Ict@innovation: Free your IT Business in Africa/4-1

Module 4.1 Starting a Business

Duration:

1:00hrs

Delivery method:

For instructional purpose, it is advised that trainers/lectures use lectures and group and individual exercises as a major means of delivering this module.

Introduction

Business is both context and product specific. While one kind of business may work in one region or country, the same business may not prosper in another region. The type of product defining ones business also plays an important part in determining whether the business will succeed or not. Thus, when starting a new business, there are many factors to consider, important decisions to be made, rules and procedures to be followed. In simple terms, there is no golden rule one can follow when starting a business. However, this module addresses some new business requirements by identifying some business opportunities one can explore, it discusses how one can set up a business, develop a plan and some business strategies that one can adopt to help set up a FOSS-based business in the African context. The module draws on experiences and practical issues discussed in some of the case studies in Module 2.

Identifying Business Opportunities

Most successful businesses start with a good idea. This idea may be your own or may be drawn from any one of a number of available resources, including the following:

• Business contacts and acquaintances. These are people you are known to either by virtue of your current professional activities or through informal interactions.
• Business magazines and newspapers: these often contain business success stories, how-to information for would-be small business owners, and lists of start-up opportunities.
• Special interest publications: sector-related publications keep entrepreneurs informed of developments in their area of interest.
• Trade shows. During such events, there are exhibitors from all walks of life and one could chance upon a brilliant idea by simply interacting with them.

• Radio, television and the Internet. With the wealth of information at our finger tips through the various media at our disposal, it is now possible to tap ideas from across the globe without ever setting foot outside your country.
• Import goods list: Reviewing a list of the goods imported into an area might provide clues on a wide variety of business opportunities in import replacement and supplier development. If products are not manufactured locally, find out why not.
• Trend Analysis: Watch for trends in population, consumer or corporate buying behavior, government legislation, and other trends related to your business sector.
• Existing inventions and innovations: Inquire at universities, trade schools and other research centers for opportunities to acquire technologies already developed.
• Government departments, agencies and programs: governments departments and agencies are often committed to increasing the volume of federal government purchasing in their area of operation.
• Departments and agencies offer studies and reports on business trends and opportunities. Boards of Trade and Chambers of Commerce also compile a number of business and investment opportunities.
• Internet and personal blogs where you can search and read about what businesses others are doing, considering or commenting on other FOSS businesses in your region.

Components of Business Management Skills

The following resources have been identified as essential components for building an effective business.

Finance and Accounting: The lifeblood of a business is money and a concrete understanding how the finances keep a business afloat is critical to the success of a business. Another concept which is closely associated with finance and accounting is bookkeeping.

Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting.

Accountancy or accounting can be simply defined as the systematic recording, verifying, and reporting of your company's assets, income, expenses, etc. Accounting has been defined by the American Institute of Certified Public Accountants (AICPA) as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."

The role and responsibility of book-keepers are appropriately summerized by Biswaroop Todi (2007) thus;

• Keep complete, up-to-date, and accurate records of accounts and financial arrangements.
• Bookkeepers verify and enter information into journals and ledgers or into a computer.
• They periodically balance the books and compile reports and financial statements.
• They also receive, record, bank and pay out cash.
• They balance checkbooks with monthly bank statements.
• They may calculate employee wages from plant records or time cards and issue payroll checks.
• Posting accounts receivable and payable, prepare and make bank deposits, record payrolls, maintain inventory records, purchase supplies, prepare purchase orders and do expense reports.
• Bookkeepers may also make schedules, sort documents, and file bills.

Role and responsibility of accountants and controller

The role and responsibilities of accountants may vary from one company to another. However, there are some standard practices which must be adopted. For instance, your company accountant will evaluate your business records drawn up by the bookkeeper . Accountants must also be able to draw up a set of financial records and prescribe the system of accounts that will most easily give the desired information (M. Chatfield; 1977 and A. J. Briloff; 1972).

They must be capable of arriving at a comprehensive view of the economic and the legal aspects of a business, envisaging the effect of every sort of transaction on the profit-and-loss statement.

They must recognize and classify all other factors that enter into the determination of the true condition of the business (e.g., statistics relating to production; properties and financial records representing investments, expenditures, receipts, fiscal changes, and present standing). In addition, it is important that the accountant possesses the following skills and is able to carryout the following;

• knowledge and skills necessary for the implementation of sound accounting and financial protocols and procedures
• know and carry out basic bookkeeping and accounting terminology, such as financial statements, positive cash flow, bridge financing, liquidity, etc
• be able to assess project performance based on financial evaluations ie: general valuation concepts, project viability evaluations
• carry out cost accounting principles and local pricing strategy
• manage accounts receivables
• Again the topic and content under it does do justice to components of business skills

Business Plan

Definition: A business plan is a generic model suitable for all types of businesses.

However, you should modify it to suit your particular circumstances. In this case it should accommodate your plan of action; which should aim at sustainability and strategic actions detailing how you should generate revenue from FOSS. Paul Young (2008) listed components which you may consider incorporating into your business plan. The components of a business plan are schematically illustrated in the figure below:

Components of a business plan

As shown in the figure above, Young (2008) described a business plan as consisting of an executive summary, general company description, mission statement, company goals and objectives, the legal form of ownership of your company, and describing the business opportunities which may exist for your company. In addition to these, you may also want to state or list some of your notable or target clients and consider them as part of your business plan. Young's categorization of the components of a business plan are discussed below:

• Executive Summary:

Write this section last and make it two pages or fewer. Include everything that you would cover in a five-minute interview. Explain the fundamentals of the proposed business: What will your business be? Who will your customers be? Who are the owners? What do you think the future holds for your business and your industry? Make it enthusiastic, professional, complete, and concise. If applying for a loan, state clearly how much you want, precisely how you are going to use it, and how the money will make your business more profitable, thereby ensuring repayment. The table below shows examples of executive summaries from some companies

• General Company Description:

What business will you be in? The work you are planning to do is not necessarily the business you are in. As an example, if you are planning to setup a hotel, you are actually going into the business of Hospitality i.e. looking after people. That is the actual business and once you understand that, then all your efforts will be on making sure that the hotel 'looks after people' very well.

• Mission Statement:

Definition: A mission statement is a brief description of a company’s fundamental purpose.

A mission statement answers the question, “Why do we exist?” Many companies have a brief mission statement, usually in 30 words or fewer, explaining their reason for being and their guiding principles.

• Company Goals and Objectives:

Goals are destinations—where you want your business to be. Objectives are progress markers along the way to goal achievement. For example, a goal might be to have a healthy, successful company that is a leader in customer service and that has a loyal customer following. Objectives might be an annual growth in your customer base and some specific measures of customer satisfaction.

• Business Philosophy:

Defining this helps you know what is important to you in business, to whom will you market your products, a brief description of your industry etc. However most of the information here is found in detail in the strategic plan, marketing plan and other sections of the business plan.

• Legal form of ownership:

Determine what form you want your business to take, that is

• Sole proprietorship: is a type of business entity which legally has no separate existence from its owner.
• Partnership: is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested.
• Limited Company: is a corporation whose liability is limited by shares (Ltd), which is the most common form of privately held companies.
• Describing the opportunity:

Describe the gap that exists in the market. What has given rise to this gap and how can it be filled? One way of finding out what the market or your customers need is to use surveys, as demonstrated by the Linux Holding (Pty) Ltd. Case study in Module 2.4.

• Describing the industry and the market:

A deeper understanding of an opportunity involves systematic research. Paul Young (2008) argued that “It is very dangerous to assume that you already know about your intended local market”. Thus, a form of SWOT analysis (Section 4.1.6) or market research must be undertaken to make sure you’re on track; you know what the business climate is in your region, who your potential customers (e.g. government, private sectors, etc) and competitors are. Use the business planning process as your opportunity to uncover data and ensure that there is a realistic gap in the market for your product or service and that you can be competitive in providing that product or service. “Your time will be well spent“ (Young, 2008).

• Market research / competitive analysis:
  There are two types of market research. Namely, primary research and secondary research.
  Primary research involves gathering new information, that are directly from the potential customer. It means collecting new relevant information by interviews or surveys. By this you can learn about the preferences and tendencies of consumers.
  As you have to address many people for a professional market research, this type can be very expensive. Therefore you should seek advice from examples and market research success stories in publications.
  Secondary research means desk research and involves compiling already existing information, e.g. information and research results in newspapers, magazines, statistical data or demographic profiles from government agencies.
  If you want to analyze the market, you have to show sources, statistics, and numbers as exactly as possible. Efficiency of market analysis plays a major role, because it will result into a marketing plan and later into the all-important sales projection.
  

• Industry Analysis and Analysis of barriers to entry:

Young (2008) also listed barriers you may face when entering to a new and emerging market, especially FOSS markets. Some of these barriers may be relevant to your market or region while others may not:

1. High capital costs
2. High production costs
3. High marketing costs
4. Consumer acceptance and brand recognition
5. Training and skills
6. Unique technology and patents
7. Tariff barriers and quotas

• Analysis of buyer power:

Young (2008) posits that an important factor of your business is whether you customers have the buying power of/over the products you are offering. You must look at your market and ask your self; Do my potential customers have significant choice when buying my product or service? Are there substitute offerings for the product or service that I have? What is the likelihood that customers will switch to the substitute? What products and companies will compete with you?

• List your major competitors:

Will they compete with you across the board, or just for certain products, certain customers, or in certain locations? How will your products or services compare with the competition?

What is a Product

In their “Marketing Tutorials”, KnowThis. Com argued that, the term “product” is often used as a catch-all word to identify solutions a marketer provides to its target market. In essence, a product can be categorized as goods, services, or even an idea. You may find some of the definition of a product may extend beyond your FOSS business: :

• Goods – Something is considered a good if it is a tangible item.  That is, it is something that is felt, tasted, heard, smelled or seen. Is you FOSS business offering tangible goods? Are you using non-tangible (software) as an 'enhancer' to the tangible goods in your business? For example, you can install Ubuntu as a dual boot in all the PCs or Laptops you are selling
• Services – according to KnowThis.com, something is considered a service if it is an offering a customer obtains through the work or labor of someone else. Services can result in the creation of tangible goods (e.g., a publisher of business magazines hires a freelance writer to write an article) but the main solution being purchased is the service. Unlike goods, services are not stored, they are only available at the time of use (e.g., hair salon) and the consistency of the benefit offered can vary from one purchaser to another (e.g., not exactly the same hair styling each time).
• Ideas – Something falls into the category of an idea if the marketer attempts to convince the customer to alter their behavior or their perception in some way (see FOSS advocacy in Module 3.1). Marketing ideas is often a solution put forth by non-profit groups or governments in order to get targeted groups to avoid or change certain behavior. This is seen with public service announcements directed toward such activity as youth smoking, automobile safety, and illegal drug use.

While in some cases a marketer offers solutions that provide both tangible and intangible attributes, for most organizations their primary offering -- the thing that is the main focus of the marketing effort -- is concentrated in one area. So while a manufacturer may offer intangible services or a service firm provides certain tangible equipment, these are often used as add-ons that augment the organization’s main product.

Business Financing

Capital requirements are all the assets needed to begin a business. An astute entrepreneur is able to identify what those assets are and how to pay for them. Forms of Capital;

• Debt Financing - Through banks, micro finance institutions, leasing or trade credit.
• Equity Financing - Through lenders, personal funds, family and friends or Partners

These two forms of financing are the most readily available capital financing modes in Africa. Ranging from private money lenders to the mushrooming micro finance institutions, there is now a big source of financing for small business people with big plans. The need for extra income has also spurred many gainfully employed people to invest in other people's business ideas as a way of earning a side income and this helps then ends up either as equity financing or debt financing.

The challenge with financing in Africa lies in:

1. The demand for security tends to be outrageous. Some banks require security in form of land titles or buildings owned before they can extend a grant of as low as US$ 2000. This makes it hard for the small businesses to raise cheap money to do business because when you look at the rates of the bank Vs those of the money lenders, the difference is more than 5 times. The only advantage of the money lender is that they do not usually have very stringent terms before lending you.
2. The lack of documentation makes it hard for one to get credit from the formal sector. A bank for example may require that you have certain documentation before it can lend you money.

SWOT Analysis

When you setup a business plan, often this plan does not operate in a vacuum. There are other external/internal factors which may impact your business. The key elements you identified as part of your business' s internal resources and key capabilities or issues must be matched or assessed against the external environment in which you business operates. The technique which helps you in this endeavour is a process called SWOT analysis. SWOT which stands for Strength, Weakness, opportunities and threats is, according to David and Robert (1998) the most familiar of all [business] performance assessment techniques. A scan of the internal and external environment is an important part of the strategic planning process. Definition: Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.The online QuickMBA.com course on “Strategic Management” provides a SWOT analysis framework, shown below, and discusses what you may consider for your business in of the elements in the framework:

Figure 1:compare with s.91, Kahraman, Grengiz: Fuzzy Multi-Criteria Decision-Making, Theory and Application, NY 2008.

Strengths

A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:

• strong brand names
• good reputation among customers
• cost advantages from proprietary know-how
• exclusive access to high grade natural resources
• favorable access to distribution networks

WeaknessesThe absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:

• lack of patent protection
• a weak brand name
• poor reputation among customers
• high cost structure
• lack of access to the best natural resources
• lack of access to key distribution channels

In some cases, a weakness may be the flip side of strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.

OpportunitiesThe external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:

• an unfulfilled customer need
• arrival of new technologies
• loosening of regulations
• removal of international trade barriers

ThreatsChanges in the external environmental also may present threats to the firm. Some examples of such threats include:

• shifts in consumer tastes away from the firm's products
• emergence of substitute products
• new regulations
• increased trade barriers

The SWOT MatrixAccording to QuickMBA.com, a firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed.

• S-O strategies pursue opportunities that are a good fit to the company's strengths.
• W-O strategies overcome weaknesses to pursue opportunities.
• S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.
• W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.

State your competitive advantages and disadvantages with respect to the following:

• Change in technology
• Change in government regulations
• Change in the economy
• Change in your industry

Sales and Marketing

The sales and marketing divisions of a business have a very important role in securing cash through sales to keep the business vibrant.

• Role and responsibility of sales and marketing personnel
• Sales strategy and targets
• Role of sales personnel
• Market research of FOSS business potential, competition and self-assessment
• Distribution Channels
• Development of a “Preliminary” Marketing Mix

Operations Management

The operation of a company is the glue that pulls all the company divisions together for a common purpose.

• Role and responsibility of Operations
• Setting targets and building capacity
• Setting personnel and sales call scheduling
• Manage Inventory controls
• Compliance to ISO or other standards
• Compliance to privacy and other regulatory controls

Human Capital

The HR or personnel department is essential in building the necessary talent pool to perform all the functions of the business.

• Role and responsibility of HR professionals
• Recruitment strategy of suitable candidates
• Hiring and firing methodologies
• Specifications of job descriptions and salary levels
• Compliance rules for Labour Law,  Fair Recruitment & Selection process
• Personnel professional development
• Personnel performance appraisal and organisational effectiveness mapped to business goals and strategy

Module 4.1: ASSESSMENT

• Assignment 1: List and describe resources (business magazines, ministries, trade shows, Association etc.) in your country which are vital for establishing FOSS business in your country.

• Assignment 2: Using your knowledge in Module 4.1.2 identify and list accounting procedures in 3 companies you may know in your country.
• Assignment 3: Identify and describe the FOSS opportunities which exist in the market in your country.
• Assignment 4: Using the table below, describe the support structures in place in your country which support or finance ICT or any kind of enterprenural initiative.

Country	Support structures for finance	Example/Case
eg. Republic of Gambia	Commercial bank, Chamber of commerce, ''Asusu'	Kumba enterprise obtained a loan of 2000$ to start Linux training in the Gambia
….............	…..................................	…..............................
…...........	…..................................	…...............................
…...............	….................................	…................................

• Exercise 1: Using your knowledge in Module 4.1.3 and the case studies in Modules 2.1 -2.7, complete the table below by ticking where you think the complete information is complete.

Business Plan Score Sheet for Case Studies
Company	Executive Summary	Company Description	Mission Statement	Company goals & objectives	FOSS market opportunities
OpenWorld
GIS GlobalImage
FutureSoft Resources
Linux Holding
Linux Solution
Amest Santim
CenFOSS

1. Exercise 2: List and identify 5 FOSS services and 5 FOSS products commonly used in your country or region
2. Exercise 3: Based on your knowledge of SWOT analysis in Module 4.1.7 develop a matrix for a FOSS company you may know in your country.

1. Exercise 4: Develop sales and marketing plan for a particular FOSS solution (database system, CMS, etc) using your local market as the target for business.
2. Discussion: Possible means of overcoming the barriers to entry to market listed in Module 4.1.3?

Notes

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