ENTREPRENEURSHIP GC University Faisalabad

Document Sample
ENTREPRENEURSHIP GC University Faisalabad Powered By Docstoc
					Entrepreneurship (New Venture Creation)                                                Prepared By: Ch. Adnan Arshad

                                             NEW VENTURE CREATION

                                          CREATED BY ADNAN ARSHAD
                                             Contact No: 0301-7120098
                                           E-Mail: adnan_776
            Your suggestion and opinion for the development of these notes should be cordially appreciated.

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

TOPICS                                                                                                    Page No
Entrepreneurial Perspective - Defining Entrepreneurship - Economic and Entrepreneurship                       03
Characteristics of Successful Entrepreneurs                                                                   03
Entrepreneurship Venture - Small Business – Types of small business                                           04
Small Business Risk & Failure                                                                                 06
Product & Service Concept for New Venture (The Four Stage Growth Model)                                       06
Feasibility Planning                                                                                          08
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
The marketing Concept - Marketing Research for New Ventures                                                   15
Competitive Analysis                                                                                          16
Sources of Market Intelligence                                                                                17
Legal Forms of Business in Perspective - Sole Proprietorship - Partnership                                    18
Joint Stock Company                                                                                           19
Rationale for Acquiring a Business - Evaluation Acquiring Opportunities                                       20
Evaluating the Business Venture                                                                               20
Methods of Valuation                                                                                          21
Structuring the Acquisition and Franchising                                                                   22
Asset Management                                                                                              23
Equity Financing - Debt Financing                                                                             24

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

Entrepreneurship is one of the four mainstream economic factors: land, labor, capital and entrepreneurship.
The world itself derived from 17th century French entreprendre, refers to individuals who were "undertakes"
meaning those who "undertook" the risk of new enterprise.

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

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.

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.

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

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.

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.

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

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:

                                     Planning &                                    Customer
                                     Leadership                                    Relation

                         Marketing and                                                         Human
                            Sales                            OWNER                            Resources

                                    Purchasing                                     Cash Control
                                          Role/Responsibilities of Small Business Owner

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.

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

-- 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


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

 The period during                The initial period of               A period of often                   The evolution of a
 which entrepreneur               the business when                   rapid development                   venture into a large
 plan the venture and             the entrepreneur                    and growth when                     company with active
 do the preliminary               must position the                   the venture may                     competitors in an
 work for obtaining               venture in the                      undergo major                       establish industry
 resources and                    market and make                     changes in markets,                 when professional
 getting organized                necessary                           finance and resource                management may be
 prior to start up                adjustment to assure                utilization                         more important than
                                  survival                                                                entrepreneurial
                                                                                                          verve (strength)

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
                                          What is the purpose of the ventures?
1- Business Concept Defined
                                          What does the entrepreneur want to accomplish with the business?

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

                                          Financial Projection
3- Financial Planning                     What cash is needed? -- How will income be generated -- What expenses are expected?
                                          What is invested? Borrowed? -- What is needed to meet operating requirements?
                                          Getting ready to start: The entrepreneur must find resource.
4- Pre-Start-up Implementation            Purchase beginning inventory. Hire those needed at start up.
                                          Obtain necessary license, permit, leases, facilities and equipment.

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

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

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:
                                 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
 1- Executive Summary
                                 -- 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

                                 -- Purpose of the venture
                                 -- Major objective of the founders
 2- Business Concept
                                 -- Mission statement
                                 -- Description of the distinct competency of the firm

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

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

                                 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
 5- Market Plan                  -- 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
                                 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,
 6- Manufacturing or                                     Supplies and Support
    Operations                   -- 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

                                 -- Profile of Founders
                                 -- Key Personnel
 7- Entrepreneurial Team
                                 -- Investors
                                 -- Management Roles

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

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

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
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
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.


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.

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

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.

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

                             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 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
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
2) Idea Screaming: Screening or select best product ideas and drop poor ones as soon as possible.
Entrepreneurship (New Venture Creation)                                          Prepared By: Ch. Adnan Arshad

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

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.

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.

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

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.

   Documents                   Patent               Patent                 Patent                  Patent
   Disclosure                  Search             Application            Examination               Grant

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
-- 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.

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

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.

                              Applicant       FILLING FOR TRADE MARK                 Patent Office
                               Filling                                                  Action

    Written                   Drawing             Specimen              Trademark                    Trademark
   Application                Prepared            Prepared             Examination                      Issue

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
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.

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

There are several broad categories of service firms.
     Professional                Personal          Merchandising        Distributive             Information
       Services                  Services            Services            Services                  Services

                                            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
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.

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.

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

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

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.

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

                         Suppliers                       Competitive                         Buyers
                                      Bargaining           Rivalry              Bargaining
                                        Power                                    Power

                                                                  Threat of


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

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.

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.

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

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
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.

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.

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

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

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

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

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
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

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
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.

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
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.

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

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
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.

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

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.
                                                                                              No growth
        Average annual                 Multiplied by               X 01 = 20,000               Potential
        net income for                factors between              X 03 = 60,000
         recent years                     1 and 10                 X 07 = 140,000
            20,000                                                 X 10 = 200,000            High growth
                                   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
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.
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.

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.

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

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.
                                               Franchisor Provides
        Franchisor                        -- Business Concept                             Franchisee
                                          -- Consulting
                                          -- Merchandise
                                          -- Site selection
                                          -- Staffing Plan                              Franchisee Pays
                                          -- Marketing Plan                           -- Initial Fee
                                          -- Operations Plan                          -- Royalties
                                          -- Owner Training                           -- Inventory Price
                                          -- Administrative System                    -- Advertising Fees
                                          -- National Brand Advertising               -- Lease and Rental

                               FRANCHISE SYSTEM AND SUPPORT SERVICES

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.

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

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

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
-- 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 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 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.

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

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


Shared By: