CHAPTER TWO

SMALL BUSINESS MANAGEMENT

2.1 Definition of Small Business

The small business (cottage industry) may be defined to be an enterprise or series of operations
carried out only by a workman skilled in the craft on his own responsibility, the finished
products of which he markets himself. He works in his own home with his own tools and
materials and provides his own labor. These workers are mostly hand labors and having personal
skills with little or no aid from modern technology and machinery they work in accordance with
the traditional technique.
Small business is a business which is independently owned and operated, not dominated in its
field of operation and meets certain standard of number of employee and capital.
capital Generally,
there are two approaches to define small business enterprises:
 Size criteria Economic/ control criteria

Size criteria
To measure the size of the business and classify them in to small business enterprise, the
following criteria are commonly used;
1 Sales volume – Amount of product an enterprise produce and sell in specified period of
time(usually one year)

2 Number of employees

3 Asset size

4 Volume of deposit

5 Insurance in force

Economic/control criteria
1 Market share

2 Independence

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 3 Management style

The most widely used criteria to define small business are number of employees and amount of
capital. Besides, different countries defined small business in heir own way. In our country,
Ethiopia, micro and small enterprises are given different meanings at different times and the
definition given by the Central Statistics Authority in using information analysis and that given
by the Ministry of Trade are Industry in 1997 are basic applicable definitions.

The Central Statistics Authority defines small trade organization that employs less than 10
people. Those engaged in handicraft and informal work sectors are categorized as micro
enterprises. As the name indicates, informal trade organizations are to mean those who are
engaged in various works without possessing trade license.

The definition of micro and small trade enterprises can vary depending on the level of capacity
of subsiding of each country and from time to time. In our country, the definition of micro and
small trade enterprises is determined from time to time by the Ministry of Trade and Industry by
evaluating the situation of the time. Accordingly, when seen from the current development level
(standard) and capacity, the following definition is determined to be applicable by the Ministry
of Trade and Industry.
 Micro Trade work enterprises means trade organization whose capital is not exceeding 
exceeding  Birr
20,000.00 and higher consultancy service organizations and other higher technological
enterprises are not included.

1 Small business organizations means trade work organizations whose minimum paid up
capital is not less than Birr 20,000.00 and not exceeding from Birr 500,000.00 and shall not
include higher technological consultancy service and other higher technological institutions.

2 Micro and small business works sectors means, without including those mentioned by the
two capital level above (higher technical consultancy service and other higher technological
institutions) trade industry and technical (hand craft) intuitions.

3 Trade means supplying for market any product or service for the purpose of getting profit.
For the purpose of this program industry shall mean manufacturing industry. Manufacturing
industry shall mean the process of producing new product privately or joint possession using
mechanical or chemical methods; using organic or inorganic matters through machinery or

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 labor.

4 Handicraft means the process of producing a product mainly through hand and small hand
tools without motor power.

5 In the region, when we refer micro and small enterprises, it is based on the definition given to
it by the Ministry of Trade and Industry here in above.

2.2 Characteristics of Small Business

1 Actively managed by its owner - independent Management
2 No or few management layers
3 Style of management is highly personalized. I.e. the owner has first hand knowledge of
every move in the business a at all levels and he is the main decision maker
4 Relatively small in size within the industry as compared to the highest unit in its field
5 Largely dependent on the internal resources of capital to finance its growth.
6 Capital is supplied by ownership and is held by an individual or a small group
7 Limited resources: a small business is unlikely to have sufficient resources to dominate
the market.
8 Independence: the owner has ultimate authority and effective control
9 Scope of operations: small enterprises serve a limited segment of local or regional market
10 Scale of operation: they occupy a limited share of given market.
11 Labor: they are low in capital and high in labor, as they cannot afford capital-intensive
machinery.
12 Specialized skills: The small enterprises normally have specialized skills for certain
specific clients. The small business does well in small, isolated, overlooked and imperfect
market
13 Small business does well in developing markets as it can easily absorb the changes
14 Small business survives well in a bad business condition due to having quick and clever
capability of bringing changes in cost and labor.

2.3 Major Areas of Small Business

Small business tends to do better in some industries than in other:
2 Service business-
business- requires a small capital investment to get started. In Ethiopia, most of

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 small enterprises are engaged in hotels and transportation services.

3 Retail business- buying products from whole sellers and reselling the products to final
consumer

4 Wholesale business-buying
business-buying products from large manufacturers and reselling the products
to retailers

5 Manufacturing business

6 Agriculture

2.4 The Importance of Small Business Enterprises

The following are some of the major vital roles of MSE
a. Greater value in building up a local production structure and in promoting economic
growth
b. As a means of creating employment opportunity, and achieving a fair distribution of
nation resources, income, knowledge and power
c. A seed bed for development of local entrepreneurship
d. Promote rural industrialization
e. More appropriate technology is applied
f. Supplier of parts and accessories to bigger industries
g. Play prominent role in promoting the export market

2.5 Environment of Small Business

Entrepreneurial environments are critical to the creation of favorable atmosphere to the
development of entrepreneurs. Entrepreneurship environment refers to the various facets within
which enterprises have to operate in. These entrepreneurial environments are most rationally
divided into two major parts: internal and external environment. The two major parts are:
 External Environment
 Internal Environment

External Environment
By and large, entrepreneurship is influenced by environments created by the external forces.
These external forces are demarcated as macro and micro environmental forces.
1. Macro – Environment
Macro environment is the type of environment that is not specific to a given entrepreneur or
company. It has universal application to all the entrepreneurs in a given country irrespective of

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the type of entrepreneurs. Macro environmental force more or less include the following
environments

a) Economic environment: related to factors of production & distribution

like economic staged, economic system, economic policies economic indices (per capital
income), infrastructural factors, living standards, etc
b) Socio-cultural environment: related to social attitude & cultural
factors. Demographic factors, social concern & attitude, education level, aspirations and
values, consumer motives etc
c) Political- legal environment: related to government regulation &
consumer protection-like political system, consumer protection, taxation laws, quality
leadership, etc.
d) Technological environment: It relates to the knowledge applied and
equipments used-like source of technology, communication & infrastructure facilities,
and patent protection.

2. Micro - Environment
Micro environmental forces on the other side are forces that are specific to companies or
entrepreneurs. It includes forces like customers, suppliers, competitors, intermediaries, etc
Sources of Environmental Scanning
 Formal Sources: research studies, consultants
 Secondary Sources: publications, magazines, books
 Internal Sources: MIS records, co- employees
 External Sources: marketing intermediaries, customers, suppliers etc
 Spy

Internal Environment
This is the second part of SWOT analysis. It identifies the weakenesses and strengths that are
internal in nature. In sensible terms it is assessing the expertise, resources, abilities, skills, costs,
organizational structure and culture, manufacturing techniques etc.
2.6 Factors that contribute to the success of small business
2 Hard work, drive and dedication- an individual must have a strong desire to work
independently of others and be willing to put long hours if he is to succeed.
Generally,, successful entrepreneurs tend to be reasonable risk taker, self confident ,
hardworking, goal setter and innovators

3 Market demand for products/ services provided- for any business to succeed, there
must be sufficient demand for the products or services provided

4 Management competence-regardless of the level of demand, it is necessary for the

entrepreneur to posses basic managerial competences. He needs to understand how to select a
location, what kind of facilities re needed, how to acquire finance and how to manage people

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2.7 Common Causes for Small Business Failure

Many small businesses fail due to various reasons. Presumably, most of the reasons are
artificial i.e. the majority of the reasons are created by faults and mistakes of human
beings. Some of the reasons include the following.
 Managerial incompetence or inexperience- just as competence contributes to
success, so does incompetence contribute to failure. The owner may lack the basic
or experience to recognize problems and to make hard decisions. She/ he may
have no experience in hiring and evaluating employees, dealing with bankers, or
negotiating contracts, may do a poor job of dealing with suppliers or customers.

 Neglect-some
Neglect-some entrepreneurs fail because they neglect some aspect of operations.
Beyond this they also ignore customer dissatisfaction, worker unrest etc

 Weak control system-if

system-if control systems do not provide adequate information on a
timely basis, the entrepreneur may be in trouble before he knows it.

 Under capitalization-having
capitalization-having too few funds to survive start up and growth

 Failure to clearly define and understand your market,

market, your customers, and your
customers' buying habits

 Poor financial control

 Over investment in fixed asset
 Failure to plan current as well as future operation
 Failure to adopt proper inventory control system
 Improper Attitude ( The entrepreneur may not respect time, employees and may
have lazy lifestyle and dictatorial style of work)
 Inadequate marketing plan
 Incorrect market identification
 Poor distribution channel
 Poor location
 Weak marketing communication or promotion

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2.8 Problems in Ethiopia Small Business
While in certain circumstances SMEs enjoys some advantages of flexibility, in general they
suffer from structural handicaps in their operations arising from small size, particularly where
exports are concerned. Even SMEs that are highly successful domestically, for a variety of
reasons, do not find it easy to upgrade production to production for exports.
Problems faced by SMEs in Ethiopia typically include:

1 Scarcity of capital.
2 Limited and unequal access to institutional credit markets.
3 Irregular access to domestic and imported inputs coupled with higher cost.
4 Inadequate infrastructure facilities.
5 Weak managerial and technical skills.
A large number of SMEs have successfully overcome these formidable difficulties, established a
sound base in the domestic market, and may be potentially capable of breaking into export
markets. However they may be hampered by a variety of circumstances:
1 Lack of information on possible export market.
2 Absence of guidance on export regulations and procedures.
3 Inability to identify sources of assistance for product development and product upgrading
for export.
4 Lack of information on export credit and insurance facilities as well as for export
requirements.
5 Lack of information on operation of indirect marketing channels like merchant export
houses.
6 Absence of guidance on basic management issues relevant exporting firms.
7 Absence of sound steps that need to be taken to enter in export field.
2.9 Setting Small Business
2.9.1 Business Ideas
A business idea is some one’s opinion regarding what may or may not be a good business. There
are three types of business ideas. They are:

1. Old idea – Here an individual copies an existing business idea from someone.
2. Old Idea with Modification – In this case the person accepts an old idea from someone

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 and then modify it in some way to fit a potential customers demand.
3. A new Idea – This one involves the invention of something new for the first time
a) Sources of Business Ideas
As entrepreneurs start up a new business, they could get the idea of business from different
sources. There are many possible sources of ideas. Some of the more useful ones are consumers,
existing companies; distribution channels, the government and research and development units.
i. Customers: - Entrepreneurs are paying increasing attention to what should be the focal
point of the idea for a new product or service in the eyes of the customer. This can take the
form of monitoring ideas mentioned on an informal basis or formally arranging for
consumers to have an opportunity to express their opinions.
ii. Existing companies: - Entrepreneurs should also establish a more formal method for
monitoring and evaluating the products and services being offered by existing or new
companies. Frequently this analysis uncovers ways to improve on these present offerings,
resulting in a new venture being formed.
iii. Distribution channels: - Members of the distribution channels are also excellent sources for
new ideas. Because of their familiarity with the needs of the market channel members
frequently have suggestions for completely new products. These channel members can also
be a source of help in marketing the new idea once it is developed by the entrepreneur.
iv. Research and Development units: - The largest source for new ideas is the entrepreneur’s
own research and development department, whether this is a more formal endeavor
connected with current employment or an informal lab at home. Of course the more formal
research and development department is often better equipped to produce successful new
product ideas.
v. Government: - New product ideas can come from government regulations. In addition,
governments that have patent offices provide a good source of new ideas to entrepreneurs.
Although the patents themselves may not be feasible for new product introductions, they
can frequently suggest other, more marketable, new product ideas.

2.9.2 Small Scale Industry & Large Scale Industry

Definition
The countries generally try to identify their SME and large scale industries in order to target

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them for special assistance. Yet, the definition of the terms depends to a greater extent on local
conditions. An enterprise considered an SME in one country might well be bigger than many
large countries in another. In some cases, each of the industry further broke down in to two
separate groups. Thus a generic definition is not easy to find, any definition and classification
can thus be considered specific to the country in question. . There are nevertheless three
parameters that are generally accepted, either signally or in combination, in defining the terms in
most countries, these are
1 Number of workers employed which is the most widely used criteria
2 The level of capital investments or assets
3 The volume of production or business turnover.
In many countries, medium scale industry is not defined and is understood to include those that
fall between small and large industries
Accordingly, Small scale industry means an industry that has less capital and employee less
workforces and Large-scale industries refers to those which have relatively substantial capital
and grater annual sales turn over.
Advantages Associated With Small Scale Industries
 This industry is especially specialized in the production of consumer commodities.

 Small scale industries can be characterized with the special feature of adopting the labor
intensive approach for commodity production. As these industries lack capital, so they
utilize the labor power for the production of goods. The main advantage of such a process
lies in the absorption of the surplus amount of labor in the economy that was not being
absorbed by the large and capital intensive industries. This, in turn, helps the system in
scaling down the extent of unemployment as well as poverty.

 It has been empirically proved all over the world that Small Scale Industries are adept in
distributing national income in more efficient and equitable manner among the various
participants in the process of good production than their medium or larger counterparts.

 Small Scale Industries help the economy in promoting balanced development of

industries across all the regions of the economy.

 This industry helps the various sections of the society to hone their skills required for
entrepreneurship.

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  Small Scale Industries act as an essential medium for the efficient utilization of the skills
as well as resources available locally.

Small Scale Industries enjoy a lot of help and encouragement from the government through
protecting these industries from the direct competition of the large scale ones, provision of
subsidies in the form of capital, lenient tax structure for this industry and many more.
Advantages of Large Scale Industries
Advantages of Large Scale industries generally related to Advantages of Large Scale Production
in which would compensate advantages enjoyed by small scale producers. The advantages
claimed for production on a large scale resolve themselves into two general classes:

(1) Economies in making the goods, and

(2) Economies in marketing the goods.

As to the first, it is claimed that in production on a large scale there is a saving in (a) capital
cost, per unit of product, both in fixed and in circulating capital; in (5) labor cost, owing to the
possibility of more efficient organization ; in (c) the possibility of making improvements, both
through the employment of special investigators and inventors, and through the comparison of
methods in different departments of the same factory or in the same departments of different
factories under the same ownership; in (d) the cost of superintendence; in (e) the utilization of
waste, as is instanced by the Standard Oil Company and the large beef and pork packing
companies; in (f) providing their own aids to making and marketing making their own cans,
boxes, etc., and owning railways and steamship lines, etc. In businesses enjoying this last
advantage, we have examples of integration of industry as well as of concentration of industry.

Among the second class of advantages claimed for large scale production, economies in
marketing the goods, are the following: (a) economy in securing trade, through advertising and
commercial travelers; (6) economy in "carrying " stocks of goods, a relatively smaller stock
being sufficient to meet the fluctuations in demand; (c) economy in getting goods to consumers,
through the power to secure better freight rates for large shipments, and through the power
possessed by some concerns to avoid "cross freights"; (d) economy in securing a foreign market,
through the greater power of the large concern to withstand the cutthroat competition common in
"hard times."

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2.9.2 The Start up Process of a Small Enterprise
The challenges of starting a new enterprise from the stage of its conception till functioning are
indeed stupendous or multidimensional as indeed its contribution to the society in various forms
such as employment, economic growth, balanced development, equitable distribution of wealth
etc. Success is a slave to those who only correctly perceive the nature and intensity of problems
that they are likely to encounter but also plan appropriate remedial actions. Starting a new
business requires the following steps:
STEP 1: Identification of New Venture Opportunities
In the search for new ventures, entrepreneurs explore both (a) external and (b) internal resources.
The external resources include:-

1 Newspapers, trade journals, professional journals etc. which tell about trends in fashions,
customs and other social areas.
2 Professional magazines catering to particular interests such as electronics, computers, oils
3 Trade fairs and exhibitions displaying new products and services.
4 Government agencies.
5 Ideas put forth by others.
Internal resources basically consist of storehouse of knowledge build up by an individual over
the years. An entrepreneur draws upon it and undertakes the following exercise:-
o Analysis of concepts in the light of existing problems and their capacity to solve them.
o Search of memories to find similarities and elements related to the concept and its
problems.
o Recombining the elements found in new and useful ways.

Sources of Ideas for New Products

1. Necessity
It involves the identification of potential customer needs and then tailoring the product and
services to meet them.
2. Hobbies/ Personal Interest
For example, an aircraft designer working for a large company developed a catamaran for his
own pleasure. Later he was asked to build a similar catamaran for a friend. Gradually, it took
the shape of a successful business.

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3. Watching Trends in Fashions and Customs
Alert observers of the fashion scene can capitalize the opportunity thrown by the change of
fashion. Demand for handcrafted jewelry, fast foods etc. have made many professionals in
these fields.
4. Observing other’s Deficiencies
It helps improve performance or add desirable features, for instance, development of a key
that would identify the person and open the door only to him. It would sound an alarm if the
door is forced open or in case an improperly coded key is used.
5. Gap Filling
Business opportunities may be found to exist in reply to the question, why is not there a
gadget for doing this? Several products have been developed to fill up a felt gap. For
instance, the difficulty of cleaning an old paint brush has led to the discovery of a disposable
paint brush with plastic handle into which a polyurethane tapered brush can be inserted and
later an discarded after finishing painting.
6. Novel Use of Known Products
With ingenuity, it is possible to think of new uses of existing products e.g. Use of flyash- a
common effluent in thermal plants, to make bricks and light-weight concrete etc. Similarly,
rice husk (a common product in rice Sheller) could be used for making hardboards.
7. Ancillarisation/Subsidiary
An entrepreneurially oriented brain can conceive new ideas or think of improvements in
products with which they are familiar: As a consequence, a unit ancillary of an existing
industry could be start
STEP 2: Evaluation and selection of New Venture Opportunities
Once the business ideas are lacerated, study, screening, and testing of these ideas are done based
on the entrepreneur’s own experience or with the help of experts in the field. While evaluating
the major points to be considered are:
i) Technical feasibility that is the possibility of production with the available skill &
technology
ii) Commercial viability of the idea based on cost and profitability. It evaluates the
tradeoff between cost and income to judge the attractiveness of a business idea

Pitfalls in Selecting New Venture Opportunities

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(1) Lack of objectivity
Some entrepreneurs get so obsessed with their idea that they overlook the need to scrutinize
its feasibility. No wonder such projects end up as failures.
(2) Market Myopia
A shortsighted approach of concentrating on production rather than on marketability could
lead t avoidable disaster. An entrepreneur may fail to properly assess the market acceptability
of his product. He may not appreciate that no product can become instantaneously profitable
or could have an endurable success. Selection of the right time for introducing the product is
important for its success..
(3) Inadequate Understanding of Technical Aspects
Technical difficulties involved in the production of a product are a time consuming and
thorough job. Inexperience in this area can prove quite costly and swamp a budding
enterprise.
(4)Lack of Product Differentiation
To capture the market, the product should have distinctive characteristics in terms of design,
utility and other features. Assured superior performance over the products is essential to
provide it a competitive edge.
Pricing is no problem in the case of such products. Product differentiation is essential so that
the potential customer could recognize the product merely by looking at it.
(5)Overlooking Legal Issues
A shrewd entrepreneur should be alive to meeting the various legal requirements. For
instance, workers should be provided with legitimate legal dues, consumers are provided
with reliable and safe products, copyright, trade mark etc. should be observed
STEP 3: Technical, Marketing and Financial Feasibility of the Identified Project
A. Technical Feasibility
It covers the following
1 Identification of critical technical specifications comprising
a) The functional design of the product.
b) Adaptability to the new customer demand.
c) Durability
d) Reliability of performance.

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 e) Safety
f) Reasonable utility (i.e. acceptable level of obsolescence)
g) Standardization (i.e. elimination of unnecessary variety)
2 Examination of product quality-cost relationship
In making this investigation, the entrepreneur must understand that there are trade offs
between technical excellence and associated cost i.e. a positive relationship exists between
technical quality and costs. It is possible through an increase in the technical excellence of a
product to that level at which marginal product quality equals marginal cost. This level is
reached where slope of product quality and product cost curves are equal. Quality
enhancement should not be carried beyond a particular point because it would cause cost
increase and lead to decrease in total market demand (except where the product has a snob
value). Thus entrepreneur should avoid unnecessary gold plating when market situation does
not justifies it.
3 Product testing, which includes:
a) Engineering studies relating to machines, tools, instruments work flow etc.
b) Product development through blueprint, models, prototypes.
c) Product testing through laboratory testing and field-testing
2. Market Feasibility
The following process may be adopted to assure the market opportunities of a product.
1.Identifying the Market Potential
It involves an estimation of both the current demand of the product and projection of future
market trends. The prospective entrepreneur will do well to identify:
 Specific end users,
 Major market segments, and
 Potential volume of purchases within each market segment.
Some statistical yardstick may be of quite help in accomplishing this work. To illustrate, a
potential manufacturer of helmets may find out the annual production of two wheelers,
percentage of helmet users and proportion of demand already met.
2.Estimating Cost-volume Relationship to ascertain how various price levels may affect
total sales volume. The price must reflect the value of the product. The entrepreneur may not
adopt a uniform price structure to take care of the sensitivity of the buyer to price changes.

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 The cost-volume analysis would also facilitate the determination of appropriate economies of
scales i.e. optimum size of enterprise, which has lowest average per unit cost of production
and distribution.
3. Sources of Market Information.
Relevant data for market analysis can be gathered from two main sources viz (a) primary
sources such as interviews, mailed questionnaire, survey etc and (b) secondary sources like
government agencies, trade unions, chambers of commerce etc. Whereas the former is costly,
the latter may not meet the requirements of the entrepreneur.
The following kind of data matrix may be quite helpful:
helpful:
 Data relating to general economic trends as revealed by various indicators such as new
orders, house activity, inventories consumer spending.
 Market data relating to demand pattern, seasonal variation etc.
 Pricing data i.e. range of prices for same, complementary and substitute products; base
price; discount structure etc.
 Channels of distribution both wholesale and retail.
 Data relating to competitors.
To obtain this data, the entrepreneur may either conduct his own survey or approach a
consultant.
 Market Testing
It is an important method of establishing the overall feasibility of a new venture, significant
market testing methods include:
 Displaying the product at trade fairs,
 Test marketing to analyze the receptivity of the product, and
 Sample sales.
C. Financial Feasibility
It covers the following:
 Determination of total financial requirements
In making the above estimation, provision must be made for cost escalation that is inevitable due
to price changes. Besides, appropriate sales forecasts should also be made to have a clear picture
of expenditure. The projection could be weekly or monthly.
 Financial resources and other costs
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Financial resources could be categorized on the basis of periodicity into:
Short term resources:
resources: (those payable in a year). Trade credit supplies, short term loans from
backs or other lending institutions, sales of account receivable etc. belong to this category.
Term Loans:
Loans: Intermediate term loans are those available for one to three (sometimes five) years.
It includes terms loans from banks, lease finance, financial assistance from institutions etc.
Long-term loans are those from banks, equity capital and investments of earnings.
While considering different sources, it is better to consider specific costs as well as advantages
and disadvantages of each. On the basis of average cost of capital, it is possible to ascertain
whether there is positive net present value when anticipated cash flow are discounted at average
rate of cost of capital.
 Cash Flow Analysis
If the projected sales associated financial requirements and available financial resources are
known, the anticipated cash flow can easily be determined.
Cash Flow (projected)
 Anticipated return on investment
Financial feasibility is adjudged on the basis of satisfactory yield on investment. It can be
calculated by relating the average earnings expected over a given period to either the total
amount of investment or net worth of organization (Return on equity). Both are compared with
potential yield from alternative investment opportunities to ascertain the acceptability or
otherwise of a new venture.
STEP 4: Assessment of Personal Requirements and Organizational Capabilities
Human beings provide the motive force to an enterprise. For this purpose, it is necessary to
consider the available talent and skills consonants with the organization structure. An inventory
must be made of the skills needed for effective implementation of new venture. The steps in
undertaking the exercise relating to determination of personal requirements and designing the
initial organizational structure are described below:
A) Ascertaining the anticipated workflow and the various activities (called activity analysis).
At this stage, the total range of activities and level of skills are identified.
B) Grouping the activities into set of tasks that individuals can handle effectively.
C) Categorization of various tasks to form the basis of structure of organization.
D) Determination of interrelationship between different positions and designing of

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 organizational hierarchy.
STEP 5: Analysis of Competition
In order to ensure the survival and growth of enterprise, it is essential to make competition
analysis.
Generally, every organization to face two types of competition:
competition:
A) Direct competition from similar products.
B) Indirect competition from substitutes.
Competition analysis must seek to identify potential competitors, the strategies adopted by them
and their impact on proposed enterprise, specific advantages enjoyed by the purpose venture and
formalization of strategy in consonance with these advantages. The entrepreneur must guard
against being content with neutralization competitors strategic advantages. The aim should be to
have superior strategies at least during the initial stages.
STEP 5: Developing Action Plans
No strategic plan is complete until it is put in to action. To make the plan workable, the business
owner should divide the plan into projects, carefully defining each one of the following:

i. Purpose: What is the project designed to accomplish?

ii. Scope: Which areas of the company will be involved in the project?

iii. Contribution: How does the project relate to other projects & to the overall strategic
plan?

iv. Resource requirements: What human & financial resources are needed to complete the
project successfully?

v. Timing: Which schedules & deadlines will ensure project completion?

Under this particular step, how strategies are going to be undertaken is specified. Who does it?
Why it is done? When it is done? How it is going to done? Is answered. For instance in
answering the how and who questions, an entrepreneur tries to focus on the ways of obtaining
finances, licenses, raw materials, equipments, recruiting staff, distribution network, construction
of plant etc.
STEP 6: Implementation and Evaluation
Now it is the time of reality. When action plans are materialized according to the action plan

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which is composed of various projects, business plans are considered to be implemented. After
implementation follows evaluation. Evaluation is mainly concerning towards making sure the
achievement of mission, objectives etC.
2.9.3 Field Problems of Starting a New Enterprise
Identification of a venture after a thorough analysis of the major aspects described earlier should
not be regarded as the end of all problems. Rather the real problems have been summarized in
the following paragraphs.
(1) Pre-operator problems
 Problem of selecting an appropriate form of business organization.
 Problems related with the acquisition of basic facilities such as sources of raw materials,
power, transport etc.
(2) Problems during the construction phase.
phase.
These would be connected with:
1 Acquisition of land;
2 Construction of building and other aspect of civil works;
3 Acquisition of machinery and its installation;
4 Preliminary work about the sources of supply of raw materials , labor and managerial
inputs;
5 Prospecting about marketing;
6 Preliminary work regarding sources of working capital;
7 Coordination problem connected with the acquisition of different kinds of assets or
completion of jobs;
Unless care is taken to ensure proper sequencing of different activities, the project would have
cost over-run and/or time over run. Here in some kind of PERT analysis could be quite helpful
(3) Post Operative Problems of a New Enterprise
Several Problems are common to starting a y enterprise-whether small or large. They need not
always arise but an awareness regarding them could enable their timely avoidance prevention.
Below are given some of the post operative problems.
 Lack or absence of profits.
 Experience Factor:
 Unfamiliarity of lack of experience in product or services line.

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  Lack of experience in management. There is a vast difference between being a
machinist and being able to manage a machine shop.
 Over concentration of experience .e.g. .focusing only on the area of interest says, sales,
finance, production etc and neglecting others.
 Incompetence of management.
 Sale Causes
o Weak competitive position ;
o Lack of proper inventory control;
o Low sales volume ;
o Poor location ;
o Decline in demand due to recessionary trends in the particular industry ;
o Inappropriate marketing strategy ;
o High production costs and consequent high pricing ;
 Expense Causes i.e. failure to control operating expenses that reduce profit and
Pose a threat to survival of the firm. For instance, borrowing too heavily may force business
to close if debts cannot be timely paid;
1 Neglect Causes
Common Cases of neglect are; poor health, laziness, family or manage Problems.
Entrepreneurs need to establish priorities for themselves relative To their involvement in the
firm. They must concentrate on objectives of the Firm.
2 Capital Causes
o Low a over estimation of capital needs;
o Fund mismanagement ;
o Cash losses;
o Poor debt collection or unfavorable credit terms.
 Customer Causes .i.e. extension of credit on liberal terms.
 Personnel Causes.
Causes.
 High rate of absenteeism &/or labor turnover;
 Unhealthy industrial relations;
 Frequent strikes and lockouts;

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  Low productivity ;
 Militant trade unions.
 Natural calamities such as burglaries, earthquake .fire etc.
 Government Regulations.
o Difficulty of compliance due to excessive cost burden;
o Interference and dilatory tactics adopted by government authorities.
 Unmindful expansion so that sufficient business is not generated to sustain expanded
capacity.
 Environmental Causes.
Causes.
o Changes in government policy ;
o Changes in social or political conditions ;
o Inflationary pressures leading to increases in the input cost.
 Production Causes
 Technological obsolescence;
 Low capacity utilization;
3 Inability of labor to correctly understand technology;
4 Non-availability of spares and replacements;
5 Poor machinery maintenance;

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