Uploaded by Victor Ngeno


Course Description
This course unit is intended to equip the trainee with the necessary knowledge, skills and attitudes
that will enable them to start, operate and manage a personal or group enterprise. It is intended to
instill the drive necessary for any of them to venture into profit making attitudes.
General objectives:
At the end of this course unit the trainee should be able to:
Demonstrate positive attitudes towards self- employment
Identify viable business opportunity
Understand factors likely to affect the success of a business
Portray a desire to venture into business
Acquire management skills necessary for running a successful enterprise.
Course Content
1. The meaning and importance of entrepreneurship:
Definition of terms
Characteristics of an entrepreneur
2. Theories of entrepreneurship:
Sociological theories
Economic theories
Financial theories
3. Role of entrepreneurship in economic growth and development:
Entrepreneurship and national development
Different economic systems
Role of entrepreneur in different economic systems
Positive and negative role of entrepreneurship in economic development.
4. Preparing for start-up of a business
Steps in preparation for start-up
Generation of business idea.
Stages of starting a business
5. Legal aspects in starting and operating business enterprise
Registration process
Licensing matters
Permits and taxes
Government policy on small enterprises
6. Coping with competition:
Financing small enterprises
Selecting the business location
Reaching the customers
7. Record keeping
Uses of a business plan
Steps in business planning
Rhoda Abrams; A stp-by-step program for starting your business
Patrick .R. Liles; New Business Ventures and The Entrepreneur; Homewood, Illions.
Robert D. Hisrich; Entrepreneurship African Editor, McGraw Hill Education
Sara Carter; Enterprise and Small Business, Principles, Practice and Policy, Prentice Hall.
CATs 20%
Assignments 20%
Main Exam 60%
Total 100%
The lecture should help you to understand the meaning of entrepreneurship and the
rationale for studying the discipline. It should also help you to appreciate the role played by
entrepreneurship in the country.
By the end of this lecture you should be able to: Define and explain the meaning of the concept Entrepreneur, entrepreneurship and
 Explain the rationale of learning entrepreneurship.
 Analyze the role of entrepreneurship in the economy
Definition of entrepreneurship: A way of thinking, reasoning and acting that is opportunistically
The concept of entrepreneurship has a wide range of meanings.
It is the process of constantly scanning one’s environment and creatively responding to it
through identification of business opportunities, organizing resources to implement the
opportunities and launching enterprise, which thrones and grows through making profit.
According to Schumpeter, “Entrepreneurship is based on purposeful and systematic
Entrepreneurship is the attempt to create value through recognition of business opportunity,
the management of risk-taking appropriate to the opportunity, and through the communicative
and management skills to mobilize human, financial and material resources necessary to bring a
project to fruition.
Is a person who has the ability to identify and evaluate business opportunities in the
environment, gather resources to take advantage of the business opportunities and initiate
appropriate action to ensure success.
An entrepreneur is a person who has possession of an enterprise, or venture, and assumes
significant accountability for the inherent risks and the outcome. He is an ambitious leader who
combines land, labour and capital to often create and market new goods or services.
Is also known as corporate entrepreneurship. It occurs when managers of large organizations
practice entrepreneurship in those organizations, being more concerned with innovations and
turning round those organizations. Although these managers do not risk their resources or gain any
profits they risk their jobs, embarrassment and they may gain promotion, and bonuses
He is the prime mover of the business enterprise; without the entrepreneur, there will be no
business in the first place.
Entrepreneur identifies the gaps in the market and then turns these gaps into business
Entrepreneur is involved in financing the business and availing the capital.
The entrepreneur manages the business (though he may delegate to others but he has the
Entrepreneur bears the risks and uncertainties of the business.
He provides the necessary leadership to the people working for the business.
Marketing of products and responding to the competition.
Determination of those objectives of the enterprise and change of the objectives as conditions,
Development of an organization including efficient relations with subordinates and all
Development of a market for products and devising of new products to meet or anticipate
consumers demand.
Maintenance of good relations with public authorities and with the society at large.
Initiative and risk taker:- He takes actions that go beyond job requirements or demand of the situations.
- He sees and acts on business opportunities.
Innovative:- Innovation involves problem solving and an entrepreneur is a problem solver. According to
Schumpeter, entrepreneurship is a creative activity. An entrepreneur is basically an
innovator who introduces something new in the economy.
Persistent and Patient;- An entrepreneur takes repeated action to overcome obstacles that get in way of getting
- Does personal research on the best way to provide products or services
- He consults experts for business or technical advice.
High achievement:- People having high need for achievement are more likely to succeed as entrepreneurs.
- Entrepreneur has a concern for high quality work.
- He acts to do things that meet or beat existing standards of excellence.
- He desires to produce or sell top quality products/services.
Opportunity seeking:- Searching for business opportunity is a constant pre-occupation of entrepreneurs.
- They will go into any length to get what they want.
- Entrepreneurs use a variety of methods to acquire information around.
Future oriented:- Entrepreneurs have a great foresight.
- They can sense opportunities in the future by just observing world trends. This makes them
different from other people.
- They act with little hesitation on what they perceive about the future.
- This may be based on trends in demand, supply, technology, etc.
- The trend could also be I n demography, socio-political changes or even climate.
Imaginative:- Entrepreneurs tend to be people with a lot of ideas.
- They also want to put their ideas into practice. Its for this reason that they are said to be
creative, resourceful and innovative.
Efficient and quality conscious:- Entrepreneurs believe a lot in their own abilities to do things and succeed. There is usually
nothing that they think they cannot accomplish when their mind is set to it.
- They work independently.
- They spare no energy or resources to achieve the objectives of the business.
In the last lecture, we discussed the meaning of entrepreneurship,
entrepreneur and intrapreneurship. In this lecture we will learn different
classifications of entrepreneurs. We shall also discuss the role played by
entrepreneurs in economic development
By the end of this lecture, you should be able to: Analyze different classification of entrepreneurs
 Explain who entrepreneurs are and what makes them different
from managers
2.4 content
There are different classifications of entrepreneurs. In one of the
classifications, entrepreneurs are classified as:1.Craft entrepreneurs :
These are entrepreneurs who exploit or rely on their personal skills to
start and operate their business. For example, when a person trained in
Information Technology (IT) starts a business related IT such as a cyber
café, web design, etc. These types of entrepreneurs rarely expand
because they may be limited by the skills and are not keen to hire the
skills they lack.
2. Lifestyle Entrepreneurs
These are people who enter business because they have little else to do.
Their objective could be survival or to maintain a lifestyle they may
have been used to when they were employed. These include many that
start business after retrenchment or retirement. They are mostly sole
traders or employ only a few people. Their businesses rarely grow or
expand. As long as the business can maintain them they may not be
interested in expansion.
3. Opportunistic Entrepreneurs
These are entrepreneurs who rely on opportunities to start and run
their businesses more than their skills. They can start businesses in
areas where they have no skills and employ skilled labor. They are more
of coordinators who are interested in having the business grow and
expand, delegating responsibilities to others and increasing the number
of employees working in the business. They are more concerned with
the growth of the firm and their firms are usually entrepreneurial. They
are few in number. These entrepreneurs may own more than one firm
(Deakins and Freel,2003). They start business and expand as far as
possible in order to be able to hire other employees. Most of these other
employees have needed expertise that the owners does not have.
NB: The owner is not limited by his skills because he/she can hire the
lacking skills.
Entrepreneurs may also be classified as:1) Self-Employed Entrepreneurs
These are individuals who perform all the work and keep all the
profit, e.g, family run store, agents, repair persons, accountants,
physicians, lawyers etc. The business could be full time because no
one else is involved.
2. Inventors
Have particular inventive abilities to help them design better
products, create companies to develop, produce and sell the item e.g
high technology companies such as computer hard wear or software
3. Pattern Multipliers
These look for an idea someone else has already created and then
create their own businesses based on it.e.g franchises, chain stores
4 .Economy of scale exploiters
Refers to entrepreneurs who benefit from a large volume of sales by
offering discount prices and operating at very low overheads.
5 .Acquirers:
Those who take over a business started by another and use their own ideas
to make it successful eg, buying a on going concern (business on sale).
Sometimes, it happens when a business has financial problems forcing the
owner to sell it to new owners or managers.
6. Buy and sell artists:
Are those who buy a company for the purpose of improving it before
selling it for a profit.
7. Speculators
Those who purchase commodities hopping the prices will increase and
they sell them at a profit .eg real estate, arts food stuff, shares,etc
8. Internal entrepreneurs/intrapreneurs
Those who create new ideas and make them into a successful project
within an existing business. Although they earn no profit nor take personal
financial risks, they need the same methods of operations as an
entrepreneur who is running his/her own business.
9. Social entrepreneurs
Is a someone who recognizes social problems and uses entrepreneurial
principles to organize, create and manage a venture to make change.
He/she is driven by social mission to produce goods and services for social
purpose. These are entrepreneurs whose main objective is not to make
profits but to produce or offer service that would help the society for
example, NGOs that are started to help the disadvantaged such as the
destitute, refugees, etc.
Whereas business entrepreneurs typically measure performance in profit
and return, social entrepreneurs assess their success in terms of the impact
they have on society. While social entrepreneurs often work through nonprofits and citizen groups, other entrepreneurs work in the private and
governmental sectors. They may not make any profits but gain satisfaction
when the people they serve benefit eg starting a community library to help
the people in the community access information easily.
Political entrepreneur:
The term political entrepreneur may refer to any of the following:Someone(usually active in the field of either politics or business), who
founds a new political project, group, or political party.
A business person who seeks to gain profit through subsidies,
protectionism, government contracts, or other such favorable
arrangements with government through political influence.
A politician who seeks to further his own political career and popularity
by pursuing the creation of policy that pleases the populace.
Uses a political system to further a commercial venture or their own
 Economic development essentially means a process
of upward change whereby the real per capita
income of a country increases over a long period of
The economic history of the presently developed
countries for example, America, Russia and Japan
tend to support the fact that the economy is an effect
for which entrepreneurship is the cause.
 Generally speaking, economic growth is regarded as
a good thing. It brings wealth, improved health,
better education lower rates of child mortality,
longevity (long life span), more democracy, greater
sexual equality, enriched prospects for personal
development etc.
The crucial role played by entrepreneurs in the
development of western countries has made people
in the under – developed countries too much
conscious of the significance of entrepreneurship for
economic development. Entrepreneurship is
considered as a catalyst for economic development.
Several scholars of socio-economic development
have supported the development of
For achieving the goal of economic development, it
is necessary to increase entrepreneurship both
qualitatively and quantitatively in the country.
Schumpeter visualized the entrepreneur as the key
figure in economic development because of his role
in introducing innovations.
Parson and Smelser described entrepreneurship as
one of the two necessary conditions for economic
development, the other being increased output of
 Entrepreneurs are considered to be the prime
movers of innovations and entrepreneurship is a
necessary dynamic force.
 The entrepreneur has an ability to perceive
opportunities which either others do not see or care
 Essentially, the entrepreneur searches for change,
sees need and then brings together the manpower,
material and capital required to respond to the
opportunity that he sees.
 The role of entrepreneurship in economic
development varies from economy to economy
depending upon its material resources, industrial
climate and the responsiveness of the political
system to the entrepreneurial function. Thus,
entrepreneurs contribute more in favorable
opportunity conditions than in economies with
relatively less favorable opportunity conditions.
Economic growth is envisioned as function of inputs
of land, labor and capital.
 Economic growth is as a result of wealth creation
 Potential for economic growth is limited by
availability of economic resources.
 As Kirztner sees it, entrepreneurial insights are
profit opportunities that have previously gone
unnoticed. Entrepreneurs act upon these insights
and the economy becomes more productive
because it is able to produce more consumer
satisfaction at lower cost.
 The connection between entrepreneurship and
economic growth is that these previously
unnoticed profit opportunities must come from
somewhere, and the most common source of
profit opportunities is the insight of other
 Entrepreneurial ideas arise when an entrepreneur
sees that the idea developed by earlier
entrepreneurs can be combined to produce a new
process or output.
 Entrepreneurial opportunities tend to appear
within the context of a specific time and place.
Therefore, a decentralized economy that allows
individuals to act on their entrepreneurial
insights, and rewards them for doing so, produces
an environment where additional entrepreneurial
insights are likely to be produced.
 Entrepreneurial insights lay the foundation for
additional entrepreneurial insights, which drive
the growth process.
Economic systems are broadly grouped into three:
 Capitalism – free market economy
 Socialism – planned / centralized
 Mixed economy.
ECONOMY (Capitalism)
- In capitalist economy, the entrepreneur enjoys
considerable degree of freedom in decisionmaking. Capitalist economy is characterized by;
 Free enterprise
 Freedom to invest
 Healthy competition
 Lack of government interference
 Consumers seveignity (consumer power)
- In capitalist economy, the price factor is
determined by market dynamics i.e. the interplay
of demand and supply factors.
- There is no interference on the part of
government in respect of price fixation.
- The entrepreneur has complete control over price
and market mechanism. Therefore the
entrepreneur determines:
 How much to be produced
 Where to produce
 How and where to distribute
 How to promote and the price
- In capitalist economy, business is driven by profit
objectives. (not exploitation)
- The price is determined by market situation.
Capitalism encourages healthy competition and in
competitive environment, one cannot change high
prices to exploit the customers.
- Also the professional firms in a capitalist economy
understand their social responsibility and
therefore, they try to balance profit maximization
and social responsibility.
o NB: small entrepreneurs do not enjoy
protection in a capitalist economy. The
principle is survival for the fittest.
o Small entrepreneurs concentrate on the
business areas which large firms find it
difficult to concentrate.
o Small firms may also concentrate in a small
local areas rather than marketing their
products in the whole country.
 In a socialist economy, the governments play an
important role in economic activities.
 Almost all industries are owned by the
The central government appoints experts to frame
business policies to plan for resources, to set up
business units and to manage them.
 The enterprises are run for national interest or
social interest rather than for profit motive.
 Entrepreneurs have role in large enterprises,
especially of national importance. (e.g Soviet
Union, China and East European countries).
Currently these economic systems are only found
in few countries like Cuba and North Korea.
It has both characteristics of centralized and free
market economy.
 The ownership and management of some
industries, especially of national importance is
with the government.
 Certain industries are reserved for public
sectors and other industries are open for private
sector. E.g Industries reserved for public sector
include defense, energy, railway, mining etc.
Thus entrepreneurs have the role of:
Regional development, general employment,
social development, technology development,
research and development, contribution of
revenue through paying of taxes.
1. Entrepreneurship promotes capital formulation
by mobilizing the idle saving of the public.
2. It provides immediate large- scale employment –
thus helping to reduce unemployment which is
the cause of most social economic problems.
3. It promotes balanced regional development by
reducing rural – urban migration.
4. It helps reduce the concentration of economic
power to urban areas.
5. It stimulates the equitable redistribution of
wealth, income and even political power in the
interest of the country.
6. It encourages effective resource mobilization of
capital and skill, which might otherwise remain
unutilized and idle.
7. It increases backward and forward linkages,
which stimulate the process of economic
development in the country.
8. It promotes countries export trade, which is very
essential to economic development.
Their inputs should be sought – their suggestions
could be supportive
Allow them to share some of their fears or concerns
as you get a realistic idea of what’s on their minds.
Discuss ways to make certain that your family
responsibilities are met even while you build your
Make them feel part of your new, exciting adventure.
However, be careful on loans or investment from
family or close friends. This is because you may risk
both the business and personal relationship.
(a) Importance to the trainees
(1) Career planning
 Trainees are able to understand the unlimited options of starting a business or
becoming self-employed.
(2) Business Understanding
 Trainees will understand all the functions and have a strong business base.
(3) Application of Skills
 Entrepreneurship education serves as a vehicle for trainees to see ways to become
self-employed with the skills they have acquired.
(4) Community understanding
 Trainees may use entrepreneurship education content to study. Entrepreneurs in
their communities to discover opportunities for new business in their areas, to gain
understanding of suppliers available, and to analyze the demographic that would
contribute to the success of their ventures.
(5) Self Understanding.
 Entrepreneurship education will enable the trainees analyze their strength and
weaknesses. It is important to look at both the positive and negative factors in a
persona make-up and how they are likely to influence success in business.
(6) Orientation to change.
 Entrepreneurship education encourages trainees to look for changes that may lead to
 Opportunities of the future.
 Entrepreneurs have a single-minded divine to try the “new” and stay ahead of others.
(7) Creativity
 Entrepreneurship education encouraged all kinds of innovative thinking related to new
products quality, product diversification, efficiency, new technology, etc.
(b) Benefits to the country/Nation
1) Employment creation
Own employment and hiring assistants.
2) Rural – Urban balance
Small entrepreneurs who are able to establish and operate “Jua Kali” enterprises in small
towns and villages are developed.
3) Industrializations
Accelerated industrialization particularly through small-scale and jua kali enterprises
requires an increased supply of individuals with entrepreneurial capabilities especially in
manufacturing and technology based – businesses.
Capital formulation
Capital is a scarce national resource and care should be taken to ensure that individuals receiving
loans are prepared technically and entrepreneurially.
The high mortality rate of new enterprises and the limited growth of those that survive is a clear
indication that the availability and utilization of loan capital needs to be examined.
Labour Utilization
Productivity is improved through better organization and use of labour by entrepreneurs.
Human resources are very important for development; therefore, by orienting entrepreneurs to
importance of efficiency, human resources will be used more productively.
Financial gains
Self-employment which leads to job satisfaction and flexibility.
Provide job opportunities to the unemployed or those seeking better jobs.
A means of opening up new industries especially in the rural areas.
A source of generating income and increased economic growth.
Facilitates competition hence encouraging high quality products
Facilitates production of more goods and services.
Leads to development of newer markets
Promotes use of modern technology hence enhancing higher productivity.
Draw backs of Entrepreneurship
(a) Challenges to the entrepreneur
Long working hours
Unclear/unguaranteed income
Poor pay
Fear of loosing all the investment
Bankruptcies and closure.
Fear of delegating
Competition by established businesses
Lack of funds
As an entrepreneur one wants to make sure he /she gets what he/she wants and
deserves. He must exploit his full potential in order to realize economic benefits
and personal satisfaction.
He must do this by organizing, operating his own small business from which he
will deprive the following benefits:
Engaging in self- employment- employment is normally associated with hiring
out one’s services for wage employment. In wage employment one sells his
labor to an employer. The employer pays wages or salaries for the labor
provided. Such a person therefore depends on employer for his or her income
and means of earning a livelihood .Such employer is referred to as “other
Self- employment on the other hand refers to a situation where a person creates
his/her own employment by starting an income generating activity (enterprise).
Such a person works for himself/herself. He/she depends on his self- created
income/ income generating activity (I.G.A) for income and livelihood. This
person is literally employed by the enterprise he has created and thus selfemployed.
Implications of self-employment
 You own the IGA i.e the enterprise and therefore you will bear all the
risks and provide the finance to be invested.
 You must be ready to manage the enterprise. You will be the owner
 You will depend on the business for your income and means of
livelihood. The business is your employer
Advantages of being self-employed
 One becomes independent and no longer depends on on another
person called the employer
 One gets a chance to try one’s own ideas
 Financial rewards are no longer limited by another person. What one
gets depends on:
-the business opportunity/how good the choice of business is
-one’s own hard work and effort
-success of the business/how well the business is managed
 Recognition and prestige especially if the business succeeds
 One can create business network without being accountable to anybody else
 Self- image and self- worth may be boosted
Increases responsibilities being the owner manager
One may need to work long and irregular hours
Income may not be guaranteed
One takes all the risks of failure
A good business idea is a prerequisite for successful business venture. Good
ideas do not just appear but are as a result of hard work, effort and
Finding a good idea is the first step in transforming the entrepreneurs desires
and creativity into a business opportunity.
Unmet need in the community:
One can identify a need for a given product/service in the community e.g a
school, a health facility, a petro station, etc, whereby people travel long
distances to get that facility.
Hobbies and interests:
Many people turn their hobbies to successful business ideas.
Personal skills and experiences:
Having a certain skill can lead one to deciding to start so as to utilize that
skill or experience.
Mass media:
These include newspapers, magazines, TV, internet, etc. these are used to
advertise business and so highlight problems.
Shows and exhibitions:
One can look for new technologies that can be traded by discussing with
One can identify market needs not met by the existing business,
shortcomings or weaknesses of existing business that give an opportunity to
open a new business. This can be by a way of attributive listening (keen
listening, which is able to identify problems from complaints very quickly).
7. Government policies, plans and priorities:
Some people develop ideas out of the pronounced government policies,
priorities and plans. E.g. policy on fixing safety belts and speed governers on
all public vehicles, phasing out 14-seater matatus, etc.
8. Brainstorming:
It is a creative technique of solving problems as well as for generating ideas.
It facilitates creativity. Many ideas are thought of and listed down. The list is
then examined systematically and finally one idea can be pursued which
looks more profitable.
A good idea is not necessarily a good business opportunity.
 A business opportunity is an attractive investment idea or proposition that
provides an entrepreneur with the possibility of good return on the
 Not all business ideas turn into good business opportunities.
 A business becomes a good opportunity when it is viable, and feasible.
Viable means it can give the owner good/reasonable returns and is able to
Feasible means it is able to start and is workable.
An idea is an opportunity only if it has a chance to success.
NB: Kenyan marketing environment is complex, turbulent (changing
constantly) and subject to rapid changes on demographics, consumer
attitudes, social values, availability of raw materials, economic slumps
(reduction) and recessions caused by drought, clashes, changes in exchange
rates, inflation, technological change etc.
Trends, Implications And Business Opportunities
Trends- are occurrences in a place (eg increased accident rates)
Implications- are based on trend. They could be positive or negative
Business opportunities- are entrepreneurial activities resulting due to these
implications (sell of coffins, flowers, transport/ hearse)
1. Environment:
Assess the basic features and resources in the environment e.g raw materials,
infrastructure, population – size, composition, occupation, socio – economic
2. Target customers:
Assess the people you intend to target as your customers in great detail e.g.
the children, youth, elderly, men, women, farmers, learning institutions,
health facilities etc.
Know their specific needs, expectations, income levels, tastes, buying
behavior etc.
3. Current business scene:
Assess the present pattern/trends in the area to understand the needs, flow of
commodities, local consumption etc.
Assess the emerging trends and patterns of trading and business activities in
terms of new demand, products/services, competition, etc e.g growing need
for computer literacy information technology etc.
4. Technology change:
Assess whether there are any changes or anticipated changes in technology
that may make some products obsolete while creating new opportunities e.g.
changing from manual to computerized systems which indicates more
opportunities in the area of IT.
A good opportunity occurs where there is:-
Real demand for the products/services i.e there are people with need for
the product, money and will to buy them. Good market scope.
Attractive returns on investments / sufficiently profitable.
The business is competitive – is able to compete effectively and cope
with the competition.
The business meets the objectives of the entrepreneur who is taking the
There is availability of resources e.g raw materials, equipment, premises.
Income exceed the cost of production i.e it is profitable.
The required infrastructure is available e.g water, transport, electricity,
security etc.
Enough skilled people i.e. technical and managerial skills.
Environmental Trends Suggesting A Business Or Product Opportunity.
1. Economic Forces:State of the economy level of disposable income, consumer spending
2. Social forces:Social and cultural, trends, demographic changes and what people think is in
3. Technological advances;New technologies, emerging technologies, new uses of old technologies.
4. Political and regulatory changes;New changes in political arena, new laws and regulations
The first step in selecting business opportunities is to do some screening. In
screening ask yourself the following questions:
 What are the benefits and how large are they?
 What are the assumptions?
 What are the likely problems?
 Do you like and understand the customers?
 Do you have any experience in this area?
 Do you have relevant skills and resources?
In many firms, idea generation is an haphazard process. However,
entrepreneurial ventures can take certain concrete steps to build an
organization that encourages and protects new ideas.
The following are some of the steps to be followed to encourage and protect
new ideas.
1. Establish a focal point for ideas:Some firms meet the challenge of encouraging, collecting, and evaluating
ideas by designating a specific person to screen and tract them. (if it is
everybody’s job, it may be nobody’s responsibility.)
2. Establishing an idea bank (or vault).
This could be a physical or digital repository (storage store/library) for
storing ideas.
3. Encouraging creativity at the firm level:
Innovation refers to the successful introduction of new outcomes by a firm.
In contrast, creativity is the process of generating a novel or useful idea but
does not require implementation. Creativity is the raw material that goes into
4. Protecting ideas from being stolen:Intellectual property right is a body that protects human intellect that is
intangible but has value in the market place. It can be protected through
patents, trademarks, copyrights and trade secrets.
Life cycle growth Model
Age of the Business
The organization life cycle (OLC) model or theory, proposes that over the
course of time, businesses move through a fairly predictable sequence of
developmental stages.
This model, which has been a subject of considerable study over the years, is
linked to the study of organizational growth and development.
 Organizations are said to pass through a recognizable life cycle which are
fundamentally impacted by external environmental circumstances as well
as internal factors.
 This explains the rise and fall of some organizations and even entire
 In a summary of OLC models, the changes that occur in organizations
follow a predictable pattern that can be characterized by developmental
stages. These stages are sequential in nature, occur as a hierarchical
progression that is not easily reversed, and involve a broad range of
organizational activities and structures.
 There are five stages of organizational life cycle. They include:
1. Start – up/inception stages
 Is the most challenging and critical stage and many businesses (over
50%) close down within this time.
 A lot of effort is required to help business move from this stage to the
 It is characterized by:
 Lack of information
 Few products/single product
 High production cost
 Limited market /few customers
 Low sales and profits if any
 Little capital and other resources
 No specific division of labour.
 Unstructured (does not have normal departments and processes; no
complete management system.
 The enterprise has not formed its core competence and the
entrepreneur remains the central human resource – he does most of
the work.
2. Survival StageAt this stage, the major goal is survival.
Just like in the start – up stage there are very many challenges:
 Although the business has already started the customers are too few to support
 Cost of operation are still high
 Ability to compete is a challenge.
 Sales are still low.
3. Growth/expansion stage:
 Is also called maintenance stage. The enterprise is fast-growing .
 It is transiting from non-planning to planning enterprise.
 It is running on functional departments.
 This stage is characterized by rapid growth, increased production and
product lines, reduced cost of production.
 It is enjoying economies of scale.
 The market starts expanding as the number of customers increase. This
leads to increased sales, improved cash flow and profits. The workload
increases and this brings the challenges of need for more personnel, more
structures and extra more funding.
 This growth normally raises the need for more structures and more
 The expansion marks critical turning point and the entrepreneur must be
willing to take leadership roles quite different from their founding roles.
 They will be required to delegate more, have leadership vision and
aggressiveness I and setting the pace through strategic planning and
implementation of those plans.
4. Maturity/consolidation stage:
 In this stage, the entrepreneurs are expected to have mastered the product
and production, market, and basic managerial skills.
 The business is generating enough profit and the challenges include:
 Control of expenses,
 Competition
 Monitoring the market changes
 Developing new products
 At a certain level of maturity more expansion could be seen as
threatening as it would mean losing control.
 The entrepreneur is more eager for status, prestige, respect, trust and high
This may lead to reduced growth and the firm may start declining as the
entrepreneurs start prioritizing to spend more on activities that bring in
 There may be need for more formal structure, more delegation, because
the enterprise could be employing more people and thus becoming more
5. (a) Revival stage/regeneration
 Theory has it that after this consolidation or maturity stage the businesses
should be assisted to re-engineer failure to which they decline and
sometimes fizzle out (disappear gradually)
 This may involve:
 Development of higher skills i.e. staff training.
 Broadening the marketing strategies
 Introducing modern technologies.
 Pursuing creativity and innovation
 Introduce operational strategy to new field of investment, production
and marketing, diversification, management etc.
 More financing will be required. Holt (2004) referred to this stage as
one of rekindling organizational growth during which rapid growth
could be achieved by clever repositioning of product lines and
services through purposeful market segmentation (creation of new
(b) Decline stage/degeneration
This occurs if the business does not re-engineer itself by being more
innovative and creative to developing new products, venturing into
other markets, diversifying, reorganizing the management and even
sometimes the form of business.
Degeneration may occur because:
 Demand has changed
 The market competition has intensified.
 The enterprise has not met emergency in time
 The domestic markets become saturated.
 Decrease of resources availability
 Improper choice of lead manner.
 Upswing of self-satisfaction.
 Competitors with advanced technology.
 If the firm does not respond swiftly its growth will continue to decline.
 Sales will go down as the product life may have started to decline.
Profits also drop and some products become uneconomical to
produce. However, if the entrepreneur is able to re-engineer the firm,
it may start the growth cycle all over again and instead of declining, it
will go through a revival or renewal but at a higher level.
 Some business at this level develop new products, venture into
partnerships, mergers, take- over or employ other growth strategies to
keep them afloat.
 Organizational life cycle is an important model because of its premise
and its prescription.
 The models premise is that, requirements, opportunities and threats
both inside and outside the business firm will vary depending on the
stage of development in which the firm finds itself. For example,
threats in the start – up stage differ from those in the maturity stage.
 As the firm moves through the developmental stages, changes in the
nature and number of requirements, opportunities and threats exert
pressure from change on the business firm.
 Organizations move from one stage to another because the fit between
the organization and its environment is so inadequate that the
organization’s efficiency and or effectiveness is seriously impaired or
the organization’s survival is threatened.
 The models prescription is that the firms managers must change the
goals, strategies and strategy implementation devices of the business
to fit the new set of issues.
 Thus, different stages of the company’s life cycle require alterations in
the firm’s objectives, strategies, managerial processes (planning,
organizing, staffing, directing, controlling), technology, culture and
decision – making. For example at the start-up stage firms exhibited a
very simple organizational structure with authority centralized at the
top of the hierarchy. As the firms grow, they adapt more sophisticated
structures and decentralized authority to middle and lower level
At maturity, the firms demonstrate a significantly more concern for
internal efficiency and installed more control mechanisms and
Can be classified into:
Financial vs Non-financial institutions
External Vs internal
Formal Vs informal
Often, small business will need to use a combination of financing
sources, depending on the sector, and the stage in their growth and
 A key consideration in choosing the source of new business finance
will be to strike a balance between equity and debt to ensure the
funding structure suits the businesses needs.
1. Financial Vs Non-financial institutions.
These institutions provide financial services for its clients or
 They act as financial intermediaries.
 Most financial institutions are highly regulated by the
 Broadly speaking, there are three major types of financial
i. Deposit – taking institutions that accept and manage
deposits and make loans, including banks, building
societies, credit unions, trust companies and mortgage
loan companies.
ii. Insurance companies and pension funds
iii. Brokers and investment funds.
 Financial institutions provide service as intermediaries of the capital
and debt markets.
 They are responsible for transferring funds from investors to borrow
in need of those funds.
 They facilitate the flow of money through the economy.
 Financial institutions provide financing services in the following
1. Credit
2. Debt
3. Loan
4. Equity
Credit is the trust, which allows one party to provide resources to another
party where that second party does not reimburse the first party
immediately (or other materials of equal value) at a later date. Credit can
be formal or informal depending on the sources.
 The resources provided may be financial (loan), or they may consist of
goods and services (consumer credit).
 Credit encompasses any form of deferred payment.
 Credit is extended by a creditor/lender to a debtor/borrower.
 Credit does not necessarily require money. The credit concept can also be
applied in barter economies based on the credit exchange of goods and
 Credit is depended on the reputation or credit worthiness of the entity,
which takes responsibility for the funds.
Trade Credit:
Traditionally supplier credit is an important way of financing stock
inventory held by SMEs.
By using trade credit, SMEs are able to post pone payments for goods and
services purchased, which is useful in managing cash flow.
Trade credit is often an important aspect of business – to –business
relationship, substituting financing for short – term bank credit or other
more formal arrangements.
Trade credit is the second most important source of external financing for
SMEs, although it is generally considered to be more costly than bank
Consumer Credit:
 This is money, goods or services provided in lieu of payment.
 Common form of consumer credit include credit cards, store cards, motor
finance, personal loans, retail, loans and mortgages.
 The cost of credit is the additional amount, over and above the amount
borrowed, that the borrower has to pay.
 It includes interest, negotiation arrangement fees and any other charges.
2. Loan Financing
A loan is a type of debt.
 A loan entails the redistribution of financial assets over time, between
the lender and the borrower.
 The borrower initially receives or borrows an amount of money, called
the principal, from the lender, and is obligated to pay back or repay an
equal amount of money to the lender at a later date.
 Money is paid back at regular installments, or partial repayments,
installments, in an annuity, each installments being the same amount.
 Loan is generally provided at a cost, referred to as interest, which
provides an incentive for the lender.
 A loan obligation is enforced by contract.
Four Types of Loans:
1. Secured loan – a loan in which the borrowers pledge some assets as
2. Subsidized loan – a loan that will not gain interest before you begin to pay
3. Unsubsidized loan – a loan that gains interest the day of disbursement.
4. Mortgage loan – used to purchase or build a house.
Definition: Capital is money borrowed to be paid later.
 Debt capital has two parts:
 Short-term liabilities/current liabilities. This is money payable
within 12 months.
 Long – term debt: loans from banks or other sources that is or
payable until after 12 months.
Debt Finance by Banks:
 Bank lending is the largest source of external SME finance.
 Bank loans are used for financing investments, working capital and stock
 Bank lending to SME whether secured or unsecured will depend on the
credit rating of an SME.
Bank Overdraft:
 This means overdrawing from a bank account.
 An overdraft occurs when withdrawals from a bank account exceed the
available balance, which gives the account a negative balance.
Working capital:
Firms need cash to pay for all their day – to – day activities.
They have to pay wages, pay for raw materials, pay bills, etc.
The money available to meet all these activities is called working capital.
The main sources of working capital are the current assets as these are the
short-term assets that the firm can use to generate cash.
 It is vital to a business to have sufficient working capital to meet all its
 Many businesses have undergone bankruptcy, not because they were
unprofitable, but because they suffered from a shortage of working capital.
Equity is the term commonly used to describe the ordinary share capital of a
Sources of Equity Finances
 Ownership equity/personal savings
 Retained profits - through retaining profits rather than paying them out as
dividends. This is the most important source of equity for new start-ups.
 Rights issues- is an issue of new shares.
 New issues of shares to the public an issue of new shares to new
shareholders. This is uncommon to SMEs.
 It is also called asset financing.
 Hire purchase or leasing represents secured financing based on the
existence of a tangible asset.
 By its nature, the finance is secured on the leased asset so it can provide an
effective source of finance to an SME.
 Leasing improves cash flow and is easier to finance than purchases.
 It is also known as peer-to-peer lending/investing or social lending.
 It is an certain breed of financial transaction (primarily lending and
borrowing) which occurs directly between individuals or “peers” without
the intermediation of a traditional financial institution.
 Either on your own, friends or family members.
 It is a relatively easy and quick method of providing. Short-term financing.
 However, personal relationship can get entangled with the business and
hence compromising business success.
 One of the most important decisions is to select the right source of
 The choice affects the future of your business activities.
 Consider which source exposes your business to the lowest degree of
risk. The cost of your capital source is measured by the impact on
your earnings and not increase of expenses incurred by the business.
 You should be able to know that each capital source has its own cost.
 Internal sources such as the sale or liquidation of assets could lead to
loss of revenue following inventory disposal or added operation
costs if machinery were sold to generate costs.
 If you use trade credit, discount is forfeited. In reaching a decision, it
is important that you consider all relevant costs for each source.
 You take general risks when raising capital. Use of trade credit could
lead to supplier dissatisfaction and possible damage to your credit
 Since borrowed money must be repaid with interest, debt capital
imposes obligations upon the cash flow of your business, which must
be paid to avoid defaulters.
 A default could cause you a number of actions such as forfeiture of
collateral or forced bankruptcy.
 The only capital source that frees your business from risk is own
savings equity capital because the equity investor is the key risk
taker but not the business.
 If you rely upon asset management to meet, your capital needs then
you deny your business credit extensions or inventory purchases
which leads to lost sales.
 Use of trade credit as a major capital source makes your business to
depend on a few suppliers, which denies you the chance to buy from
other suppliers who may be charging low prices.
 The use of internal financing and trade credit is unlikely to have any
impact upon the control of the business exercised by you.
 If you are equity investors, you are entitled to some degree of control
in the company operations.
 Shares issued to your partners usually carry voting rights in
proportion to the number of shares purchased.
 Lenders are interested in controlling corporate affairs.
 Your business may be restricted in to raise capital due to nonavailability of preferred resources. Regardless to the source
considered most feasible, your business only has access to whatever
is available.
Mis-management by employees.
 A business plan is a statement that guides either a new business venture
or an on going business in terms of the products and services offered or to
be offered, the market justification, financing plan as well as the overall
resource planning.
 It is a written document that describes the goals and objectives of the
business and lists the steps that will be taken to achieve those goals and
 It gives a projection of the expected returns to the business and justifies
the viability of the business ventures.
(A) Cover Page
This is the title page of the business plan document and simply gives the name
and the address of the business, the period covered by the plan and
sometimes the author and date of the document.
(B) Table of Contents
Is normally the second part of the second part of the business plans.
It is the reference point for all the headings and sub-headings covered in the
business plan and help a reader to peruse through the document to any
specific section as it gives the page reference for each section.
(C) The Executive Summary
This is normally a brief write-up of not more than two pages to capture all
aspects of the plan in summary form.
It gives the reader a feel of everything that is contained in the plan document.
This describes the business in detail including the mission and vision of the
business. It includes the following aspects of the business.
 Who are we? (background of owner)
 What do we sell?
 Who are our customers?
 Who are our competitors?
 Where will the business be 12-48 months from now?
 What business are we in?(sector)
 What products/services do we provide?
 What is our promotion strategy?
 Show a SWOT analysis which emphasizes on;
 Strengths to exploit the opportunities be.
 Strengths to counter the threats in the environment
 Strategies to address the weaknesses within the organization.
4P strategies analysis – to be supported by factual market survey.
 Product strategy
 Promotion strategy
 Pricing strategy
 Placing/distribution strategy.
What is the market niche for the business?
 What processes are in place for the identification of new business
 What arrangements do we have for supply chain management?
 What policies and procedures are in place?
 How do we ensure governance and regulatory compliance?
Deals with human resource strategy.
It addresses the following aspects:
 Organization chart
 Current establishment
 Senior staff qualifications
 HR gaps in the organization and plans in place to bridge the gaps
 Recruitment process
 Orientation, training and development.
 This quantifies all the above plans reducing them into figures.
 It includes budgeting both summary and detailed.
 Includes the following projections for the next 3-4 years.
 Profit and loss
 Balance sheet
 Cash flow forecasts.
 Gives direction and purpose –preacher, a roadmap to a traveler.
 Helps in fund raising
 Helps in monitoring performance, reviews and communication.
 Decision making
 Helps to build profile to would-be investors.
Reasons why some Entrepreneurs do not do Business Planning
 Lack of technical know-how and managerial skills
 Lack of financial resources.
 Lack of entrepreneurial culture
 Ignorance.
The central government has enacted several legislations whereby rules
have been prescribed for governing and controlling the conduct of a
Besides municipal corporations and state governments have also added
numerous other norms and orders to control business activities within
their jurisdictions
These regulations, imposed by the local authorities are also legally
binding on business establishments.
Learning outcomes
By the end of this lecture you should be able to:
I. Understand the legal aspects of the business.
II. Explain the process of registering a business
III. Describe different types of insurances undertaken by businesses
Legal Requirements.
Business formation
There are no major requirements for the formation of sole proprietorship and
partnership except registration of the business name with the registrar of
companies, and preparing a partnership agreement in the case of a
partnership. For a limited liability company specific formalities need to be
satisfied. Registration is normally done by a lawyer, who drafts the
memorandum and article of association and receives and receives a certificate
of incorporation after registering the company.
Trade licensing
This is regulated by the trade licensing act of the laws of Kenya which
stipulates that no person may conduct any business in Kenya except under
and in accordance with the terms of a current licensing. Obtaining a trade
license is a necessary pre-condition for conducting business and you should
apply to your district trade officer in the ministry of commerce and industry.
Regulatory laws governing small business:
a) Labor laws
These include the employment Act, workman’s compensation Act and
National Social Security Fund. These regulations are administered by
the ministry of labor and deal with such matters as regulation of wages
and conditions for employment, compulsory compensation for injury or
loss of limb while undertaking work and providing for a retirement
benefit as social security.
b) Taxation
Forms of taxation that affects your business include Value Added Tax,
income tax and customs duty. You must register your business with
relevant taxation authority if you must qualify so as to act as tax
collection agency for the government.
c) Business insurance
Include regulations pertaining to business insurance, public liability
insurance for public service vehicle, National Hospital Insurance Fund,
which gives hospitalization cost relief for members against the services.
d) Public Health
The public health act relates to the sanitation and the hygienic
conditions of buildings (ventilation, cleanliness, drainage, toilets,e.t.c.),
as well as food production and handling to maintain good public health.
Aim of Laws and Regulations
1) Ensuring fair trade practices and fair competition.
2) Protecting employee interests, consumer rights and the environment.
3) Effecting collection of revenues from business concerns.
 These rules and regulations are altered quite often.
 Depending on their business nature, size and location, different types of
enterprises will have differing rules and norms to follow.
 The business owners are personally responsible for ensuring that their
firms strictly comply with the prescribed rules and laws; failure to
which they are liable to meet with unpleasant consequences.
 Entrepreneurs are expected to remain watchful and keep themselves
informed of latest standing orders that serve to control, regulate and
guide business activities.
 Generally, a business concern must conduct itself as regulated by rules
and laws.
 It is only after satisfying the elementary requirements, fundamental to
the structure and function of an enterprise, that the final thrust for the
launch of a unit can be undertaken.
 In this context, emphasis must be placed upon such fundamental issues
as form of ownership, industrial license, project registration,
environmental protection, trade license, employee welfare, consumer
rights, etc.
(1) Form of Ownership
In any business one of the basic procedural needs is to make the final
decision on the form of ownership to be adopted.
In case the choice is partnership form of ownership, a partnership
agreement has to be drawn up and duly registered as required by
partnership Act.
If it is to be run as cooperative society, necessary formalities are to be
completed and the firm duly registered with Registrar of Cooperative
For a Joint Stock Company, the Major prerequisite includes preparation of
Memorandum of Articles of Association and the firm’s registration with
Registrar of Companies in terms of the companies Act.
(2) Project Registration
Newly set- up small-scale units can be registered in two phases/ first,
provisionally and next, permanently both provisional and permanent
registrations are documented by the concerned district industries centre in
the district where a new unit will be located.
For provisional registration; a firm has to submit its application supported
by the details and documents as may be required by the registering
The particularly required include:
 Name and address of the business.
 Bio-data of the entrepreneur.
 Copy of partnership Agreement or Memorandum and Articles of
 Copy of registration certificate.
Location indicates the general area of a region, state or city. Many
business owners select location by a chance, the most common reason
being ‘noticed vacancy’
Location is instrumental to business success and growth and also its
stability. An appropriate site and premises helps to reduce the total
costs of the business and facilitates contact with customers spelling out
the difference between success and failure. Locations do have an impact
or influence on marketing the product or service.
Sales come from customers who find it advantageous to buy from you
rather than someone else. These advantages include:
 Convenience
 Cost
 Reliability
 Good services, all of which are influenced by location
Selecting the business location is one of the several factors which determine
the success or failure of a small business. Good location will enhance
survival and success of the business while bad location may spell doom even
for the best planned business.
Information Needed In Choosing A Business Location
 The number of people living in the area (demographic)
 The kind of people living in the area (where buyers live)
 The kind of businesses in the area (where competition is, because
of ease to get in)
 The conditions /history of the area (how others have been
 The conditions and cost of the building (space, size, right place)
General Factors In Selecting Location
Evaluate the following:
a) Social characteristics
- The population of people willing to spend their money
- The attitudes and progressiveness promoting and attracting more
people and thus increasing purchasing power
-buying habits or shopping habits /patterns of potential customers
- special features which are considered to be assets in attracting
customers to the business.
b) Economic considerations
consider income that will be available for buying goods and services.
Competition should be surveyed and analyzed for quality, quantity and
extend of aggressiveness in the type of business present.
c)The population and its mobilityConsider whether there are planned regional centers
Neighboring shopping centers- that serves immediate needs of the
people located within that area eg supermarkets
Isolated enterprise sites- convenient enterprises such as local grocery,
kiosks and restaurants
e)Traffic flow and its analysis:The volume of customers/ the traffic passing a particular site. The
number of potential customers for specific types of goods and services