CHAPTER 1 : ENTREPRENEURSHIP

ENTREPRENEURSHIP STUDIES

1. Entrepreneurship - Origin

Various scholars have written extensively on the origin of entrepreneurship. What is interesting is that

most of the scholars who wrote about the origin of entrepreneurship are either economists or historians.

Basically, the concept entrepreneur is derived from the French concept “entreprendre” which literarily

is equivalent to the English concept “to undertake”. From the business point of view, to undertake simply

means to start a business (QuickMBA, 2010). From the historical point of view, Schumpeter (1951)

opined that the French economist Richard Cantillon, was the first to introduce the concept "entrepreneur"

in his work in 1755. He viewed the entrepreneur as a risk taker (Burnett, 2000).

However, some scholars contend that it was an economist, Jean-Baptiste Say, who analysed the concept

in an advanced way in his work in 1821 where he identified entrepreneur as new economic phenomenon

(Wikipedia, 2010). Given the foregoing, we can infer that the concept “entrepreneur” is almost as old

as the formal discipline of economics itself (Schumpeter, 1951) especially given the fact that it was

economists such as Adam Smith, David Ricardo, and John Stuart Mill who have written extensively on

it, albeit referring to it as "business management”. However, unlike Smith and Ricardo, Mill stressed

the significance of entrepreneurship for economic growth. Another renowned economist, Alfred

Marshall buttressed Mill’s view by formally recognizing entrepreneurship as an important factor of

production in 1890; he viewed entrepreneurship as organization creation and believed that

entrepreneurship is the driving element behind organization (Schumpeter, 1951; Burnett, 2000).

Schumpeter (1951) contends with this view and opined that though many economics scholars agree that

entrepreneurship is necessary for economic growth, they do not agree on the actual role that

entrepreneurs play in generating economic growth. These debates, notwithstanding, entrepreneurship

theory has kept on evolving over the years and throughout its evolution different scholars have put

forward different characteristics that they believe are common among most entrepreneurs.

Entrepreneurship theoretical foundations extend from economics to other disciplines such as history,

politics, education, ecology, culture, experience, and networking and so on. To this effect, Schumpeter

(1951) concludes that by combining the various disparate theories, a generalized set of entrepreneurship

qualities can be developed. He then listed the characteristics of entrepreneurs as: risk-bearers,

coordinators and organizers, gap-fillers, leaders, and innovators or creative imitators. He submits that

though not exhaustive, this can help explain why some people become entrepreneurs while others do

not (Burnett, 2000).

Why is entrepreneurship important according to the various scholars?

It is generally agree that entrepreneurship is important because of it create utility, increase society’s

welfare, promote economic growh and development.

2. An Overview of the Definitions of Entrepreneurship and Entrepreneur

2.1.Entrepreneurship

There are many definitions of the concept ‘entrepreneurship’. For instance, Putari (2006)

observes that scholars had not been in agreement in their definitions of entrepreneurship and

chronicled the definitions of entrepreneurship by various scholars (Brockhaus & Horwitz,

1986, Sexton & Smilor, Wortman, 1987; Gartner, 1988). Cantillon (circa 1730) views

entrepreneurship as: “self employment of any sort”. In 1934, Joseph Schumpeter equated

entrepreneurship with the concept of innovation and applied it to a business context, while

emphasizing the combination of resources. Penrose (1963) views entrepreneurship as the

activity that involves identifying opportunities within the economic system. While Leibenstein

(1968, 1979) perceives entrepreneurship as involving "activities necessary to create or carry

on an enterprise where not all markets are well established or clearly defined and/or in which

relevant parts of the production function are not completely known”. Gartner (1988) conceives

entrepreneurship as the creation of new organizations.

Okpara (2000) defines entrepreneurship as the willingness and ability of an individual to seek

out investment opportunities in an environment and be able to establish and run an enterprise

successfully based on the identifiable opportunities. In addition, Nwachukwu (1990) regards

entrepreneurship as a process of seeing and evaluating business opportunities, gathering the

necessary resources to take advantage of them and initiate appropriate action to ensure success.

After critically studying the above definitions, we can summarize by concluding that

entrepreneurship is a function which involves the exploitation of opportunities which exist

within a market.

Box 1.1 Definitions of entrepreneurship

Self employment of any sort; the activity that involves identifying opportunities within

the economic system; the creation of new organizations; the willingness and ability of

an individual to seek out investment opportunities in an environment and be able to

establish and run an enterprise successfully based on the identifiable opportunities.

Thus, from the definitions above we can see that while defining the concept

‘entrepreneurship’, laid emphasis on a wide spectrum of activities such as:

Self-employment of any sort.

Creation of organizations.

Innovation applied to a business context.

The combination of resources.

Identification and exploitation of opportunities within the economic system or

market.

The bringing together of factors of production under uncertainty.

We can therefore conclude that whatever activity that involves any or all of the above

activities can be regarded as entrepreneurship. Entrepreneurship refers to all the processes

and activities involved in establishing, nurturing, and sustaining a business enterprise.

2.2.Entrepreneur

Scholars have also given several definitions of the concept ‘entrepreneur’. For instance in

1816, Putari (2006) quoted Say who asserts that the entrepreneur is the agent "who unites all

means of production and who finds in the value of the products...the reestablishment of the

entire capital he employs, and the value of the wages, the interest, and rent which he pays, as

well as profits belonging to himself." He views entrepreneurs as change agents (Say, 1816).

Knight (1921) views entrepreneurs as individuals who attempt to predict and act upon change

within markets.

Schumpeter (1934) conceives the entrepreneur as the innovator who implements change

within markets through the carrying out of new combinations such as introduction of new

techniques of production, reorganization of an industry and innovation. He further argues that

the entrepreneur is an innovator, one that introduces new technologies into the workplace or

market, increasing efficiency, productivity or generating new products or services (Deakins

and Freel, 2009).

Cantillon (circa 1730) conceptualized the entrepreneur as: the "agent who buys means of

production at certain prices in order to combine them" into a new product (Schumpeter,

1951). In Quick MBA (2010), the entrepreneur is defined as one who combines various input

factors in an innovative manner to generate value to the customer with the hope that this value

will exceed the cost of the input factors, thus generating superior returns that result in the

creation of wealth.

The entrepreneur is the person who perceives the market opportunity and then has the

motivation, drive and ability to mobilize resources to meet it (Di-Masi, 2010).

An entrepreneur is a person who has possession of a new enterprise, venture or idea and

assumes significant accountability for the inherent risks and the outcome (Wikipedia, 2010).

The entrepreneur is anyone who has the capacity and willingness to undertake conception,

organization, and management of a productive venture with all attendant risks, while seeking

profit as a reward (Business Dictionary, 2010). Interestingly, small business experts also have

their definitions of the concept ‘entrepreneur’ (Thinking like, 2010) for instance: Reiss

(2010), views the entrepreneur as the person that recognizes and pursues opportunities

without regard to the resources he/she is currently controlling, with confidence that he/she

can succeed, with the flexibility to change course as necessary, and with the will to rebound

from setbacks.

Pinson (2010) visualized the entrepreneur as a person who starts a business to follow a vision,

to make money, to be the master of his/her own soul (both financially and spiritually) and is

an "educated" risk taker. Murphy (2010) conceives an entrepreneur as a person who is dynamic

and continues to seek opportunities and/or different methods of operation and will do whatever

it takes to be successful in business.

Given the above wide range of factors and behaviorur which are used to define the concept

‘entrepreneur’, we can see the difficulty and impossibility of finding a unified definition of

the ‘entrepreneur’. Hence, to Di-Masi (2010), the concept ‘entrepreneur’ can be best used in

the past tense to describe a successful business person. Thus, entrepreneurs are business

persons who identify the existence of business opportunities and based on this they create

businesses thereby creating new products, new production methods, new markets and new

forms of organization to satisfy human needs and wants mostly at a profit.

It should also be noted that though most entrepreneurial businesses start small, entrepreneurs

are not only small business owners; they can also be big business owners. This is because

successful entrepreneurs, unlike small business owners, are innovative and, when operating in

an enabling business environment, can rapidly create a large amount of wealth while bearing

very high risk. In fact, innovation is considered to be the strategic tool of entrepreneurs; this

is one of the tools that enable them gain strategic advantage over competitors (QuickMBA,

2010). Entrepreneurs are individuals or groups of individuals who carryout entrepreneurship

activities to build business empires.

2.3.Intrapreneurs

There are given situations where an entrepreneur is not able to establish his or her own

business and as such has to work in an organization. In this case they are referred to as

‘Intrepreneurs’ i.e. entrepreneurs within an organization. These individuals are entrepreneurs

in their own right because they pursue the exploitation of business opportunities as they

emerge and are also visionaries within a given organization. Thus, once identified, these

individuals should be encouraged to manifest their entrepreneurial abilities to the benefit of

the organization otherwise they will be frustrated and may leave the organization or start their

own businesses. Entrepreneurship is the processes and activities by which corporate

organization behave entrepreneurially.

How is entrepreneur differ from intrapreneur

An entrepreneur is a person who create a venture or startup a business and nature it, takes

risks of bringing together the factors of production to meet the society’s need at a profit,

while an intrapreneur work within an existing organization to pursue the exploitation of

business opportunities.

2.4. Technopreneur

We could also have technopreneur, who is an individual whose business is in the realm of

high technology, who at the same time has the spirit of an entrepreneur. A technopreneur’s

business involves high technology or to put it more clearly a technopreneur is a technological

innovator and a business man all combined in one individual (Ogundele, 2007).

3. Types of Entrepreneur Based on the interaction with the business environment, various types of entrepreneurs can

emerge. To this effect, Rockstar (2008) identifies the four types of entrepreneurs as Innovative,

Imitating, Fabian and Drone.

3.1.Innovative

This type of entrepreneur is preoccupied with introducing something new into the market,

organization or nation. They are interested in innovations and invest substantially in research

and development.

3.2.Imitating

These are also referred to as ‘copy cats’. They observe an existing system and replicate it in a

better manner. They could improve on an existing product, production process, technology

and through their vision create something similar but better. This is the case of the student

becoming better than the master!

3.3.Fabian

These are entrepreneurs that are very careful and cautious in adopting any changes. Apart from

this, they are lazy and shy away from innovations.

3.4.Drone

These are entrepreneurs that are resistant to change. They are considered as ‘old school’. They

prefer to stick to their traditional or orthodox methods of production and systems.

Entrepreneurs occupy three roles, namely as agent of (1) economic change (2) social change

and (3) technological change. These are referred to as behavioral roles.

The types and roles of entrepreneur notwithstanding, all entrepreneurs possess certain

characteristics and are motivated to become entrepreneur due to certain factors or

circumstances which we shall discuss in this unit.

4. Roles of Entrepreneurs In order to perform their functions effectively and operate a successful business, entrepreneurs

have to perform certain roles. These roles are the same as the basic managerial roles which are

identified by Henry Mintzberg in 1973. They are as follows:

Figure Head Role: The entrepreneur has to act as figure head in the organization, as such;

he/she has to perform ceremonial duties. This is done by representing the organization in

formal and informal functions.

Leader Role: The entrepreneur has to act as a leader because the entrepreneur is the one who

brings other people together in order to create the business. Thus, he/she has to lead the people

in the organization by hiring, firing, training and motivating them.

Liaison Role: The entrepreneur has to act as the link between the business and the parties

outside the business.

Monitor Role: The entrepreneur acts as a monitor; he monitors both the internal and the

external environment of the business constantly.

Information Disseminator Role: The entrepreneur has to act as the organizational

representative and transmit information both within and outside the business.

Spokesman Role: The manager has to act as the spokesman of the business; he/she is the

person for the business both inside and outside.

Entrepreneurial Role: This is the basic role of the entrepreneur; he/she launches new ideas

for the business and bears the risk.

Disturbance Handler: The entrepreneur also acts as arbitrator in situations of conflict so as

to maintain organizational harmony.

Resource Allocator: The entrepreneur decides on how the scarce resources of the business

are allocated among its competing ends so as to achieve organizational goals and objectives.

Negotiator Role: The entrepreneur has to negotiate on behalf of the business both with the

other categories of labour and other outside sources.

The specific entrepreneurial roles noted earlier on have a number of activities in each role.

They are specified below:

Social Roles of Entrepreneur

Transformation of traditional indigenous industry into a modern enterprise.

Stimulation of indigenous entrepreneurship.

Job or employment creation in the community.

Provision of social welfare service of redistributing wealth and income.

Economic Roles of Entrepreneur

Bearing the ultimate risk of uncertainty.

Mobilizing savings necessary for the enterprise.

Providing channel for the disposal of economic activities.

Utilizing local raw materials and human resources.

Technological Roles of Entrepreneur

Stimulation of indigenous technology in the production process.

Adapting traditional technology to modern system.

Adapting imported technology to local environment.

Developing technological competence in self and the workforce through innovation

(Ogundele, 2007).

NATIONAL UNIVERSITIES COMMISSION

CHAPTER 2: TECHNO ENTREPRENEURSHIP

TECHNOLOGY ENTREPRENEURSHIP AND ENTREPRENEURIAL STRATEGIES

1. Introduction

Field of information technology is characterized by a very high dynamic, business start-ups

emergence, and the opportunity for entrepreneurs to be competitive through a strategic

approach. The paper started as a need to understand the reality of startups in information

technology operating in the western region of Romania.

The research is based on two main directions as assumptions. The first line of research is based

upon analysis of the way that interviewed entrepreneurs relate to business environment,

specifically with the components of the technology entrepreneurial ecosystem. We were

interested to find entrepreneurs opinions about opportunities provided by entrepreneurial

ecosystem and if they found all the components and elements necessary for the development

and growth of their information technology startups. The second direction of research was

focused on strategic component of the business. We were interested also to analyze the

entrepreneurial patterns related to the way that business has evolved and transformed over

time. We search to find and to identify patterns that entrepreneurs have chosen, how they

put their ideas and strategies in practice and what was the role of strategy in different stages

of the business life cycle. For many entrepreneurs the only compass in their entrepreneurial

orientation is still intuition and not strategy. When they engage in new ventures in the

regional ecosystem, they found few reference points by which to start and grow a startup, a

lack of support services to understand the steps and the skills they need in entrepreneurship

and business management.

2. Technological Entrepreneurship According to Schumpeter, the most important function of entrepreneurs is to reform or to

reinvent the pattern of value generation by exploiting inventions. The new economic context

characterized by globalization, knowledge, increasing role of innovation in regional innovation

systems and the importance of technological entrepreneurship as a factor in the wealth

creation generate the emergence of new types of entrepreneurial ecosystems (Camagni,

1995; Feldman, 1994; Porter, 1990). The reason why some regions are more advanced than

others lies in successful use of new technologies and technological entrepreneurship

fostering.

Related to Therin there are several words and definitions used in scientific articles for

technological entrepreneurship as technology entrepreneurship, technical entrepreneurship,

techno-entrepreneurship and technology entrepreneurial ecosystems (Therin, 2007).

The most cited authors Dorf and Byers, define technological entrepreneurship as a style of

business leadership that involves identification and human resource high-potential

capitalization, technology- intensive commercial opportunities, managing accelerated growth

and significant risk taking (Dorf and Byers, 2005). In their definition Shane and Venkataraman

see technological entrepreneurship as the processes of assembling resources, technical

systems and strategies by an entrepreneurial venture to pursue opportunities (Shane and

Venkataraman, 2004).

We can analyze technology entrepreneurial ecosystems or technological entrepreneurship at

many levels and from interdisciplinary view perspective. We have identified more than nine

key elements of technology entrepreneurial ecosystem: new technology venture,

communities, universities, corporations, capital and investments, markets, business sectors,

government, professionals, advisors and other components like incubators, accelerators and

hubs.

The most important component of technology entrepreneurial ecosystem is the entrepreneur

itself, and he is the key catalyst in the process of business sectors emergence and start-ups

growth. Technology entrepreneurs have more technical skills and competences than non-

technical ones, for example business skills. One important step in the new venture success is

the transformation of the entrepreneurial mind into managerial one. Technology

entrepreneurs have to understand how their businesses will evolve and the importance of

managerial skills, and most important strategic oriented mindset. The most important three

motivational factors of the technological entrepreneurs are independence, opportunities

exploitation and value generation (Oakley, 2003). In information technology industry, the

networks between entrepreneurs are enhancers of the first startup life cycle stages.

Universities as components of the entrepreneurial ecosystem are linked with other

components of the same ecosystems. The most important role of universities is the

educational one as a supplier of qualified workforce. Universities can act as a node in the

network between corporations, incubators, research centers, clusters and technology parks.

Universities have also an important role of spin-off generators.

At the regional level, collaboration between universities, research centers, start-ups,

corporations, small and medium enterprises and other regional entities is very important to

foster innovation, know- how transfer and human resource development.

At the regional level, clusters as a form of collaboration between companies can increase

competitiveness of start-ups, and have positive effects on innovation and long term

development of technology start-ups. The main role of technological parks, incubators,

accelerators and hubs is to ensure and enhance collaborative and interconnected

environment which increase interaction between communities, resources, ideas and

technologies.

Entrepreneurial approaches in information technology industry have become important

sources of value generation and growth in Europe due to the dynamics and the value that

information technology brings in our daily life and in business. The developed countries have

realized the major role that information technology have in society and economy and

developed strategies to encourage, ensure and accelerate the creation of start-ups in

information technology field. Currently techno- entrepreneurship promises both high profits

and high risks for founders and investors.

For entrepreneurs one of the biggest challenges is to validate and demonstrate the value of

opportunity and business idea before its realization. One of the main goals of the

entrepreneurial approach is to create and capturing economic value either by developing new

technologies or by exploiting them. To achieve these goals, entrepreneurs must develop

strategies and business models to recreate new dimensions of socio-economic life beginning

from ideas and strategic vision.

The ability to recognize business opportunities is a major skill an entrepreneur should acquire

and it will dramatically shape the future of his venture. To our view, despite a thorough

understanding of the opportunity recognition process, its determinants of success and failure,

quite an important lack of understanding remains as to appropriate anticipative and proactive

approaches. The literature in the fields of management and entrepreneurship assumes that

entrepreneurs are able to anticipate and to be proactive and to build a credible vision of their

business. To act proactively, entrepreneurs need to understand the business environment and

the influences of entrepreneurial ecosystem components to new venture strategies. The

ability of an entrepreneur to be proactive enables them to understand and exploit the first

signs of changes and to develop strategies to minimize risks and maximize competitive

advantage in the business sector.

To counteract and minimize specific risks and dynamics of business environment,

entrepreneurs have to formulate proactive strategies and deployment plans to make their

startups competitive, or to increase the competitiveness of existing ones. On the other hand,

the relation between entrepreneurs with entrepreneurial ecosystem is particularly important

in the light of opportunities identification, information and knowledge acquired and

conceptualization of future business value. Schumpeter in his works put the emphasis on

entrepreneurs as those who, in opposition to traditional capitalists, engage in new activities

or ventures that did not exist before and in innovative or creative ones (Schumpeter, 1976).

In his view, entrepreneurs have to explore new opportunities in order to build a new world

order while deconstructing or destructing the old one. Hence, entrepreneurship can be

defined as an activity and a process involving the discovery, creation and exploitation of

opportunities in order to create value thanks to the introduction of new goods, services,

processes and organizations (Therin, 2007).

The way individuals recognize opportunities for business creation is one of the first critical

abilities in the early stages of the business development process. Entrepreneurs are those

people who sense, create and respond to changes and needs regarding a possible opportunity

for profit. In literature we identified different approaches and are still adopted to understand

this phenomenon. Davidson argue that in practice we can identify in entrepreneurial

ecosystem three main streams of thinking about the nature of an opportunity: the objective

approach in which opportunities do exist in the environment so that entrepreneurs can

identify them and build a strategy to capitalize them; the subjective objective approach

focusing on the ability and individual characteristics of entrepreneurs; and the subjective

creative approach where the opportunity is built in the mind of the entrepreneurs using

creative thinking (Davidsson, 2004).

If we consider that technology is at the core and origin of the new venture we will refer to

technology based-entrepreneurship. We have identified many authors that paid attention to

the concept of innovative entrepreneurship related to new technologies development. Gaglio,

De Koning, Singh and Therin argue that entrepreneurship and opportunities are a social

construct and correlated with entrepreneur values, behavior cognitive capabilities,

knowledge, competence, skills and connections with entrepreneurial ecosystem and

individual motivations (Gaglio, 1997; De Koning, 1999; Singh, 1999).

Technology based entrepreneurship brings in more novelty, innovations and R&D products on

the markets. If technology is involved, entrepreneurship consists in bringing important

changes into the traditional markets and new ones compared to the more traditional

entrepreneurship.

For an entrepreneur in the field of technology, opportunity recognition starts with the sensing

of a need or a change and ends with innovative solutions in which future potential economic

value is validated and recognized. The new venture will generate value if the founder will

understand the entrepreneurial ecosystem. Information’s and knowledge should have been

gathered in order to answer key issues regarding business model, new venture and markets.

Techno-entrepreneurs will have to undergo a series of other activities, non-technical ones

related to management, including creative thinking, incubating, demonstrating, validating,

promoting and sustaining (Jolly, 1997). Entrepreneurs will extend their resources and

knowledge about technology, markets, managerial skills and competences through their

professional, and all these are limited by their absorptive capacity and ability to understand

the components of entrepreneurial ecosystem and relations between them. Techno-

entrepreneurs will draft and redraft their vision and strategy linking the opportunities with

business contexts and startup capabilities. Proactive entrepreneurs will understand the

business environment and will innovate the business model to remain or to become

competitive.

Technology parks will have also an important role in entrepreneurial ecosystems and in

fostering startups competitiveness. The main role of technological parks is to interconnect

components like communities, universities, governmental agencies and institutions, resources

and to foster innovation through collaboration. Technology parks incubate startups, provide

consulting and support services, infrastructure and serve like interface between academic

institutions and organizations. The most important objectives of technological parks are: to

generate the emergence of technological companies with high level of innovation based on

favorable conditions, to be an interface between science and business environment, to

develop regional economy, and to provide technical and business consulting services.

Corporations have also an important role in technological ecosystems. In addition to the

innovative character of corporate entrepreneurship initiatives in large, medium and small

companies can generate spin-offs when employees decide to use their skills and know-how

into a new start-up venture.

Alexandru ROJA, Marian NĂSTASE, PROCEEDINGS OF THE 8th INTERNATIONAL MANAGEMENT CONFERENCE, November 6th-7th, 2014, BUCHAREST, ROMANIA

CHAPTER 3: INNOVATION

INNOVATION

1. What Is Innovation?

There are three types of innovation (process, product/service, and strategy) each of which can vary from incremental to radical and from sustaining to discontinuous. There are also important relations between these types of innovation. For example, a strategy innovation may necessitate process, and/or product innovations.

Levels of Innovation

As the term broadened, innovations were seen as ranging from incremental to radical. This distinction primarily focused on the extent of newness. An innovation can be new within a particular context or new in terms of the overall marketplace of ideas. Similarly, it can be a new twist on an old theme or a radically novel idea. This distinction did not, however, clearly differentiate between newness and impact. In terms of impact, the effect of an innovation can range from: (1) contributing to fairly small improvements to products or to the way things are done, (2) causing a fundamental transformation in the resulting products or services and/or the process technology of an entire industry, or (3) transforming the market place and/or the economy as a whole. Christensen (1997) advanced the concept of innovation by disentangling the attributes of newness and impact. Because radically new innovations do not always have a significant impact, he differentiates between sustaining versus discontinuous innovations. Sustaining innovations improve the performance of established products or services. Discontinuous innovations bring to market very different products or services that typically undermine established products and services in the particular market sector. An example of a discontinuous innovation is steel minimills (while the product was not significantly changed, a change in the production process led to a drastic change in prices, firms, and markets). A discontinuous innovation does not always have greater utility; it may, in fact, result in a product that under-performs established products. The reason for this is that the momentum of on-going sustaining innovations can push product and service functionality beyond what many customers may actually require (in other words, the establish products and services eventually overshoot a large segment of their market). He advises companies in all industries to be continually attuned to a potentially discontinuous innovation that could cause their demise if they do not quickly adapt and adjust to the fundamentally changing situation.

Types of Innovation

There are three main types of innovation (process, product/service, and strategy), each of

which can vary in the degree of newness (incremental to radical) and impact (sustaining

versus discontinuous).

Process Innovation

Process innovation became an important topic with the rise of the quality and continuous improvement movements and, then again, with the more recent attention directed at change management, organizational learning and knowledge management. Corporations today, at least in the developed world, are reaching the limits of incremental process improvement1. Some have argued that what is needed today is radical process innovation. Hammer and Champy (1994) introduced the concept of radical reengineering based on their assertion that for companies to achieve maximum efficiency and effectiveness requires radical process reengineering of the organization and its processes. Because processes lag far behind what is possible given technological advancement, it is not possible to achieve the necessary transformation through incrementalism. The argument for radical reengineering seemed plausible and many organizations undertook large scale reengineering efforts. The results, however, have been mixed. Many organizations spent a great deal of time and money for little pay-off (Carter 1999). There are several competing explanations for these failures, including an explanation proposed by one of the initial advocates. Champy (1996) suggests that management has often been a barrier and that successful reengineering of the corporation requires that management itself be radically reengineered. Others suggest that organizations are often not capable of changing as much and as quickly as radical reengineering encourages and that transition management has not been sufficiently addressed (Feldman 1999). There have been two main problems with reenginereing: (1) an ambitious model of the reengineered corporation without a sufficiently detailed and realistic plan of how to manage current operations while transitioning to the new model and (2) a lack of the sustained effort needed to ensure success. In addition, as Carter (1999) notes, downsizing has too often posed as reengineering and, not surprisingly, downsizing tends to have short-term and limited benefits. The clear lesson is that radical engineering to be successful must be done with great care and that balance and caution must be exercised. Discontinuous process innovation can originate outside the industry and/or may be more or less serendipitous. Thus, in addition to intentional process improvement and reengineering, companies must take care to monitor and have the ability to quickly adapt to potential innovations that could affect how they currently operate. 1

Many American and British companies have reached the point of diminishing returns in their cost-cutting and efficiency programs. In 1999, the average operating margin for the non-financial services companies in the S&P 500 was 15.7%, the same as 5 years earlier. Indeed, between 1994 and 1999, the average operating margin for these companies never varied by more than 1.3 percentage points (Hamel 2000).

Product/Service Innovation

Incremental product/service innovation is oriented toward improving the features and functionality of existing products and services. Radical product/service innovation is oriented toward creating wholly new products and/or services. Product life cycles, in particular, have become shorter and shorter, causing business survival to depend on new product development and, increasingly, on the speed of innovation in order to develop and bring new products to market faster than the competition (Jonash and Sommerlatte 1999). Organizations must direct greater attention to new product development, while maintaining and improving their existing products. Discontinuous products and services are increasingly likely with ever-faster new product/service development. Organizations must be constantly on the lookout for discontinuous new products and/or services. Although product/service innovation and process innovation are not the same thing, they are often interconnected. For example, process innovation may be required to support product or service innovations. Also, it has been argued that organizational processes and structures oriented to incremental product innovation are not the same as those needed to foster and facilitate new product development. The current wisdom it is necessary to separate these activities and to introduce wholly new process innovations that will help promote and speed-up radical product innovation. Strategy or Business Concept Innovation It is, of course, possible to incrementally improve one’s business strategy but Hamel (1996, 2000) contends that radical business concept innovation is now paramount. He claims that the current environment is hostile to industry incumbents and hospitable to industry revolutionaries. The fortifications that protected the industrial oligarchy have crumbled under the weight of deregulation, technological upheaval, globalization, and social change. What is now required to ensure organizational success is to continually revolutionize the basic organizational strategy, which progressively typically requires: • Radically reconceiving products and services, not just developing new products and services • Redefining market space • Redrawing industry boundaries. If radical business concept innovation is successful in accomplishing these objectives, it is by definition discontinuous. Drivers of Innovation The primary drivers of innovation include: • Financial pressures to decrease costs, increase efficiency, do more with less • Increased competition • Shorter product life cycles • Value migration • Stricter regulations • Industry and community needs for sustainable development

• Increased demand for accountability • Community and social expectations and pressures (giving back to the community, doing good, etc.) • Demographic, social, and market changes • Rising customer expectations regarding service and quality • Greater availability of potentially useful new technologies coupled with the need to keep up or exceed the competition in applying these new technologies • The changing economy.

Although cost reduction has been a major driver of innovation, other drivers are also important. Regulatory drivers have become more important in the last several decades. In addition, companies increasingly feel they must promote their image and this has become a major driver of environmental and sustainable development innovations. A good image can help promote both customer loyalty and a company’s growth strategy. As noted above, Hamel (1996, 2000) sees important recent change in both (a) the drivers of innovation and (b) the importance of radical business concept innovation for organization survival. Basically, he argues that a dramatic change in the overall economy has occurred and that this economic environment no longer protects established mainstream businesses. He further argues that organizations must develop an innovation competency if they are to survive: radical business concept innovation must become a core component of this competency.2

Enablers and Obstacles to Innovation The presence of innovation drivers and/or the need to innovate will not necessarily result in innovation. Innovation is difficult, particularly radical and/or discontinuous innovation. Companies have reengineered their core business processes for efficiency. They now need to reinvent their core business processes for innovation in order to accelerate the production and pay-off of radical ideas. In other words, the capacity to innovate, especially to produce radical and discontinuous innovations, is seen by an increasing number of scholars and practitioners as the new competitive competency of organizations. While some argue that innovation cannot be managed – that it just happens – most researchers and theorists agree that the organizations can be designed to have a structure, a culture, and processes that are conducive to innovation (Roger and Roger 1976; Kanter 1998; Amabile 1988; Jonash and Sommerlatte 1999; Hamel 2000). As innovation has become a more pressing concern for companies in almost every sector of the economy, the literature has increasingly explored the factors that enable or hinder an organization’s capacity to innovate. Factors have been identified at each of the following levels (see the following text box on Innovative Capacity for specifics): • Individual • Project • Organization • Environment. 2Incumbency has never been worth less. Deregulation, the internet, venture capitalists, etc. have changed the economic landscape to make it both more hostile to established firms and more hospitable to new ventures. Only 11 of the S&P top 500 delivered top-quartile shareholder returns for more than 5 years out of the last 10 – not one company achieved top-quartile returns in more than 7 of the last 10 years. Success has become highly transient (Hamel 2000).

Until very recently, most of the literature addressed enabling or hindering factors as residing at the organizational level or below. Organizational level innovation theory and research emphasized innovation output – new product development and the speed of bringing new products to market. Greater attention is now being directed toward increasing the organization’s innovation input capacity – the ability of an organization to continuously absorb, accumulate, and create the new knowledge necessary to spur new ideas. This has been referred to as the “organization as sponge explanation” – the organization must absorb more inputs in order to squeeze out more outputs (Fiol 1996). It has also been referred to as the organization’s absorptive capacity (Cohen and Levinthal 1990). Absorption refers to environmental scanning to identify new ideas that may be of potential relevance, promoting idea generation among the staff, as well as adopting potentially relevant externally developed innovations. It has also clearly been found that smaller and less hierarchical organizations are more capable of innovations. Some large organizations have attempted to foster intrapreneurships within the company but, increasingly, large organizations are creating small entrepreneurial spin-offs to enhance their capacity to innovate. Hamel (2000) offers suggestions for larger firms to become incubators of innovation (internally, externally, and via appropriation) and sees no inherent contradiction in being both a large and an innovating organization (see Chapter 4, “Change Management” for additional discussion of these challenges).

Innovative Capacity

The Individual Level: Factors to look for at the individual level include: employee empowerment and engagement, trust, training, job rotation, and the extent and range of individual networks.

The Project Level: Factors to look for at the project level include: a diverse mix of project team members, conversation rules and management, and an initial openness to new ideas and withholding of criticism to a later point in the process. As the speed of innovation is becoming a greater concern, greater attention is being focused on ways to speed up innovation projects. There has also been greater attention directed at differentiating between two critical phases of innovation projects: the fuzzy front-end or Phase I activities and Phase II activities. Phase I activities involve new product conceptualization, analysis, and definition, and currently account for half the new product development cycle time. Phase II activities involve the more typical activities of product design, piloting, production, and early marketing. Some have argued that Phase I activities need to be dealt with separately as they require a different type of project management approach (Bacon et al. 1994).

The Organizational Level: Organizations must have effective, efficient, and speedy systems and processes for the following:

Environmental scanning, identifying discontinuities, surveying customer needs, encouraging new ideas to be advanced by staff members, and innovation activist and other forms of training.

Other means of promoting knowledge absorption and sharing, such as the ability to communicate across organizational boundaries, communities of practice, enterprise level knowledge systems, and problem identification and problem solving processes.

Deconstructing the dominant mental models regarding business mission, market scope, relevant products and services, target customers and questioning existing biases regarding the kinds of profit boosters that can be exploited, the core competencies that are most important, pricing strategies, bundling options, and partnering opportunities.

Sustained, innovative strategizing and strategy implementation.

On-going classification, screening, and prioritization of new ideas.

Managing the innovation stream—the number of ideas being pursued at a given time and their developmental stages.

Effective innovation project management.

Effective innovation utilization, transfer, diffusion—the culmination of innovation is to transfer the innovation to those who will exploit it through successful commercialization and, as needed, promoting its adoption into organizational practice and/or individual life styles.

Effective change management.

Promoting a broad definition of business boundaries, fluid organizational boundaries, and a wide and open market for ideas/talent.

Motivating, rewarding, and recognizing innovation.

This sounds very similar to knowledge management, particularly as the focus has expanded beyond increasing the speed of innovation outputs and recognizes the importance of identifying and capturing new ideas/knowledge. Also, it has been found that smaller and less hierarchical organizations are more capable of innovation. Some large organizations have attempted to foster internal intrapreneurships but, increasingly, they are creating small entrepreneurial spin-offs to enhance their capacity to innovate.

The Environmental Level: Factors at the environmental are now getting greater attention. These include: the level of competition and extent of customer options, geographical co-location, inter-organizational associations and communities of practice, partnerships and alliances, the regulatory context, and the extent of customer and stakeholder engagement.

The external environmental context is now receiving greater attention. Previously, the external environment had been considered a given – beyond the control of the organization. However, inter-organizational collaborations have now become a major topic in the innovation literature. The ways organizations can take advantage of the environment to encourage and sustain innovation and they ways they can use innovation to buffer themselves from environmental threats are areas that need to be further developed. The literature on institutionalism can provide a possible basis for linking organizational context and environmental (inter-organizational) context and demonstrating how these factors jointly affect organizational strategic action (either strategic conformance or innovation). In the past, institutional theory has been more oriented to explaining organizational similarity (isomorphism) and stability than opportunity for organizational innovation and change. New institutional theory is beginning to address the issue of strategic innovation.

Hamel (2000) suggests that an innovation competency requires both an internal and external organizational perspective. To develop an innovation competency, the organization must:

1. Have a fluid notion of organizational boundaries and an open market for talent. It is not necessary to create all innovations internally. Partnerships can be a useful strategy to promote innovation. Also, in addition to development, acquisition can be an effective innovation strategy.

2. Transform organizational strategy. Typical strategic planning is often antithetical to promoting radically innovative business models and strategies. Innovation cannot be held to a scheduled strategic planning timeline; it should be on-going. Also, strategy should not be restricted to the same set of top level decision-makers. Innovative strategy does not necessarily come from the top but too often not a word about contributing strategically appears in the performance criteria for anyone below the level of senior executive. Finally, strategy tools can only do so much. IRR forecasts and EVA calculations may be somewhat helpful but thinking about the possibilities is the most important component. Thinking about how big the thing could become and what the obstacles might be and how these can be addressed and constructing a convincing story is the most important part of strategy.

3. Create an open market for capital investment and rewards. Strategic thinking must not only be encouraged but also sponsored and rewarded. Just as wealth-generating strategies do not come from the strategic planning process, they do not necessarily come from serendipity or a single visionary (such as Bill Gates-Microsoft, Ted Turner-CNN, Anita Roddick-The Body Shop, Andy Grove-Intell, Jeff Bezos-Amazon.com, Howard Schultz- Starbucks, Mickey Dresler-The Gap, Michael Dell-Dell Computer, Pierre Omidyar- eBay.com). An organization must motivate strategic thinking and be able to quickly assess, select, and support potentially useful innovations. When innovative ideas do not succeed, staff members and sponsors should not be sanctioned in any way. On the other hand, it is very important to allow staff to share in the rewards when an idea does pay-off.

4. Manage the risk. Strategy should not be monolithic; it should be sufficiently varied to allow for organizational agility and flexibility. Remember that most innovation ideas will not pan out, so don’t think big in terms of funding any one innovative idea. The strategy should be to fund a number of ideas. Low-risk experimentation is key—invest in many ventures but start out small. Although most new ventures will fail, important learning can be acquired from each. Project risk must be distinguished from portfolio risk—the risk of any new project will be high but if there are enough innovation projects, the portfolio risk will be manageable.

5. Create a culture and a structure that promotes innovation. Having an elastic business definition helps to ward against protectionist instincts. Senior executives should be directed to spend a significant amount of their time looking for opportunities outside the boundaries of the business they are managing. Deconstruct the dominant mental models regarding business mission, market scope, relevant products and services, target customers and question existing biases regarding the kinds of profit boosters that can be exploited, the core competencies that are most important, pricing strategies, bundling options, and partnering opportunities. Open up innovation opportunities to all staff and engage customers, suppliers, competitors, and complementary organizations to develop new approaches to generating new wealth. Cellular division to promote smaller, independent unit; de-mergers; divestitures; spin-offs; and an EcoNet model that encourages cooperation and collaboration across organizational entities as needed can all help promote innovation.

The degree to which an organization is perceived to be innovative varies. Being innovative does not only refer to the process of creating a new product from the beginning to the end; it can also refer to the capacity of the organization to quickly adopt externally developed innovations.

However, companies that wait until new innovations have been widely implemented and have a proven track record are not typically considered innovative. Light (1998) notes that the “whatever is new to us” is the prevailing use of the term in organizations that do not necessarily see themselves as innovation leaders, while “something that significantly changes the marketplace” is more likely to be the standard for highly innovating organizations.

By Kathryn A. Baker

CHAPTER 4: SOFT SKILLS

THE IMPORTANCE OF SOFT SKILLS: EDUCATION BEYOND ACADEMIC KNOWLEDGE

1. What are soft skills?

Before going any further in debating the importance of soft skills we have to clarify the

question “What exactly are soft skills?” This basic question is not easy to answer, because the

perception of what is a soft skill differs from context to context. A subject may be considered

a soft skill in one particular area, and may be considered a hard skill in another. On top of it

the understanding of what should be recognised as a soft skill varies widely. Knowledge in

project management for instance is “nice to have” for an electrical engineer, but it is a “must

to have” for a civil engineer. Training in cultural awareness might be useful for a chemist, but

it is an absolute necessity for public or human resources management in societies of diverse

cultures.

Interesting enough the internationally renowned encyclopaedias have little to say about soft

skills. The online encyclopaedia “Wikipedia” gives a very broad definition of soft skills, which

leaves much room for discussion:

“Soft skills refer to the cluster of personality traits, social graces, facility with language,

personal habits, friendliness, and optimism that mark people to varying degrees. Soft skills

complement hard skills, which are the technical requirements of a job.” (Wikipedia, 2007)

Table 1: Examples of soft skills

Table 1 offers a list of examples of soft skills based on the Wikipedia definition. The list is by

far not complete. For instance under personal traits characteristics like imagination, curiosity,

determination, passion, or persistence could be added. In January 2007 the career

management consultant Challa Ram Phani published an article under the headline “The top

60 soft skills at work”, listing and discussing those 60 skills which according to his study are

“the personal traits and skills that employers state are the most important when selecting

employees for jobs of any type” (Phani, 2007)

• Communication skills • Critical and structured

thinking • Problem solving skills • Creativity • Teamwork capability • Negotiating skills • Self-management • Time management • Conflict management • Cultural awareness • Common knowledge

Responsibility Etiquette and good manners Courtesy Self-esteem Sociability Integrity / Honesty Empathy Work ethic Project management Business management

However to keep things simple, from the definition and the list in Table 1 it becomes

immediately clear that we are looking at three very different skill categories, i.e.

• Personal qualities,

• Interpersonal skills, and

• Additional skills / knowledge

Starting with the last item, the additional skills and knowledge category refers to skills that

can be learned by undergoing training, often in connection with a formal assessment, and in

this way acquiring an additional qualification or certification. Even so additional formal

qualifications like Accounting or Legal Studies are a very important factor for increasing a

person’s employability, they are generally not readily recognised as soft skills. In the classical

sense and according to the Wikipedia definition the term “soft skills” primarily refers to the

first two categories of personal qualities and interpersonal skills including language skills. “The

Human Resources Glossary” even limits the definition of soft skills to interpersonal skills

(Tracey, 2004). Therefore, I will restrict the scope of this article to the two categories of

personal traits and interpersonal skills.

2. What are the most important soft skills?

Again the answer regarding the importance of soft skills depends very much on the context

and one’s personal perception. However, there is one property that immediately comes to

most people’s mind when soft skills are mentioned: those are the communication skills. And

indeed, it is the talent of communication skills, which is mostly lacking among graduates from

colleges and universities.

When asking people what exactly they understand to be communication skills, one will receive

a wide range of answers, because communication skills include a lot of different aspects.

Figure 1 offers an overview of important factors shaping a person’s communication skills.

The collection of aspects spans from basic language proficiency, which in multi- lingual

societies like Namibia may not be taken for granted, to advanced topics like Dialectic or

Rhetoric, which are sophisticated skills in their own right. Minimum requirements for a

graduate of a tertiary institution should be ample proficiency in spoken and written language,

a certain amount of self-esteem that will be reflected in conversation skills and body language,

adequate discussion skills, and of major importance, good presentation skills in order to be

able to market oneself and one’s ideas. However, communication skills are not only necessary

for a person’s professional career, but are even more contributing to one’s so-called social

competence, a fact which applies to many other soft skills, too. Good social skills are also

reflected at the working place and hence recursively further the career.

However, if we continue drilling down deeper into Communication skills the issue will become

even more complex. In the English speaking world “Language proficiency is the ability to

speak, read, and write Standard English in a businesslike way. One may have the ‘hard’ skill of

knowing what usage is correct and what is incorrect, but lack the ‘soft’ skills of knowing when

to use only standard forms and in what tone to use them.” (Waggoner, 2002). In this definition

our basic soft skill “Communication Skills” itself is divided into a “soft” and a “hard” part.

Furthermore, adequate communication skills are a prerequisite for a range of other soft skills

like moderating discussions or conflict management. Another pair of soft skills frequently

lacking in tertiary education is critical and structured thinking. Both go hand in hand with

problem solving abilities. Especially in today’s information society it is of high importance to

critically filter the endless stream of incoming data, analyse it, and make informed decisions

based on it. Analytical skills also form the base for developing solutions to any kind of problem.

And also in this case the soft skills are of equal usefulness in a person’s professional and private

life.

A last soft skill that should be highlighted here is creativity. This skill is often misinterpreted as

being only useful for artists, whereas in the science or business arena only structured logical

thinking should be applied. However, this perception is wrong. Applying creativity results in

“thinking out of the box”, which means that given conventional rules and restrictions are left

aside in order to find innovative approaches to problem solving. If Albert Einstein had not

bypassed the guidelines of Newton’s old established physics, and even discarded a bit of

common sense, he probably would not have arrived at his revolutionary new view on physics.

Brainstorming and mind mapping are well known applications of creativity in the business

world.

3. Can personal traits and habits be changed?

As we recognised earlier, a large part of soft skills relates to personal traits and habits. Thus,

an interesting question to ask is whether a person’s traits and habits can be changed or

improved. Anybody raising children or living with a partner who has irritating habits, might be

tempted to answer that the task of changing personal traits is extremely difficult, if not

impossible. The corporate trainer and instructional designer Rukmini Iyer has a strikingly

simple answer to this question: “There is a lot of argument in industry as to whether it is

possible to enhance soft skills in a few hours of training, especially when one considers the

fact that a person has lived with those traits all his life. To this, the answer is harsh but real --

a professional who wants to do well in his / her career does not really have a choice.” (Iyer,

2005)

A key aspect in this regard is a person’s ability to recognise and acknowledge certain

behavioural shortfalls or plain bad habits. As a German proverb states: “Self-recognition is the

first step towards improvement”. As soon as a deficit has been identified, one can start

working on its elimination.

For example many people are not fond of doing small talk, a common characteristic among

those working in a scientific or technical environment. The reasons might vary: shyness,

introverted character, lack of “how to”, boredom, etc. However, small talk is an important

part of communication skills necessary to display social competence. Once having

acknowledged this truth, a person can undergo a simple self-training or guided training to

improve the lacking skill. There are for instance many books available on the issue of “Small

Talk”. Forthwith, the person can make it a habit at parties or social gatherings to initiate a

conversation with at least three strangers. While the first times might require quite an effort,

after a few months the frequent chatting with strangers will become a second nature. With

such and similar easy exercises even a very introverted person can appear reasonably sociable.

In summary it means that negatively perceived personal traits could be changed or

successfully covered by undergoing self-imposed training. Only prerequisite is that one

acknowledges one’s weakness and takes the decision to change it. Training will most likely be

unsuccessful if one is not fully convinced that it will lead to any improvement or that the

improvement will be beneficial.

4. Why are soft skills important?

After having elaborated so much on soft skills, the answer to why they are considered as being

so important is still open. There are numerous reasons for having a critical look at a person’s

soft skills.

One straightforward reason is today’s job-market, which in many fields is becoming ever

increasingly competitive. To be successful in this tough environment, candidates for jobs have

to bring along a “competitive edge” that distinguishes them from other candidates with similar

qualifications and comparable evaluation results. And where do they find this competitive

advantage? In bringing along additional knowledge and skills, added up by convincing personal

traits and habits. This sounds familiar.

Understandably, employers prefer to take in job candidates who will be productive from a

very early stage on. If a graduate from university first has to be trained on putting more than

three sentences together, how to do a proper presentation, or how to chat in a pleasant and

winning manner with colleagues and customers, this graduate will not qualify as a quick

starter. Also basic knowledge in business management, project management and general

economy will improve the chances of a job candidate considerably.

Already during the job interview itself good communication skills are invaluable. They can

even serve to successfully cover up weaknesses on the hard skills side. Don’t we all know

colleagues who are splendid talkers, but there is no action forthcoming from their side? The

advantages of displaying positive traits like courtesy, honesty, flexibility, common sense,

flawless appearance, etc. during a job interview have not even to be discussed.

Vice versa, it unfortunately happens very seldom that a job candidate who was rejected

because of inadequate soft skills is told the truth about the reason for rejection, e.g. “Your

body language showed that you seemed to feel very insecure, and you had problems to

express yourself and present yourself in a convincing manner”. Even so this evaluation may

sound harsh at first glance; this kind of feedback would help a job seeker a lot in improving

his/her style for oncoming interviews. However, instead employers usually give no reason or

even vague misleading reasons for rejections, which are of no help at all for the unlucky

candidates.

Once employed, the success story of people who know how to master soft skills continues

because of much better career opportunities. Simple fact, which can be verified in daily

business life, is that employers prefer to promote staff members with superior soft skills. Good

hard skills alone are not necessarily enough anymore to be a first choice when it comes to

promotion.

Soft skills are shaping human beings’ personality. Any educator’s dream is that graduates,

especially from tertiary education institutions, should not only be experts in a certain field but

matured personalities with a well balanced, rounded off education. However, this

characteristic is reflected in soft skills, not in hard skills.

During the last decades in many societies the opinion on soft skills has changed considerably.

Whereas in the past the mastering of hard skills was rated first and soft skills were considered

as “nice to have”, the perception has been turned upside down. As mentioned before, good

communication skills can easily be used to cover up a lack in hard skills. Nowadays in general,

people who are extroverted, who are good in marketing themselves, and who are socialising

easily are rated superior to others who lack those attributes. The good old technician, an ace

in his field, but being introverted and talking less than ten complete sentences a day is not

appreciated any longer.

This development is not necessarily positive, and it must be allowed to ask the question,

whether today soft skills are overemphasised.

When Germany in 2003 scored a disastrously bad result in the European evaluation of its

school learners’ knowledge, the so-called PISA study (PISA, 2003), educational experts were

quick in explaining that the tests were unfair, because they only probed the hard skills of

learners; the fact that the German students might be good in discussing issues and have nice

personality traits was not considered in those tests.

However, for a future civil engineer it is not good enough to do acclaimed presentations on

how to build bridges, but he must be able to construct a solid bridge that survives a century.

Not to mention a medical practitioner or surgeon, from whom we expect a lot more than

having appealing communication skills.

In this sense it can only be hoped that the pendulum of perception on soft skills soon moves

back to the centre position. Soft skills are playing an important role in shaping a person’s

personality, they enable social competence, and they complement the hard skills, which are

the technical requirements of a job. As such, soft skills stand with equal importance beside

hard skills, but they should not be misused to camouflage a person’s lack of expertise in

particular areas.

Bernd Schulz, Polytechnic of Namibia

CHAPTER 5: BUSINESS IDEA GENERATION AND DEVELOPMENT

GENERATING IDEAS: NEED AND OPPORTUNITY

Generating Ideas- Deciding What To Do!

Once a group has been formed and information collected, it meets to adopt a priority list of

'good ideas' to pursue. Selecting ideas, testing them, planning and gathering funds and other

resources to get off the ground can be lengthy. Take your time and plan thoroughly.

Finding Business Ideas

There are 3 main ways of finding ideas:

1: What can local people do? What skills do they have?

It is much easier to build a business idea around real people who have particular skills.

2: Is someone else running a social enterprise that you could copy or apply locally?

Particularly if you’re not competing, the social enterprise may be willing to share their

experience with you or even help you set up.

3: What goods and services are needed in your locality?

There are many goods and services the private sector doesn’t think it profitable to supply to

some (your?) communities. Make a list of things your social enterprise might provide.

It is usually easier and cheaper to set up a service business than a manufacturing one,

especially as the market for the services is more likely to be local, less equipment is needed

and less money required starting up. There’s usually less risk because market research is easier

and there are less likely to be established competitors. You could get ideas from asking local

people, advertising in the local paper or radio, asking local businesses or even running a

competition with local school children.

At a brainstorming session many ideas will emerge, the more the merrier. But at some stage

you will need to prioritise certain ideas and this has to be something the whole group agrees

with and is committed to.

Testing The Idea

In many deprived areas, the local economy doesn’t have enough money circulating to support

new businesses: there’s not enough return on investment for the private sector. But for a

social enterprise interested in breaking-even while employing local people there may be

enough business to make it worthwhile. Alternatively, you could target more affluent areas

and customers who might provide sufficient income to make profit, and then return that profit

to your home community through donations or supporting community initiatives or projects.

The main task is to answer these questions:

. Is the idea viable?

. Do people have the necessary skills and abilities?

. Will it sell?

. Will it pay?

. Can it be resourced?

Skills and Resources

Are there enough of the right people with the right sort of skills locally? Or are you going to

have to recruit?

The people running a social enterprise must have:

. The technical skills to provide the service or make a product

. The ability to organise themselves and the business, managing people and resources

. The ability to co-operate effectively

. The skill and knowledge to manage finance

Business can be complex and highly competitive. It’s important that you assess what skills and

knowledge you have, analyse the gaps and come up with strategies for filling them, whether

by training, access to expert advice or recruitment. Many skills can be learnt ’on the job’ but

if you have to be successful from the start, you may need to think about appointing a business

manager to ensure the business is set up right and is managed properly.

Will It Sell?

A common mistake is for a group to decide that because they want something, everyone does.

Or that because a service is needed, there are enough people able to afford it. Or that a service

is needed and it will be able to capture 100% of the market from existing competitors. These

assumptions must be tested. Inevitably, this means market research, and not just ’desk

research’ in libraries, business centres or via the net but actually talking to people,

investigating potential competitors, digging deeply into why people buy things, how much

they are willing to spend, how much it costs to provide a service or make and sell particular

goods and so on. Remember, you are not the customer and may not know what the customer

will buy.

Will It Pay?

You may be able to sell your product or service but will you make any money doing it? What

will people pay compared to all the costs involved in making the product: do you know? How

many products will you need to produce a year or how often will the service be bought? What

income will that generate? You need to work out how much it will cost to do a thing and then

find out if the price you plan to charge (or that people are willing to pay) will cover your costs.

Don’t be put off if the sums don’t add up at first. You may need to change your product or

who you are selling it to

or how and where you market it. Planning a business is a kind of back-and-forth discussion

between the business (you) and the market/your customers.

Will It Be Founded?

Some brilliant ideas just can’t or won’t be funded. It is possible to change people’s thinking

and to persuade them to fund a project they initially oppose or don’t see the value of. But

you’d be wise to check out the likelihood of getting funding or support for each of your ideas

before going too far down the planning stage.

Does It Deliver A Real Benefit?

Things that do are likely to last longer and be supported politically and financially and by the

community when it counts. You may need that support and sometimes its better to, say, plan

to create more employment and less social profit (because that’s what people value) rather

than employing fewer people but making more money. It's not just what you would like to do,

but also what works out there.

Understandıng Project Development

Why Plan Projects?

Any project which is properly planned and managed has a greater chance of success. And

success is important if you are trying to create self-sustaining processes of regeneration,

development or meeting changing social and community needs.

Project planning involves certain basic and common activities:

. Allocating resources

. Setting timetables

. Identifying targets for achievement

Project planning will also usually depend on the co-operation and support of other

people. You usually have to co-operate with others to get a project going or sustain it.

People will need to be persuaded the project is a good idea. And those with political or

financial support will also need to be engaged with.

The Project Planning Process

The first stage in project planning is to set goals,

The second stage of project planning is to consider the external factors that will affect the

project (like ’the market’ or ’funding opportunities’),

The third stage is to discuss and adopt appropriate strategies based both on your goals and

the external environment.

Project planning requires both a clear focus, and appreciation of other people’s goals and

agendas and flexibility to accommodate both. Any group managing a project planning process

needs to be pragmatic, open-minded and willing to adapt.

Phases of Project Development

Winning Support For The Project - the project needs to be well thought out and have a match

with the goals of key players and stakeholders.

Clarifying Goals - to work you first have to identify all the people with a stake in the project or

who might be affected by it and get them on board through a series of meetings or interviews

Researching Possible Solutions - once goals have been identified its easier to identify potential

solutions which will need to be looked into and tested. Are they practical? Will they work

locally? What factors for success must be present? Has the idea worked well elsewhere, and

why?

Making Proposals - these must be detailed statements of the aims, means and requirements

of the project in terms of money and other resources. The aim of the proposal is to win or

retain thesupport of the individuals and stakeholders involved. At this stage it’s always a good

idea to have an alternative proposal to hand in case the first is rejected or needs extensive

modifying.

Reviewing And Agreeing The Action Plan

Your plan must:

. Be broadly compatible with the needs and goals of those involved

. Have a fit with the goals of funders and stakeholders

. Be broadly supported both internally (within the group and community) and externally (with

key players and interest groups)

. Be robust and defensible

. Have identified counter-arguments and potential (worse) alternatives

Undertaking The Project - once you get approval, start early in order to ward off criticism,

damp down scepticism and prevent competing groups ’recalling’ the decision to go ahead.

Make sure you have achievable milestones in place and measurable progress indicators.

Make sure decisions can be made quickly, especially decisions about putting things right

when they're going wrong.

Ensure allies are kept informed about the project's progress.

Ensure that there is sufficient time for the project to succeed; don't let people with other

agendas impose early evaluation on the project.

Working With Groups – The Development Role

An individual working in the community may have to take on a development role. They may

be asked to lead or work as part of a team developing a new local service. They may be

assisting an organisation draw up plans. They may be helping put plans into practice.

One mistake that is often made is that ’development’ and ’training’ become confused. One is seen as

a substitute for another or a precondition for progress.

Training is any learning situation with an underlying purpose and an ongoing process.

Development is about putting ’lessons’ into practice, actually making use of acquired skills,

assisting a group to maximise the benefits from learning. Keeping training

and development properly focused and balanced can be very hard to do. Planning group

development and having a clear timetable for development, properly monitored, can help.

Some Development Issues

1 : Developing Ideas Together

a)How will the group share information and ideas? Are there problems in how it plans to use

information?

b)How do the interactions between group members affect the development process?

c)Is the right information coming to the group in a way that is understood and can be used?

d)Does decision-making leave members empowered or do they feel left out/disempowered?

Different levels of participation affect how people engage with and contribute to the project

or group aim and therefore how a project develops. Those leading the process will need to

make decisions about the kinds of information that can be given to all or part of the group and

monitor and balance out ’inequalities’ that may arise because of different levels of

participation in the development and/or learning process.

2 : How Do You Combine Training And Development Work?

a)How will you measure learning success? What access to training will people in the group

have?

b)How will you apply what is learnt?

c)How will you deal with different levels of competence/confidence/skills?

The development process will go better if all people involved engage and interactpositively,

share tasks and fairly delegate, get and use feedback, encourage discussion and questioning

and develop an agreed decision-making process.

3: Managing Development Work

The first rule is to be flexible. There are no hard and fast rules about the development process.

Decisions will need to be made about time and resources (especially). There will need to be

some structure. But this may well be different each time. Making the right decisions about

who to involve and what needs to be done and how is crucial.

The group will also need to correctly assess its ability to carry a workload, deal with

unexpected developments, delegate and co-ordinate work and so on. Some groups accept

work willingly, others do not. Some groups depend on outside assistance, others may resist

external help or involvement.

Difficulties may arise from:

a)Outsiders playing a leadership rather than a support role. In the reverse case, some groups

expect ’experts’ to lead and the process stalls when this isn’t offered.

b)Incorrect decisions about task allocation and individual levels of involvement.

c)Bad resource allocation, misdirected effort or misunderstanding the symbolic significance of

situations or decisions.

4 : Planning Group Work

Planning involves:

a)Resource analysis

b)Assessing and choosing appropriate development techniques

c)Analysis of group needs

d)Assessment of skills and experiences

Planning the development process can either be worker-led, group-led or a joint/collective

decision between all parties. Whichever applies, someone must be in control.

Group involvement in planning the development process can be very important in validating

it.

Someone in the group must schedule and manage regular reviews of progress and how

development is going. Changes to the process may need to be negotiated and agreed within

the group. Sometimes reviewing and making decisions may take place in a formal process,

sometimes informal. Both have equal validity but one may be more appropriate than the

other.

Development Notes

Learning And Progress Indicators

Relationships

How have intra-group relationships developed?

Is there a sense of everyone understanding their roles?

Has the group formed positive relationships with key individuals and stakeholders?

Focus

Is the group focussed and business-like?

Is the group committed to realistic ideas and achievable goals?

Is there a clear understanding of what needs to be done next?

Negotiation And Communication Skills

What are the kinds and levels of intercommunication between group members?

Does the group negotiate effectively with external stakeholders and/or with each other?

Are decisions recorded and information shared properly and effectively?

Leadership

Have strong and effective leaders emerged?

Or do all members of the group share in the leadership role?

Is there clear agreement between ’leaders’ and ’followers’?

Are leaders trusted and respected by group members and external stakeholders?

Practical Ideas

Has the group adopted achievable and realisable goals?

Are all members of the group engaged?

Do they make practical and sensible proposals?

Does the group have the capacity to objectively consider and evaluate ideas?

Development Of A Culture Of Aspiration

Has a positive and business-like culture developed?

What are energy levels in the group like?

Is effort focused on achievement or discussion and debate?

Effective Resource Allocation

Are resources being allocated to the right places?

Is there effective delegation and/or co-ordination?

Do certain individuals control the group or command an excessive share of resources?

Does the group assign tasks to the right people?

Wrexham County Borough Council

https://www.academia.edu/10085478/İŞYERİNDE_KARAR_VERME_VE_PROBLEM_ÇÖZME_YÖNTE

MLERİ

CHAPTER 6 : MARKETING

MARKETING PRINCIPLES

1. Defining Marketing

Marketing1 is defined by the American Marketing Association as “the activity, set of

institutions, and processes for creating, communicating, delivering, and exchanging offerings

that have value for customers, clients, partners, and society at large.”American Marketing

Association, “Definition of Marketing,” http://www.marketingpower.com/ AboutAMA /Pages

/ Definition of Marketing.aspx?sq=definition+of+marketing (accessed December 3, 2009). If

you read the definition closely, you see that there are four activities, or components, of

marketing:

1. Creating2. The process of collaborating with suppliers and customers to create

offerings that have value.

2. Communicating. Broadly, describing those offerings, as well as learning from

customers.

3. Delivering. Getting those offerings to the consumer in a way that optimizes value.

4. Exchanging3. Trading value for those offerings.

The traditional way of viewing the components of marketing is via the four Ps:

Product. Goods and services (creating offerings).

Promotion. Communication.

Place. Getting the product to a point at which the customer can purchase it

(delivering).

Price. The monetary amount charged for the product (exchanging).

Introduced in the early 1950s, the four Ps were called the marketing mix, meaning that a

marketing plan is a mix of these four components.

If the four Ps are the same as creating, communicating, delivering, and exchanging, you might

be wondering why there was a change. The answer is that they are not exactly the same.

Product, price, place, and promotion are nouns. As such, these words fail to capture all the

activities of marketing. For example, exchanging requires mechanisms for a transaction, which

consist of more than simply a price or place. Exchanging requires, among other things, the

transfer of ownership. For example, when you buy a car, you sign documents that transfer the

car’s title from the seller to you. That’s part of the exchange process.

1. “The activity, set of institutions, and processes for creating, communicating, delivering, and exchanging

offerings that have value for customers, clients, partners, and society at large.”

2. In marketing, a term that involves collaboration with suppliers and customers in order to generate

offerings of value to customers.

3. The act of transacting value between a buyer and a seller.

Even the term product, which seems pretty obvious, is limited. Does the product include

services that come with your new car purchase (such as free maintenance for a certain period

of time on some models)? Or does the product mean only the car itself?

Finally, none of the four Ps describes particularly well what marketing people do. However,

one of the goals of this book is to focus on exactly what it is that marketing professionals do.

Value

Value is at the center of everything marketing does (Figure 1.1). What does value mean?

Figure 1.1

When we use the term value4, we mean the benefits buyers receive that meet their needs. In

other words, value is what the customer gets by purchasing and consuming a company’s

offering. So, although the offering is created by the company, the value is determined by the

customer.

Furthermore, our goal as marketers is to create a profitable exchange for consumers. By

profitable, we mean that the consumer’s personal value equation is positive. The personal

value equation5 is

4. Total sum of benefits received that meet a buyer’s needs. See personal value equation.

5. The net benefit a consumer receives from a product less the price paid for it and the hassle or effort

expended to acquire it.

value = benefits received – [price + hassle]

Hassle is the time and effort the consumer puts into the shopping process. The equation is a

personal one because how each consumer judges the benefits of a product will vary, as will

the time and effort he or she puts into shopping. Value, then, varies for each consumer.

One way to think of value is to think of a meal in a restaurant. If you and three friends go to a

restaurant and order the same dish, each of you will like it more or less depending on your

own personal tastes. Yet the dish was exactly the same, priced the same, and served exactly

the same way. Because your tastes varied, the benefits you received varied. Therefore the

value varied for each of you. That’s why we call it a personal value equation.

Value varies from customer to customer based on each customer’s needs. The marketing

concept6, a philosophy underlying all that marketers do, requires that marketers seek to

satisfy customer wants and needs. Firms operating with that philosophy are said to be market

oriented7. At the same time, market-oriented firms recognize that exchange must be

profitable for the company to be successful. A marketing orientation is not an excuse to fail to

make profit.

Firms don’t always embrace the marketing concept and a market orientation. Beginning with

the Industrial Revolution in the late 1800s, companies were production orientation8. They

believed that the best way to compete was by reducing production costs. In other words,

companies thought that good products would sell themselves. Perhaps the best example of

such a product was Henry Ford’s Model A automobile, the first product of his production line

innovation.

Ford’s production line made the automobile cheap and affordable for just about everyone.

The production era9 lasted until the 1920s, when production-capacity growth began to

outpace demand growth and new strategies were called for. There are, however, companies

that still focus on production as the way to compete.

From the 1920s until after World War II, companies tended to be selling orientation10,

meaning they believed it was necessary to push their products by heavily emphasizing

advertising and selling. Consumers during the Great Depression and World War II did not have

as much money, so the competition for their available dollars was stiff. The result was this

push approach during the selling era11. Companies like the Fuller Brush Company and Hoover

Vacuum began selling door-to-door and the vacuum-cleaner salesman (they were always

men) was created. Just as with production, some companies still operate with a push focus.

6. A philosophy underlying all that marketers do, driven by satisfying customer wants and needs.

7. The degree to which a company follows the marketing concept.

8. A belief that the way to compete is a function of product innovation and reducing production costs, as good products

appropriately priced sell themselves.

9. A period beginning with the Industrial Revolution and concluding in the 1920s in which production-orientation thinking

dominated the way in which firms competed.

10. A philosophy that products must be pushed through selling and advertising in order for a firm to compete successfully.

11. A period running from the 1920s to until after World War II in which the selling orientation dominated the way firms

competed.

In the post–World War II environment, demand for goods increased as the economy soared.

Some products, limited in supply during World War II, were now plentiful to the point of

surplus. Companies believed that a way to compete was to create products different from the

competition, so many focused on product innovation.

This focus on product innovation is called the product orientation12. Companies

like Procter & Gamble created many products that served the same basic function but with a

slight twist or difference in order to appeal to a different consumer, and as a result products

proliferated. But as consumers had many choices available to them, companies had to find

new ways to compete. Which products were best to create? Why create them? The answer

was to create what customers wanted, leading to the development of the marketing concept.

During this time, the marketing concept was developed, and from about 1950 to 1990,

businesses operated in the marketing era13.

So what era would you say we’re in now? Some call it the value era14: a time when companies

emphasize creating value for customers. Is that really different from the marketing era, in

which the emphasis was on fulfilling the marketing concept?

Maybe not. Others call today’s business environment the one-to-one era15,

meaning that the way to compete is to build relationships with customers one at a time and

seek to serve each customer’s needs individually. For example, the longer you are customer

of Amazon, the more detail they gain in your purchasing habits and the better they can target

you with offers of new products. With the advent of social media and the empowerment of

consumers through ubiquitous information that includes consumer reviews, there is clearly

greater emphasis on meeting customer needs. Yet is that substantially different from the

marketing concept?

Still others argue that this is the time of service-dominant logic16 and that we are in the

service-dominant logic era17. Service-dominant logic is an approach to business that

recognizes that consumers want value no matter how it is delivered, whether it’s via a product,

a service, or a combination of the two. Although there is merit in this belief, there is also merit

to the value approach and the one-to-one approach. As you will see throughout this book, all

three are intertwined. Perhaps, then, the name for this era has yet to be devised.

12. A philosophy that focuses on competing through product innovation.

13. From 1950 to at least 1990 (see service-dominant logic era, value era, and one-to-one era), the dominant

philosophy among businesses is the marketing concept.

14. From the 1990s to the present, some argue that firms moved into the value era, competing on the basis

of value; others contend that the value era is simply an extension of the marketing era and is not a separate

era.

15. From the 1990s to the present, the idea of competing by building relationships with customers one at a

time and seeking to serve each customer’s needs individually.

16. An approach to business that recognizes that customers do not distinguish between the tangible and the

intangible aspects of a good or service, but rather see a product in terms of its total value.

17. The period from 1990 to the present in which some believe that the philosophy of service- dominant

logic dominates the way firms compete.

Whatever era we’re in now, most historians would agree that defining and labeling it is

difficult. Value and one-to-one are both natural extensions of the marketing concept, so we

may still be in the marketing era. To make matters more confusing, not all companies adopt

the philosophy of the era. For example, in the 1800s Singer and National Cash Register

adopted strategies rooted in sales, so they operated in the selling era forty years before it

existed. Some companies are still in the selling era. Recently, many considered automobile

manufacturers to be in the trouble they were in because they work too hard to sell or push

product and not hard enough on delivering value.

Creating Offerings That Have Value

Marketing creates those goods and services that the company offers at a price to its

customers or clients. That entire bundle consisting of the tangible good, the intangible

service, and the price is the company’s offering18. When you compare one car to

another, for example, you can evaluate each of these dimensions—the tangible, the

intangible, and the price—separately. However, you can’t buy one manufacturer’s

car, another manufacturer’s service, and a third manufacturer’s price when you

actually make a choice. Together, the three make up a single firm’s offer.

Marketing people do not create the offering alone. For example, when the iPad was

created, Apple’s engineers were also involved in its design. Apple’s financial

personnel had to review the costs of producing the offering and provide input on how

it should be priced. Apple’s operations group needed to evaluate the manufacturing

requirements the iPad would need. The company’s logistics managers had to evaluate

the cost and timing of getting the offering to retailers and consumers. Apple’s dealers

also likely provided input regarding the iPad’s service policies and warranty structure.

Marketing, however, has the biggest responsibility because it is marketing’s

responsibility to ensure that the new product delivers value.

2. Who Does Marketing? The short answer to the question of who does marketing is “everybody!” But that answer is a

bit glib and not too useful. Let’s take a moment and consider how different types of

organizations engage in marketing.

For-Profit Companies

The obvious answer to the question, “Who does marketing?” is for-profit companies like

McDonald’s, Procter & Gamble (the makers of Tide detergent and Crest toothpaste), and

Walmart. For example, McDonald’s creates a new breakfast chicken sandwich for $1.99 (the

offering), launches a television campaign (communicating), makes the sandwiches available

on certain dates (delivering), and then sells them in its stores (exchanging). When Procter &

Gamble (or P&G for short) creates a new Crest tartar control toothpaste, it launches a direct

mail campaign in which it sends information and samples to dentists to offer to their patients.

18. The entire bundle of a tangible good, intangible service, and price that composes what a company offers to customers.

P&G then sells the toothpaste through retailers like Walmart, which has a panel of consumers

sample the product and provide feedback through an online community. These are all

examples of marketing activities.

For-profit companies can be defined by the nature of their customers. A B2C (business-to-

consumer) company like P&G sells products to be used by consumers like you, while a B2B

(business-to-business) company sells products to be used within another company’s

operations, as well as by government agencies and entities. To be sure, P&G sells toothpaste

to other companies like Walmart (and probably to the army, prisons, and other government

agencies), but the end user is an individual person.

Other ways to categorize companies that engage in marketing is by the functions they fulfill.

P&G is a manufacturer, Walmart is a retailer, and Grocery Supply Company

(http://www.grocerysupply.com) is a wholesaler of grocery items and buys from companies

like P&G in order to sell to small convenience store chains. Though they have different

functions, all these types of for-profit companies engage in marketing activities. Walmart, for

example, advertises to consumers.

Grocery Supply Company salespeople will call on convenience store owners and take orders,

as well as build in-store displays. P&G might help Walmart or Grocery Supply Company with

templates for advertising or special cartons to use in an in- store display, but all the companies

are using marketing to help sell P&G’s toothpaste.

Similarly, all the companies engage in dialogues with their customers in order to understand

what to sell. For Walmart and Grocery Supply, the dialogue may result in changing what they

buy and sell; for P&G, such customer feedback may yield a new product or a change in pricing

strategy.

Non-profit Organizations

Nonprofit organizations also engage in marketing. When the American Heart Association

(AHA) created a heart-healthy diet for people with high blood pressure, it bound the diet into

a small book, along with access to a special Web site that people can use to plan their meals

and record their health-related activities. The AHA then sent copies of the diet to doctors to

give to patients. When does an exchange take place, you might be wondering? And what does

the AHA get out of the transaction?

From a monetary standpoint, the AHA does not directly benefit. Nonetheless, the organization

is meeting its mission, or purpose, of getting people to live heart- healthy lives and considers

the campaign a success when doctors give the books to their patients. The point is that the

AHA is engaged in the marketing activities of creating, communicating, delivering, and

exchanging. This won’t involve the same kind of exchange as a for-profit company, but it is

marketing. When a nonprofit organization engages in marketing activities, this is called

nonprofit marketing19. Some schools offer specific courses in nonprofit marketing, and many

marketing majors begin their careers with nonprofit organizations.

19. Marketing activities conducted to meet the goals of nonprofit organizations.

Government entities also engage in marketing activities. For example, when the U.S. Army

advertises to parents of prospective recruits, sends brochures to high schools, or brings a

Bradley Fighting Vehicle to a state fair, the army is engaging in marketing. The U.S. Army also

listens to its constituencies, as evidenced by recent research aimed at understanding how to

serve military families more effectively. One result was advertising aimed at parents and

improving their response to their children’s interest in joining the army; another was a

program aimed at encouraging spouses of military personnel to access counseling services

when their spouse is serving overseas. Similarly, the Environmental Protection Agency (EPA)

runs a number of advertising campaigns designed to promote environmentally friendly

activities. One such campaign promoted the responsible disposal of motor oil instead of simply

pouring it on the ground or into a storm sewer.

There is a difference between these two types of activities. When the army is promoting the

benefits of enlisting, it hopes young men and women will join the army. By contrast, when the

EPA runs commercials about how to properly dispose of motor oil, it hopes to change people’s

attitudes and behaviors so that social change occurs. Marketing conducted in an effort to

achieve certain social objectives can be done by government agencies, nonprofit institutions,

religious organizations, and others and is called social marketing20. Convincing people that

global warming is a real threat via advertisements and commercials is social marketing, as is

the example regarding the EPA’s campaign to promote responsible disposal of motor oil.

Individuals

If you create a résumé, are you using marketing to communicate the value you have to offer

prospective employers? If you sell yourself in an interview, is that marketing? When you work

for a wage, you are delivering value in exchange for pay. Is this marketing, too?

Some people argue that these are not marketing activities and that individuals do not

necessarily engage in marketing. (Some people also argue that social marketing really isn’t

marketing either.) Can individuals market themselves and their ideas?

In some respects, the question is a rhetorical one, designed for academics to argue about in

class. Our point is that in the end, it may not matter. If, as a result of completing this book,

you can learn how to more effectively create value, communicate and deliver that value to

the receiver, and receive something in exchange, then we’ve achieved our purpose.

20. Marketing conducted in an effort to achieve social change.

John F. (Jeff) Tanner, Jr., is professor of marketing at the Hankamer School of Business, Baylor

University

Mary Anne Raymond is a professor and chair of marketing at Clemson University

CHAPTER 7: FINANCE

ANALYSIS OF FINANCING SOURCES FOR START-UP COMPANIES

1. Introduction

Start-up companies are newly founded companies or entrepreneurial ventures that are in the

phase of development and market research. They are usually, but not necessarily, associated

with high-tech projects because their product is mostly software which can be easily produced

and reproduced. Additionally, technology-oriented projects, by their very nature, have the

greatest potential for growth (mashable.com, 2013). An interesting fact shown by the

research is that technology-oriented start-ups are typically located in major urban centres.

The reason is attributed to the need for a market that exceeds the local level (Baptista,

Mendonça, 2009). However, there are more and more start-up companies in traditional

industries and business sectors. At the international level, there is more and more research

associated with the importance and ways of financing entrepreneurial ventures (formal and

informal), especially in the period of intense globalization. A research by Korostelevae and

Mickiewicz (2010) proved that financial liberalization affects the overall financial investment

in start-ups, using either external or internal financing sources. The data from the GEM (Global

Entrepreneurship Monitor) research from 2001 to 2006 showed at the level of 54 countries

that the total investment in start-up companies depended on the economic development of

the country. As GDP per capita increases, greater financial opportunities for investment in

entrepreneurial activities are being created.

2. Types of Start-Up Companies

According to Marmer, Hermann and Berman (2011), who conducted an analysis on more than

650 web start-ups across the USA (Silicon Valley), Internet start-up companies can be divided

into three basic types. The first type of the start-up companies is called "The Automizer"

whose characteristics are being focused on customers, attracting customers who show

interest in a product, fast performance, common automatization processes that were

previously performed manually, a large market, struggle on the existing market, use of new

technologies, strong technology-oriented developers, etc. A subtype of this type of Start-up

Company is called "The Social Transformer" to which belong the start-ups that are

characterized by the existence of a critical mass, increased subscriber growth, and networking.

These start-ups typically create new ways to connect people and therefore need more capital.

Business people and teams meet more frequently in this type of start-up than in an IT-oriented

one.

Another type of start-up companies is "The Integrator" which belongs to start-ups

characterized by high security, early profit, targeting small and medium-sized enterprises as

well as smaller markets, high probability that it will keep small teams even after scaling

(growth and expansion), etc.

The third type is called "The Challenger", characterized by start-up companies having very high

sales, as well as customer dependence, and also by complex and rigid markets, repeatable

sales processes, more time in relation to the first and second type, in need of more capital,

business-oriented teams. This type also has a large number of users and needs large teams in

case of start-up scaling, etc. Cassar (2004) stated in his research that the financing and

collection of investments at the initial stage of development, as well in the expansion phase

will depend on the characteristics and features of each type of enterprise.

3. Financing Sources For Start-Up Companies

One of the most important steps in starting an entrepreneurial venture is to ensure an

adequate financing source. Analyzing the mobilization of financial resources, Kotha and

George (2012) showed that entrepreneurs with previous experience in start-ups are able to

raise more funds (from both formal and informal sources) compared to entrepreneurs without

any experience. Start-up projects and start-up companies are most interesting to those

investors who can significantly accelerate the development of the project or product through

their investments as well as contribute to strong business relationships which investors tend

to have and which are essential for the expansion of start-up products. In his research,

Atherton (2012) demonstrated that multiple factors influenced the decision of a start-up

founder on the financing source (formal or informal). At the same time, it is possible to

observe very high disparity between the highly capitalized and undercapitalized start-ups.

Finding investment funds to launch or expand a start-up is one of the biggest obstacles faced

by many entrepreneurs (Berger, Cowan, Frame, 2011). In their paper, researchers Paul,

Whittam and Wyper (2007) proved that start-up founders first turn to internal financing

sources (their own funds), and afterwards they use external financing sources.

Sometimes it is good to try to found start-up companies independently, without third party

investment, which is called bootstrapping (˝to pull oneself up by one's bootstraps˝). In reality,

this is a very difficult task, but it is one of the foundations of entrepreneurship (Lopac, 2007)

and represents a creative financing strategy (Lahm, Little, 2005). Bootstrapping (Worrell,

2002) implies that the entrepreneur has certain income at the beginning, which is only

possible if the start-up does not require a big investment and if no financial investment has to

be covered by third parties. The advantage of this approach is that entrepreneurs have full

control of their company (lack of co-owners), while on the other hand, the drawback is that

the entrepreneur can be in some kind of isolation if he/she is young and less experienced and

there is no help from experienced partners and business contacts (Lopac, 2007). Many authors

point out that bootstrapping is a method of transforming human capital into financial capital,

which involves a certain level of investment from external sources (Lahm, Little, 2005).

Freear, Sohl and Wetzel (1995) identified four types of bootstrapping. These are: 1)

bootstrapping product development, 2) bootstrapping business development, 3)

bootstrapping to minimize the need for (outside) capital financing, 4) bootstrapping to

minimize the need for capital. A survey carried out on 214 start-up companies showed that

bootstrapping has a positive impact on increasing the added value for the company (Vanacker,

Manigart, Meuleman, Sels, 2010). Recent studies show that the bootstrapping and lean start-

ups are complementary approaches. This is confirmed by the fact that both approaches use

techniques that seek to eliminate all surpluses through maximization of existing resources

before investing more funds from external sources (Maurya, 2012). In addition to

bootstrapping, there are other various sources of financing start-up projects which are divided

into traditional and new methods of launching start-up companies.

Traditional methods of financing start-ups

Traditional methods represent a logical sequence for start-up companies to start raising

money, and most start-up companies enter the entrepreneurial world in this way. If the start-

up project founders do not have their own financial resources and cannot independently raise

the start-up without external investments they usually turn to the traditional financing

sources such as (Kovačić, 2011): bank loans, 3F (i.e. Friends, Family and Fools), seed

investments, business angels and venture capital investments.

Bank loans are probably one of the oldest formal financial sources for many entrepreneurs

and genuinely mean that an individual or company can take a loan from one or more banking

institutions. Most start-up companies seek to avoid bank loans as they are usually related to

complex procedures and are given based on company`s or individual`s credit history and

property. Since start-ups are usually founded by young people who, in many cases do not own

property, it is hard to get a bank loan. Åstebroa and Bernhardt`s research (2003) shows a very

high and positive correlation between bank loan and sustainability of the start-up company.

Nevertheless, an unconditional correlation between bank loan and sustainability is negative.

The reason for this negative correlation is a growing number of start-up companies that have

received some other form of investment and at the same time successfully exist in the market.

A recent research on a very large data panel (9,715 start-up companies over the period 2007-

2009) shows that high-tech start-ups are unlikely to use bank loan and it is much harder for

them to get one compared to the start-up companies in other industries (Brown, Degryse,

Hoewer, Penas, 2012).

3F - Friends, Family and Fools – before they turn to external formal financing sources (business

angels, different funds or banks) entrepreneurs should try to collect their initial funds from

those people who are closest and familiar to them such as friends and family (informal sources

of financing) before they turn to external investments such as business angels, various funds

or banks (Krishnan, 2010). This is the "first line" of investors and it is often called "Fools"

because they invest their money into start-up companies although all data shows that a great

number of start-up companies fail within the first three years of doing business. However,

before turning to larger and more powerful investors, it is important that the start-up

companies receive initial investments. This shows that the entrepreneur believes in his idea

and that his family and closest friends are also ready to take the risk and invest in their

business idea. Potential risks of such a financing are disagreements that may occur in the

families or between friends if the project fails in the end (Lopac, 2007).

Seed investments are also known as initial investments that help start-up companies in

expanding their business. Start-up companies engaged in technology development with rapid

growth potential due to the nature of their business often explore seed investments in order

to accelerate their growth and the development of their products (Brezak Brkan, 2010). A very

popular way of funding start-up companies and receiving seed investments are private

investors who want to invest their capital into potentially successful businesses (Brezak Brkan,

2010). It is rather common that seed investments are collected at the earliest stage of

fundraising and they usually include personal savings and funds from family members and

friends (smallbusiness.chron.com, 2013).

Business angels are investors who help entrepreneurs to realize their business ideas. In

addition, business angels help by sharing their knowledge, experience and financial resources

not only with start-ups but also with established businesses that already have a track record

but are temporarily in financial difficulties. The greatest value of business angels is the so-

called "smart funding" that includes providing skills, expertise and business contacts, while

most common reasons for investing are acquisition of profit, encouraging entrepreneurship,

business activity and creating new value4. Before investing in a company takes place, a

contract defines the relationship between the start-up founder and the business angel as an

investor. The contract generally contains an investment value, the investment time period,

the investment price and an exit strategy from the company (Cvijanović, Marović and Sruk,

2008). Sharpe, Cosham, Connell and Parnell (2009) conducted a study in the UK which proved

that business angels have a major role in funding high-tech start-ups in their early stages. One

of the reasons for that is the governmental support through tax exemption of their

investments.

Giurca Vasilescu (2009) believes that business angels are the most important link between

funding and developing companies, from the start-up stage to the stage in which companies

are ready to be on the capital market. Moreover, business angels provide financial and

managerial support which is the additional option for survival of the companies.

Table 1 shows a comparison between the number of Business Angels Networks in the US and

Europe. Europe has more Business Angels Networks, but in the US each network has more

members (a higher number of business angels). For instance, in Europe there are 75,000

Business Angels Members and in the US there are 259,480. Individually made investments (i.e.

per each round) as well as total invested funds are higher in the United States.

According to the EBAN Secretariat research, in 2009 almost € 18 billion of invested funds were

invested in the US while in Europe it was between € 3 and 5 billion. However, an interesting

fact is that according to the same data, the total invested funds by VC funds were higher in

Europe (€ 4 billion) than in the US (€ 1.7 billion).

Venture Capital investments or risk capital investments can come from individuals, companies

or funds that invest in individual companies in order to help their development. Venture

Capital investments are not the same as bank loans because after investing Venture funds

seek for a corresponding part of the ownership in the company, while banks enter into a

financing for an exactly determined time period and with precisely defined interest rates.

Venture Capital (VC) is not affected by company`s cash flow and it does not create any costs,

while bank loans are always time-limited and during the entire repayment time they burden

the company`s cash flow (Rakar, 2006).

In Croatian legislation, the Venture Capital funds are also called risk capital funds with a private

offering. Venture capital funds are focused on high- risk projects with potentially high return

on investments. Their main activity is providing financial assistance to start-up companies, and

in accordance with this looking for young, creative and innovative people who want to start a

business (Jozić, 2011). Generally, it refers to funding a firm in the early as well as the expansion

stages of development (Cvijanović, Marović and Sruk, 2008).

In their research, Dean and Giglierano (1990) showed that VC funds seek to reduce the funding

risk by focusing their investments in a particular development stage and by focusing on just

one development stage, in relation to making new investments at further stages. By analyzing

more than 470 Silicon Valley start-up companies, Davila, Foster and Gupta (2000) proved that

companies which had been using Venture funds as the financing source generally grew faster

than those that had used some other financing source. Their study also confirmed a research

conducted by Hellman and Puri (2000) in which they, among other, proved that innovative

companies used venture capital investments more often than the imitating companies.

On a sample of 391 Italian start-up technology companies, Colombo and Grilli (2005)

conducted a study on the correlation between the size of start-up companies and potential

funding sources. The research showed that start-up companies funded by their own

resources, family members or friends are not any smaller in size compared to the start-ups

funded by bank loans.

This result can be explained by a usual limit on the amount of bank loan which makes this type

of funding inefficient when funding start-ups. Some earlier researches also showed that

greater role and importance are attributed to the external funding sources, such as private

equity funds (Carpenter, Petersen, 2002).

New methods of financing the start-up firms

As investment methods in the start-up companies are changing and evolving, some new

methods of financing start-up projects and companies are known today. In this chapter the

emphasis is on the so-called seed accelerators that offer financial injections and mentoring

and represent an opportunity for all start-up companies and teams who are willing to learn

and succeed in the start- up world (Lopac, 2007). Although there is no satisfactory level of

research and literature about these new investment programs, some research shows that

today there are more accelerators than start-ups themselves and this is considered to be a

positive change in the economic structure of the high-tech industry5.

According to Christiansen (2009), one of the most common reasons for starting seed

accelerators is a possibility and a need for creating a new ecosystem and increasing the

number of start-ups through investment programs, which will increase the number of

companies and in the long run employment. Christiansen (2009) also mentions three elements

for recognizing successful accelerators. Those are: 1) the intersection of highly qualified

people that are experienced both in operating start-ups and angel investing, 2) a clear

technology or industry focus, 3) a very distinct and compelling reason for existence. The US is

a centre of start-up companies, nevertheless most recently Europe opened up and strives to

give as higher support as possible to Internet, technological and mobile start-ups. London,

Berlin and Vienna are the best European start-up accelerators. Some of the world's most

successful accelerators and recognized online platforms for fundraising are (Lopac, 2007): Y

Combinator, TechStars, CRV QuickStart, Seedcamp, Start-upbootcam, Fundable

(crowdfunding) and others.

Y Combinator, TechStars are the most suitable approaches for younger entrepreneurs. It is

one of the world's most successful seed accelerators. It was founded in 2005 and today it is a

model program for developing many new accelerators. Since it was founded, it helped launch

more than 140 new start-ups (Christiansen, 2009). TechStars was founded by business angels

from Colorado.

CRV QuickStart - Charles River Ventures QuickStart is a U.S. venture company which facilitates

entrepreneurs to take a loan. The difference from a bank loan lies in the fact that if the start-

up company achieves a second round of investment, the initial loan is converted into majority

holding. If the company does not achieve a second round of investment, then the start-up

company must return the loans taken (Lopac, 2007).

Seedcamp is an investment program for companies in their early stage of development. Apart

for the initial capital, it offers an opportunity of mentoring start-ups by experts in the field of

seed investments (initial investments) that help start-up companies to expand their business.

This program also offers experts in the field of product development, human resources, PR,

marketing, lawyers, journalists, etc.6 As opposed to TechStars and Y Combinator, Seedcamp

is initiated by business angels and venture capital funds. It is important to emphasize that

when VC funds decide not to finance some project/start-up, this presents an important

distress signal to other potential investors (Christiansen, 2009).

Start-up bootcamp is an accelerator program for start-up companies and it is being held at

various European locations several times per year (Copenhagen, Madrid, Dublin, Amsterdam

and London). It gathers a wide network of mentors and partners which help selected start-up

companies with the implementation of their idea. Start-up bootcamp is a selective program,

meaning that around 300 projects in Europe and worldwide register for the program and

usually about 10 projects per program are selected. Start-up bootcamp provides networking

and mentoring and it is also an associated member of Techstars program in the US (Maršić,

2012).

Fundable is an online platform for gathering investments into small companies7, i.e. a form of

collecting development funds that are used for different purposes and in various amounts; it

is a form of collecting donations for charities and interesting projects in general. Each

entrepreneur can raise funds from future clients before the project is even developed. In case

of a failure, money is returned to those who contributed, while Fundable ensures that all the

transactions are made fairly (Lopac, 2007).

Marina Klačmer Čalopa, Jelena Horvat, Maja Lalić , Original scientific paper UDC 658.14(497.5)

CHAPTER 8: HUMAN RESOURCES

BEGINNING MANAGEMENT OF HUMAN RESOURCES

1. What Is Human Resources?

Every organization, large or small, uses a variety of capital1 to make the business work. Capital

includes cash, valuables, or goods used to generate income for a business. For example, a

retail store uses registers and inventory, while a consulting firm may have proprietary

software or buildings. No matter the industry, all companies have one thing in common: they

must have people to make their capital work for them. This will be our focus throughout the

text: generation of revenue through the use of people’s skills and abilities.

2. What Is Human Resources Management?

Human resource management (HRM)2 is the process of employing people, training them,

compensating them, developing policies relating to them, and developing strategies to retain

them. As a field, HRM has undergone many changes over the last twenty years, giving it an

even more important role in today’s organizations. In the past, HRM meant processing payroll,

sending birthday gifts to employees, arranging company outings, and making sure forms were

filled out correctly—in other words, more of an administrative role rather than a strategic

role crucial to the success of the organization. Jack Welch, former CEO of General Electric and

management guru, sums up the new role of HRM: “Get out of the parties and birthdays and

enrollment forms.… Remember, HR is important in good times, HR is defined in hard

times.”Kristen B. Frasch, David Shadovitz, and Jared Shelly, “There’s No Whining in HR,”

Human Resource Executive Online, June 30, 2009, accessed September 24, 2010,

http://www.hreonline.com/HRE/ story.jsp?storyId=227738167.

It’s necessary to point out here, at the very beginning of this text, that every manager has

some role relating to human resource management. Just because we do not have the title of

HR manager doesn’t mean we won’t perform all or at least some of the HRM tasks. For

example, most managers deal with compensation, motivation, and retention of employees—

making these aspects not only part of HRM but also part of management. As a result, this book

is equally important to someone who wants to be an HR manager and to someone who will

manage a business.

3. The Role of Human Resources Management

Keep in mind that many functions of HRM are also tasks other department managers perform,

which is what makes this information important, despite the career path taken. Most experts

agree on seven main roles that HRM plays in organizations. These are described in the

following sections.

1. Capital includes cash, valuables, or goods used to generate income for a business.

2. The process of employing people, training them, compensating them, developing policies relating to the

workplace, and developing strategies to retain employees.

Staffing

You need people to perform tasks and get work done in the organization. Even with the most

sophisticated machines, humans are still needed. Because of this, one of the major tasks in

HRM is staffing. Staffing3 involves the entire hiring process from posting a job to negotiating

a salary package. Within the staffing function, there are four main steps:

1. Development of a staffing plan. This plan allows HRM to see how many people they should

hire based on revenue expectations.

2. Development of policies to encourage multiculturalism at work. Multiculturalism in the

workplace is becoming more and more important, as we have many more people from a

variety of backgrounds in the workforce.

3. Recruitment. This involves finding people to fill the open positions.

4. Selection. In this stage, people will be interviewed and selected, and a proper compensation

package will be negotiated. This step is followed by training, retention, and motivation.

Development of Workplace Policies

Every organization has policies to ensure fairness and continuity within the organization. One

of the jobs of HRM is to develop the verbiage surrounding these policies. In the development

of policies, HRM, management, and executives are involved in the process. For example, the

HRM professional will likely recognize the need for a policy or a change of policy, seek opinions

on the policy, write the policy, and then communicate that policy to employees. It is key to

note here that HR departments do not and cannot work alone. Everything they do needs to

involve all other departments in the organization. Some examples of workplace policies might

be the following:

• Discipline process policy

• Vacation time policy

• Dress code

• Ethics policy

• Internet usage policy

Compensation and Benefits Administration

HRM professionals need to determine that compensation is fair, meets industry standards,

and is high enough to entice people to work for the organization.

Compensation4 includes anything the employee receives for his or her work. In addition, HRM

professionals need to make sure the pay is comparable to what other people performing

similar jobs are being paid. This involves setting up pay systems that take into consideration

the number of years with the organization, years of experience, education, and similar

aspects. Examples of employee compensation include the following:

3. The entire hiring process from the first step of posting a job to the actual hiring of an employee.

4. Anything the employee receives for his or her work. It can include pay, benefits, vacation time, and sick leave.

• Pay

• Health benefits

• 401(k) (retirement plans)

• Stock purchase plans

• Vacation time

• Sick leave

• Bonuses

• Tuition reimbursement

Retention

Retention5 involves keeping and motivating employees to stay with the organization.

Compensation is a major factor in employee retention, but there are other factors as well.

Ninety percent of employees leave a company for the following reasons:

1. Issues around the job they are performing

2. Challenges with their manager

3. Poor fit with organizational culture

4. Poor workplace environment

Despite this, 90 percent of managers think employees leave as a result of pay.Leigh

Rivenbark, “The 7 Hidden Reasons Why Employees Leave,” HR Magazine, May 2005,

accessed October 10, 2010, http://findarticles.com/p/articles/mi_m3495/is_5_50/

ai_n13721406. As a result, managers often try to change their compensation packages to

keep people from leaving, when compensation isn’t the reason they are leaving at all.

Training and Development

Once we have spent the time to hire new employees, we want to make sure they not only

are trained to do the job but also continue to grow and develop new skills in their job. This

results in higher productivity for the organization. Training is also a key component in

employee motivation. Employees who feel they are developing their skills tend to be happier

in their jobs, which results in increased employee retention. Examples of training programs

might include the following:

• Job skills training, such as how to run a particular computer program

• Training on communication

• Team-building activities

• Policy and legal training, such as sexual harassment training and ethics training

5. The process and strategies of keeping and motivating employees to stay with the organization.

Dealing with Laws Affecting Employment

Human resource people must be aware of all the laws that affect the workplace. An HRM

professional might work with some of these laws:

• Discrimination laws

• Health-care requirements

• Compensation requirements such as the minimum wage

• Worker safety laws

• Labor laws

The legal environment of HRM is always changing, so HRM must always be aware of changes

taking place and then communicate those changes to the entire management organization.

Rather than presenting a chapter focused on HRM laws, we will address these laws in each

relevant chapter.

Worker Protection

Safety is a major consideration in all organizations. Oftentimes new laws are created with

the goal of setting federal or state standards to ensure worker safety. Unions and union

contracts can also impact the requirements for worker safety in a workplace. It is up to the

human resource manager to be aware of worker protection requirements and ensure the

workplace is meeting both federal and union standards. Worker protection issues might

include the following:

• Chemical hazards

• Heating and ventilation requirements

• Use of “no fragrance” zones

• Protection of private employee information

Communication

Besides these major roles, good communication skills and excellent management skills are

key to successful human resource management as well as general management.

Awareness of External Factors

In addition to managing internal factors, the HR manager needs to consider the outside

forces at play that may affect the organization. Outside forces, or external factors6, are those

things the company has no direct control over; however, they may be things that could

positively or negatively impact human resources. External factors might include the

following:

6. Anything the company has no direct control over; it could positively or negatively impact human

resources.

1. Globalization and offshoring

2. Changes to employment law

3. Health-care costs

4. Employee expectations

5. Diversity of the workforce

6. Changing demographics of the workforce

7. A more highly educated workforce

8. Layoffs and downsizing

9. Technology used, such as HR databases

10. Increased use of social networking to distribute information to employees

For example, the recent trend in flexible work schedules7 (allowing employees to set their

own schedules) and telecommuting8 (allowing employees to work from home or a remote

location for a specified period of time, such as one day per week) are external factors that

have affected HR. HRM has to be aware of these outside issues, so they can develop policies

that meet not only the needs of the company but also the needs of the individuals. Another

example is the Patient Protection and Affordable Care Act, signed into law in 2010.

Compliance with this bill has huge implications for HR. For example, a company with more

than fifty employees must provide health-care coverage or pay a penalty. Currently, it is

estimated that 60 percent of employers offer health-care insurance to their

employees.Peter Cappelli, “HR Implications of Healthcare Reform,” Human Resource

Executive Online, March 29, 2010, accessed August 18, 2011,

http://www.hreonline.com/HRE/ story.jsp?storyId=379096509. Because health-care

insurance will be mandatory, cost concerns as well as using health benefits as a recruitment

strategy are big external challenges. Any manager operating without considering outside

forces will likely alienate employees, resulting in unmotivated, unhappy workers.

Notunderstanding the external factors can also mean breaking the law, which has a

concerning set of implications as well.

One way managers can be aware of the outside forces is to attend conferences and read

various articles on the web. For example, the website of the Society for Human Resource

Management, SHRM Online,Society for Human Resource Management, accessed August 18,

2011, http://www.shrm.org/Pages/default.aspx. not only has job postings in the field but

discusses many contemporary human resource issues that may help the manager make

better decisions when it comes to people management.

7. A policy that allows employees to set their own schedules to work around family and personal needs.

8. Allows employees to work from home or a remote location for a specified period of time, such as one day

per week.

Figure 1 : An understanding of key external factors is important to the successful HR professional. This allows

him or her to be able to make strategic decisions based on changes in the external environment. To develop this

understanding, reading various publications is necessary.

Figure 2: Most professionals agree that there are seven main tasks HRM professionals perform. All these need

to be considered in relation to external and outside forces.

Prof. Dr. Laura Portolese Dias, This is the book Beginning Management of Human Resources (v. 1.0).

CHAPTER 9: BUSINESS PLAN FORMATION

HOW TO PREPARE YOUR BUSINESS PLAN

1. What Is A Business Plan?

A business plan is a comprehensive, written description of the business of an enterprise. It is a detailed

report on a company's products or services, production techniques, markets and clients, marketing

strategy, human resources, organization, requirements in respect of infrastructure and supplies,

financing requirements, and sources and uses of funds.

The business plan describes the past and present status of a business, but its main purpose is to present

the future of an enterprise. It is normally updated annually and looks ahead for a period of usually

three to five years, depending on the type of business and the kind of entity.

It is a crucial element in any application for funding, whether to a venture capital organization or any

other investment or lending source. Therefore, it should be complete, sincere, factual, well structured

and reader-friendly.

2. Why A Business Plan?

There are many important reasons for drawing up a business plan. Some of the most significant are

the following:

•Getting an integrated view of your business. By preparing your business plan, you get an integrated

view of all issues regarding your business. For example, it helps you to identify better your target

clients, outline your market segment, shape your pricing strategy and define the competitive

conditions under which you must operate in order to succeed. Business planning ensures that all these

considerations are consistent and properly harmonized. Also, the business plan process often leads to

the discovery of a competitive advantage or new opportunities as well as deficiencies in the plan.

Committing your plans to paper, ensures that your overall ability to manage the business will improve.

You will be able to concentrate your efforts on any deviations from the plan before conditions become

critical. You will also have time to look ahead and avoid problems before they arise.

•Mutual understanding within the management team. Reaching mutual understanding among the

members of the management of the firm is particularly important in cases in which the recommended

policy of engaging as many managers as practically possible is applied in the preparation of the

business plan.

•Determining financial needs and applying for funds. Determining the amount, type and sources of

financing and when it is required. Using the business plan in the process of application for funds.

•Approval from board of directors/shareholders. Using it as a basis for getting approvals from the

company board and shareholders.

•Recruiting. Using it in recruiting and introducing new members of the management and staff.

•Deriving objectives for employees. Deriving from the business plan measures and objectives for units

and individuals in the organization (management by objective).

•Informing employees. Using it as a means of informing/motivating employees about the objectives of

the company.

•Informing lenders. Giving it to banks/investment funds that have financed your business in the past

and require periodical information for monitoring purposes.

•Informing partners. Using the business plan in informing business partners and other relevant

organizations.

In preparing this manual, it has been assumed that the primary objective of preparing a business plan

is to determine the financing requirements of your business and to apply for external funding.

3. Who Reads The Business Plan?

Among the readers of your business plan will most probably be key employees, the board of directors

and shareholders, selected business partners, and current or prospective lenders and investors.

Which parts of your business plan should be distributed to which persons depends on its confidentiality

and on the particular responsibility of the persons concerned. If you include in your business plan

confidential strategic decisions or secrets, you should be restrictive in distributing copies of it. Give it

only to persons who you are confident will not pass on information without your consent. In some

cases, you may request the recipient to sign a confidentiality declaration.

Some of the most important target readers may well be potential lenders or investors. If you are

looking for outside financing to develop your business, there are many possible sources you can

approach with your business plan. The most important of these are the following:

•Commercial banks. Commercial banks provide loans to viable businesses on standard market terms

and conditions. They are normally very risk-conscious and require adequate coverage by means of

collateral. This may consist of, in the order of preference of the banks, cash accounts, precious metals,

tradable securities, infrastructure (land, buildings, machinery), accounts receivable and inventory. If

some of these assets are accepted as collateral, the bank may require the loan to be covered with 200

per cent or more of their value. The interest rate depends on the prevailing macroeconomic conditions

in a country, but also on the risk the bank attributes to a project. Experience has shown that interest

rates demanded by commercial banks in some countries can often be too high to be really supportive

of the development of a business.

•Private investment funds. Recent years have seen a rapid increase in the number of private venture

capital funds that operate on a commercial basis. The objective of these funds is to make a profit, and

they will scrutinize your business until they are convinced that they can get substantial return on their

equity at a calculable risk. A particular advantage of such funds, as compared with bank loans, is that

they can finance your business by placing equity without requiring collateral. On the other hand, they

will expect a good share of the profit and will demand a control function in your business, for example

through appointing one of their staff members to the board of directors of your company.

•Development funds. Such venture capital funds are established and supported primarily by

Governments or governmental institutions and have a social and macroeconomic development

objective. Particular characteristics of these funds are:

➢They are willing to take more risks than commercial/private venture capital funds.

➢They participate in the business only for a limited period of time. They exit when the business is

financially self-sufficient.

➢They particularly favour businesses with special social and environmental benefits (creating many

jobs, including a strong value-added component, transferring a substantial amount of know-how,

being friendly to the environment, etc.). Therefore, if you address yourself to such a fund you have to

cover these issues well in your business plan.

Nevertheless, most development funds, like all other funding institutions, are only ready to finance a

project if the business plan shows the viability and profitability of the business.

•Multilateral development institutions. Among the most prominent multilateral development

institutions are:

➢The International Finance Corporation (IFC), which is part of the World Bank Group located in

Washington, DC, United States;

➢The European Bank for Reconstruction and Development (EBRD), located in London, United

Kingdom;

➢The Asian Development Bank (ADB), located in Manila, Philippines;

➢The African Development Bank (ADB), located in Abidjan, Côte d´Ivoire;

➢The Inter-American Investment Corporation/Inter-American Development Bank, located in

Washington DC, United States.

The share capital of these institutions is held by many Governments. Their common goal is to assist

the social and economic development of the regions they cover. Their philosophy and their objective

are similar to those of the development funds mentioned above. They tend to finance directly large

projects (with equity and/or loans) costing $5-10 million or more. They also cover smaller investment

projects through intermediaries such as local commercial banks and leasing companies.

•Private investors. Private investors are usually independent and wealthy individuals who are seeking

opportunities to put money in promising businesses. Their incentive is to get a higher return on

investment than on marketable securities or investing in a fund. Quite often they allocate a percentage

of their fortunes for start-up or expansion projects. Placing money in diverse businesses reduces the

overall risk in their investment portfolio.

•Technical assistance credits/grants. Depending upon the type and location of your business, there

may be some possibilities to access government funds that provide soft loans or grants. Typical

examples of applications for such soft loans or grants are for training your personnel, preparing a

feasibility study, implementing a pilot project prior to an investment, and making environmental-

protection-related improvements.

Nevertheless, even for a grant, the donor will most probably assess your business plan before taking a

decision. Donors wish their grants to be given only to well- planned and viable ventures. They rightly

believe that these are the ones that can have a substantial social, microeconomic and macroeconomic

impact.

4. How To Prepare A Business Plan?

Who Prepares A Business Plan?

The answer to the question about who contributes to the preparation of a buiness plan depends very

much on the type of business and the structure and size of the entity. In a very small company, the

planning work and the drafting of the document have to be done by the managers and owners

themselves. In larger organizations, contributions have to come from different people.

The larger the number of management and staff members involved in the preparation of a business

plan, the less the chance that non-viable solutions will be arrived at. Ultimately, those employed by

the business will assume some of the responsibility in implementing the plan. Therefore, it makes

sense from a technical, psychological and team-building point of view to involve them at an early stage

of the process. Firstly, employees have the best knowledge of the different aspects of the company's

operations, and secondly no plan will be implemented successfully unless key employees identify

themselves with the targets set and the means committed. Company employees contributing to the

preparation of a business plan are typically:

•The Chief Executive Officer (CEO), who should have the main responsibility for supervising the

business planning process;

•The marketing and sales manager, who understands best the demand of the market, its growth

potential, the specific requirements of clients, the prices that they are ready to pay, the moves of

competitors, etc.

•The development and production managers, who provide input of central importance for the

business plan, such as lead times for developing new products, requirements for new production

machinery and equipment, personnel needs and raw material requirements.

•The financial manager, who usually puts the financial data of the business plan together, works out

the financing requirements of the firm, and is one of the key figures in talking to investors and lending

institutions.

In some ventures, these persons inform their personnel about the business planning process and ask

them to assist by contributing data, information, opinions and ideas. This system approach of

mobilizing a large part of the organization has the great advantage of stimulating the awareness and

motivation of the firm as a whole.

The best skills available within the company should then be used for synthesizing and harmonizing the

input provided by the above team members and for producing the actual report. This work should

not be allocated simply to the least useful member of staff who happens to have time available. Many

large entities have highly competent business development managers whose main tasks are to

coordinate the business planning process and edit the relevant documents. Other enterprises do not

have adequate internal resources and hire external consultants to guide and facilitate the business

planning process.

What Are The Steps In The Plannıng Process?

A business plan should not be something you prepare once, then put on a shelf and forget. Dynamic

planning should be an integral part of managing your business. Most successful ventures prepare a

three-to-five year business plan every year. This involves updating last year’s business plan by

comparing the planned figures and goals with results achieved and taking into account changes,

new information, experiences and new ideas. The steps involved in the business planning process are

the following: (1) Assessing the situation, (2) Developing a mission, (3) Getting ready , (4) Setting goals,

(5)Working out the business plan, (6) Setting employee objectives, (7) Monitoring the process.

1. Assessing the situation

This should be an assessment of how your customers, partners, competitors and suppliers view your business. It should answer the question “where are we now?” It should also be a honest and self-critical exercise trying to answer the important questions any businesspersons should be asking themselves regularly: “What are our important strengths and main weaknesses?” “What can we do well and what should we not be doing at all?” “What are the major mistakes we have made in the past and what can we learn from them?” “Do we make a reasonable number of mistakes?”

2. Developing a mission

Before proceeding further you should formulate a clear mission statement for your enterprise. Developing your mission is often the most valuable part of the dynamic planning process since it can change or reconfirm the direction of your business. Missions are intended to provide a sense of purpose and act as a tool for communicating where the business is heading. Shareholders, employees and business partners can be better motivated and support the mission if they know what it is.

Your vision says how you see yourself in the far future. It expresses what you want your company to become. A vision shared by all the people concerned with the business is an important factor for its successful development.

Your mission defines what you want to achieve. It states the benefits your business will bring to clients, employees, shareholders and the community as a whole.

Your philosophy expresses the values and beliefs of your organization's culture.

Your strategy indicates how to get there.

A business is often founded on the vision of an individual. As the entity grows, the organization may

lose its original raison d’être and its mission may change. The mission should be reviewed regularly

and if necessary adapted. This should be providing an updated picture of what you are trying to

achieve and answering questions such as:

• What business are you in?

• What do you do best?

• Whose needs do you meet?

• What needs do you meet?

• What benefits do you generate?

Philosophies or values should be included in the written business plan. They are an important

foundation that should be communicated to all levels within your organization and to your outside

business partners. A consistent corporate culture and a good understanding of the entity's direction

and values can improve decision-making and staff productivity. Staff may feel better about what they

do. People are motivated by more than just getting a salary.

The vision, mission, philosophy and strategy of a firm are usually developed by the top management,

sometimes at an off-site location has many benefits (getting away from the day-to-day distractions for

the purpose of this process).

3. Getting ready

After the mission and the philosophical basis have been defined, you need to start the actual work of preparing the business plan. Some important matters you need to address when getting ready are: Appointing a coordinator. Appoint the staff member who will be responsible for coordinating the business planning process and for delivering the final document (business planning project manager) in time.

Hiring a facilitator. Consider the value of an experienced facilitator. Hire one if you do not have a staff member who is available and has the relevant experience and talent in guiding complex business planning processes. Very often an external person - neutral and independent - can be of value in moderating complex consensus-seeking sessions. This person should be knowledgeable about the requirements of the readers of the business plan.

Defining tasks. Define the different tasks and steps involved in the process, the timing of these and the

overall schedule for the work.

Identifying team members. Identify the people who will be involved in the process and define their

roles, competencies, responsibilities and expected contributions/deliverables.

4. Setting goals

Setting goals for the future development of the business is a prerequisite for the preparation of the

business plan. Although these goals will have to be adjusted in the iterative planning process, they can

still be of great value in setting the “tune” and “spirit” for further work. The goals should be time-

bound, realistic and measurable. Examples of such goals can be:

•Over the next three years increase sales volume by an average of 20 per cent per year by intensifying

marketing and sales effort in the neighbouring countries (export);

•In the coming year reduce production costs by 10 per cent through greater automation of production

lines;

•By the end of the second planning year launch three new products on the local market.

5. Working out the business plan

Working out the business plan basically involves synthesizing and harmonizing your marketing, sales,

development, manufacturing, operations and financing targets in such a way as to enable the

enterprise to meet its overall objectives. This “matching work” is usually conducted in an iterative

process until full consistency of all elements of the business is achieved.

•Gathering information. Gather and organize all the basic information that will be required from

internal and external sources (market surveys, reports on competition, new technological

developments, etc.). In addition to information available in-house, there are valuable sources and tools

such as industry associations, databases and specialized consultants to be considered.

6. Setting employee objectives

One of the most important actions after your business plan has been completed is to use it as a basis

for setting the objectives of units and individuals in your firm. The objective of your sales manager is

to achieve the sales volumes set in the plan. The production manager has to meet the quality

standards and production rates anticipated. The development staff have, among other things, to meet

the schedules planned for bringing into production the new product. These individual objectives

should be fixed in writing and the results of the work should be monitored and assessed periodically.

These should form the basis for the financial compensation of the employee.

7. Monitoring the process

Systematic monitoring of the implementation of your plan is a very important factor for the success of your business. Action plans, monitoring systems and constant feedback should be integrated to ensure successful implementation of the plan and achievement of its objectives. Participation in this process can have a profound effect on the way your team members view their role in the enterprise, and can have an immediate impact on their performance. If the business plan is completed and then locked up in a cupboard and forgotten for a year, your employees will never take business planning seriously again.

If key assumptions change, the plan must be adjusted. Accordingly, mid-term corrections are recommended. The key to maximizing the benefits of dynamic planning lies in implementation, action and keeping the plan up to date.

5. Different Types Of Business Plans

The structure, content and depth of a business plans depends on many factors, such as:

The main objective of the business plan;

• The stage of the business (start-up or existing company or spin-off); • Type of business/industry; • Financing situation; • Size of the company, etc.

The brief discussion below gives some examples of relevant factors.

•Type of business/industry. If you are in trade, your business plan will not be dealing with issues such

as manufacturing process or investments in machinery. You will put more emphasis on obtaining

funds to finance the building up of your procurement and sales network and pre-financing the goods

you will be trading with. The mix of products and services to be offered can also affect the content of

a plan. Issues relating to inventory, storage and so forth become less significant as the

product/service mix moves towards a pure service business. In any case, your business plan should

cover standard issues such as development of human resources and marketing.

•Sole ownership. If you are a sole proprietor of a small business, perhaps you will be drafting the

entire business plan yourself. For a small business, the size, complexity and effort spent in producing

the business plan have to be kept within limits. In such a case the business plan has to put emphasis

on your own person. Personal financial information may be required in order to support your

statement that you will be allocating a certain part of your own funds as an investment in the

business. You should also provide specific details regarding any personal non-financial assets that you

plan to use in your business.

•Transnational corporation. The corporate business plan of a transnational corporation with an annual

sales volume of several billion dollars does not put emphasis on the same issues as an average medium-

size company with an annual turnover of a few million dollars. Issues covered in the business plans of

transnational corporations are:

➢ Global image promotion strategies;

➢ Expansion through acquisition of other companies/mergers, etc.;

➢Analysis of global macroeconomic developments and international politics that are likely to

influence the business;

➢Prediction of long-term trends and developments in demographic, social and consumer behaviour;

➢Long-term product development (5 to10 years or beyond);

➢Government relations and lobbying policies. Issues of less significance for corporate business plans

are perhaps the following:

➢Production techniques (such corporations have many different types of products);

➢Sales tactics (these could vary in different continents/countries);

➢Staff policy (with perhaps the exception of top management in the different countries, etc.).

•Divisional business plan. The plan of a business division (unit) of a large corporation does not differ

much from the business plan of an independent company. However, in addition to the standard

issues covered in the business plan (production, sales, resources, etc.), it has to cover all issues of

interfaces and synergies with the other units of the corporation.

•Start-up business. If you are just starting, you face a special challenge because you do not have an

established track record. Instead, you must concentrate heavily on your ability to sell yourself and

the partners that you may have as potentially successful businesspersons. It does not matter

whether you are using your business plan in an effort to obtain financing or to convince prospective

employees to come to work for you. You need to convince whoever reads your plan that your

business idea is going to be a success. In essence, your ability to sell yourself is a substitute for the

historical information that does not exist. Therefore, your plan should include personal information

about all persons involved in the start-up venture (previous occupation, experience, business

achievements, etc.), instead of the historical information that an ongoing business would be able to

provide.

As is the case of an established business, you also need to provide projected profit and loss

statements and a cash flow plan. These documents quantify the results you expect to achieve

through your operations. Be sure to include any start-up costs that will be incurred prior to the

opening of your business. While your business will probably involve certain expenses that are unique

to your industry, do not forget some of the more common start-up expenses such as:

➢Professional fees (legal or accounting);

➢Regulatory charges (licensing, company registration costs, etc.);

➢Deposits for rented space;

➢Market study.

•Major expansion of existing business. If your business plan is produced with the main aim of raising

finance to expand your business, the two following issues have to be properly covered:

➢That the market of the business sector you are targeting has potential for further growth; and

➢That your entity, on the basis of its history and competitive strengths, is well positioned to win a

substantial share of this market.

•Regularly continuing business. There are also business plans that do not anticipate significant

growth or major investments and therefore are not concerned with the issue of raising additional

funds. In such cases, business plans are produced to inform or get approval from the decision-making

bodies and existing investors and/or the team of managers write themselves in order to reach a

common understanding of their goals and to determine their future priorities and activities.

Obviously, in such business plans, less emphasis is put on justifying the market potential to

accommodate growth. Many firms produce such business plans every year.

•Financing stage. As has often been mentioned, one of the primary purposes of producing a business

plan is to inform your lenders and investors. If you are not seeking new money but only intend to

keep your present financiers informed, you need to put less emphasis on the background of the

business (which is already known), but to emphasize more new developments in the business.

However, if you are approaching new lenders/investors (so-called second and third round and/or

the stock market), your plan has to contain a more detailed description of the background of your

business (including markets and products).

•Specific project. Perhaps you are drawing up a business plan not for the entire business of your

entity, but only for an isolated one-time investment project such as:

➢ Opening a subsidiary/profit centre in a specific country abroad;

➢ Starting a new business unit for a set of new products or services.

For such business plans you need only to provide general information about the entire group. Your

business plan should be concentrating on the new specific business you are planning. However,

lenders or investors will be interested in having a wider picture of your company’s finances in order

to assess the overall financial risks. If your company has financial difficulties, obviously this will

reflect on the project as well.

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

UNITED NATIONS, New York and Geneva, 2002

REFERENCES

CHAPTER 1:

NATIONAL UNIVERSITIES COMMISSION

http://www.unimaid.edu.ng/root/CDl/Entrepreneurship%20Studies.pdf CHAPTER 2: Alexandru ROJA, Marian NĂSTASE, PROCEEDINGS OF THE 8th INTERNATIONAL MANAGEMENT CONFERENCE, November 6th-7th, 2014, BUCHAREST, ROMANIA http://conferinta.management.ase.ro/archives/2014/pdf/10.pdf

CHAPTER 3:

By Kathryn A. Baker

http://www.au.af.mil/au/awc/awcgate/doe/benchmark/ch14.pdf

CHAPTER 4:

Bernd Schulz, Polytechnic of Namibia

http://ir.polytechnic.edu.na/handle/10628/39

CHAPTER 5:

Wrexham County Borough Council

https://www.wrexham.gov.uk/assets/pdfs/business/se_manual/11_generating_ideas.pdfSerkan

CHAPTER 6:

John F. (Jeff) Tanner, Jr., is professor of marketing at the Hankamer School of Business, Baylor

University

Mary Anne Raymond is a professor and chair of marketing at Clemson University

http://2012books.lardbucket.org/pdfs/marketing-principles-v2.0.pdf

CHAPTER 7:

Marina Klačmer Čalopa, Jelena Horvat, Maja Lalić , Original scientific paper UDC 658.14(497.5)

https://www.efst.hr/management/Vol19No2-2014/3-KlacmerCalopa_et_al.pdf

CHAPTER 8:

Prof. Dr. Laura Portolese Dias, This is the book Beginning Management of Human Resources (v. 1.0)

http://2012books.lardbucket.org/pdfs/beginning-management-of-human-resources.pdf

CHAPTER 9:

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

UNITED NATIONS, New York and Geneva, 2002

http://unctad.org/en/Docs/iteiia5_en.pdf