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Entrepreneurship (New Venture Creation) Prepared By: Ch. Adnan Arshad

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ENTREPRENEURSHIP NEW VENTURE CREATION

CREATED BY ADNAN ARSHAD

Lecturer (GC University Faisalabad)

Contact No: 0301-7120098

E-Mail: adnan_776 @yahoo.com Your suggestion and opinion for the development of these notes should be cordially appreciated.

mailto:[email protected]


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BRIEF CONTENTS

TOPICS Page No

01) ENTREPRENEURSHIP & NEW VENTURE OPPORTUNITIES

Entrepreneurial Perspective - Defining Entrepreneurship - Economic and Entrepreneurship 03

Characteristics of Successful Entrepreneurs 03

02) SMALL BUSINESS & CORPORATE ENTREPRENEURSHIP

Entrepreneurship Venture - Small Business – Types of small business 04

Small Business Risk & Failure 06

03) A MODEL FOR NEW VENTURES

Product & Service Concept for New Venture (The Four Stage Growth Model) 06

Feasibility Planning 08

04) THE PRODUCT CONCEPT & COMMERCIAL OPPORTUNITIES

Manufacturing Matters - Products and Technology 09

Product Development Process 10

05) PRODUCT PROTECTION: Patents, Trademarks & Copyrights

Patent - Types Of Patents - The Patent Process 11

Trademarks – Copyrights - Rights and accessing govt. Information 13

06) SERVICES: The Human Side of Enterprise

Types of Service Ventures - Success Factors in Service Ventures 14

07) MARKETING RESEARCH FOR NEW VENTURES

The marketing Concept - Marketing Research for New Ventures 15

Competitive Analysis 16

Sources of Market Intelligence 17

08) THE ENTREPRENEURIAL TEAM & BUSINESS FORMATION

Legal Forms of Business in Perspective - Sole Proprietorship - Partnership 18

Joint Stock Company 19

09) BUSINESS ACQUISITIONS & FRANCHISING

Rationale for Acquiring a Business - Evaluation Acquiring Opportunities 20

Evaluating the Business Venture 20

Methods of Valuation 21

Structuring the Acquisition and Franchising 22

10) FINANCIAL RESOURCES FOR NEW VENTURES

Asset Management 23

Equity Financing - Debt Financing 24


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ENTREPRENEURSHIP

01) ENTREPRENEURSHIP & NEW VENTURE OPPORTUNITIES

ENTREPRENEURIAL PERSPECTIVE

Entrepreneurship is one of the four mainstream economic factors: land, labor, capital and entrepreneurship. The world itself derived from 17

th century French entreprendre, refers to individuals who were "undertakes"

meaning those who "undertook" the risk of new enterprise.

DEFINING ENTREPRENEURSHIP Entrepreneurship, defined as doing things that are not generally done in the ordinary course of business

routine.

*Entrepreneurship is the process of innovation that reallocates resources to new opportunities, often creating new opportunities through unusual combination of resources and skills of risk taking.

*Entrepreneurship is the process of creating something new with value by devoting the necessary time and

effort, assuming the accompanying financial, physical, and social risk, and receiving the resulting rewards of monetary and personal satisfaction and interdependence.

ECONOMIC AND ENTREPRENEURSHIP

Richard Cantillon, a French economist of Irish descent is credited with giving the concept of entrepreneurship a central role in economic. Cantillon described an entrepreneur as a person who pays a

certain price for a product to resell it at an uncertain price, therefore making decision about obtaining and

using resources while consequently assuming the risk of enterprise. A critical point in Cantillons argument was that entrepreneurs consciously make decisions about resource allocations.

Adam Smith, a well known economist describe in his book "wealth of Nations as an individual who

undertook the formation of an organization for commercial purposes. He ascribed to the entrepreneur the role

of industrialist, but he also views the entrepreneur as person with unusual foresight who could recognize potential demand for goods and services. In smith views entrepreneurs reacted to economic change, thereby

becoming the economics agents who transformed demand into supply.

French economist Jean Baptiste describe in his book, entrepreneur is one who possessed certain arts and skills of creating new economic enterprises.

CHARACTERISTICS OF SUCCESSFUL ENTREPRENEURS Some of the following characteristics of successful entrepreneurs are given below.

01) Creative 02) Take Initiatives 03) Ethical Standard

04) Conceptual Skill 05) Versatile Knowledge 06) Knowledge of Market

07) Honesty & Integrity 08) Energetic and Diligent 09) Responsive to Criticism 10) Flexible and Able to Adapt 11) Responsive to Suggestions 12) Able to take calculate risk

13) Self-confident and Optimistic 14) Respond Positively to Challenges 15) Able to get along well with other

01) Creative: Creativity is the major characteristic of an entrepreneur. He should have the ability to create more value for their product and services. The business opportunity, creative imagination is regarded a

unique asset in the business world.

02) Take Initiatives: The business world of today is moving at a very fast speed. An entrepreneur should

have the ability to take initiative by producing new things, new methods of marketing the product & service as per expectation of the target customer.

03) Ethical Standard: The ethical standard of business is that there should not be cheating, fraud and other

commercial bribery in business. A good entrepreneur has the social, moral and religious responsibility to follow the ethical standard of business to earn profit and stay long in the market.

04) Conceptual Skill: Effective entrepreneur are characterized by their conceptual skills. Conceptual skills

are specific abilities to analyze a situation, decision making, determine the root of any problem or

opportunities and devise an appropriate plan. 05) Versatile Knowledge: An entrepreneur should have versatile knowledge of his business as well as

adequate knowledge of trade, finance, marketing, legal management issues, technical management concern,

and other business areas.

06) Knowledge of Market: An entrepreneur should have sufficient knowledge of market as well as finding

new market for expand their business. He should know the geographic, demographic, psychographics and

behavioral changes in the market.


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07) Honesty & Integrity: Entrepreneur should be honest in dealing with others. He provides good quality of

product and services to their customer. He doesn't make any anti-social practices such as black marketing,

smuggling, overcharging to earn profit.

08) Energetic and Diligent: Entrepreneurs should be energetic and diligent person. He should be complete

their work in time. He must believe in this phrase "don’t put of till tomorrow what you can do today. He is

hardworking person and complete their all task as soon as possible. 09) Responsive to Criticism: An entrepreneur should response positive to criticism. He should concentrate

on customer criticism or complaints. He accepts criticism for their product and services and responds

positively to overcome these complaints.

10) Flexible and Able to Adapt: An entrepreneur should have the aptitude for research and adaptability to apply scientific findings to compete and stay in business. He should be able to adopt the new technologies

for producing the product or service and new methods of marketing the product and service

11) Responsive to Suggestions. Entrepreneurs pay their attention toward suggestion form their co-workers, customer, suppliers, or venture distributes. If he collects any best idea from these resources, he should be

carefully tried to implement these suggestion.

12) Able to Take Calculate Risk: Although every business has some internal and external risk but

entrepreneur carefully evaluate these risks and implement their plan. Although there is no guaranty for success but the chances of success are more due to calculated venture planning.

13) Self-Confident and Optimistic: Effective entrepreneurs are characterized by self-confident and

optimistic quality. He is confident about their plans for their venture. Sometime he may confuse due to some critical situation in their venture but he faces these situations confidently.

14) Respond Positively to Challenges: The major characteristics of the entrepreneurs are the commitment

toward organization goals. He is willing to do anything and respond positively to venture challenges. Demanding challenge motivate entrepreneurs to achieve results and developing their own managerial skills

and capabilities.

15) Able to get along well with others: An entrepreneur maintains a professional relation with their staff.

He believes that business activity is carried on by the workers. He should be aware of the temperament, aptitude and belief of the staff working with him. He should also know the limitation and feelings of the

individual. He should have the ability to solve any misunderstanding or conflict between the staff.

03) SMALL BUSINESS & CORPORATE ENTREPRENEURSHIP

ENTREPRENEURSHIP VENTUR

SMALL BUSINESS According to the Small Business Administration (SBA)

-- Small business is one that doesn't not dominate its industry

-- Small business less than $10 million in annual sales

-- Small business has fewer than 1000 employees. Small businesses started by individual who seek income substitution and who serve a local community. Most

small business owner are not concerned to changing the world or setting the industry with some marvelous

new invention.

TYPES OF SMALL BUSINESS

Generally small business has three major types as under:

1) Family Enterprise 2) Personal Service Business (PSF) 3) Franchise

1) Family Enterprise:

Family enterprise are locally owned and operated, often by one person called a sole proprietor. Family owner

business types are very widely and can include retail store, restaurants, small manufacturing firm and etc.

2) Personal Service Business (PSF)

PSF rely on unique skills of their founder or key employees. Some examples of PSF business are interior

designer, freelance writers, beauty salon, schools, college, and sports instructor. Most of these enterprises become quite large and are distinguish from smaller business firm by their growth characteristic.

For example. In Pakistan Duplex beauty salon start their services in small scale but now it has a lot of

branches all over the Pakistan.

*Punjab College start education services in small scale but now it has largest network of Pakistan. 3) Franchise: The individual who buy a franchises business typically a small business person seeking a

protected local market with an establish business line. Those individuals who buying franchise are called

franchisees and those who sell franchises are called franchisors.


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Franchises are created by contract in which franchisor supplies to franchise complete packages of well

known brand name products and services. Franchisee pays the specific amount as per agreement to the franchisor based on a percentage of the sales or profit generated by the franchisor products.

Role/Responsibilities of Small Business Owner Some of the following responsibilities of the small business owner are under:

Role/Responsibilities of Small Business Owner

SMALL BUSINESS RISK & FAILURE

Some of the following forces may causes of failure the small business.

External Factors of Failure

1) Political Forces: Adverse Govt. policies, laws, institutions that influence the small business performance.

For example a new law for operating medical store is not acceptable for the medical store owners. 2) Natural Forces: Natural environment may affect the availability of raw material that use in production. In

this way natural environment can affect the performance of the small business owners.

For example: Few year back, a lot of restaurant business adversely disturb due to the virus of Bird Flow. 3) Technological Forces: Changes in technology is the big threat for small business owner because it

changes the buying behavior of customers.

4) Customer: Customers may strongly influence the small business because their purchase of goods and

services determines the organization success or failure. 5) Suppliers: If the supplier does not deliver on time, or shortage of material, then organization could have a

lot of problems to serve customer.

Personal Factors of Failure

1) Inexperience: Too often, entrepreneurs launch their business enterprise without having sufficient

experience. Inexperience means lack of technical skills conceptual skills, or management concern. Each of

these shortcomings can lead to disaster but they also be overcome by an individual willing to make the commitment of time and energy to learn about business.

2) Arrogance: Many small businesspersons' particulars inventors become arrogance (Over-confidence).

Their arrogance will not allow them to take advice from others. 3) Mismanagement: Mismanagement of resources can lead crucial problems for enterprise. Management

resources determine the success or failure of the enterprises. Several categories of management mistakes are

critical for small businesses to avoid. -- Over-investment: Over-investment in fixed assets is common. When starting or expanding a business, it

is tempting to buy facility and equipment rather than lease or subcontracted. It may cause of shortage of

initial capital that is required for survival the business.

-- Poor Inventory Control: Poor inventory control threatens the success of nearly all retail, wholesales or other types of enterprise. Purchasing too much inventory increases the risk of low turnover and obsolescence.

Having too little inventory undermines customer selection and sales. Purchasing errors and lack of good

inventory management are critical problems for any business. So entrepreneur should have careful decision for purchasing right quantity in right time.

OWNER

Inventory Control

Marketing and Sales

Cash Control Bookkeeping

Human Resources

Purchasing

Customer

Relation

Planning &

Leadership

Investment Finance


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-- Poor Financial Control: Poor financial control is also critical for survival of the business. Entrepreneur

should have to pay their full attention and carefully manage these financial issues. 4) Lack of Planning: Research shows that less than half of small business owner had formal plan prior into

business. Many engaged in formal planning soon after starting their business but one third could not make

any adequate plan. Many critical problems emerge (come, appear) from lack of planning and cause in failing the business. It is nearly impossible to acquire capital, obtain loan, vendor contract, customer analysis market

analysis, and clear statement of the business purpose without any adequate planning Plans are guidelines for

action and must be continuously upgraded to reflect changes in the business environment. 5) Poor Business Philosophy: An unfortunate aspect of many business failures is poor business philosophy.

Several categories of poor business philosophy: are critical for small businesses to avoid.

-- Entrepreneurs may not be fully committed to the long hours required to make a venture successful.

-- Entrepreneurs may not be fully committed to provide the product or services as customer requirements. -- Commitment to quality is replaced by a commitment to use cheapest or poor quality materials

04) A MODEL FOR NEW VENTURES

PRODUCT & SERVICE CONCEPT FOR NEW VENTURE

THE FOUR STAGE GROWTH MODEL The four stage growth model consists of distinct activities essential for a new venture to progress from an

idea to a substantial enterprise.

The four stages consist of the following like pre-start-up stage, stat-up stage, early growth stage and later

growth stage. THE FOUR STAGE GROWTH MODEL

1) Pre-Start-up Stage During this initial stage, entrepreneur generates ideas for operating business according to their interest,

abilities, qualification, and visions. After selecting the best idea entrepreneur believe that their ideas are

feasible and they become fascinate by visions of their enterprises. In this stage enterperebour carefully concentrate the following issue such as production & operation, nature

of market, competitors, cost, financing and potential profit. Depending on the complexity of the proposed

enterprise, the range of pre-start-up activities can be quite extensive but there are four activities common to

new venture. These four activities are given below. (Entrepreneur must know the following answer before starting the business)

PRE-STARTUP ACTIVITIES

1- Business Concept Defined

What is the purpose of the ventures? What does the entrepreneur want to accomplish with the business?

2- Product Market Study

Product Research: Is the product or service feasible? Realistic? Market Research: Who will buy? Where are they? What competitors exist?

3- Financial Planning

Financial Projection What cash is needed? -- How will income be generated -- What expenses are expected? What is invested? Borrowed? -- What is needed to meet operating requirements?

4- Pre-Start-up Implementation

Getting ready to start: The entrepreneur must find resource. Purchase beginning inventory. Hire those needed at start up.

Obtain necessary license, permit, leases, facilities and equipment.

Pre-start-up Stage Later Growth Stage Early Growth Stage Start-up Stage

The period during

which entrepreneur

plan the venture and

do the preliminary

work for obtaining

resources and

getting organized

prior to start up

The initial period of

the business when

the entrepreneur

must position the

venture in the

market and make

necessary

adjustment to assure

survival

A period of often

rapid development

and growth when

the venture may

undergo major

changes in markets,

finance and resource

utilization

The evolution of a

venture into a large

company with active

competitors in an

establish industry

when professional

management may be

more important than

entrepreneurial

verve (strength)


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2) Start-up Stage: The start-up-stage is the initial period of the business when the entrepreneur must

position the venture in the market and make necessary adjustment to assure survival. In this stage, ventures profits are negative because of the low sales and high distribution and promotion expenses. Much money is

needed to attract consumers and distributors.

Entrepreneurial Strategies: Start-up Stage -- Appointed well trained staff.

-- Improve product quality and services.

-- Offer lowers prices to attract large number of buyers. -- Pay more concentration to product awareness advertising.

-- Pay more concentration on customer suggestion and information.

-- Pay more concentrate on product & service differentiate strategy.

-- Offer sale promotion techniques to attract larger number of buyers. -- Required extensive advertising in electronic media and print media.

-- Carefully evaluate the competitor's strategy and offer better service to target customer.

The start-up stage has no definite time frame, and there are no model to describe a business does during this stage; however, there are two major benchmark considerations.

-- First, entrepreneurs want to meet operative objective such as satisfying revenue and cost targets

-- Second, they want to position the venture for long term growth.

START-UP OPERATING OBJECTIVES

Sales To attain monthly sales volume

Revenue To achieve projected revenue from the sales of product and services

Growth To maintain the balance of growth with ability to underwrite inventory, material, and human resources

Position To identify market strategy for niches or opportunities on new products, service or markets.

3) Early Growth Stage: A period of often rapid development and growth when the venture may undergo

major changes in markets, finance and resource utilization. If the new venture satisfies the markets, it will enter in early growth stage. In this stage, sales will start rapidly rising. The early adopter will continue to

buy, and later buyers will start following their lead, especially if they hear favorable word of mouth.

Entrepreneurial Strategies: Early Growth Stage

-- It enters new market segments -- It increase its distribution channels

-- It improve product quality and services

-- It lowers prices to attract price sensitive buyers. -- It increase new product features and improved styling

-- It shifts from product awareness advertising to product preference advertising

4) Later Growth Stage: The evolution of a venture into a large company with active competitors in an establish industry when professional management may be more important than entrepreneurial verve.

Entrepreneurial Strategies: Later Growth Stage

1) Expanding the Total Market -- Market Penetration Strategies: A strategy involves increasing sales of current product to current market.

-- New Market Segment Strategies: Identifying new market segments for current company products.

-- Geographical Expansion Strategy: A strategy involves expanding areas for current company products. 2) More Usage: The amount of consumption can sometimes be increased through packaging or product

design. Large package sizes increase the amount of product that consumer use at one time.

3) Market Diversification involves acquiring new businesses outside the company current products &

market. 4) Market Broadening involves shifting focus from the current product to the underlying generic need. The

company involve in R&D across the whole range of technology associated with that need.

5) Contraction Defense: Large companies sometimes recognize that they can no longer defend all of their territory. Then companies make planned contraction (also called strategic withdrawal) giving up weaker

territories and reassigning resources to strong territories.


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FEASIBILITY PLANNING

The term feasibility planning is used to moderating the concept of comprehensive business plan and encompasses the full range of business planning activities. A feasibility plan is an outline of potential issues

to address and set of guidelines to help an entrepreneur make better decision.

Developing a Good Plan Feasibility plans usually are written for investors and lenders. A well-written plan should be concise, clearly

identifying products, services, markets and the founders. The plan should be easy to read, complete and

accurate. There should be no misspellings, improper grammar, or mistakes in data. Although a business plan often has more than 50 pages, but many plans bases on easily understood business

concept may be less than 20 pages long. If there is choice, keep it short. Potential investors and lenders

receive many proposals but they rarely read more than the first few pages. If the concept is stimulating they

spend more time. It can be quite disturbing to an entrepreneur who has spent months writing a good plan for acquires a loan,

but loan officer spend five minutes reading the front page and skimming projections. Therefore it is more

important to be convincing in the opening pages. This means that an entrepreneur must be very careful to capture a reader attention early.

The Feasibility Plan: A good feasibility contains the eight common elements as following:

1- Executive Summary

Six key elements in the executive summary -- Venture Defined: Describe the purpose and nature of the business

-- Product or Service: Describe the product or service to be sold -- Market Characteristics: Describe market size and location, and customers -- Entrepreneurial Team: Describe the founder, key personnel and their role -- Financial Summary: Describe estimates of expenses, founder equity & capital needed

2- Business Concept

-- Purpose of the venture -- Major objective of the founders

-- Mission statement -- Description of the distinct competency of the firm

3- Product or Service

-- Function and nature of the products and services -- Proprietary interests such as patents, trade mark or copywriting

4- Market Research &

Analysis

Product Research: Is the product or service feasible? Realistic?

Market Research: Who will buy? Where are they? What competitors exist?

5- Market Plan

Six key elements in the market plan -- Product or Service: Product Mix, Quality and Reliability, Use of the Product -- Pricing System: Pricing method, discount, quantity and bulk prices -- Promotional Mix: Advertising, Sales Promotion, Public Relation, Direct Marketing -- Distribution Channel: Direct distribution channel – Indirect distribution channel -- Services and Warranties: Repair & Maintenance, Warranties or Guarantees, Sales Policies -- Marketing Leadership: Define leadership role and responsibilities for marketing & sales

6- Manufacturing or

Operations

Five key elements in the manufacturing and operations -- Facilities: Purchase or lease, Renovations, Equipment and Technology, Parking

and Transport -- Inventory: Opening Inventory, Purchasing System, Inventory Management, Supplies and Support -- Human Resources: Operating Personnel, Skill Requirements, Supervision

-- Operations: Research & Development, Manufacturing Process, Quality Control, Safety and Maintenance -- Other Issues: Insurance, Legal Protections, Patents, Copyrighting, and Trademark, Security System

7- Entrepreneurial Team

-- Profile of Founders -- Key Personnel -- Investors -- Management Roles

8- Financial

Documentation

--Financial statement for income and expenses -- Cash flow, Assets and Liabilities -- Breakeven Projection


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Venture Defined: The Company must be identified to include when it was formed, by whom, and for what

purpose. The most important is to explain the purpose of new venture. For example, a ventures purpose can be described as manufacturing automobiles, electronic appliance, merchandising, or publishing books. In

each instance, the entrepreneur should briefly explain how the enterprise is unique. The definition should

also include its legal formation, identifying it as a corporation, partnership, sole proprietorship or other form of business.

Product or Service: The entrepreneur must describe clearly what will be sold. If there is a proprietary

interest such as patent, trademark or copywriting, this fact should be stated. Product and services should also be described in term of quality, pricing, and distinguish characteristics that might dominate a distinctive

competency.

Market Characteristics: Existing and potential markets must be briefly described in terms of size and

geographic characteristics. However, the executive summary is an overview of market data, not a complicated presentation of detail market research.

Entrepreneurial Team: An entrepreneurial team may include only the founder of enterprise. But usually

there are other key personnel essential for the enterprise success. These individual must be identified and their skill and talents must be adequately described. If the business require individual with unique

qualification, these should be emphasized.

For example, a restaurant may require chef skilled in preparing French, chainees or other healthy meal may require an experienced instructor. The executive summary emphasis strength of team members and their

qualification.

Financial Summary: Critical financial consideration must be summarized to include startup estimates of

revenue, cost, cash flow requirements and profits or losses. The plan will establish what is needed and what is being sought from investors and lenders.

For instance, a venture may be seeking 400,000 form investors with an established equity base of 100,000

from the founders or it may be seeking a loan of 300,000. This summary indicates to potential investors how much capital is needed, how much the founder has invested and how much has to be borrowed.

05) THE PRODUCT CONCEPT & COMMERCIAL OPPORTUNITIES

MANUFACTURING MATTERS

Manufacturing is the process of converting raw material into semi-finished product or finished product. The

manufacturing concept is one of the oldest concepts in business. It holds that customers will prefer products that are widely available and inexpensive. Managers of manufacturing concentrate on achieving high

production efficiency, low cost and mass distribution. They assume that consumers are primarily interested

in product availability and low prices. The Manufacturing Perspective: To better understand our current and future opportunities, it is important

to recognize how important manufacturing is to a nation wealth and power. One only has to glance around to

see how technology has influenced our lives. Televisions, VCRs, CD players, hair dryers, AC, microwave

ovens, and automatic coffee makers using material and technology unavailable several years ago are now common place. Micro computers, Fiber-optic telecommunications, surgical laser, new medicine from

biogenetic research and robotic engineering systems are going to change through second and third generation

changes. Someone initially challenged to develop each of these products, behind each useful products are hunderds or thousands inventions that provided the ethnological foundation for new products.

PRODUCTS AND TECHNOLOGY High-Tech Products: High-tech products are those requiring exceptional skills and state-of-the-art

technology to produce them. High-tech products are protected by patents, and they can't copy or replicated

by competitors.

Mid-Tech Products: Mid-tech products are those requiring skilled employees and adequate technology to

produce them. Mid-tech products are often protected by patents, and they can't copy or replicated by

competitors.

Low-Tech Products: Low-tech products are those requiring few skills and common material or technology

to produce them. Low tech products can be made easily, marketed quickly, and terminated with a minimum

of effort. Low-tech products can't protected by patents, and they can be easily copied by competitors.


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Some examples of High-Tech, Mid-Tech and Low-Tech Products

High-Tech Products Mid-Tech Products Low-Tech Products

Digital Cameras VCR Printing

Satellite Systems Radio Eyeglasses

Laser Instruments Cosmetics Plastic Toys

Digital CD Players Fax Machine Small Engine

Guidance Systems Television Sets Paper Supplies

Play Station (Sony) Microwave Oven Office Furniture

Telecommunication Photo Reproduction Building Supplies

Biogenetic Engineering Machine Tool Design Candy and Cookies

Medical Instrumentation Dot-matrix Printers Clothing and Textile

Digital Flat Screen Television Automatic Coffee Maker UPS (Entrapped power supply)

THE PRODUCT DEVELOPMENT PROCESS

The product development process consists of almost five stages such as idea generation, idea preparation,

idea incubation, idea illumination, and idea verification 1) The Idea Generation Stage: The idea generation stage is the identification of product idea that logically

addresses an opportunity. An opportunity is defined as the identification of any unique idea that must be

desirable for customers. The purpose of idea generation is to create a large number of ideas. Major sources of

new ideas include internal sources such as employees, top management and external sources such as customers, competitors, distributors, and suppliers. Toyota claims that its employees submit two million

ideas annually---about 35 suggestions per employees---and more than 85 percent of these ideas are

implemented.

2) Idea Preparation: Idea preparation is the process of select best product ideas and drop poor ones

as soon as possible

3) The Incubation Stage: Having survived a screening process and obtaining funding, the innovator must

set about implementing the first stage of actual product development.

-- Product Design: Product design involves prepares a preliminary design and drawings work .R&D will follow prescribed path of turning rough sketches into blueprints. These will expanded into material lists and a

plan for making one item.

-- Making the Prototypes: Prototypes mean developing a trial product or model.

-- Commercialization Decision: The critical milestone activity at this point is to write a formal business plan. It includes Designing an initial commercialization decision and marketing strategy for a new product

based on the product concept. The marketing strategy consists of three parts. 1) Describe the target market 2)

Planned product positioning 3) Market share and profit goals 4) Idea Illumination or Implementation Stage: The fourth stage in the product development also knows as

the initial implementation stage. Illumination stage includes developing the product concept to assure that the

product idea can be turned into a workable product. This is the preliminary effort to put actual product into the field and to gather market feedback.

-- The Diffusion Stage: Diffusion is important as part of development process because design work is not

complete until the product has proved effective and profitable. The best product can go sure because of

market changes, competitions, poor assumption by management about cost, material, suppliers, distribution, human resources, product reliability, and many other factors.

5) Idea Verification: In this stage, entrepreneur test the product and its entire marketing program,

positioning strategy, advertising, distribution, pricing, branding, and budget levels. Idea verification gives the marketer experience before going to the great expenses of launching the product in market.

New Product Development process consists of eight major stages.

1) Idea Generation: The purpose of idea generation is to create a large number of ideas. Major sources of new ideas include internal sources such as employees, top management and external sources such as

customers, competitors, distributors, and suppliers. Toyota claims that its employees submit two million

ideas annually---about 35 suggestions per employees---and more than 85 percent of these ideas are implemented.

2) Idea Screaming: Screening or select best product ideas and drop poor ones as soon as possible.


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3) Concept Development is a detail version of the idea. An attractive idea must be developed a product

concept. It is important to distinguish between product idea, product concept, and product image.

-- Product Idea: Thinking for a possible product.

-- Product Concept: Detail version of the new product. -- Product Image is the way of consumer perception.

-- Concept Testing: Testing new product concepts with a group of target consumers to find out its result

4) Marketing Strategy Development: Designing an initial marketing strategy for a new product based on the product concept. The marketing strategy consists of three parts. 1) Describe the target market 2) Planned

product positioning 3) Market share and profit goals

5) Business Analysis: A review of the sales, cost, and profit for a new product to find out these factors

6) Product Development: Developing the product concept to assure that the product idea can be turned into

a workable product.

7) Test Marketing: In this stage, company test the product and its entire marketing program, positioning

strategy, advertising, distribution, pricing, branding, and budget levels. Test marketing gives the marketer experience before going to the great expense of full introduction. When using test marketing, companies

usually choose one of three approaches.

-- Standard Test Markets: Using standard test market, the company finds a small number of representative test cities; conduct a full marketing campaign in these cities, and consumer & distribution surveys. Standard

test markets have some drawbacks. They can be very costly and they may take long time.

-- Controlled Test Markets: Controlled test markets usually cost less than standard test markets and take

less time. However, companies are concerned limited number of small cities and panel consumer for testing the product.

-- Simulated Test Market: The company or research firm shows ads and promotion for a variety of

products, including the new product as sample of consumer. The researches note how many consumers buy the new product and competing brands. The researchers then ask consumers the reasons for their purchase or

no purchase. This simulation provides a measure of trial

8) Commercialization: Introducing a new product into the market. Next, the company must decide where to launch the new product---in a single location, a region, the national market, or the international market.

06) PRODUCT PROTECTION: Patents, Trademarks & Copyrights

PATENTS

A patent is a grant of a property right by the government to an inventor. It is issued by PTO Patent and

Trademark Office. Patent are exclusive property right that can be sold, transfer, licensed or used for valuable assets. In fact, most independent inventor doesn't commercialize their inventions or create new products from

their ideas. So they sell or license their products to others who have resources to develop products and

commercial markets.

TYPES OF PATENTS

Patents law provides three categories of patents: 1) Utility Patents, 2) Design Patents, and 3) Plant Patents.

1) Utility Patents: Utility patents are the most common types of patents and granted for 17 years. Its has further four major types such as Process, Machine, Manufacturing and Composition of Matter

Process: Process patent means new methods of manufacturing or new technological procedures that

can be validated as unique and useful. For example, the process of electrical power transmission was

unique when patented. A new process of testing blood samples was patented.

Machine: The word machine in patent law means that the patent application is for a specific

physical item. Products, instruments, machines, and other physical objects that have proved useful

and unique.

Manufacturing: The word manufacturing refers to physical items that have been fabricated through

new combination of materials or technical application. The application must explain how the product

is made, including material, manufacturing process, and any physical modification that the inventors want to include for protection under the patent grant

Composition of Matter: This category refers to chemical compounds such as medicines, cosmetics,

and fertilizing agents. The composition must have a new ingredient often itself patentable.

2) Design Patents: Design patent can be obtained for three and half year, 7 year or 14 year.


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Design Patents are granted for any new or original ornamental (attractive) design for an article of

manufacturing. A design patent protects the appearance of the article, not the article itself. Design patent can be obtained for three and half year, 7 year or 14 year.

Entrepreneur can select the period of time for protection in order to commercialize designs. The benefits of

design patent may be a distinguish feature that may creating brand identification or enhancing sales volume. For Example: Most of the Textile companies patent their famous textile design and get benefits of these

ornament design.

3) Plant Patents: (Plant patent can be obtained for 17 year) In botanical terms. Anynew variety of palnt that has been reproduced can be granted as plant patent. The new

plant must not exist in nature. Therefore new plants, mutants, and seeding may be patented. Plant patent can

be obtained for 17 year.

THE PATENT PROCESS

Stage: 1) Documents Disclosure: Documents discloser is an important service provide by the patent office.

The filling of disclosure is ideally done at the earliest stage of the idea generation phase. Document disclosure provides a legal recognition and protection for an aspiring inventor from the patent office. If some

one else takes the sketches or steals the idea, at least there is some evidence on record. It will be retained for

two years, and then destroyed unless a reference is made to disclosure in a patent application.

Stage: 2) Patent Search: A patent search is required to determine whether an inventor creation already

exists and remain actively protected under the law.

Stage: 3) Patent Application: An application is made after the patent search and it is sent to the Patent and

Trademarks office. There are three main parts to the applications.

1) The written documents 2) Drawings 3) Declaration

1) The Written Documents: Patent attorneys maintain standard application forms and typically use legal or standard size paper for describing the invention. Individuals can write their own applications but they must

conform to Patent office guidelines. This document will be atleast several pages long and contain at least five

sections. -- A formal declaration that identifies inventor, type of patent and a statement claming the idea is original.

-- Brief history that describe how the invention evolved, background of its development & evidence of testing

-- Briefly describes what the item is and how it works. -- Briefly describes the inventions working parts, how they are made and how the item is used.

-- Description of claims hat lists each modification, use, method of manufacturing or feature that is being

claimed for patent protection by the inventor.

2) Drawings: The application requires accurate hand drawings of the invention. These can be done by the inventor, but it requires extensive engineering work. So inventor contracts the drafting work to someone who

completely understands complex specification for the final set of illustrations.

3) Declaration: The third part of the application is a formal oath (promise) or declaration by the inventors. Patent Office will provide standard form for the oaths and declaration.

-- Patent Filling Fees: These items are bundled together and accompanied with an application fee. Patent

office records the transaction as being a complete application and issue the receipt. Currently the basic filling fee for a patent application is $340, but some additional fee may be charged due to

complexity and number of patent claims. Patent filling fees don’t include patent attorney fees or other cost of

patent search, patent agency work, preparing drawings and so on. For a simple invention, the total cost of an

application might exceed $2000.

Stage: 4) Patent Examination: Patent Office makes search and patent examination for lawful recording and

specifies claim allowed or problem to be resolved.

Stage: 5) Patent Grant: The final stage is patent issued. If application is complete with all relevant concern

and patent office requirement then patent grant to an inventor. The inventor receives full documentation in

what are called "letters patent" by the Patent Office.

Documents

Disclosure

Patent

Search

Patent

Application

Patent

Examination

Patent

Grant


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TRADEMARKS

Trademark includes word, name symbol, or distinguishing device used by manufacturer to identify his goods and distinguish then form competitors. A trade mark is granted through patent and trademark office for

period of 20 years.

Service Marks Service marks are unique characteristics or slogans often quite similar to trademark that provide protection

for brand image and creative properties that enhance company marketability.

FILLING FOR TRADE MARK

Filling to Register a Trademark of Service Mark There are three major parts to a formal application

-- First, a standard from can be obtained from the Patent Office for a making a written application

-- Second, a drawing of the trademark or service mark must be provided. -- Third, specimens or facsimiles of the mark must be included.

These items are bundled together and accompanied with an application fee. The basic application fee is

currently $200, but there can be additional fees depending on the complexity of the registration. Stage: 1) Written Application: Applicant can use a Patent office standard form or simply writing the

application on legal size white paper. Application provides information such as name, address, citizenship,

identification of partners, and corporate name. The applicant must make a declaration that claims proprietary

ownership. In addition, the applicant must explain how it is being used commercially. There are several dozen categories of trademarks. These are called classes of trademark, and the applicant must select the

appropriate class for filling.

For example, a trademark of soap is in class 3, and photograph trademark is in class 6, junk food is in class 9 and entertainment marks fall in to call 30. It is not uncommon to have trademark registered in several classes

but applicant pay the addition filling fees.

The applicant must establish a date on which the trademark was first used commercially. This defines the beginning of the term of protection in the event of ant modification or disputed claims. The applicant must

take an oath or formal declaration that he is the originator of the trademark.

Stage: 2) Drawings: A formal drawing of each trademark must be submitted on plain white paper and must

be used permanent black ink. The drawing cannot have erasable or multiple colors. This procedure does not require engineering credential or special skill.

Stage: 3) Specimens: Five specimens of actual trademarks or facsimiles (duplicates) must be submitted with

the applications. Specimen and facsimiles must be capable of photocopying and fit into a legal size format. Stage: 4) Trademark Examination: Patent Office searches records and examines the trademark for lawful

recording.

Stage: 5) Trademark Issue: Once an application is successful according to the Patent & Trademark office

requirement then trademark is published in Official Gazette. The Patent & Trademark office will register a Trademark and send three copies of the registration to the applicant and date of the Trademark for tracing the

20 years protection limitations.

COPYRIGHTS (Copyrights can be obtained for more than 50 years)

Copyrights are distinct from patents and trademarks and granted through the Copyright Office. Copyrights

extend protection to authors, composers, and artists, allowing them to register their "intellectual property" as commercially valuable asset. A registered copyright is admissible in court as evidence of documents

ownership and priority of claims.

ACCESSING GOVT. INFORMATION There are many ways to obtain information about patents, trademarks, and copyrights.

o Entrepreneur can consult library and find relevant information.

o Entrepreneur can write information to one of the controlling agencies.

Written Application

Drawing Prepared

Specimen Prepared

Trademark Examination

Trademark Issue

Applicant Filling

Patent Office Action


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o Patents Office publishes two series of guidelines, General Information concerning Patents and

General Information concerning Trademarks. Entrepreneur can obtain printed copies of existing

patents from PTO office.

07) SERVICES: The Human Side of Enterprise

SERVICES Service is the specific activity or benefits that one party can offer to another that is essentially

intangible and doesn't result in ownership of anything.

TYPES OF SERVICE VENTURES

There are several broad categories of service firms.

TYPES OF SERVICE VENTURE

1) Professional Services: Professional services are those that require specialized education recognized by

professional association. Professional services require license to practice by state or national government bodies. Entrepreneurs can rarely choose to go into a professional service but many professionals become

entrepreneur. For example physician or doctors may choose to setup an individual practice rather than work

in hospital. Examples: Physicians, Dentists, Lawyers, Certified Public Accountants, Architects.

2) Personal Services: Personal services are those that rely on personal abilities or skills to perform these

services. Personal services are not always a requirement to hold specialized education recognized by professional association. Educational levels also differ between those in personal and professional services.

Many entrepreneurs in personal services are credentialed or licensed but these requirements are substantially

different from professional's services.

Examples: Interior Designers, Management Consultants. Software engineers, Barbers, Tailors 3) Merchandising: Merchandising is the primary form of retail trade. Successful merchandise are skillful at

selecting inventory that fits a specific market niche for a particular group of customers, but they also

recognize that success depends crucially on the level of service offered. Examples: Retail Stores, Restaurants, Laundries, Video rental Shops

4) Distributive Services: Distributive services are concerned with moving products through various

marketing channel or linking manufacturer with merchandise. Examples: Wholesalers, Warehouses, Import-export Agents, Transport Firms, Logistic Services, Courier

Services

5) Information Services: Information services are concerned with processing information, disseminate

knowledge or facilitate transaction. Private school disseminate knowledge, newspapers provide information on latest current affairs through news and articles. Banks facilitate transaction, and entertainment media

provide information and knowledge.

Examples: Schools, Colleges, Universities, Newspapers, Media Channels. Banks 6) Others Services: Most of the services that has no special classification include Retirement Homes,

Telemarketing Companies, Blood Donation Companies, Travel Agencies, Counseling Centers.

SUCCESS FACTORS IN SERVICE VENTURES Services enterprises face the same management challenges as manufacturers with the exception of actual

production. Service enterprises place far greater emphasis on human resources because they deal directly

with customers.

Some of the following success factors in service ventures are given below

1) Creating the Vision 2) Effective Hiring 3) Rewarding Quality 4) Training Development

5) Working with a Vision 6) Encouraging Creativity 7) Epilogue on Human Resources 1) Creating the Vision: A corporate vision is the art of seeing things invisible to others. A vision

encompasses the value that an entrepreneur will provide to their customer.

2) Effective Hiring: Three things are generally needed to get a business started.

-- Sufficient money to carry on venture. -- New venture need a good product or service based on sound vision

-- Hiring potential employees who possess specific skill, qualification, knowledge and abilities.

Professional Services

Personal Services

Information Services

Distributive Services

Merchandising Services


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Entrepreneur first must write job descriptions that identify the type of employees needed, their skills, past

experiences, and duties in the new job. These descriptions will help to identify potential candidates and

provide guidelines for job advertising. 3) Sufficient Training: Entrepreneur must provide sufficient training to employees for better understanding

the scope of job duties and responsibilities. Adequate training develops up-to-date skills, knowledge and

abilities for performing their jobs successfully. Effective decision about training can be made by following a simple process of identifying needs, methods of training available, and resources that an entrepreneur

possesses and then matching needs and methods.

*IBM spends nearly $900 million annually on corporate training for more than 18,000 employees. 4) Rewarding Quality: Rewarding quality concerned with helping employees to promote high energy

levels. If employees are working as per organizational requirements and achieve their goals within a specific

time frame work, then organization arrange some incentives or reward for these employees. Some of the

following rewards are given below

Gain Sharing: A reward system in which employees receive bonuses based on their unit

performance.

Profit Sharing: A reward system in which employees receive bonuses based on the

organizations profitability.

Employee Stock Ownership Plan (ESOP) A reward system in which managers encourage

employees to own stock in their own companies, providing an incentives for employees to increase the value of that stock through higher performance.

5) Encouraging Creativity: Entrepreneur must encourage creativity of their employees and allow them to

share their idea for improvement their product and services and identify their deficiencies. Toyota claims that its employees submit two million ideas annually---about 35 suggestions per employees---and more than

85 percent of these ideas are implemented.

08) MARKETING RESEARCH FOR NEW VENTURES

THE MARKETING CONCEPT

The marketing concept is consciously articulated philosophy of business that says in essence, the

"customer is King"

This concept translates into the following key consideration for successful business.

-- The Marketing concept depends on determining the needs and wants of target market and delivering the

desired satisfaction more effectively and efficiently than competitors.

-- Entrepreneur must focus on long-term customer relations by creating a reputation for product, service and quality and after sale services.

-- Entrepreneur must integrate with other marketing function such as buying and selling of goods,

transportation and storage, risk taking, research, and product designing etc. A Commitment to Customer: Sales comes from both parties agreeing to fair exchange but more

specifically, customer buy product and services that they believe are worth, not what seller feel are

important. The market concept encourage entrepreneur to concentrate those prospective to do marketing research necessary to understand customer need and to make decision based on those needs rather than rely

on their perception.

MARKETING RESEARCH FOR NEW VENTURES Marketing Research: The systematic design, collection, analysis and reporting of data relevant to a specific

marketing situation facing an organization

*Marketing research is defined as the systematic and objective process of gathering, recording and analyzing data for aid in making marketing decisions.

Marketing Research in the Pre-Start-up Phase

Before entrepreneurs actually commit themselves to opening a business, the most important question to answer is "Will it sell?" A mistake that many entrepreneurs make is to merely assume that their product or

service will sell. However, intelligent marketing research provides the base to establish a business or not.

Some of the following pre-start-up phases for marketing research are given below:

01) Who is the Customer? Developing a clear profile of potential customer is a basic elements of market research. In marketing language, a customer profiles is called a customer scenario. Customers may be young

or old, married or single, teachers or students, home-owner or renters, poor or wealthy or a thousand other

characteristics. A customer scenario also can reflect categories of business. Classifications of consumers help entrepreneur to define their market segments.


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02) Sex and Age: These are the two essential characteristics to identify in the customer scenario.

Sex: sex is an important factor in marketing. Age: People change the goods and services they buy over their lifetimes. Taste in food, clothes, furniture and

recreations are often age related

03) Income Status: A person’s economic situation will affect product choice. Every one tries to purchase product or services according to their income.

04) Occupation and Education: Both of these factors can significantly influence entrepreneur's decisions. A

person’s occupation affects the goods and services bought. Blue-collar workers tend to buy more rugged work clothes, while white-collars workers buy more business suits.

05) Other Customer Characteristics: These include family profiles, such as being married, single or

divorced; having preschool toddlers, teenage children, or children away at college; and having one or both

parents working. Customers also can be identified by ethnic group, religion, and domicile. Marketing research is used to discover consumer buying habits to determine their need and delivering the desired

satisfaction more effectively and efficiently than competitors.

06) Where is the Market? Part of the customer scenario will ionvlove locating the potential customer base. There are three major categories to identifying the potential customers such as metropolitan areas, suburban

communities, and rural town.

07) Segmenting the Market: Dividing the market into smaller group of buyers on the bases of distinct needs, characteristics or behavior.

08) Sale forecast: The result of good market research will be a well defined sales forecast. A sales forecast is

a specific tool that projected sales within a market niche for a specific time period. Sale forecast also help to

determine human resource, production, and management system requirement. 09) Competition: who are the market players? Competition is always on an entrepreneur mind.

Entrepreneur must be known the market leader and their major products attributes, pricing strategies,

advertising campaign. 10) Products or substitute: A venture is unattractive when there are actual or potential substitute for the

product. Substitute place a limit on prices and on profits. The entrepreneur has to monitor price trends

closely. If technology advances or competitions in these substitute industries, prices and profit of the venture

are likely to fall. 11) Distribution: How will customers be reached? A distribution system is the physical process of moving

product from the producer to the customer. Distribution is usually accomplished through marketing channel

(From producer to whole seller to retailers to customer). Managing products, transportation, storage, processing orders are some important distribution activities.

COMPETITIVE ANALYSIS A competitive analysis is essentially a structured method of examining an organization in order to provide a

clear understanding of the factors that affect a business. Michael Porte created a competitive analysis model

as strategic management techniques. He has identified five forces that determine the long run attractiveness

of market. It applies equally to entrepreneur enterprise, not-for-profit organization and major corporation.

Michael Porter Competitive Analysis Model

Potential Entrants

Threat of Entrants

Suppliers Buyers Bargaining Bargaining

Power Power Threat of Substitutes

Substitutes

Competitive

Rivalry


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The five forces are described with an emphasis on the new venture company in a start-up or early

growth stage. 1) Completive Rivalry: Successful entrepreneurs continuously raise these questions and answer them

thoughtfully (attentively) and thoroughly (in detail or comprehensive).

-- How many competitors are already exit in market? -- What are their term & condition and prices?

-- How much market share they have?

A venture is unattractive if it already contain s numerous, strong or aggressive competitors. It is even more unattractive if it is table or declining, if fixed costs are high, if exit barriers are high, if competitors have high

stakes in staying the market. These conditions will lead to frequent price wars, advertising battles, and new

product introduction, and will make it expensive to compete.

*The cellular phone market has seen fierce competition due to segment rivalry. *The telecommunication sector in Pakistan has a strong competition due to segment rivalry.

2) Threat of New Entrants: Some of the following critical question should be considered by entrepreneur.

-- Will competitors be able to enter the industry easily? -- Are there barriers to entry?

-- How is the venture protected?

Venture attractiveness varies with the height of its entry and exit barriers. The most attractive venture is one in which entry barriers are high and exit barriers are low. When both entry and exit barriers are high, profit

potential is high

3) Threat of Substitutes: Some of the following critical question should be considered by entrepreneur.

-- Is the proposed product or service unique? -- If not, what substitutes exist?

-- What substitute could arise?

-- How can the venture protect its market and customers? A venture is unattractive when there are actual or potential substitute for the product. Substitute place a limit

on prices and on profits. The entrepreneur has to monitor price trends closely. If technology advances or

competitions in these substitute industries, prices and profit of the venture are likely to fall.

4) Threat of Buyers Growing Bargaining Power: Some of the following critical question should be considered by entrepreneur.

-- Will the venture be selling to several large and powerful buyers?

-- If so, will they dictate prices and terms? -- How can the venture compete?

Buyers may strongly influence to the venture because their purchase or use of goods and services determines

the venture success or failure. Venture can get buyers feedback from a variety of sources and improve products and services according to the buyer's requirements.

A venture is unattractive if a buyer poses strong or growing bargaining power. Buyers bargaining power

grows when they become more potential and purchase large volume, when the product is undifferentiated,

when the buyers switching cost are low, when buyers are price sensitive because of low profit. A better defense consists of developing superior offers that buyers can't refuse.

5) Threat of Suppliers Growing Bargaining Power: Some of the following critical question should be

considered by entrepreneur. -- Will the venture be able to acquire suppliers?

-- Will large suppliers dictate prices and terms?

-- How will the venture compete if suppliers or material are interrupted? Suppliers are individuals and organizations who provide the resources used in producing of goods and

services. A venture can aversively panic if the company suppliers are able to raise prices or reduce quantity

supplied. Suppliers tend to be powerful when they are concentrated or organized, when there are few

companies, when the suppliers products is an important input, when the costs of switching suppliers are high. The best defenses are to build strong relationship with suppliers or use multiple supply sources.

SOURCES OF MARKET INTELLIGENCE Marketing Intelligence System is a set of procedures and sources used by manager to obtain everyday

information about development in the marketing environment.

Marketing manager collect marketing intelligence by reading books, newspaper, and trade publication,

talking to customers, suppliers, distributors and other company managers.


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Sources of marketing intelligence

1) Potential Customers: The most important source of market information is developed by contracting potential customers. Entrepreneur must find a way to communicate with potential customers. A company

cam set up a customer advisory panel made up of representative’s customers or the company largest

customers or it’s most outspoken or sophisticated customers. 2) Intermediaries: The Company can motivate distributors, retailers and other intermediaries to pass along

important intelligence.

3) Existing Competitors: Companies can collect competitive intelligence by purchasing competitor’s products, reading competitors publications, attending trade shows, collecting competitor’s ads, and looking

up new stories about competitions on the internet.

4) Staff Assistance: It can train and motivate the sale force to spot and report new development. The staff

scans the internet and major publications, relevant news, and disseminates a new bulletin to marketing managers.

5) Research Firms: A company can purchase information from outside suppliers such as the “Marketing

Memo” secondary source of data online. These research firms gather consumer panel data at a much lower cost than company could manage on its cost.

6) Trade Publications: There are hundreds of specialized publication, magazines, newsletters, catalogs and

brochures available in nearly early every product line and service that exists. By reading popular article, a great deal can be learned about new trends of marketing.

11) THE ENTREPRENEURIAL TEAM & BUSINESS FORMATION

LEGAL FORMS OF BUSINESS IN PERSPECTIVE In the private sector, there are three main legal forms of business ownership:

1) Sole-proprietorship 2) Partnership 3) Joint Stock Company

1) SOLE PROPRIETORSHIP (Sole-proprietorship is also known sole-tradership or sole ownership)

Sole-proprietorship is a form of business organization in which an individual introduces his own capital, uses

his own skill and knowledge in the management of its affairs; assume all risks of business and solely

responsible for the result of it business operations.

Advantages of Sole-proprietorship

01) Secrecy 02) Sole Authority

03) Ease of formation 04) Sole Claim on Profit 05) Possible Tax Advantage 06) Minimum Legal Restriction

07) Benefit of inherited Goodwill 08) Development of Personal Qualities

09) Direct Relationship with Customer 10) Power to Start and Close the business

Disadvantages of Sole-proprietorship

01) Entire Loss 02) Limited Sources

03) Loss in Absence 04) Lack of Continuity

05) Difficulties of Expansion 06) Weak Bargaining Position 07) Limited Managerial Ability 08) Limited Chances of Growth

09) Burden of Unlimited Liability 10) Absence of Specialized Employees

2) PARTNERSHIP (Partnership came into force on partnership act 1932)

A partnership is a voluntary association of two or more persons, who contribute money, property, time, care

or skill to carry on a lawful business for profit and share the profits and losses of the business.

Forms of Partnership

1) General Partnership: In this type of partnership, the liability of the all partner is unlimited. This means

that the creditors of the firm can realize his dues in fall form any one of the partners or collectively by

attaching their personal property. On the basis of duration or purpose of the firm, general partnership has two further forms such as Partnership At-will and Particular Partnership.

o Partnership At-will: This type of partnership is neither for a fixed period nor for a particular

purpose. A firm can be dissolved by the partner by giving 7 days notice in writing to remain partner. o Particular Partnership: When partnership is formed for a certain undertaking or for a certain

period, it is called particular partnership. When the work is completed or the specified time period

expired, the partnership comes to an end. For example, a partnership is formed for a limited period of

4 years. On the expiry of the period of 4 year, the firm would stand dissolved.


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2) Limited Partnership: Under this partnership, the liability of the partners is limited to the extent of capital

invested in the business. This partnership is formed for encourage those persons who want in interest in business but don’t want to take risk of unlimited liability. In Pakistan, this type of partnership is not

recognized. However, limited partnership is very common in USA and in several European countries.

Advantages of Partnership 01) Large Capital 02) Profit Incentive

03) Quick Decision 04) Sharing of Risk

05) Ease of Formation 06) Ease of Dissolution

07) Frozen investment 08) Better Management

09) Spirit of Cooperation 10) Possibility of Expansion

Disadvantages of Partnership

01) Lack of Secrecy 02) Implied Authority 03) Lack of Harmony 04) Limited Resources

05) Unlimited Liability 06) Risk of Dissolution

07) Possibility of Fraud 08) Possibility of Disagreement 09) Disputes among the Partners 10) Possibility of Misuse of Resources

3) Joint Stock Companies: (Joint stock company came into force on company ordinance 1984) Joint Stock Company is the third major legal form of business ownership. It has entirely a different

organizational structure from the sole proprietorship or partnership. It is setup due to two main reasons.

First, The Company offers the protection of limited liability to the investors.

Second, Sole proprietorship or partnership forms of organization cannot meet the increased capital demand of industry

Definition: A joint stock company is a voluntary organization which is an artificial person created by law,

having limited liability of its members and a perpetual succession with its capital divided into transferable share and which has a common seal.

Classification of Companies

The companies are generally of the following types.

1) Chartered Company: A company created by the grant of a Royal Charter. For instance, the Chartered Bank of England, the East India Company, The Chartered Mercantile Bank of India. After the passing of

Companies Ordinance 1984, there is no new company can be formed by a Royal Charter in Pakistan. The

provisions of companies ordinance 1984 applies to the foreign companies in Pakistan as well. 2) Statutory Company: The companies which are incorporated by the Special Act of Legislative.

For instance, The State Bank of Pakistan, The National Bank of Pakistan, Pakistan Industrial and Credit

Investment Corporation, WAPDA. They also enjoy special rights and privileges which are not available to companies incorporated under the company ordinance, 1984.

3) Registered Company: A company which is formed and registered under the Companies Ordinance, 1984

is known as registered company.

There are two major forms of registered company as under -- Private Limited Company: A private limited company is an association of minimum 02 and maximum

50 members. Private limited companies are not authorized to subscribe their share to the public. A private

limited company suits the need of those person who which to take advantage of limited liability of its members and the same time keep the business as private as possible.

-- Single member Private Company (SMC) A new concept of single member private company has been

introduced to admit the individual businessman in the corporate sector as a company having the limited liability through amendment in companies' ordinance in 2002.

-- Public Limited Company: A public company must have at least seven members to form it. There is no

restriction to the maximum number of members. Public limited company issues a prospectus for invite

people to purchase its shares. The shares of public company are freely sold and purchased in the stock exchange market.

Advantages of Company

01) Higher Profit 02) Social Benefits 03) Limited Liability 04) Grater Permanency

05) Spirit of Cooperation 06) Possibility of Expansion

07) Recognized Legal Entity 08) Easy to transfer ownership

09) Availability of Skilled Employees 10) Benefits of Large Scale Production


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Disadvantages of Company

01) Double Taxation 02) Lack of Secrecy 03) Chances of Fraud 04) Grouping of Powers

05) Creating Monopolies 06) Complicated Formation

07) Favoritism and Nepotism 08) Stock Exchange Speculation 09) Disputes among the Members 10) Possibility of Misuse of Resources

12) BUSINESS ACQUISITIONS & FRANCHISING

RATIONALE FOR ACQUIRING A BUSINESS

The decision to buy business begins with a personal examination of why a person would want to buy any

business. Buying a business is not like buying a used car, nor is it justifies because a person has little spare cash. There must be sound reason for buying into business and there are sensible ways to go about making an

acquisition.

Consideration for Making an Acquisition Aspiring entrepreneur must decide whether to buy a business or to start one and the decision must encompass

both personal and commercial consideration. There are five major categories for making an acquisition.

1) Experience: Having experience relevant to the proposed venture is often influence entrepreneur to acquire or start a business. Examples include construction contracting, medical technology, electronic engineering,

and specialty services such as advertising.

2) Nature of the Business: The type or nature of business often influence entrepreneur to acquire the

business such a dealership or franchising business. Some well known fast-food restaurant chain such as McDonalds, KFC, Fried-chiks,) acquired by entrepreneur.

3) Location: Most entrepreneurs start or acquire business near their homes rather than pursue unfamiliar

markets. In this way, entrepreneurs pay their full concentration for grooming their business. However, location is not a sophisticated reason for acquiring a business. There must be sound reason for buying into

business and there are sensible ways to go about making an acquisition.

4) Personal and Business Risk: The greater risk is associated to establish a new business. These include

economic condition, market potential, legal documentation, or other forces. Buying an existing business has several potential advantages than starting a new business. An existing business has a track record of

performance that can be verified and show the actual strength of the venture.

5) Enterprise Costs: Entrepreneur considers the cost of physical assets for a new venture. If a person opens a new restaurant, the start up cost of new equipment and furnishing can be quite high. By purchasing an

existing business, this cost may be reduced. Used restaurant equipment and furnishing would bring a very

little money on the open market compared with their value as assets of an ongoing business. Consequently, a seller can often benefits when the price of business is bargain for the buyer. Cost of the purchasing new

assets is almost always high, but the buyer must be careful to buy serviceable assets, and ignore unnecessary

equipments.

EVALUATION ACQUIRING OPPORTUNITIES

Buying an existing business has several potential advantages than starting a new business. An existing

business has a track record of performance that can be verified and show the actual strength of the venture. Assets can be evaluated, profit and cash flow are documented, and pattern of sales activity can be

determined.

An ongoing business will also have an appropriate system for supply, personnel, and distribution. Existing business will have been resolved the thorny issue such as patent right, copyrighting, and trademark by the

existing owner. Most important is the business reputation can be ascertained.

EVALUATING THE BUSINESS VENTURE Complete and accurate information about the enterprise is beneficial in negotiating a fair purchase

agreement. Consequently, both sellers and buyers must have a clear idea of the ventures value. Evaluating a

business involve three categories of information: business assets, operational performance and the business environment.

1) Business Assets: Tangible assets include account receivable, inventory, facilities, equipment, vehicles,

patents, copyrights and trademarks. Intangible assets include goodwill, proprietary information such as

mailing lists or trader secret and experienced and productivity employees.


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Evaluating tangible assets often is straightforward. Accounts receivable are verified for their book value

and collection history. Inventory is valued according to its age, quality, and salability. If inventory has been returned by customer as faulty, the book value of inventory will be reduced by replacement costs of

projection future return. Professional assessment can be obtained on facilities and vehicles to establish

market value equipment can be valued using standard accounting procedure such as depreciation cost or market value.

Evaluating Intangible assets are far more difficult or complex. Good will is the most important asset to

consider because it is the tangible value of business ability to produce excess earning. Accountants usually assign a premium value based on the ability of the business to generate income in excess of the average

generated by comparable enterprise.

2) Operational Performance: Buyers analyze sales from several perspectives.

First, sale volume and growth rate (rate of change in sales) are determined. This determination involves evaluating marketing factors that influence sales, marketing strategies, merchandise quality, competition,

pricing tactics, promotional programs and distribution decisions.

Second, sales pattern are determined in order to understand seasonal variations, turnover rate for merchandise, and consumer profiles. Having a clear idea of who buy a firm products and when customer

make purchase often are important for buyers. A buyer must be determining than impressive sales volume

may rely on only a few customers who may not remain with the new owners. Third, sales trends are reviewed in term of credit policy that can encourage sale volume.

Fourth, other considerations are after-sale-service such as installation, delivery and individual skill of the

seller or his staff.

If the venture to be acquired is involved in manufacturing, operational issues include product design, process engineering, production system, plant utilization, inventory control, raw material supply and product

distribution. The buyer must want to know about factory operations, safety records, environmental forces,

quality control, and compliance requirements such as waste disposal, ISO standards, or other legal matters. Minor oversights in any of these areas may cause huge losses.

For example, the buyer may be unaware of pending legislation. The buyer could face huge costs to solve

this issue. Lack of information regarding safety and health issue can create a critical problem.

The most important point is that a buyer must feel confident that sales can be maintained or improved after actuations.

3) Business Environment: Business environment also most important to making an acquisition. This

process involves using statistical market data for comparative research on industry and local market characteristics. It includes a competitive analysis to understand the strength, weakness and investigation of

external threats & opportunities of the acquisition.

METHODS OF VALUATION

For the small business enterprise, there are three method of valuation commonly used: 1) Book Value,

2) Multiple of Earning, and 3) Discounted Future Earning or NPV

1) Book Value: The book value method of valuation uses a company's financial statement to establish the net worth of the firm. It is also called the balance sheet method or the net worth approach.

For example: If a company balance sheet showed Rs.100,000 in current assets (cash, A/R, and inventory)

and long term fixed assets (office equipment, land, machinery) are 200,000 and accumulated depreciation of 50,000, then its tangible assets would be worth 250,000. Deducting current liabilities of 20,000

(A/P, salaries, wages or utility bills) and long term liabilities (bank loan) of 80,000. The book value of the

business would be 150,000.

EXAMPLE OF BOOK VALUE OF BUSINESS

Current assets (cash, A/R, and inventory) Rs. 100,000

Long-term or fixed assets (equipment) 200,000

Less accumulated depreciation – 50,000 ----------------

Total assets 250,000

Less current liabilities (A/P, salaries, wages) – 20,000

Less long term liabilities (bank loan) – 80,000

----------------

Net value Rs. 150,000

The book value is not necessarily the market value or a fair value for buying or selling the business. All

tangible assets must be evaluated in order to accuracy, bad debts, obsolescence, and usefulness.


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2) Multiple of Earning

When the buyer intends to continue an existing business, the multiple of earning methods is used to capitalize net income. A value is established by multiplying net annual income by a factor that accounts for

risk, future income potential, and the buyer's expectations for investment payback.

A risky business, one with low growth potential, may have a multiplier of only 2. Consequently, a business that has generated on average 20,000 net incomes during the past several years will be valued at 40,000. If

the buyer puts forward a 40,000 bid, because the business is too risky or has too little potential, and the

buyers wants a payback in two years. For a rapid growth business with potential for high net income, a multiplier of 10 might be used. Thus an

extremely attractive business with 20,000 average net incomes will be valued at 200,000. In this case the

buyer expects to bring about acceleration (speeding up) in the growth and to benefit from the prior owner has

already accomplished. To achieve a two-year payback period in this instance, the 20,000 earning must nearly triple for each of the following two years.

EFFECT OF MULTIPLIER ON BUSINESS VALUE

3) Discounted Future Earning or NPV: The discounted future earning method is also called the net present

value. The NPV techniques are used to estimate present value of future earnings and discount rate must be

established. For example, a person could earn 7 percent interest on a risk free government security, and a relatively low-

risk business opportunities seems to justify a small 2 percent premium, then the discount rate for valuing that

business would be 9 percent. If the business seems to be risky, a larger risk premium of 10 percent could be assigned, resulting in a 17 percent discount rate. Most small business is assigned risk premium between 5 to

10 percent and risk free base interest rate tends to vary between 7 to 12 percent. As a result, discount rates for

most small busyness valuations range between 12 to 22 percent.

EXAMPLE OF THE DISCOUNTED FUTURE EARNING METHOD 15 percent rate is used to discount a five year income projection

Year Net Cash Flow Present Value Factor Present Value 1 20,000 0.8695 17,390 2 20,000 0.7561 15,122 3 20,000 0.6575 13,150 4 20,000 0.5717 11,434

5 220,000 0.4972 109,384

-------------- --------------

Total 300,000 166,480

The total value of the projected cash flow stream in today is 166,480. This includes the estimated net worth

of 200,000 at the end of five years. If the 15 percent discount rate is appropriate, then a buyer should pay 166,480 for the business.

STRUCTURING THE ACQUISITION AND FRANCHISING

FRANCHISING

The individual who buy a franchises business typically a small business person seeking a protected local market with an establish business line. Those individuals who buying franchise are called franchisees and

those who sell franchises are called franchisors.

Franchises are created by contract in which franchisor supplies to franchise complete packages of well known brand name products and services. Franchisee pays the specific amount as per agreement to the

franchisor based on a percentage of the sales or profit generated by the franchisor products.

Franchisor can generate revenue from the following sources:

1) Initial Franchise Fees: The initial franchise fee is a payment by the buyer to acquire the franchise rights. This low-end fee is often less than 10,000. A more extensive contract will require hefty fee, perhaps as much

as 200,000. This fee will cover a start-up program including management training, site selection, assistance,

accounting and control system, and on-site consulting by company personnel who act as mentors to "jump start" the new business.

Average annual net income for

recent years 20,000

Multiplied by factors between

1 and 10

X 01 = 20,000 X 03 = 60,000

X 07 = 140,000 X 10 = 200,000

No growth Potential

High growth

potential


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2) Royalties: The major sources of generating revenue from franchisee are royalties. There are several ways

to structure royalties but the most common is a percentage of gross sales. This percentage can range from approximately 4 percent for low-margin business and approximately 20 percent for high-margin business.

(These are not perfect criteria, often it's negotiable) Some franchise agreements replace royalties with

percentage in gross profit and other specifies fixed payments based on sales volume. These agreements are negotiated for differences in location.

3) Services to Franchisee: Franchise agreements can specify certain basic services provided by the company

for which franchisees pay a retainer or periodic fee. These services can include bookkeeping service, maintenance, and technical advising.

4) Inventory Price: Franchisor receives the inventory price from franchisee. Franchise owners occasionally

receive financial support from franchisor in form of credit for inventory and supplies.

5) Advertising Fees: National promotion and advertising fees are specified in the franchise agreement. These will be the part of franchisors marketing program. A franchisee will pay monthly advertising fee to

company based on gross sales volume. This can be small percentage of sales, no more than 1 percent or a flat

monthly fee.

6) Lease and Rental: New franchise outlets that require unique physical facilities are usually built

by franchisors and leased to franchisees. If franchisor provides building or space to the franchisee,

then he should collect monthly rental from franchisee according to market rental value.

FRANCHISE SYSTEM AND SUPPORT SERVICES

13) FINANCIAL RESOURCES FOR NEW VENTURES

Financial resources are essential for business, but particular requirements change as an enterprise grows.

Obtaining those resources at the time when they are needed can be difficult for entrepreneurial ventures

because they are generally considered more risky than established enterprise.

ASSET MANAGEMENT

Managing assets is crucial because underwriting assets create liabilities and require more concentration to effectively and efficiently managing these resources. Cash is the most important asset to manage Lack of

mismanagement of asset may create a critical problem for business.

Asset management for the startup entrepreneur is a matter of determining what is needed to support sales and then "gaining access" to those assets at the optimum (most favorable) cost. The term gaining access is used

because there are alternatives other than cash purchase of asset. Equipment can be leased, and office

furniture can be rented, even plants can be obtained through rental centers. Manufactured products initially

can be subcontracted rather than made thereby avoiding the expense of producing materials, equipment, and plant facilities. Entrepreneurs have choices about what assets to obtain, when they must be obtained and how

to gain access to them.

-- Inventory Decision: Most retailers and wholesalers must have inventory in their possession before they can generate sales and supplier normally require cash on delivery (COD) until entrepreneurs establish

themselves as reliable customer.

Accounts Receivable Decision

-- Equipment Decisions: Equipment is important to business because it can help earn profit, not because it has residual asset value. A computer system is depreciating asset and its residual value declines every day

whether it is being used or not. Vehicles, office machines, furniture, store fixture, production machinery,

handling equipment and tools depreciate systematically. An efficiency utilized asset contributes to business earning.

Franchisor

Franchisee

Franchisee Pays -- Initial Fee

-- Royalties -- Inventory Price -- Advertising Fees -- Lease and Rental

Franchisor Provides -- Business Concept -- Consulting -- Merchandise -- Site selection -- Staffing Plan -- Marketing Plan -- Operations Plan

-- Owner Training -- Administrative System

-- National Brand Advertising


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Entrepreneur must make sound decision about how to equip and furnish their enterprise. They must

understand the costs associated with purchasing assets. The cost of buying equipment includes the purchase price as well as delivery, installation, and financing cost. It also includes operating cost such as maintenance

and repair and the cost associated with depreciating value.

If equipment is used for particular time period, then a short term lease/rental agreement may be beneficial. For example, retailers with seasonal sales can lease display stands, temporary location, furnishing and

delivery van thereby maximizing asset utilization without purchasing these asset that remain idle most of the

year. -- Subleasing: A specialized business such as boutique, perfume shop can arrange with a large department

store to sublease a counter area rather than setup an independent business location. This practice is becoming

quite common as major store encourage specialty merchandises to contact for counter space. Stores benefit

by improving space utilization and cash flow from leases, and lessees' benefits by having significant exposure to customer without capital expense for facilities.

-- Subcontracting: Most manufacturers have excess production capacity and they are willing to perform

contact work form other companies. *Most of the fabric exporters print or dyed and stitch or packing their fabric from other textile mills.

EQUITY FINANCING Equity is capital invested in a business by its owner and it is "at risk" on permanent basis. Equity financing

does not require collateral and offers the investor some form of ownership position in the venture. All

ventures have some equity, as all ventures are owned by some person or institution. Although the owner may

sometimes not be directly involved in the day-to-day management of the venture, there is always equity funding involved that is provided by the owner.

The amount of equity varies by the nature and size of the venture. In some cases, the equity may be entirely

provided by the owner such as in small computer college or restaurant. Large venture may require multiple owners, including private investor or venture capitalists. This equity provides the basis for debt financing,

which together make the capital structure of the venture.

There are some sources of equity financing.

-- Personal Sources At first entrepreneur arrange startup capital as their personal resource. These include cash from their personal

saving and personal assets that can be converted to cash. A personal car may provide cash through sale or

refinancing and second mortgages can be obtained for home equity. Life insurance policies may also have accumulated equity, and other assets such as stamp and coin collection have capital value. These are not

unusual sources but some assets also can be converted to business use including personal trucks or van,

computer, telephone exchange, furniture and tools. Family members and close friend also become involved an informal investors but having them invest can

lead controversy if their participation is not clear to everyone.

-- Small Business Investment Corporations (SBIC)

SBIC is a company chartered under the federal government specially to help small businesses. SBIC provide equity and debt financing to small corporation with less then 6 million in net worth and less then 2 million in

after tax earning average over the previous two year.

-- Minority Enterprise Small Business Investment Company (MESBIC) MESBIC is similar to an SBIC, but it is chartered specifically to a special category of business. To qualify

MESBIC financing, a company must demonstrate majority ownership by those considered socially or

economically disadvantaged. -- Initial Public Offering (IPO): IPO companies sell their share through SEC regulated exchange and get

finance for developing their business.

DEBT FINANCING Debt financing is also called asset-based financing. Debt financing is financing method involving an interest-

bearing instrument, usually a loan. Debt financing require the entrepreneur to pay back the amount the

amount of funds borrowed as well as fee expressed in terms of the interest rate. Short term debt (less than one year), the money is usually used to provide working capital to finance

inventory, account receivable, or the operation of the business. The funds are typically repaid from the

resulting sales and profits during the year.


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Long term debt (lasting more than one year) is frequently used to purchase some asset such as machinery,

land, building or vehicle. The entrepreneur needs to be careful that the debt is not so large that regular interest payment become difficult.

Small enterprises have fewer choices than large firms for obtaining debt financing. They are excluded from

financial resources such as money raised through the sale of bonds, debenture and commercial paper.

There are some important ways to obtain debt financing.

Commercial Banks

Most commercial loan is made to small businesses. Commercial banks provide unsecured and secured loans. An unsecured loan is personal or signature loan that grant on the bases of business strength and reputation. --

-- Unsecured loan are usually small loan but they can be quite useful for meeting emergency cash flow

requirement such as paying wages or bills. Unsecured signature loan usually must be paid back with in a year

and they will have high interest charges. Entrepreneur also establish personal "lines of credit" through their banks and these are treated in the same

way as credit card account that must be paid down or cleared each month.

-- Secured loan are those with security pledged to the bank as assurance that the laon will be paid. There are many types of security will consider, such as guarantor, another credit worthy person or company that agree

to pay the loan in the vent the borrower default but the most security is in the form of tangible assets pledged

as collateral.

Types of security and collateral in commercial loans 01) Real Property Real estate, Land, Home

02) Securities: Stock & bonds that can be pledged

03) Endorser Individual who pledges to back loan 04) Guarantor Individual who personally guarantee loan

05) Co-maker Individual who signs as secondary principal

06) Insurance Policy: Cash surrender value of insurance policies in affect 07) Merchandise: Retail and wholesale saleable items with market value

08) Account Receivable: Items receipted as sold with verifiable credit outstanding

09) Vehicles: Equity in cars vans, trucks, and moving transport equipment

10) Equipment Capital assets that include machinery, computers and instrumentation 11) Personal Property Items that have mortgage such as stamp collection, coins, and antiques

12) Inventory: Other than merchandise like raw material, partial assemblies & finishing goods

WISH YOU BEST OF LUCK