MPU2222 Entrepreneurship I - Vapr20

MPU2222
Entrepreneurship I
Copyright © Open University Malaysia (OUM)

MPU2222
ENTREPRENUERSHIP I
Norashidah Hashim
Assoc Prof Abd Aziz Yusof
Ooi Yeng Keat
Armanurah Mohamad
Abd Razak Amir
Dr Oh Teik Hai
Abd Kadir Othman
Loo Sze Wei
Prof Dr Mohd Ghazali Mohayidin
Dr Chiam Chooi Chea
Yanty Roslinda Harun

Project Directors: Prof Dr Widad Othman
Prof Dr Shamsul Nahar Abdullah
Open University Malaysia
Adapted by: Prof Dr Mohd Ghazali Mohayidin

Dr Chiam Chooi Chea
Yanty Roslinda Harun
Enhancer: Dr Abu Hanifah Ayob

Universiti Kebangsaan Malaysia
Developed by: Centre for Instructional Design and Technology

First Edition, August 2017

Second Edition, April 2020 (MREP)
Copyright © Open University Malaysia, April 2020, MPU2222

All rights reserved. No part of this work may be reproduced in any form or by any means without
the written permission of the President, Open University Malaysia (OUM).

Table of Contents
Course Guide ix–xiv
Topic 1 Introduction to Entrepreneurship 1

1.1 The Evolution of Entrepreneurship 2
1.2 Concepts and Motives of Entrepreneurship 3
1.2.1 Who are Entrepreneurs? 5
1.3 The Importance of Entrepreneurship 7
1.4 Development of Entrepreneurship in Malaysia 7
Summary 8
Key Terms 9
References 9
Topic 2 Identifying Entrepreneurial Characteristics 10

2.1 Characteristics of Successful Entrepreneurs 11
2.2 Entrepreneurial Self-assessment Test 14
2.3 Differences between Businessmen, Managers and 15
Entrepreneurs
2.3.1 Differences between a Businessman and 16
an Entrepreneur
2.3.2 Differences between a Conventional Manager and 16
an Entrepreneur
Summary 17
Key Terms 18
References 18
Topic 3 Developing Entrepreneurial Creativity and Innovation 19

3.1 What is Creativity? 20
3.1.1 The Process of Creativity 20
3.1.2 Barriers to Creativity 23
3.1.3 How to Generate Creative Ideas 24
3.1.4 Characteristics of Creative Individuals 26
3.2 What Is Innovation? 28
3.2.1 Types of Innovation 28
3.2.2 Sources of Innovation 30
3.2.3 Barriers to Innovation 31
Summary 33
Key Terms 33
References 34

iv  TABLE OF CONTENTS
Topic 4 Ventures Environment Assessment 35

4.1 Components of Ventures Environments 36
4.2 Macro Environment 38
4.2.1 Politics and Legislation 39
4.2.2 Economy 41
4.2.3 Sociocultural 42
4.2.4 Technology 43
4.3 Micro Environment 44
4.4 Internal Environment 47
4.5 Identification of Business Opportunity 47
4.5.1 Recognition of the Opportunity Phase in the Process 48
Perspective on Entrepreneurship
4.5.2 E-commerce as a New Opportunity 50
Summary 51
Key Terms 51
References 51
Topic 5 Business Plan 53

5.1 What is a Business Plan? 54
5.2 Importance of Business Planning 55
5.3 Who Needs a Business Plan? 57
5.4 Essential Elements of a Good Business Plan 59
5.5 Guidelines on Preparing a Business Plan 61
5.5.1 Pitfalls to Avoid in Planning 63
Summary 64
Key Terms 65
References 65
Topic 6 Starting a New Entrepreneurial Venture 66

6.1 Initiating a Start-up 67
6.1.1 Phases in Start-up 67
6.1.2 Advantages and Disadvantages of Start-up 68
6.2 Buying an Existing Business 69
6.2.1 Steps and Processes in Buying an Existing Business 70
6.2.2 Advantages of Buying an Existing Business 74
6.2.3 Disadvantages of Buying an Existing Business 75
6.3 Franchising 76
6.3.1 Advantages of Franchising 77
6.3.2 Disadvantages of Franchising 78
6.4 Legal Structures for New Businesses 79
6.4.1 Sole Proprietorship 79
6.4.2 Partnership 81
6.4.3 Corporation 84

TABLE OF CONTENTS  v
6.5 Sources of Capital for Business Activities 86

Summary 88
Key Terms 88
References 89
Topic 7 Entrepreneurial Networking 90

7.1 What is Networking? 90
7.2 Advantages of Good Networking 91
7.3 What is Strategic Networking? 91
7.3.1 Types of Networking 92
7.3.2 The Importance of Networking 93
Summary 95
Key Terms 95
References 95
Topic 8 Evaluation of Entrepreneurial Opportunities 96

8.1 Pitfalls in Selecting New Ventures 97
8.2 Critical Factors for New Venture Development 99
8.3 Why New Ventures Fail 101
8.4 The Evaluation Process 102
Summary 105
Key Terms 106
References 106
Topic 9 Entrepreneur and Personal Financial Planning 107

9.1 Need for Personal Financial Planning 108
9.1.1 Steps in Financial Planning 108
9.1.2 Benefits of Financial Planning 109
9.1.3 Life Stages and Financial Goals 109
9.2 The Power of Money 111
9.2.1 How to Set Your Goals 111
9.2.2 An Important Goal – Saving for Emergencies 112
9.2.3 Assets and Liabilities: What You Own and Owe 113
9.2.4 Knowing Your Net Worth 115
9.2.5 Deriving Your Net Worth 116
9.3 The Basics of Budgeting 118
9.3.1 Budgeting and Spending Plan 118
9.3.2 Tracking Your Cash Flow 120
Summary 123
Key Terms 123
References 123

vi  TABLE OF CONTENTS
Topic 10 Achieving an EntrepreneurÊs Personal Financial Dreams 125

10.1 Entrepreneur Wealth Building 126
10.1.1 The Saving Habit 126
10.1.2 Increasing Net Worth via Savings and Investments 127
10.1.3 Types of Investment 130
10.2 Planning for Uncertainties 133
10.2.1 The Need to Get Insured 133
10.2.2 Types of Insurance 135
10.3 Managing Debt: Borrowing Basics 138
10.3.1 Loans and Credit 138
10.3.2 Types of Loan 140
10.3.3 Types of Cards, Credit Trap and Tips on 145
Using Credit Cards
10.3.4 Repayment and Default 148
Summary 150
Key Terms 151
References 152

COURSE GUIDE

COURSE GUIDE  ix
COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly, what the course is about and how you can work your way through the
course material. It also suggests the amount of time you are likely to spend in order
to complete the course successfully. Please keep on referring to the Course Guide
as you go through the course material. It will help you to clarify important study
components or points that you might miss or overlook.
INTRODUCTION
MPU2222 Entrepreneurship I is one of the courses offered at Open University
Malaysia (OUM). This course is worth two credit hours and should be covered
over 15 weeks.
COURSE AUDIENCE
This is a compulsory course for all learners at OUM.
As an open and distance learner, you should be acquainted with learning

independently and being able to optimise the learning modes and environment
available to you. Before you begin this course, please ensure that you have the right
course materials, and understand the course requirements, as well as know how
the course is conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a two-credit hour course, you are expected to spend
80 study hours. Table 1 gives an estimation of how the 80 study hours could be
accumulated.

x  COURSE GUIDE
Table 1: Estimation of Time Accumulation of Study Hours
Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussion 4
Study the module 20
Attend 3 to 5 tutorial sessions 6
Online participation 10
Revision 20
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 80
COURSE LEARNING OUTCOMES

By the end of this course, you should be able to:
1. Independently explain the basic concepts of entrepreneurship, the
importance of entrepreneurship and the characteristics of successful
entrepreneurs;
2. Differentiate between the concepts of creativity and innovation;
3. Critically evaluate business opportunities based on the micro and macro
environments;
4. Develop a business plan for various types of business venture opportunities;
and
5. Critically discuss the types, techniques and barriers to good entrepreneur
networking and its importance towards successful entrepreneurship.
COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic is as follows:
Topic 1 introduces and defines entrepreneurship together with difference motives

for becoming an entrepreneur. It describes the importance of entrepreneurship to
individuals, society and country. Also, it discusses the development of
entrepreneurship in Malaysia.

COURSE GUIDE  xi
Topic 2 focuses on sixteen most dominant entrepreneurial characteristics. The

entrepreneur self-assessment test is a means of getting insight into individual
entrepreneurial potential. This topic describes not only the differences between a
small business owner and an entrepreneur but also the differences between a
conventional manager and an entrepreneur. Lastly, it presents differences on
ethical conduct between a manager and an entrepreneur.
Topic 3 is devoted to creativity and innovation. Entrepreneurs need to know the

definition of creativity and innovation, the advantages and relationship with
entrepreneurship. This topic explains the sources and barriers to creativity and
innovation, as well as the strategy to encourage creativity and innovations among
entrepreneurs in todayÊs competitive business environment.
Topic 4 focuses on the environmental assessment that should be conducted when

pursuing business opportunities and identifying threats that exist in the
environment. It also explains elements in the internal and external environments
of business ventures that influence entrepreneurial decisions and activities.
Topic 5 outlines the techniques of preparing a business plan which will help
students to evaluate a business plan objectively, critically and practically. Learners
will be taught how to produce a blueprint for a realistic business plan. They will
also be exposed to several methods and techniques of presenting an effective
business plan.
Topic 6 describes the various types of ventures that an entrepreneur can

undertake. Here, students will be introduced to three common types of ventures.
It will also discuss some of the advantages and disadvantages of the different types
of ventures, the legal structures for new ventures and various sources of capital
for an entrepreneur starting a new venture.
Topic 7 discusses the importance of networking for entrepreneurs. It further

details the concept of strategic networking, different types of strategic networking
and how strategic networking helps entrepreneurs to start and grow the business.
Learners will learn how to exploit existing contacts and at the same time create
new ones.
Topic 8 discusses the evaluation of entrepreneurial opportunities. It also explains

six common pitfalls in selecting new ventures. Learners will be exposed to the
critical factors involved in new venture assessment and the underlying factors of
venture success. An effective evaluation process for new ventures will also be
looked at in this topic.

xii  COURSE GUIDE
Topic 9 discusses the need for personal financial planning and looks at the steps
and benefits of financial planning as well. It will also explain the power of money
in terms of building financial success, preparing basic budgeting and planning for
expenditures.
Topic 10 explains entrepreneur wealth building by having a good savings habit as

this practice will ultimately increase the entrepreneurÊs net worth in the long term.
The topic will also discuss an entrepreneurÊs need to plan for future uncertainties
by taking into consideration the several types of insurance coverage. Learners will
be exposed to the various types of loans and credit cards available. They will learn
how to manage their loans efficiently and avoid falling into a credit trap or
becoming a credit defaulter.
TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:
Learning Outcomes: This section refers to what you should achieve after you have
completely covered a topic. As you go through each topic, you should frequently
refer to these learning outcomes. By doing this, you can continuously gauge your
understanding of the topic.
Self-Check: This component of the module is inserted at strategic locations

throughout the module. It may be inserted after one subtopic or a few subtopics.
It usually comes in the form of a question. When you come across this component,
try to reflect on what you have already learnt thus far. By attempting to answer
the question, you should be able to gauge how well you have understood the
subtopic(s). Most of the time, the answers to the questions can be found directly
from the module itself.
Activity: Like Self-Check, the Activity component is also placed at various locations
or junctures throughout the module. This component may require you to solve
questions, explore short case studies, or conduct an observation or research. It may
even require you to evaluate a given scenario. When you come across an Activity,
you should try to reflect on what you have gathered from the module and apply it
to real situations. You should, at the same time, engage yourself in higher order
thinking where you might be required to analyse, synthesise and evaluate instead
of only having to recall and define.

COURSE GUIDE  xiii
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should be
able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful textbooks,
journals, articles, electronic contents or sources can be found. The list can appear
in a few locations such as in the Course Guide (at the References section), at the
end of every topic or at the back of the module. You are encouraged to read or
refer to the suggested sources to obtain the additional information needed and to
enhance your overall understanding of the course.
PRIOR KNOWLEDGE
No prior knowledge needed.
ASSESSMENT METHOD
Please refer to myINSPIRE.
REFERENCES
Abd. Aziz Yusof. (2000). Usahawan dan keusahawanan: Satu penilaian. Petaling
Jaya, Selangor: Pearson.
Barringer, B. R., & Ireland, R. D. (2016). Entrepreneurship: Successfully launching

new ventures. Essex: Pearson Education Limited.
Dollinger, M. J. (2007). Entrepreneurship: Strategies and resources. Lombard,

IL: Marsh.
Histrich, R. D., Peters, M. P., & Shepherd, D. A. (2017). Entrepreneurship

(10th ed.). New York: McGraw-Hill Education.

xiv  COURSE GUIDE
Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: Contemporary

approach (5th ed.). Fort Worth, TX: Harcourt College.
Mohd Salleh Hj Din, Hoe C. H., Norashidah H., Rosli M., Habshah B., Ooi Y. K.,
Armanurah M., Shuhymee A., Norita D., & Lily Julienty A. B. (2004). Asas
keusahawanan. Kuala Lumpur: Thomson.
Zimmerer, T. W., & Scarborough, N. M., (2007). Essentials of entrepreneurship and

small business management (5th ed.). Upper Saddle River,
NJ: Prentice Hall.
TAN SRI DR ABDULLAH SANUSI (TSDAS)

DIGITAL LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for the
use of its learners. This comprehensive digital library, which is accessible through
the OUM portal, provides access to more than 30 online databases comprising
e-journals, e-theses, e-books and more. Examples of databases available are
EBSCOhost, ProQuest, SpringerLink, Books24ൈ7, InfoSci Books, Emerald
Management Plus and Ebrary Electronic Books. As an OUM learner, you are
encouraged to make full use of the resources available through this library.

Topic  Introduction to
Entrepreneurship
1
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the concepts and motives of entrepreneurship;
2. Discuss the importance of entrepreneurship; and
3. Discuss entrepreneurship development in Malaysia.
 INTRODUCTION
Welcome to the world of entrepreneurship!
Most of what you hear about entrepreneurship is all wrong. It is not magic; it
is not mysterious; and it has nothing to do with genes. It is a discipline; it can
be learned.
Peter F. Drucker
Innovation and Entrepreneurship
Source: Kuratko & Hodgetts (2001)
Economists introduced the concept of entrepreneurship in the 18th century as a

topic for discussion and analysis. It continued to attract the interest of economists
in the following century. In the 20th century, the word entrepreneurship became
synonymous with free enterprise. It was generally recognised that entrepreneurs
act as agents of change, provide creative, innovative ideas for business enterprises
and help businesses grow and become profitable. Entrepreneurship is the symbol
of business tenacity and achievement. Entrepreneurship is important to
individuals, society and the country and is recognised throughout the world as a

2  TOPIC 1 INTRODUCTION TO ENTREPRENEURSHIP
catalyst for economic growth. This topic discusses the motives for becoming an
entrepreneur, the importance of entrepreneurship as well as entrepreneurship
development in Malaysia.
1.1 THE EVOLUTION OF ENTREPRENEURSHIP

The word entrepreneur is derived from the French word entreprendre, meaning
„to undertake‰. The evolution and development of the theory of entrepreneurship
is summarised in Table 1.1.
The concepts of the entrepreneur and entrepreneurship are elaborated further in

the following discussion.
Table 1.1: Evolution and Development of the Theory of Entrepreneurship
Period Theory and Concept

Earliest An early example of the definition of an entrepreneur as a go-between
Period is Marco Polo, who attempted to establish trade routes to the Far East.
As a go-between, Marco Polo would sign a contract with a financier
(capitalist) to sell his goods. The capitalist was a passive risk bearer. The
merchant-adventurer took the active role in trading, bearing all the
physical and emotional risks. Once the merchant adventurer had
successfully sold the goods, the profits would be divided between the
capitalist and the merchant-adventurer.
Middle During this period, the term „entrepreneur‰ was used to describe both
Ages an actor and a person who was in charge of and managed large
production projects. This person merely managed the projects using the
resources provided by the government and did not assume any risks.
The entrepreneur in this period was the person who was in charge of
great architectural works, such as public buildings and cathedrals.
17th In this century, there was a connection between risk and
Century entrepreneurship. The entrepreneur was a person who entered into a
contractual arrangement with the government to perform a service or
to supply stipulated products. The contract price was fixed. Therefore,
any profits or losses were borne by the entrepreneur. It was during this
century that Richard Cantillon, an economist, developed one of the
early theories of an entrepreneur. He is regarded as the founder of the
term „entrepreneur‰. He viewed an entrepreneur as a risk taker. The
entrepreneurs in the 17th century as observed by Cantillon were
merchants, farmers, craftsmen and other sole proprietors. They bought
at a certain price and sold at an uncertain price, therefore operating at a
risk.

TOPIC 1 INTRODUCTION TO ENTREPRENEURSHIP  3
18th In the 18th century, an entrepreneur was differentiated from a capital

Century provider. This was due to the industrialisation that occurred
throughout the world. Many of the inventions developed during this
time were reactions to the changing world. Two cases in point were the
inventions of Eli Whitney and Thomas Edison. Whitney and Edison
were developing new technologies but were unable to finance their
inventions. Whitney and Edison were capital users (entrepreneurs), not
providers (venture capitalists).
19th and In the late 19th and 20th centuries, entrepreneurs were not often
20th distinguished from managers. In the middle of the 20th century, the
Centuries notion of an entrepreneur as an innovator was established. The function
of the entrepreneur is to reform or revolutionise the pattern of
production by exploiting an invention or, more generally, an untried
technological possibility for producing a new commodity or producing
an old one in a new way.
21st Century Entrepreneurs in the 21st century are considered the heroes of free
enterprise. Many of them have used innovation and creativity to build
multimillion-dollar enterprises from fledgling businesses.
Entrepreneurs have created new products and services and have
assumed the risks associated with these ventures. Today, many people
regard entrepreneurship as „pioneership‰ on the frontiers of business.
1.2 CONCEPTS AND MOTIVES OF

ENTREPRENEURSHIP
According to Hisrich and Peters (1998), entrepreneurship is a dynamic process of
creating something valuable for the entrepreneurs and target market. However,
venturing into entrepreneurship requires individualsÊ substantial time and effort
to make it successful. In addition, entrepreneurship involves great challenges in
terms of financial, psychology and social risks. Therefore, one needs to have the
right motivations to become an entrepreneur: whether to be oneÊs own boss,
pursue oneÊs own ideas or acquire financial rewards. This definition of
entrepreneurship focuses on four basic aspects, as shown in Figure 1.1.

Figure 1.1: The four basic aspects of entrepreneurship

Source: Hisrich & Peters (1998)
Another definition, proposed by Kuratko and Hodgetts (2004), describes

entrepreneurship as a process of innovation and new venture creation through
four major dimensions:
(a) Individual;
(b) Organisational;
(c) Environmental; and
(d) Process.
Collaborative networks in government, education and institutions aid these

dimensions.
ACTIVITY 1.1
According to Peter Drucker (1985), entrepreneurship is a discipline

which can be learned. What do you think of this statement? Discuss
your opinions with your coursemates on myINSPIRE online forum.

In recognising the importance of entrepreneurship in the 21st century, Kuratko

and Hodgetts (2004) developed an integrated definition of entrepreneurship as
follows:
Entrepreneurship is a dynamic process of vision, change and creation. It

requires an application of energy and passion towards the creation and
implementation of new ideas and creative solutions. Essential ingredients
include the willingness to take calculated risks in terms of time or equity, or
to marshal needed resources; the fundamental skill of building a solid
business plan; and finally, the vision to recognise opportunity where others
see chaos, contradiction and confusion.
1.2.1 Who are Entrepreneurs?

Entrepreneurs are the pioneers of todayÊs business success. Their sense of
opportunity, their drive to innovate and their capacity for accomplishment have
become the standard by which free enterprise is now measured. The following are
some definitions of entrepreneurs by various scholars:
Scarborough and Zimmerer (1999) define an entrepreneur as a person who

creates a new business in the face of uncertainty for the purpose of achieving
profit and growth by identifying opportunities and assembling the necessary
resources to capitalise on. Entrepreneurs usually start with nothing more than
an idea, often a simple one, and then assemble the resources necessary to
transform that idea into a sustainable business.
Kuratko and Hodgetts (2004) define an entrepreneur as one who undertakes

to organise, manage and assume the risks of a business. The entrepreneur is
also a catalyst for economic change, who uses purposeful searching, careful
planning and sound judgement when carrying out the entrepreneurial
process. Uniquely optimistic and committed, the entrepreneur works
creatively to establish new resources or endow old ones with a new capacity,
all for the purpose of creating wealth.

Today, an entrepreneur is an innovator or developer who recognises and seizes

opportunities; converts those opportunities into workable or marketable ideas;
adds value through time, effort, money or skills; controls the risks (overcomes the
challenges) in a competitive marketplace to execute these ideas; and acquires the
rewards from these efforts.
The meaning and definition of an entrepreneur varies across disciplines. For

example, economists see entrepreneurs as those who bring resources, labour,
materials and other assets into unusual combinations that make their value greater
than before and also those who introduce changes, innovations and a new order
to generate profit. Psychology scholars define entrepreneurs at the behavioural
term of achievement that is recognised as individuals who are driven to seek
challenges and accomplishments.
Although each definition views entrepreneurs differently, they all contain similar
notions such as:
(a) Newness;
(b) Wealth;
(c) Organising;
(d) Creating; and
(e) Risk-taking.
ACTIVITY 1.2
Scarborough and Zimmerer (1999) posit that entrepreneurship starts
with an idea and identification of the resources to materialise it. Can
you think of any entrepreneurial idea and the resources needed to
make it happen? Share your ideas with your coursemates in
myINSPIRE online forum.
SELF-CHECK 1.1
1. What is entrepreneurship?
2. What are the four basic aspects of entrepreneurship?

1.3 THE IMPORTANCE OF ENTREPRENEURSHIP

Entrepreneurship is important in todayÊs world. It is a catalyst for economic
change and growth. The role of entrepreneurship in economic development
involves more than just increasing per capita output and income. It also involves
initiating and constituting change in the structure of business and society. One
theory of economic growth depicts innovation as the key for economic growth by
developing and introducing new products or services to the market. Innovative
activities also stimulate investment interest in the new ventures, which result in
economic development. As more ventures are created, new jobs will be produced,
thus reducing the unemployment rate.
Also, entrepreneurship, through its creativity and innovation process, produces

new products and services to fulfil customersÊ needs. Improvement in the
economic status makes the demands of todayÊs customers more sophisticated and
dynamic. Therefore, entrepreneurship serves as a means to meet such demands
with more innovative products and services, sometimes offered at a cheaper price.
Entrepreneurship helps to improve the lives of millions of people, where

entrepreneurs are also extremely generous in donating substantial portions of their
wealth to eminently worthy causes. Therefore, entrepreneurs are individuals who
create wealth, as well as promote wealth distribution.
ACTIVITY 1.3
Based on your entrepreneurial idea from Activity 1.2, can you think of
the benefits it could bring to individuals, society and the country?
Discuss it in class.
1.4 DEVELOPMENT OF ENTREPRENEURSHIP

IN MALAYSIA
Entrepreneurship has existed in Malaysia (Malaya) since the sovereignty of
Malacca a long time ago. However, when the British colonised the Malay
Peninsula, they changed the structure of the society and practised the „divide and
rule‰ system, in which the Malays were engaged in administration and
agriculture, the Chinese in mining and business, and the Indians in rubber
plantations. As a result of this system, the Chinese society was far ahead in
business compared with the Malays and Indians.

After independence, the Malaysian Government realised the importance of

entrepreneurship to individuals, society, as well as the country, and how it
contributes to the nationÊs prosperity. Since then, the government has been
focusing on the field of entrepreneurship. The New Economic Policy (1971 to
1990), the National Development Policy (1990 to 2000) and Vision 2020, all
encourage and support entrepreneurship development in Malaysia.
The government encourages entrepreneurship development and gives recognition

to entrepreneurs because they contribute greatly to the development of the
country.
ACTIVITY 1.4
Name three initiatives taken by the Malaysian government to
promote entrepreneurship since 2000.
SELF-CHECK 1.2
1. Discuss the importance of entrepreneurship to individuals, society

and country.
2. List all policies adopted by the Malaysian government to encourage

entrepreneurship since independence.
 The study of entrepreneurship is very relevant, not only because it helps

entrepreneurs to better fulfil their personal needs but also because of the
contribution it gives to the individual, society, country and the world.
 Entrepreneurship can be defined as a process of innovation and new venture

creation through four major dimensions:
 Individual;
 Organisational;
 Environmental; and
 Process.

 The role of entrepreneurship involves initiating and constituting change in the

structure of business and society.
 Entrepreneurship creates new investments and ventures which will result in

economic development.
 The government of Malaysia encourages and recognises entrepreneurs

because they greatly contribute to the development of the country.
 The study of entrepreneurship also provides a framework and foundation for

researching contemporary theories and processes of entrepreneurship.
 Furthermore, to foster entrepreneurship development, entrepreneurship

education is a vital element to further educate society in the area of
entrepreneurship.
Divide and rule New venture

Entrepreneur Risk
Entrepreneurship
Hisrich, R. D., & Peters, M. P. (1998). Entrepreneurship: Starting, developing and

managing a new enterprise (4th ed.). Boston, MA: McGraw Hill.
Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: A contemporary

Kuratko, D. F., & Hodgetts, R. M. (2004). Entrepreneurship: Theory, process,

practice. Mason, OH: Thomson Learning.
Scarborough, N. M., & Zimmerer, T. W. (1999). Effective small business

management: An entrepreneurial approach (6th ed.). Upper Saddle River,
NJ: Prentice Hall.

Topic  Identifying
2 Entrepreneurial
Characteristics
LEARNING OUTCOMES
1. Identify common characteristics of successful entrepreneurs;
2. Evaluate your entrepreneurial inclination potential using the
entrepreneur self-assessment test; and
3. Describe differences between businessmen, managers and
entrepreneurs.
 INTRODUCTION
Entrepreneurs are individuals who recognise opportunities where others see
chaos or confusion. They are aggressive catalysts for change within the
marketplace. They have been compared to Olympic athletes challenging
themselves to break new barriers, to long-distance runners dealing with the
agony of the miles, to symphony orchestra conductors who balance the
different skills and sounds into a cohesive whole, or to top-gun pilots who
continually push the envelope of speed and daring. Whatever the passion,
because they all fit in some way, entrepreneurs are the heroes of todayÊs
marketplace. They start companies and create jobs at a breath-taking pace.
They challenge the unknown and continuously create the future.
This topic describes the most common characteristics associated with successful
entrepreneurs, entrepreneur self-assessment and differences between
entrepreneurs, businessmen and managers.

TOPIC 2 IDENTIFYING ENTREPRENEURIAL CHARACTERISTICS  11
2.1 CHARACTERISTICS OF SUCCESSFUL

ENTREPRENEURS
This subtopic provides a brief summary of characteristics most commonly
associated with successful entrepreneurs. Even though new characteristics are
continuously being added to the list, it does provide important insights into the
entrepreneurial perspective.
Figure 2.1: Characteristics of successful entrepreneurs

12  TOPIC 2 IDENTIFYING ENTREPRENEURIAL CHARACTERISTICS
Now let us look at each of the characteristics.
(a) Initiative and Responsibility

Most researchers agree that effective entrepreneurs actively seek and take
initiative. They willingly put themselves in situations where they are
personally responsible for the success or failure of the operation.
Entrepreneurs feel personally responsible for the outcome of ventures with
which they are associated. They like to take the initiative in solving problems
and translating them into opportunities.
(b) High Degree of Commitment

Launching a venture requires total commitment from entrepreneurs. This
commitment helps entrepreneurs to overcome business-threatening mistakes
and obstacles. EntrepreneursÊ commitment to their ideas and ventures
determine how successful those ventures ultimately become.
(c) Opportunity Orientation

Entrepreneurs focus and start on opportunities rather than on resources,
structure or strategy. They begin with opportunities and let their understanding
of them guide other important issues. Entrepreneurs have a well-defined sense
of searching for opportunities. In searching for new business opportunities,
entrepreneurs observe the same events other people do but offer different
perspectives. Entrepreneurs are not only capable of searching for opportunities
but also capable of seizing the extraordinary ones.
(d) Moderate Risk-taker

Entrepreneurs are not wild risk-takers as they strongly consider both the
costs and benefits before making any decision. When entrepreneurs
participate in any venture, they do so in a very calculative and carefully
thought-out manner. They often avoid taking unnecessary risks.
(e) Confident and Optimistic

Entrepreneurs typically have an abundance of confidence in their ability to
succeed. They tend to be optimistic about their chances of success and
usually their optimism is based on reality. The high level of confidence and
optimism explains why some of the most successful entrepreneurs have
failed in business, often more than once, before finally succeeding.
(f) Creative and Innovative

Creativity and innovativeness are important for entrepreneurs to gain a
competitive advantage in their ventures. Through their creative and
innovative minds and imagination, entrepreneurs can produce unique goods
and services for customers. Fortunately, creativity is not inherited but it can
be learned.

(g) Seeking Feedback

Entrepreneurs like to know how they are doing and are constantly looking
for reinforcement. They actively seek and use feedback to improve
themselves and their venture performance. Through feedback,
entrepreneurs can learn from their mistakes.
(h) Drive to Achieve

Achievement seems to be the primary motivating force behind
entrepreneurs. Entrepreneurs are self-starters who have a strong desire to
compete, excel, pursue and attain challenging goals. One of the common
misconceptions about entrepreneurs is that they are driven wholly by the
desire to make money. However, to most entrepreneurs, money is simply a
symbol of achievement, not the driving motive.
(i) Able to Set a Vision

Entrepreneurs know what they want to achieve. They have a vision or
concept of what their firm would be. Not all entrepreneurs have
predetermined visions for their firm. In many cases, this vision develops over
time as the entrepreneur begins to realise what the firm is and what it can
become.
(j) Skilled at Organising

Building a venture from the very beginning is not easy. So, entrepreneurs
know how to put the right people together to accomplish a task.
Entrepreneurs are able to organise their resources in an effective way so as
to transform their visions into reality.
(k) Internal Locus of Control

Entrepreneurs believe that the success or failure of their venture depends on
themselves. Their accomplishments and setbacks are within their own
control whereas they can affect the outcome of their actions.
(l) Tolerant of Failure

Entrepreneurs do not become disappointed, discouraged or depressed by
failure. They use failure as a learning experience. In difficult times, they still
look for opportunities. Most entrepreneurs believe they learn more from
their early failures than from their early successes.
(m) Highly Energetic

Entrepreneurs are more energetic than the average person. Entrepreneurs
need to have a high level of energy so as to cope with the extraordinary
workload and the stressful demands they face. That energy may be a critical
factor, given the incredible effort required to start up and grow a company.

(n) Team Building

Most successful entrepreneurs have highly qualified and well-motivated
teams to help handling the ventureÊs growth and development.
(o) Independent
Entrepreneurs are independent people. They like to accomplish tasks in their
own way. This does not mean entrepreneurs must make all the decisions.
Yet, they want to have authority to make important decisions.
(p) Flexible
Entrepreneurs are not rigid in their ventures. They are flexible and have the
ability to adapt to the changing demands of their customers and businesses.
In this rapidly changing world economy, rigidity often leads to failure.
SELF-CHECK 2.1
What are the common characteristics of successful entrepreneurs?
2.2 ENTREPRENEURIAL SELF-ASSESSMENT

TEST
There are many instruments that can be used to assess and measure the inclination
towards entrepreneurship in individuals. Today, many interactive tests and
quizzes are available online to test the level of entrepreneurial potential. Among
them is an instrument proposed by Robinson, Stimpson, Huefner and Hunt (1991).
The purpose of the entrepreneur self-assessment test is to get insights into the level
of entrepreneurial inclination in individuals. It is not to find out whether
individuals can become entrepreneurs or not because anyone has the potential to
become an entrepreneur, regardless of age, race, gender, colour and national
origin. In fact, entrepreneurship is not a genetic trait; it is a learned skill. Hence,
from this entrepreneur self-assessment test, you can gauge your standing and do
something to improve your level of inclination towards entrepreneurship if you
are really interested in becoming a successful entrepreneur.

ACTIVITY 2.1
Please try one of the online tests by accessing the following link. Explain
your level of entrepreneurial inclination and compare your score with
your coursemates.
https://www.bizmove.com/other/quiz.htm
2.3 DIFFERENCES BETWEEN BUSINESSMEN,

MANAGERS AND ENTREPRENEURS
In this subtopic, we are going to look at the differences between businessmen,
managers and entrepreneurs. Before we do that, let us have a look at the definition
of a businessman and a manager.
Forbes Magazine (2016) describes a businessman as:
A person who is involved in carrying out any activity related to commercial

and industrial purposes.
On the other hand, Kuratko (2017) describes a manager of small businesses as:
A person who manages his/her business with a less aggressive approach and
prefers more stable outcomes.
ACTIVITY 2.2
Are businessmen similar to entrepreneurs? Can you think of any

similarities between businessmen, managers and entrepreneurs? Discuss
with your coursemates in the myINSPIRE online forum.

2.3.1 Differences between a Businessman and

an Entrepreneur
Entrepreneurs are not the same as businessmen, especially the small businessman.
Entrepreneurs are a subset of businessmen, whereby not all businessmen are
entrepreneurs but all entrepreneurs are businessmen. Businessmen do have the
characteristics of most entrepreneurs, but those characteristics are at a lower level
compared with entrepreneurs. Several characteristics can be used to differentiate
the small businessman from the entrepreneur as shown in Table 2.1.
Table 2.1: Differences between a Businessman and an Entrepreneur
Small Businessman Entrepreneur

Engages in business activities for the Starts the venture, demonstrates leadership
purpose of profit to support his lifestyle and expands the venture to fulfil personal
and his family goals and attain self-accomplishment
Low risk-taker Moderate risk-taker
Follows others and invests only in tested Takes calculated risks

and proven markets
2.3.2 Differences between a Conventional Manager

and an Entrepreneur
There are also differences between managers and entrepreneurs. Table 2.2 shows the
differences between managers, especially conventional managers and entrepreneurs.
Table 2.2: Differences between a Conventional Manager and an Entrepreneur
Conventional Manager Entrepreneur

Ć Very conscious of rules and taboos Ć Views rules only as guidelines
Ć Sensitive to the future and willing Ć Concept of the future based on personal
to postpone rewards goals. Low threshold for frustration.
Ć Has a powerful need for acceptance Ć Ambivalent towards control, success
and responsibility. Can be manipulative
and exploitative of others
Ć Able to identify problems in any Ć Impatient with discussions and
course of action theories. Prone to action and seems
 Makes detailed plans impulsive.
Source: Zimmerer & Scarborough (1998)

SELF-CHECK 2.2
Summarise the differences between businessmen, managers and

entrepreneurs. Discuss your answer with your coursemates.
 There are 16 characteristics of entrepreneurs identified in this topic:

ă Seeking feedback;
ă Internal locus of control;
ă Flexibility;
ă High level of energy;
ă Team building;
ă Ability to set vision;
ă Tolerance for failure;
ă Drive to achieve;
ă Skilled at organising;
ă Creative and innovative;
ă Independent;
ă Confident and optimistic;
ă Moderate risk-taker;
ă Opportunity orientation;
ă High degree of commitment; and
ă Initiative and responsibility.
 Many instruments can be used to assess and measure the inclination towards
entrepreneurship in individuals.
 The purpose of the entrepreneur self-assessment test is to get insights into the
level of entrepreneurial inclination in individuals.

 There are three main differences between a businessman and an entrepreneur.
 A businessman engages in business activities for the purpose of profit, to

support his lifestyle and his family, is a low risk taker, and follows others and
invests only in tested and proven markets.
 An entrepreneur starts the venture, demonstrates leadership and expands the

venture to fulfil personal goals and attain self-accomplishment, is a moderate
risk-taker and takes calculated risks.
Creative Innovative
EntrepreneurÊs self-assessment Optimistic
Forbes Magazine. (2016). Retrieved from https://www.forbes.com/sites/quora/

2016/11/15/theres-a-subtle-difference-between-a-businessman-and-an-
entrepreneur/#5b19f1414a58
Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: A contemporary

Kuratko, D. F. (2017). Entrepreneurship: Theory, process, practice (10th ed.).

Singapore: Cengage Technology Edition.
Robinson, P. B., Stimpson, D. V., Huefner, J. C., & Hunt, H. K. (1991). An attitude
approach to the prediction of entrepreneurship. Entrepreneurship: Theory
and Practice, 15(4), 13ă33.
Zimmerer, T. W., & Scarborough, N. M. (1998). Essentials of entrepreneurship and

Small Business Management (2nd ed.). New York: Prentice Hall.

Topic  Developing
3 Entrepreneurial
Creativity and
Innovation
LEARNING OUTCOMES
1. Define the concepts of creativity and innovation;
2. Explain four main phases in the creative process;
3. Explain five creativity techniques;
4. Describe four basic types of innovation; and
5. Discuss the barriers to creativity and innovation.
 INTRODUCTION
TodayÊs competitive business environment requires an entrepreneur to think of
ways to produce new products, services or processes, with new purposes for
customers. This, in turn, could enable the organisation to attract the attention of
customers to the organisationÊs new inventions, enabling the organisation to
survive by creating value and generating revenue. Hence, creativity and
innovation are vital elements for all levels of businesses to grow and expand. They
are also essential for survival and for building competitive advantage
(Kirby, 2003).

20  TOPIC 3 DEVELOPING ENTREPRENEURIAL CREATIVITY AND INNOVATION
Continuously seeking new paradigms of solving a business problem is the

precondition for successful entrepreneurs. As a creative person, the entrepreneur
must be able to think creatively to find solutions to existing problems. However,
one should remember that efficiency and effectiveness no longer guarantee the
survival of a business nowadays. Instead, creativity and innovation have
constantly pushed the business forward. As a result, the ability to create or invent
something new is the answer for businesses to remain in the market. This topic
will discuss what creativity is, the process of creativity, barriers to creativity, how
to generate creativity and characteristics of creative entrepreneurs.
3.1 WHAT IS CREATIVITY?

Creativity is imperative for responding to complex challenges in a dynamic
business environment which is often full of non-routine problems. There are a few
definitions of creativity. According to Sternberg, Kaufman and Pretz (2002),
creativity refers to the ability to produce work that is novel (i.e., original and
unexpected), in high quality and appropriate (i.e., useful, meets task constraints).
Similarly, Schermerhorn, Hunt and Osborn (2003) explain that creativity involves
the development of unique and novel responses to problems and opportunities.
SELF-CHECK 3.1
Define creativity and give one example for it. Discuss barriers that can
hinder one from being creative.
3.1.1 The Process of Creativity

An entrepreneur needs to think of ideas to implement new strategies. Generally,
ideas evolve from the creative process in which an imaginative individual will
imagine, shape and develop an idea into a form that can be effectively executed
and in return, benefit both the entrepreneur and the organisation.

TOPIC 3 DEVELOPING ENTREPRENEURIAL CREATIVITY AND INNOVATION  21
According to Kuratko and Hodgetts (2004), there are four main phases or steps in
the creative process, as shown in Figure 3.1.
Figure 3.1: The creative thinking process


The elaboration of the phases is shown in Figure 3.2.
Figure 3.2: Four phases in the creative process

SELF-CHECK 3.2
Explain four steps in generating creative ideas.
3.1.2 Barriers to Creativity

We should bear in mind that not all novel ideas generated during the creative
thinking process are acceptable. A creative idea needs to get through a lot of
challenges and barriers before it can be successfully embraced. There are four
barriers to creativity, as shown in Figure 3.3.
Figure 3.3: Barriers to creativity


3.1.3 How to Generate Creative Ideas

Different people have different ways of thinking. There are several techniques to
improve creativity. Five techniques that can be used to foster creativity are shown
in Figure 3.4.
Figure 3.4: Techniques to foster creativity
Let us now look at these different ways of thinking in further detail.
(a) Brainstorming
Brainstorming is the most common and powerful technique used to hatch
ideas. During a brainstorming session, all members of the group suggest
ideas that are then discussed. The ideal number of group members involved
in a brainstorming session is between four and seven. There are four rules of
brainstorming (Williams, 2000), namely:
(i) The more ideas, the better;
(ii) All ideas are acceptable, no matter how wild or crazy they might be;

(iii) Use other group membersÊ ideas to come up with even more ideas; and
(iv) Criticism or evaluation of ideas is not allowed.
(b) Forced Analogy

This is a very useful and fun-filled technique of generating ideas. An idea is
compared to a problem and something else that has little or nothing in
common to get a new insight. There are several ways that you can „force‰ a
relationship between almost everything and gain new solutions, such as you
and a pen, music and computers, products and markets. Forcing
relationships can help to develop new insights as well as new alternatives.
To develop a relationship is to have a selection of objects or a card with
pictures or images that help to generate ideas. Choose an object or card
randomly and see what kind of relationship can be forced.
(Adapted from http://members.optusnet.
com.au/charles57/Creative/Techniques/)
(c) DO IT
At the first stage of the DO IT technique, we must analyse the problem to

ensure that the correct question is being asked. Studying and understanding
the problem is crucial in order to identify the main cause of the problem. If
the problem appears to be very large, break it into smaller parts and
summarise the problem as concisely as possible.
Secondly, once we have successfully identified a problem, generate as many

ideas as possible to get possible solutions to overcome it. Every attempt to
generate an idea is essential, regardless of whether the ideas are good or bad.
Thirdly, we need to examine and analyse in detail before choosing the best ideas
to solve a problem, and all the solutions should come from the second stage.
Finally, once the best solution is identified, it is time to implement it. This
stage involves the development of a reliable product from the ideal,
marketing and business strategies and it normally incurs time, cost, and
energy.
(d) Mind Mapping

This technique allows one to use pictures and/or word phrases to organise
and develop thoughts in a non-linear fashion. It helps people to „see‰ a
problem and its solution.
Many people use mind mapping during:

(i) Brainstorming;
(ii) Taking notes; and
(iii) Refreshing their memory.
Mind mapping can also be used to generate new products, solve a problem,
plan strategy, or develop a process. The key to its effective use is to not
necessarily think logically. If one idea triggers another, do not try to analyse
it; just mark it down on the mind map. Similar to brainstorming, the crazier
the association, the better. That is how truly innovative solutions come about.
(e) Nominal Group

The use of nominal groups is to generate ideas and evaluate solutions face-
to-face in non-threatening group circumstances; members do so by writing
down silently as many ideas as possible. After that, group members engage
in recording the ideas given and then discuss the ideas to obtain clarification
and evaluation. Finally, each member will vote privately on the priority of
ideas.
SELF-CHECK 3.3
Gather a few friends, choose any technique for creativity and apply it
to generate one creative idea. Share it with your coursemates.
3.1.4 Characteristics of Creative Individuals

Entrepreneurs are somewhat creative individuals. However, not all creative
individuals can be entrepreneurs. Figure 3.5 shows the eight characteristics of
creative individuals.

Figure 3.5: Characteristics of creative individuals
You may want to visit the following link to look at eight most creative
entrepreneurs in history https://www.cleverism.com/8-creative-entrepreneurs-
history/.

3.2 WHAT IS INNOVATION?

Once entrepreneurs have undergone a creative process and found the best
solution, the next step will be application and eventually innovation. Creativity is
a pre-condition for innovation. Today, innovation is widely believed to be the key
to sustainable success for many organisations. Companies that are able to compete
and win are those that develop new products or new systems of producing
products and continue doing so over time.
What is innovation? and why it is imperative? In this subtopic, we will discuss

what innovation is, and its types, sources and barriers.
According to Kinicki and Williams (2003), innovation is „finding ways to deliver

new or better goods or services‰. This means that every organisation, whether
profit or non-profit, should not allow itself to become complacent, especially when
rivals are coming up with creative ideas. Innovation is also deemed as the creation
of something new in the marketplace that alters the supply-demand equation
(Chell, 2001). An entrepreneur creates a new demand in the market by
recombining the factors of production to create something novel. Therefore,
innovation is the key to survival for entrepreneurs in todayÊs intense business
environment. ``Innovate or dieÊÊ should be every entrepreneurÊs principle of daily
life.
ACTIVITY 3.1
What is innovation? How does it differ from creativity?
3.2.1 Types of Innovation

Everyone in an enterprise must be innovative in order to respond fast enough to
cater to dynamic customersÊ needs and demands. Essentially, there are four basic
types of innovation (Kuratko & Hodgetts, 2004) as shown in Figure 3.6.

Figure 3.6: Types of innovation
Now let us look at each type of innovation.
(a) Invention
Invention is the act of creating a new product, service or process that is totally
novel or untried, for example the invention of the telegraph by Samuel
Morse.
(b) Extension
The extension or addition to existing product lines, services or processes. For
example, Samsung is well known for electric and electronic products,
extending its business to automobiles.
(c) Duplication
Process of replication of existing product, service or process. Duplication
does not mean simply copying, but adding new features or improving the
competitiveness of product, service or process. For example, the function of
handsets is to enable us to talk with others anywhere. Today there are extra
features added to the function such as MMS, WAP services and social media
applications.

(d) Synthesis
The process of combining separate parts or elements into a whole new
formulation or application by taking into consideration several ideas or items
that already exist. For example, a combination of computer and network
technologies has produced the internet.
3.2.2 Sources of Innovation

An entrepreneur needs powerful ideas before he or she can inspire a new product,
service or process. The following are four sources of innovation for entrepreneurs
(Drucker, 1985; Kuratko & Hodgetts, 2004).
(a) Unexpected Events

Entrepreneurs frequently notice that they get ideas from something that is
out of their expectations. Unexpected events offer immense opportunities for
entrepreneurs to apply their expertise to a new application or formula.
Besides that, unexpected success or failure is also a major source of
innovation when things go unnoticed or unplanned.
(b) New Knowledge Concepts

In todayÊs marketplace, we can find out about new products or services
easily. Indeed, most of these products or services are knowledge-based
innovations that need a long time to be researched and developed by experts.
New knowledge can be obtained through reading, attending seminars or
conferences or discussions among professionals.
(c) Demographic Changes

Changes in demographic characteristics in age, educational levels, income
and types of employment have been a main source of innovation for
entrepreneurs. The transformation of demographic characteristics has
created huge opportunities for entrepreneurs to explore. For example, as the
standard of living and income increase, the demand for luxury goods and
health care products also accelerate.
(d) Process Needs

Process needs exist within the process of business, an industry, or a service.
It perfects a process which already exists, replaces a link that is weak,
redesigns an existing process and so on. All these provide opportunities for
entrepreneurs to produce products, services or processes that suit the
customersÊ demands and needs. For example, in the process of creating a
healthy society, people will want to do more exercise. Thus, entrepreneurs
could provide more health facilities or centres for those who desire them.

SELF-CHECK 3.4
1. Select one type of innovation, give appropriate examples and
explain this to your friends.
2. What are the sources of innovation? Give examples based on

your observation of your surroundings.
3.2.3 Barriers to Innovation

Even though entrepreneurs have a pool of ideas for innovation, there are some
glitches that can hinder them from becoming innovative. Barriers to innovation
always come from within an organisation, either from the management or the staff.
The barriers to innovation are as follows:
(a) Organisation Does Not Encourage Innovation

Some organisations are comfortable with the current status quo and refuse
to change. For them, any change means a threat that could affect the
organisational culture and procedures, and more importantly their current
position. Thus, to prevent such things from happening, the management will
try to avoid or refuse to recognise the need for innovation within the
organisation. Moreover, interdepartmental borders prevent communication
of innovative ideas among the staff.
(b) Insufficient Resources

Some organisations are keen to change and innovate but are let down by
insufficient resources, like human resources, funds and facilities, that are
vital in implementing innovations.
(c) Traditional Management Behaviour

ManagementÊs desire to be in control prevents staff from being creative. This
happens especially when the management is controlled by senior staff
members who maintain traditional ways of thinking and resist changing.
Sometimes, creative ideas from the staff members are hindered by the
managementÊs excessive rules, constraints and bureaucracy.

In addition to all these, barriers to innovation could be derived from personal or

individual behaviour, as shown in Figure 3.7.
Figure 3.7: Personal or individual behaviour
ACTIVITY 3.2
1. What are the strategies that you can use to encourage creativity
and innovation in an organisation?
2. Go online to the following websites and attempt the creativity test

to measure your creativity.
(i) http://www.testmycreativity.com/
(ii) http://www.enchantedmind.com/html/creativity/iq_test
s/creativity_test.html

 Creativity is „the ability to produce work that is novel (original and

unexpected), high in quality and appropriate (useful, meets task constraints)‰.
 The four main phases in the creative process are:
 Knowledge accumulation;
 Incubation;
 Ideas; and
 Evaluation and implementation.
 The five creativity techniques are brainstorming, forced analogy, DO IT, mind
mapping and nominal group.
 Innovation is defined as „finding ways to deliver new or better goods or

services‰.
 The four basic types of innovation are invention, extension, duplication and
synthesis.
 Barriers to innovation are:
 Organisations which do not encourage innovation;
 Insufficient resources; and
 Traditional management behaviour.
Brainstorming Forced analogy

Creativity Innovation
Creative process Mind mapping
DO IT Nominal group

Chell, E. (2001). Entrepreneurship: Globalisation, innovation and development.

London, England: Thomson Learning.
Drucker, P. F. (1985). Innovation and entrepreneurship: Practice and principles.

Oxford, England: Butterworth-Heinemann.
Kinicki, A., & Williams, B. K. (2003). Management: A practical introduction.

Boston, MA: McGraw-Hill.
Kirby, D. A. (2003). Entrepreneurship. London, England: McGraw-Hill.

Schermerhorn, J. R., Hunt, J. G., & Osborn, R. N. (2003). Organisational behaviour

(8th ed.). New York, NY: John Wiley & Sons.
Sternberg, R. J., Kaufman, J. C., & Pretz, J. E. (2002). The creativity conundrum:
A propulsion model of kinds of creative contributions. New York, NY:
Psychology Press.
Williams, C. (2000). Management. Cincinnati, OH: South-Western College.

Topic  Ventures
4 Environment
Assessment
LEARNING OUTCOMES
1. Identify two components of ventures environments;
2. Describe four elements of macro environments and six elements of
micro environments;
3. Explain three elements of an organisationÊs internal environment;
and
4. Explain the concept of a business opportunity.
 INTRODUCTION
Business venture environments are often discussed in relation to marketing and
economics management, to name a few areas. In this topic, we will discuss the
importance of environment in providing opportunities and threats to new
ventures creation. There are many ways to assess the environment of new business
ventures.
First, we will analyse the components of the environment where the ventures
operate. Then, we will discuss the steps in identifying a business opportunity and
how to evaluate and grab this opportunity to start up new business ventures.

36  TOPIC 4 VENTURES ENVIRONMENT ASSESSMENT
4.1 COMPONENTS OF VENTURES

ENVIRONMENTS
Entrepreneurs need to evaluate the environment not only prior to the start-up of
their business but also during the growth stage of ventures. An environment is the
situation where business ventures operate. Ventures environments can be divided
into two parts, which are:
(a) External environment, consists of macro and micro view; and
(b) Internal environment.
Each of these consists of many components that need to be assessed. Figure 4.1
illustrates the components of ventures environments.
Figure 4.1: The components of ventures environments


TOPIC 4 VENTURES ENVIRONMENT ASSESSMENT  37
The following explains further external and internal environments found in

ventures environments.
(a) External Environment

The external environment consists of the following elements: macro
environment and micro environment. The macro environment can influence
business decision-making in the long term and comprises uncontrollable
elements. It consists of four elements:
(i) Politics and legislation;
(ii) Economy;
(iii) Sociocultural context; and
(iv) Technology.
Meanwhile, according to Kuratko and Hodgetts (2004), the micro environment

of business ventures, which is also part of the ventureÊs external environment,
can directly influence the entrepreneursÊ decisions and activities. It is also
known as the industrial environment or task environment. The micro
environment consists of six elements:
(i) Customers;
(ii) Competitors;
(iii) Suppliers;
(iv) Financial institutions;
(v) Non-government organisations; and
(vi) Government agencies.
The micro environment or the industrial environment is also known as the

competitive environment in PorterÊs Five Forces Model (1979), which
includes threat of new entrants, substitute products and bargaining power of
suppliers and buyers. Financial institutions are considered as part of the
general environment, while non-government organisations and government
agencies are categorised under politics and legislation.

(b) Internal Environment

Unlike the external environment, elements in internal environment can be
controlled and directly influence the decision-making of entrepreneurs. The
internal organisation environment consists of the following elements:
(i) Organisation structure;
(ii) Culture; and
(iii) Resources.
ACTIVITY 4.1
What do you think will happen if entrepreneurs start up their business

without analysing the environment in which the venture operates?
Compare and discuss your answers with your coursemates and tutor
in the myINSPIRE online forum.
SELF-CHECK 4.1
List all components of business environments.
4.2 MACRO ENVIRONMENT

Earlier, we mentioned that the macro environment consists of elements such as
politics and legislation, economy, technology and sociocultural. In this subtopic,
we will describe these elements and their influence on entrepreneurs. Figure 4.2
shows the environmental variables.

Figure 4.2: Environmental variables

4.2.1 Politics and Legislation

The political and legislative segment of a macro environment is the arena in which
different interest groups compete for attention and resources. This is the
environment where entrepreneurs exercise their political power. To a large extent,
entrepreneurs have to consider the given political and legislative elements of the
new ventures. They have to obey and adhere to the policy, legislation and
regulations where the business operates.
ACTIVITY 4.2
Choose one industry and consider how the political and legislation
environment can influence a venture in this industry. Discuss your ideas
with your coursemates in the myINSPIRE online forum.

Figure 4.3 shows the political and legislative segment of the macro environment.
Figure 4.3: The political and legislative segment of the macro environment
There are many political and legislative differences between one country and
another. Entrepreneurs should be aware of global issues pertaining to trade
barriers, tariffs and political risks, as well as bilateral and multilateral
relationships. All these issues are interrelated. The following subtopic looks at the
different segments of global and national issues shown in Figure 4.3 in further
detail.
(a) Trade Barriers and Tariffs

Trade barriers and tariffs are imposed on goods and services that are traded
internationally. They hinder the free flow of resources from other countries
as a protection for the home countryÊs industries. Examples include trade
barriers that are imposed on the automobile industry in Malaysia.
(b) Political Risks

This refers to the potential for instability, corruption and violence in a
country or region where businesses operate. In regions where political risks
are high, it is difficult and costly for entrepreneurs to buy, protect and
dispose of resources. Other risks include political and physical violence,
extortion and corruption, which involve bribes and other forms of unethical
payments. These will also add to the cost of new ventures.
(c) Trade Agreements

There is a trend of increasing trade agreements between countries, for
example, the ASEAN Free Trade Agreement (AFTA), that Malaysian
entrepreneurs should consider when making decisions regarding trading
internationally. The goal of this agreement is to increase economic
productivity within the geographical region covered.

National issues entrepreneurs must be aware of are taxation, regulations and

government spending. All these issues are interrelated.
(d) Taxation
This is the major political factor that entrepreneurs face at the national level.
The impact of taxation on business operations are as follows:
(i) Reduces the cash available for business ventures to invest; and
(ii) Some taxes are favourable to only certain businesses and
disadvantageous to others.
(e) Regulations
An example of regulations is the regulation on the use of drugs. However,
sometimes the effect of regulations on businesses is negative. They
sometimes add to the cost of businesses in terms of paperwork, testing,
monitoring and compliance.
Therefore, entrepreneurs should evaluate the political environment thoroughly in

order to identify whether threats or opportunities exist. Generally, political
stability of a country will allow business operations to provide opportunities for
entrepreneurs to start up new ventures or expand their business.
ACTIVITY 4.3
What is AFTA? How does it influence the international operation of
a firm from Malaysia?
4.2.2 Economy
The economic environment plays a vital role in the success or failure of any new
venture. A macro economic environment encompasses the total of all goods and
services produced, distributed, sold and consumed. Entrepreneurs need to analyse
this environment at the global, national and local levels where their business
operates. Each business is related to one another at these three levels of the macro
economic environment. However, one should know which level has a greater
impact on entrepreneurs. Entrepreneurs should scan, monitor, forecast and assess
the macroeconomic conditions that affect their new venture. They should be able
to see the changes that take place in the economy and be able to determine the
variables that are relevant for analysis.

Figure 4.4 lists some important questions to be answered by entrepreneurs

regarding the economic environment of new ventures to provide an overall picture
of the business climate:
Figure 4.4: Questions to consider regarding new ventures
4.2.3 Sociocultural
The sociocultural environment consists of two highly related aspects:
(a) Demographics; and
(b) Cultural trends.
There are business opportunities that exist in a societyÊs popular culture, for
example, business opportunities for consumer and durable goods, retailing and
services, leisure and entertainment, and housing and construction. Let us take a
look at the two aspects of the sociocultural environment.
(a) Demographic Changes

They occur due to changes in the population, ethnic groups as well as
population structure according to age, gender, geographical location and
population distribution of income. These elements are the contributing
factors to consumersÊ demand, purchasing power and industrial capacity.
Entrepreneurs should also closely examine these elements which contribute
to the creation of markets. However, the demographic trends and changes
are beyond an entrepreneurÊs control. Entrepreneurs need to assess

demographic changes in order to identify business opportunities. For

example, the increasing number of children in a society can create
opportunity for business related activities that service the needs and wants
of this particular group, such as childrenÊs education, food and clothes.
(b) Social Trends

Social trends relate to the modes and manner in which people live their lives.
Lifestyle reflects peopleÊs tastes and preferences. Entrepreneurs need to scan
and monitor lifestyle changes in order to identify business opportunities. The
variables that require attention are household formations, work modes and
labour force participation rates, education levels, patterns of consumption
and patterns of leisure. Entrepreneurs can use available information from
public and private sources of data to scan and monitor these changes.
Entrepreneurs also need to forecast and assess the meaning of changes for a
new venture by looking after their own self-interest. Thus, they can predict
how people behave.
SELF-CHECK 4.2
Why is understanding the sociocultural environment vital to the
entrepreneur?
4.2.4 Technology
The branch of knowledge that deals with industrial arts, applied science,
engineering, process, invention or method can be defined as technology.
Technological analysis requires scanning and monitoring from the time of basic
research through product development and commercialisation. Technological
change takes two forms, which are pure invention and process innovation:
(a) Pure Invention

Pure invention refers to the creation of something new that is different from
existing technology or products. For this reason, invention usually has
economic value and has no competitors at initial stages and is often a
monopoly by the individual who has the legal right over that invention. New
inventions can create new markets and enormous opportunities for business,
for example, during the early years of the invention of semiconductors in
computers. However, there are disadvantages with inventions because there
is no market at the early stage.

(b) Process Innovation

Process innovation refers to small changes in design, product formulation
and manufacturing, materials and distribution. This will be discussed in
further detail in the subtopic on opportunity identification.
Scanning and monitoring changes in technology is not an easy task because

information is not always available. Even the scientist who is involved in
basic research does not know when the commercialisation stage is reached.
However, it is a great advantage and opportunity if entrepreneurs have this
information.
4.3 MICRO ENVIRONMENT

As mentioned earlier, the micro environment for a new venture also refers to the
industrial environment. It is this environment that influences entrepreneurial
activities because it is difficult for entrepreneurs to influence the elements in the
industry. Entrepreneurs need to plan and implement certain strategies in order to
gain a competitive advantage in the industry. Major influences in the industry
include customers, competitors, suppliers, financial institutions, governmental
agencies as well as non-governmental organisations. Let us now take a detailed
look at these influences.
(a) Customers
Customers are the main target group in business. They consume goods and
services produced by the industry. Customers can be housewives, workers,
students or groups of people. The consumer is „king‰ in the market system.
Some products are consumed by industrial buyers such as dealers, agents,
wholesalers and retailers. This group of people influences the decisions of
entrepreneurs.
(b) Competitors
Entrepreneurs in new venture businesses must really analyse their
competitors in the industry. The competitors are the businesses that fulfil the
same customer needs or have the potential to serve those customers. They
can be identified by asking the customers (of an existing business) or
potential customers (of a new business) where they can buy the product or
services. Entrepreneurs can also identify them through business directories.
A resource-based competitive analysis grid can be used as a tool to analyse and

rank competitors in the industry. Entrepreneurs can also identify the strengths
and weaknesses of competitors using this tool and help them to position new
ventures. Table 4.1 exhibits the resources-based competitive analysis.

Instructions: On a scale of 1 to 7, evaluate the competitorÊs resource base. A

value of 1 indicates that the firm has absolutely no advantage in the resource
area; a value of 4 indicates that the firm possesses about the same resource
capabilities as the other industry participants; a value of 7 indicates that the
firm possesses an absolute advantage in the resource category.
Table 4.1: Resources-based Competitive Analysis
Resource Type
Own Firm 1 2 3 4 5 6 7
and Attribute
Financial Resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Physical Resources
Rare
Valuable
Non-substitutable
Human Resources
Rare
Valuable
Non-substitutable
Technical Resources
Rare
Valuable
Non-substitutable
Reputation Resources
Rare
Valuable
Non-substitutable
Organisational Resources
Rare
Valuable
Non-substitutable
Total scores ___________________

Grand Mean ___________________
+/ă From mean ___________________

(c) Suppliers
Suppliers are the second group of people who have a great influence over
entrepreneurial activities. They can increase the prices they charge for the
products and services they sell. They can also decrease the quality of those
products and services that are in the market.
(d) Financial Institutions

Financial institutions are one of the sources of external funding to initiate a
new business venture or to expand an existing business. Loans from financial
institutions are hard to get for new venture entrepreneurs not only because
of their lack of track record, but also because of the cost in terms of interest
payments, which burdens the new business. Thus, financial institutions have
a direct influence on entrepreneurs.
(e) Government Agencies

Government influences the entrepreneurial activities through policy
implementation. Some examples include the New Economic Policy,
Privatisation Policy and the Malaysian Agriculture Policy which have been
implemented in our country. Some policies have a direct impact on
entrepreneurial activities. These government policies and regulations have
certain objectives and purposes. The Government also provides some
support for entrepreneurs. This has been discussed in earlier topics of this
module.
(f) Non-government Organisations

Non-government organisations such as consumer societies, political
organisations, religious groups, business societies, environmental groups
and others are among interest groups that can influence entrepreneurs. These
groups can influence entrepreneurs through campaigns against products or
services and by disseminating information regarding certain products. Later,
these actions can influence customers and pressure the government to take
action on certain issues.
ACTIVITY 4.4
Why do entrepreneurs need to analyse each component of macro and
micro environments? Discuss your opinion and ideas with your
coursemates.

4.4 INTERNAL ENVIRONMENT

An organisationÊs internal environment consists of resources, structure and
culture. These elements are within the organisationÊs control and directly influence
the entrepreneurÊs decisions and activities. Entrepreneurs need to assess the
strengths and weaknesses in their business before making any decision or
formulating any strategies.
(a) Resources
Among the internal resources in an organisation are the entrepreneur
himself, finances, human resources, tangible and intangible assets,
technology and reputation. Entrepreneurial personality characteristics,
skills, energy, ideas, knowledge and experiences are also part of an
entrepreneurÊs resources. All these resources are processed together in the
business venture to produce goods and services.
(b) Structure
Organisational structure must be suitable for a new venture to adapt
following changes in the environment.
(c) Culture
Positive culture and values should be inculcated into the business
organisation for the benefit of all human resources.
4.5 IDENTIFICATION OF BUSINESS

OPPORTUNITY
Opportunities can translate into a plan on paper or remain merely as ideas. Thus,
opportunities can turn a bad situation or loss into a good situation or profit.
According to Myzuka (2000), opportunity is defined as a business concept that, if
turned into a tangible product or service offered by a business enterprise, will
result in financial profit. Opportunities can emerge from many sources such as
entrepreneursÊ work experience, hobbies and social environment.
Opportunity is defined as the potential to create something new that involves

changes in knowledge, technology, or economy, and in political, social and
demographic conditions. They are also defined as positive external trends or
changes that provide unique and distinct possibilities for innovating and creating
value.

Good business opportunities do not suddenly exist but result from an entrepreneur
being responsive towards identified opportunities. Most entrepreneurs do not have
formal mechanisms for identifying business opportunities. However, consumers,
business associates, members of the distribution system and technical people are the
best sources of ideas for a new venture.
ACTIVITY 4.5
In your opinion, what is a business opportunity? Discuss your opinion with
your coursemates.
4.5.1 Recognition of the Opportunity Phase in the

Process Perspective on Entrepreneurship
Recognition of an opportunity is one of the major phases in the process perspective
on entrepreneurship. The entrepreneurial process begins when one or more
persons recognise an opportunity. The opportunities themselves are generated by
economic, technological and social factors. The convergence of these factors offers
an opportunity for an interesting new venture (refer to Figure 4.5).
Figure 4.5: Opportunities emerge out of a confluence of factors

Source: Baron & Shane (2004)

Baron and Shane (2004) emphasise that changing economic, technological and
social conditions generate opportunities; however, nothing happens with respect
to these opportunities until one or more energetic, highly motivated persons
recognise them.
Entrepreneurs should be able to identify, pursue and capture the value of business
opportunities. Successful entrepreneurs are those who can capture an opportunity.
Some entrepreneurs seize opportunities through exploration and others from
fortunate circumstances. Entrepreneurs who pursue an opportunity should have
added value to attract customers, distributors and retailers. Drucker (1985), a well-
known management author, has identified seven potential sources of opportunity
in the external context as shown in Table 4.2.
Table 4.2: Sources of Opportunity
Sources of
Situations
Opportunity
The unexpected Opportunities can be found when situations and events are
unanticipated. An event might be an unexpected success/good
news or unexpected failure/bad news that can be an opportunity
for entrepreneurs to pursue.
The Incongruous situations happen when there are inconsistencies in
incongruous the way they appear. For example, there are opportunities to
capture when conventional wisdom about the way things should
be no longer holds true. In these situations, entrepreneurs who are
willing to think beyond the traditional approach may find a
potential possibility.
The process Entrepreneurial opportunities could also surface throughout the
needs process of discovery such as the process of research and
development done by the researchers and technicians of a product
or service. Even before a breakthrough, there will be numerous
opportunities which could be seized by entrepreneurs during the
process.
Industry and Changes in technology, social values and customersÊ tastes
market can change the structure of an industry and market. These
structures situations, however, will give entrepreneurs opportunities to
innovate their product or services.
Demographics Changes in demographics will influence industries and markets
upon their target market and market segmentation. These can be
entrepreneurial opportunities in anticipating and meeting needs of
the population.

Change in Perception is oneÊs view of reality. Changes in perception get to the

perception heart of peopleÊs psychographic profiles of what their values are,
what they believe in, and what they care about. Changes in these
attitudes and values create potential market opportunities to alert
entrepreneurs.
New knowledge New knowledge can be a source of opportunities for entrepreneurs.
Examples of new knowledge are new technologies and new
discoveries that can be sources of information for entrepreneurial
innovation. Entrepreneurs who come out with new products and
processes to compete with other products can manipulate this kind
of knowledge.
4.5.2 E-commerce as a New Opportunity

The evolution of electronic commerce has created many new opportunities for new
businesses. However, building and marketing a business via e-commerce can be
costly. E-commerce offers entrepreneurs opportunities by turning ideas into
exciting new markets. Entrepreneurs can use a website catalogue containing online
information about their company to promote and sell their products or services
online. Technologies that use electronic commerce also offer information that
assists customers in making decisions.
Information in e-commerce is available 24 hours a day, with data updated every

half-hour (depending on the company). It enables the enterprise to take customers
through a web experience from the beginning of the customer activity cycle to the
end. It also personalises offerings to suit the unique needs of individuals and
enables interactivity between customers and the enterprise itself. Most
importantly, e-commerce can lower transaction costs.
ACTIVITY 4.6
How do you see the current trend of e-commerce among student

entrepreneurs? Discuss your views with your coursemates in the
myINSPIRE online forum.
SELF-CHECK

 The components of ventures environments can be divided into external

environment and internal environment.
 The macro environment involves politics and legislation, economy,

sociocultural context and technology.
 The micro environment is highly influenced by customers, competitors,

suppliers, financial institutions, government agencies and non-government
organisations.
 An organisationÊs internal environment consists of resources, structure and

culture.
 A business opportunity is a business concept that, if turned into a tangible

product or service offered by a business enterprise, will result in financial
profit.
Business opportunity Resources based

Competitive analysis Sociocultural
External environment Trade barriers and tariff
Industrial environment Ventures environment
Internal environment
Baron, R. A., & Shane, S. A. (2004). Entrepreneurship: A process perspective.

Mason, OH: Thomson South Western.
Drucker, P. (1985). Innovation and entrepreneurship. New York, NY: Practice and
Principles.


practice (6th ed.). Mason, OH: Thomson Learning.
Myzuka, D. F. (2000). Evaluating the opportunity: Spotting the market

opportunity. New York, NY: Prentice Hall.
Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business

Review, 57, 137.

Topic  Business Plan
5
LEARNING OUTCOMES
1. Explain what a business plan is;
2. Explain the importance of business plans;
3. Identify the parties who need business plans;
4. Explain eight essential elements of a good business plan;
5. Discuss six guidelines for preparing a business plan; and
6. Describe five factors that contribute to the failure of business plans.
 INTRODUCTION
Business environments today are dynamic, complex and subject to continual
change. In order to gain and retain sustainable competitive advantage, an
entrepreneur must have a good business plan. Business planning is one of the
important management tools used to achieve business objectives.
Therefore, a company should prepare a convincing business plan to attract

investors. Investors are more interested to invest in a business when they believe
it is realistic and potentially profitable based on the business plan presented. When
a business plan is prepared based on correct information, investors will have
stronger confidence in the market, product or service of the company. The
accuracy of a business plan will reflect the managementÊs ability and strengths in
running the business.

54  TOPIC 5 BUSINESS PLAN
5.1 WHAT IS A BUSINESS PLAN?

A business plan is a written document which describes in detail the overall plans
of a business in which an entrepreneur aims to get involved. Even if the
entrepreneur has been in business for a number of years, describing the business
plan on a paper allows the entrepreneur to re-examine his business as well as to
consider new business opportunities. Therefore, a business plan is the blueprint of
a company, presented in a standard business format that is logical and realistic. A
business plan must communicate ideas and goals clearly. To accomplish this, a
plan should include three things as shown in Figure 5.1:
Figure 5.1: Three main things that an entrepreneur should include in a business plan
According to Utton (2001), a business plan is a detailed programme or road map

outlining every conceivable aspect of an entrepreneurÊs proposed business
venture. It is a comprehensive, self-explanatory plan of what the entrepreneur
intends to do; how the entrepreneur intends to do it, when the entrepreneur
intends to do it; where the entrepreneur intends to do it and why he believes his
idea is viable and profitable. It is, in essence, a structured guideline to achieve the
entrepreneurÊs goals in operating the business.
Besides that, a business plan is an ideal tool to check facts and to comprehensively
examine the practicality of an idea before putting it into action. It gives the
entrepreneur opportunities for setting realistic expectations and action when
taking the business into operation. On the other hand, it also helps the
entrepreneur to identify areas of strength and weakness, the opportunity to be
exploited and the threat to be faced. All these aspects will determine how they can
best achieve their business goals.

TOPIC 5 BUSINESS PLAN  55
Generally, an entrepreneur needs to prepare a workable business plan for the

following purposes:
(a) It forces entrepreneurs to arrange their thoughts in a logical and
structured order.
(b) It helps entrepreneurs to create business frameworks by defining the
activities, responsibilities and objectives to be achieved.
(c) It encourages entrepreneurs to embrace reality and anticipate pitfalls before
they actually occur.
(d) It helps entrepreneurs to develop strategies to meet those objectives.
(e) It serves as a working action plan or guideline in operating their business.
(f) It enables entrepreneurs to identify constraints that they may face when
running the business.
5.2 IMPORTANCE OF BUSINESS PLANNING

A business plan is very important to an entrepreneur for various reasons
(refer to Figure 5.2).
Figure 5.2: The importance of a business plan
The following is a more detailed explanation of the importance of a business plan

as illustrated in Figure 5.2.
(a) Increase Opportunities for Success

Comprehensive business planning can identify the level of performance that
is supposed to be achieved in business. A business plan will determine the
changes that need to be taken to ensure its success. Changes that need to be
considered involve organisational structure, introduction of new technology,

new manufacturing techniques and new programmes for subordinates to

increase their commitment and productivity. Entrepreneurs need to update
their knowledge and skills to increase their opportunity for success.
(b) Develop Mission and Vision

A business plan sets a clear mission and vision for a business. It enables the
entrepreneur to make the right decisions and take appropriate actions. The
mission and vision will act as a lighthouse to enable entrepreneurs to know
the direction in which they are moving. The entrepreneurs should
communicate the mission and vision to all the stakeholders to gain their
confidence.
(c) Identify the Main Competitor(s)

Business planning will enable entrepreneurs to determine who their main
competitors are, identify their strengths and weaknesses, and determine the
right strategy to face them. All these can be done through competitive
analysis to identify the competitorsÊ product line or service as well as their
market segment. The entrepreneur should identify all key competitors for
each of their products or services and estimate how long it will take before
new competitors enter the marketplace.
(d) Identify the Right Way of Managing the Business

A business plan provides room for entrepreneurs and their employees to
develop an effective strategy to run the business. They can define who, when
and how to tender their knowledge, skills and abilities in implementing the
business. The entrepreneurs should also ensure that their products and
services are in line with the customersÊ tastes, government policies and other
changes in the business environment.
(e) Increase StakeholdersÊ Confidence

Every stakeholder who has an interest in a business will want to know the
companyÊs strengths, including finances, resources and company viability.
This information is necessary for the stakeholder to forecast the return on
his/her investment. For example, before a financial institution agrees to
provide the loan needed by the entrepreneur either to start or to expand his
business, they would want to know the prospects of the business, and the
ability to repay the loan. On the other hand, suppliers also want to know the
strength of the entrepreneursÊ financial position before they give credit for
their materials. In addition, government agencies would want to know the
background and nature of the business before they allow the company to
operate.

(f) Identify Barriers to Business

When running a business, an entrepreneur is bound to face many barriers.
These barriers will cause failure or slow down the entrepreneurÊs progress if
not properly managed. Therefore, the entrepreneur should identify the
barriers he/she may face before implementing the business and take
necessary action to face them. The entrepreneur knows how far those barriers
will affect the business.
(g) As a Performance Tool

A business plan is an operating tool which, if properly prepared, will help
the entrepreneur to work effectively towards success. The business plan will
allow the entrepreneur to set a realistic target to be achieved as a
performance yardstick. Therefore, the business plan will provide the basics
for evaluating and controlling the companyÊs performance in the future, in
terms of profit, cost and quality. It is also used to achieve performance
targets, and also to analyse customersÊ behaviour trends and competitorsÊ
strengths.
ACTIVITY 5.1
Why are business plans important for entrepreneurs? Discuss your
response with your coursemates.
5.3 WHO NEEDS A BUSINESS PLAN?

A business plan is very important to various parties. Among those who need
business plans are:
(a) The Management Team

A business plan will enable the management team to consider the time, effort
and support needed to achieve the companyÊs goal. It will provide them with
opportunities to analyse critical situations that could hinder business
progress. It will also enable them to forecast changes that might occur in the
future. The management team must also analyse the reasons for the success
and failure of the company as well as threats and opportunities that would
be faced in the future. Therefore, the team must build and examine the
strategies and priorities that should be clearly described and communicated
to ensure company growth. The management team is responsible for setting
a reasonable benchmark as a comparison for the companyÊs success. Besides
that, a business plan will enable the management team to identify difficulties
and constraints faced by the employees in achieving the target.

(b) The Shareholders

Business planning is also important to shareholders. They must know how
the business would be conducted since their approval is necessary if changes
in target and strategy are to be made. So, they need to know about any new
decisions before they are executed. A business plan is an essential document
for shareholders because it plays a vital role in critically reviewing the draft
plan. The entrepreneur should inform them about the future market of the
products or services, business operations, financial projections and future
plans, such as expanding the business to international markets. The business
plan is also important for new ventures or new businesses in order to secure
potential new shareholders.
(c) Bankers or Creditors

Before approving a loan application, bankers will need to study the
entrepreneurÊs business plan. This plan will give them an indication of the
returns they may expect from their loan and also enable them to gauge the
viability of the venture and its profitability within a reasonable time frame.
The business plan will also give bankers an idea of the companyÊs strategies
and priorities. These must be clearly described in the plan and consistent
with the overall departmental strategy policy, functional objectives and
reporting requirements. From the business plan, bankers will also be able to
ascertain government grants and tax incentives available to the entrepreneur.
(d) Customers
Customers will also be interested in the business plan to seek information
regarding the company which will influence their decision to use its products
or services. Issues of interest include the quality and safety of the companyÊs
product. To gain customersÊ confidence, the business plan should also
include the price of the product, durability, features and additional support
or after sales services. Customers will have more confidence if the product
uses new technologies, is authorised by parties such as SIRIM and JAKIM,
and is in line with their culture.
(e) Suppliers
Suppliers need a business plan when considering approval for business
procurement on credit terms. Suppliers want to see the ability of a business
to pay back the credit on time. Thus, a good business plan is able to give a
clear picture of the capability of the business.
(f) Employees
Most potential employees want information about business developments
and performance before they decide to join an organisation. They can get this
information from the business plan.

5.4 ESSENTIAL ELEMENTS OF A GOOD

BUSINESS PLAN
Every successful business plan must contain certain essential elements as
summarised in Figure 5.3.
Figure 5.3: The eight essential elements of a good business plan
Let us look at these essential elements in further detail.
(a) Executive Summary

The executive summary is the most important section of a business plan. This
is the first section that needs to be looked at because it tells readers where the
company is and where it is headed. Among the elements included in the
executive summary are the mission statement, the starting date of the
business, the name of the founders and the roles they play, the number of
employees, location of the business and their branches or subsidiaries (if
any), description of plans or facilities, products manufactured, bankersÊ
names, the progress of the company and its growth, financial status and a
summary of the managementÊs future plans.
(b) Market Analysis

The market analysis section illustrates the entrepreneurÊs knowledge about
a particular industry in which the business operates. It should also present a
general overview and conclusion of any marketing research data that has

been collected. However, specific details of marketing research studies

should be moved to the appendix section of the business plan. This section
should include an industry description and outlook, target market
information, market test results, lead times and an evaluation of competition.
(c) Marketing and Sales Strategies

Marketing is the process of creating and attracting customers to the business.
Entrepreneurs should realise that customers are the lifeblood of a business.
A business plan should include a sales forecast based on market analysis. In
this section, the most important thing to do is to define the marketing
strategy. Marketing strategy should be a part of an ongoing self-evaluation
process and unique to the company. An overall marketing strategy would
include strategies for market penetration, business growth, channels of
distribution and communication. Overall sales strategy should include sales
force strategies and sales activities. It is also important to include the
marketing budget in this section.
(d) Services or Product Line

This section describes the uniqueness of the companyÊs services or products
and the benefits to potential and current customers. The entrepreneur should
focus on the areas where a distinct advantage exists by identifying the
problem for which the service or product provides a solution.
(e) Organisation and Management

This section includes companyÊs organisational structure, details about
the ownership of the company, a profile of management teams and the
qualifications of members of the board of directors, the remuneration plan
and the administrative budget.
(f) Funding Request

This section focuses on the amount of funding needed to start or expand the
business. If necessary, it can include different funding scenarios such as with
and without funding and their implications on the business. Therefore, this
section consists of project implementation cost, which includes capital
expenditure, operational expenditure, and sources of finance or funding. It
also includes funding requirements at present and over the next five years,
how the funds received will be utilised and any long-term financial strategies
that would have an impact on the companyÊs financial progress.
(g) Financials
Financials should be developed after analysing the market and setting clear
objectives. In this section, the entrepreneur shows clearly the financial
projections such as cash flow pro forma, profit and loss pro forma, balance
sheets projections, etc.
(h) Appendix
The appendix section should be provided to readers on an as-needed basis.
In other words, it should not be included in the main body of the business
plan. The business plan is a communication tool. As such, it will be seen by
many people. The appendix includes a credit history, resume of key
managers, product pictures, letters of reference, details of market studies,
relevant magazine articles, licences, permits, legal documents, copies of
leases, building permits, contracts and a list of business consultants,
including attorneys and accountants.
ACTIVITY 5.2
You are an entrepreneur who is running a bakery selling traditional

cakes at a local shopping mall. What are the details you will include
under the Marketing and Sales Strategy in your business plan? Discuss
this with your coursemates and write down the details.
SELF-CHECK 5.1
What are the important elements of a good business plan?
5.5 GUIDELINES ON PREPARING A BUSINESS

PLAN
It is important to have an idea of how to prepare a good business plan, so that you
will be better prepared at tackling obstacles that come your way. Figure 5.4 shows
the six guidelines to be followed in order to produce an effective business plan.
Figure 5.4: Guidelines on preparing a business plan

Now we will look at each of the guidelines.
(a) Keep the Business Plan Short

Keep the business plan as short as possible without compromising the
description of the venture and its potential. Cover the key issues that will
interest an investor and leave secondary details for a meeting with the
investor.
(b) Be Focused
Do not over-diversify the venture. This means that attention must be focused
on one or two services or product lines and markets because a new or young
business does not have the management depth to pursue too many
opportunities.
(c) Reveal People Involved

Do not have unnamed, mysterious people on the management team, such as
Mr X who will join the company later as financial vice president. The investor
will want to know who exactly Mr X is and what his commitment to the
venture will be.
(d) Avoid the Use of Jargon

Do not describe technical products or manufacturing processes using jargon
that only experts can understand. Most venture capitalists do not like to
invest in what they do not understand or think the planners do not
understand.
(e) Include Only Substantiated Information

All information presented should be substantiated and based on proper
research. For example, the sales estimates should not be based on plant
capacity. Therefore, the planner must estimate the potential sales carefully
on the basis of the marketing study and from these estimates determine the
production facility that the planners need.
The statement must not be ambiguous, vague or unsubstantiated because

this will make the planner look like a shallow and fuzzy thinker. If the
planner wants to substantiate the data, he must analyse past, present and
projected future growth rates and market size.
(f) Be Realistic and Objective

A planner must be rigorously realistic and objective in making estimates and
discussing risks.

5.5.1 Pitfalls to Avoid in Planning

According to Kuratko and Hodgetts (2004), there are a number of pitfalls that should
be avoided by entrepreneurs in the formulation of a business plan. Some of these are
common errors that are usually committed by entrepreneurs and are easily noticed.
Table 5.1 describes five pitfalls and steps to be taken to avoid them.
Table 5.1: Pitfalls in Planning
Pitfall Facts How to Avoid

No realistic  Some of the business plans do not Good business plan should
goals contain attainable and clear goals include a clear schedule with
that entrepreneurs are trying to specific steps of action to be
achieve. accomplished within a specific
 Lack of time frame. time frame.
 No priorities.
 No action steps in the business
plan.
Failure to Sometimes, entrepreneurs are so List possible obstacles that
anticipate immersed in their ideas that they are may arise and steps or
obstacles unable to see the possible problems contingency plans if the
that may arise. There are no problems occur.
indicators to recognise the problems,
no admission of possible mistakes or
weaknesses in the plan and
contingency plans do not exist.
No Many entrepreneurs appear to lack Entrepreneurs should follow
commitment commitment to their business. up important appointments
or Entrepreneurs should not give the and be willing to demonstrate
dedication impression that they do not take financial commitment to their
matters seriously in doing business. business.
The obvious indicators of lack of
commitment are:
 Excessive procrastination.
 Missed appointments.
 No desire to invest personal
money.
 Desire to make a quick profit.

Lack of Many investors look for They should give evidence of

business or entrepreneurs with actual experience personal experience and
technical and not merely with ideas, and who background for this venture.
experience have true knowledge in the proposed If they lack specific knowledge
business. Thus, entrepreneurs should or skills, they should get
demonstrate their knowledge and assistance from those with
background experience in their suitable qualifications.
business areas.
No market Many entrepreneurs do not identify The best way to avoid this
niche potential customers for their pitfall is to establish a
products. Many new potential specifically targeted market
products never reach the customer segment and demonstrate why
because of the lack of a market niche and how a specific product or
or no market was ever established for service will meet that target
that product. group.
Entrepreneurs should avoid these pitfalls in order to improve the chances of their
business plan succeeding. These critical areas must be handled carefully before
developing their business plan. This will help the entrepreneur to establish a solid
foundation on which to develop an effective business plan.
SELF-CHECK 5.2
Describe the factors which contribute to the failure of business plans.
 Business planning is a management system. It integrates the management

functions of planning, organising, implementing and controlling.
 The business planning process provides management with basic tools and
information that describe the management and resource environment and
contributes to establishing the accountability framework needed to manage a
business in a dynamic environment. Therefore, the execution of business
planning is very important to ensure the survival and expansion of the
business.

Business plan Product line

Executive summary Pitfalls
Management function Shareholders
Market analysis Stakeholders

Utton, P. (2001). The importance of the business plan. Retrieved from

http://allafrica.com/stories/200109180286.html

Topic  Starting a New
6 Entrepreneurial
Venture
LEARNING OUTCOMES
1. State the three forms of business;
2. Explain the three phases in a start-up;
3. Explain the seven steps and processes in buying existing business
ventures;
4. Examine the franchise structure, its advantages and its disadvantages;
5. Discuss the legal structures for new ventures; and
6. Identify six sources of capital for entrepreneurs.
 INTRODUCTION
Do you know what an entrepreneur is? According to Kuratko (2017), an
entrepreneur is an inventor who recognises and seizes opportunities and converts
them into workable ideas. So, are you interested in becoming an entrepreneur? Do
you know how to set up a new business?
In this topic, we will examine the three most common types of businesses which are:
(a) Start-ups;
(b) Existing businesses; and
(c) Franchises.
We will also look into legal structures for new businesses and sources of capital
for business activities.
TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE  67
6.1 INITIATING A START-UP

In starting up a business, it is important that you know the definition of a start-up,
the phases in a start-up as well as the advantages and disadvantages of a start-up.
We will look at all these aspects in this subtopic. Let us start by defining a start-
up. Have a look at the following definition:
A start-up company is a company recently formed. It is a process where the

entrepreneur creates a completely new business starting from scratch.
Below are a few features of a start-up company:

(a) Many entrepreneurs start up their business by themselves;
(b) Usually, entrepreneurs will use funds from their savings or by borrowing
from others;
(c) An entrepreneur who wants to start up his business usually needs to have
lots of experience, knowledge, skills and interest in the field involved; and
(d) Start-up business usually involves the invention of new products or services.
6.1.1 Phases in Start-up

Any new business goes through three phases in a start-up. The phases are pre start-
up phase, start-up phase and post start-up phase. Figure 6.1 illustrates the three
phases in a start-up.
Figure 6.1: Phases in start-up

68  TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE
6.1.2 Advantages and Disadvantages of Start-up

There are a few advantages and disadvantages of a business start-up. Table 6.1
describes six advantages and five disadvantages of start-up.
Table 6.1: Advantages and Disadvantages of Start-up
Advantages Disadvantages
 The freedom of making oneÊs own  It requires a lot of time, money and
decisions by answering all questions effort to search for a strategic
such as when, how and what type of location, obtain a licence, purchase
products or services. machines, find suppliers, and hire
 The opportunity of using oneÊs and train workers to perform
ideas and developing brand image advertising activities.
based on the customerÊs needs.  In the initial stage of the business,
 The freedom to select the ideal an entrepreneur will obtain minimal
location, plant, equipment, products profits or even losses because of the
or services, employees, suppliers and large expenditure on numerous items
bankers. These opportunities can related to start-up.
determine the success of a business.  There is no history of business
 The ability to avoid any undesirable records from which an entrepreneur
precedents, policies, procedures and can forecast sales, expenditures and
legal commitments of existing firms. profits.
 The opportunity to build up oneÊs  There are no ready customers. An
own reputation from scratch. The entrepreneur needs to take a lot of
ability to self-determine the direction effort to attract new customers. Sales
of the business. usually grow very slowly in the
beginning before brings in profits.
 There is difficulty in obtaining loans
from financial institutions because
these institutions have less
confidence in new businesses
compared with established
businesses.
ACTIVITY 6.1
You are planning to sell seafood-based crisps. Which form of new

business is the most appropriate, and why? Compare your answer with
those of your coursemates.

SELF-CHECK 6.1
1. Define a start-up.
2. List the three phases in a start-up.
6.2 BUYING AN EXISTING BUSINESS

In buying an existing business, it is important for you to know:
(a) The definition of buying an existing business;
(b) The steps and processes in buying an existing business;
(c) The advantages of buying an existing business; and
(d) The disadvantages of buying an existing business.
Let us start by defining what „buying an existing business‰ means. Have a look
at the following definition.
Buying an existing business is buying or acquiring either the shares of an

existing company or all of the assets of an existing company or business.
If you are thinking of running your own business, buying a company that is
already established may be a lot less hassle than starting from scratch. According
to some business experts, buying an existing business is the safest and most
effective way for entrepreneurs to go into business. However, you will need to put
time and effort into finding the business that is right for you. Buying an existing
company allows entrepreneurs to further expand the business and provide
opportunities to explore new markets.

6.2.1 Steps and Processes in Buying an Existing

Business
When buying an existing business, there are a few steps and processes that need
to be considered. These are as follows:
(a) Personal Priority

Ideally an entrepreneur needs to consider personal factors, lifestyles and
aspirations. Before you start looking, think about what you can bring to the
business and what you would like to get back in return.
(i) Your Expectations in Terms Of Earnings ă What level of profit do you
need to accommodate your needs?
(ii) Your Commitment ă Are you prepared to put in hard work and
investment in the business to succeed?
(iii) Your Strengths ă What kind of business opportunities will give you the
chance to leverage your background, experience and skills?
(iv) The Type of Business ă What is the nature of the business, for example,
sole proprietorship, partnership, and etc., that you are interested in
buying?
(v) The Business Sector You are Interested in ă Learn as much as you can
about your chosen industry so that you can compare different
businesses.
(b) Business Opportunities

You can find potential opportunities by reading classified advertisements,
discussing opportunities with business brokers and checking industry
sources. Resist the temptation to buy a business that looks good; instead do
more research and study it objectively.
Make an appointment with business sellers or brokers for initial introduction

to the opportunities. They should provide you with a brief financial report,
history, price and reason for sale. This will allow you to know more about
the business and make a reasonable decision.

(c) Reviewing Potential Target

The potential target must be examined closely to determine how well it
has been managed and maintained. For service businesses, speak to the
employees and customers. Prepare a checklist of information needed, which
should include the following:
(i) Complete financial accounting of operations, including all income tax
returns and state sales tax forms for at least the past three years.
(ii) List all assets to be transferred to the new owner, including an itemised
breakdown of all inventories as of the last accounting period.
(d) Arrangement for Financing

Without proper financing, no business acquisition can move forward
successfully. There are usually several funding options. However, they must
be carefully scrutinised to determine the best fit for your needs. Lenders
generally require the following:
(i) Details of the business/sales particulars;
(ii) Accounts for the last three years;
(iii) Financial projections (if no accounts are available); and
(iv) Details of your personal assets and liabilities.
(e) Conduct Due Diligence

Due diligence is like detective work. It is the process of conducting
investigations to gather information other than what has been provided by
the current owner or broker. The result of due diligence is extremely useful
for you to decide on the following:
(i) Whether to proceed with an acquisition;
(ii) Whether to buy shares or assets;
(iii) How much to pay and how to allocate the purchase price; and
(iv) What matters need to be covered in the purchase agreement for your
protection.
The process should guide your decision-making by providing valuable

insights into the new business and give you a good estimate of the value at
which the transaction should be undertaken, and the warranties and
indemnities that should be obtained from the vendors as part of the deal.

(f) The Formal Agreement

The preparation of the formal agreement gives the parties the opportunity to
carry out the basic agreement and work out a number of smaller matters, which
may not have been thought of by the parties during the initial negotiation. The
three basic components of the formal agreement are as follows:
(i) The Basic Elements

The first part of the agreement will usually cover the basic elements of
the agreement:
 The parties;
 The assets or shares being purchased;
 The purchase price;
 Adjustments to the purchase price, how, when the purchase price

and adjustments will be paid; and
 How tax will be handled.
(ii) Representations and Warranties

They are given primarily by sellers on those matters, which are
important to your purchase of the business. You first have to consider
what facts and issues are important for your purchasing decision and
the amount you are willing to pay. Then, in addition to conducting
your due diligence on those matters, you will look for a representation
or warranty from the seller which proves that the facts presented to you
are true. This is intended to protect you, should there be other facts or
information that you do not know about, or if the seller has misled you
on some important matter.
(iii) Closing Matters

This portion of the agreement will generally set out the closing date,
and what must be exchanged at the time of the closing. It will also set
out any special conditions of closing which must be met before the sale
can be sealed. The typical conditions of closing are:
 All representations and warranties given prior to closing shall

continue to remain true and accurate as of the date of closing;
 You will receive the purchase assets or shares free and clear of all
encumbrances, except those to which you have agreed;
 Any special licences or consent have been received;

 All government clearance certificates or approvals have been

received;
 All other documents that form part of the transaction have been
signed and received; and
 You have tendered the payment as promised in the agreement.
(g) Ready for Business

At this point, you are the proud owner of a new business. If you have
conducted due diligence and have a good purchase agreement in place, you
are well on your way to success. Nevertheless, you may still need ongoing
consultation with the prior owners. So, it is always wise to keep a good
working relationship with them. You may also require ongoing assistance
from your team because the ownership transfer has been completed but the
work has just begun.

6.2.2 Advantages of Buying an Existing Business

The advantages of buying an existing business are shown in Figure 6.2.
Figure 6.2: The advantages of buying an existing business

6.2.3 Disadvantages of Buying an Existing Business

The disadvantages of buying an existing business are shown in Figure 6.3.
Figure 6.3: The disadvantages of buying an existing business
SELF-CHECK 6.2
1. Differentiate between establishing a start-up and buying an

existing business.
2. List five advantages and five disadvantages of a start-up.
3. Ali is planning to run a „nasi kandar‰ stall in Bangsar, Kuala

Lumpur. Dewi, who is AliÊs friend, asks Ali to buy her existing
stall. What are the benefits if he buys DewiÊs stall compared to
setting up a new stall? Discuss with your coursemates.

6.3 FRANCHISING
When we talk about franchising, it is important to know:
(a) The definition of franchising;
(b) The advantages of franchising; and
(c) The disadvantages of franchising.
Before we discuss the advantages and disadvantages of franchising, have a look at

the following definition.
A franchise is any arrangement in which the owner of a trademark, trade name

or copyright has licensed others to use it and sell its goods or services.
A franchisee (a purchaser of a franchise) is generally legally independent but

economically dependent on the integrated business system of the franchisor
(the seller of the franchise). A franchisee can operate as an independent
businessperson but still realise the advantages of regional or national
organisations. Some examples of these franchises are McDonaldÊs (see Figure 6.4),
Kentucky Fried Chicken and Pizza Hut restaurants.
Figure 6.4: Examples of well-known franchises

6.3.1 Advantages of Franchising

Well, do you have any idea what the advantages of franchising are? Figure 6.5
shows some advantages of franchising.
Figure 6.5: The advantages of franchising
Let us look at the advantages in detail.
(a) Training and Guidance

The greatest advantage of buying a franchise, compared to starting a new
business or buying an existing business, is that the franchisor will provide
complete training and guidance to the franchisee.
(b) Brand Name Appeal

An entrepreneur who buys a well-known national franchise, especially a
large and famous one, has a good chance of succeeding. The franchisorÊs
name is the drawcard for the establishment. People are often aware of the
products or services offered by a national franchise and prefer them to those
offered by lesser known outlets.
(c) Proven Track Record

The franchisor has already proven that the operation can be successful. As
an organisation, they have been around for at least five to 10 years and must
have 50 or more units. Thus, it should not be difficult to see how the
operations have been thriving. If all of the units are still in operation and the
owners report that they are performing well financially, we can be certain the
franchisor has proven that the layout and location of the store, the pricing
policy, the quality of the goods or services and the overall management are
successful.

(d) Financial Assistance

A franchise is a good investment because the franchisor may be able to help
the new owner to secure the financial assistance needed to run the operation.
In fact, some franchisors have personally helped the franchisee get started by
lending money and not requiring any repayment until the operation is
running successfully. In short, buying a franchise is often an ideal way to
ensure assistance from the financial community.
6.3.2 Disadvantages of Franchising

Despite its strong potential, franchising also has some disadvantages as below:
(a) Franchise Fees

No one gets something for nothing. The more successful the franchisor, the
greater the franchise fees would be. A franchise of a national chain would
charge a fee from as low as RM15,000 (such as NelsonÊs) to as high as
RM700,000 (such as OLDTOWN White Coffee). Smaller franchisors or those
who have not had great success would charge less. The prospective
franchisee must also pay for building the unit and stocking it. Although the
franchisor may provide assistance in securing a bank loan, additional fees
are usually tied to gross sales. A franchisee will have to pay a continual
royalty based on sales, usually between two (such as Daily Fresh) and eight
per cent (such as Subway). Most franchisors require franchisees to have 25 to
50 per cent of the initial costs in cash. The rest can be borrowed from the
organisation itself. The cost of franchising involves the following
expenditure:
(i) Franchising fee;
(ii) Insurance;
(iii) Opening product inventory;
(iv) Remodelling and leasehold improvements;
(v) Utilities charges, payroll, debt services;
(vi) Bookkeeping and accounting fees, legal and professional fees;
(vii) State and local licences; and
(viii) Permits and certificates.

(b) Franchisor Control

In most large corporations, the company has a strong control over the
franchiseesÊ activities. The franchisor generally exercises control over the
operation in order to achieve a certain degree of uniformity. If entrepreneurs
do not follow the franchisorÊs directions, they may not have their franchise
licences renewed when the contract expires.
(c) Unfulfilled Promises

In certain cases, among lesser known franchisors, the franchisees may not
receive all that they were promised. Many franchisees find themselves
with trade names that have no drawing power. Also, many franchisees
find the promised assistance from the franchisor not forthcoming. Quite
often, instead of being able to purchase supplies more cheaply through
the franchisor, many operators find themselves paying higher prices for
supplies. If the franchisees complain, they risk having their agreement with
the franchisor terminated, revoked or not renewed.
ACTIVITY 6.2
Is operating a franchise business more expensive compared to other types
of ventures? What is your opinion on this? Discuss this with your
coursemates.
6.4 LEGAL STRUCTURES FOR NEW

BUSINESSES
Before deciding how to organise an operation, prospective entrepreneurs need
to identify the legal structures that will best suit their business. The obligation for
this is derived from changing tax laws, liability situations, the availability of capital
and the complexity of business formation. Three primary legal forms of
organisation are sole proprietorship, partnership and corporation.
Because each form has specific advantages and disadvantages, it is impossible to

recommend one form over the other. The entrepreneurÊs specific situations,
concerns and desires will dictate his choice.
6.4.1 Sole Proprietorship

A sole proprietorship is a business that is owned and operated by one person. The
enterprise has no existence apart from its owner. This entrepreneur has rights over
all its profits and bears all of the liabilities for the debts and obligations of the

business. The entrepreneur also has unlimited liabilities, which means his or her
business and personal assets stand behind the operation. If the company cannot
meet its financial obligations, the owner may be forced to sell the family car, house
and whatever assets to repay the creditors.
To become a sole proprietor, a person merely needs to obtain the necessary local
and state licences to begin the operations. If the proprietor should choose a
fictitious or an assumed name, he or she also must file a „certificate of assumed
business name‰ with the state. Due to its ease of formation, the sole proprietorship
is the most widely used legal form of organisation. Table 6.2 describes the
advantages and disadvantages of sole proprietorship.
Table 6.2: Advantages and Disadvantages of Sole Proprietorship
 Ease of formation  Unlimited liability

Less formality and fewer restrictions are The entrepreneur proprietorship
associated with establishing a sole is personally responsible for all
proprietorship than with any other legal business debts. This liability
form of business. The proprietorship extends to all the proprietorÊs
needs little or no governmental approval, assets.
and it is usually less expensive than a
 Lack of continuity
partnership or corporation.
The enterprise may be crippled
 Sole ownership profits or terminated if the owner
The proprietorship is not required to becomes ill or dies.
share profits with anyone.
 Less available capital
 Decision-making and control vested in Ordinarily, proprietorships have
one owner less available capital than other
No co-owners or partners to be consulted types of business organisations,
in the running of the operation. such as partnerships and
corporations.
 Flexibility
Management can respond quickly to  Difficult to obtain long-term
business needs during day-to-day financing
activities. Because the enterprise rests
exclusively on one person, it often
 Freedom from governmental control
has difficulty in raising long-term
Except for requiring the necessary
capital.
licences, there is very little governmental
interference in the operation.  Limited viewpoint and
experience
 Freedom from corporate business taxes
The operation depends on one
Proprietorship is taxed as an
person and this entrepreneurÊs
entrepreneur taxpayer and not as
ability, training, and expertise
business.
will limit its direction and scope.

SELF-CHECK 6.3
1. Briefly define the three legal forms of business organisation.
2. List five advantages and disadvantages of a sole proprietorship.
6.4.2 Partnership
A partnership is an association of two or more persons acting as co-owners of a
business for profit. Here, each partner contributes money, labour or skills and each
shares the profits as well as losses of the business. Though not specifically required
in the uniform Partnership Act, written articles of partnership are usually executed
and are always recommended. This is because unless otherwise agreed to in
writing, the court assumes equal partnership; that is, equal sharing of profits,
losses, assets management and other aspects of the business. A partnership
agreement clearly outlines the financial and managerial contributions of the
partners and carefully delineates the roles in the partnership relationship.
The following are examples of the type of information customarily written into a
partnership agreement:
(a) Name, purpose, domicile;
(b) Duration of agreement;
(c) Character of partners (general or limited, active or silent);
(d) Contribution by partners (at inception, at a later date);
(e) Division of profits and losses;
(f) Draws or salaries;
(g) Right of continuity partner(s);
(h) Death of a partner (dissolution and wind-up);
(i) Release of debts;
(j) Business expenses (method of handling);
(k) Separate debts;
(l) Authority (entrepreneur partnerÊs authority on business conduct);

(m) Books, records and method of accounting;

(n) Sale of partnership interest;
(o) Arbitration;
(p) Settlement of disputes;
(q) Additions, alterations or modifications of partnership;
(r) Required and prohibited acts;
(s) Absence and disability; and
(t) Employee management.
In addition to the written articles, entrepreneurs must consider a number of different

types of partnership arrangements. Depending on the needs of the enterprise, one
or more of these may be used. It is important to remember that in a typical
partnership arrangement, at least one partner must be a general partner who is
responsible for the debts of the enterprise and who has unlimited liabilities. Table
6.3 describes the advantages and disadvantages of partnership.

Table 6.3: Advantages and Disadvantages of Partnership
 Ease of formation  Unlimited liability of at least one partner

Legal formalities and expenses are Although some partners can have
few compared with those of a limited liability, at least one must be a
complex enterprise or corporation. general partner who assumes unlimited
liability.
 Direct rewards
Partners are motivated by direct  Lack of continuity
sharing of profits to put forth their If any partner dies, is judged to be insane
best effort. or simply withdraws from the business,
the partnership arrangement ceases.
 Growth and performance
However, operations of the business can
facilitated
continue based on the rights of
In a partnership, often it is possible
survivorship and the possible creation of
to obtain more capital and a better
a new partnership by the remaining
range of skills than in a sole
members or by the addition of new
proprietorship.
members.
 Flexibility
 Difficult to obtain large sums of capital
A partnership is often able to
Most partnerships have some problems
respond quickly to business needs
raising a great deal of capital, especially
during the daily operations.
when long-term financing is involved.
 Freedom from governmental Usually the collective wealth of the
control and regulation partners dictates the amount of total
Very little governmental capital the partnership can raise,
interference in the operation of a especially when first starting out.
partnership.
 Bound by the acts of just one partner
 Possible tax advantage A general partner can commit the
Most partnerships pay taxes as enterprise to contracts and obligations
entrepreneurs, thus escaping the that may prove disastrous for the
high tax rate of corporations. enterprise in general and for other
partners in particular.
 Difficulty of disposing partnership interest
The buying out of a partner may be
difficult unless specifically arranged for
in a written agreement.
SELF-CHECK 6.4
State five advantages and disadvantages of partnerships.

6.4.3 Corporation
A corporation is a separate legal entity that is run by stockholders having

limited liability.
Source: Hisrich, Peters and Shepherd (2017)
From this definition, it is clear that a corporation is a separate legal entity apart
from the entrepreneurs that own it.
In Malaysia, a business organisation is created based on the Companies Act 2016.

This Act is the law that governs all companies in Malaysia. This Act was enacted
on 31 January 2017 and has been revised several times since. This Act was based
on company law enacted in Australia and the UK. The following looks at the
characteristics of a corporation as well as its advantages and disadvantages.
(a) Characteristics of a Company or Corporation

The following are characteristics of corporations:
(i) Rights and Responsibilities

A corporation has responsibility over ownership of capital and can take
legal action against others or vice versa. However, a corporation cannot
take action against the entrepreneur. The implementer agent, the
driving force behind the corporation, will take action where necessary.
(ii) Life Span

The life span of a corporation is not dependent on its members. The
corporation will continue even if its members have died or withdrawn
from the corporation. However, the corporation can be terminated if all
its members are not interested in continuing their business.
(iii) Liabilities
The liabilities of members of a corporation are only limited to the
number of shares they subscribed. Therefore, members are not liable
even if the corporation were to incur bankruptcy. Corporations differ
from sole proprietorship and partnership, in that there is no separation
between business assets and personal assets in the latter.

(iv) Members
A corporation must have at least two members that are permanent
residents of Malaysia. The two members involved must act as directors
and the cornerstone of the corporation. In a corporation, its members
will elect the board of directors, which will be responsible for operating
the corporation as well as following specified rules and regulations as
stipulated by the Companies Act 2016.
(b) Advantages and Disadvantages of Corporation

The advantages and disadvantages of corporations are shown in Table 6.4.
Table 6.4: Advantages and Disadvantages of Corporations
 Limited liability  Restriction on activities

The stockholderÊs liability is limited Corporate activities are limited by
to the entrepreneurÊs investment. the charter and by various laws.
This is the most amount of money
the person can lose.  Lack of representation
The majority stockholders in the
 Transfer of ownership corporation outvote the minority
Ownership can be transferred stockholders.
through the sale of stock to
interested buyers.  Regulation
Extensive governmental regulations
 Unlimited life and reports required by the state and
The Company has a life separate and federal agencies often result in a
distinct from that of its owners and great deal of paperwork and red
can continue for an indefinite tape.
period.
 Organising expenses
 Ease of securing capital in large Forming a corporation involves a
amounts large amount of expenses.
Capital can be acquired through the
issuance of bonds and shares of  Double taxation
stock and through short-term loans Income taxes are levied both on
made against the assets of the corporate profits and on
business or personal guarantees of entrepreneur salaries and dividends.
the major stockholders.
 Strong ability and expertise
The corporation can draw on the
expertise and skills of a number of
entrepreneurs, ranging from major
stockholders to the professional
managers who are brought on
board.

SELF-CHECK 6.5
State five advantages and disadvantages of a corporation.
6.5 SOURCES OF CAPITAL FOR BUSINESS

ACTIVITIES
There are various sources of capital for entrepreneurs that can be used to start and
expand their businesses. The length of time you require depends on which of the
many different sources of financing best suits you and your business. Figure 6.6
shows the sources of capital to finance your businesses.
Figure 6.6: Sources of capital for entrepreneurial activities
The following subtopic looks at the different kinds of sources of capital in further
detail.
(a) Personal Funds

Your personal savings is your first source of money. They may come from
what you have saved over certain periods of time, whether in a savings
account, current account, money in a safe at home, or cash that is readily
available when you need it. Very often, personal savings are quickly
exhausted after some time, especially as the business starts to grow.
(b) Family and Friends

When you exhaust your personal funds, the next place to seek money is from
family and friends. They may be friends or colleagues who are in a position
to lend you money. Although it may seem like a good idea at the time, you
can almost guarantee that they will demand their money back when you can
least afford it. Therefore, it is important to get the terms of the loan written
down clearly and precisely in order to avoid any confusion later.

(c) Retirement Accounts

You have saved these funds for retirement. Therefore, you can use this
money to fund the development of your business. However, using this fund
is very risky because if you failed in your business, you may have to live
more frugally in retirement.
(d) Banks and Other Financial Institutions

These institutions loan money to people who have assets that can serve as
collateral for the loan. Table 6.5 shows three types of financing: long term,
medium term and short term.
Table 6.5: Three Types of Financing from Financial Institutions
Type of
Financial
Description
Institutions
Financing
Long Term This type of financing will be borrowed from external sources over
a long period, usually between 5 and 25 years. A commercial
mortgage or long-term loan agreement from one of the main banks
is an example of long-term financing. The money can be used for
acquiring fixed assets such as plant and equipment.
Medium Term Any borrowing over a period of two to seven years can be
described as medium-term financing. The financing is commonly
based on an agreement between yourself and the organisation that
will be providing it. It will cover hire purchase, leasing and loan
agreements.
Short Term The most typical and frequently used type of short-term financing
is bank overdraft facilities. Although the arrangement fees can be
high, you have the advantage of only paying interest on the
amount actually overdrawn. With a bank loan, on the other hand,
you have the use of a set amount of money and you will have to
pay interest whether you use the full amount or not.
(e) Government Loans

Contrary to public belief, the government is taking positive steps to
assist businesses and industry as a whole. Millions of ringgit are set aside for
the sole purpose of providing various grants and subsidised loans in a bid to
encourage investment and development. Government programmes are
available and can reduce the effective interest rate of bank loans and make
debts available to business that would otherwise not have access to this
source of funding. In general, the government is looking to assist projects
which benefit areas of declining industry with a high level of unemployment
as well as promoting growth and improvement in rural areas.

(f) Stock Markets

These funds are obtained by offering stock in your business to the public.
Public stock offering must comply with federal regulations. Typically, the
services of an investment banker are used. In exchange for capital
investment, most offers typically include a percentage of ownership. This in
turn would give your investor a limited amount of control within the
business and share of any profits equal to the value of the percentage of
ownership. This would probably be in the form of dividends.
SELF-CHECK 6.6
Give five sources of capital that an entrepreneur can use for new
business ventures.
 There are three forms of new business, which are initiating a start-up, buying
an existing business and franchising.
 Each form of new business has its own characteristics, advantages and
disadvantages.
 Three primary legal forms of new business are sole proprietorship, partnership
and corporation.
 This topic also discussed six sources of capital for entrepreneurial activities,
namely personal funds, family and friends, retirement account, bank/financial
institution, government loan and stock market.
Corporation Partnership
Due diligence Sole proprietorship
Franchisee Start-up company
Franchising

Companies Act 2016. Retrieved from https://www.ssm.com.my/Pages/Legal_

Framework/Companies-Act-2016.aspx
Hisrich, R. D., Peters, M. P., & Shepherd, D. A. (2017) Entrepreneurship (10th ed.)
New York, NY: McGraw-Hill Education.

Kuratko, D. F. (2017). Entrepreneurship: Theory, process, practice (10th ed.).

Singapore: Cengage Technology Edition.

Topic  Entrepreneurial
7 Networking
LEARNING OUTCOMES
1. Describe three advantages of establishing good networking;
2. Discuss two types of networking; and
3. Explain six important reasons for networking.
 INTRODUCTION
Networking is a business tool that plays a significant role in the entrepreneurÊs
success. If entrepreneurs have very good networking with both external and
internal stakeholders, it will be easier for them to take advantage of business
opportunities and settle some of the problems related to their business. Good
networking relationships will enable them to gain support and cooperation from
these circles. Therefore, every entrepreneur should develop networking skills, as
it will act as a catalyst to achieve business goals and objectives.
7.1 WHAT IS NETWORKING?

Networking is both an outcome of a past relationship strategy and a resource for
future strategy. Relationship rights and obligations are the results of the resources
that the company initially brought to the network, the experience it gained and the
investment it has made in its relationships. This means that in addition to the
analysis of the companyÊs relationship portfolio and understanding of networking,
this also involves a listing of those additional resources that have been built
through interaction. These could be analysed using a conventional view of the
bases of power which the company may possess.

TOPIC 7 ENTREPRENEURIAL NETWORKING  91
7.2 ADVANTAGES OF GOOD NETWORKING

The advantages gained by an entrepreneur from having good networking are as
follows:
(a) Accessibility
Networking is very important for entrepreneurs to gain either tangible or
intangible resources directly or indirectly. Among the tangible resources are
financial support, transfer of technology and accessibility in gaining
information to produce the right product at the right cost and the right time
as demanded by the market. Intangible resources are the moral support,
guidance and confidence provided by various groups to entrepreneurs in
operating their business.
(b) Reputation
Reputation refers to the ability of entrepreneurs to exercise leadership or to
influence the decision-making of other network members, based on the
expertise that they have. A good reputation enables the entrepreneur to
attract members in networking circles to give priority to the products or
services they produce.
(c) Expectations
These can both facilitate and restrict the freedom of the companyÊs actions.
For example, network members could have the expectation that a particular
company will effectively set prices similar to a number of other companies.
On the other hand, a company may be expected not to take advantage of
product shortages by raising prices or to conform to conventional
competition or to set higher ethical standards.
SELF-CHECK 7.1
Outline the advantages that an entrepreneur would gain from good
networking.
7.3 WHAT IS STRATEGIC NETWORKING?

Being a strategic entrepreneur is to envision the future and take the necessary steps
to create that future. Strategic networking, then, is gaining clarity on an
entrepreneurÊs goals and objectives to be achieved in running the business by
utilising their interaction with others and determining the best action that should
be taken. While it is tempting to jump into action, it is essential for entrepreneurs

92  TOPIC 7 ENTREPRENEURIAL NETWORKING
to understand where they are now and where they want to go. Successful
networking is the result of proper planning and careful construction and
execution. Entrepreneurs need to find ways and means to create good networking
and gain maximum benefit from it. Networking should be one of the core
marketing tactics of most independent professionals and small business owners.
Entrepreneurs may use client-centred networking to lessen their reliance on cost
and time in getting and distributing information. Over time, this business building
strategy will reward the entrepreneur with a steady stream of new clients, besides
maintaining existing ones.
7.3.1 Types of Networking

There are two types of networking which are as follows:
(a) Formal Networking

Formal networking is the existing relationship between various people who
have a symbiotic relationship with the entrepreneur. Those who have
networking correlation are better prepared to take the initiative for creating
business opportunities and solving the problems they face in the networking
chain. Every member in the networking circle is ready to share his experience
and strength for mutual advantage.
(b) Informal Networking

Informal networking is established through relationships with childhood
friends, members of oneÊs family and people sharing common interests or
hobbies. It enables an entrepreneur to discuss his business informally,
without making appointments.
Informal networking provides opportunities for the entrepreneur to gain

new information or exchange of information. Services provided by informal
networking members are usually free of charge or with minimal charges.
Informal networking usually enables the entrepreneur to get opinion, advice,
and moral and financial support. Such support will help entrepreneurs to be
more confident and increase their ability for effective decision-making,
leading to minimised business risks. Members in informal networking circles
include friends, mentors and professionals. Figure 7.1 illustrates the
members in an informal networking circle.

Figure 7.1: Informal networking circle
7.3.2 The Importance of Networking

Now let us look at the importance of networking. Figure 7.2 illustrates the
importance of networking.
Figure 7.2: The importance of networking
The following subtopics discuss these factors in detail:
(a) Build Confidence

In business, entrepreneurs may face uncertainties, for example, investment,
losses, competition and products which cannot penetrate the market. Good
networking can reduce these uncertainties. An entrepreneur may obtain
reliable information on investment opportunities, market share and product
preferences. Networking can also help the entrepreneur to face changes in
business environments, such as:
(i) Changes in competitorsÊ strategies;
(ii) Demographic changes; and
(iii) Changes in customer satisfaction.

94  TOPIC 7 ENTREPRENEURIAL NETWORKING
(b) Reduce Bureaucracy

Rigid bureaucracy delays the process of business activities. Networking
helps to reduce red tape in decision-making by:
(i) Speeding up the application process;
(ii) Saving time, finances and other resources;
(iii) Preventing entrepreneurs from repeating mistakes; and
(iv) Eliminating irresponsibility („passing the buck‰).
(c) Increase Information

Networking will build an entrepreneurÊs reputation as everybody in the
networking circle knows what the entrepreneur is doing. At the same time,
information like who is who in the networking circles will enable the
entrepreneur to get the information necessary for progressing successfully in
the business.
(d) Develop Trust

Trust is one of the most important factors when establishing networking.
With trust, a member in the networking circle is committed to give priority
to the entrepreneurÊs products or services. Trust also motivates people to
promote the entrepreneurÊs products or services by word of mouth.
(e) Create an Interdependent Situation

SomeoneÊs success might come from anotherÊs contribution. Maybe your
success too comes from someone elseÊs contribution. People, thus, rely on
others, so whatever we do must benefit others. Everybody must behave
following the symbiotic spirit. The concept of give-and-take is a must for
developing good networking relationships.
(f) Source of Creativity

Networking can also be a source of creativity for an entrepreneur operating
a business. Various groups in networking circles will help to develop novel
ideas to create new products or services, and new marketing techniques. In
addition, members in the networking circle will also provide new business
opportunities. All these ideas may come from friends, workers, customers
and distributors. Support and various contributions from various members
of the networking circle will enable entrepreneurs to:
(i) Improve product quality;
(ii) Improve distribution;
(iii) Improve techniques of production;

(iv) Improve the technique for better after sales services; and
(v) Suggest new ways of promoting the product.
 Networking is both an outcome of past relationship strategy and resource for

future strategy.
 The advantages of networking include accessibility, reputation and

expectations.
 There are two types of networking, namely formal networking and informal
networking.
 Networking is important because it builds confidence, reduces bureaucracy,

increases information, develops trust, creates an interdependent situation and
generates creativity.
Formal networking Strategic networking

Informal networking


Topic  Evaluation of
8 Entrepreneurial
Opportunities
LEARNING OUTCOMES
1. State six common pitfalls in the selection of new venture ideas;
2. Explain eight critical factors involved in new venture assessment;
3. Describe three major factors that underlie venture success;
4. Analyse four evaluation process methods; and
5. Outline the specific activities involved in a comprehensive feasibility
evaluation.
 INTRODUCTION
The number of new ventures has been increasing in the past few years. There are
several reasons for entrepreneurs to start up new ventures. However, as ideas
develop into new ventures, the real challenge is for these companies to survive and
grow.
What will make you a successful entrepreneur? Have you ever thought of the
necessary aspects that you should be familiar with? In order to face the real
challenges in the world of entrepreneurship, you need to have a very deep
knowledge and understanding of the common pitfalls in selecting a new venture.
This topic will help you to identify critical factors for new venture development
and underlying factors of venture success. We will also discuss an effective
evaluation process for new ventures.

TOPIC 8 EVALUATION OF ENTREPRENEURIAL OPPORTUNITIES  97
8.1 PITFALLS IN SELECTING NEW VENTURES

The stage of transition from an idea to a potential venture can be the most critical in
new venture development. Figure 8.1 illustrates six common pitfalls that an
entrepreneur may encounter in the process of selecting a new venture.
Figure 8.1: Six pitfalls in selecting new ventures
Now let us look at a brief description of each pitfall.
(a) Lack of Objective Evaluation

Many entrepreneurs lack objectivity and do not realise the importance of
careful examination of their work. All ideas should be studied and
investigated to avoid this pitfall.
(b) No Real Insight into the Market

(i) The importance of developing a marketing approach as the basis for a
new venture is often ignored by many entrepreneurs.
(ii) They fail to take into account the life cycle of a new product/service.
(iii) Entrepreneurs must realise that timing is crucial. Projecting the life
cycle of new products is important, as is introducing the products at
the right moment.

98  TOPIC 8 EVALUATION OF ENTREPRENEURIAL OPPORTUNITIES
(c) Inadequate Understanding of Technical Requirements

(i) Before initiating a new venture, entrepreneurs should conduct a
thorough study of the project including the technical aspect.
(ii) Technical problems often arise, taking up a lot of the entrepreneursÊ
time, thus resulting in costly issues.
(d) Poor Financial Understanding

(i) Costs often hamper entrepreneurs, especially when proper financial
planning is neglected.
(ii) Underestimation of development costs by huge margins is also not
unusual.
(e) Lack of Venture Uniqueness

(i) Concepts with special designs and characteristics will attract
customers. Thus, entrepreneurs will not be able to attract customers if
there is no uniqueness in their ventures.
(ii) Product differentiation is the best way to create awareness among
customers to distinguish the new products from of the rivals.
(f) Ignorance of Legal Issues

(i) Major problems can arise if legal issues are overlooked.
(ii) Examples of legal requirements are creating a safe working
environment, ensuring quality control of products and services and
having copyright and patents to protect oneÊs products and creations.
ACTIVITY 8.1
Name two world-renowned firms that have failed in their new business
ventures. What was the cause of their problems? Share this information
with your tutor and coursemates in the myINSPIRE online forum.
SELF-CHECK 8.1
Describe six pitfalls in selecting new ventures.

8.2 CRITICAL FACTORS FOR NEW VENTURE

DEVELOPMENT
There are several critical factors that affect new venture development. According
to Vesper (1990), an entrepreneur should consider eight vital factors as shown in
Figure 8.2.
Figure 8.2: Eight areas to be considered in new venture development
Table 8.1 shows an assessment checklist that an entrepreneur should use when
developing a new venture idea.

Table 8.1: Checklist for New Venture Ideas
Area Assessment Question

Basic feasibility of the  Can the product or service work?
venture  Is it legal?
Competitive advantages of  What specific competitive advantage will the
the venture product or service offer?
 How are the competitors likely to respond?
Buyer decision in the  Who are the customers likely to be?
venture  How much will each customer buy and how
many customers are there?
Marketing of the goods and  How much will be spent on advertising?
services  What share of the market will the company
capture?
 Who will perform the selling function?
Production of the goods  Will the company make or buy what it sells?
and services  Are sources of supplies available at
reasonable prices?
Staffing decision in the  How will competencies in each area of the
venture business be ensured?
 Who does the hiring?
Control of the venture  What records will be needed? When?
 Will any special controls be required?
Financing the venture  How much will be needed for development?
 How much is the working capital?
 Who will provide the financing? At what
cost?
ACTIVITY 8.2
What are the critical factors that need to be considered in the
development of a new venture?

8.3 WHY NEW VENTURES FAIL

Many newly established businesses vanish within a year or two. Only a small
percentage of them are successful. According to Bruno, Leidecker and Harder
(1987) and Karakaya and Kobu (1994), there are three major causes of failure of
new ventures, as you can see in Figure 8.3.
Figure 8.3: Three major factors that contribute to the failure of new ventures
Meanwhile, Table 8.2 describes in detail the causes of failure.
Table 8.2: Causes of Failure
Causes of
Factors
Failure
Product/market  Poor timing
problems  Product design problems
 Inappropriate distribution strategy
 Unclear business definition
 Over-reliance on one customer
Financial  Initial undercapitalisation
difficulties  Assuming debt too early
 Venture capital relationship problems

Managerial  Concept of a team approach (e.g. hiring and promotions

problems based on nepotism rather than qualifications; poor
relationships with parent companies and venture capitalists;
founders who focus on their weaknesses rather than their
strengths; incompetent support professionals).
 Human resource problems (e.g. kickbacks and subsequent
firings; deceit on the part of the venture capitalist; verbal
agreements not honoured; protracted lawsuits).
8.4 THE EVALUATION PROCESS

A critical task in starting a business enterprise is conducting a solid analysis and
evaluation of the feasibility of the product/service idea. Entrepreneurs might later
discover that a proposal contains many fatal flaws if the initial analysis was not
properly conducted.
Figure 8.4 illustrates the evaluation process proposed by Kuratko and Hodgetts
(2004).
Figure 8.4: Evaluation process

The evaluation process comprises the following steps:
(a) Asking the Right Questions

Many important evaluation-related questions should be asked. Examples of
questions that entrepreneurs should ask themselves are:
(i) Is it a new product/service idea? Is it proprietary? Can it be patented
or copyrighted?
(ii) Has a prototype been tested by independent testers who try to blow up
the system or rip the product to shreds? What are the weak points? Will
it stand up?
(iii) Has it been taken to a trade show? If so, what reactions did it receive?
Were any sales made?
(iv) Is the product or service easily understood by customers, bankers,
venture capitalists, accountants, lawyers and insurance agents?
(v) What is the overall market? What are the market segments? Can the
product penetrate these segments? Can any special niche be exploited?
(vi) Has market research been conducted? Who are the competitors?
(vii) What distribution and sales methods will be used?
(viii) How will the product be made? How much will it cost?
(ix) Will the business concept be developed and licensed to others or
developed and sold away?
(b) Profile Analysis

A single strategic variable seldom shapes the ultimate success or failure of a
new business venture. In most instances, a combination of variables
influences the outcome. It is important to identify and investigate these
variables before new ideas are put into practice. The results of such a profile
analysis enable the entrepreneur to judge the potential of the business.
(c) Feasibility Criteria Approach

This approach was developed as a criteria selection list from which
entrepreneurs can gain insight into the viability of their venture. According
to Kuratko and Hodgetts (2004), the feasibility criteria approach asks the
following questions:
(i) Is it proprietary?
(ii) Are the initial production costs realistic?

(iii) Are the initial marketing costs realistic?

(iv) Does the product have potential for very high margins?
(v) Is the time required to get to market and to reach the break-even point
realistic?
(vi) Is the potential market large?
(vii) Is there any initial customer?
(viii) Is the cost of development and calendar time realistic?
(ix) Is it a growing industry?
(x) Can the product and the need for it be understood by the financial
community?
(d) Comprehensive Feasibility Approach

This refers to a more comprehensive and systematic feasibility analysis that
incorporates external factors.
There are two major factors involved in a comprehensive feasibility study of

a new venture as described in Table 8.3.
Table 8.3: Two Major Factors in a Comprehensive Feasibility Study

of a New Venture
Technical Feasibility Marketability

Identifying the technical requirements for This analysis examines how saleable
producing a product or service that will the product or service is in the market
satisfy the expectations of potential and what the demand is like. Three
customers. major areas in this analysis are as
follows:
The important criteria for the requirement
are as follows:  Investigating the full market
potential and identifying
 Functional design of the product and
customers for the goods or
attractiveness in appearance.
services.
 Flexibility, for example, permitting ready
 Analysing the extent to which the
modification of the external features of
enterprise might exploit this
the product to meet customer demands or
potential market.
technological and competitive changes.
 Using the market analysis to
 Durability of the materials from which
determine the opportunities and
the product is made.
risks associated with the venture.
 Reliability, for example, ensuring
performance as expected under normal
operating conditions.

To address these areas, a variety of informational sources must be acquired and

used. For a market feasibility analysis, general sources would include the
following:
(a) Trends in the general economy (various economic indicators, etc.);
(b) Market information (customers, customer demand patterns);
(c) Pricing information (range of prices for similar, complementary and
substitute products; base prices and discount structures); and
(d) Competitive information (major competitors and their competitive strength).
SELF-CHECK 8.2
State the main reasons why new ventures fail.
 New venture selection may foresee a few pitfalls such as insufficient objective
evaluation of the venture, lack of market potential knowledge, little
understanding of the technical requirements, insufficient financial
understanding, lack of unique ideas and being unaware of legal issues.
 Major factors that may cause the failure of new ventures are insufficient market
knowledge, faulty product, ineffective sales and marketing strategy, lack of
awareness of competitive pressure, timing problems and insufficient capital.
 By asking the right questions, conducting a profile analysis and carrying out a
feasibility criteria study, the feasibility of an entrepreneurÊs product or service
can be assessed.

Critical factors Product differentiation

Customer availability Profile analysis
Legal requirements Technical feasibility
Marketability Uniqueness
Product availability
Bruno, A. V., Leidecker, J. K., & Harder, J. W. (1987). Why firms fail. Business
Horizons, 30(2), 50ă58.
Karakaya, F., & Kobu, B. (1994). New product development process: An

investigation of success and failure in high technology and non-high
technology firms. Journal of Business Venturing, 9(1), 49ă66.

Vesper, K. H. (1990). New venture strategies. Englewood Cliff, NJ: Prentice Hall.

Topic  Entrepreneur
9 and Personal
Financial
Planning
LEARNING OUTCOMES
1. Explain the meaning of financial planning;
2. Discuss the importance of setting personal financial goals in
financial planning;
3. Calculate individual net worth with reference to personal balance
sheets; and
4. Prepare a budget for personal financial planning purposes and a
cash flow statement to track cash flow.
 INTRODUCTION
A well-thought out plan is half the success of a new venture. The same principle
applies to an entrepreneurÊs personal financial planning. It is either you do it or
you just ignore it. If you apply principles of financial planning in a proper manner,
you will definitely be better off financially. This topic will introduce some basic
knowledge about personal financial planning and serve as the foundation for
learning the other important aspects related to personal financial planning. Let us
begin.

108  TOPIC 9 ENTREPRENEUR AND PERSONAL FINANCIAL PLANNING
9.1 NEED FOR PERSONAL FINANCIAL

PLANNING
Why do you think we need financial planning? Well, financial planning has an
effect on our future, dreams and goals. It will determine what we want to do in
our life, such as getting married, buying a car or a house, having children and
planning for their education.
You need to do proper financial planning to achieve your life dreams and goals. It
involves how you manage your budgeting, saving and spending money from time
to time.
According to the Financial Planning Association (2015), financial planning is

the long-term process of wisely managing your finances so you can achieve
your goals and dreams, while at the same time negotiating financial barriers
that inevitably arise in every stage of life.
Remember, financial planning is a process, not a product.
9.1.1 Steps in Financial Planning

Do you know what sound financial planning involves? Figure 9.1 shows the five
steps in financial planning.
Figure 9.1: Five steps in financial planning
We will discuss more about these steps in the following subtopics.

TOPIC 9 ENTREPRENEUR AND PERSONAL FINANCIAL PLANNING  109
9.1.2 Benefits of Financial Planning

Most of us think that financial planning is a hassle that stops us from enjoying life.
Then, you often think that if you consistently live on a budget, surely you would
have to give up fun activities, right? Think again. The inverse is actually true; if
you save your money, you can always budget your financial conditions so that you
have some money to spend on entertainment with friends
Well, you may need help getting started. If you set up good financial planning
habits, you can always ensure you have enough for more fun in the future!
But, if you have the time and knowledge, and your financial situation is not too
complicated, you may be able to do a lot of it on your own. With your own financial
plan, you will be able to do the following:
(a) Have more control of your financial affairs and be able to avoid
excessive/unnecessary spending, unmanageable debts, bankruptcy or
dependence on others;
(b) Have better personal relationships with people around you, such as your
family, friends and colleagues, because you are happy with your life and you
are not going around borrowing money to make ends meet or expecting
handouts from others;
(c) Have a sense of freedom from financial worries because you have planned
for the future, anticipated your expenses and achieved your personal goals
in life; and
(d) Be more effective in obtaining, using and protecting your financial resources
throughout your lifetime, not only for yourself but also for the people you
love.
In other words, when you have a good personal financial plan, you will be more
informed about your future needs and the resources that you have. You will also
have peace of mind knowing that you are in control.
9.1.3 Life Stages and Financial Goals

In your adult life, you will go through various stages, from starting a career to
retiring, from being single to getting married, having children and sometimes
being single again. At various phases in your life, you will have different priorities,
responsibilities and financial goals.

Each stage of your life presents different investment opportunities and challenges.
Discipline and perseverance play an important role in maintaining a reliable
financial strategy. As your life changes, so will your needs and goals. Sound
financial planning will prepare you to meet the challenges and changes
successfully.
When you are in your 20s, you will be looking at money and spending it differently
from when you get into your 50s. For example, when you are single, you probably
want to have enough money to make a down payment on a car or go on a holiday
with friends. After you get married, you may want to buy a house. Later, when
you have children, you would want to plan for their education and maybe even
start a retirement fund.
As your needs change, your financial priorities will adjust to meet your needs at
different points of your life. Therefore, what you do with your money as you go
through your adult life depends on your financial goals. In the following subtopic,
we will go into detail about how you can achieve your financial goals. Nonetheless,
it is worthwhile to point out here that to achieve your financial goals, you need to
save your money!
ACTIVITY 9.1
How can you evaluate your current financial situation? Compare your
response with your friends.
SELF-CHECK 9.1
1. Define the term financial planning.
2. Describe three benefits of financial planning.
3. How do financial goals change according to the life stages of an

individual?

9.2 THE POWER OF MONEY

The previous subtopic discussed the importance of personal financial planning. It
emphasised on the vital role money plays in our lives as it helps us achieve many
things. Have you heard the following quotation?
Money is power, freedom, a cushion, the root of all evil, the sum of blessings.
(Carl Sandburg, 1960)
It is important for all of us to understand the power of money in terms of building

our financial success. Gaining personal knowledge is important because financial
knowledge empowers us to make good decisions with our money. In this subtopic,
we will discuss how to set your goals, what important goals are, saving for
emergencies, and assets and liabilities, that is, what you own and owe. We will
also look into your net worth and learn how to derive your net worth.
9.2.1 How to Set Your Goals

Do you know that setting goals puts you in charge of your money and life? Your
goals can be short or long term, small or large; but they must be achievable.
When setting your financial goals, you need to sort out what your priorities are.
Without knowing your priorities, it will be difficult to set satisfying financial goals.
You will find it easier to set financial goals that you can achieve when you
understand your priorities.
How do you set your goals? Just having these goals in your thoughts are not
enough. You are very likely to forget the goals that you have set, or you may even
have unconsciously changed them in your mind. It is best to write down your
financial goals. Writing them down will increase your chances of achieving them.
When writing down your financial goals, be as specific as possible. What is the
point of writing: „My goal is to have lots of money in the bank.‰? What do you
mean by „lots of money‰? Is it RM50,000 or RM500,000 or RM5,000,000? Be specific
and write your goals in terms that can be measured. Break down your goals into
those that are short term, medium term and long term.

For instance:
(a) Short-term Goals (Less than One Year)

(i) To save RM5,000 in six months.
(ii) To pay the deposit for a new car.
(b) Medium-term Goal (One to Three Years)

To pay a deposit of RM 20,000 for my first house.
(c) Long-term Goal (More than Three Years)

To save RM100,000 within five years for my retirement account.
You may use Table 9.1 to help you write down your financial goals:
Table 9.1: Financial Goals
My Financial Goals
Short Term Medium Term Long Term
9.2.2 An Important Goal – Saving for Emergencies

What would happen if you suddenly could not afford to pay for your education?
Would you sacrifice your goal of attaining a degree or would you have a back-up
emergency plan?
In life, there are many uncertainties that you might face ă from a minor car
breakdown to the more serious death of the sole breadwinner in your family.
Unexpected events are, well, unexpected.
In most of these situations, money would be needed. It is extremely important that

you are always prepared with the right tools and knowledge for situations that
require you to think on your feet and deal with problems you might not be used
to. An emergency fund is one such tool you can use.

When you list your financial goals, include saving for an emergency fund. As a
rule of thumb, have an equivalent of at least six monthsÊ worth of your basic living
expenses in your emergency fund. Ideally, you should put aside about 12 monthsÊ
worth.
For example: If you need about RM1,500 a month to pay for your living expenses,
including fixed payments such as housing loan or rent and insurance premium, as
well as electricity and water bills, you should have at least RM9,000 in your
emergency fund (i.e. RM1,500  6 months). If possible, keep aside RM18,000 in the
fund (RM1,500  12 months).
It might be difficult at first when you start working to have that kind of money
kept aside but make sure you build it over time; every little amount will help build
your emergency fund. Remember to make a conscious effort to save.
9.2.3 Assets and Liabilities: What You Own and Owe

In financial planning, you need to assess where you are now in financial terms,
that is, what you own and what you owe; how much money you have and after
making the various payments, how much money is left.
When doing this, two types of personal financial statements come in handy:
(a) Your personal balance sheet; and
(b) Your cash flow statement (discussed in the subtopic on „The Basics of
Budgeting‰ later in this topic).
These statements will help you to:

(a) Provide information about your current financial position and a summary of
your income and expenditure;
(b) Measure your progress in meeting your short-term, medium-term and long-
term financial goals;
(c) Maintain information about your financial activities, such as investments and
spending patterns; and
(d) Provide data you can use when preparing tax forms or applying for a bank
loan.

Do you know what a personal balance sheet is? Let us look at the definition:
A personal balance sheet is your financial scorecard, which you can use to
regularly assess your financial standing. It can be a reference point in making
money-related decisions.
Your personal balance sheet reports on what you own and what you owe:
(a) What You Own (Assets) ă Items such as cash, savings, real estate, unit trusts
or shares in companies.
(b) What You Owe (Liabilities) ă All types of loans, whether to banks, family or
friends, as well as credit card debt and payments that are due, such as house
rental and utility bills.

An example of a personal balance sheet is provided in Table 9.2, which you can
use as the basis to prepare one for yourself. This personal balance sheet has a
positive net worth because the value of the total assets is more than the total
liabilities.
Table 9.2: Personal Balance Sheet
Asset Liability
Item
RM RM
Bank Accounts
Savings accounts 5,237
Current accounts 3,532
Fixed deposit accounts 25,835
Cash on hand 1,235
Properties
Apartment 250,000
House ă
Land ă
Jewellery 7,695
Car 60,000
Investments
Employee Provident Fund 55,267
Unit trust 15,982
Shares ă
Bank Loans
Credit cards ă
Study loan ă
Borrowing from friends & family ă
Hire purchase of furniture & electrical goods ă
Total 424,783 254,292
Net Worth 170,491
9.2.4 Knowing Your Net Worth

Your net worth is your total assets minus your total liabilities. You will have a
positive net worth if you own more than what you owe. When this happens,
congratulations! This means that you are in a healthy financial position.

However, having a high net worth does not guarantee that you will never face
financial difficulties. You can have a high net worth and still be in for a rough
time. So how is it possible? Financial difficulties can occur when your assets are
not liquid! When assets are not liquid (easily converted into cash) there could be
potential problems looming ahead. Let us see how this is possible.
Say you have a house as your asset (which you live in), but you do not have cash
in your wallet or bank account, and you have already defaulted on your credit
card payments. The most pressing thing now is that you need money for your
daily expenses. Out of a job with no possible way of making any money, you
decide to sell your house for money to support your expenses. Here is the
problem. You cannot sell your house immediately to get money because the
house, being a non-liquid asset, is not easily sold and finding a buyer may take
several months. Equally depressing is the question of where you and perhaps
your family will live then. You really cannot sell your home unless you have
somewhere else to go.
It is easy to conclude that being financially healthy means having a balanced

portfolio of assets so that you will not be short of cash at any time. That way, you
can ensure that financial freedom will be in your grasp.
When you owe more than you own, you have a negative net worth. In this
situation, you are unable to pay off your debts when they are due because you do
not have enough money or assets that can be easily converted into cash. You are
actually in financial trouble and may be made bankrupt.
Your net worth gives an idea of your financial position on a given date. Do not
consider your non-cash items as cash as they may not be easily disposed of.
9.2.5 Deriving Your Net Worth

How do you derive your net worth? Figure 9.2 shows five steps in deriving your
net worth.

Figure 9.2: Five steps in deriving your net worth

There are several ways you can increase your net worth. These include increasing
your savings, reducing your spending and debts and selling some of your non-
income generating assets/belongings.
ACTIVITY 9.2
Use the personal balance sheet provided in Table 9.2 as an example and
prepare one for yourself. Calculate your net worth. Do you have a positive
or negative net worth?
SELF-CHECK 9.2
Describe the five steps in deriving your net worth.
9.3 THE BASICS OF BUDGETING

A budget is one of your best tools for reaching your goals ă whatever your age or
stage in life. It is a plan of what money you expect to receive and how you expect
to spend it.
9.3.1 Budgeting and Spending Plan

In financial planning, it is important to prepare a budget. It is true that living
according to a budget requires a lot of discipline, but it helps you to:
(a) Live within your monthly income;
(b) Keep aside money or savings;
(c) Reach your financial goals;
(d) Prepare for financial emergencies; and
(e) Develop good financial management habits, with regular checks of your cash
flow and net worth.
Prepare your budget at the beginning of the month or on the day you receive
your monthly salary.

When you prepare your personal budget:
(a) Refer to your financial goals. Compare your budget with your financial goals
to see whether or not you are achieving them. For example, if you have
targeted to put a down payment to buy a car in one year, make sure you do
monthly checks to ensure you are setting aside money towards your goal.
(b) Estimate your income for the budget period. This covers your salary,
commissions, allowances and other sources of money.
(c) Put aside at least 10 per cent of your income for your savings (20 per cent to
30 per cent of your income as savings will be better because you are creating
a bigger pool of money for your future retirement).
(d) Put aside some money for your emergency fund. According to Elkins (2019),
money experts generally encourage you to set aside three to six monthsÊ
worth of living expenses in an emergency fund. Some even want you to stash
away a yearÊs worth.
(e) Estimate fixed expenses for the budget period. These are expenses that must
be paid or spent. These include house rental, loan instalment payments,
credit card payments and insurance premiums.
(f) Also estimate variable expenses for the period. These cover items such as
petrol, groceries, and electricity and water bills.
(g) Aside from that, estimate your discretionary expenses, such as for items that
you can choose whether to spend on or not. They include gifts, hobbies,
entertainment and holidays.
To prepare a successful budget, remember:
(a) Be patient and disciplined. A good budget takes time and effort to prepare.
Do not give up because you feel that there is too much to do!
(b) Be realistic. If you have a moderate income, do not expect to save a lot of
money in a short period of time.
(c) Be flexible. There will be unexpected expenses and changes in the prices of
groceries and other items. Revise your budget when needed.
(d) Set aside an amount of money to enjoy yourself. You are young and will want
to have a night out with friends or to watch a movie.

Remember: A budget will work only if you follow it!
9.3.2 Tracking Your Cash Flow

Preparing your personal budget is not the end of the process. You need to monitor
your actual spending every day, to know where your money is going. Another
term for this is managing cash flow ă the actual inflow and outflow of cash during
a given period of time (refer to Figure 9.3).
Figure 9.3: Actual inflow and outflow of cash
Your most important inflow is probably your income from employment. However,
you may have other sources of income, such as a business income and interest
earned on savings and investments. Outflows would be living expenses, loans and
other financial commitments.
If you have a cash surplus, that is fantastic! Put the money away in your savings.
However, if you have a cash deficit, take another look at your spending. Try
postponing any purchases or payments for the time being. Try not to use your
emergency fund unless it is absolutely necessary. If you have to use your credit
card, use it as a last resort as using your credit card will only add towards expenses
for the coming months.
In preparing next monthÊs budget, base it on the balance brought forward from the
previous month.
Make sure you review and revise both your budget and spending plan regularly.
If you need to decrease your spending, start with unnecessary purchase and cut it
down. A good idea is to take a look at expenses involving food and entertainment.
You may even have to revise your financial goals, if some of these are not realistic
in relation to your monthly income.

 Your balance sheet outlines your financial net worth.
 Your budget tells you the amounts of your planned income, savings and
spending to achieve your financial goals.
 Your cash flow statement tells you what you received and spent in terms of
cash over a period of time.
Table 9.3 is an example of a statement that combines a personal budget and cash
flow statement. In this example, the person has spent more than his budget due to
unforeseen circumstances, such as a car breakdown and extra travelling using the
car, resulting in additional spending on petrol, toll and parking expenses as well
as food.
Table 9.3: Monthly Personal Budget with Personal Cash Flow
Monthly Personal Budget with Personal

Cash Flow in One Statement
Monthly Income Budget Actual Cash Flow
Job #1 (net of EPF, SOCSO and PAYE RM3,450 RM3,450

tax)
Job #2 RM0 RM0
Other sources RM0 RM0
Total monthly income RM3,450 RM3,450
Less monthly fixed savings (10% of RM345 RM345

monthly income)
Less savings for emergency funds RM100 RM100
Monthly income net of savings RM3,005 RM3,005
Less monthly fixed expenses
Rental of room RM300 RM300

Car payment RM650 RM650
Car insurance RM0 RM0
Total monthly fixed expenses RM950 RM950

Less monthly variable expenses
Food RM550 RM650

House utilities RM0 RM0
Handphone bill RM85 RM97
Bus and taxi fare RM50 RM30
Gas and oil RM200 RM270
Parking and toll RM150 RM198
Car Repairs RM250 RM598
Total monthly variable expenses
Less monthly discretionary expenses RM1,285 RM1,843
Medical expenses RM70 RM0

Clothing RM150 RM0
Entertainment RM100 RM186
Household items RM100 RM392
Personal items RM150 RM163
Gifts RM100 RM0
Other expenses RM100 RM0
Total monthly discretionary expenses RM770 RM741
Excess (Deficit) Income RM0 (RM529)
Excess of income over expenses + Fixed savings + Emergency funds = Extra savings.
(If the amount is negative, you have spent more than your monthly income)
ACTIVITY 9.3
1. What are your personal financial goals and how are you going to
achieve them? Prepare a budget for achieving these purposes.
2. Prepare and analyse your own cash flow statement.

SELF-CHECK 9.3
State the considerations when preparing a successful budget.
 Financial planning is important to provide you with peace of mind, security

for your future and a better quality of life.
 Financial planning is essential in achieving your lifeÊs dreams and goals.
 Provided that money can earn interest, money you have at the present time is
worth more than the same amount in the future.
 Setting financial goals is important to achieve security and financial freedom.
Assets Net worth

Budgeting Personal balance sheet
Financial planning Personal cash flow statement
Liabilities
Elkins, K. (2019). Economists say this is the minimum amount of money you need
in an emergency fund. Retrieved from https://www.cnbc.com/2019/
10/18/minimum-amount-of-money-you-need-in-an-emergency-fund.html
Financial Planning Associations. (2015). How a financial planner can help you⁄
Retrieved from http://www.plannersearch.org/assets/brochures/fpa_
financial20 planner_web_060315.pdf


Sandburg, C. (1960). Harvest Poems 1910ă1960. Hougthon Mifflin Harcourt.

small business management (5th ed.). Upper Saddle River, NJ:
Prentice Hall.


Topic  Achieving an
10 EntrepreneurÊs
Personal
Financial
Dreams
LEARNING OUTCOMES
1. Describe the meaning of and various ways of saving;
2. Discuss your investment goals, and the relationship between risk
and return;
3. Explain various types of investments, insurance and loans;
4. Make an informed decision on buying an insurance policy;
5. Determine the risks of being a guarantor; and
6. Identify signs of financial difficulty.
 INTRODUCTION
Have you ever heard of this saying: „what matters is how much you save, not how
much you earn.‰? In other words, higher earnings do not guarantee that you are
financially better off than others who are earning less than you. It is always better
to spend below your means and make a habit of saving. However, besides saving,
one must learn and practise investing ă saving may not make you rich, but
investment does. Investment from the personal financial perspective will never be
126  TOPIC 10 ACHIEVING AN ENTREPRENEUR'S PERSONAL FINANCIAL DREAMS
complete if it is done without the knowledge of sustaining it and proper

protection, such as insurance. Finally, you need to know when you are falling into
financial difficulty. This serves as the financial self-check that should not be
overlooked in order to achieve true personal financial success.
10.1 ENTREPRENEUR WEALTH BUILDING

We discussed in the previous topic that the way to become smart with your money
is to build your wealth by owning more than you owe. Here, we will go further
into discussing how you can build your wealth and at the same time plan for future
uncertainties.
10.1.1 The Saving Habit

Putting money aside for the future is hard to do. There is more to it than spending
less money although that part alone can be challenging. How much money should
you save, where will you put it and are you sure you made the right decision?
Here are a few tips on how to set realistic goals and get the most out of your money.
According to www.businessdictionary.com, savings is the portion of disposable

income not spent on consumption of consumer goods but accumulated or invested
directly in capital equipment or in paying home mortgage, or directly through
purchase of securities.
You should make your savings an automatic part of your life. A savings plan is an
essential part of your financial plan. Without a savings plan, you will not be able
to achieve your financial goals. We suggest that you save at least 10 per cent of
your salary every month. It is even better if you can save 20 to 30 per cent because
this will translate into more money for your future. Remember that the more you
save now, the easier it will be to achieve your financial goals.
There are several ways that this percentage of your monthly salary can be put into
your savings account in the bank. You can:
(a) Write out a cheque every month and deposit it into your savings account;
(b) Carry out the transfer using the ATM; or
(c) Transfer money from your current account to your savings account via
Internet banking every month.

TOPIC 10 ACHIEVING AN ENTREPRENEUR'S PERSONAL FINANCIAL DREAMS  127
It is good if you have done any of the above. However, after a few months, you
may forget to do so or find some reasons to use the money for something else
instead of putting it into your savings account. You would have broken the pattern
and, once broken, it is possible that you will not get back to your savings plan.
So how do you make sure that you keep to your savings plan? Simple ă by making
it automatic.
Instruct your bank to transfer at least 10 per cent of your monthly salary from your
current account to your savings account every month. Have the transfer done as
soon as your salary is credited into your current account. What you do not see or
have, you will not miss. In the meantime, the amount of money in your savings
account will grow, bringing you closer to your financial goals.
As and when you can afford it, such as after you have received a raise or
promotion, instruct your bank to increase the amount to be transferred to your
savings account.
When you have saved the total amount of money that you had planned for,
transfer the whole sum into a fixed deposit or some other account that can earn
more returns.
However, continue to instruct your bank to make the monthly deduction. Never
stop it, as this would only break your habit. The money that you are
„automatically‰ saving can go towards another financial goal.
ACTIVITY 10.1
What is the meaning of savings? How are savings different from
investments?
10.1.2 Increasing Net Worth via Savings and

Investments
Building wealth is about increasing your net worth, which we covered in Topic 9.
Your assets minus your liabilities equals your net worth, which can be positive
(assets more than liabilities) or negative (liabilities more than assets).
In this topic, we will focus on increasing your assets through savings and
investments. We will look at your investment goals, investment risk and return,
and at diversifying your investments.

(a) Your Investment Goals

Once you save your money on a regular basis, you will need to start making
important decisions about how to invest your money. Now, how do you do
this? Easy, you can invest money sensibly by first stating your investment
goals.
However, how do you come up with investment goals that fit your needs?
Well, there are some crucial questions you should think about when coming
up with your investment goals. The following are some of these crucial
questions:
(i) What are your financial goals? Why do you need to save and invest
your money?
(ii) How much money do you need to save and how much to invest to
achieve your goals?
(iii) How long do you have to save or invest your money to achieve your
goals?
(iv) How much risk are you willing to take?
(v) How much return do you expect from your savings or investments?
(vi) What sort of sacrifices are you prepared to make to achieve these goals,
for example, changing your lifestyle and spending habits?
Be realistic when you consider your answers to the above questions. Look at
your sources of income and see how much you can consistently save and
invest. Your financial and investment goals should be reasonable and
achievable.
(b) Investment Risk and Return

Keeping your money in a savings or fixed deposit account with a bank is the
safest form of investment. The return (the interest rate) is lower compared
with other forms of investment, but it is not risky. You can sleep soundly at
night and not worry about your money.
Of course, by keeping your money only in savings or fixed deposits, you

would not be able to build your wealth as fast as you would like to. However,
keep in mind that although other forms of investments can give you better
returns, they also sometimes carry greater risks, that is, there is a greater
chance of such investments losing their value.

For example, if you invest your money in the stock market, you face a greater
risk of losing your money than if you were to keep it in a savings account.
Share prices move up and down, depending on many factors. You may have
bought the shares of a company at RM5 per share, but this price can go up to
RM7 or it can go down to RM2.
When you invest your money, you expect to earn a return on that money. A
return on an investment is usually stated as an annual percentage. If you buy
shares at RM10 a share and the price goes up to RM10.80 after one year, then
your rate of return is eight per cent.
The actual return on an investment would, however, be after you have

deducted related expenses. If you buy a house, for example, and then sell it,
you will only know your return after you have deducted items such as legal
fees, agentÊs commission, stamp duty and bank loan interest.
Remember: When choosing your investment, the higher the return, the
greater the risk.
(c) Diversify Your Investment

When you invest your money, do not put it all into one type of investment.
If something happens to that investment, you will lose all your money. It is
important to diversify.
It is smarter to put your money in different types of investments. In other

words, plan for a balanced portfolio of investments. Spreading your money
across a variety of investments is the key to spreading your risks. When you
do this, you are highly likely to benefit substantially from your investments
while eliminating chances of financial losses.
How you invest is partly determined by your investment preference profile,

that is, whether as an investor, you are aggressive, moderate or conservative.
Many people actually fall in-between these types.
If you are a moderate investor, you might invest a high portion of your
money in a different asset class such as unit trust funds and the balance in
fixed income investments such as fixed deposits. The amount that you assign
to an asset class could be further divided among different segments such as
bond or equity funds.

If you are an aggressive investor, you might consider investing in more

volatile investments such as shares. On the other hand, if you are a more
conservative investor, you might consider putting your money in less
aggressive investments such as bonds and fixed deposits.
No two investors are alike. Only you can decide which options to choose and
how to spread your savings among the types of investment products
available.
SELF-CHECK 10.1
1. List three types of investors and briefly discuss the characteristic of
each.
2. Discuss the relationship between risk and return, using examples.
10.1.3 Types of Investment

Do you know that good investment planning can turn your goals into realities? It
involves more than just trying to pick the right investment. Now have a look at
Figure 10.1 to find out the types of investment available in the financial
marketplace.
Figure 10.1: Types of investment

Let us look at the detailed explanation of each type of investment.
(a) Cash and Fixed Interest Investments

Cash investments are the most common form of investment in Malaysia,
covering products such as bank savings accounts and fixed deposits. They
provide easy access to your money when you need it and there is no chance
you could lose any capital, so they are very secure.
However, while they do offer security, they usually provide very little
income and no capital growth. In actuality, they can be quite risky in the
long run because inflation erodes the value of your investment. For most
investors, cash and fixed interest products are suitable for:
(i) Use as a transaction account;
(ii) Keeping cash on hand for short-term expenses and emergencies; and
(iii) Short-term savings where they cannot afford any risk to their capital.
(b) Shares
Shares (also known as equities or stocks) represent ownership in a company.
When you buy a share, you become a part-owner of the company and
become entitled to share in its future value and profits.
Shares in a company offer growth to investors in two key ways:

(i) As the overall value of the company increases, the value of the shares
also increases; and
(ii) You can earn dividends when the company chooses to pay part of its
profits to shareholders as income payment.
Shares have the potential to generate very high returns. However, they also
have the potential to fall in value if the companyÊs performance drops. Shares
are generally suitable for investors who:
(i) Want to build a nest egg for medium-term and long-term financial
goals;
(ii) Have a longer investment time-frame; and
(iii) Are comfortable with some volatility in their investment value over the
short term, in exchange for higher returns in the long term (in terms of
dividend income and capital gain).

(c) Unit Trust Funds

In a unit trust, money from hundreds of individual investors is pooled
together to buy a large number of different assets. Professional fund
managers decide what percentage of the fund should be invested in each
asset class, and also which countries, industries and companies have the best
prospects for good returns.
Each investor then receives „units‰ in the fund, with each unit representing
a mix of all the underlying assets such as shares, bonds and fixed deposits.
Unit trust funds are an ideal option for people who:
(i) Are new to investing;
(ii) Are happy to outsource the selection of investments to professional
managers;
(iii) Have a small initial amount to invest (with the option to make regular
additional contributions); and
(iv) Are seeking investment diversification to minimise risk.
(d) Property
Property is one asset class that most Malaysians are familiar with. Property
investment offers value to investors in two ways:
(i) Properties increase in capital value over time as house and land prices
rise; and
(ii) You can earn rental income from tenants.
Like shares, property prices go up and down and have periods of

sustained high and low returns; so property is generally only suitable
as a long-term investment. One of the most important factors to
consider when buying property is its location. Property is generally
suitable for investors who:
 Do not require „emergency‰ access to their money;
 Have a long-term investment time-frame; and
 Have the ability to meet mortgage repayments if interest rates rise

or if the property is not being tenanted.

(e) Other Types of Investments

Other types of investments are:
(i) Bonds
When you buy a government or corporate bond, you are „lending‰
your money for a certain period of time at a predetermined interest
rate. In return, you receive a steady income stream through regular
interest payments.
(ii) Real Estate Investment Trust (REIT)

This is similar to a unit trust except that the investments are in property
and real estate. The profits from such investments are passed on to
investors in the form of dividends.
ACTIVITY 10.2
What are your preferred types of investment? Why?
SELF-CHECK 10.2
State the main types of investment.
10.2 PLANNING FOR UNCERTAINTIES

Life has many ups and downs where accidents and disasters can and do happen
unexpectedly. When this happens, we feel like life has more control over us than
we have control over it. This is especially so if we are not adequately prepared for
uncertainties. Whatever the uncertainty that comes, it usually creates feelings of
fear, depression and worry. How do we cope with such uncertainty?
Well, in the following subtopic, we will discuss several tips on how to deal with
uncertainties, for instance, the need to get insured and the types of insurance we
should take.
10.2.1 The Need to Get Insured

Before you take any insurance, you must understand what insurance is, the
purpose of insurance and how it works to protect you. Now let us go into detail.

(a) What is Insurance?

When you make a financial commitment, such as purchasing a house by
borrowing money from the bank, you have locked part of your future
income. Should there be an unfortunate natural event (death or disability)
or an economic catastrophe (retrenchment), which affects your ability to
meet these commitments, the possibility of losing your hard-earned asset is
real.
There is a financial instrument that you can purchase to protect you from
such an eventuality ă insurance. It is a means of giving you a financial buffer
or protection in case something happens to you, your family or your
belongings.
(b) Purpose of Insurance

In offering such protection, insurance provides you with peace of mind. The
money you put towards insurance will enable you to:
(i) Pay for damages to your personal belongings or to replace items that
had been stolen (provided such items are insurable);
(ii) Pay for medical bills when you or your family members are
hospitalised;
(iii) Take care of your monthly living expenses, debts and financial
commitments when you are not able to work due to a serious illness
or an accident; and
(iv) Provide some financial support to your family in the event of your
disability, serious illness or death, particularly if you are the
breadwinner of the family.
(c) How Does Insurance Work?

Upon payment of a relatively small fee (known as a premium), a licensed
insurance company will replace items lost or damaged due to an insured
peril, such as fire, accidents and theft. However, these incidents must occur
during the insurance period up to the limit of the sum insured.
The insurance company sells policies to thousands of people and the

premiums collected become part of a common fund. Not all who pay the
premiums will be affected by misfortune and when some do, they are not
affected at the same time. The common fund helps all those who contribute
to share the risks.

The insurance industry in Malaysia is regulated by Bank Negara Malaysia

(BNM). To help the public find out more about insurance, BNM has
produced a series of booklets, which are available at branches of insurance
companies. Alternatively, you can visit www.insuranceinfo.com.my for
more information regarding insurance.
ACTIVITY 10.3
1. Are you willing to pay high premiums to get your family
members and yourself insured? Why?
2. What is your opinion about the insurance industry in Malaysia?

Are they trustworthy?
10.2.2 Types of Insurance

You can insure almost anything under the sun, but certain things absolutely need
to be properly insured. This typically includes your life, your health and your
property. Figure 10.2 shows us two types of insurance.
Figure 10.2: Types of Insurance
Let us look at these two types of insurance in further detail:
(a) Life Insurance

A life insurance policy insures you and your life against risks such as
premature death, illness, disability and hospitalisation. It is important to
have one if there are people depending on you, whether they are young
children or aged parents. The coverage period is usually more than a year,
and you have a choice of making premium payments monthly, quarterly,
semi-annually or annually throughout the coverage period.

Figure 10.3 illustrates the main life insurance products.
Figure 10.3: The main life insurance products
Now, we will go into detail for each main life insurance product.
(i) Whole Life

This offers lifelong protection, but you must pay premiums throughout
your life. The claim amount (sum insured), including bonuses, will be
paid upon death, total and permanent disability or critical illness. Due
to the long-term nature of the policy, the premium is higher than for
term insurance and it provides cash value during the term of policy.
(ii) Term Life

This offers protection for a limited period of time only. The money will
be paid only upon death, total and permanent disability or critical
illness during the term of the policy and according to the amount
agreed upon when buying the policy.
(iii) Endowment
This combines protection and savings. This policy provides cash
benefits at the end of a specific period or upon death or total and
permanent disability during the same period. The coverage period is
determined by the buyer.
(iv) Investment-linked
This combines investment and protection. Under this policy, you get to
choose the type of investment fund you wish to place your investment
and the amount of life insurance coverage you wish to have. The
amount of premium is flexible.

(v) Medical and Health

This helps to cover the cost of medical treatment, particularly in regard
to hospitalisation and surgery.
(vi) Mortgage Reducing Term

This is usually a single premium policy with the coverage amount
matching the scheduled outstanding balance of the loan. In case you
default on the payments due to illness or disability or upon premature
death, the policy will settle the loan and the bank will release the
ownership of the house to you or your beneficiaries.
(b) General Insurance

General insurance protects you against losses due to theft or damage to your
personal belongings. It also covers you if you cause damage to a third party,
or if there is accidental death, injury or hospitalisation. The period covered
is usually one year, and you have to pay a one-time premium payment on an
annual basis. Table 10.1 describes the main general insurance products.
Table 10.1: The Main General Insurance Products
Product Explanation
It covers your motor vehicle against theft, accident or fire. If you
buy third party cover, you are insured against claims made against
you by a third party for injuries or death of other person (third
party) as well as loss or damage to the property of the third party
that is caused by your vehicle. If you buy comprehensive cover,
you are getting the widest coverage, i.e. third-party injury and
Motor death, third-party property loss or damage, and loss or damage to
your own vehicle due to accident, fire or theft.
A basic fire policy covers a building only against fire, lightning or
explosion. A house ownerÊs policy extends coverage of the building
to loss or damage due to flood, burst pipes and other calamities as
well. With a house holderÊs policy, the contents of the house, such
as furniture, are covered against theft, flood and fire. This policy
does not cover damage to the house itself.
House

This is good to buy when you travel overseas. It protects you against
travel-related accidents, flight delays or interruptions, baggage lost
in transit, medical and other expenses.
Travel
This covers items such as computers, handphones, notebooks and
cameras against loss or theft.
Personal
belongings
Before deciding on an insurance policy, make sure you check the perils and risks
that are covered by various policies offered by different insurance companies.
10.3 MANAGING DEBT: BORROWING BASICS

You may be tempted to spend more money than you have because of the
availability of loans and credit cards offered by financial institutions. These
institutions offer you money and credit on loan so you can buy a house, a car, pay
your bills or go on a holiday. It is crucial to keep in mind that this money is not
free. You have to pay it back ă with interest!
Before borrowing money, make sure you can manage your debts. Remember that
you want to own more than you owe. You want to build wealth. If you borrow
money, you should use it to make more money. Try not to pay for things that will
not create value for you. Also, never use short-term loans, such as credit cards or
overdrafts, to fund long-term assets, for example, a house or building.
10.3.1 Loans and Credit

When you want to take a loan or use a credit card, ask yourself these questions:
(a) Is the product or service you want to buy important? Is it necessary?
(b) If it is important and you need to have it, can you afford to pay the
instalments?
(c) If it is a substantial purchase, such as a car or house, can you afford to put
down a larger down payment?
(d) If it is something you desire, can you control the feeling and delay your
decision to buy it since it is not that important?
(e) If you decide to take a loan or use your credit card to buy something, have
you worked out your cash flow to see if you are able to repay the money you
borrowed?
(f) Do you know the costs of borrowing and using your credit card? There are
interest rate costs as well as finance charges such as late payment fees.
(g) Do you understand the consequences of failing to repay money you borrow?
If you fail to do so, legal proceedings can be taken against you. You can even
be made bankrupt.
Unless you are able to increase your income, you need to give up something to
make your monthly loan payment. Are you prepared to make this trade-off? For
example, are you willing to give up spending on your weekly entertainment to
make payments for your loan and credit card debt?
No matter how carefully you have worked out your monthly cash flow to pay your
loan payment or credit card debt, something unexpected or an emergency can
happen and you will need extra cash. Will you still be able to meet your
commitments if such a thing happens?
Hence, it is important not to over-commit on loans and purchases especially using

credit cards. As a general rule, your total monthly payments on all your loans and
credit card debt should not exceed one-third of your gross monthly salary.
Never, ever borrow money from a loan shark because you will:
(a) Get a loan on very strict terms and conditions;
(b) Have to pay a very high rate of interest with a daily compounding effect;
(c) Open yourself and your family to harassment if you fall behind on your
payments; and
(d) Be pressured into borrowing more from the loan shark to repay one debt
after another.

10.3.2 Types of Loan

There is a wide range of loans and credit facilities available in the market. We will
discuss the more common ones in this topic. The common types of loan are
illustrated in Figure 10.4.
Figure 10.4: Types of loan
Now we will discuss in detail each type of loan.
(a) Personal Loan

This is a loan offered for personal use, not for a large purchase such as a
house or car but more for the purchase of a personal computer or money to
use for your marriage. It is tempting to apply for this type of loan because
the application process is usually fast and easy. Moreover, most banks do not
require a guarantor or collateral. However, some of the interest rates can be
very high.
As stated earlier, ask yourself some important questions before applying for
such a loan. Be clear about the purpose of your application and whether you
can afford to make the repayments.
(b) Car Loan

Most people want to have their own car as soon as they start working. They
usually buy a car using a loan (also known as hire purchase or HP). If you do
so, you become the hirer of the car while the financial institution is the owner.
As the hirer, you pay instalments to the financial institution based on their
terms and conditions. You become the owner after completing all your
payments.
As with any loan you take, ask yourself the important questions before
deciding to borrow for the purchase of a car. Also work out your cash flow
to see how much you can afford to pay in monthly instalments. When you
apply for a car loan, you can do so directly with the financial institution or
through the car dealer, who will then submit your application to the financial
institution.

As a hirer you should:

(i) Read all the fine print in the written agreement;
(ii) Check and ensure that the purchase price and HP terms in the
agreement are as agreed;
(iii) Know your rights under the Hire Purchase Act;
(iv) Know your obligations as a hirer so that you do not do anything to
breach the agreement;
(v) Keep all documents, such as the agreement and receipts, in a safe
place; and
(vi) Make your payments to authorised persons only as identified by the
financial institution.
However, before taking up a car loan, check on the effective interest rate as
it will work out to be much higher than the flat rate offered. Look at the
following example of a RM50,000 loan at five per cent interest per annum
with a five-year tenure. The effective interest rate works out to be 9.15 per
cent.
Monthly instalment: RM1,042

Total interest payment: RM12,500
Total loan + interest: RM62,500
Approximate effective rate per annum: 9.15%

Do know the basics of hire purchase? Table 10.2 provides some details on
hire purchase basics.
Table 10.2: Hire Purchase Basics
Terms Explanation
Minimum This is about 10 per cent of the cash value of the car but
deposit financial institutions can request for a higher deposit.
Interest rate This is a fixed rate and the maximum allowed is 10 per cent.
Effective interest This is the actual interest that you pay after taking into
rate account annual compound interest on the loan over its
tenure.
Late payment You will be charged a penalty if you are late in paying your
charges instalments. This interest is charged on a daily basis.
Guarantor Financial institutions may require a guarantor who will be
responsible for the unpaid portion of a loan including
interest, if you default on your loan.
Insurance You must purchase insurance coverage for your car.
Financial institutions require a car owner to undertake a
comprehensive insurance policy.
Repossession If you default on your payments, financial institutions can
repossess your car as they are the legal owners.
When you do not make your car loan payments on schedule, the financial
institutions can repossess your car by engaging a registered repossessor.
Having your car taken away from you can be a traumatic and embarrassing
experience. Before taking any action, the repossessor must show you his
identity and authority cards along with a repossession order issued by the
financial institution. He must then make a police report and bring the
repossessed car to a place indicated by the financial institution.
You will receive advance notice in writing, known as the Fourth Schedule,
before your car is repossessed. This notice expires in 21 days after which you
will receive a second notice of 14 days after the Fourth Schedule is issued ă
this is a reminder to pay up or your car will be repossessed.
To avoid repossession, pay the outstanding arrears before the notice period
expires or return the car to the financial institution before the expiry date.
You will still need to pay any outstanding amount less the value of the car.

If your car has been repossessed, there is still a way to get it back. The
financial institution will issue you and your guarantors, if any, a Fifth
Schedule notice within 21 days of the repossession. You can have the car
returned to you if you pay all outstanding arrears or the due amount in full
and other expenses incurred by the financial institution. Alternatively, you
can introduce a buyer, for example, a family member or friend, to buy the car
at the price given in the Fifth Schedule.
Within 21 days of the Fifth Schedule issue, if you or your guarantors do not
settle the outstanding amount, the financial institution will sell your car by
public auction or give you the option to buy the car at a price lower than the
estimated price stated in the Fifth Schedule.
(c) Housing Loan

The market for housing loans today is very competitive and financial
institutions now offer all kinds of loans to attract customers. Some loans are
even packaged with free gifts.
Do your research, get as much information as you can and compare items
such as interest rates before deciding on the loan suitable for you. As with
other loan products, you can choose between a conventional or Islamic
housing loan.
A housing loan is a large financial commitment, one that will stretch over
many years. Think very carefully about the various aspects of such a loan
before making your decision, some of which are as follows:
(i) Is the loan meant for buying a completed house or one under
construction? Are you buying land to build a house?
(ii) What is the value of the house or land you want to buy? How much
can you afford to pay in monthly instalments, depending on your
monthly cash flow?
(iii) Do you have enough money to make the down payments and the cash
flow to pay the loan instalments?
(iv) What are the incidental fees or costs that you have to pay? The more
common ones are legal fees, stamp duties, processing fees and
disbursement fees.
(v) Is the interest rate fixed or variable with the Base Lending Rate (BLR)?

(vi) How flexible can your loan payments be? There are several payment
schemes available.
(vii) Is there an early termination penalty if you repay your loan in full
before the tenure expires? Financial institutions may impose such a
penalty because of the attractive rates they may have packaged for the
loan.
Is it better to take a loan on a fixed or variable interest rate? With a fixed rate
loan, the interest is fixed and you therefore know the amount of instalments
you need to pay. With a variable rate loan, the rate changes according to the
BLR. If the BLR rises, your interest rate will increase and your monthly
repayments will be higher. On the other hand, if the BLR decreases you will
benefit from paying lower monthly repayments.
There are also variable interest rate loans with fixed monthly payments where
any changes to the interest rate will either increase or decrease the loan tenure.
There is more than one method of paying a housing loan (Table 10.3). The
principal sum of a loan is reduced each time an instalment is paid.
Table 10.3: Methods of Payment for Housing Loan
Method of Payment Explanation

Graduated payment This allows you to pay lower instalment payments at
the beginning of the loan. The amount will, however,
gradually increase over time. This scheme is useful if
you have just started working and your salary will
increase over the years.
Partial prepayment of You can shorten the loan tenure by making partial
the outstanding loan prepayments with your surplus savings or annual
bonus. If done during the early years of the loan tenure,
you can reduce your interest charges. There may,
however, be restrictions on how much you can pay.
As a borrower you should:

(i) Read and understand all the terms and conditions of the loan;
(ii) Stick to these terms and conditions;
(iii) Ask questions on all aspects of the loan to your satisfaction;
(iv) Make payments on time; and
(v) Check that you have accurate information on your loan account on a
regular basis.

As with any loan, if you fail to pay your instalments, the financial institution
will take legal action against you to recover the loan.
To enhance the borrower's credit standing and enable them to obtain financing,
be it for a car or housing loan, financial institutions may require guarantees
from prospective borrowers. You may be requested by a family member or
friend to become a guarantor for his or her loan. Think carefully before you
agree to do so because being a guarantor for a loan means that if the borrower
cannot or will not pay the loan, you are legally bound to do so.
Should you agree to be a guarantor, make sure that:

(i) You read and understand the nature of the guarantee and the
implications on you;
(ii) You do not sign a blank or partially filled document;
(iii) You do not become a guarantor to someone whose integrity you are
doubtful of; and
(iv) You are aware of your liabilities if variations are made to the terms and
conditions of the loan.
It is not easy to withdraw from being a guarantor. The decision is up to the

financial institution, which may agree, subject to conditions such as full
repayment of the principal debt. Even if the borrower dies, the financial
institution can seek recourse from the guarantor if there are no other sources
of repayment of the loan.
10.3.3 Types of Cards, Credit Trap and Tips on Using

Credit Cards
In this subtopic, we will look at the types of card available to us, the credit trap of
paying the minimum and tips on using credit cards.
(a) Types of Card

There are some cards available these days to make our lives easier, so we do
not have to carry cash every time we shop or pay for any service rendered.
The types of cards are shown in Figure 10.5.

Figure 10.5: Types of card
Below is a detailed explanation of each type of card shown in Figure 10.5.
(i) Credit Card

Credit cards allow you to buy items and pay for services electronically
without using cash. When you use a credit card, the credit card acquirer
will pay the merchant on your behalf and bill you later through your
issuing bank. This makes purchasing things a lot easier.
A credit card can be a useful payment instrument if you know how to

use it properly and wisely. Some of its benefits are as follows:
 It is a convenient and efficient method of payment;
 You can use the statement to track your spending for budgeting
purposes;
 Some credit cards provide personal accident and travel insurance,

depending on the type of card issued;
 Credit card issuers have introduced attractive schemes, such as

zero interest instalment scheme, flexi-pay scheme and zero per cent
balance transfer, to enable you to maximise on your purchases; and
 You can also earn loyalty points for usage of credit cards, a reward
that is unavailable when cash payments are made.
Normally, the credit card limit given is two or three times your monthly
salary. If you use your card up to this limit, you are effectively spending
at least two or three months of your salary in advance.

(ii) Charge Card

A charge card is similar to a credit card. While a credit card allows you
to make a minimum payment when you receive your monthly
statement, a charge card does not. With a charge card, you must pay
the total amount due in full each month, failing which, late payment
charges will be imposed.
(iii) Debit Card

A debit card is similar to an Automatic Teller Machine (ATM) card,
except that you do not have to withdraw cash from an ATM. You can
use the debit card at places where you pay for products or services. The
amount spent will be immediately deducted from your bank account.
Similar to credit cards, it is convenient to use a debit card because you
do not have to carry cash with you.
(iv) Prepaid Card

A prepaid card can be used to make purchases but there is a spending
limit equivalent to the amount of money you place on the card. It is like
a prepaid phone card or a Touch & Go card, where you have a fixed
amount of money you can spend. When the amount placed on the card
gets low, you can reload up to the maximum amount as determined by
the card issuer. Debit and prepaid cards are better options for people
who are not financially disciplined.
(b) The Credit Trap of Paying the Minimum

It may be tempting to just pay the minimum monthly due on your credit card
statement. After all, it helps with your cash flow. Unfortunately, there are
consequences of paying just the minimum each month ă you will incur
interest charges and it will take you longer to settle your outstanding
balance. The result? Huge debts in a short time frame. At present, most card
issuers impose a finance charge of 1.5 per cent per month, which is charged
on a daily basis and compounded monthly.
Earlier in this module, we discussed the effect of compound interest when

you save your money. Compound interest also applies in this situation,
where interest is paid on the principal amount plus the accumulated interest
amount owing.

It is important to realise that the longer you take to settle your credit card
debts by making minimum payments, the more money you will owe. With
high interest rates, you will end up paying more money to the financial
institution as compared with the original amount you paid for the product
or service. Remember to always pay in full ă this will ensure you keep out of
financial trouble.
(c) Tips on Using Credit Cards

Here are few tips that you may adopt when using your credit card:
(i) Pay the amount due in full when you get your monthly statement to
avoid paying interest;
(ii) Do not use a credit card if you cannot make the monthly payments;
(iii) Limit the number of credit cards you have;
(iv) Do not use your credit card to get cash advances from an ATM. Each
time you use your credit card to withdraw money, you are increasing
your loan commitments in addition to paying upfront withdrawal
charges and daily interest;
(v) Pay before the due date to avoid late payment charges and penalty
rates;
(vi) Be aware of the consequences of paying minimum amounts all the
time;
(vii) If you have a cash flow problem, pay the minimum amount for the
present but pay the full amount as soon as possible; and
(viii) Always check your credit card monthly statement to ensure proper
transactions and charges are recorded. The statement includes your
transactions, any fees and charges, the due date of payment and the
minimum payment. Call your bank if there is anything wrong with
your statement, or you have not received it.
10.3.4 Repayment and Default

A good paymaster is one who pays his or her monthly loan repayments on time
and in the amount required according to the terms and conditions of the loan
agreement. In this subtopic we will look into the credit bureau and debt
repayment problems.

(a) Credit Bureau

The Credit Bureau of Bank Negara Malaysia (BNM) has been in operation
since 1982. It collects credit information on borrowers, including private
individuals, businesses (sole proprietors and partnerships), companies and
government entities, and supplies the information back to lenders.
The Credit Bureau keeps information in the Central Credit Reference

Information System (CCRIS), which is a computerised system that
automatically processes credit data received from financial institutions and
synthesises this information into credit reports. These reports are made
available to financial institutions on request.
Each time you make a new application for a loan, the financial institution
will check your payment history with the Credit Bureau. They will use the
information to decide whether to give you a loan or not. Other than the
Credit Bureau, there are also privately-owned companies that provide their
clients, including financial institutions, with information on a borrowerÊs
repayment record and status of legal actions, if any.
Keep a copy of your CCRIS report to track your loans with financial
institutions and monitor your loan and credit card repayment pattern. You
can check whether you have a healthy repayment schedule and defaults or
late payments appearing in your report. If your CCRIS report indicates late
repayment or default, a financial institution has the option of denying any
new loan applications because it indicates that you are not managing your
loans well or you have financial difficulties.
It pays to be a good paymaster because this will be reflected in your credit

report. In fact, effective 1 July 2008, you are rewarded for being prompt in
your credit card payments ă financial institutions impose finance charges on
a tiered basis depending on your repayment behaviour.
If you wish to find more information on the credit bureau, go to this website:
http://creditbureau.bnm.gov.my
(b) Debt Repayment Problem

Defaulting on loan payments and failing to settle your credit card debt can have
terrible consequences. You will be sued by the financial institution. Your car or
property will be auctioned. Your family members will be affected because they
may need to help in paying your debts. Your guarantors, if any, will also suffer
because legal action can be taken against them. On top of that, you may become
a bankrupt if you fail to repay your loan.

You will suffer emotionally due to stress. You will be getting constant calls
and letters from lawyers and lenders to demand that you settle your debts.
In such situations, you can become unproductive and your work or health
may be affected.
Some signs to show that you are in financial difficulty are:

(i) You are not in control of your money, that is your expenses are higher
than your income;
(ii) You have more debts than you can manage to pay;
(iii) You are only able to pay the minimum five per cent every month on
your credit card bills;
(iv) You do not have any savings to meet personal or family emergencies;
(v) You get calls from debt collectors regularly; and
(vi) You are being served with legal notices of demand.
If you are facing any of the above problems, seek help and advice on your
finances from a professional financial counsellor as soon as possible.
SELF-CHECK 10.3
1. What are the risks of becoming a guarantor? How can you
minimise the risks of becoming a guarantor?
2. How do you determine whether an individual is facing financial

difficulty?
3. Discuss the main types of loan.
 In order to build wealth, start saving and invest now. You also need to increase
your assets in order to increase your net worth.
 Diversify your investments in order to spread your risks. The higher the return
you get from an investment, the greater the risk.

 The amount of life insurance to buy depends on how much money you need
to support your lifestyle and pay your expenses when you are critically ill or
disabled due to illness or accident.
 When making a claim, ensure that you have all the documents needed by the
insurance company to speed up the process.
 When applying for a loan, ask yourself the purpose of the loan and whether
you can afford to make the instalments. Never ever resort to borrowing from
unlicensed moneylenders. Be aware of the terms and conditions of the loans
you take.
 Always ask for the effective interest rate on all your hire purchase and fixed
rate term loans. Your total monthly payments on all your loans and credit card
debt should not exceed one-third of your gross monthly salary.
 Do not fall into the trap of using credit and charge cards as if it is „free‰ money.
 Paying only the minimum monthly payment on your credit card statement can
result in a huge debt due to the compounding effect.
 Aim to be a good paymaster so that you will have a positive credit report.
Bonds Loan
Borrowing Property
Cash Real Estate Investment Trust (REIT)
Credit Risk and return
Fixed interest investment Saving
Insurance Shares
Insurance coverage Unit trust funds
Insurance premium Wealth
Investment



small business management (5th ed.). Upper Saddle River,
NJ: Prentice Hall.

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Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Adapted by: Prof Dr Mohd Ghazali Mohayidin

Enhancer: Dr Abu Hanifah Ayob

Developed by: Centre for Instructional Design and Technology

First Edition, August 2017

Copyright © Open University Malaysia, April 2020, MPU2222

Copyright © Open University Malaysia (OUM)

Topic 1 Introduction to Entrepreneurship 1

Topic 2 Identifying Entrepreneurial Characteristics 10

Topic 3 Developing Entrepreneurial Creativity and Innovation 19

Copyright © Open University Malaysia (OUM)

Topic 4 Ventures Environment Assessment 35

Topic 5 Business Plan 53

Topic 6 Starting a New Entrepreneurial Venture 66

Copyright © Open University Malaysia (OUM)

6.5 Sources of Capital for Business Activities 86

Topic 7 Entrepreneurial Networking 90

Topic 8 Evaluation of Entrepreneurial Opportunities 96

Topic 9 Entrepreneur and Personal Financial Planning 107

Copyright © Open University Malaysia (OUM)

Topic 10 Achieving an EntrepreneurÊs Personal Financial Dreams 125

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

COURSE GUIDE DESCRIPTION

As an open and distance learner, you should be acquainted with learning

Copyright © Open University Malaysia (OUM)

Table 1: Estimation of Time Accumulation of Study Hours

COURSE LEARNING OUTCOMES

Topic 1 introduces and defines entrepreneurship together with difference motives

Copyright © Open University Malaysia (OUM)

Topic 2 focuses on sixteen most dominant entrepreneurial characteristics. The

Topic 3 is devoted to creativity and innovation. Entrepreneurs need to know the

Topic 4 focuses on the environmental assessment that should be conducted when

Topic 6 describes the various types of ventures that an entrepreneur can

Topic 7 discusses the importance of networking for entrepreneurs. It further

Topic 8 discusses the evaluation of entrepreneurial opportunities. It also explains

Copyright © Open University Malaysia (OUM)

Topic 10 explains entrepreneur wealth building by having a good savings habit as

TEXT ARRANGEMENT GUIDE

Self-Check: This component of the module is inserted at strategic locations

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Barringer, B. R., & Ireland, R. D. (2016). Entrepreneurship: Successfully launching

Dollinger, M. J. (2007). Entrepreneurship: Strategies and resources. Lombard,

Histrich, R. D., Peters, M. P., & Shepherd, D. A. (2017). Entrepreneurship

Copyright © Open University Malaysia (OUM)

Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: Contemporary

Zimmerer, T. W., & Scarborough, N. M., (2007). Essentials of entrepreneurship and

TAN SRI DR ABDULLAH SANUSI (TSDAS)

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Source: Kuratko & Hodgetts (2001)

Economists introduced the concept of entrepreneurship in the 18th century as a

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1.1 THE EVOLUTION OF ENTREPRENEURSHIP

The concepts of the entrepreneur and entrepreneurship are elaborated further in

Table 1.1: Evolution and Development of the Theory of Entrepreneurship

Period Theory and Concept

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