Chapter Two

Small Business
Management and Business
Enterprise Creation

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Expected outcome of the chapter
2

 Up on the completion of the chapter, the students

will be able to:
o Explain the Concepts of small business

o Identify the Characteristics of Small Business

o Point out the Role of Small Business In Economic

Development

o Find out Small business failure factors

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 Expected outcome of the chapter….
3

o Realize and explain fundamentals of business

enterprise creation:
o How opportunity can be scanned and recognized

o Sources and methods of idea generation

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 Small Business Management
4

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Brainstorming question
5

How do you understand the concepts of small

business?

How small business contributes to economic

development?

Compiled by: Zinashbizu L. (PhD) 12/1/2022

Concepts & definition of Small Business
6

 There is no generally accepted definition of micro

and small enterprises.

 Micro enterprises in one country may be small or

medium enterprises in the other country

 A small business:
- Is independently owned and operated

- Is not a dominant force in its field

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Concepts & definition of Small Business…..
7

 Two approaches to define small business.

1. Size criteria

2. Economic/control criteria.

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 1. Size criteria
8

 Size refers to the scale of operation

 Criteria used to measure size are:

 Number of employees
 Volume and value of sales turnover,
 Asset size
 Volume of deposits
 Total capital investment
 Volume/value of production and
 A combination of the stated factors.

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 1. Size criteria ….
9

According to Small Business Administration (SBA) criterion

 Financing of the business is supplied by one individual
or a small group.
o Only in a rare case would the business have more than 15 or 20
owners.

 Compared to the biggest firms in the industry, the

business is small.

 The number of employees in the business is usually fewer

than 100.

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 MSE definition in Ethiopian context
10

Source: FeMSEDA, 2010

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 2. Economic/Control Criteria
11

 Size does not always reflect the true nature of an

enterprise.

 In addition, qualitative characteristics may be used

to differentiate small business from other business.

 The economic/control definition contains:

1. Market share: is not large enough to enable it to
influence the prices of national quantities of goods
sold to any significant extent.
2. Independence: owner has control of the business
himself/herself.

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 2. Economic/Control Criteria
12

3. Personalized Management:
 The owner actively participates in all aspect of
management of business and decision-making process.
 There is little delegation of authority.
 One person is involved when anything material is involved.
4. Technology
 Generally labor intensive.
 Only few are technology intensive
5. Geographical area of operation
 The area of operation of a small firm is often local.

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 Characteristics of Small Business
13

1. Managed by the owner

o Decisions are taken at one point
o Little or no delegation of authority
o Verbal communication
o Independently run/managed
o All risks born by the owner
o No separate entity
2. Human Resource: Family workers and or fewer hired workers
3.Sources of Finance: Mostly owner financed and or limited
borrow funds with no access to the share market

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 Characteristics of Small Business…..
14

4. Short term Planning: Little emphasis on long term planning

5. Close Relationship: Close labor-owner/management

relations

6. Innovation: No or limited use of innovative

production/marketing

7. Limited Reach: Limited market or limited non-local market

8. Size of investment: is relatively smaller

9. Volume of sales relatively smaller

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 Characteristics of Small Business…..
15

10. Labor intensive: Unable to adopt modern technology

11. Requirement of minimum legal formalities

12. Flexibility: Because they are small, they are open and
flexible to sudden changes, unlike large industries.

13. Resources: utilize local and immediately available

resources.

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 Role Of Small Business In Economic Development
16

i. Equitable distribution of wealth and decentralization of

economic power
 Unregulated growth of large-scale industries results in
concentration of economic power in the hands of a few and
consequently gross inequalities in the distribution of
income and wealth will occur.

 Income generated in a large number of small enterprises is

dispersed more widely and its benefit is derived by the large
segments of the society.
 This is due to wide spread ownership and
decentralized location of small scale enterprises.
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 Role Of Small Business In Economic Development….
17

ii. More Employment creation capacity

 Economic planners have realized the necessity of
encouraging small enterprises because they require less
capital but generate more employment.

 The small-scale sector has the capacity to generate a

much higher degree of employment than the
large-scale sector.

 small scale enterprises are labor intensive and thus

create more employment with a given level of capital.

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 Role Of Small Business In Economic Development….
18

iii. Removing Regional Imbalance

 Due to lack of employment opportunities in the country
side, people migrate in large numbers to big
cities.
 over-crowding in cities

 This problem can be solved by inducing people to set up

small firms in rural areas.
 Small scale units can be located in rural and semi
urban areas to reduce regional disparities.

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 Role Of Small Business In Economic Development….
19

iv. Ancillary Function

 Many small-scale enterprises supply parts and
accessories to bigger enterprises.

 This ancillary function involves specialization in specific

areas and results in greater profitability.

v. Export Promotion
 Small-scale enterprises are opening up fresh avenues in
the export market in our world.

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 Advantages of going into Small Business
20
 For individuals pursuing a career in business ownership, numerous
benefits can be attained personally as well as professionally.

Independence

Catering for
small or Financial
niche Opportunities
markets
Common
advantages of
Introducing owning a Community
Innovation small Service
business

Learning Job
from Security
Challenge
Family
Employment

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 Advantages of going into Small Business….
21

1. Independence
 Most small business owners enjoy being their own boss;
they like the freedom to do things their own way.

 Although a great deal of responsibility is associated with

this independence, they are also willing to assume it.

2. Financial Opportunities

 Many small business owners make more money

running their own company than they would be
working for someone else.

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 Advantages of going into Small Business…..
22

3. Community Service
 Sometimes an individual will realize that a particular
good or service is not available.

 If the person has reason to believe the public will pay for
such output, he or she will start a small company to
provide it.
4. Job Security:
 When one owns a business, job security is ensured.

 The individual can work as long as he or she wants; no

mandatory retirement exists.

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 Advantages of going into Small Business…
23

5. Family Employment
 It helps to provide family members an employment
opportunity.
 This has several benefits.
i. Owner-managers want to perpetuate their business and
how better to do it, then to get children or relatives to
take it over.
ii. Higher moral and trust usually occur more in
family-run businesses than others.
iii. In times of severe economic downturn, small business
owners can provide employment for family members.
Compiled by: Zinashbizu L. (PhD) 12/1/2022
 Advantages of going into Small Business
24

6. Learning from Challenge

 Many small business owners are attracted by the challenge
that accompanies going in to business for oneself.

 Research reveals that most successful small business

owners like to feel they have a chance to succeed
(they want to know success is possible) and the chance to
fail.

 They learn from the past failure or success.

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 Advantages of going into Small Business….
25

7. Introducing Innovation:
 The record shows that many scientific breakthroughs
originated with independent inventors and small
organizations.
8. Catering for small or niche markets:
 Large firms with high overheads must produce high levels
of output to spread costs.
 Small firms are able to make a profit on much lower sales
figures.
 They can therefore sell into much smaller markets
that are ignored by larger organization

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Small Business Failure factors
26

1 • Poor operations management

2 • Lack of experience

3 • Poor financial management

4 • Over-investing in fixed assets

5 • Poor credit practices

6 • Failure to plan

7 • Unplanned and uncontrolled growth

8 • Inappropriate location

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 Small Business Failure factors…..
27

 Poor operations management – The manager lacks the

ability to operate a small business.

 Lack of experience – Many owners start businesses in

industries in which they have no experience

 Poor financial management – Many owners start with

too little money and with little or no understanding of
financial spreadsheet applications.

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 Small Business Failure factors…..
28

 Over-investing in fixed assets – Owners who over-

invest in fixed assets may find themselves with no access
to funds for working capital.

 Poor credit practices – Owners often sell on credit to

meet (or beat) the competition and find that they lack the
additional working capital required or the ability
to collect receivables.

 Failure to plan – The lack of a strategic plan to guide the

business in the long run

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 Small Business Failure factors…..
29

 Unplanned and uncontrolled growth – Growth is

natural and healthy, but unplanned growth can be fatal to a
business.

 Inappropriate location – Owners who choose a

business location without proper analysis,
investigation, and planning often fail.

 Too often, owners seek “cheap” sites and locate

themselves straight into failure.

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 Small Business Failure factors…..
30

 Other common causes of business failure include

a) Neglect:
 Occurs whenever an owner does not pay sufficient
attention to the enterprise.

 The owner who has someone else manage the business

while he or she goes fishing often finds the business
failing because of neglect.

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 Small Business Failure factors…..
31

b) Fraud
o Involves intentional misrepresentation or
deception.

o If one of the people responsible for keeping the business’s

books begins purchasing materials or goods for
himself or herself with the company's money, the
business might find itself bankrupt before too long.

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 Small Business Failure factors…..
32

c) Disaster
o refers to some unforeseen happening.

o If a hurricane hits the area and destroys property in the

company's yard, the loss may require the firm to
declare bankruptcy.

o The same is true for fires, burglaries, robberies, or

extended strikes.

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 Problems in the Ethiopian small business
33

 Small-scale businesses have not been able to contribute

substantially to the economic development, particularly
because of:
 Financial

 Production

 Marketing problems.

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 Problems in the Ethiopian small business
34

 Lack of adequate finance and credit

 Small-scale units mostly organized on proprietary and
partnership basis and are of very small size

 They do not have easy access to industrial sources of finance

because :
 their size /lack of collaterals/

 their surpluses which can be utilized to repay loans

are relatively small.
 Consequently, they approach traditional money
lenders who charge extra high rate of interest hence
small enterprise continue to be financially weak.

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 Problems in the Ethiopian small business….
35

 Production:
 Small scale enterprises find it difficult to get raw
materials of good quality at reasonable prices in
the field of production.

 The techniques of production, which the enterprises

have adopted, are usually outdated.

 Because of their poor financial position they are not able

to buy new equipment, consequently their productivity
suffers.

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 How to overcome those problem?
36

 Small business owner can avoid some of the common

pitfalls that lead to business failure by:
 Knowing the business in depth

 Developing a solid business plan

 Managing financial resources

 Understanding financial statements

 Learning to manage people effectively

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Business Enterprise Creation
37

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Business Enterprise Creation
38

 Once an individual decides to take up entrepreneurship as a

career path, to be a job provider instead of a job seeker,
he/she has to establish an enterprise.

 Setting up of a small new enterprise is a very challenging as

well as a rewarding task.

 It is extremely important to take utmost care in identifying

the product or service to be launched; otherwise it might
prove to be a costly mistake.

Compiled by: Zinashbizu L. (PhD) 12/1/2022

Entrepreneurial process to set up a business.
39

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Opportunity scouting/ sensing
40

 The entrepreneurial process begins with identifying an

opportunity and evaluating it through an initial
screening process.
 The bottom-up: look around one’s immediate
context- family, community, and job and build up a
case for business

 Top-down approach: scanning of the international

and macroeconomic environment and identifying
appropriate business ideas

 Is found in the form of needs and problems

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 Opportunity scanning
41

 It is quite possible that many of the promising

opportunities might not make commercial
sense.

 Scanning involves close examination of the

environmental conditions and their impact upon
the business idea.

 An attempt can be made to modify, adapt, rearrange,

substitute, combine, reverse etc.

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 Opportunity scanning:
1. Environmental analysis
42

 For an analysis of the environment of

entrepreneurship one would be required to develop an
understanding of:

o Macroeconomic
 are not immediate part of the
entrepreneur’s venture yet they have an
impact on his enterprise.
o Industry/sector specific factors.
 the sector or industry conditions in which the
entrepreneur proposes to launch a venture.

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 Opportunity scanning:
1. Environmental analysis
43

Macro environment Industry/sector

Political Environment The future trends

New products developed in

Technological Environment the industry

Socio-Cultural The existing or potential

Environment competition

Threat of substitutes and

Legal Environment entry barriers

Economic Environment- Availability of technology,

Liberalization Manpower or raw materials

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 Opportunity scanning:
1. Environmental analysis……
44

I. Macroeconomic : Political Environment

 Entrepreneurship can flourish under a stable and
conducive political climate.

 Government policies which give priority to:

 growth of trade and industry
 infrastructural facilities and
 institutional support give a stimulus to entrepreneurship
 It has created an extensive institutional framework for
provision of finance, technology as well as help in
marketing is made available by government
institutions.
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 Opportunity scanning:
1. Environmental analysis……
45

I. Macroeconomic : Technological Environment

 The level of technology, the trends and the rate
of change in technology all have a direct impact on
enterprise creation.

 Changes in technology, both innovation and

invention change industry structures by altering
costs, quality requirements and volume
capabilities.

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 Opportunity scanning:
1. Environmental analysis……
46

I. Macroeconomic : Socio-Cultural Environment

 The customs, norms and traditions of the
society play an important role in either hindering
or promoting enterprise.
 It is also very important for a multi-national
company to understand the socio-cultural
background of its customers in the host
country.
 Socio-cultural environment is also concerned with
attitudes about work or quality concerns,
ethics, values, etc.

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 Opportunity scanning:
1. Environmental analysis……
47

I. Macroeconomic : Economic Environment

 Liberalization, globalization and opening of
economy of Ethiopia, has increased the space for
business operations.

 It has also opened channels for foreign investors to

start operations.

 The resultant competition, rapid and complex

changes have generated uncertainties, which
have to be handled by the entrepreneurs.

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 Opportunity scanning:
1. Environmental analysis……
48

II. Industry/sector specific factors.

 The purpose of industry analysis is to determine
what makes an industry attractive-
o above normal profits or
o high growth rates.
 Study the history of the industry
 the future trends
 new products developed in the industry
 forecasts made by the government or the industry
 the existing or potential competition
 threat of substitutes and entry barriers

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 Opportunity scanning:
2. SWOT analysis
49

 Conducting a SWOT analysis:

 Internal: entrepreneur strengths and weaknesses
 External: the opportunities and threats in the
environment.
 Strengths are positive internal factors that
contribute to an individual’s ability to accomplish his/her
mission, goals and objectives.
 Weaknesses are negative internal factors that
inhibit an individual’s ability to accomplish his/her
mission, goals and objectives.

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 Opportunity scanning:
2. SWOT analysis…..
50

 Threats in the environment are negative external

forces that hinder an individual from accomplishing
his/her mission, goals and objectives.
 can arise from competition, technological
breakthroughs, change in government policies etc.

 Opportunities are positive external options that an

individual could exploit to accomplish his/her mission,
goals and objectives.

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 Opportunity scanning:….
51

 The hierarchical approach to the development of business

idea:

 The proposed product

should be compatible with
the capability of the
entrepreneur, resources
available in the
environment and the need
of the society.

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 Opportunities In Contemporary
Business Environment
52

 Business environment is constantly evolving as a result of

changes in:
 Demographic

 Technological

 Legal and other.

 These creates challenges and opportunities

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 Opportunities In Contemporary
Business Environment….
53

 Some opportunities, which can be explored by the potential

entrepreneur are:

Niche
Service Sector
Marketing

Franchising Tourism

Green
Entertainment Entrepreneurship

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 Opportunities In Contemporary
Business Environment….
54

a) Niche Marketing
 The
entrepreneur can try and identify a very specific
market segment called a niche.
 By providing personal service, convenience and value to the
customers the small entrepreneur can successfully compete
with the bigger market players.
b) Service Sector
 servicesare not tangible, they cannot be stocked, and they
cannot be marketed through wholesalers and retailers.

 setting
up a service enterprise is that they require lower
investments compared to the manufacturing sector.

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 Opportunities In Contemporary
Business Environment….
55

c) Franchising
 Business franchising is a name given to relationship in which
the owner of a product, process or service allows a
local operator to set up a business under that name,
for a specified period.

 Franchising is an arrangement between the seller who is called a

franchiser and the buyer who is called the franchisee.

 The buyer is relieved of most of the functions involved in

setting up of an enterprise and gets the benefit of
visibility and recognition.

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 Opportunities In Contemporary
Business Environment….
56

d) Tourism
 Tourism is amongst the fastest growing industries the
world over; it is the highest foreign exchange earning
sector for many countries and offers tremendous opportunity
for entrepreneurship and employment.

 It includes any business connected with the activities of tourists:

 Travel arrangement (rail, road, air or sea)
 Accommodation (hotels, motels, guest houses)
 Food
 Entertainment

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 Opportunities In Contemporary
Business Environment….
57

 The growing segments of tourism include:

 Cultural Tourism
 Heritage Tourism
 Adventure Tourism
 Eco-Tourism
 Rural-Tourism
 Religious Tourism.
 Medical Tourism

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 Opportunities In Contemporary
Business Environment….
58

e) Entertainment
 There are innumerable entertainments ranging from news,
sports, cartoons, family dramas, music, religious etc.

 Music industry is also flooded with music videos, remixes,

music and film nights, preparation
 Enterprisescan be set up to provide services for pre and
post production including script writing, music,
dubbing, animation, editing etc.
 The entertainment sector also has a host of feeder activities
attached to it – supply of jewelry, food, banners, posters.

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 Opportunities In Contemporary
Business Environment….
59

e) Green Entrepreneurship
 Green Entrepreneurship signifies concern for the
environment.

 Such business activity should be chosen which has the least

adverse impact on the environment.

 It concentrates on:
 new and creative ways to recycle usable materials,

 use of substitutes or processes that are less polluting

 as well as adoption of waste minimization strategies.

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Idea Generation
60

 For a new entrepreneur it becomes very difficult

to:
 filter
information from the business environment
 identify opportunities
 evaluate them and then crystallize one specific idea.

 Things that can help in generating a number of

ideas
 difficultyin obtaining a satisfactory product or service,
 evaluating new products being offered in the market and
 active engagement in Research and Development.

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 Idea Generation….
61

 a reading of the Economic Times,

 business magazines,
 watching special business programs on the television,
 discussions with professionals, friends, even teachers,
 surfing the internet all help to provide valuable inputs .

 Attending an Entrepreneurial Development

Programs can provide entrepreneur with a sound
understanding of all the steps one has to take to initiate and
run a venture.

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Sources of idea generation
62

 Idea can be generated either internally or externally.

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 Role of Creativity and Innovation
in Idea Generation
63

 A creative person develops new alternatives and offers

innovative solutions.
 It is through their creative thinking that entrepreneurs find
solutions to problems, handle difficulty and exercise control over
business.

 Creativity helps not only:

 in doing different things but also
 in doing the things differently.

 A number of ideas and solutions are generated depending upon

the personal knowledge, experience, insight etc. of the
potential entrepreneur.

Compiled by: Zinashbizu L. (PhD) 12/1/2022

 64

Compiled by: Zinashbizu L. (PhD) 12/1/2022