ESTABLISHING NEW BUSINESSES.

AN ENTREPRENEURS APPROACH

-BY JOSEPH MACHARIA KINYANJUI

May 2007

1.0 INTRODUCTION This paper seeks to explain the various methods used by entrepreneurs to establish new businesses. It describes the methods of recognizing innovative business opportunities and the internal and external sources of business ideas. It also describes the various ways of testing business ideas. A good idea is nothing more than a tool in the hands of an entrepreneur. Finding a good idea is the first step in the process of converting an entrepreneurs creativity into an opportunity, Timmons and Stephens (2004). Ideas are what some entrepreneurs have all the time, especially the inventor entrepreneurs. They have a lively mind that can make connections and sees patterns that others miss. It is the fruit of this talent that evokes the comments from others why didnt I think of that. Longnecker (2003)

1.1 OPPORTUNITIES RECOGNITION Entrepreneurship is about opportunity and risk. Successful entrepreneurs first spot opportunities often where others fail to see the same idea at the same time, although the same information is available to them Longnecker (2003). The entrepreneurs may or may not actually invent the ideas personally but they recognize and exploit the opportunities by creating and building successful operations or organizations.

The entrepreneurial process starts with opportunity, not money, strategy, networks, team, or the business plan. Most genuine opportunities are much bigger than either the talent or capacity of the team or the initial resources available to the team. Timmons et al (2004).An opportunity has the qualities of being attractive, durable, and timely and is anchored in a product or service which creates or adds value for its buyer or end user, Timmons and Stephens (2004), 2

Joseph Schumpeter (1893-1950) described entrepreneurship as a force of creative destruction whereby established ways of doing things are destroyed by the creation of new and better ways to get things done. He further described entrepreneurship as a process and entrepreneurs as innovators who use the process to shatter the status quo through new combinations of resources and new method of commerce Holt, (2003)

1.1.2

Window of Opportunity

Opportunities exist or are created in real time and have what is referred to as a window of opportunity. For an entrepreneur to seize an opportunity the window must be open and remains open long enough to achieve market-required returns. The ability to recognize a potential opportunity when it appears and the sense of timing to seize that opportunity, as the window is opening, rather than slamming shut, is critical. Timmons and Stephens, (2004). A window is time horizon Holt, (2003) during which opportunities exist before something else happens to eliminate them. According to Hisrich (2002), the market size and the length of the window of opportunity form the primary basis for determining risks and rewards. He asserts that the risks reflect the market, competition, technology, and amount of capital involved. The amount of capital forms the basis of risk and reward. The opportunity must fit the personal skills and goals of the entrepreneur. An entrepreneur must believe in the opportunity so much he or she will make the necessary sacrifices to develop and manage the organization.

1.1.3 Recognizing Innovative Opportunities One leading consultant of our time, Peter Drucker promoted a provocative concept on how to make profit. Because its purpose is to create a customer, the business enterprise has two and only two basic functions, marketing and innovation. Marketing and innovation produce results: all the rest are costs observes Drucker, (1985) He further said that to practice innovation we must be students of change and suggested monitoring seven sources for innovation opportunities. These sources are categorized as either external or internal. External Sources. 3

a) Demographics Shifts in population, both in space and time nearly always open up business niches. Changes in age structure, education status, and income can be found in the census reports. Some changes like birth rates are predictable, while others such as those caused by calamities like war diseases and perils are not predictable. Discussing the same concept Stoner et al (2001) asks, what will these facts mean for business? What will they demand from business? What new opportunities for innovation will be possible because of these new demographic realities?

b) Changes in Perception The second external source is change in perception. When a change in perception takes place, the facts do not change but their meaning does, Drucker (1985).For example the fast food restaurant business is experiencing such a shift. Some of it is due to a change in customers perceptions, attitudes, and even values and others due to concern about health and fitness. This has forced many traditional fast-food establishments to focus on healthier options, Stoner et al (2001) Observations in our own country (Kenya) show that the healthier and more affluent in society live longer, yet they are more worried of getting sick and growing old. The result is a booming market for health clubs and health products c) New Knowledge: The third external source of innovation is new knowledge or new awareness and techniques that allow us to do things we could not do before. For instance the recent innovation of hosting adverting bill boards on street lighting poles by Adopt -A Light Company has both beautified the city and earned the company revenue from various clients wishing to advertise their products and services. Without doubt scientific knowledge has been at the heart of many enterprises and we can see how important it is by tracing the development of computers. The contemporary history of computing includes literally thousands of scientific innovations, each one making computers better faster, more accurate easier to use and less expensive, Holt, (2003)

Internal Sources
(a) The Unexpected The unexpected success or failure of a venture seen in greater or less demand than anticipated is a good source of an internal innovation. Unexpected success can be exploited

to build competitive strength or an unexpected failure can help the business understand its customers more fully, Stoner et al, (2001). (b) The Incongruity

An incongruity occurs when theres a gap between what the business expected and what occurs or a discrepancy between what is and what should be, Stoner et al (2001) and Drucker (1985).To find incongruities, listen to customer complaints. These indicate what the supplier or a producer values is different from what consumer values. They indicate an opportunity for innovation that is specific and has a good chance of success.

(c)

Process need

Process need is task focused rather than situation focused Drucker, (1985). A process is perfected or redesigned, or a weak link replaced. For example, a motel that was short on help and was having problems keeping up with the laundry simply installed the washer and dryer in the room behind the receptionist desk. That way, in her spare time the reservations clerk could do the sheets and towels. Closely related to process need is innovation process. For instance the original syrup for Coca-Cola was invented in1886 by an Atlanta pharmacist, John Pemberton. Pemberton did not realize the potential for his invention. However with time and through innovation process Asa Candler realizing the potential in the invention bought shares and commercialized the world premier soft drink Coca-Cola Longnecker, (2003)

1.1.4 Industry and Market Structure Every industry is fragile, and subject to sudden change. New laws, the dissolution of old laws, economic influences, social changes and new technologies are all threats to industrial stability, providing in their wake ample opportunities for entrepreneurs Holt, (2003). For instance if an industry grows significantly faster than the economy or population, structural problems will occur and changes are certain, for example the experience of Telkom Kenya following the introduction of mobile phones and the simu ya jamii public booths rendered the landlines and public phone booths almost irrelevant. In addition to the above changes Wickham, (2004) postulates that opportunities can be identified through Political, Economic, Sociological and technological (PEST) analysis. The next chapter describes some of the ways of generating good business ideas.

2.0

GENERATION OF BUSINESS IDEAS 2.1 Sources of Business Ideas

There are several sources of business idea and this chapter seeks to explain a few which have been tried and tested with a high degree of success. 2.2Trade fairs and Association Meetings Trade shows and association meetings can be an excellent way to examine the products of many potential competitors, meet distributors, sales representatives, learn of products and market trends and identify potential products, Timmons and Stephens (2004).Many entrepreneurs have opened businesses as a result of recognizing opportunities at the Kenyatta International Conference Centre (KICC) where businesses are held as well as the Nairobi Trade Fair which is an annual event. 2.3 Consumers and Customers According to Hirsch et al (2002), potential entrepreneurs should establish a formal method for monitoring and evaluating competitive products and services on the market. Frequently this analysis uncovers ways to improve on these offerings that may result in a new product that has more markets appeal. Similarly, Timmons and Stephens (2004 ) confirms the foregoing by stating that contacting potential customers of a certain product or service can identify a need and where existing products might be deficient or inadequate. The two authors are in effect supportive of the saying that necessity or need is the mother of all inventions Consumers require quick ,efficient unparalleled service which this presents numerous opportunities for entrepreneurs for example home based computer servicing 2.3 Research and Development Ideas always involve some form of research and development either to generate them in the first place or to turn them into practical use. For instance, Archimedes generated one of his many ideas in the bathroom, Bolton et al (2005). 6

According to Hirsch et al (2002), the largest source of new ideas is the entrepreneurs own research and development. He further asserts that a more formal research and development department is often better equipped and enables the entrepreneur to conceptualize and develop successful new product ideas. In addition to the two authors, Timmons and Stephens (2004) notes that a number of universities are active in research and development to license inventions that results from this research either directly or through an associated research foundation that administers its patent program. According to Bolton et al (2005), whether in the University or in the Industry, the research and development laboratory is an important part of the support infrastructure because of its formal role in the generation of new ideas. Where these ideas are easily released they form important spin-off points for new businesses. For instance, Jomo Kenyatta University of Agriculture and Technology Enterprises is involved in licensing potential entrepreneurs to market JKUAT innovations.

2.4 Distribution Channels Members of distribution channels are excellent sources of new ideas because of their familiarity with needs of the market, Hisrich et al ( 2002), Timmons and Stephens (2004) reinforces the foregoing by stating that contacting distributors and wholesalers of a certain product can yield extensive information about the strengths and weaknesses of existing products and kinds of products improvements and new products that are needed by customers. 2.5 Competitors According to Timmons and Stephens (2004), examining products offered by companies competing in an industry can show whether an existing design is protected by patents and whether it can be improved or imitated. Brookside Dairies attributes t heir success to improvement of what Kenya Cooperative Creameries was offering to the Kenyan market where it had the monopoly. 2.6 Networks Joining clubs and professional associations can be stimulant and source of new ideas as well as a source of valuable contacts with people, Timmons and Stephens (2004) Such associations in Kenya include Fresh Produce Exporters of Kenya (FPEAK) , Marketing Society of Kenya ( MSK),and Kenya Association of manufacturers(KAM)

2.6.1 TESTING OF BUSSINES IDEAS

Even with a wide source of ideas, coming up with the basis for a new venture can still be a difficult problem. The entrepreneur can use several methods to help test new ideas

including focus groups, brainstorming and problem inventory analysis, , Hisrich et al (2002).

2.7 Focus Groups In this method a moderator leads a group of people through an open, in depth discussion rather than simply asking questions to solicit participant response. In addition to generating new ideas the focus group is an excellent method for initially screening ideas and concepts. Focus groups is very useful when developing new products in manufacturing SMEs are numerous ideas are needed to make the project a reality. 2.8 Brainstorming

The brainstorming approach is based on the fact that people can be stimulated to greater creativity by meeting with others and participating in an organized group experiences , Hisrich et al (2002. According to Wickham, (2004) the creativity of a group is potentially, more than the sum total of the creativity of the individual who make it up. A good brainstorming session starts with a problem statement that is neither too broad (which would diversify ideas too greatly so that nothing specific would emerge) nor too narrow (which would tend to confine responses).Once the problem statement if prepared, 6 to 12 individuals are selected to participate to ensure the representation of a wide range of knowledge. To avoid inhibiting responses, no group member should be recognized expert in the field of the problem. All the ideas, no matter how illogical, must be recorded, with participants prohibited from criticizing or evaluating during the brainstorming session, Hisrich et al (2002).

2.8 Problem inventory analysis Problem inventory analysis uses individuals in a manner that is analogous to focus groups to generate new product ideas. However, instead of generating new ideas themselves, consumers are provided with a list of problems in a general product category. They are then asked to identify and discuss products in this category that have a particular problem, Hisrich et al (2002). Wickham, (2004) further asserts that in many respects problems and opportunities are the two side of one coin. It depends on whether one looks at what has been achieved from the perspective of might have been achieved all from the starting point.

Translating one to the other is often a matter of rhetorical approach. The old adage of the half filled glass applies: Is it half full or half empty? 2.9 Creativity According to Hisrich et al (2002 creative problem solving is a method for obtaining new ideas focusing on the parameters. It is an important attribute of a successful entrepreneur. However, it is highest at early ages. The author suggests that creativity can be unlocked and creative ideas and innovations generated by using any of the following problem solving techniques:-

2.10

Reverse Brainstorming

This is a group method for obtaining new ideas focusing on the negative. Reverse brainstorming is similar to brainstorming, except that criticism is allowed. In fact, the technique is based in finding fault by asking the question, in how many ways can this idea fail?, Hisrich et al (2002) Reverse brainstorming can be effectively used before other creative techniques to stimulate innovative thinking. The process involves identification of everything wrong with an idea, followed by a discussion of ways to overcome these problems. 2.11 Synectics Synectics is a creative process that forces individuals to solve problems through one of the four analogy mechanisms: personal, direct. Symbolic, and fantasy. . Hisrich et al (2002). The process entails first generalizations or models consciously reversing the order of things and putting the problem into a readily acceptable or familiar perspective, thereby eliminating the strangeness. Once the strangeness is eliminated, participants engage in the second step, making the familiar strange through personal, direct, or symbolic analogy, which ideally results in a unique solution being developed.

2.12 Gordon method Unlike many other creative problems solving, Gordon method begins with group members not knowing the exact nature of the problem. This ensures that the solution is not clouded by preconceived ideas and behavioral patterns.

2.13 Checklist Method In the checklist method, a new idea is developed through a list of related issues or suggestions. The entrepreneur can use the list of questions or statements to guide the direction of developing entirely new ideas or concentrating on specific idea areas.

2.14 Free associations This technique is helpful in developing an entirely new slant to a problem. First, word or phrase related to the problem is written down, then a another and another, with each new word attempting to add something new to the on going thought, process, thereby creating a chain of ideas ending with a new product idea emerging. Hisrich et al (2002)

2.15 Forced relations Forced relationships, is the process of forcing relationships among some product combinations. It is a technique that asks questions about objects or ideas in an effort to develop a new idea. Hisrich et al (2002). The new combination and eventual concept is developed through a five step process: 1. Isolate the elements of the problem 2. Find the relationships between these elements 3. Record the relationships in orderly form 4. Analyze the resulting relationships to find ideas or patterns 5. Develop new ideas from these patterns. 2.16 Heuristics A heuristic is a particular technique of directing one's attention in learning, discovery, or problem-solving. It is originally derived from the Greek "eureka", which roughly means "I found". The following are common and simple heuristics: 1. If you are having difficulty understanding a problem, try drawing a picture. 2. If you can't find a solution, try assuming that you have a solution and seeing what you can derive from that ("working backward"). 3. If the problem is abstract, try examining a concrete example.

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4. Try solving a more general problem first (the "inventor's paradox": the more ambitious plan may have more chances of success). In psychology, heuristics are simple, efficient rules of thumb which have been proposed to explain how people make decisions, come to judgments and solve problems, typically when facing complex problems or incomplete information. These rules work well under most circumstances, but in certain cases lead to systematic cognitive biases. For instance, people may tend to perceive more expensive beers as tasting better than inexpensive ones. This finding holds true even when prices and brands are switched; putting the high price on the normally relatively inexpensive brand is enough to lead experimental participants to perceive that beer as tasting better than the beer that is normally relatively expensive. One might call this "price implies quality" bias(www.wikpedia.org/wilj/Heuristics)Accessed on 25th February, 2007.The technique is probably used more than imagined, because entrepreneurs frequently must settle for an estimated outcome of a decision rather than a certainty.

2.17 Scientific Method The Scientific method, widely used in various fields of inquiry, consists of principles and processes, conducting observations and experiments, and validating the hypothesis. The approach involves the entrepreneur defining the problem, analyzing the problem, gathering and analyzing data, developing and testing potential solutions, and choosing the best solution, Hisrich et al (2002).

2.18 Value analysis The value analysis technique develops methods for maximizing value to the entrepreneur and the new venture. To maximize value, the entrepreneur asks such questions as, Can this part be lesser quality, since it isnt a critical area for problems? Hisrich et al (2002). Quoting Carl Menger in the principles of economics Holt ,(2003) economic change does not arise circumstances but from an individuals awareness and understanding of those circumstances. The entrepreneur becomes, therefore, the change agent who transforms resources into useful goods and services, often creating the circumstances that lead to industrial growth. For instance in Mengers view the entrepreneur is able to see both extremes and conceive ways to transform the unharvested wheat into fresh bread. 11

.Mengers

model identified intermediate points of transformation-harvesting wheat,

grinding grain, making bread, and delivering it, each with opportunities for adding value to the original resource in such away as to eventually satisfy a human need ,Holt(2003). Extending the example, the entrepreneur who invents a way to harvest grain more efficiently or to grind grain into flour more rapidly adds more value to the product because the consumer benefits from more bread at a lower cost. , Holt (2003).

2.19 Attribute listing Attribute listing involves developing a new idea by looking at the positive and negatives. It requires the entrepreneur to list the attributes of an item or problem and then look at each from a variety of viewpoints. Through this process, originally unrelated objects can be brought together to form a new combination and possible new uses that better satisfy a need, Hisrich et al (2002). For instance an old car tyre can be use in various ways: making of open sandals popular with the Kamba tribe of Kenya, swings in play grounds, defining boundaries along paths and gardens, and ceiling among others. 2.20 Matrix charting Matrix charting is a systematic method of searching for new opportunities by listing important elements for the product area along two axes of a chart and then asking questions regarding each of these elements. The answers are recorded in the relevant boxes of the matrix. Example questions that can elicit creative new product ideas include: What can it be used for? Where can it be used? Who can use it? When can be used? How it cant be used, Hisrich et al (2002).Empty plastic tins are used for potting flowers or can be recycled.By listing the uses of the tins in a matrix on can discover the use of a product.

2.21 Big Dream Approach According to Hisrich et al (2002 the big dream approach requires that the entrepreneur dream about the problem and its solution, in other words, thinking big. Every possibility should be recorded and investigated without regard to all the negatives involved or the resources required. Ideas should be conceptualized without any constraints until an idea is developed into a workable form. 2.22 Parameter Analysis This process involves two aspects: parameter identification and creative synthesis. Parameter identification involves analyzing variables in the situation to determine their relative importance. The variables become the focus of the investigation, with other 12

variables being set aside. After the primary issues have been identified, the relationships between parameters that describe the underlying issues are examined. Through an evaluation of the parameters and relationships, a solution(s) is developed; this solution development is referred to as creative synthesis, Hisrich et al (2002)

CONCLUSION In the introduction the paper looks at the ways in which the entrepreneur uses to establish businesses, opportunity recognition, internal and eternal sources of business ideas. Creativity is appreciated as excellent attribute to business idea development. From creativity, negatives convert to positive, failure converts to success and the glass is described as half full not half empty.

References 1. Schumpeter J.A (1971) The Fundamental Phenomena of Economic Development New York Free Press 2. Dollinger J.M. (1995) Entrepreneurship, strategies and resources. Indiana University, Austin Press 3. Hisrich Robert, Peters Michael (2005) Entrepreneurship, Boston: McGraw-hill& Shepherd D.A. 4. Bird J. (1989) Entrepreneurial Behaviour. Scott Forestmand and Company Glenview: Illinois 5. Wickam (2004) Strategic entrepreneurship, England, Pearson Publishing 6. Hisrich Robert D., Peters Michael & Shepherd D.A. (2002) Entrepreneurship. Boston: McGraw-hill 7 www.wikipedia.org/heuristics.htm accessed on 25th February 2007 8 Stoner et al 9 Drucker Peter F,(1995) Management ,6 th Ed New Delhi Allied Publishers PVT Ltd

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