1.

THE ROLE OF ENTREPRENEURSHIP IN THE ECONOMY

1. Economic Growth: Entrepreneurship in all its diversity provides a dynamic and

potentially efficient means of meeting many of the emerging challenges of development.
When entrepreneurship produces outputs greater than the inputs (as is often the case), the
economic development of a nation is directly enhanced.
2. Provision of goods and services: They produce and distribute goods and services to the
community thus boosting the community welfare. Entrepreneurship provides new
products (or services), or develops methods, procedures, or technologies that produce or
deliver existing services more optimally (i.e. lower cost, better quality, improved
environment, etc.
3. Provides opportunities for on-the-job training: They employ unskilled and semi-
skilled employees as well as fresh graduates/school leavers who do not have the
experience and give the opportunity to gain experience through on-the job training.
4. Decentralization of economic activities By locating their businesses in various areas
including the rural areas, they help decentralize economic activities thus even rural-urban
migration.
5. Utilization and conservation of local resources: They creatively seek ways of utilizing
the local resources to come up with useful goods e.g. through recycling. Entrepreneurship
creates jobs for a nation’s people (thereby utilizing the human resources of the country
and helping nurture natural talent).With new inventions and development of new
technologies, a nation can use its resources more effectively through entrepreneurship.
6. Promoting technology development: Through development of appropriate technology,
like energy saving jikos, oil press, charcoal refrigerators etc, they help transfer and
development of technology.
7. Earning foreign exchange: Through exporting their products, e.g., curio products,
ciondos etc, they earn the country foreign exchange.
 8. Improving society’s standards of living: Through their contribution to development of
social amenities, infrastructure and provision of goods and services they help raise the
standards of living of the society in general.
9. Act as role models in the society and enhances the entrepreneurial culture: By portraying
successful image in business, they stimulate desire for success within the society.
Entrepreneurs lead by example in uplifting their own communities and assisting the entire
society thereby boosting the morale of the public

2.CHARACTERISTICS OF SMALL BUSINESSES

Small business bears the following characteristics:-

 Low capital investments- small enterprises require less capital to start and run than large
enterprises this makes them easier to start than the large organizations.
 Find difficult to raise funds- few financiers have confidence in small enterprise which are
considered as more risky than large organizations furthermore many of the m lack the
collateral required by some commercial banks to support the loans give .This puts them at a
disadvantaged point compared to the large organizations.
 Informal structures- they have less formal structures than large organizations and few
management levels. This makes communication between the owner / manager and the
employees faster .This facilitates quick decision making giving them an advantage over the
large organizations.
 Have few employees- mostly operated by the family members with the help of few
employees if any .The employees closely identify with the business there is there fore low
personnel turnover. The management of the human resource is therefore less complex than
in large organizations.
 The owner makes most of the decisions- the owner has personal influence on what takes
place and rarely delegates. This means that the owner keeps in touch with all happenings of
the business which may be an advantage. However the owner could miss out important
contributions from gifted and knowledgeable employees if not careful to involve them
where necessary.
 Specialization is rare- the owner and the employees perform a variety of tasks.
  Have few strategic issues than large organizations- rarely have long term plans and
decisions are more reactive (to deal with issues at hand) than proactive.
 inadequate quantitative data/ information- small businesses rarely do research may be
because they do not appreciate the need or cannot afford .Their decisions are therefore
rarely based on quantifiable facts and can easily be misleading.
 Close and direct contact with the customers- most small business entrepreneurs know
their customers well and so can easily know their needs and meet them.
 Flexibility- small entrepreneurs are more flexible than large organizations this is facilitated
by their informal structures, low capital investments and direct contact with the market they
can easily identify changes in the market and quickly rechanneled their resources to meet
the challenging demand.
 Small market share- their market share is usually not large enough to influence the market
prices.

3.SOURCES OF BUSINESS IDEAS

Every business depends on an initial idea. An idea is a mental impression, concept or plan, an
intention, purpose or essential feature. It is not necessarily the very first idea that develops into a
business venture. Usually, the original idea is subjected to a series of tests and evaluations.
During this process, the idea is adapted to become more attractive. A good idea is the foundation
on which entrepreneurs build an enterprise. What they do with the idea determines whether or
not they eventually become entrepreneurs. One brilliant idea, rarely results in a prospering new
business in no time. Potential entrepreneurs usually pass through a series of trial-and-error
situations before they achieve success.

To start a new business, you should have some idea that can be developed into a product or
service that customers would be willing to pay for. Customers must receive a perceived benefit
from the purchased product or service. No matter, how brilliant you may think your idea is, you
cannot develop it into a new venture unless consumers are willing to buy it.

Types of Ideas
There are three types of ideas which develop into new ventures
 i) Ideas that focus on providing the customers with products and services that do not
exist in their market but already exist in another market – identifying a new market.
ii) Ideas that involve new or relatively new technology.
iii) Ideas that improve existing products and services and thus provide new benefit
Sources of Ideas in the Market Environment

Ideas are drawn from our experiential environment that stimulates our entrepreneurial
imagination. This means that the experiences we have in our environment can give us ideas
which could turn into an enterprise.

Sources of ideas vary from country to country, from enterprise to enterprise, from entrepreneur
to entrepreneur. Furthermore, in a changing environment, an idea is only available for a limited
period.

Consumers

Talk to people and find out what is wrong with products or services that they are using and how
these products or services could be improved. Ask people what they do and how it could be
improved. Do they have suggestions about how their jobs could be performed better, faster, more
safely or more easily? What products or services would they like to have or use, that is, what
products or services would they like to have that do not exist yet?

Market trends

What trends are emerging among consumers? Where are they moving to live? What services are
they requiring? On what are they spending their money?

Distributors and wholesalers

Distributors and wholesalers are usually the first to hear from customers about product
weaknesses and about improvements that they would like to buy. Distributors can inform you
about product weaknesses and also about product strengths, the buying patterns of customers and
trends.

Competitors
It is often possible to imitate or improve products offered by companies competing in an
industry. By examining the product, you can find out whether it is protected by a patent.

Advertisements

Analyze advertisement in newspapers and magazines. What trends are emerging? Are people
becoming more interested in a particular subject, product, service or idea? Could you develop
any of these?

Trade shows

Almost every industry has a trade fair at which many of the suppliers and consultants exhibit. At
trade shows, you have an excellent opportunity to examine the products of both existing and
potential competitors, and you can question sales representatives and meet distributors. You can
find out the latest products and market trends and identify potential products, new markets and
new areas for business and you can negotiate agency agreements for new products.

Industry association meetings

Some industry associations such as Institute of surveyors, Institute of Engineers, Chamber of

Commerce and industry hold meetings to discuss new developments in technology, new or
unusual applications of existing technology, and market trends.

Nonprofit research institutes

Some nonprofit institutes undertake research and development for government and development
of private enterprises, as well as self-sponsored research into new product and processes that can
be licensed to private enterprises for further development, manufacturing and marketing.

Universities

In most universities, research is undertaken in the physical and chemical sciences and in the
engineering departments. To find these inventions, you should familiarize yourself with the work
of researchers in your field of interest.
The Common Characteristics of a Good Business Idea

 Easy to manage and involves minimum risk.

 Does not require excessive investment capital.
 Offers good returns on investment.
 Has the scope for growth, expansion and diversification.
 Comparative with the owners’ goals and interests.
 It is not against the expectations of the society.
 It has a short gestation period.
 It has readily available market.
 Easy to exit if necessary.
 It does not require frequent and extensive changes in technology.
What Makes Business Successful
 An entrepreneur is usually successful when he/she is skilled, excellent in management
and leadership. Technical skills of the owners means business success.
 Having the ability to manage people – hiring, supervising, training, motivating and
organizing staff employed in the business.
 Managing money – arranging for financing when necessary, keeping records, managing
cash, handling credit and insurance, paying taxes and planning for financial success.
 Directing business apparitions, buying and selling, purchasing equipment and machinery,
 making sure that stocks are adequate, meeting customer’s needs and managing
everything you have to make the business effective.
 Making sure that sales and marketing are efficient – meeting customer’s needs,
developing new products or services, setting prices, advertising, dealing with the media
and making sales contacts.
 Dealing with the business environment – licensing and laws, taxation, government
requirements, supplier’s requirements.
4. BUSINESS PLANNING

A business plan is a workable written document prepared by the entrepreneur that describes all
the relevant external and internal elements involved in starting a new venture (Hisrich & Peters,
2003).

It is a written document prepared by the entrepreneur, which describes all the relevant external
and internal elements involved in starting a new venture. It is an integration of functional plans
such as marketing, finance, manufacturing and human resources.

It carefully articulates merits, requirements, risks and potential rewards offered by the
opportunity and how it can be seized.

Main Functions of a Business Plan

 To create a structure for the business by defining activities and responsibilities.
 To assist in development of strategies to meet the entrepreneur’s objectives.
 To point out gaps which an entrepreneur may not have thought of when planning the
business.
 To be a roadmap for setting direction and keep the business on track a
 To assist when looking for finance to start a business.
 To provide a clearly articulated statement of goals and strategies for internal use.
 To serve as a setting document to be shared with outsiders such as the customers
suppliers and investors.

COMPONENTS OF A BUSINESS PLAN

FRONT CONTENT

Cover/title page

Table of contents

Executive summary

MAIN COMPONENTS

Business description
Marketing Plan

Management plan

Operation Plan

Finance plan

Title Page

The title page is the first thing that a potential investor sees. Therefore, it should have an impact.
It contains: Company name, Company Logo, Date, Names, telephone numbers, email of key
contacts.

Executive Summary

It is a written summary/overview of the business plan. It should be written last so that you can
summarize key points easily.

Table of contents

CHAPTER ONE: BUSINESS DESCRIPTION

It comprises the following Subsections

 Business Name

 Legal form of business

 Mission, Vision and objectives of the business

 Products and services

 Industry

 Business opportunity

 Entry and growth strategies

 Location
  You may have a great product, but if you do not market it well, it will not sell. Research
indicates that the marketing plan is the most crucial but often worst prepared component
of the business plan. A total of 98% of firms receiving venture capital funding have a
clear, concise market plan. Rather than describing a business sector, describe your
specific product market.

CHAPTER 2:MARKETING PLAN

 Clearly define your market strategy and market segment. Describe the nature of that
market. Support your conclusions with primary and secondary data. To accredit your
proposal, include insights from industry experts. Provide a profile of the typical customer
and then explain the marketing channels you will use to reach that customer base.

Describe your :

 Pricing strategy.

 Sales strategy

 Distribution channels

 Advertising and promotion

 Critical Decisions for Marketing Mix Marketing

Variable Critical Decisions

Product Quality of components or materials, Style, features, options, brand name.

Price Quality image, list price, quantity, discounts, quick payments, credit.
Channels of Use of wholesaler and/or retailers, brokers, agents etc.
distribution

Promotion Media alternatives, message, media budget, role of personnel selling.

CHAPTER THREE: MANAGEMENT PLAN

 More than half of all new venture proposals are rejected because the management team is
not considered to have demonstrated leadership back and track record relevant to venture.

 Therefore, it is important to describe your team accurately and complete. If your team
lacks expertise in a particular area (legal, marketing) describe who or how you fill the
gap. You must also describe the ownership structure and stock. In most cases, a few
people will fill a multitude of positions. A strong board of directors can go a long way to
improving your Leadership image

 Describe strategies of recruiting, rewarding, promoting and training the workers.

 Draw the organization Chart

CHAPTER FOUR: MANUFACTURING AND OPERATIONS PLAN

 Enumerate and explain capital equipment, material and labor requirements. Are the above
items readily available? Do you have multiple supply sources? List inventory
requirements, quality and technical specifications, hazardous materials

 Your choice of a location can make or break your business, so put careful thought and
analysis into your needs. Consider your type of business, traffic, zoning ordinances and
competitors. Do you require heavy traffic (either foot or car)? For some businesses, such
as retail stores, location is critical. For other businesses, you may be able to operate out of
your home but share secretarial services at a shared office facility.

 Draw the business layout and describe the production process

CHAPTER FIVE: FINANCIAL PLAN

 The financial plan provides a picture of where your venture stands today and where
would it to be in the future. Financial information is critical to venture funding.
Minimally, your business plan should include a balance sheet which shows the worth of
the business. A second essential element is a profit and loss statement. Any investor
wants to know where the money has gone and where you expect the money to go in the
future. You should also include cash flow projections which inform potential investors
where the money is going. You can develop these items in Excel or purchase business
planning software.

 Calculate the business ratios and break even point

 You need to make this information easy to digest. Graphic representations (pie charts,
scatter diagrams, histograms) are extremely viable method of communicating
information.

5.SELF EMPLOYMENT
This is a situation where one creates his or her own business to employ him / herself and
others.

ADVANTAGES OF SELF EMPLOYMENT

1. Personal satisfaction- because you do what you enjoys doing.

2. Independence – freedom to control self and others using own knowledge and skills
making own decisions
3. Profit- enjoying all the proceeds of owns labour is motivating and exciting.
4. Job security- self employment cannot be laid off. As long as the business exists one is
assured of employment.
5. Status – self employed persons receive attention and recognition in the society through
customer contact and public exposure as a result they enjoy status above other people.
DISADVANTAGES OF SELF EMPLOYMENT

1. Possible loss of invested capital

If the business fails the capital invested will be lost .sometimes some entrepreneurs lose
their lifetime savings or borrowed loans which may take years to repay or lead to loss of
family assets like land vehicles, computers etc.
2. uncertain or low income
Business is a risk –the income could a times be very low, uncertain or inadequate to
meet the family or personal needs it could also vary from month to month.
3. Long working hour
Many self employed people work for more hours than employed ones e.g. they wake up
very early to Start working and close business late.
4. Routine chores
Some businesses involve routine chores which can be boring after sometime

.TRENDS IN EMPLOYMENT AND UNEMPLOYMENT

• The number of Kenyans openly unemployed was 1,800,623 in1998/99 based on the Integrated
Labor Force Survey. In 2005/2006 the number was 1,856,294 based on the Integrated Household
Budget Survey. The number of those considered employed was 10,525,609 in 1998/99 and
12,708,035 in 2005/2006.
• In 2005/2006, six (6) million Kenyans were self-employed in agriculture.
• Overall labor force participation rate was slightly over 72% in both1998/99 and 2005/2006.
Male labor force participation rate is higher than female participation rate and participation rates
are higher in urban than rural areas.
• In 2005/2006, the open unemployment rate among the youth ages15-24 as estimated by the
Kenya National Bureau of Statistics, was 24% compared to an overall open unemployment rate
of 12.7%. Open Unemployment rate in urban areas at 19.9% is more than double that in rural
areas; and the rate in Rift Valley Province at 23.9% was the highest among Provinces.
• Majority (94%) of unemployed persons according to the 1998/99 integrated labor force survey
were seeking paid employment and the most common job search method was through friends
and relatives. Government and private employment offices were not widely used.
• Based on the 1998/99 integrated labor force survey an estimated 506,017 Kenyans were
underemployed while in 2005/2006 the estimated number from the integrated household budget
survey was 2,721,248.

The 1998/99 data indicates that the relationship between unemployment rate and age appears to
be U-shaped. Unemployment rates are relatively high among the youth, relatively low for the
middle years and rising thereafter though not to levels such as those of the youth. In 1999, the
overall unemployment rate among ages 15-19 years was 24.3 per cent; 27.1 per cent among ages
20-24 years and 15.5 per cent among those aged 25-29 years (CBS, 2003). Unemployment rates
in 2005/06 declined with age and are generally lower than in 1998/99. Nevertheless, 2005/06
unemployment rates of the youth aged 15-24 are nearly double the overall rate. The high
unemployment rates among the youth are a particular problem in many
developing countries. For example, in sub-Saharan Africa, the unemployment rate for youth aged
15-24 years was 21 per cent, which was twice that of the overall labour force (ILO, 2004). Youth
unemployment is also a problem in developed countries, but the unemployment rates are far
lower than those of developing nations.

Unemployment Rate in Kenya increased to 40 percent in 2013 from 12.70 percent in 2006.

CAUSES OF UNEMPLOYMENT
1. Lack of capital
The shortage of capital is the hindrance in the establishment of more industries and due to this
reason, more employment opportunities are not created.
2. Lack of education and training facilities
Sometimes, employment opportunities are available for skilled and trained persons. The lack of
education and training facilities may be another reason for employment.
3. Rapid population growth
The rapid increase in population compared to the overall growth of the economy and the available
resources leads to unemployment. In many countries, the employment opportunities are not
increasing at the rate of increase in labour supply.
4. Use of inappropriate technology in developing countries.
Most developing countries use capital intensive techniques of production i.e techniques that make use
of more machines and less labour which displaces human labour and reduces chances of people
getting jobs.
5. Seasonality of jobs.
This is especially important in developing countries where the agricultural sector is dominant.
Changes in weather leads to seasonality in agricultural production which causes seasonal
unemployment. Seasonality of jobs also affects the tourism sector whereby unemployment tends to
be high during off-peak seasons
6. Rural to urban migration
The massive movement of the young and energetic people from the rural to urban areas leads to
urban unempoyment owing to the limited job creation capacity in the urban areas
7. Inappropriate education system
The education systems in most developing countries were adopted from developed countries.
These education systems are geared towards white collar jobs and this does not conform to
realities in developing countries most of which have high populations and low rates of white
collar job creation in the formal sector.

EDUCATION AND UNEMPLOYMENT IN KENYA

Looking for standard employment in Kenya is considered the safest and most convenient way to
a comfortable and normal life. Everyone is trying to survive. In Kenya, the employment rate
stands at 40% where 64% of the Kenya youths are unemployed. With such staggering statistics,
it is hard for an individual to get a job in Kenya.

Kenya has 22 public universities, 14 chartered private universities and 12 universities with LI
which is the first accreditation step for private universities in Kenya. The goal is to ensure that
every citizen in Kenya can access quality education. Comparing students graduating every year,
the numbers far outweigh the job opportunities present in Kenya. Most people in Kenya have
great expectations and they disregard manual and agricultural work since they have the notion
that they are tailor-made for white collar jobs and formal employment in Kenya. A study in
Kenya by USAID (U.S. Agency for International Development) states that, over the last six
years, the Kenyan economy has generated only 150,000 jobs, leaving hundreds of thousands
without formal employment. Many of them are forced to join the informal sector while 60% of
Kenyans live on less than USD 2 (KES 173) a day. The remaining 9.3 million are self-employed
Kenyans.

Measures to solve unemployment include

 1. Use of appropriate technology
The Government should adopt pricing policies that encourage the use of appropriate technology. This
can guide investments towards labour intensive technologies in different sectors which are appropriate
to labour surplus economies of many less developed countries. Labour-intensive techniques must be
adopted in such countries in order to absorb more people.
2. Decentralization of Industries and markets
Industries must be established in different regions of a country. The establishment of industries in
various parts of the country will provide employment opportunities to greater number of people. It
will also induce people not to migrate to other areas of the country.
3. Diversification of economic activities
The diversification of agricultural and industrial production can be also agricultural and
industrial goods are produced then there will demand for more workers. As a result, creation of
alternative employment opportunities will increase. This reduces seasonal unemployment in
areas that overdepend on tourism and agricultural activities.
4. Greater use of natural resources
Greater use of natural resources can also increase the employment opportunities. In most of the
countries including Kenya, there are uncultivated lands. If these lands are brought under
cultivation then more and more people can be employed.
5. Use of fiscal and monetary Policies
The Government can use fiscal and monetary policies to create more employment opportunities.
Central bank can encourage advancing more loans to those projects which can provide
employment to greater number of people. Similarly, the expansion of public work programmes
can solve the problem of unemployment to a greater extent.
6. Education and training facilities
To meet great demand for skilled and educated people, education and training facilities should be
provided to the individuals to enable them to increase their knowledge and technical skill.
7. Control of population growth
The rapid increase in population is the main cause of unemployment in less-developed countries.
The Government should take some steps such as encouraging family planning and educating the
population on the need for small families to control the population growth in an effort to solve
the unemployment problem in the long run.
 8. Encouraging employment creation in the private sector
Government policy can support private sector development by creating an enabling environment for
the private sector to develop. This includes providing incentives such as microfinancing to offer capital
to small and medium term enterprises, developing infrastructure, provision of cheap land, lowering the
tax rates on profits, offering subsidies e.t.c
9. Encouraging foreign direct investment.
This can be achieved by providing a conducive political and economic environment to encourage
the inflow of foreign capital.

10. Encouraging the use of domestic goods

This tends to create employment domestically. Considerable use of foreign inputs and goods should
be reduced since such usage generates enployment abroad and not domestically.

11. Intensive rural development by the government.

 Providing appropriate education and training that provides relevant skills & knowledge
 Delocalization of firms to reduce urban unemployment which is brought about by rural-urban
migration
 Ensure there is political stability to boost foreign investors confidence .Protect local
industries from unfair foreign competition

ETHICAL ISSUES IN BUSINESS

Business Ethics

Derived from ancient Greek word ethos, ethics has come to mean moral character. Ethical
behaviour is what is good or right. Ethical senses always make use of good, bad, right and
wrong. Applying this definition to business, we come to a conclusion that though the primary
objective of any business or company is to maximize the profits to shareholders, stakeholders
also need to be kept in mind, they are directly or indirectly affected by the decisions taken by the
company for the operation of business.

Business ethics is the behaviour of any business that it indulges in its dealings with the
community or society. For some, making money is all they are interested in, and this is
capitalism in its dirtiest form. These people are least concerned with the bad effects of their
business practices and the harm they are doing to the society at large.
.

Unethical behavior is any action that is aimed at taking advantage of another without their
knowledge or consent. Most define this as manipulating someone without their permission.
Unethical actions are not necessarily illegal.

Ethics is based on the recognition of certain human rights. An individual has the right not to be
deliberately deceived. He has the right not to be forced to go against his conscience. He has the
right to expect other parties to live up to their commitments and to behave according to the law.
In the workplace, the employer has the right to expect employees to behave according to
company policy.

Causes of unethical behavior

 Pressure can drive people to do things they wouldn’t normally do. Pressure to succeed,
pressure to get ahead, pressure to meet deadlines and expectations, pressure from co-workers,
bosses, customers, or vendors to engage in unethical activities or at least look the other way.
 Some people make unethical choices because they are not sure about what really is the right
thing to do. Often, ethical problems are complicated, and the proper choice may be far from
obvious.
 Self-interest, personal gain, ambition, and downright greed are at the bottom of a lot of
unethical activity in business.
 Misguided loyalty is another reason for unethical conduct on the job. People sometimes lie
because they think in doing so they are being loyal to the organization or to their bosses. No
doubt these managers believed they were protecting their employers. They may well have
seen themselves as good, loyal employees.
 Then there are those who simply never learned or do not care about ethical values. Since they
have no personal ethical values, they do not have any basis for understanding or applying
ethical standards in business. These people do not think about right and wrong.

Unethical practices

1) Deliberate Deception-Deliberate deception in the workplace includes taking credit for work
done by someone else, calling in sick in order to go to the beach, sabotaging the work of
another person and, in sales, misrepresenting the product or service to get the sale. There are
other examples of deliberate deception, but these show how damaging deception can be by
using a person's trust to undermine his rights and security. In a workplace environment, this
results in conflict and retaliation. In a sales function, it can result in lawsuits from deceived
customers.
2) Violation of Conscience- Coercion is also the basis for workplace sexual harassment and
results in lawsuits. Unethical behavior often causes more unethical behavior.
3) Failure to Honor Commitments.
4) Unlawful Conduct-Padding an expense account with non-business expenses, raiding the
supply cabinet to take home pens and notebooks and passing around unregistered or
 counterfeit software are examples of unlawful conduct in the workplace. The person who
steals from the company by padding her expense account or taking supplies for personal use
risks losing her job. If a company decides to overlook such theft on the basis of maintaining
employee morale by not firing a popular employee, other employees will also steal so they
can feel they are getting the same deal as their co-worker. Passing around counterfeit
software, if discovered by the manufacturer, can cost the company through lawsuits and
fines.
5) Disregard of Company Policy-An employer is understandably concerned about avoiding
lawsuits and angry customers because those things negatively affect profitability. Most
employers clearly state company policies against deception, coercion and illegal activities.
They also strive to convey an image of trustworthiness to their customers and employees.
Corporate trustworthiness helps retain customers and valued employees, and the loss of
either also negatively affects company profitability. To disregard company policy is unethical
because it has the potential to harm the company and other employees.
6) Workplace Bullying-Bullying at work is the repeated, health or career endangering
mistreatment of one employee, by one or more employees. The mistreatment is a form of
psychological violence and is often a mix of verbal and strategic insults preventing the target
from performing work well.

Strategies of starting a small business.

An entrepreneur can utilize the following strategies in small business ownership and
startup:
 Small business ownership

Startup

Creating a new form from scratch

Buyout

Purchasing an existing business

Franchising

A marketing system revolving around a two-party legal agreement,

whereby the franchisee conducts business according to the terms
specified by the franchisor

Family business

An enterprise in which family members are directly involved in the

ownership and/or functioning of the enterprise

Franchises and parties to a franchise arrangement

A franchise is established when one party licenses another party to use the franchisor's trade name,
trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling
of goods.

Forms of franchises

 Distributorship franchise—the franchisor manufactures a product and licenses a retail

franchisee to distribute the product to the public.
 Processing plant franchise—the franchisor provides a secret formula or process to the
franchisee, and the franchisee manufactures the product and distributes it to retail dealers.

Rights and duties of parties to a franchise agreement

Franchise agreements generally cover the following:

 Quality control standards.

 Training requirements.
 Covenants not to compete.
 Arbitration clauses.
  Other terms and conditions.

Forms of franchise fees

 Initial license fee—a lump sum payment for the privilege of being granted a franchise.
 Royalty fee—a fee for the continued use of the franchisor's trade name, property, and
assistance that is often computed as a percentage of the franchisee's gross sales.
 Assessment fee—a fee for such things and advertising, promotional campaigns, and
administrative costs.
 Lease fees—payment for any land or equipment leased from the franchisor.
 Cost of supplies—payment for supplies purchased from the franchisor.

ADVANTAGES

Advantages:

a) Association with a well established brand, reputation and product or service

b) Assistance with site selection, lease negotiation, site development, builders and shop fitters

c) Assistance with outlet design and equipment purchasing

d) Initial management training and continuing management assistance

e) Access to group/national market research, along with advertising and merchandising assistance

f) Access to established standard procedures, operating manuals and stock control systems

g) Assistance in securing finance and sometimes financial assistance in establishing the business

h) Access to financing packages which may be more attractive and easier to access than for non
franchised business

i) Access to established financial systems and checks which can provide early warning signals to
highlight trouble spots.

Disadvantages:

a) Less autonomy in some business decisions. Franchisees are required to operate their
businesses according to the procedures and restrictions set forth by the franchisor in the
franchisee agreement.
b) Restricted territory in which you may operate and/or promote your business

c) Ongoing payment of fees to the franchisor

d) Less control if you decide to sell your franchise business as there will be a set of procedures for
you to follow, including getting the franchisor's approval of the buyer
 e) If you sell the business you will usually have to pay a fee to the franchisor as outlined in the
franchise agreement

f) Restraint of trade provisions on the sale or termination of the franchise that may be more
onerous than required if a non franchised business is sold

g) At the end of the franchise term, the franchisor is not obliged to renew the franchise, in which
case the business and its goodwill revert to the franchisor.

h) A damaged, system-wide image can result if other franchisees are performing poorly or the
franchisor runs into an unforeseen problem.

ACQUISITION

A corporate action in which a company buys most, if not all, of the target company's
ownership stakes in order to assume control of the target firm. Acquisitions are often
made as part of a company's growth strategy whereby it is more beneficial to take over
an existing firm's operations and niche compared to expanding on its own. Acquisitions
are often paid in cash, the acquiring company's stock or a combination of both
Advantage of acquisition are :

 Market power: It builds market presence.

 Overcome entry barrier: It overcomes market entry barrier by acquiring an existing
organization. The risk of competitive reaction is also likely to decrease.
 Financial gain: Organization with low share value or low price earnings ratio but future
potential can be acquired .
 Resources and competencies: Acquisition of resources and competencies that are not
available in house can be a motive for acquisition.
 Stakeholder expectations: Stakeholder may expect growth through acquisitions.

Disadvantage of acquisition are:

 Integration problems: The activities of new and old organizations may be difficult to
integrate, cultural fit can be problematic and employees may resist it.
 High cost: The acquirer may pay high cost, especially in cases of hostile takeover bids.
Value may not be added for the acquirer.
 Financial consequences: The returns from acquisitions may not be attractive .Executed
cost saving may not materialize.
 Unrelated diversification: This may create problem of managing resources and
competencies.
 Too much focus: Too much managerial focus on acquisitions can be detrimental to
internal development.

FAMILY BUSINES
A family business is any business in which a majority of the ownership or control lies within a family,
and in which two or more family members are directly involved.

System overlap is apparent when conflicts of interest arise between the family and the business.
Some families put personal concerns before business concerns instead of trying to achieve a
balance between the two. It is important to understand that the family's strong emotional
attachments and overriding sense of loyalty to each other create unique management situations.
For example, solving a family problem, such as giving an unemployable or incompetent relative
a position in the firm, ignores the company's personnel needs but meets the needs of family
loyalty.

Another example of conflict of interest occurs when business owners feel that giving children
equal salaries is fair. Siblings who have more responsibility but receive the same pay as those
with less responsibility usually resent it. In cases of sibling rivalry, it isn't unusual for one sibling
to withhold information from another or try to engage in power plays, i.e., behaviors that can be
detrimental to the firm.

Much of this behavior can be eliminated or managed by devising policies that meet the needs of
both the family and the business. Developing these policies is part of the family strategic
planning process. Before discussing them, you should make sure you have identified all the
issues that need to be addressed.

Issues in the Family Businesses

The list below contains the issues that most family businesses face:

Participation--who can participate in the family business and under what circumstances.

Leadership and ownership--how to prepare the next generation to assume responsibility for the
business.

Letting go--how to help the entrepreneur let go of the family business.

Liquidity and estate taxes.

Attracting and retaining non-family executives.

Compensation of family members--equality versus merit.

Successors--who chooses and how to choose among multiple successors.

Strengthening family harmony.

Actors in family business

The next consideration in understanding the family business is to understand the perspectives of
those involved. Without this understanding, managing a family business will be difficult.

The actors in the family business can be divided into two groups: (1) family members and (2)
non-family members. Each group has its own perspective and set of concerns and is capable of
exerting pressures within the family and the firm.

Transition process

With the right plans in place, the business, in most cases, will remain healthy. There are four
plans that make up the transition process.

- A strategic plan for the business will allow each generation an opportunity to chart a course for
the firm. Setting business goals as a family will ensure that everyone has a clear picture of the
company's future.

- The family strategic plan is needed to maintain a healthy, viable business. This plan establishes
policies for the family's role in the business. For example, it may include an entry and exit policy
that outlines the criteria for working in the business. It should include the creed or mission
statement that spells out your family's values and basic policies for the business. The family
strategic plan will address other issues that are important to your family. By implementing this
plan, you may avoid later conflicts about compensation, sibling rivalry, ownership and
management control.

- A succession plan will ease the founding or current generation's concerns about transferring the
firm. It outlines how succession will occur and how to know when the successor is ready. Many
founders do not want to let go of the company because they are afraid the successors are not
prepared, or they are afraid to be without a job. Often, heirs sense this reluctance and plan an
alternative career. If, however, the heirs see a plan in place that outlines the succession process,
they may be more apt to continue in the family business.

- An estate plan is critical for the family and the business. Without it, you will pay higher estate
taxes than necessary. Taking the time to develop an estate plan ensures that your estate goes
primarily to your heirs rather than to taxes.

For business owners who do little planning, the idea of preparing four plans may seem
overwhelming. Although it is not easy, the commitment made by all family members during the
planning process is the key ingredient for business continuity and success. The first rule for
successfully operating and transferring the family firm is sharing information with all family
members, active and non active. By doing this, you will eliminate problems that arise when
decisions are made and implemented without the knowledge and counsel of all family members.
Limited Companies - Introduction
A limited Company is formed under the Companies Act Cap 486. A company is a legal entry
separate and distinct from its member’s .It has a Legal personality, Capital is divided into
transferable shares .Since a company is a separate entity it will be necessary for it to sign papers
and documents. Such signature is embodied in the common seal of the company .It enjoys
Perpetual succession and exists indefinitely till it is liquidated or wound up. Members cannot
bind a company by their acts. It is managed by the Board of Directors. It has a Limited liability

Limited Companies - Private

They may consist of a minimum of two members, but the maximum may not exceed fifty .A
private company is not allowed to call upon the public for funds in the forum of shares or
debentures. Any transfer of shares is restricted; the Board of Directors must approve it.

Limited Companies - Public

A public company is one whose membership is not less than seven but a maximum limit is not
imposed. Expansion can be achieved through the sale of shares to the public .Shares are freely
transferable and thus more funds can be raised by sale of shares on the stock exchange

Limited Companies - Forming

In Kenya, the limited companies are formed according to the companies’ act of 1962 (Chapter
486) .For a company to be formed, there must be some people who bring out the idea of forming
and setting it in operation .Such founder members are known as PROMOTERS .To form a
private company, it requires two and a public company seven promoters. The promoters are
required to submit to the Registrar of Companies a Memorandum of Association, Article of
Association and List of directors

Limited Companies – Memorandum of Association (MOA)

The purpose of the memorandum of association is to define the company’s objectives, powers
and serves as a guideline to the outside public. The document states:

- The name of the company with the word “Limited” as the last word in the name
- The country and town in which the registered office is situated
- The objectives of the company
- A statement that the liability of the members is limited
- The nominal authorized capital of the company

Limited Companies – Articles Of Association

The Article of association serves as a guideline to the internal management of the company .It is
very essential in the case of a private company but a public may, if it wishes, adopt the standard
set of articles known as “Tables”. Contained in the articles of association are:
Articles of Association (AOA)

a) Classes and rights of shareholders

b) The issue and transfer of shares
c) Methods of dealing with any alterations on the capital
d) Procedures of general meetings, and voting rights
e) Qualifications, duties and powers of directors
f) Borrowing, dividends and reserve policies
g) Auditing of the books etc.
Certificate of incorporation:- When the required documents are presented to the registrar of
Companies and everything is found satisfactory, a CERTIFICATE OF INCORPORATION may
be issued. This brings the company into existence as a separate legal entity
Companies – License & Prospectus

Trading License:-This document is issued by the authority in an area to carry out a particular
business in a specified area. After acquiring a trading license, a private company can then begin
business but until a certain minimum amount of capital has been raised a public company cannot
do so.
The prospectus: The directors of public company must advertise the shares of the company so as
to raise the capital required. The document advertising such shares or inviting the public to
subscribe is what is known as a Prospectus

Limited Companies – Advantages

a) Larger capital and more Sources of Funds

b) Assured Continuity of Business
c) Limited liability
d) Specialization is possible : Companies are financially strong enough to employ specialists
e) Share Loss: Large membership and the fact that the capital is divided into different
classes of shares mean that the risk of loss is also shared and spread
f) Shareholders are safeguarded – Publicity of company accounts safeguard shareholders
against fraud by management.
Limited Companies - Disadvantages

i. Costly and difficult to establish

Observation of law and regulations: e.g. No company is allowed to undertake any
form of business outside agreed upon with the registrar.
i. Delay in decision making – board approvals
ii. Shareholders’ non-participation in management
iii. Difficult to control the company
Higher taxes – Companies pay a higher rate of tax on their incomes

INFORMAL SECTOR IN KENYA

Introduction.

Kenya has the highest informal sector employment among nine countries covered in a new report
by the United Nations Economic Commission for Africa. Employment in the sector stands at
77.9 per cent of the total ahead of Rwanda’s 73.4 per cent, Uganda’s 59.2 and Tanzania’s 8.5
per cent. In Egypt, Liberia, Madagascar, Mauritius and South Africa, the sector offers jobs to
51.2, 49.5, 51.8, 9.3 and 17.8 per cent of workers, respectively.

The study, launched Thursday in Nairobi, looked at the informal employment outside the
agricultural sector with the overall focus being industrialization through trade. In Kenya and
Rwanda, three out of four workers are employed in the informal sector, a proportion that
increases to over 80 per cent among women, said the report. The study attributes the high level
of informal sector workers to inability of the formal sector to absorb the huge number of job
seekers. As the formal sector public and private cannot absorb the increased tide of job seekers,
informal employment usually drives job creation in most countries, says the report. It notes that
over 70 per cent of jobs in eastern, central, western and southern Africa in the past 10 years have
been in the informal sector.

In Africa, abundant labour supply is compounded by the fact that there are no social safety nets,
making it difficult for most low-skilled workers to quit the labour market. The coverage of social
protection of informal workers in Africa is estimated at about 10 per cent compared to 50 per
cent in Latin America and the Caribbean.

Most of these workers operate under a high degree of informality and vulnerability, resulting in
small and unpredictable incomes, poor working conditions and low productivity. Such
informality is likely to trap people into poverty, says the report.

According to data from Kenya’s Economic Survey 2015, the informal sector employed 11.8
million people in 2014 against 2.4 million in the modern or formal sector. Total recorded
employment stands at 14.3 million. Out of the 799,700 jobs created last year, 693,400 were in
the informal sector. The number of new formal sector jobs fell in 2014 to 106,400 from 134,200
in the previous year. Majority of the small businesses such as retailers, hawkers, boda boda
operators and other service providers’ fall in this sector but it excludes drug trafficking and any
other illegal activity,” said the Economic Survey.

Informal sector is the part of the economy that is neither taxed nor monitored by any form of
government. Activities that are engaged in the informal sector are not included in the gross
national product (GNP) and in gross domestic product (GDP).

Characteristics of the informal sector

1. There is easy entry as one does not require much capital and there are no entry barriers.
Anyone who wishes to join the sector can find some sort of work which will result in
cash earnings and profits.
2. Workers who participate in the informal sector are classified as employed. This is
because they earn a living from the sector and are able to cater for their daily lives
including sending their children to school.
3. The spectrum in the informal sector ranges from self -employment to family ownership
of enterprises. These businesses can passed down the family tree through inheritance. A
 father teaches his sons the art of his trade and they take it up. Later on in life they also
teach their children the same trade and may even have a co –joint business enterprise.
4. People in the informal sector operate on small scale operations as street vendors, shoe
shiners and even junk collectors. This businesses require little startup capital and are
flexible (one can move to another business easily). On the higher side of the spectrum are
upper informal activities such as small scale service or manufacturing businesses which
have more limited entry.
5. Most workers in the informal sector even those self -employed or wage workers, do not
have access to secure work, benefits, welfare protection and representation.
6. Most prevalent types of work in the informal sector are home –based workers and street
vendors. Home –based are more numerous while street vendors are more visible.
7. Economic motivations in the informal sector include ability to evade taxes, freedom to
circumvent regulations and licensing requirements and capacity to maintain certain
government benefits.
8. Skills acquisition is outside the formal schools. One can easily gain the skills required for
a certain work through observing others. One can also source ideas from the internet and
watch videos from the internet. They can also build a business from a hobby.

Role of the informal sector

The informal sector has a great impact in the country and the country’s economy as a whole.
It its impact is so huge such that it cannot be ignored. In one way or another, the country
needs the informal sector.

1. Creation of employment is one of the major roles of the informal sector in Kenya and
anywhere else in the world that the informal sector can be found. Formal employment fell
from 42% in 1985 to 19% in 1998.this meant that a good number of educated Kenyans
could not find jobs in the formal sector. Owing to the fact that the largest population in
Kenya is illiterate and semi –literate, it was an opening for these groups of people to earn
a living. Informal sector comprises close to three quarters of all employment and at -least
about 90% of all new jobs annually.
2. Informal sector meets the needs of poor consumers. Poor consumers may need cheap
goods that come in small quantities. They may need these good on a daily basis. The
informal sector is able to provide cheaper and more accessible goods and services at
nearly all times.
3. Some of the entrepreneurs enter into the informal sector by exploiting their hobbies and
talents. The informal sector taps talent that appropriate technology movement and the
formal sector has not been able to tap into as much as it should.it allows people to
practice what they love and at the same time make a living out of it.
4. The informal sector makes use of local and indigenous materials and resources. These
resources are readily and easily available to the entrepreneurs in the small scale
 enterprises. The only important detail is how the entrepreneur becomes creative with the
resources at hand in -order to attract his customers.
5. It boosts a family’s income. Most of the time married women start up these businesses
in order to help their husbands cater for the family. In turn their families can live a more
comfortable life as there are two bread winners.
Occupations in the informal sector.
Occupations in the informal sector include
1. Subsistence farming
2. Crafts including woodwork, pottery, handicraft, basketry, jewelry –making,
leatherworking, weaving, sewing and furniture making.
3. Small scale manufacturing including bread making, tailoring, confectionery, food
catering and candle –making.
4. Small scale mining
5. Small scale construction (building, brick making, plumbing, welding, carpentry and
electricity)
6. Informal services like transport, repair of shoes, cars, electric household appliances,
gardening, domestic work and shoe polishing)

ASSIGNMENT
INSTRUCTIONS

Answer all questions.

QUESTION

a) Discuss the principles, types and roles of cooperative societies (10 Marks)

b) Describe the indicators of business ideas and examine the components of a feasibility analysis

in validating business ideas (10 Marks)

c) Using valid examples examine the role of government in business development in Kenya

today (10 Marks)