SECOND EDITION

Gideon Nieman & Cecile NieuwenhuizenEDITORS

Van SchaikPUBLISHERS

Table of contents

Editors and contributors xviPreface to the first edition xviiPreface to the second edition xviiiA student's experience xix

PART A: ENTREPRENEURSHIP AND ENTREPRENEURS1 The nature and development of entrepreneurship 31.1 Introduction 31.2 The economic impetus of entrepreneurship 41.3 The development of entrepreneurship theory 4

1.3.1 The economists 51.3.2 The behaviourists 61.3.3 The explosion of the field of entrepreneurship 71.3.4 The development of entreprenology 8

1.4 Defining entrepreneurship, the entrepreneur, small businesses andentrepreneurial ventures 81.4.1 Entrepreneur and entrepreneurship 91.4.2 Small business 91.4.3 Entrepreneurial ventures 10

1.5 A model for entrepreneurial development 101.5.1 Entrepreneurial orientation 111.5.2 The supportive environment 121.5.3 The cooperative environment 13

1.6 The domains of entrepreneurship, management and leadership 131.7 Success factors of entrepreneurs 14

1.7.1 Entrepreneurial success factors : 141.7.2 Managerial success factors 19

1.8 The entrepreneurial process 221.8.1 Identifying and evaluating the opportunity 221.8.2 Developing the business plan 221.8.3 Determining the resources required 221.8.4 Starting and managing the enterprise 23

1.9 Conclusion 23

2 The entrepreneur 292.1 Introduction 292.2 The entrepreneur as a catalyst for economic activity 292.3 Entrepreneurs at various levels of entrepreneurial sophistication 30

2.3.1 Basic survivalists 302.3.2 Pre-entrepreneurs 302.3.3 Subsistence entrepreneurs 302.3.4 Micro-entrepreneurs 302.3.5 Small-scale entrepreneurs 31

2.4 The background and characteristics of entrepreneurs 312.4.1 The background of entrepreneurs 31

IV

2.4.2 The characteristics of entrepreneurs 322.5 Role models and support systems 332.6 Push and pull factors 342.7 Challenges facing entrepreneurs and SMMEs in South Africa 35

2.7.1 Access to start-up and expansion finance 352.7.2 Access to markets 362.7.3 Access to appropriate technology 362.7.4 Access to human resources 37

2.8 Women and emerging entrepreneurs 372.8.1 Types of women entrepreneurs 382.8.2 Barriers facing women entrepreneurs 382.8.3 Comparison between male and female entrepreneurs in South

Africa ; 392.9 Some new 'labels' for entrepreneurship 40

2.9.1 Emerging entrepreneurs • 402.9.2 Survivalist and micro enterprises (the informal sector) 402.9.3 Opportunity and necessity entrepreneurship 412.9.4 Youth entrepreneurship 42

2.10 Entrepreneurship and certain industries or sectors 422.10.1 Technology entrepreneurs (technopreneurs) 422.10.2 Social entrepreneurs 432.10.3 Tourism entrepreneurs 43

2.11 Entrepreneurs vs inventors 442.12 Conclusion 46

PART B: THE ENTREPRENEURIAL PROCESS3 Creativity and business opportunity 553.1 Introduction •. 553.2 The theory of creativity 563.3 The creativity model 57

3.3.1 The person 573.3.2 The creativity myth , 583.3.3 Blocks to creativity 593.3.4 The process 603.3.5 Creative techniques 623.3.6 Idea vs opportunity 633.3.7 The product 653.3.8 Legal protection of the product 68

3.4 Conclusion 69

4 The window of opportunity 854.1 Introduction 854.2 The opportunity 854.3 The role of ideas 864.4 When is an idea an opportunity? 864.5 Sources and drivers of ideas and opportunities 874.6 Opportunity evaluation -.87

4.6.1 Industry and market issues 884.6.2 Economics 894.6.3 Harvest issues 894.6.4 Management team issues 89

4.6.5 Fatal flaw issues ^ 894.6.6 Personal criteria 894.6.7 Strategic differentiation 90

4.7 The pursuit of opportunities ,: 904.8 Why bigger businesses leave gaps in the market 90

4.8.1 Failure to see new opportunities 924.8.2 Underestimation of new opportunities 934.8.3 Technological inertia 934.8.4 Cultural inertia 934.8.5 Politics and internal fighting 934.8.6 Government intervention to support new (and smaller) entrants . . . . 94

4.9 The window of opportunity 944.10 Seeing, locating, measuring and opening the window of opportunity 95

4.10.1 Seeing the window 954.10.2 Locating the window .' 964.10.3 Measuring the window 964.10.4 Opening the window 964.10.5 Closing the window 96

4.11 The real-time window of opportunity - a holistic approach 974.12 Continuous opportunity evaluation and utilisation 974.13 Conclusion 97

5 The business plan 103

5.1 Introduction 1035.2 A definition of a business plan 1035.3 Reasons for drawing up business plans 103

5.3.1 To obtain funding 1045.3.2 To serve an internal purpose 1045.3.3 To be used as a tool for reducing the risk 104

5.4 Standard format and layout of a business plan 1045.4.1 Cover sheet 1045.4.2 Table of contents r 1045.4.3 Summary *. : 1045.4.4 Products and/or services plan 1055.4.5 Marketing plan 1055.4.6 Operations plan 1065.4.7 Management plan 1065.4.8 Financial plan 1065.4.9 Appendix 109

5.5 How to select the most appropriate business plan 1095.6 Types of business plans and their functions I l l

5.6.1 To plan a new business I l l5.6.2 To transform or expand an existing business I l l5.6.3 To create a strategic document for an existing or a new business . . . 1125.6.4 To obtain a loan 1125.6.5 To attract shareholders or partners 1145.6.6 To sell the business 1145.6.7 To provide direction for management and staff in a new or existing

business 1145.6.8 To prepare the business for a merger with another business 1145.6.9 To prepare the business for the takeover (acquisition) of another

business 115

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5.6.10 To help position the business in the market 1155.7 Problems when drawing up a business plan 1165.8 Using the Internet as a tool for drawing up a business plan 1175.9 Conclusion \ 118

6 Resource requirements and legal and related aspects 125

6.1 Introduction 1256.2 Resource requirements in establishing a new business venture 126

6.2.1 The nature of resources x. 1266.2.2 Major types of resources 126

6.3 Legal requirements for establishing a business 1286.3.1 Legal forms a business can take in South Africa 1286.3.2 Intellectual property rights 1356.3.3 Taxation • 1396.3.4 Registration with the Department of Labour 1416.3.5 Trading licences 1436.3.6 Regional Services levies 143

6.4 Legal aspects in the normal course of business 1436.4.1 Concluding contracts 1436.4.2 Licensing 1446.4.3 Labour legislation governing employment in South Africa 1446.4.4 Product liability 1486.4.5 Standards 1486.4.6 Fair trade, competition and consumer protection 1486.4.7 Environmental legislation 1486.4.8 Promotion of Access to Information Act 1496.4.9 Usury Act 149

6.5 Conclusion 149

7 Getting started . . ; 155

7.1 Introduction -.'' 1557.2 Countdown to start-up and gradual start-up •. 1557.3 Locating the business 156

7.3.1 Factors to consider in the physical establishment of a business 1597.3.2 Home-based businesses 1607.3.3 Residential area-based businesses 1607.3.4 Shopping centres 160

7.4 Risk management 1617.4.1 Types of risk 1617.4.2 Management of risk 162

7.5 Quality systems and management 1627.5.1 What are quality systems? 1637.5.2 Why have a quality system? 1637.5.3 Putting a quality system in place 163

7.6 Ethics 1637.7 Record keeping and internal control 1647.8 Conclusion 165

8 Financing an entrepreneurial venture 1718.1 Introduction 1718.2 Determining the financial requirements of the business venture 171

VII

8.3 Sources of short-term finance 1738.3.1 Trade credit 1738.3.2 Bank credit 1738.3.3 Short-term funds from other sources 174

8.4 Sources of medium-term finance 1758.4.1 Instalment sale transaction (hire purchase) 1758.4.2 Leasing finance 1758.4.3 Medium-term loans 176

8.5 Sources of long-term finance 1768.5.1 Equity capital 1768.5.2 Debentures 1808.5.3 Retained earnings: internal financing 1808.5.4 Long-term loans/mortgage bonds 180

8.6 Institutions that support small and new business ventures 1818.7 Informal sources of finance 1818.8 The venture capital and private equity market 1818.9 Attracting investors and the private placement of shares 182

8.9.1 Stage 1: Making contact 1838.9.2 Stage 2: Deal screening 1838.9.3 Stage 3: Deal evaluation 1848.9.4 Stage 4: Deal structuring 1848.9.5 Stage 5: Post-investment activity 184

8.10 The cost of raising finance 1848.11 Initial public offering 1858.12 Conclusion 186

9 Networking and support 191

9.1 Introduction 1919.2 Networking and networks for entrepreneurs 1929.3 Business support required by emerging entrepreneurs 193

9.3.1 Business counselling 1939.3.2 Business mentoring 1949.3.3 Business incubation : 194

9.4 The role of national government in developing an enabling small businessenvironment 1969.4.1 The role of government from 1995 to 2004 1969.4.2 The role of government from 2005 to 2014 198

9.5 The role of the Department of Trade and Industry 2019.5.1 The role and functions of seda 2019.5.2 The role and functions of Khula Enterprise Finance Limited 2029.5.3 The Enterprise Information Centre (EIC) programme (previously the

LBSC) 2039.5.4 South African Micro-Finance Apex Fund (Samaf) 2039.5.5 The role of the Industrial Development Corporation (IDC) 2039.5.6 The role of the Umsobomvu Youth Fund (UYF) 205

9.6 The role of Business Partners 2059.7 The role of commercial banks 206

9.7.1 Standard Bank 2069.7.2 First National Bank 2079.7.3 Nedbank : 2089.7.4 ABSA 209

9.8 Conclusion 209

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PART C: ALTERNATIVE ROUTES TO ENTREPRENEURSHIP10 Entering the family business 217

10.1 Introduction 1 21710.2 Denning family businesses 21810.3 Systems in family businesses 22110.4 Problems in family businesses 22110.5 Succession 22310.6 Advisory board 22610.7 Family council 22610.8 Conclusion 228

11 Buying a franchise 233

11.1 Introduction 23311.2 Definition and characteristics of the franchise concept 23311.3 Important concepts of franchising 23611.4 The structure of the industry in South Africa 23711.5 Types of franchising 23711.6 Advantages and limitations of franchising 238

11.6.1 Introduction .23811.6.2 Advantages from the franchisee's viewpoint 23811.6.3 Disadvantages from the franchisee's viewpoint 23911.6.4 Advantages from the franchisor's viewpoint 23911.6.5 Disadvantages from the franchisor's viewpoint 239

11.7 Evaluating franchise opportunities 23911.8 Complying with ethical requirements 240

11.8.1 Consumer Code for Franchising 24111.8.2 FASA Code of Ethics 24111.8.3 Disclosure document 24111.8.4 Advertising practice 24111.8.5 Competition Board 242

11.9 Selecting franchise opportunities 24211.9.1 Questions to ask the franchisor 24211.9.2 Questions to ask existing franchisees 243

11.10 Understanding the relationships set out in the franchise contract 24311.10.1 The duties of the franchisor 24311.10.2 The duties of the franchisee 24411.10.3 The protection of the franchisor's intellectual property 24411.10.4 Restraints of trade on the franchisee and the franchisor 24511.10.5 Payment obligations 24511.10.6 Termination of the agreement 246

11.11 The potential of franchises within the emerging entrepreneurial sector . . . 24611.12 Conclusion 247

12 The business buyout 253

12.1 Introduction 25312.2 Evaluating the option of buying an existing business 253

12.2.1 The advantages of buying a business 25412.2.2 The disadvantages of buying a business 254

12.3 Finding a business to buy 25712.3.1 Businesses on the market 25712.3.2 Businesses not on the market 258

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12.4 Evaluating available businesses \ 25812.4.1 Why is the business for sale? 25812.4.2 Is the business profitable? ; 25812.4.3 What skills and competencies do I need for managing the

business? 25912.4.4 What is the history of the business in terms of its previous owners,

its reputation and public image? 25912.4.5 What is the physical condition of the business, its faculties and all

other assets? 25912.4.6 What are the degree and scope of competition? 25912.4.7 What is the existing and the potential market size? 25912.4.8 What important legal aspects must be considered? 25912.4.9 Further questions 260

12.5 Methods for determining the value of a business 26012.5.1 The asset-based method : 26112.5.2 The market-based method 26212.5.3 The earnings-based approach 26312.5.4 Non-quantitative factors in valuing a business 264

12.6 The negotiation process 26512.6.1 Price vs value 26512.6.2 Sources of power in negotiations 266

12.7 Traps to avoid when buying an existing business 26612.8 Conclusion 267

PART D: POST-START-UP CHALLENGES13 Managing growth 275

13.1 Introduction 27513.2 Why South Africa needs businesses that grow 27513.3 The desire to grow ..- 27613.4 Growth as an objective for the business venture 277

13.4.1 Growth and strategy 27713.4.2 Growth and resources •. 27713.4.3 Growth and risk 277

13.5 Controlling and planning for growth 27713.5.1 Desire 27713.5.2 Potential 27813.5.3 Direction 27813.5.4 Management of growth 27813.5.5 Achievement 278

13.6 What is business growth? 27813.7 Characteristics of growing firms 278

13.7.1 Market domination 27913.7.2 Differentiation 27913.7.3 Product leadership 27913.7.4 Flexibility 27913.7.5 Innovation 27913.7.6 Orientation towards the future 27913.7.7 Export activity 27913.7.8 Related growth 279

13.8 The process of growth 27913.8.1 Financial growth 280

13.8.2 Strategic growth 28113.8.3 Structural growth 28113.8.4 Organisational growth 281

13.9 Stages of growth . .\ 28113.9.1 Stage 1: Pre-start-up (incubation) 28213.9.2 Stage 2: Start-up (infancy) 28313.9.3 Stage 3: Breakthrough or growth stage 28313.9.4 Stage 4: Maturity 28413.9.5 Stage 5: Decline/rejuvenation 286

13.10 Key factors during the growth stages 28613.11 Conclusion 286

14 Growth strategies and options 291

14.1 Introduction 29114.2 What is a strategy? ' 29114.3 Growth strategies and methods 292

14.3.1 Internal growth 29214.3.2 External growth 292

14.4 External growth methods 29314.5 Mergers and acquisitions 294

14.5.1 Challenges to the success of mergers and acquisitions 29514.5.2 Requirements of the Competition Act 295

14.6 Joint ventures 29514.7 Franchising 296

14.7.1 Advantages and disadvantages of a franchise chain 29614.7.2 Criteria for identifying and developing a business suitable for

franchising 29714.7.3 Steps in developing a franchise system 297

14.8 Alliances 30214.9 Exclusive agreements 30214.10 Licensing 30214.11 Dealerships 30214.12 Broad-based black economic empowerment (BBBEE) 30214.13 Financing growth 30314.14 Conclusion 303

15 Business failure and turnaround measures 309

15.1 Introduction 30915.2 Failure in perspective 31015.3 Typical goals for the entrepreneurial venture 310

15.3.1 Personal goals of the entrepreneur 31015.3.2 Financial goals of the venture 31015.3.3 Strategic goals of the venture 311

15.4 Levels of failure in ventures 31115.4.1 The venture that is performing well 31115.4.2 The underperforming venture 31115.4.3 Trouble or difficulty in the venture 312 ,15.4.4 The venture in crisis 31315.4.5 The venture that failed 313

15.5 Key issues of business success or failure 31315.5.1 Attitude and motivation 31315.5.2 Positioning 314

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15.5.3 Economic model .<t 31515.5.4' Sales and market share 31515.5.5 Cash flow , 317

15.6 Signs of trouble \ 31815.6.1 Decline in gross margin 31815.6.2 Decrease in net margin 31815.6.3 Irregular cash flows 31815.6.4 Faltering value proposition and sustainable competitive

advantage 31815.6.5 Sales decrease and drops in market share 31915.6.6 Cash flow issues 31915.6.7 Confidence levels drop 32015.6.8 Core employees leave 32015.6.9 Non-measurable signs 320

15.7 Causes of trouble '. 32115.7.1 Strategic issues 32115.7.2 Management issues 32215.7.3 Poor planning and financial systems, practices and controls 32215.7.4 Environmental issues 323

15.8 When growth leads to trouble (overtrading) 32315.9 The size of the venture and signs or causes of trouble 32515.10 Franchising and failure 32515.11 Success signs that oppose failure 32615.12 Conclusions about failure 32615.13 Turnaround 327

15.13.1 Core principles or focuses of the turnaround 32915.13.2 Diagnoses 32915.13.3 Intervention decision 33015.13.4 Stabilising the venture 33115.13.5 Strategic analysis 33315.13.6 Identification of the core issues 33415.13.7 Restructure decisions 33415.13.8 Action , 334

15.14 Principles of a turnaround process 33415.14.1 Management focus 33415.14.2 Cost and cash 33415.14.3 Focusing on the core business 33415.14.4 Strategy 33415.14.5 Time factor 334

15.15 Options other than a turnaround 33515.15.1 Harvesting alternatives 33515.15.2 Divestment alternatives 336

15.16 Conclusion 336

16 Harvesting and exiting the venture 341

16.1 Introduction 34116.2 Harvesting in perspective 34116.3 Reasons for harvesting 342

16.3.1 Personal goals of the entrepreneur 34216.3.2 Retirement 34216.3.3 Succession 34216.3.4 Wanting to make a change 342

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16.3.5 Other forces .\ 34416.4 Severity of the situation 344

16.4.1 Strategic pressure 34416.4.2 Urgency \ 34516.4.3 Other 345

16.5 A broad strategy 34516.5.1 Growth strategy 34516.5.2 Retrenchment 34516.5.3 Stability 34616.5.4 Combination strategy 346

16.6 Environmental issues 34616.7 Performance level 346

16.7.1 Good performance 34616.7.2 Underperformance 34616.7.3 Trouble '. 34616.7.4 Crisis ' 34716.7.5 Failure 347

16.8 The venture life cycle stage 34716.8.1 Incubation stage (pre-start-up) 34716.8.2 Start-up stage 34716.8.3 Growth stage 34716.8.4 Maturity stage -. 34716.8.5 Decline stage 347

16.9 Harvest options 34716.9.1 Outright sale of the business venture 34716.9.2 Management buyout 34916.9.3 Employee share option plan 35016.9.4 Forming an alliance with another venture 35016.9.5 Merging with another venture (offensive merger) 35016.9.6 Proceed with a professional manager 35116.9.7 Capital cow 35116.9.8 Public offering 35116.9.9 Divestment alternatives 351

16.10 Principles of a harvest strategy 35216.10.1 Timing 35216.10.2 Patience 35216.10.3 Vision to plan ahead 35216.10.4 Realistic evaluation 35216.10.5 Contractual agreement 35316.10.6 Mentoring agreement 35316.10.7 Structured deal 353

16.11 Questions about harvesting 35416.12 Conclusion 355

17 International business opportunities 359

17.1 Introduction 35917.2 The importance of international opportunities for South

African business 36017.3 Growth in global business activities 36017.4 Entrepreneurial entry into international business 361

17.4.1 Exporting 36417.4.2 Licensing 365

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17.4.3 Turnkey projects \ 36517.4.4 Management contracts 36517.4.5 Joint ventures \ 36517.4.6 Overseas investment and manufacturing 366

17.5 South Africa's road to globalisation 36617.5.1 A brief overview of South Africa's globalisation 36617.5.2 Factors affecting South Africa's foreign trade patterns 368

17.6 Opportunities and problems facing South African exporters 36917.7 Principles for going international 371

17.7.1 Clarify the international business mission 37117.7.2 Challenge assumptions about 'closed' markets 37217.7.3 Host country contacts are critical for successful market assess-

ment 37217.7.4 Fit market entry strategies with the host country's needs and the

firm's capabilities 37317.7.5 Successful partnerships require a clear understanding of the

partners' goals 37317.7.6 Feasibility analyses must test 'competitiveness' and 'fairness' . . . . 37317.7.7 Let local executives manage once the strategy is set 374

17.8 Strategic partnerships and alliances 37417.8.1 The importance of strategic alliances in South Africa 37417.8.2 Strategic alliances profile of South African companies 37517.8.3 Factors to be considered when entering strategic alliances 376

17.9 Conclusion 376

18 E-commerce opportunities 383

18.1 Introduction 38318.2 The history of the Internet 38318.3 Benefits of e-commerce for a business 38618.4 The Internet market in South Africa 38618.5 Products that sell vs products that do not sell 38918.6 E-consumer behaviour 39018.7 E-commerce business models 392

18.7.1 Business-to-consumer (B2C) 39218.7.2 Business-to-business (B2B) 39518.7.3 Consumer-to-consumer (C2C) 395

18.8 The design of a website 39818.9 Promoting a website 40018.10 Conclusion 400

PART E: CORPORATE VENTURING19 Corporate entrepreneurship 407

19.1 Introduction 40719.2 What is corporate entrepreneurship? 408

19.2.1 Definition of CE 40819.2.2 Forms of CE 40919.2.3 The importance and benefits of CE to the enterprise 410

19.3 Pressures which compel the enterprise to act in entrepreneurial ways . . . . 41319.3.1 Influence of the external environment 41319.3.2 The influence of firm size 41419.3.3 The influence of firm age and the venture life cycle 415

XIV

19.4 Implementation of CE 41519.4.1 An enabling environment for corporate entrepreneurship 41619.4.2 Capacity development 41919.4.3 Formal corporate entrepreneurship programmes 423

19.5 The role of CE in the enterprise 42619.6 Corporate entrepreneurship in South Africa 42719.7 Measurement of CE 42819.8 Conclusion 428

PARTF: CASE STUDIES

Case study 1 Chicken Licken 439Case study 2 Black Tie 445Case study 3 Filling station in the eastern suburbs 448Case study 4 Business plan for. the Pool Doctor 451Case study 5 Megamed (1) - Failure 459Case study 6 Megamed (2) - Turnaround 461Case study 7 Megamed (3) - The real outcome 462Case study 8 Habakuk, the Cane King 465Case study 9 How open is this window? 470

Index 475

5Van Schaik] v\/

Publishers A V