. How much does the entrepreneur make per naira sale? The answer could be sought

through the aid of the ratio of net profit lo net sales.

2. Does firm obtain enough sales from its producing assets? The ratio of net sales to

fixed assets offers a solution to this question.

3. Does the entrepreneur have enough sales for the amount invested? A net sale to net

worth ratio offers the explanation. -

4. Can the entrepreneur make good his current obligations? The ratio of current assets to

current liabilities answers this question, among others.

Many other questions could still be answered through the use of one ratio analysis or the

other. However, it is pertinent to state that the ratios are tools for analyzing the firm’s

conditions and operations.

108

Figure 7.2: Ratios used in Evaluating a Financial position

Source: Tate, Megginson, Scott and Trueblood (1978:385),

Successful Small Business Management, Dallas, Irwin-Dorsey Limited.


▪ What changes can occur in business environment? ▪ The changes include change in cost of production, taxes, theft, decline in sales, loss

of man hours occasioned by closure of business outlet, fines, penalty, change of taste, loss of good customers, etc.

109

3.3 Averting Failure and Ensuring Success in Entrepreneurship: A Way Out

It is one thing to have the entrepreneurial urge, and another to succeed in the art of

entrepreneurship. Even where one seems to have succeeded in the business, how does he

ensure that he does not fail. To do this he need to avert possible failure? ‘This is the focus of

this sub-section.

Eze (1999:78) paints a six level pyramid for entrepreneurial success; it is as shown in figure

7.2.

Source: Eze J.A. (1999: 78) Fundamentals of Small Business Management, Enugu, Glanic

Ventures.

The Eze pyramid above highlights the rudiments for ensuring success in the business

enterprise. In as much as it is a solid contribution to knowledge in the area of entrepreneurial

success, it appears that there remains a gap on how to sustain the success and thus avert

possible failure thereafter. To sustain success in business and avert possible failure, the

entrepreneur needs to continuously do six basic things. It is presupposed here that the

entrepreneur is already in business and consequently requires averting failure. In this case the

followings are prerequisites for continuous success.

110

1. Evaluate your financial position and operations regularly

2. Maintain adequate and accurate records.

3. Plan for profit

4. Control the financial structure and operations of your enterprise.

5. Safeguard your assets

6. Develop and maintain an acceptable marketing mix for your target market.

Marketing mix refers to a set of controllable marketing variables (Products, price, place and

promotion) that the firm blends to produce the response it wants in the target market. It is

greatly influenced by the entrepreneur’s positioning of his products in the market arena

(Kotler, 1984: 41 - 43), through the accomplishment of the above six cardinal assignments.

The entrepreneurs have to:

1. Be sensitive to internal and external changes affecting the business;

2. React quickly and positively to changes;

3. Obtain accurate and useful operating and marketing information;

4. Be efficient, effective and humane in use of human resources;

5. Obtain sufficient investment capital at a reasonable price whenever the need arises;

6. Be knowledgeable, effective and factual in handling government laws, rules and

regulations;

7. Be sensitive and alive to social responsibilities;

8. Be optimistic, confident and persevering;

9. Always have an air castle (plan of action) before any real castle (action)

10 The tradition and culture of the Community where the entrepreneur operates must be

given due consideration. The above, form the guide for the successful operation of the

entrepreneur. This maintaining a product-need fit continuously in the market place.

3.4 Unit Summary


3.3.1. Some factors can cause failure in business

3.3.2. Symptoms of business failure can be identified

3.3.3. Averting failure and ensuring success in entrepreneurship is possible

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Why has it been relatively difficult for a good, number of Nigerian entrepreneurs to obtain

lank loans?


What is the nature of government business relationship?


Produce a list of causes of business failure


How would a businessman checkmate possible failure of his business?


Wilken P.H., (1977) Entrepreneurship, New Jersey: Ablex Publishing Corporation.

https://www.entrepreneur.com/howto/raisemoney/index.html

http://www.raise-capital.com/raise-capital-for-business.php

https://www.forbes.com/sites/drewhendricks/2014/07/16/the-5-best-ways-to-raise-

capital/#4ec6fc705f42

https://www.entrepreneur.com/howto/raisemoney/index.html

http://www.raise-capital.com/raise-capital-for-business.php

https://www.forbes.com/sites/drewhendricks/2014/07/16/the-5-best-ways-to-raise-capital/#4ec6fc705f42

https://www.forbes.com/sites/drewhendricks/2014/07/16/the-5-best-ways-to-raise-capital/#4ec6fc705f42

112

Module 4: Business Strategies, Benchmarking and

Entrepreneurship Spirit

Module Overview

The role of strategy and benchmarking in entrepreneurial activities cannot be underplayed.

Once a decision on what to be achieved is taken, the next thing becomes how to achieve the

set target. This is where strategy comes in. The entrepreneur will either set his strategies from

the beginning giving considerations for his business peculiarities or he may decide to copy

preexisting best practices. The attempt to copy existing best practices, introduces the issue of

benchmarking. This module contains the concept of business strategies, benchmarking and

the spirit of entrepreneurship. The module is divided into three units and each unit would

take you a minimum of three hours to cover. The units you will encounter in this module will

include:

Study Unit 4.1: Business Strategies

Study Unit 4.2: Benchmarking

Study Unit 4.3: The Spirit of Entrepreneurship

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Study Unit 1: Business Strategies


Introduction

Any viable business organization achieves success through the application of effective

strategies in its business practices. Strategic planning therefore becomes necessary for the

accomplishment of predetermined goals. In this study unit you will look into some topics in

order to provide for comprehensive understanding of business strategy. The topics are:

1 Strategic planning

2 Forces that govern industrial competition

3 Approaches to strategizing

4 Four typologies of strategic direction and types of generic strategies


At the end of this module, it is expected that the learner should be able to know:

1.1 Meaning of strategic plan, its importance, and the process

1.2 The difference between a vision and a mission

1.3 The levels of strategy

1.4 Forces that govern industrial competition

1.5 Approaches to strategizing.

1. 1: Strategic Planning

Good plans start from the top. A business must have an overall plan if it is to operate in a

coherent and consistent manner. It is from such an overall (Corporate Strategy) that all other

plans evolve. To develop a human resources plan, or production plan, even marketing plan in

isolation from the overall plan would be like attempting to fashion the various parts of a suit

without ‘an overall blue print. In any such endeavour, when the time to fit the pieces together

comes, there obviously would be no guarantee that they would come together to form a

coherent desirable whole piece of suit. It is therefore implied that first things should come

first – overall Business Plan or Strategic Plan

114

What then is a strategic plan? A strategic plan is an interactive holistic long range plan of a

business that guides its internal activities and relates the business to the external

environments. In effect, it is an overall strategy for a firm that coordinates the separate

functional areas of a business, it defines the business objectives, analyses the internal and

external environments and determines the strategic direction of the firm. It is the stream from

which all other plans of the organization draw their validity, relevance and guide for details.

Its focus is on the whole instead of individualistic parts. It is concerned with the mission,

vision and commission of the enterprise. Like the guiding star, it is a lead to the wise men,

(the entrepreneur and manager).

The Importance of strategic plan is seen on how it enables an entrepreneur to build a

tent/castle in the sky before developing a real one on the ground. This enables the

entrepreneur to develop a model or a guide before operations. Planning is a continuous

process. Once an entrepreneur stops planning, he starts planning to fail. Strategic plans are

critical to the survival of business organizations through creation of competitive edge. This

brings to fore, before the entrepreneur, his weaknesses, strengths, threats in the environment

as well as opportunities. Strategic planning compels the entrepreneur to confront the realities

of the business situation or warfare. Strategizing tells the entrepreneur what, how, when and

whom to go to the business warfare with, and how and when to withdraw if the need be. It

guides the design of the managerial job and the business structure. As a guide, it makes

deviation noticeable and corrective action taken ahead of time to avoid damages to the firm’s

life.

Examinations are not the best test of knowledge, argued some students; but what is the true

test of knowledge? Examinations have no substitutes for now - In ‘same manner there is no

substitute for strategic planning. Before an entrepreneur launches his business, basic

questions are addressed. This is strategic thinking process. This process forces the

entrepreneur to evaluate in clear realities the business world ideas, where they seem to lead

and how they will really fare in the competitive business environment. Strategies are of

military origin. The business world is seen as a warfare, where strategies should be

formulated, implemented and evaluated for survival operations.

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Strategic Planning Process

Every successful venture starts with an idea. Such ideas are usually converted to goods and

or services that are valuable to the society. This is done at a cost to the entrepreneur and a

price to the society. Strategic planning is merely a comprehensive process of anticipating the

future and designing logically the activities of the firm in such a manner as to take advantage

of such a future. It is a continuous process of scanning, adjusting and adoption of approach

that actualizes set goals. Strategic plan may not necessarily mean a strategic planning.

Strategic planning may not necessarily mean a strategic plan. A plan may be given but

planning is continuous. It involves giving and taking. In the view, of Zimmerer and

Scarborough (1988: 35 - 45) eight steps are involved in strategic planning. They include:

(a) Development of Clear Mission

The entrepreneur who wants to succeed must first plan. To plan involves a statement of the

mission and vision. Mission statement is an enduring declaration of a company’s purpose that

addresses the first questions of any business venture. What is our business? Vision, on the

other hand, is a statement of the entrepreneurs dream. It is compelling and futuristic; a clearly

defined vision statement helps the firm in three ways:

1. It provides direction

2. It determines the firm’s decisions

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3. It motivates the people.

In the words of Peter Drucker, management must be able to ask and answer some

fundamental questions such as

What is our business?

What should our business be?

Who is our customer?

To do this, the entrepreneur must identify the following:

1 Its expectations

2. Its competitive advantages

3. Its domain or scope of operation be it specific industry, market segment or

geographical scope.

In effect, a mission refers to “a broad declaration of an organization’s purpose that identifies

the organization’s products and customer and distinguishes the organization from its

competitors” (Jones and George, 2003 :251). On the other hand, the strategy merely refers to

a cluster of decisions about what goals to pursue,, what actions to take and how to use the

resources to achieve1e goals. It could also be seen as the determination of the mission or

purpose and the basic long-term objectives of an enterprise, followed by the adoption of

courses of action and allocation of resources necessary to achieve these aims (Weibrich and

Koontz, 2005:122). For further clarification planning at this point will refer to identifying

and selecting appropriate goals and causes of action. It is a principal function of management

to determine mission, and then develop strategy, and plan. Note the entire process consists of

one type of planning or the other, for planning is continuous.

(b) Assessment of Self-Strengths and Weaknesses

Quality, adequate (complete), timely, and relevant information is a prerequisite for sound

mission statements. However, there are three information needs facing the entrepreneur.

These include self, industry and market, and the competitors. It is the synthesis and analysis

of these three stakeholders: self, industry and market, and the competitors that will enable the

entrepreneur to define self in the context of his environment to be able to fit-in well in

deducing appropriate strategy from the knowledge of his strengths and weaknesses.

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(c) Conduct a Thorough Market Segment Analysis

For the entrepreneur to have a competitive advantage or edge it will be based on detailed

study of the specific market segment of operation, thus surfacing the abilities and weaknesses

of the competitors, and bringing to the fore the opportunities, and threats in the environment.

(d) Analyze Your Competitors

The business environment is likened to warfare; they are victors and vanquished. For you to

come up with a war plan against an enemy, you need to know him. In the same vain, you

need to know your competitors before you can make good plans to fight with them. For

instance when David in the Holy Bible fought Goliath, knowing Goliath, he, David did not

play by the big league rules, rather he had to hit Goliath where Goliath least expected. David,

however, anchored on unknown strategy to Goliath (the name of God).

(e) Develop your Goals and Objectives

Goals and objectives are the essence of business. They are futuristic. Goals and objectives are

about the same. However, goals refer to the broad, long-range attributes or broad long-range

values the entrepreneur hopes to accomplish. Objectives are precise values the firm hopes to

accomplish. Good goals are specific, measurable, attainable, realistic, timed and written

objectives are more specific and precise than goals. Management by objectives (MBO) is

advocated. It is a process of joint management and subordinate involvement in goals and

objectives setting. It enlists subordinates’ commitment to the organizational goals and

objectives. Consequent upon that, it psychologically propels the workforce to, strike towards

the goals achievement without force. Prudent entrepreneurs are goal focused.

(f) Formulation of Strategy and Selection Appropriate Strategies

Strategic plan embodies and revolves around the statement of a strategy. It is a game planner,

the broad program for defining and achieving an organization’s objectives. That is the

organization’s response to its environment over time. In 1962 a business historian Alfred D.

Chandler avers that strategy is “the determination of the basic long-term goals and objectives

of an enterprise, and the adoption of courses of action, and the allocation of resources

necessary for carrying out these goals.” Records also trace the usage of the term to a Second

World War general and president of Sears, Raebuck and Company, General Robert E. Wood

in 1920s. It is, an ancient Greek word, strategic referring to the art and science of a general.

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The entrepreneurs must identify’ suitable game plans to enable the firm achieve its

predetermined goals and mission (Stoner, Freeman and Gilber. 2005:263 - 267).

(g) Translation of the Strategic Plans into Action Plans

Strategic plans are designed to meet organizational broad goals. It looks ahead of several

years. Operational plans deal with the details for carrying out or implementing those strategic

plans in day-to-day activities. Usually a year or less may constitute its time horizon. In effect,

the two differ in time horizon, scope and degree of detail. No air castle is real until it is put

down on a solid ground; likewise no strategic plan means anything but paper work until it is

put into action. The translating of the strategic plans into operational action plans enables

these obvious goals to be accomplished.

(h) Establishment of Accurate Controls and Feedback Mechanism

Plans fail but planning does not. Plan could be static but planning is continuous. Actual

operation/performance rarely matches plans exactly. Operational data from the business

errand services act as the yardstick for detection of deviations from plans. Such operational

information constitutes essential ingredients for plotting future strategies even implementing

the on-going strategy. There would be no control without plans. Strategic planning does not

end with these eight sub steps. It is a continuous process. The entrepreneur will need to go

over it continuously.

Levels of Strategy

You must have come across the fact that there are basically three levels of strategy -

corporate level, business unit level and functional level strategy. The entrepreneur must be

conscious of the level of strategy he is handling at each point in time. This is illustrated in

Fig. 8.2 below and is discussed in the following section:

i) The corporate level strategy refers to strategy that is formulated by top management

to oversee the interests and operations of multi-line corporations. Note, the

organization must be conceptualized by the author, made up of more than one line

of business. The questions that will arise include:

• What kind of businesses is the firm involved in?

• What are the goals, objectives and expectations of each of the individual businesses?

• How should the available resources be allocated to each of the businesses in order to

ensure achievement of their planned goals and objectives.

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ii) The business level strategy is also called line of business strategy. It is a strategy

formulated to meet the need and aspirations of a particular line of business. It

poses questions like:

• Hew would the business compete within its market segment?

• What product/services will it offer?

• Which customers does the firm seek to service?

• How would resources be distributed within the business?

iii) In effect, business unit or line strategy seeks to determine appropriate approach to its

market segment, including how to conduct itself, gives its resources and the

condition of the market, in order to have a competitive advantage over its

competitors. Functional level strategy is drawn from the corporate and business

level strategies. It is the last of the strategies in the hierarchy. They are strategies

that create a framework for managers in each function or department such as

personnel/human resources, marketing, production, etc. It is from the

departmental functional strategies that operational plan emerge.

Activity 4.1.1: Strategic Planning

Imagine the situation of an entrepreneur who could not understand strategic

planning process. Record it in your study diary.

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1.2: Forces that Govern Industrial Competition

When you hear of Competitive competence, it refers to skills or activities a firm could

display in the business environment better than its rivalries (Better competence level than

opponents). This of course gives the entrepreneur an edge (competitive advantage) over the

other competitors - cost leadership, superior product, technology, quality and reliability of

service. The entrepreneurial strategies are focused on creation of distinctive competence

as a cornerstone, for establishment of competitive advantage.

Michael Porter of the 1Iarvard Business School identified five forces that shape and

influence strategic direction whether defensive or offensive.

Examination of the forces

1. Threat of New Entrants - In the absence of entry difficulties (barriers) such cost

advantages, as a result of economy of scale or learning curve, potential entry of budding

entrepreneurs could constitute real fear or threat to other on-going firms especially in high

growth Industries. This is because the new entrepreneur may have something new, may have

discovered a gap in the already existing firms.

2 Threat from Customers – The supremacy of the customer cannot be taken for granted.

Powerful few customers, who are large buyers, are capable of bargaining to drive down the

prices of a product, thus cutting down the profit margin of producer(s)

3 Threat of Substitute Products- A firm producing products that have very close

substitutes may not charge high prices for fear of loosing the market to the opponents

that deal on the substitutes. This threat is capable of keeping an entrepreneurial’s price

under control; for instance, plastic containers and steel containers, Ovaltine and Milo.

4. Threat from Suppliers – An entrepreneur who has few suppliers of an important input

of his output runs a risk. If such suppliers are powerful, they could team up and drive up the

price of the input, thus increasing the cost of production. This may automatically mean

lower profit margin for the entrepreneur.

5. Rivalry among the entrepreneurs in the same industry (competitors) The more the

rivalry or competition among firms in the same industry for customers, the more likely

fluctuations, in price, the more intense innovations, creativity, advertising and possible subtle

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in-fighting. These have possibility of bringing prices and increasing cost of production, and

the obvious implications of increasing cost of production thereby reducing profit margin.

Porter’s Summary of Forces Governing Industrial Competition

It is Porter’s contention that entrepreneurs in their environmental scanning for opportunities

and threats should pay particular attention to these five Forces because they constitute the

major threats or obstacles that the firm will encounter. It is the function of strategic

entrepreneur to formulate corporate, business and functional strategies that will checkmate or

counter these threats so that the firm could respond to its task and general environments from

point of strength, competence and competitive advantage. Thus being ahead and generating

high profit.


▪ Identify levels of strategy

▪ There are basically three levels of strategy:

i) Corporate level,

ii) Business unit level and

iii) Functional level strategy.

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1.3 Approaches to Strategizing

You have seen what existing and new entrepreneurs contend against in 1.2 above, how they

are able to deal with these forces depends on their approaches to strategizing.

Generic strategies are strategies that allow organizations to gain competitive advantage from

three different bases: cost leadership, differentiation, and focus.

1. Cost Leadership

This emphasizes produces standard goods and services at very low per unit cost. It is

recommended for price sensitive customers. This is achievable through cost efficiency

throughout the ganizationa1 operations. The entrepreneur interested in cost leadership must

have in-depth knowledge of the firm’s cost structure and cost control systems. Cost

efficiency is the substructure for competitive advantage. If sustained over a long period of

time, cost advantages will thus emerge.

• Experience curve (process learning and experience which will reduce cost and time of

production per unit of output).

• Capacity utilization - increasing capacity reduces fixed cost per unit.

• Economies of scale - as volume of production increases cost per unit tends to

decrease.

2. Differentiation.

This aims at producing goods and services that are considered unique in the industry It works

for a market that is relatively insensitive to price A product could be differentiated by

improved quality, features, appearance, durability, reliability, product design, maintenance

and repair services, warrant, information to the customers etc. The approach to

differentiation to be adopted by an entrepreneur depends on his self-analysis and situational

variables in his industry.

3. Focus (Niche Strategy)

This involves concentrating on a specific market; group of customers, product or services.

This form creates a competitive advantage in a narrow and well defined niche to avoid head-

on collision with large rivals/competitors. This is achievable through identification,

development and sustenance of distinctive competence in what it does best. The firm erects

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barriers to entry in its niche and, defends that niche aggressively. The entrepreneur adopting

this approach this would need to ensure that the niche is big enough to generate enough

return in order to be profitable. After all he is not a mere good doer but a businessman.

Four Typologies of Strategic Direction (Mills and Snow Typology)

Raymond Miles and Charles Snow identified four typologies of strategic direction. These

are: The prospectors, the defender, the analyzers and the reactors (Ibrahirn and Ellis, 1990:

53-58).

1. The Defenders carve narrow product/market domain and protect it heavily by

building strong competitive advantages. They hardly scan the environment for new

opportunities outside their area of operations. Defenders like in a good football team plan

intensively, possess centralized control systems, and are functionally structured with high

degree of formalization and cost efficiency. They are countered as successful in their bid.

2. The Prospectors are continuous environmental scanners for windows of opportunities

such as new product/new service or new market. They tend to be highly decentralized,

flexible, less formalized and structured on divisional or product basis. They are research and

development oriented with in-built flexible type of technology. They arc the aggressors in the

business environment. They are also considered successful.

3. Analyzers are found in between the prospectors and defenders. They combine the

attributes of the prospectors and defenders, while maintaining their traditional lines or

domains; they scan for new opportunities. ‘They are mixed strategists while in their

traditional domain; they are highly centralized, formalized and cost effective. However, as

scanners for opportunities they are highly decentralized, flexible and less formalized. That is

to say such a strategist could become both an aggressor and a defendant. They may not be as

successful prospectors and defenders.

4. Reactors are entrepreneurs who are consistently poor performers as a result of lack of

appropriate strategies. Reactors are unable to respond effectively to developments in their

environments.

If you were to be an entrepreneur, what kind of strategist would you have been, a

prospector, a reactor, an analyzer or a defender.

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1.4 Types of Generic Strategies

This term generic is used here because each strategy has countless variations. Some authors

group generic strategies available to a Nigerian entrepreneur into fourteen. However,

according to Aluo, Odugbesan, Gbadamosi and Osuagwu (2004: 31 - 34) David F. R.

grouped strategies the entrepreneur could adopt into four broad categories:

1. Integration Strategy

The primary aim of integration strategy is to gain cost leadership. Cost leadership also has, to

be pursued in conjunction with a degree of product differentiation. Integration, strategies arc

sub-classified into three:

i. Forward Integration - Distributors/Retailers

Forward integration involves gaining ownership or increase control over the

distributors/retailers. Forward integration s recommended as an effective tool when the

entrepreneurs’ distributors are expensive, unreliable or lacking in meeting, the entrepreneurs

distribution needs. From self-analysis, if the entrepreneur possesses the capacity in terms of

capital and human resources for distribution of new products, forward integration will be

highly recommended

ii. Backward Integration - Suppliers

In situations where the entrepreneur’s spheres are unreliable, expensive or incapable of

meeting the entrepreneur’s demands when required, the firm will be advised to make effort in

ownership or control over the sources of supply. This strategy is referred to as backward

integration.

iii. Horizontal Integration - Competitors

Seeking ownership or increased control over the entrepreneur’s competitors is referred to as

horizontal integration. It could take the form of merger between direct competitors in order to

create competitive efficiencies. Other forms of horizontal integration include acquisitions

and take-over. In the Nigerian banking industry, this is the order of the day.

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2. Intensive Strategies

The entrepreneur’s strategies that require intensive effort to improve the firm’s competitive

position with already existing product(s) arc referred to as intensive strategies. Such

strategies include: ‘

i. Market Penetration seeks to enlarge an entrepreneur market share in the same market

using its present products or services. It could be by way of extensive sales promotion,

improved salesmanship or intensive advertisement.

ii Market Development is an act of introducing the firm’s products and services into new

markets probably new geographical areas. This is preferably adopted when there are new

channels of distribution that are reliable, inexpensive and of good quality.

iii Product Development refers to modification or improvement of firm existing

products/services as a way of boosting sales. Usually this involves market research and

development. This is control among firms in industries characterized by rapid technological

transformations. It is used also when a product appears successful but is approaching a

maturity stage.

3. Diversification Strategies

Diversification strategies seek to break new grounds, so as not to be dependent on any single

industry. In broad terms diversification could be:

i Concentric Diversification which deals with adding new, but related product or service to a

firm’s product line. It is common when a firm operates in a no-growth industry or when the

firm’s product is on the decline stage.

ii Horizontal Diversification which is the strategy of adding new but unrelated products or

services for the existing customers.

iii Conglomerate Diversification which a firm use when a firm is facing declining annual

sales and profits, it may add new, related products or services to its existing product lines for

its customers.

4. Deliberate and Emergent Strategies

There could also be deliberate and emergent strategies.

i Deliberate Strategies come from the top as a result of planned or calculated process. ii

Emergent Strategies come from the bottom as an outcome of operations.

5. Other Strategies

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These sets of strategies include the under-listed.

a) Joint Venture

b) Retrenchment

c) Divestiture

d) Liquidation

e) Combination

1.5 Unit Summary

In Unit 4.1 you should have learnt:

1. The meaning of strategic plan, its importance, and the process.

2. How to distinguish between a vision and a mission.

3. The levels of strategy

4. The forces that govern industrial competition.

5. Approaches to strategizing


At this stage, you have completed unit 4.1.1; you are expected to answer the following



Examine thefive forces that shape and influence strategic direction whether defensive or

offensive.


Explain the four topologies of strategic direction


Why is planning is a continuous process?


Which approach is the best in strategizing?


Udu, A.A. and Okafor, L. (2012), Essentials of Business Management 3rd

edition, Enugu, RhyceKerex Publishers.

http://www.macquarie.com/au/business-banking/business-strategy/expertise/entrepreneurial-

mindset-enterprise-building

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Study Unit 2: Benchmarking


Introduction

Once a bird is flying, it is most likely to be watched by those above and below it. The bird is

likely to be doing same to those above and below it, including those at the same level with

the bird on the sky. This is the fate of an entrepreneur who appears successful. He is most

likely to be benchmarked by other entrepreneurs. The entrepreneur thus needs to be

acquainted with the various forms and ways of benchmarking. He also needs to benchmark

others in order to know the best practices in his industry including gaps to take advantage of.

For better understanding, this unit 4.2 discusses the following topics:

1. The meaning and relevance of benchmarking

2. Types of benchmarking

3. Benchmarking process


At the end of this module, it is expected that the learner should be able to:

2.1: Explain the meaning and relevance of benchmarking

2.2: State the various types of benchmarking

2.3: Discuss benchmarking process

2.1: Meaning and Relevance of Benchmarking

Real quality comes from being sensitive to actual customer requirements, continually trying

to produce consistently to the agreed specification and at the same time, ensuring that all

areas of the company work more effectively, thus making sure that their own customers in

the “process chain” are satisfied every time. Most times, this can be done by copying or

following best practices in the industry you find yourself. This is precisely where

benchmarking comes in.

Benchmarking is a tool that is used to learn the best practice within and outside the industry.

It is relevant in that it can help the firm find ways to improve processes and systems. It may

involve comparing company’s financial and operating performance against a competitor’s

performance or comparing the performance of various internal departments against each

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other. Internal comparisons allow best practices within a company to be identified. So,

department that are not performing up to expectation can find out why and adopt the new

standard.

Bellie (1995: 15 - 16) maintains that quality-based organization use benchmarking to

identify and study other firms that perform effectively a process that the benchmarking firm

wants to improve. Health care organizations, for instance, use a practice known as clinical

benchmarking to collect and analyze data from a number of service providers to determine

the most effective way to organize a process.

Benchmarking is a process that involves sharing information between and within an

organization. This agrees with Imaga (1996: 184) as he stresses that Total Quality

Management (TQM) uses benchmarking as a solid tool for its implementation. They do not

depend on quick fix, for they are not a quick fix; require patience and willingness to share

power and information. Such cross fertilization of information and ideas are geared towards

improvement of products and processes benchmarking bring to the fore the best ways of

operations that ensures continuous improvement of the performance of the organization.

To do this, Mill (1993:51) suggests that one should have knowledge of how one’s own

organization performance stands in relation to other companies’ performance. This of course,

is benchmarking, which is a key tool in achieving total quality in practice. This means that

through benchmarking, total, quality management as a management philosophy would appear

to be essential for any manufacturing firm that aspires to quality excellence. Thus, any

organization that discovers its customers’ needs and gives them consistently a product that

meets these needs, (delivered on time every time and at a fair price) will automatically obtain

a major market share. This requires a programme that emphasizes continuous improvement

of the whole organization.

In fact, just as improvement should be looked at as a continuous process, so must the firm

also constantly maintain its competitive edge over others. This is because benchmarking is

something that has to be part and parcel of the daily work culture.

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Definitions of Benchmarking

i) Garvin (1993: 86) defines benchmarking as an ongoing investigation and learning

experiences that ensure that best industry practices are uncovered, analyzed, adopted and

implemented.

ii) Orgland (1997: 203) sees benchmarking as a process that provides an insight into the gap

between best-in-class performance targets and the company’s own ability to beat them.

iii) Hammer and Champy (1993: 32) describe benchmarking as “looking for companies that

are doing something best and learning how they do it in other to emulate them”

Relevance of Benchmarking

1. Through benchmarking companies search out the very best practice around the world

and quickly replicate them.

2. Benchmarking competitors in the same industry are important in order to understand

their capabilities in product, and service design and cost position.

3. Benchmarking provides insights into the gap between what customers need and how

these are achieved.

4. Benchmarking helps to set strategies and learn new approaches

5. Benchmarking maintains the stimulus for continuous improvement.

6. Benchmarking enables any organization to focus on the changes in management

capability on areas where it yields the best through improving quality, productivity

and customer satisfaction.

7. Benchmarking brings out the best performance in organizations

8. Benchmarking encourages specialization

9. Benchmarking improves human resources.

The application of benchmarking as a tool of Total Quality Management in the

manufacturing firms may usher in the climate of change and continuous improvement in all

the areas of operations. In other words, benchmarking may be a very good intervention

technique for a positive change and for manufacturing firms to survive in a competitive

business environment, there is the need for the acquisition and exchange of practices among

the firms.

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2.2: Types of Benchmarking

Hodder and Stoughton (1999: 22) group it into three broad categories:

• Metric Benchmarking

• Diagnostic Benchmarking

• Process Benchmarking

These three categories of benchmarking form an umbrella for other types of benchmarking.

1. Metric Benchmarking

Metric benchmarking helps define performance gap. This form of benchmarking provides

indications of relative performance and helps identifies leading competitors, but it is unlikely

to yield any real ideas on how to change. Many organizations both in manufacturing and in

service-oriented sectors use benchmarking as a means of direct comparison both internally

and externally with other organization. Metrics are performance indicators used as

comparative measures.

There are five forms of benchmarking under the metric type and they are follows:

• Internal benchmarking. This is the comparison of different processes within

the same firm. It has nothing to do with outside firm or external environment.

Internal benchmarking gives the organization iii understanding of its own

performance level and it has the following advantages.

i. It ensures that the best practice existing within the firm is identified.

ii. It identifies those processes that will be compared within the external benchmarking.

iii. It helps the personnel to have a clear knowledge of benchmarking so that external

benchmarking will be performed easily with an aim clearly known.

• Competitive benchmarking. This has been described by Ivancerich et al (1997: 159)

as another approach to assessing current conditions that are widely used among quality-based

Activity 4.1.1: Strategic Planning

Think about how benchmarking could be applied in a very new entrepreneurship

outfit. Record it in your study diary.

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organization. Competitive benchmarking sets standards for performance and is based on

what others have been able to achieve.

Advantages

1. It makes firms to maintain their competitive edge

2. It makes firms gain superiority over their rivals

3. It makes firms under the same competitive product wise, thereby maintaining

their standard.

• Product Benchmarking. Product benchmarking is the long-standing practice of

carefully examining other organizations products. Not only is the cost of the competitor’s

product examined, but also often methods, such as reverse engineering are used. Buying a

rival’s product to take part and test is a common practice.

• Statistical Benchmarking. This is the numerical or statistical comparison of a

company’s performance. It has to do with comparison of firm’s performance over the years

with a view to determining when the best practice was achieved.

• Customer Benchmarking

This has to do with the relationship between the external customers that will help the firm to

achieve competitive edge. Emphasis here is that quality should be defined as perceived by

the customer by viewing it externally from the customer’s perspective.

2. Diagnostic Benchmarking

Diagnostic benchmarking requires a little more effort but in return will identify areas of

strength and give more details on areas of weaknesses, which might help in formulating

strategies on how business practices can he improved upon in order to enhance performance

in manufacturing firms. Diagnostic benchmarking helps firms to identify and transfer

improvement into their operations and strategies. Strategy drives performance and hence

quality. Indeed, quality can and should become the central theme of strategy. This leads to

Strategic Benchmarking the study of other organizations with a view to improving upon

them.

3. Process Benchmarking

This is the most involving form of benchmarking. It is where the most substantial benefits

can be found. These terms are interchangeably used to mean process benchmarking.

However, the focus here is on any key business processes which have been identified as an

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area of improvement. Process benchmarking requires considerably more resources, efforts

and time, but it is said that organizations that successfully complete the process are usually

rewarded with many benefits of transferred best practice. These include generic, operational,

and functional benchmarking

i Generic Benchmarking. Hodder and Stoughton (1999:22) define generic benchmarking as

a type of benchmarking which involves the best practice of recognized world-class

organizations. This type of benchmarking offers a great opportunity for innovation, creative

and stimulating ideas.

ii Operational Benchmarking. Omachoun and Ross (12995: 144) see it as the type, which

focuses on the particular activity within a firm’s functional operation and then identifies

ways to emulate or improve on the practices of best-in-class. They further state that this type

of benchmarking is more detailed in terms of data gathering and the rigour of analysis. Here,

much of the focus is on cost and differentiation. Owing to the fact that the customer’s

purchasing decision (PD) is a function of price and differentiation, it is necessary to

differentiate through quality and improve price through cost reduction. PD = F (P x Q).

Both lead to an analysis of the cost and activity chains of inter connected processes. The

essence here is to reduce operation cost in the process of manufacturing goods.

iii Functional Benchmarking. This is explained by Foster and Sjoblom(1996) as the type that

positions a firm in such a way that it studies other organization practices and cost with

respect to functions or processes such as assembly or distribution. All these are done in a bid

to manufacture a standard and the best in world-class products. From another perspective,

benchmarking can be grouped into two, depending on how information is acquired by the

bench markers or form the benchmarks. This might be informal or formal method of

gathering information, which may then give rise to cooperative or formal and informal

benchmarking.

a cooperative benchmarking

This involves the voluntary sharing of information through mutual agreements. Elnathan

and Kim (1995: 345 – 364) model how cooperative benchmarking groups are formed among

firms that possess different amount of’ technological information contained in their

operations. They show that there is a unique equilibrium group structure characterized by

grouping among firms with similar amount of technological information.Elnathan and Kim

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(1995), in a comparative static analysis, also show that group size and the number of’ firm

participating on cooperative benchmarking tend to increase learning becomes more efficient.

Technology also becomes more complementary as firm’s technological information

uniformly increases and as the cost of’ benchmarking is reduced. They argue that today’s

changing business environment is likely to encourage cooperative benchmark and increase

group size, because increased competition and technological progress in information

processing increase benefits of benchmarking relative to costs.

b informal benchmarking

Most organizations carry out what Orgland (1997) regards as informal benchmarking. He

further lists two approaches adopted by such organizations, in benchmarking as follows:

• By visits to other businesses, ideas can be gleaned which can be used to facilitate

improvements in their own organization.

• The collection in a variety of ways, of data, about competitions.

These two approaches arc not carried out in any planned manner and they are limited in their

value.

Wall Street Journal (1993:10) reports also those small firms executives who created a

network of what can be described as informal benchmarking. One reason cited was that,

they felt that, the best way of learning about improvement of their operations comes from

discussions with other small firms. On the surface, it seems that the segregation occurred due

to high degree of leaning among small firms but on a closer look, firms preferred to

benchmark with large firms but were not able to, because they were not accepted.

The type of benchmarking adopted by any firm should be based on the fact that the firm

understands its processes before starting to look at other firms. It may also be reasonable to

suggest that due to the nature of benchmarking; a manufacturing firm can apply or use either

one or a mixture of decent types of benchmarking to achieve its goals.


▪ Which type of benchmarking leads to Strategic Benchmarking

▪ Diagnostic Benchmarking

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2.3 Benchmarking Process

Benchmarking is used to compare with others the effectiveness of various processes of

products and procedures. The objective is to identify where superior performance is found in

whatever variable that is being used for comparison. The normal thing one might suggest is

that once the company with the highest performance is identified, the exercise becomes to

explore the behind their superior performance.

Benchmarking process in the manufacturing firms involves decision on:

• What the firm is going to benchmark? (non-financial or financial data)

• What the firm is going to benchmark? (sample selection)?

• How will the company analyze information?

• How will the company use the information?

However, there is no standard or commonly accepted approach to the benchmarking process.

Each consulting group like Kaiser Associates (1991) uses its own method, Harrington and

Harrington (1996: 38) list eight steps, which have been further expanded to nine steps by

Hodder and Stoughton (1999). Camp (1995: 65) however suggests seven steps in

benchmarking. Camp’s seven steps method is shown in fig. 4.2.1

Another approach to benchmarking process similar to that of camp is the three major steps of

Omachoun and Ross (1995: 146). These steps are as follows:

i. Measuring the performance variables

ii. Determining how the levels of performance are achieved; and

iii. Using the information to develop and implement a plan for improvement (Nwuba,

2006).

Fig. 4.2.1 Camp’s Seven-Step Benchmarking Process

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2.4 Unit Summary

In Unit 4.2, you should have learnt:

1. The meaning of strategic plan, its importance, and the process.

2. How to distinguish between a vision and a mission.

3. The levels of strategy

4. The forces that govern industrial competition.

5. Approaches to strategizing


At this stage, you have completed unit 4.2.1; you are expected to answer the following



Enumerate the relevance of benchmarking


What is the relationship between benchmarking and Total Quality Management?


Explain the three types of benchmarking


What are the advantages of competitive benchmarking?


In what areas do benchmarking process in manufacturing organizations involves decision-

making?

References and Further Studies

Stoner J.A.F., Freeman R.E., Gilbert DR (JR) (2005) Management (6th ed),

India BarkhaNath Printers.

http://www.academicjournals.org/journal/AJBM/article-full-text-pdf/94C94A923521

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Study Unit 3: The Spirit of Entrepreneurship


Introduction

A participant in an academic session asked the presenter what was inside the entrepreneurial

mind and whether entrepreneurship could be taught? These two apparently simple questions

generated severe disagreement among members of the Board. However, at the end of the

discourse, it was resolved that what is inside the entrepreneurial mind is the spirit of profit

making anchored on creativity and innovation, as a strategizing tool in achieving competitive

advantage in the face of threats and opportunities occasioned by the dynamics of the

tribulations of the business milieu. This study unit 4.2 exposes the contents of the following

topics for smooth comprehension.

1. Creativity and innovation.

2. The secrets of leading creative organizations.

3. The methods of improving creative process


At the end of this module, it is expected that the learner should be able to know:

3.1 Meaning of creativity and innovation

3.2 The secrets of leading creative organizations

3.3 The methods of improving creative process

3.1: Creativity and Innovation

A German scientist Robert Koch in the late 1800s discovered that bacteria cause many

diseases. He later found a specific bacterium that causes anthrax (diseases of the beep and

cattle, as well as tuberculosis and cholera). Pasteur then later discovered how to protect

animals and humans from diseases caused by bacteria. This was instrumental to the

development of immunization of people against diseases. An English Surgeon Joseph Lister

anchoring on the findings of Koch and Pasteur developed ways to kill bacteria on surgeons’

hands and surgical instruments so that bacteria would not be introduced into a patient’s body

137

during surgery. The adoption of Lister’s Methods in the medical field led to drastic decline in

deaths associated with post-operative infection (Beers, 1991:501). These are all acts of

entrepreneurship in medicine through creativity and innovation, re-action to threats and

opportunities in their field.

What then is creativity and innovation? Creativity is the mother of invention. We were told in

our early days. What then specifically is creativity? It is the capacity of to develop new ideas

coupled with new ways of looking at problems and opportunities in the business setting.

Innovation, on the other hand is the ability to apply creative solutions to problems and

opportunities with a view to enhancing or enriching the lives of the people concerned.

Invention thus is the by-product of creativity and innovation. Theodere Levitt of Harvard has

it that creativity is the act of thinking new things while innovation is the act of doing new

things. He thus opines that entrepreneurs succeed by thinking and doing new things or old

things in new ways. Peter Drucker the Management legend avers that innovation is the

specific instrument of entrepreneurs, the means by which they exploit change as an

opportunity for a different business or a different service” (Buchanan, 2002:53; Zimnierer

and Scarborough, 2005: 35).

Development of an idea is good but it is not enough; transformation of the idea into a

product, service or business venture is the ultimate. It is the completion of the circle that

leads to invention, which attempts/closes a need-gap.Innovation is a continuous process.

Most ideas do not work, nor this innovation close need gap completely at the first instance.

Consequently, just like planning, creativity and innovation must be perceived as a continuous

process. Trial and error is accepted until perfection is actua1ized.

Creative Thinking Process

Convention holds the view that creativity is not taught. Human beings are adjudged logical,

rigid, and narrow minded. Recent studies show that tradition could be faulted in this regard.

Creativity could be taught. However, even for a creative minded individual, creativity tends

to decline with age, education and lack of use. Perception, culture, emotion and peer group

influence are also capable of stifling latent potentials for an individual creativity.

138

Studies in science about the functionalities of the human brain unveil that each hemisphere of

the human brain processes information differently one side of the brain tends to dominate the

other. The development of the brain is asymmetrical, with each hemisphere specializing in

different functions. Linear, vertical thinking guides the left brain (reasoning from one logical

conclusion to another), while Kaleidoscopic, lateral thinking guides the right brain

(speculation). The left brain takes care of issues like logic, symbols and language. It

processes information on a logical and systematic manner. Its vertical thinking process is

narrowly focused and operates in a highly logical fashion.

On the other hand, the right brain processes information intuitively and relies heavily on

images. Its lateral thinking appears unconventional, unstructured and unscientific. It is

unsystematic in its reasoning approach. The right brain is thus creative oriented in its

approach to problem and threats. The right brain generates ideas that are inventive and

entrepreneurial. Entrepreneurs need the two sides of the brain for effective creation.

Sources of new ideas

For a budding Nigerian entrepreneur, sources of new ideas are numerous. Such sources

include:

• The Indigenous Cu1ture

• Peer Groups

• Consumers and Consumer Associations

• The Channels of Distribution

• Existing Companies and their Product

• Research Institutes

• Governments — Local, State and Federal

• Socio-economic, socio-political groups, socio-cultural and other formations.

Possible Methods of Encouraging Organizational Creativity

For creativity to flourish, the organization needs to create the necessary enabling

environment for its development and sustenance. New ideas are fragile just like weak truth

that may be driven away by apparently established falsehood. The organization needs to

develop a corporate culture that both fosters and rewards creativity before acts of creativity

139

will foster. The organization can stimulate creativity within its workforce by the following

means:

• Hiring of Diverse Workforce

People from different cultural backgrounds, work experiences, different colleges and

universities, different interests and mind frames may provide the diversity needed to form the

crucial raw material for creativity and innovation. In the Department of Management, UNN

Enugu Campus, for instance, the cream of the workforce is made up of extraordinarily well

trained scholars from various areas of management. You will find legal experts, public

administrators, economists, psychologists, statisticians, to mention but a few.

• Creation of Opportunity for Creativity

Make it clear to the employees that they are expected to be creative and that they will be

rewarded for sound inventions.

• Tolerating Failure

Not all new ideas will succeed. Tolerate failures that are occasioned by new ideas. Trial and

error should be accommodated when genuine.

• Reward acts of creativity

• Be supportive to creative effort

• See problems as challenge

• Develop a procedure for capturing and taking advantage of new ideas

• Provide development and capturing and taking advantage of new idea

• Encourage curiosity and intuitive thinking.

• Model creative behaviour

• Creativity could be taught and development finds a means of modeling acts of

creativity.

3.2: Secrets of Leading Creative Organizations

Leaders at innovative companies know that their roles in stimulating creativity find

establishing a culture that embraces and encourages creativity are vital. Katherine Catlln

founder of a consulting firm specializing in leadership and innovation has identified the

following characteristics exhibited by leaders of innovation.

1. They Think: These leaders invest time in thinking because they recognize the power of

their own creativity and the ideas it generates.

2. They are Visionaries: These people are totally focused on the values, vision, and

140

mission of their companies and express them through their companies’ products and

services as well as through its culture. They are able to accomplish.

3. They Listen to Customers: They recognize that customers or potential customers can be

a valuable source of new ideas for product or service development and improvement,

sales techniques, and market positioning

4. They understand how to Manage Ideas: As they search for new ideas and creative

solutions, these managers look on a variety of sources: customers, employees, the board

of directors, and even their own dreams.

5. They are People Centred: these leaders hire people for their creative abilities and then

place them in a setting that enables that creativity to blossom. They see their employees

and their employees’ ideas as an important part of their companies’ competitive edge.

6. They maintain a Culture of “Change”. These leaders do not simply manage change;

they embrace it. They seek out change, recognizing that there is a constant need to

improve.

7. They maximize team synergy; balance, and focus, Realizing that teamwork fosters

creativity and innovation. These leaders bring together people from diverse

backgrounds into teams to maximize their companies’ creative output.

8. They hold themselves and others accountable for extremely high standards of

performance: These leaders demand best of the highest quality from themselves and

their employees and are unwilling to settle for anything less.

9. They use to take “no” for an answer: These leaders in the face of adversity even when

others say it cannot be done.

10. They love what they do and have fun doing it. These leaders’ passion for their work is

contagious; empowering everyone organization to accomplish everything they possibly

can.

Source: Zimmerer and Scarborough (20050. Essentials of Entrepreneurship and Small

Business management. International Edition U.S.A. Pearson prentice Hall, p. 47. Re-

produced from Katherine Cathin. “10 Secrets to leading innovation” Entrepreneurs,

September 2002, p. 72 with permission of Entrepreneur Media, Inc. www.entreprenuer.com

http://www.entreprenuer.com/

141

Creative Process

Some creative ideas may be seen as emerging out of accidents or unplanned activities.

However, the truth remains that creative ideas emerge out of a planned process. This process

involves seven steps commonly referred to as P1TI2VI by students. These steps are as

follows. It is a continuous process.

Fig. 3.1: The Creative Process

1. Preparation - Condition your mind for creative thinking. To do this you need formal

training and education, including on the job training versatile experience. This

provides the foundation for creative ideas and innovations. Mr. Biro would not have

developed the biro pen, if he did not know the need it would be put to. Prepared

minds always take advantage of creative ideas even when the ideas do not originate

from them. Solomon King of Israel in the Holy Bible wrote 3,000 proverbs due to his

training exposure and office. Creativity and innovation could be an act of building or

shaping of an idea, but the mind has to be prepared. To prepare you need to:

• Develop a learning attitude; see every situation or gathering as an opportunity to

learn; see life itself as a learning process. Make yourself a professional student.

• Read widely, related and unrelated topics in your field of study.

• Pick up articles of interest and create a file for them. After a while you may discover

you have developed encyclopedia for yourself, from which you could draw new ideas and

inspiration.

Activity 4.3.1: Creativity and Innovation

Think about what an entrepreneur wants to achieve in terms of creativity and

innovation. Record it in your study diary.

142

• Discuss your ideas freely with the knowledgeable. Any of them could help you in

sharpening the idea.

• Attend meetings of trade association and professional bodies. This may give you an

opportunity to brainstorm with others. It could be an eye opener into possible solutions to felt

problems.

• Study other codes and their culture their belief system, values and attitudinal capacity

create an opportunity for development of new opportunity for development of new

ideas and inventions. You can run into an exposure, traveling and association.

• Make yourself a good listener. Through effective listening to the elders, professionals

and people, you may amazingly learn more than you ever would have imagined.

2. Investigation — for yon to be creative and innovative, about a problem, you need

details surrounding the problem. You cannot proffer a solution to a problem without

of the circumstances, including the causes and effect. A Scottish physicist, James

Clerk Maxwell discovered that electric and magnetic energy move in waves.

Thereafter in 1895 Wilhelm Roentgen, a German physicist, based on his investigation

of the findings of Maxwell, unveils that energy waves that could penetrate solid

matter. Roentgen named these waves x-rays. Medical scientists based on this

investigation and solid understanding of the waves that are capable of penetrating

solid matter (x-rays) had to inculcate them into modern machine (this is the

background of the creation of the popular x-rays in machine).

3. Transformation — Transformation simple means complete or holistic change from

one state to the other. For a holistic change to take place, it requires critical look at the

similarities and differences in the data already generated. The creative thinking must be

involved in convergent and divergent thinking. Convergent thinking is like consideration of

centripetal forces. It deals with pondering over similarities and connection among various

variable incidents and events. On the other hand, divergent opinion or centrifugal forces need

to be considered. It deals with identification of differences among various variable incidents

and events. To do this successfully, you may need an intrinsic study of the various sub-units

(elements) of the object. This initial study or assessment will enable you have an overview or

a clear picture of the relationship among the variables. After that, reorganize the elements in

the situation. Study their functionalities or otherwise, from different perspective this may

143

enable you to uncover or unmask hidden attributes of the various components. Also study

the components as extrinsic elements. This three-process analysis will likely widen your

understanding of the situation.

3. Incubation — the subconscious mind, works under an environment of freedom, free

from stress, free from pressure. Under such an air of freedom and relaxed mind, often

during rest, sleep or leafing, the subconscious mind goes to pork, unveiling

unimaginable things. Early musicians from old Bende in Abia State, Nigeria,

including creative thinkers and fabricators (ndiuzu) machine men, attribute solutions,

to critical problems to answer raised for them by their subconscious minds, most

cases during rest, sleep or while doing other things un-related to the issues under

content. Froever, Zimmerer and Scarborough (2005: 52) opine that, creative thinkers

need to follow the under listed five steps

i. Walk away from the situation and allow ideas to emerge on its own.

ii. Take time to daydream, allow mind to water far away. In that process it may stumble

onto a creative solution.

iii. Relax and play regularly, for whenever fatigue walks in, creativity walks away. They

are no friends. Great ideas are after incubated in the toilet, on the way to or from the

farmland, or during a walk or the like.

iv. Dream lucidly - It may not be possible for you to dream about an issue on directive;

but it is possible for you to consciously speculate about a matter as you are about

sleeping off. Such matter speculated upon before drifting off to sleep has the capacity

of sending signals to your subconscious mind to work on the matter and proffer

solutions through dreams. The solutions proffered have to be harvested between the

time you wake from the sleep and the period you open your eyes. A prolific inventor

and accomplished entrepreneur and author, Ray Kurzweil, outstanding Igbo

musicians and soul winners, Friday. Uguru Okwa, Paulson Kalu opine that lucid

dreaming to very great extent were responsible for their various successful records in

life.

v. Work on the problem or opportunity under different circumstances under different

environmental settings. Go out to the one field or site on log or on top of a rock to

144

speculate on the matter. Different environmental settings have different stimulating

forces on creativity.

2. Illumination — In the process of incubation a spontaneous breakthrough there

could arise that explains the problem. This will serve as an illumination

(bright light) that now guides the creative thinker to a conclusive end course

of the enquiry. It could take the form of hallucination with the associated joy

of discovery that energized and sustain the enquiry.

3. Verification - After what appears to be a breakthrough has been unverified,

the next stage will be to subject innovative idea to a test of accuracy through

verification. Once the discovery passed this test, it could then be said to be

valid and reliable. The aim of this stage is to subject the apparent discovery to

a test of reality. To achieve this, to do this, some of the questions that need to

be asked include:

• Is it substantially a better solution to the problem?

• Is the solution feasible and viable (is it workable and profitable)?

• Does the need for exist?

• If yes, what is the most viable application of the innovation in the market place?

• Does the innovation fit into the core competencies of the establishment?

• What inputs (cost) will be required to produce or provide the innovation?

7. Implementation - This is the act of transforming an idea into reality. For it is one

thing to come up with an idea and another for it to materialize into the reality. It is an

entrepreneurial philosophy to “be ready, aim and fire” not “ready, aim, aim and aim”. Nearly

is not known for killing birds.

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Obstacles to Creativity

Roger Von Oech in his book, “a whack on the side of the head” published in New York by

Warner Blocks in 1990 pages 21 — 167 identified mental locks with limit an individuals’

creativity. These are in addition to firm’s imposed barriers such as:

• Time pressures

• Unsupportive management

• Pessimistic co-workers

• Rigid company policies

• Fear of failure.

The mental lock include the under listed:

1. Searching for the one “right” answer

2. Focusing on being logical

3. Blindly following the rules

4. Constantly being practical

5. Viewing play as frivolous — note there is a relationship between the “haha” of humor

and the “aha” of discovery; playful attitude is fundamental to creative thinking.

6. Becoming overtly specialized

7. Avoiding ambiguity — be ambiguous if need be

3.3 Methods of Improving Creative Process

There are various techniques for improving the creativity of a team these include:

1 Brainstorming

Brainstorming appears to be the most widely known and used technique for problem solving

and idea generation. It is an unstructured approach to generating possible ideas about a felt

problem within a limited time frame through spontaneous contribution of a team of small

membership. Such statement of problem need not be too wide or too narrow. In course of


▪ What stages make up creativity process?

▪ The stages that make up creative process are: preparation, investigation,

transformation, incubation, illumination, verification, and implementation

146

brainstorming, no group member should be accorded the recognition of inhibiting responses.

The aim is to generate as many ideas as possible on the solution to the felt problem.

Therefore all ideas or suggestions are recorded, no matter how illogical they may appear.

Criticisms or outright evaluation of the suggestions are not allowed during brainstorming.

The evaluation or assessments are done much later.

The opposite of brainstorming is not no-brain storming, but reverse brain storming. - Reserve

brainstorming is like brainstorming. The only exception is that criticisms are allowed. It is a

technique that focuses attention on finding fault with ideas generated. It tries to elucidate the

various ways through which an idea generated could fail. It asks the question - how many

ways can this idea fail. Because it is negative oriented, efforts must made to sustain the zeal

of the participants. After the identification of all the perceived errors or possible ways they

could fail, the team will then proceed with finding possible solutions to overcome the

identified short comings of the idea.

Brainstorming attempts to produce large quantity of novel and imaginative ideas. The

essence is to create an open, uninhibited atmosphere that allows the participants to freewheel

ideas.

The following are the recommended guidelines for brainstorming

• The team should have small membership, say, five to ten. The background, rank and

perspectives of the members should vary.

• Status and department affiliation should be deemphasized.

• The problem to be addressed by the group should be well defined, but should not be

made known to the participants ahead of time. The questions if possible should be

probing like “why”, “how” or “what”.

• Limit the session to one hour or less to avoid the participants getting weary.

• Appoint a non-participant a recorder.

• Use circular or U-shaped seating arrangement in order to encourage free

communication and interaction

• Make the brainstorming session humorous/playful. It need not be logical. Logic

often drives away creativity.

• Encourage all sorts of ideas from the participants, including wild and extreme ones. A

crazy idea is capable to stimulating creativity

147

• Generate as many ideas as possible. Be more interested in the number of ideas

generated than the quality of the ideas.

• Do not criticize or evaluate any of the ideas during the brainstorming session.

Criticisms slow down the creative thinking process instantly.

• Encourage development of new ideas from those already suggested.

2 Mind-Mapping

It is a creative thinking process that involves both sides of the brain, whereby spontaneous

ideas are recorded and related to the problem at stalk. It makes room for analysis of a

problem from various angles. As a graphic technique it makes possible vision (display of

ideas and their relationship). Effective mind mapping process will involve stating in writing

the problem under focus on the centre of a wide paper and writing down the various ideas

that come into your mind on the various sides of the paper without necessarily justifying

them. If fresh ideas emerge, write them down beside the initial one. Connect such ideas that

are not related and they should be connected straight to the problem already stated at the

centre. As soon as the flow of ideas slows down, stop ilea generation. After few minutes

brake, develop a mind map rough integration of the avaricious ideas on the solution to the

problem. Through this process beautiful solutions to the problem may emerge. Then develop

this, after due assessment, into a business action plan

3 Rapid Prototyping

Prototype refers to “like the original”, a model, a paradigm, version of the initial type.

Rapid prototyping deals with continuous creation of models of the original idea.

Transformation of the idea into a model will enable the entrepreneur to see how workable the

idea is thus surfacing the flaws in the initial idea. As the entrepreneur continuously re-models

the initial idea, he will keep perfecting that product of his endeavour, consequently,

improvements will be made on the product/design before the entrepreneur eventually

presents the product to the market.

148

Enhancement of Individual Creative Thinking

• Make yourself creative believe in self and assure yourself that you can do it and start

doing so.

• Make your mind free and fresh. Take in new ideas daily.

• Recognize the creative power of mistakes; innovations may result from serendipity.

• Make a jotter and biro pen handy – capture new ideas and thoughts in writing as soon

as you get them.

• Listen to others. If possibly benchmark; capture ideas from others improve upon

them if you can and act upon them.

• It’s not illegal to utilize unutilized or un-harvested ideas of others.

• Read stimulating books on creativity/innovation. Attend seminars and classes on

creative thinking and innovations.

• Talk and listen to children on difficult creative issues children have creative minds

that are practically boundless. They are full of experiments factions.

• Take some time off for relaxation. The subconscious mind reflects and generates

solutions to critical problems, in particular those bordering on creativity during

relaxation. If you like pose the problem to your subconscious mind without

necessarily thinking about it before going to bed at night, and review solutions

generated by your sub consciousness your eyes in the morning.

3.4 Unit Summary

In Unit 4.3: you should have learnt:

1. The meaning of creativity and innovation

2. The secrets of leading creative organizations

3. The methods of improving creative process





How can an organization stimulate creativity within its workforce?


Differentiate between creativity and innovation. Can creativity be taught? How?

149


List the ten secrets of leading creative organizations.


What are the mental blocks that hinder an individual’s creativity?


Prepare a guideline for brainstorming.


Discuss the various techniques for improving a team’s creativity.

References and Further studies

Hisich R.D. and Pofers M.P (1998): Entrepreneurs (Fourth Edition) Boston, Irwin, McGraw

Hill.

Hutt R.W. (1988) Entrepreneurship: Starting Your Own Business, Ohio, South-West

Publishing Co.


https://www.boundless.com/business/textbooks/boundless-business-textbook/small-business-

and-entrepreneurship-7/small-business-owners-a-profile-56/key-characteristics-of-

entrepreneurs-273-2430/

http://lexicon.ft.com/Term?term=entrepreneurial-mindset


https://www.boundless.com/business/textbooks/boundless-business-textbook/small-business-and-entrepreneurship-7/small-business-owners-a-profile-56/key-characteristics-of-entrepreneurs-273-2430/



http://lexicon.ft.com/Term?term=entrepreneurial-mindset

150

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Glossary

Budding Entrepreneur A fresher or beginner in entrepreneurial ventures.

Companies an association of people contributing to a common fund, having perpetual life

succession whose aim is to do business and make profit.

Competitive Advantage an edge or position of advantage which a business has over and

above its competitors.

Environmental Scanning assessment of the internal and external variables, with inherent

threats and opportunities, occasioned by the environment under which a business operates.

Financier a provider of funds and financial resources for a venture.

Incorporation the act of bringing a company to existence which creates it as a corporate

personality different from its owners or creators.

Interest the reward for capital as a factor of production.

Investor a businessman that commits resources into ventures with the expectation of yield or

returns.

Market Economy an economy where the forces of demand and supply operate unhindered in

influencing major economic questions and decisions.

Profit the excess of aggregate revenue over cost

Profiteering is the objective of driving towards excessive profit

Promoters those who take the initial steps in establishing a corporate organization.

Threats these are constraints to opportunities

Uncertainty the risk or hazards in business

Uninsurable Risk these are risks that are not specific enough to be covered by an insurance

policy

Unlimited Liability a concept that does not limit the liability of shareholders or business

owners to the amount of money invested in a business.

159

Appendix

Some Possible Small Businesses One Can Start

Management consultation

Arts Festival promoter

Arts Festival Promoter

Athletic Recruiter/Scout

Aviation House

Auto Paint Touch-up Professionals

Blade-sharpening Services

Barbering/Hair Saloon

Buying and Selling

Fashion Design/Tailoring

House Cleaning

Home Cleaning

Home Laundry

Book Indexer

Cake Decorator

Candle Maker

Cartoonist

Catering

Child Care Referrals Services

Comedy Writer

Commercial Plant/Watering Services

Book Binding

Commercial Photographing

Credit Consultancy

Dance Instructor

Day Care Services

Farming of Fruits/Vegetables

Mobile Store Business

Mobile Hair Salon

160

Mobile Hair Barbing

Motivational Speaking

Motivational Speaking

Recycling Service

Travel Agency

Upholsterer

Venture Capitalists

Advertising Agency

Ambulatory Services

Coupon Distribution

Family History Writing or Genealogical Service

Graphologist

Home Schooling Consultancy

Ice Sculpting

Hospitality Services

Business Name Registration/Business Incorporation

Laundry/Ironing Services

Law Library Management

Make-up Artist

Motor Vehicle Transportation

Events Management

Nutrition Consultancy

Private Tutor

Personal Instructor/Fitness Trainer

Story Telling

Stress Management Counsellor

Toy Cleaning Services

For over 500 business ideas and how to start them refer to:

Katina J. (1996), Business you can start Almanco, Canada, Adams Media.

161

Developing Successful Business Idea

(Environmental Scanning and Idea

Generation Stage)

Moving from ideas to an Entrepreneurial firm

(creation and innovation stage)

Managing, and growing an entrepreneurial firm

(Management stage)

Recognizing

opportunities

and

generating

ideas

Feasibility

analysis

Writing

Business

Plan

Industry and

Competitors

analysis

Developing an

affective

business

model

Preparing the proper

ethical and legal

foundation

Assessing

Financial

strength

and

viability

Building

the new

venture’s

team

Getting

Financing and

funding

Unique

marketing

Decision to become an Entrepreneur (Decision Stage) Figure 2.3 Entrepreneurial Process

162

issues

The

importance of

intellectual

property

Preparing

for and

evaluating

the

challenges

of growth

Strategies for firm

growth

Franchising

Source: Barrlinger B.R. and Ireland R.d. (2013), Entrepreneurship Successfully Launching New Ventures 4th ed. England, Pearson

Education Limited.

163

The process may also assume a different dimension. This dimension is a preferred approach and may appear thus.

Figure 2.4 Entrepreneurial Ladder

Decision

to become an

Entrepreneur

(Decision Stage)

Developing Successful Business Idea (Environmental Scanning and

Idea Generation Stage)

Moving from ideas to an Entrepreneurial firm

(creation and innovation stage)

Managing, and growing an entrepreneurial firm

(Management stage)

Getting

Financing

and

funding

Building the

new venture’s

team

Assessing

Financial

strength and

viability

Preparing the

Unique

Marketing

issues

The importance

of intellectual

property

Preparing for

and evaluating

the challenges

of growth

Strategies for

firm growth

Franchising

and other

related growth

strategies

164

Recognizing

opportunities

and generating

ideas

Feasibility

analysis

Developing an

affective

business

Industry and

Competitors

Analysis

Writing

Business

Plan

proper ethical

and legal

foundation

course title: entrepreneurship course code: man 875 …

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