Ch-02
Ch-02
Ch-02
2.1. INTRODUCTION
A business formation deals with the formalization and actual implementation of business ideas in
to practice. In today’s economic development/transformation, small businesses are creating new
jobs even as large businesses continue eliminating jobs and they are more flexible than large
ones in the products and services they offer. This chapter discusses the issues of business
development and the different legal forms of business. In addition, the concept of MSEs in the
Ethiopian and international context are discussed. The importance/roles and set up of MSEs are
discussed very well. Besides the success and failure factors of MSEs and the common problems
of MSEs in Ethiopia are discussed. Furthermore, the chapter highlights the reality in the era of
entrepreneurship environment as, not only are the skills and abilities important, but the
entrepreneur also will need to consider the personality and character of each individual to create
a viable organization culture.
Specifying size and standard to define small business is necessarily arbitrary, because people
adopt different standards for different purposes. Based on socio- economic conditions, countries
define small business differently. But all may use size and economic criteria as a base to define
small business. Size criteria include number of employees and the startup capital. Size does not
always reflect the true nature of an enterprise; in addition, qualitative characteristics are used to
differentiate small business from other business. The economic/control definition covers market
share, independence and personalized management.
Micro and small enterprises (MSEs) cover a wider spectrum of industries and play an important
role in both developed and developing economies. Ethiopia is no exception and MSEs occupy a
prominent position in the development of the Ethiopian economy. While the small entrepreneurs
can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the
vagaries(change) of the market, they have to face many problems like lack of finance, poor
operations management, lack of experience, poor financial management, etc... The process of
setting up a venture begins with searching for an opportunity. Identifying a good opportunity is a
difficult task and involves scanning the environment and the use of creativity and innovation.
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2.3 Forms of Business (A Short Explanation)
There are three basic legal forms of business formation with some variations available depending
on the entrepreneurs’ needs.
1) Proprietorship,
2) Partnership, and
3) Corporation, with variations particularly in partnerships and corporations.
These three basic legal forms are compared with regard to ownership, liability, start-up costs,
continuity, transferability of interest, capital requirements, management control, distribution
of profits, and attractiveness for raising capital.
It is very important that the entrepreneur carefully evaluate the pros and cons of the various legal
forms of organizing the new venture. This decision should be made before the submission of a
business plan and request for venture capital.
The comparison for the three basic legal forms against the aforementioned factors is briefly
presented in the table below: -
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LLP- Limited Liability Partnership
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2.4 Definition and Role/Importance of MSEs in Developing Countries
Small businesses are playing an important role in the industrial economy of the world. These are
particularly important in the developing economies. Small business is predominant even in
developed countries such as USA, Japan etc.
There is a difference between small business owners and entrepreneurial ventures as well. An
entrepreneurial venture often is a growth-oriented innovative company with product or service
offerings that are new to the market. Small businesses could be entrepreneurial ventures. Most
entrepreneurial ventures start as a small business.
However, some discernible characteristics still differ them. Most small businesses’ owners work
with known products and services aimed at incremental growth, and their innovation is focused
on sales, marketing, and market expansion. Entrepreneurial ventures incorporate a different set
of strategies. These entities are aimed at rapid growth and apply innovation and creativity at
every node of the business process. They work with new offerings, and they face a lot more
uncertainties; hence, their strategy calls for continuous work on mitigating uncertainty and risk
reduction.
Specifying size and standard to define small business is necessary because people adopt different
standards for different purposes. For example, legislators may exclude small firms from certain
regulations and specify ten employees as the cut-off point. Moreover, a business may be
described as “small” when compared to larger firms, but “large” when compared to smaller ones.
For example, most people would classify independently owned gasoline stations, neighborhood
restaurants, and locally owned retail stores as small business. Similarly, most would agree that
the major automobile manufacturers are big businesses. And firms of in-between sizes would be
classified as medium on the basis of individual viewpoints.
What is small business?
The small business administration (SBA) defines that: A small business is a business that
is privately owned and operated, with a small number of employees and relatively low
volume of sales.
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According to Nicholas Siropolis (SBM 6 th ed), for a business to qualify as small, a
business should employ fewer than 500 persons and should not be a part of another
business. In short, it must be independently owned and managed.
According to Bateman and Snell (Management, 6 th ed), “small business is defined often as
having fewer than 100 employees, being independently owned and operated, not dominant
in its field, and not characterized by many innovative practices.”
According to Griffin (Management, 5th ed), “small business is defined as one that is
privately owned by one individual, or a small group of individuals; it has sales and assets
that are not large enough to influence its environment.”
According to Central Statistics Authority, Ethiopia, “small enterprises are those business
enterprises with a paid-up capital of above 20,000 and not exceeding 500,000 birr, and
excluding high technology consultancy firms and other high technology establishments”.
Generally, there are two approaches to define small business. They are: Size Criteria, and
Economic/control criteria.
1. Size Criteria
Even the criteria used to measure the size of businesses vary; size refers to the scale of operation.
Some criteria are applicable to all industrial areas, while others are relevant only to certain types
of business. For instance, some of the criteria used to measure size are: number of employees;
volume, and value of sales turnover, asset size, and volume of deposits, total capital investment,
volume/value of production, and a combination of the stated factors.
Even though the number of employees-is the most widely used yardstick, the best criterion in
any given case depends upon the user’s purpose.
This size criteria-based definition of MSEs varies from country to country. All over the world,
number of employees or capital investment or both has been used as the basis for defining MSEs.
2. Economic/Control Criteria.
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 covers:
Market Share,
Independence, and
Personalized Management.
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Geographical Area of Operation.
All four of these characteristics must be satisfied if the business is to rank as a small business.
I) Market Share: - The characteristic 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.
II) Independence: - Independence means that the owner has control of the business
himself/herself. It, therefore, rules out those small subsidiaries which though in many ways
fairly autonomous, nevertheless have to refer to major decisions (e.g., on capital investment)
to a higher level of authority.
III) Personalized Management: - It is the most characteristics factor of all. It implies that the
owner actively participates in all aspects of the management of the business, and in all major
decision-making process. There is little delegation of authority and one person is involved
when anything material is involved.
IV)Technology: - Small business is generally labor intensive and only few are technology
intensive.
V) Geographical Area of Operation: - The area of operation of a small firm is often local.
Generally, small business is a business that is privately owned and operated, with a small number
of employees and relatively low volume of sales.
To provide a clearer image of the small firms, the following general criteria for defining a small
business are suggested by Small Business Administration (SBA).
Financing of the business is supplied by one individual or a small group. Only in a rare
case would the business have more than 15 or 20 owners.
Except for its marketing function, the firm’s operations are geographically localized.
Compared to the biggest firms in the industry, the business is small.
The number of employees in the business is usually fewer than 100.
2.4.2 Role/Importance of MSEs in Developing Countries
Micro and Small Enterprises (MSEs) cover a wider spectrum of industries and play an important
role in both developed and developing economies. Ethiopia is no exception and MSEs occupy a
prominent position in the development of the Ethiopian economy. Over the years, the number of
MSEs is growing from time to time and they need a strong support on Scio- economic and
political ground. Some of the contributions are hereunder.
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1) Large Employment Opportunities: MSEs are generally labor-intensive. For every fixed
amount of investment, MSE sector provides employment for more persons as against few
persons in the large-scale sector. Thus, in a country like Ethiopia where capital is scarce
and labor is abundant, MSEs are especially important.
2) Economical Use of Capital: MSEs need relatively small amount of capital. Hence it is
suitable to a country like Ethiopia where capital is deficient.
3) Balanced Regional Development/ Removing Regional Imbalance/: Generally small
enterprises are located in village and small towns. Therefore, it is possible to have a
balanced regional growth of industries. Ethiopia is a land of villages.
Another problem is the continuous shifting of people from rural to urban areas which causes
over-crowding in cities with slum conditions due to lack of social and medical amenities which
require heavy investments. This problem can be solved by inducing people to set up micro and
small firms in rural areas.
Large scale industries have the tendency to concentrate in big cities. As a result, semi urban and
rural areas remain deprived of the benefits of industrialization. Moreover, undue concentration of
large industries in urban areas creates several problems, e.g., pollution, shortage of civic
facilities, etc. Due to lack of employment opportunities in the country side, people migrate in
large numbers to big cities. Micro and small-scale units can be located in rural and semi urban
areas to reduce regional disparities.
4) Equitable Distribution of Wealth and Decentralization of Economic Power: It removes
the drawbacks of capitalism, abnormal profiteering, concentration of wealth and economic
power in the hands of few etc.
5) 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. On the other hand; 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. In this way, small & medium scale enterprises bring about greater
equality of income distribution. It is also argued that most of the micro and small-scale
units are either proprietary or partnership concerns. As a result, relations between workers
and employers are more harmonious in micro and small enterprises than in large
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enterprises. Micro and small enterprises also encourage competitive spirit and generate the
impetus to self-development.
6) Dispersal over Wide Areas- MSEs has a tendency to disperse over wider areas and they
play a key role in the industrialization of a developing country.
7) Higher Standard of Living: MSEs bring higher national income, higher purchasing power
of people in rural and semi-urban areas.
8) Mobilization of Locals Resources/Symbols of National Identity: The spreading of
industries even in small towns and villages would encourage the habit of thrift and
investment among the people of rural areas.
Small scale businesses are locally owned and controlled, and can strengthen family and other
social systems and cultural traditions. They are perceived as valuable in their own right as well
as symbols of national identity.
9) Innovative and Productive /Simple Technology: New but simple techniques of
production can be adopted more easily by MSEs without much investment.
Small businesses are highly innovative though they do not maintain their own research and
development.
10) Less Dependence on Foreign Capital/ Export Promotion: MSEs use relatively low
proportion of imported equipment and materials. The machinery needed for these industries
can be manufactured within the country. Micro and small-scale enterprises are opening up
fresh avenues in the export market in our world. Realizing the importance of the small and
medium- scale sectors in the economy; the Ethiopian government has adopted several
measures to speed up the growth of micro and small size enterprises.
11) Promotion of Self Employment: MSEs foster individual skill and initiative and promote
self-employment particularly among the educated and professional class.
12) Protection of Environment: MSEs help to protect the environment by reducing the
problem of pollution.
13) Shorter Gestation Period: In these enterprises the time-lag between the execution of the
investment project and the start of flow of consumable goods is relatively short.
14) Facilitate Development of Large-Scale Enterprises: MSEs support the development of
large enterprises by meeting their requirements of inputs of raw materials, intermediate
goods, spare parts etc. and by utilizing their output for further production.
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15) Individual Tastes, Fashions, and Personalized Services: Small businesses have the
flexibility to adapt quickly to changes in the business or technological environment.
16) More Employment Creation Capacity: Economic planners have realized the necessity of
encouraging micro and small enterprises because they require less capital but generate
more employment. The micro and small-scale sectors have the capacity to generate a much
higher degree of employment than the large-scale sector. This is because micro and small-
scale enterprises are labor intensive and thus create more employment with a given level of
capital. More production needs more capital in such a situation. The micro and small
firms will stand in good position because they are less capital intensive and more labor
intensive.
Priority Sectors and Sub-Sectors for MSEs Engagement in Ethiopia
1. Manufacturing Sector- This is the one which comprises textile and garment,
leather and leather products, food processing and beverage, metal works and engineering
wood works including furniture and ornaments service, and agro-processing.
2. Construction Sectors- This is the one which comprises sub-contracting; building materials,
traditional mining works, cobble stone, infrastructure sub-contract, and prestigious goods
3. Trade Sectors- This is the one which comprises whole sale of domestic products, retail sale
of domestic products and raw materials supply.
4. Service Sectors- This is the one which comprises small and rural transport service, cafe and
restaurants, store service, tourism service, canning/packing service, management service,
municipality service, project engineering service, product design & development service,
maintenance service, beauty salon, and electronics software development, decoration and
internet cafe.
5. Agriculture Sector (Urban Agriculture) - This is the one which comprises modern
livestock raring, bee production, poultry, modern forest development, vegetables and fruits,
modern irrigation, and animal food processing.
2.6 Setting up Small Scale Business
Discovery: The first stage of discovery is to identify opportunities that may form the basis of an
entrepreneurial venture. It requires creative thinking to identify issues that can benefit from an
entrepreneurial vision. This stage can be divided into two steps:
Step 1 Discovering your entrepreneurial potential - the first step is to know more about
your personal resources and attributes through some self-evaluation– what will
you bring to the venture? What are your strengths and challenges? These will
affect the type of venture you choose.
Step 2 Identifying a problem and potential solution – a new venture has to solve a
problem and meet a genuine need.
Evaluation: By the end of first stage of discovery, you should have selected an idea worthy of
further detailed investigation. The next stage evaluates if this all adds up to a feasible business in
two further steps:
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Step 3 Evaluating the idea as a business opportunity– find out information about the
market need. Is the solution to this problem really wanted by enough customers?
Investigate the feasibility of the proposed solution (technically, economically,
socially, and legally).
Step 4 Investigating and gathering the resources – How will the product/service get to
market? How will it make money? What resources are required?
Exploitation: By the end of the second stage of evaluation, you should have identified an
opportunity that has reasonable prospects of success, and analyzed what is required to launch it.
The next stage is to make the final preparations and launch it into the market. It can be developed
in three further steps:
Step 5 Forming the enterprise to create value – set up a business entity and protect any
intellectual property. Get ready to launch the venture in a way that minimizes risk
and maximizes returns.
Step 6 Implementing the entrepreneurial strategy – activate the marketing, operating, and
financial plans.
Step 7 Planning the future – look ahead and visualize where you want to go.
Environmental Analysis: Entrepreneurship does not exist in a vacuum. It is affected by and
affects the environment. Relationship between entrepreneurship and environment is shown in the
figure below.
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b) Sectoral Analysis
After having understood the general environment in which the business has to take birth, it is
important to study the sector or industry conditions in which the entrepreneur proposes to launch
a venture. This will help to put the proposed venture in the proper context. The purpose of
industry analysis is to determine what makes an industry attractive- this is usually indicated
either by above normal profits or high growth rates. For such analysis one should study the
history of the industry, the future trends, new products developed in the industry, forecasts made
by the government or the industry. It is also advisable to study the existing or potential
competition, threat of substitutes and entry barriers. Sometimes there might be bilateral
agreements between countries regarding some sectors or government policy that is sector
specific or some event that throw up challenges.
There might be certain constraints regarding availability of technology, manpower or raw
materials, which are industry specific. Similarly, there might be certain strengths of a particular
sector, which might outweigh some negative general trends. For instance, currently the cement
and steel sector are on an upward swing with a favorable climate in the housing sector as well as
government’s thrust on the construction sector.
SWOT Analysis
At this stage, conducting a SWOT analysis will help the entrepreneur to clearly identify his/her
own strengths and weaknesses as well as 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. An entrepreneur should
try to magnify his strengths and overcome or compensate for his/her weaknesses.
Opportunities are positive external options that an individual could exploit to accomplish his/her
mission, goals and objectives. Threats are negative external forces that hinder an individual from
accomplishing his/her mission, goals and objectives. These could arise due to competition,
change in government policy, economic recession, technological advances etc. Threats in the
environment can arise from competition, technological breakthroughs, change in government
policies etc. S/he might possess certain unique skills or abilities, which along with his/ her
knowledge and experience can provide him/ her cutting edge.
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An analysis of the above can give the entrepreneur a more realistic perspective of the business,
pointing out foundations on which s/he can build future strengths and remove obstacles. The
hierarchical approach to the development of business idea is given below.
The entrepreneur has to use the opportunities provided by the environment, combine these with
his/her unique strengths in terms of knowledge, skills, experience etc. and then take a decision to
launch a particular product or service. The proposed product / service should be compatible with
the capability of the entrepreneur, resources available in the environment and the need of the
society.
2.7 Small Business Failure and Success Factors
2.7.1 Small Business Failure Factors
Even though business owners launch their ventures with the best of intentions and work long,
hard hours, some businesses inevitably fail. Dun & Bradstreet, a financial research firm, defines
a business failure as a business that closes as a result of either (1) actions such as bankruptcy,
foreclosure, or voluntary withdrawal from the business with a financial loss to a creditor; or (2) a
court action such as receivership (taken over involuntarily) or reorganization (receiving
protection from creditors).
Causes of Business Failure
The rates of business failure vary greatly by industry and are affected by factors such as type of
ownership, size of the business, and expertise of the owner. The causes of business failure are
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many and complex; however, the most common causes are inadequate management and
financing.
Although financial problems are listed as the most common cause of business failure, consider
management’s role in controlling them. Could business failure due to industry weakness be
linked to poor management? Yes, if the owner tried to enter an industry or market with no room
for another competitor or responded only slowly to industry changes. High operating expenses
and insufficient profit margins also reflect ineffective management. Finally, business failure due
to insufficient capital suggests inexperienced management.
Inadequate Management: - Business management is the efficient and effective use of
resources. For small business owners, management skills are especially desirable—and often
especially difficult to obtain. Lack of experience is one of their most pressing problems. Small
business owners must be generalists; they do not have the luxury of specialized management. On
the one hand, they may not be able to afford to hire the full-time experts who could help avert
costly mistakes. On the other hand, their limited resources will not permit them to make many
mistakes and stay in business. As a small business manager, you will probably have to make
decisions in areas in which you have little expertise.
Entrepreneurs are generally correct in pointing to internal factors as the reason for the failure of
their businesses; these factors are the cause of 89 percent of such failures. Internal problems are
those more directly under the control of the manager, such as adequate capital, cash flow,
facilities/equipment inventory control, human resources, leadership, organizational structure, and
accounting systems.
The manager of a small business must be a leader, a planner, and a worker. You may be a “top
gun” in sales, but that skill could work against you. You might be tempted to concentrate on
sales while ignoring other equally important areas of the business, such as record keeping,
inventory, and customer service.
Inadequate Financing: - Business failure due to inadequate financing can be caused by
improper managerial control as well as shortage of capital. On the one hand, if you don’t have
adequate funds to begin with, you will not be able to afford the facilities or personnel you need
to start up the business correctly. On the other hand, if you do possess adequate capital but do not
manage your resources wisely, you may be unable to maintain adequate inventory or keep the
balance needed to run the business.
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There are a lot of ways to fail in business. You can extend too much credit. You can fail to plan
for the future or not have strategic direction. You can overinvest in fixed assets or hire the wrong
people. Identifying mistakes that can be made is merely one component of the problem. Figuring
out how to avoid them is the hard part.
Other common causes of business failure include Neglect, Fraud and Disaster.
Neglect occurs whenever an owner does not pay a due attention to the enterprise. The
owner who has someone else managing the business while s/he goes fishing often finds
the business failing because of neglect.
Fraud involves intentional misrepresentation or deception. If one of the people
responsible for keeping the business’s books begins purchasing materials or goods for
himself or herself using the business's money, the business might find itself bankrupt
before too long.
Disaster refers to some unforeseen happening. If a hurricane hits the area and destroys
the property in the company's yard, the loss may require the firm to declare bankruptcy.
The same is true for fires, burglaries, robberies, or extended strikes.
Mistakes Leading to Business Failure
No one likes to think about failing, yet many small business owners invite failure by ignoring
basic rules for success. One of the most common mistakes is to neglect to plan for the future
because planning seems too hard or time-consuming. Planning what you want to do with your
business, where you want it to go, and how you’re going to get there are prerequisites for a sound
business. Of course, that doesn’t mean you can’t change your plans as circumstances dictate.
Your plan should provide a road map for your business, showing you both the expressways and
the scenic routes and the detours.
Another common mistake is failing to understand the commitment and hard work that are
required for turning a business into a success. Having to work long hours and do things you don’t
enjoy because no one else is available to do them are part and parcel of owning a small business.
Yet, when you have the freedom of being your own boss, the hard work and long hours often
don’t seem so demanding!
Still another mistake that small business owners make, particularly with rapidly growing
businesses, is not hiring additional employees soon enough or not using existing employees
effectively. There comes a point in the growth of a business when it is no longer possible for the
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manager to do it all, but s/he resists delegation in the belief that it means s/he is giving up
control. It is important to recognize that delegating tasks to others isn’t giving up control—it’s
giving up the execution of details.
The last type of mistake involves with finances. Inaccurate estimates of cash flow and capital
requirements can swamp a business quickly. Figuring the correct amount of money needed for
starting a business is a tough balancing act: Asking for too little may hinder growth and actually
jeopardize survival, whereas asking for too much might cause lenders or investors to hesitate. An
important rule to remember in terms of arranging financing or calculating cash-flow projections
is to figure the unexpected into your financial plans. In this way, you can have more of a cushion
to fall back on if things don’t go exactly according to plan. After all, without the right amount of
capital, it’s impossible to succeed.
Business failure, then, is a serious reality. How can a small business owner avoid it? Difficult
changes may be needed, and change requires leaders to overcome all sorts of human dynamics,
like inertia, tradition, and head-in-the-sand hoping that things will get better. Strategic moments
require courage, or at least a lack of sentimentality, which is rare.
It is in these moments that the best leaders find a mirror and ask themselves the defining question
that the late, great Peter Drucker posed nearly 40 years ago: “If you weren’t already in your
business, would you enter it today?” If the answer is no, Drucker said, you need to face a second
tough question: “What are you going to do about it?” Every leader should heed this good advice
and, if need be, follow it through to its conclusion, whether that will be to fix, sell, or close the
business.
2.7.2 Small Business Success Factors
When large and small businesses compete directly against one another, it might seem that large
businesses would always have a better chance of winning. In reality, small businesses have
certain inherent factors that work in their favor. You will improve your chances of achieving
success in running a small business if you identify your competitive advantage, remain flexible
and innovative, cultivate a close relationship with your customers, and strive for quality.
It may come as a surprise, but big businesses need small businesses a symbiotic relationship
exists between them. For instance, John Deere relies on hundreds of vendors, many of which are
small, to produce component parts for its farm equipment. Deere’s extensive network of 3,400
independent dealers comprising small businesses provides sales and service for its equipment.
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These relationships enable Deere, the world’s largest manufacturer of farm equipment, to focus
on what it does best, while at the same time creating economic opportunity for hundreds of
individual entrepreneurs.
Small businesses perform more efficiently than larger ones in several areas. For example,
although large manufacturers tend to enjoy a higher profit margin due to their economies of
scale, small businesses are often better at distribution. Most wholesale and retail businesses are
small, which serves to link large manufacturers more efficiently with millions of consumers
spread all over the world.
Small business success factors can be seen the same as the efforts exerted in reversing the factors
of failure. There are several positive steps in addition to planning that business owners can take
to improve a firm’s chance for success.
From the discussion about factors of failure, we can conclude that a proper attitude is important
to ensure a customer orientation for quality and service; the owner must have a purpose for being
in business and want to provide customers with value for their money; and having a variety of
basic business skill is important (such as the ability to keep accounting records.) So, by
understanding why business fail, entrepreneurs can discover ways to tilt the scales towards
success. These success factors are categorized as:-
1. Conducive Environment;
2. Adequate Credit Assistance;
3. Markets and Marketing Support.
1. Conducive Environment
Successful small enterprises do not emerge, and thereafter survive and grow unless the
environment is conductive. Political, economic, technological and socio-cultural factors in the
environment impinge upon the life of the small enterprises and generate much of the needs
required for their existence.
Political Climate: - The overall political climate in a country is important for the small-scale
entrepreneur to consider. Small scale entrepreneur will need positive and encouraging measures
by government and political constituencies to establish private investment. Such measures could
include liberal or nonrestrictive investment policy, creation of promotional agencies, creation of
industrial estates and free trade zones and availability of low-cost loan capital for private
investors.
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The Economic Environment: - An analysis of the economic environment is particularly helpful
in investment decision, market measurement and in forecasting.
The general state of the economy dictates what the small enterprise will need especially since it
is handicapped in obtaining capital and credit owning to greater unit costs of small transactions,
greater risks involved, etc...
Technology: - Technological advances in the environment create new needs for the small
entrepreneur as far as adaptation and adjustment is concerned.
Small scale entrepreneur needs to learn how to adjust to the new technological environment
surrounding him/her, or needs to take a set of advance technologies and bring these to his/her
own level in the small enterprise. Either way, constant reexamination is needed for possible
utilization and improvement of existing technologies.
Socio-Cultural Environment: - Finally, the socio-cultural environment also creates a very
important climate for the survival of the enterprises.
2. Adequate Credit Assistance
Small enterprise development cannot be ensured without arrangement for financing. Adequate
and timely supply of credit is critical for new entrepreneurs to emerge especially from a wide
base. A great majority of micro and small business activities have come about because of special
financing programs offered to them.
Thus, requirements are less strict in terms of lower interest rates than the prevailing commercial
rates, less collateral requirements and lower equity ratio, various assistance schemes such as
preparing the project study, etc.
3. Markets and Marketing Support
Market for a small enterprise in a developing country can be quite a problem. The small business
entrepreneur will be in competition not only with locally mass-produced goods but even imports.
Small enterprises can brand together and sell their products as one body through closely-knit
associations or organizations. The government too can take an active part in marketing specific
products or assisting small groups of entrepreneurs in selling their products.
When entrepreneurs are deciding to involve and develop MSEs in Ethiopia, they are more likely
entitled with some supporting packages which include awareness creation about the sector;
provision of legal services, to form legal business enterprises; providing Technical and business
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management training; financial support based on personal saving, 20/80 (the beneficiaries are
save 20% and the MFIs provide Loan 80% of the projects); facilitate working premises; industry
extinction services and BDS provision; bookkeeping and audit services.
Small-scale businesses have not been able to contribute substantially to the economic
development, particularly because of financial, production, and marketing problems. These
problems are still major handicaps to their development. Lack of adequate finance and credit has
always been a major problem of the Ethiopian small business.
Small-scale units do not have easy access to the capital because they mostly organized on
proprietary and partnership basis and are of very small size. They do not have easy access to
industrial sources of finance partly because of their size and partly because of the fact that their
surpluses which can be utilized to repay loans are relatively small. Because of their size and
partly because of the limited profit, they search for funds for investment purposes. Consequently,
they approach traditional money lenders who charge extra high rate of interest hence small
enterprise continue to be financially weak.
Small scale enterprises find it difficult to get raw materials of good quality at reasonable prices in
the field of production. Furthermore, 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.
Small business’s 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; and learning to manage people effectively.
A business idea is a short and precise description of the basic operation of an intended 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
and then modifies it in some way to fit a potential customer’s demand.
3. A New Idea – This one involves the invention of something new for the first time
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2.10.1 Business Idea Identification
Before you start a business, you need to have a clear idea of the sort of business you want to run.
Your business idea will tell you:
F Which need will your business fulfill for the customers and what kind of customers will
you attract?
F What good or service will your business sell?
F Who will your business sell to?
F How is your business going to sell its goods or services?
F How much will your business depend upon and impact the environment? A good
business idea will be compatible with the sustainable use of natural resources and will
respect the social and natural environment on which it depends.
All business ideas are not equally worth. Therefore, to identify promising business idea among
others, it is important to answer the above raised questions. Let we see the explanation for the
questions raised above.
2.10.1.1 The Need will Your Business Fulfill for the Customers
Your business idea should always have customers and their needs in mind.
It might be a good idea to start a day care center in the commercial area as many other parents
may have the same need.
It might be a good idea to start a waste collection and recycling service in this area. Not only
would the owner of this restaurant need the service, but many other residents in the area might
need it as well.
Depending on your skills and the needs of the customers, you should decide which good or
service your business will sell. Also, keep in mind that they must be goods or services that
people are willing to pay for and at a price that will allow you to make a profit.
A good is an item that people pay for and use. It may be something you make yourself or it may
be something you buy to resell. Tools, baked goods, clothes and retail items are all products. A
service is something you do for people that they then pay you for. For example, delivering
goods, banking, babysitting, repairing items, collecting recyclable waste from apartment
buildings, operating tours, etc. are all services.
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2.10.1.3 Identifies Potential Customer
Any business cannot succeed without customers. Therefore, it is essential that you know who
your customers will be. Will you sell to a specific type of customer or to everyone in an area?
There must be enough people who are able and willing to pay for your goods and services or the
business will not survive.
2.10.1.4 Strategy for Selling Goods or Services/ How is Your Business Going to Sell Good
or Services?
How are you going to sell your goods or services? If you plan to open a shop, you know how you
will sell your product, but manufacturers or service operators can sell their products in many
different ways. A manufacturer, for example, can sell either directly to customers, to retailers or
to wholesalers.
Your business can only be sustainable in the long run if it works in harmony with the social and
natural environment. How much does your business depend on the environment? Does it rely on
the weather, soil or other natural resources? Does it need any specific type of labor from the local
community? Does it need the local community to support it? What should you do to make sure
that your business nurtures the natural environment and helps the local community? Will your
business nurture the natural environment or will it have a detrimental impact? How would you
minimize or reverse any negative effect that your business might have? This is discussed in
detail in Chapter one of this module.
Every business idea should be based on knowledge of the market and its needs. The market
refers to people who might want to buy a good or service; i.e., the customers. The market differs
from place to place, depending on who lives in the area, how they live and for what goods or
services they spend their money. When you understand the market in your area, you might
recognize many business ideas that you may have previously ignored.
When generating business ideas, it is best to try to keep your mind open to everything. Your first
goal is to think of as many ideas as possible and make a list of all the possible business
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opportunities. With a list, you will have more choices! You then can scan the list and nail down
the idea(s) that sound most feasible to you and that you think will be most profitable.
There are many ways to come up with business ideas, such as surveying local businesses or
asking existing business owners. The information gained from one approach may supplement
another and help you to clearly describe your business ideas. Below, we will examine a few
different approaches to generating business ideas.
1. Learn from successful business owners
You can learn a lot from people in your area who have already gone through the process of
establishing a business. You should try to get the following information from them:
What kind of idea did these businesses start with?
Where did the ideas come from?
How did they develop their ideas into successful businesses?
How does the business profit and fit into the local environment?
Where did they get the money to start their business?
When to meet successful business owners, use the Business Ideas Analysis Form shown below,
to write down their answers to the above listed questions.
2. Draw From Experience
Your own Experience
Look at the list of your interests, your experiences and your networks. Are there any possible
business ideas that you can derive from your own past experience? Think about each type of
experience.
Start with yourself. What has your experience been as a customer in the market place? Have you
ever searched all day for some items that you could not find in any store in your area? Think
about the goods and services you have wanted at different times and that you have had difficulty
finding.
Other People’s Experience
The people around you are potential customers. It is important to understand their experience
trying to find goods and services that are unavailable or not exactly what they need. Listen
carefully to what these people say about their shopping experience.
Ask your family and friends about the things they would like to find that are not locally
available. Expand your social knowledge by talking to people from different age groups, social
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classes, etc. You can also visit community groups, colleges, etc. for a greater understanding of
the market.
Here are some examples of comments that would help with your search for a business idea:
F “I cannot find a lunch box that keeps the food warm.”
F “The choice of cooking pots in the shops is very limited.”
F “There is no reliable way of sending gift packages to my friends and relatives living in
the villages.”
F “There is not enough entertainment in this town and the weekends are so boring.”
F “I really need to buy some marketing textbooks, but there are no good bookstores in this
town.”
F “There is so much garbage on the streets. Somebody should do something about it.”
3. Survey Your Local Business Area
Another way of discovering business ideas is to look around your local community. Find out
what type of businesses are already operating in your area and see if you can identify any gaps in
the market.
If you live in a village or small town, you may be able to identify all the fields of business in the
whole town. Otherwise, you may need to focus on the preferred business fields and business
types that you identified. This is an activity that will be much easier to do with a business partner
or friend. Visit the closest industrial area, markets and shopping centers in your area.
4. Scanning Your Environment
You can use your creativity to find more business ideas in your area. Look at the list of existing
local businesses. If the list has included most of the local markets, you may be able to learn about
the industries or service providers on which the local economy relies.
It may be useful to think about business ideas by considering all the resources and institutions in
your area. For example, think about:
F Natural resources,
F Characteristics and skills of people in the local community,
F Import substitution,
F Waste products,
F Publications,
F Trade fairs and exhibitions,
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Natural Resources
Think of what is abundantly available in your area that could be made into useful products
without harming the environment. Natural resources include materials from soil, agriculture,
forest, mineral, water, etc.
Perhaps there is good clay soil in the area that can be used for making bricks. It may be used for
other business ventures such as making plates, cups or tiles.
Think about a way to use this resource that would enable you to continue working with it for
many years. In other words, make sure that your business idea will not exhaust the natural
resource that would be the foundation of your business.
Consider whether the people in your area have some special characteristics or skills that could be
useful for a business:
o Are there people in your community who are good artisans, tailors or carpenters or who
have specific skills creating items unique to your area?
o Are there recent graduates looking for jobs who you could employ?
o Are there caregivers, nurses or people who could offer services to children, the elderly or
the sick?
o Is your community digitally connected?
o Is the infrastructure in your community well developed?
Waste Products
Business opportunities can also be generated by using materials that have been previously used
by both homeowners and businesses. Think about the possible use of waste materials for the
production of other useful and marketable items. Recyclable waste products can be identified by
analyzing certain items to see how they are discarded. Man-made waste has a detrimental effect
on the environment. In most cases, companies are keen to work with entrepreneurs who can turn
their waste products into valuable and marketable items.
Usually there is something that can be reused in things that we throw away. Recycling may be
done with waste products that come from agricultural processing, household garbage, used
machinery and appliances or industrial waste. People throw away food that could be used to
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make compost or animal feed. They also throw away paper, glass and aluminum that can be
recycled. Think of things that can be made from what others thought was garbage.
Many industries dispose of useful materials. A clothing company might throw out small pieces
of cloth that could be used to make something else. Plastics factories usually have materials left
over that might be useful for insulation, stuffing for pillows or a new kind of fuel.
Is there a possibility that you could recycle something that is found in abundance in your
neighborhood? Is there a way of using resources more efficiently? Maybe you could offer a
service to help individuals or institutions dispose of their waste in a way that is environmentally-
friendly or maybe you can make something new out of the waste.
Import Substitution
Can you think of anything that is imported that might be made locally? Some imported goods
have high import duties, making them very expensive. You could investigate the possibility of
operating a business that can easily make the imported goods locally.
Publications
Publications from the internet and other printed material may help you find ideas. There are
many sites on the internet that you can visit to find out about business ideas as well as franchise
businesses for sale. There are also web-based businesses that you can search from home if you
have internet connection.
Newspapers are a great source of ideas. They often describe types of businesses that you could
start or products that you could provide in your area. The classified advertisements may give
your ideas, as well as articles about business trends in other places
Trade Fairs and Exhibitions
Organizations hold trade fairs for different goods or services. Attending these fairs may give you
exposure to a number of new business ideas that you had not previously considered. Be sure to
attend any trade fair for fields of business in which you may be interested.
5. Brainstorming
Brainstorming means opening up your mind and thinking about many different ideas. You start
with a word or a topic and then write down everything that comes to mind relating to that
subject. You continue writing for as long as possible, putting down things that you think of, even
if they seem irrelevant or odd. Good ideas can come from concepts that initially seem strange.
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Brainstorming works best in a group. Get your family, friends or classmate together and ask
them to help by writing down ideas they have when they hear the word or subject matter.
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