CHAPTER: THREE

BUSINESS FORMATION

 A business formation deals with the formalization and actual

implementation of business ideas in to practice.

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 Forms of Business (A Short Explanation)
 There are three basic legal forms of business formation with some
variations available depending on the entrepreneurs’ needs.
 The three basic legal forms are:-
 Proprietorship,
 Partnership, and
 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.
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 Cont.….
Legal Forms of Business Description
1) Proprietorship Form of business with single owner who has
unlimited liability, controls all decisions, and receives all
profits.
2) Partnership Two or more individuals having unlimited liability who have
pooled resources to own a business
3) Corporation Separate legal entity that is run by stockholders having limited
liability
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 Definition and Role/Importance of MSEs in Developing Countries

 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.
1. Size Criteria
 Size criteria include number of employees and the startup capital. Even
the criteria used to measure the size of businesses vary; size refers to the
scale of operation. 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.

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 Cont.….
 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.

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 Cont.…

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.

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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.
 Geographical Area of Operation.

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 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.
III) Personalized Management: - 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.
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 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.
 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.
1)Large Employment Opportunities: MSEs are generally labor-intensive. 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.

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 Cont.….
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.
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.

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 Cont.…
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.
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 Cont.….
9) Innovative and Productive /Simple Technology: New but simple techniques of
production can be adopted more easily by MSEs without much investment.
10) Less Dependence on Foreign Capital/ Export Promotion: MSEs use relatively
low proportion of imported equipment and materials.
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.
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 Cont.…
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.
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.
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 Classification of Micro and Small Enterprises
1. In Case of Manufacturing Enterprise (Manufacturing, Construction and Mining):
a) A Micro Enterprise is one in which the investment in plant and machinery (total asset) does
not exceed birr 100, 000 (one hundred thousand); and operates with 5 people including the
owner.
b) Small Enterprises is one in which the investment in plant and machinery (a paid up capital of
total asset) of birr 100, 000 (one hundred thousand) and not more than Birr 1.5 million; and
operates with 6-30 persons.
2.In Case of Service Enterprise (Retailing, Transport, Hotel and Tourism, ICT and Maintenance):
a) A micro enterprise is one with the values of total asset is not exceeding Birr 50,000(fifty
thousands); and operates with 5 persons including the owner of the enterprise.
b) Small Enterprises is one in which the total asset value or a paid up capital of birr 100, 000
(one hundred thousand) and not more than Birr 1.5 million; and operates with 6-30 persons.

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 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; café 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 café.
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.
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 Levels of MSEs in Ethiopia
 Start-up:- It is a level where an enterprise begins production and
service under legal framework or legal entity.
 Growth Level: - An enterprise is said to be at growth level when an
enterprise become competent in price, quality and supply and
profitable using the support provided. At this level, the enterprise
man power and total asset is larger than at startup level.
 Growth- Medium Level:- An enterprise is said to be transformed
from small to medium level of growth is when it enabled to be
competent in price, quality and supply using the support given to
the level.
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 3.6 Setting up Small Scale Business

Steps for Setting up the Entrepreneurial Venture

The entrepreneurial process of launching a new venture can be divided into three key
stages of: Discovery; Evaluation; and Implementation.

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 Entrepreneurship vs Environment
 Entrepreneurship does not exist in a vacuum. It is affected by and affects the
environment.
 Environmental Analysis
a)Macro Environment
The macro environment of an entrepreneur consists of the political,
technological, social, legal and economic environments. All of these are not
immediate part of the entrepreneur’s venture yet they have an impact on his/her
enterprise.
b) Sectoral Analysis: 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.
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 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.

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 Cont.…
• The hierarchical approach to the development of business
idea is given below.

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 Small Business Failure and Success Factors
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.
Causes of Business Failure
 Inadequate Management: - Business management is the efficient and effective
use of resources.
 Lack of experience is one of their most pressing problems.
Small Business Success Factors1.
 Conducive Environment;
 Adequate Credit Assistance;
 Markets and Marketing Support.
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 Main Supporting Packages for MSEs Development in Ethiopia

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 management training;
 Financial support based on personal saving,
 20/80 (the beneficiaries are save 20% and the MFIs provide
Loan 80% of the projects); etc.
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 Problems of Small Scale Business in Ethiopia
 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.
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 CHAPTER FOUR

PRODUCT/SERVICE DEVELOPMENT

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 Product/Service Development Process
 Product/service development process is part of the overall new-venture
creation process.
 Even though there are many models that advocate what the
product/service generation process should look like, for this purpose we
shall adopt four distinct stages.
These stages can be referred to as:
1.Idea Generation
2.Incubation
3.Implementation
4.Diffusion
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 Cont.’…d

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 Cont.’…d
 The various stages of new product development process are explained next:
1. New Idea Generation
The new product development process starts with search for ideas. Companies
have to encourage any new idea coming.
2. Idea Screening
In the 2nd stage, the purpose is to lessen the number of ideas to few
vital/valuable ideas.
3. Concept Development and Testing
Attractive ideas must be refined into fast able product concepts since people do
not purchase ideas but they buy concepts.
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 Cont.’…d
Any product idea can be turned into several product
concepts. The questions asked probably include:-
 Who will use the product?
 What benefits should the product provide?
 When will people consume the produced?
Concept Testing: - calls for testing product concepts with an
appropriate group of target consumers/customers, and then
getting the consumers’ reactions.
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 4. Marketing Strategy Development

 After testing the new product the concerned body must

develop a preliminary marketing strategy plan for
introducing the new product into the market.
 The marketing strategy plan consists of three parts:
(1) Market size, structure, behavior ;
(2) Planned price, distribution strategy, and marketing budget
of the 1st year; and
(3) Long run sales and profit goals, marketing mix strategy.
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 5.Business Analysis

 After management develops product concept and marketing strategy, it can evaluate the
proposals’ business attractiveness.
 Management needs to prepare sales, cost and profit projections to determine whether they
satisfy the company's objective or not.
 Estimated Total Sales: - Management needs to estimate whether sales will be high enough to
yield satisfactory profit.
 Estimating Cost and Profits: - After sales forecast the management should estimate the
expected cost and profit at various levels of sales volume.
 The company can use other financial measure to evaluate the merit of a new product
proposal. The simplest is breakeven analysis.
6.Product Development
 If product concept passes the business test, it moves to R&D or engineering to be developed
to one or more physical version of the product concept.
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 7. Market Testing

 After management is satisfied with the products’ functional and

psychological performance, the product is ready to be dressed up with the
brand name.
 The goals are to test the new product is more authentic consumer/customer
settings and to learn how large the market is and how consumers/customers
and dealers react to handling, using and repurchasing the actual product.
 Most companies know that market testing can yield valuable information
about buyers, dealers, marketing program effectiveness, market potential &
other matters.
 Test Marketing yields several benefits include more reliable forecast of
future sale, and pretesting of alternative of future sale.
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 8. Commercialization
 In commercializing, market entry timing is critical. If the company hears
about a competitor nearing the end of its development work, it will face three
choices.
 The 1st choice is First Entry. Under this category, the firm usually enjoys the
"first mover advantage" of locking up key distributors & gaining reputation.
 The 2nd choice goes with Late Entry Strategy- which has three advantages
include:-
 The competition will have borne the cost of educating the market;
 The competing product may reveal fault that the late entrant can avoid; and
 The company can learn the size of the market.

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 Intellectual Property Protection/Product/Service Protection

 Intellectual Property which includes patents, trademarks,

copyrights, and trade secrets represents important assets to
the entrepreneur and should be understood even before
engaging the services of an attorney.
 Intellectual property is a legal definition of ideas, inventions,
artistic works and other commercially viable products created
out of one's own mental processes.

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 Patent Rights
 An entrepreneur who invents a new thing or improves an existing invention
needs to get legal protection for her invention through a patent right.
 A patent is a contract between an inventor and the government in which the
government, in exchange for disclosure of the invention, grants the inventor
the exclusive right to enjoy the benefits resulting' from the possession of the
patent.
 Utility Patent: A utility patent protects any new invention or functional
improvements on existing inventions.
 Design Patent: This patent protects the appearance of an object and covers
new, original, ornamental, and unobvious designs for articles of
manufacture.
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 Trademarks
 A trademark may be a word, symbol, design, or some
combination of such, or it could be a slogan or even a
particular sound that identifies the source or sponsorship of
certain goods or services.
 These are distinctive names, marks, symbols or motto
identified with a company’s product or service and registered
by government offices.

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 Copyrights

 Copyright is a right given to prevent others from printing,

copying, or publishing any original works of authorship.
 Copyrights provide exclusive rights to creative individuals for
the protection of literary or artistic productions.
 It protects original works of authorship including literary,
dramatic, musical, and artistic works, such as poetry, novels,
movies, songs, computer software, and architecture.

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 The Intellectual Property System in Ethiopia
 Ethiopia became a party to the convention establishing the
world Intellectual Property Organization (WIPO) in February
1998 right after some time the Country had joined the Nairobi
Treaty on the Protection of the Olympic Symbol in 1981.
 It is a member of the Treaty establishing the Common Market
for Eastern and Southern Africa (COMESA) which was
formed in 1994, the Partnership Agreement between members
of the African, Caribbean and Pacific (ACP) Group of States
and the European Union (EU).
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 Cont.’…d
The Ethiopian Government established the Ethiopian Intellectual
Property Office in the year 2003 containing the understated Objectives:-
 To facilitate the provision of adequate legal protection for and
exploitation of intellectual property in the country;
 To collect, organize and disseminate technological information contained
in patent documents and encourage its utilization;
 To study, analyze and recommend policies and legislation on intellectual
property to the government; and
 To promote knowledge and understanding of intellectual property
among the general public;
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 Cont.’…d
 The existing laws and directives in Ethiopia in the field of Intellectual Property
(IP) are the Patent Proclamation and the Implementing Regulation, the
Copyright and Related Rights Proclamation and The Trademark Registration
Directive.
 According to the proclamation in order to be granted a patent, an invention
must fulfill three conditions-
(1) it must be new- It should never have been published or publicly used before;
(2) It should be capable of industrial application- It must be something which
can be industrially manufactured or used; and
(3) It must be "non-obvious”- It should not be an invention which would have
occurred to any specialist working in the relevant field
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 Assignment

• Assume that you want to start a business to produce

something or provide service; prepare a business plan
for your business in the near future, be noted that you
should follow the outline of preparing the plan and not
more than 15 pages type written business plan.
(Maximum score is 20%).

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Questions and Comments

Thank you!!!