Entrepreneurship Chapter 4

4.
Setting a Business enterprise
Outline
4.1 Small Business as Basic components of Economy
4.2 What is basic business idea
4.3 Steps in business setting
4.4 Developing a Business Plan
What is small business?
To provide a clear image of the small firms, the following
general criteria for defining a small business are
suggested:
A). Financing of the business is supplied by one individual
or a small group.
b) Except for its marketing function, the firm’s operations
are geographically localized.
c) Compared to the biggest firms in the industry is small
d) The number of employees in the business is usually
fewer than 100
Con’t
There are two approaches to define small Business. They
are:
1. By some measure of size
2. using an economic /control definitions.
1. Size Criteria
Examples of criteria used to measure size are:
1. Number of employees 2. Sales volume
3. Asset size 4. Insurance enforce
5. Volume of deposits
• Although the first criteria located above, employee, is the

most widely used yardstick; the best criteria in any given
case depends upon the user’s purpose.
Economic /Control Criteria
The economic /control definition cover:
a)Market share:- The characteristics of a small firm’s

share of the market is that it is not large enough to enable
it to influence the prices of national quantities of goods
sold to any significant extent.
b)Independence:- Means that the owner has control of the
business himself.
c)Personalized management:- Is the most characteristics
factor of all. It implies that the owner activity participates
in all aspects of the managements of the business, and in
all major decisions-making processes. There is no
delegation of authority.
All three of these characteristics must be satisfied if the
business is to rank as a small business.
Types of small business
1. Family Enterprises
• Family owned business varies widely and can include
retail stores, contracting businesses, small manufacturing
firms, and restaurants among others. In the absence of a
successor, the life of a venture is limited to the working life
of its founder. Succession is a serious problem.
2. Personal service Firms(PSF)
3. Franchise:-The franchisee may receive Francis help,
training, a protected market, and technical assistance with
matters such as site selections, purchasing, accounting,
and operations management.
Why are small business important to economy?
They make exceptional contributions as they provide

a. New jobs as populations and economy grow, small
business provide new job opportunity.
b. Introducing innovations-many scientific breakthrough
originated with small organization. Photocopies, etc
c. Stimulating Economic competitions.
Con’t
Reasons for the more rapid growth of small firms in most

developed countries.
1. New technologies, such as numerically controlled machine
tools, may permit efficient production on a smaller scale
2. Greater flexibility is required as a result of increased global
competitions
3. Consumers may be coming to prefer personalized products
over mass produced goods.
• Discussion
what about in developing countries like Ethiopia?
Causes for small business failure
• Incompetence- The owners simply do not know how to run the
enterprise.
• Unbalanced experience- do not have rounded experience in the major

activities of business production.
• Lack of managerial experience. Do not know how to manage production.
• Lack of experience in the line- the owner has entered a business field in
which he or she has very little knowledge.
• Neglect- the owner does not pay sufficient attention to the enterprise.
• Fraud- involves intentional misrepresentations or deception (purchasing

materials or goods for him/her self with the company’s money)
• Disaster- refers to some unforeseen happening or ‘act of God’ (eg.

Robberies and extended strikes.)
Con’t
The following are specific managerial causes of small
business failure
• Inadequate records- unable to establish an adequate
record keeping system.
• Expansion beyond resources
• Lack of information about customer
• Failure to diversify market
• Lack of marketing research.
• Legal problems
• Nepotism- favoritism toward family members
• One person management
• Lack of technical competence
• Absentee management the owner stayed away for long
period
Strength and weakness of small business
Strength
1. Independence
• Most small business owners enjoy being their own boss, they
like the freedom to do things than way.
2. Financial opportunities
• Many small business owners make more money running their
own company than they would be working for someone else.
3. Community services
• if the person has reason to believe the public will pay for such
output, he/she will start a company to provide it.
Con’t
4. Job security
• when one owns a business, job security is ensured.
5. Family employment (benefits)
• create the employment in the family
• higher moral and trust occur in family-run business
• is times of server economic downturn
6. Challenge.
• They want to win or lose on their own abilities the
challenge gives them psychological satisfaction
Weaknesses
1. Sales fluctuations
in some months sales are very high, while in other they
drop off dramatically. The individual must balance cash
inflows with cash outflows.
2. Competition- Owning a business is the risk of competition
(eg. Restaurants)
3. Increased responsibilities- owner is often a bookkeeper,
accountant sales person, personnel manager.
4. Financial loses- when the owner makes all major decisions
6. Risk of failure- the ultimate risk the small business owner
manger faces is failure.
What is basic business idea?
• It is logical to think of a goal for the unit in long run rather
than to look for the immediate tomorrow. This long-term
thinking is called basic business idea
• Businessmen/businesswomen should think of long-term
goal and the profit when they start a business.
• The basic business idea, which is at the top of the hierarchy,
is to meet the broadest needs of the customers, and has the
long life perhaps from 5-50 years.
• The basic business idea facilitates choice of product
under an overall plan.
• Thus, entrepreneur may think of being in the entertainment
film, in automobiles, in medicines, in services, in
industries, etc.
Con’t
• The product line is relatively narrow and has a shorter life.

The product line consists of different families of product.
• A unit with a basic business idea for example packaging can
manufacture any of the following groups of the products:
• Glass bottles,
• Plastic packages,
• Metal packages,
• Aluminum packages,
• Paper or wood packages.
Con’t
• The product range includes different size of the product

with in the product line, in the examples given above
different size of glass bottles can be manufactured for
varied applications.
• The product is one item of the product range having
different specifications like
• size,
• material used and
• weight, etc.
What project an entrepreneur should have?
• A project is a complex of economic activities in which the key

players commit scarce/limited resources in the expectation
that the benefits gained will exceed these resources.
• Also, a project, broadly defined, in a way of using resources: a
decision between undertaking and not undertaking a project is
a choice between attentive ways of using resources.
• The project should have to consider the SWOT and should be
designed accordingly.
• The SWOT approach compels individuals to think or reason
out systematically and analytically the important factors
strengths, weakness, opportunities, and threats.
Con’t
• Strength: is an inherent capacity, which an organization can

use to gain strategic advantage over its competitors.
• Weakness: is an inherent limitation or constraint, which
creates a strategic disadvantage
• Opportunity: refers to any factor that offer promise or
potential for moving closer or more quickly towards the
firms goal
• Threat: is any factor that may limit or impede the business
in the pursuit of its goals
Con’t
To be a successful entrepreneur, one major determinant
factor is the choice of a good business idea. To select the
best business idea, the following general steps needs to be
pursued.
*Define objective, identify problem, select best alternative,
analyze the possible alternatives
a. Identify your problem
b. Define your objectives
c. Identify, develop and analyze the possible alternative
d. Select the best alternative in light of the specific criteria set to
the better fulfillment of the objective.
Steps in business setting
1. The first key to success in any manufacturing

activity is to select the right product. These must
be examined with a view to assess:
…
a.The marketing aspects
b.Technical aspects
c. Financial aspects
Con’t
2. Having selected a product, a detailed project report to be prepared.
This will cover the following aspects.
…
a.A detailed estimate of demand is to be made.
b.Technical specifications of the process should be carefully
studied.
c.The equipment required and their sources are to be specified
d.Requirement of space.
e.The total cost of the project to be worked out, the means for
financing it identified
f. The economics of the entire scheme at projected operating level
is to be assessed.
Con’t
3. Implementation of the detailed project report. Includes:
a. Deciding on form of ownership and registration
b. Obtaining finance ,Obtaining license
c. Establishing necessary infrastructures
4. Once all the required authorizations and sanctions have been
obtained, simultaneous action is to be taken for the
following. Pre-commissioning requirement
…
a. Ordering machinery from suppliers
b.Obtaining utilities like power and water connections after
constructions of shed, if necessary.
c. Recruitment of staff,
d.Arranging supplies of materials
e. Arranging for distribution of the products
Con’t
5. Once these are complete, the plant is ready for
commissioning trial run may be made. Commissioning of
plant, Includes:
a. Trial run of machineries
b. Promotional activity for the product
c. Introduce the product to the market and obtain feedback
6. The unit is then ready for commercial production.

a. Commercial production

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4.

Setting a Business enterprise

• Although the ﬁrst criteria located above, employee, is the

a)Market share:- The characteristics of a small ﬁrm’s

They make exceptional contributions as they provide

Reasons for the more rapid growth of small ﬁrms in most

• Unbalanced experience- do not have rounded experience in the major

• Lack of managerial experience. Do not know how to manage production.

• Fraud- involves intentional misrepresentations or deception (purchasing

• Disaster- refers to some unforeseen happening or ‘act of God’ (eg.

• The product line is relatively narrow and has a shorter life.

• The product range includes different size of the product

• A project is a complex of economic activities in which the key

• Strength: is an inherent capacity, which an organization can

1. The ﬁrst key to success in any manufacturing

6. The unit is then ready for commercial production.

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