Bahir Dar Institute of Technology (BiT)-BDU

Faculty of Mechanical and Industrial Engineering

Industrial Engineering Program

Lecture
Course name: Entrepreneurship and small business Management

By: Abebaw M.
2021
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 Contents

Chapter 1 Introduction to Entrepreneurship

Chapter 2 Starting Technology based new venture
Chapter 3 Business Development Process
Chapter 4 Choosing The Legal Form of Business Ownership
Chapter 5 Operations of Business startup
Chapter 6 Risk and Insurance of Business enterprises

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 Chapter one
Introduction to Entrepreneurship
1.1 Meaning of the terms entrepreneur,
entrepreneurship and owner manager;
1.2 The entrepreneurship process
1.3 Characteristics of Entrepreneurs
1.4 Motivation for starting a business
1.5 Success factors for entrepreneurs
1.6 Kinds of Entrepreneurship
1.7 Ways of going in to business and becoming an
entrepreneur
1.8 Small Business as Basic components of Economy
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 Meaning of the terms Entrepreneur, Entrepreneurship,
Owner-Manager

What is Entrepreneur?
 Entrepreneurs are action-oriented, highly motivated
individuals who take risks to achieve goals.

An individual who
undertakes the risk
associated with
creating, organizing,
and owning a
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business.
 Meaning …

 Economists may view entrepreneurs as those who bring

resources together in unusual combinations to generate profits.
 Psychologists tend to view entrepreneurs in behavioral terms
as those achievement- oriented individuals driven to seek
challenges and new accomplishments.

 Peter Drucker states, as “Entrepreneur is someone who always searches

for change responds to it, and exploits it as an opportunity.”
 Example: It is the entrepreneur who only knows
 Opening of new university near the society
 Opening of Hotels near tourists’ attraction-center

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 Meaning …

Entrepreneurs are people who have the ability

➢to see and evaluate business
opportunities,
➢to gather the necessary resources
& Information to take advantage of
them; and
➢to initiate appropriate action to
ensure success.
 Meaning …

What is Entrepreneurship?
“ Entrepreneurship is the dynamic process of creating incremental
wealth.This wealth is created by individuals who assume the major
risks in terms of equity, time and /or career commitments of
providing value for some product or service.

✓ The product or service itself may or may not be new or unique but
value must somehow be infused by the entrepreneur by securing
and allocating the necessary skills and resources” Robert
Ronstadt
➢ Entrepreneurship is very rarely a get rich-quick proposition; rather,

it is one of building long-term value and durable cash flow streams.

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 What Is An Entrepreneur
& Entrepreneurship ?
ENTREPRENEUR
A vision-driven individual who assumes
significant personal and financial risk to
start or expand a business.

ENTREPRENEURSHIP

The pursuit of opportunity through

innovation, creativity and hard work
without regard for
the resources currently controlled.
 The entrepreneur versus the owner manager
(similarities and differences)
Entrepreneur Owner Managers
a. Entrepreneurial function is the ➢ They may or may not be
organization of production: entrepreneurs.
(organizational skill). ➢ They own and manage a small
b. Decision-making and calculated enterprise, in a way, which fits
risk bearing: with their personal motivations.
c. An entrepreneur has an all-round ➢ They are more intent on survival
personality: than seeking innovative change
and growth.
d. High levels of achievement
1. Limited scope for innovativeness,
motivation creativity and imagination
e. Innovative, creative, imaginative 2. Managerial jobs are transferable
f.The entrepreneur is the owner of 3. Managers do not bear-risk
the business who enjoys the -Risk bearing capacity is an entrepreneurial quality
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position of an employer.
 Characteristics of Entrepreneurs /personal
competencies
1. Need for Achievement:- vision
2. Willingness to take risks:-financial, careers, family ,
3. Self-Confidence:- internal and external locus of control
4. Innovation:-. The entrepreneurial manger is constantly looking for
innovations, not by waiting for a flash of inspirations, but through an
organized and continuous search for new ideas
5. Total Commitment
6. All-rounders
7. A need to seek refuge:- escape from environmental factor
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Other types of “ refugees” mentioned are the following:

1.The parental (paternal) refugee

Who leaves a family business to show the parent that “I can do it alone”.

2.The feminist refugee

Who experiences discrimination and elects to start a firm in which she can
operate independently male chauvinist.

3.The housewife refugee

 Who starts her own business after her family is grown or at some other
point when she can free herself from household responsibilities.

4.The educational refugee

 Who tires of an academic program and decide to go into business.
 Motivation for starting a business
ድስከስ

The reason for small firm formation can be divided between “pull” and
“push” influences.
I.“Pull” Influence
 Some individuals are attracted towards small business ownership
by positive motive such as a specific idea which they are
convinced will work. ”Pull” motives include:
a. Desire for independence
b. Desire to exploit an opportunity
c. Turning a hobby or previous work experience in to a business
d. Financial Incentive
 The promise of long-term financial independence can clearly be a
motive in starting new firm, although it is usually not quoted as
frequently as other factors.
“Push” Independence

 Many people are pushed into founding a new enterprise by variety of

factors including:

1.Redundancy==>Being without a job (idleness)

2.Unemployment (or threat of)
3.Disagreement with previous employer==>Uncomfortable relation at
work has also pushed new entrants into small business.

 The dividing line between those “pulled” and those “pushed” is

often blurred.
Outcomes of Entrepreneurship
 Economic growth
 New industry formation
 Job creation

Success factors for entrepreneurs

Most new ventures succeed because their founders are capable individuals.

1.The entrepreneurial team

2.Incremental growth of product or services
3.Marketing and timing: Market potential is critically influenced by
timing of new products or services.
Weakness of entrepreneurship

a. Limited resource:- entrepreneurship mostly starts from small

investment or contribution of owners are more than one
individual
b. Lack of experience:- most of entrepreneurs have no
experience and this may lead to in efficiency
c. Disagreement between member: if the owner of entrepreneur
is more than one person, disagreement between them can be
created. This disagreement can limit the operation of the
business.
d. Uncertainty of income:- opening and running a business
provide no guarantee that an entrepreneur will earn enough
money to survive
e. Risk:- starting or buying a new business involves risk and the
higher rewards the greater the risk entrepreneurs usually face.
This is why entrepreneurs tend to have evaluate risk very
carefully
f. Lower quality of life until the business gets established:- the
long hour and hard work needed to launch a business can take
their tall in the rest of the entrepreneurs life

g. Complete responsibility:- it is great to be the boss but many

entrepreneurs find they must make decision on issues about
which they are not knowledgeable. When there is no one to ask
the pressure can build quickly the realization that, the decisions
they make are the cause of success or failure.
 Elements involved in Entrepreneur

1.RISK:- Simply stated risk is “a condition in which there

is a possibility of an adverse deviation from a desired
outcome that is expected or hoped from applied to a
business risk translates in to the possibility of losses
associated with the assets and the earning potential
of the firm. ”
Business risks can be classified in to two broad category
market risk and pure risk.
Entrepreneurs face a number of different types of risk. These
can be grouped in to basic areas.
a. Political risk:-
b. Business risk:-
c. Economic risk:-
d. property risk
e. Personal risk
2.Information
Information gives the following importance to the businessmen’s
➢ To know the position of their competitors that is their
strength and weaknesses, business strategy they use and their
long term plan.
➢ To know threats and opportunity in doing business
➢ Helps to design long term objectives and goals indicate
capital requirement (labor, capital and machinery)
➢ Helps to know market position locally and internationally.
Sources of information
 Information are obtained from two main methods of data
collection. That is primary data collection and secondary data
collection
1. Collection of primary data:
 Observation method
 Interview method
 Through questioner
 Other methods which includes warranty cards, consumer
panels, etc
2. Collection of secondary data:-Secondary data are available
in
 Various publication of the central state and local government
 Various publications of foreign government or international
bodies and their subsidiary organization.
 Technical and trade journals
 Books, magazines and newspapers
 Reports
 Public records and statistics, historical documents.
 Ways of going into business
 There are several ways of going into business and
becoming an entrepreneur. You can:
 Purchase an existing business
 Enter a family business
 Purchase a franchise
 Start your own business

 Read the advantages and disadvantages of these alternatives

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 ways of going into business …
❑ Buying an existing business

➢Advantages
 Existing businesses already have customers, suppliers, and procedures.
 Seller of the business may be willing to train the new owner.
 There are existing financial records.
 Financial arrangements may be easier.
➢Disadvantages
 Business may be for sale because it is not making a profit.
 Problems may be inherited with the purchase of an existing business.
 Many entrepreneurs may not have the capital needed to purchase an
existing business.
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 Introduction…
❑ Entering a family business
➢Advantages
 There is a certain sense of pride and accomplishment that comes from being part of a
family endeavor.
 A business can remain in the family for generations.
 Some people enjoy working with relatives.
 The efforts of running a family business give one the benefit of knowing that their efforts
are helping those whom they care about.
➢Disadvantages
 Senior management positions are often held by family members who may not be the best
qualified.
 It may be difficult to retain qualified employees who are not members of the family.
 Family politics may affect decisions regarding the business.
 It is often difficult to separate business life and private life in family-run businesses.
 It is often difficult to set policies and procedures and to make decisions.
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 Introduction…
❑Franchise Ownership
➢ A franchise is a legal agreement that gives an individual the right
to market a company’s products or services in a particular area.
➢ The two parties to a franchise agreement are the franchisor, the
parent company of a franchise agreement that provides the
produce/service, and the franchisee, the distributor of a
franchised product/service
➢Advantages of purchasing a franchise business
 An established product or service is being provided.
 Franchisors often offer management, technical, and other
assistance.
 Equipment and supplies may be less expensive.
26  A guarantee of consistency attracts customers.
  Franchise Ownership….
Introduction…
➢Disadvantages of purchasing a franchise business
 The cost of franchises may be high, which can reduce profits.
 Franchise owners are limited in the decisions they can make regarding the
business.
 The performance of other franchises impact on the franchisee.
 The franchise agreement may be terminated by the franchisor.
➢Operating Costs of a Franchise
 The initial franchise fee is the fee the franchise owner pays in return for
the right to run the franchise.
 Start-up costs are the costs associated with beginning a business.
 Royalty fees are weekly/monthly payments made by the owner of
franchise.
 Advertising fees are fees paid to support advertising of the franchise as a
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whole.
 Introduction…
❑ Starting Your Own Business
 For whatever reason, running an existing business or operating a franchise
may not be right for you. This means to be an entrepreneur you will have
to establish a business of your own.
 Advantages of Starting Your Own Business
➢ Independence
➢ Satisfaction
➢ Challenge of creating something new
➢ Triumph/victory when business is profitable
 Disadvantages of Starting Your Own Business
➢ RISKS
➢ Uncertainty of demand for the product/service
➢ Need to make decisions daily

.
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 Small Business as an important part of Economy
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

According to a recent World Bank Survey, out of 733 Ethiopian firms:

measured by sales and assets: 76% are small; 18% medium; and
29 6% large [Source: Bas,T. (2012)]
 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.
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 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

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rank as a small business.
 Generally, a small business
✓Owner is usually the manager
✓Operates in one or very few locations
✓Typically serves a small market
✓Not dominant in its field

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.
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 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?

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SMALL BUSINESS competitive ADVANTAGES
 Meeting customer needs
 They often serve customers where the number of products and
services needed is small or the requirements are too specialized for
large businesses to make a profit.
 They can compete by paying attention to their customers.
 They get direct information from customers about likes or dislikes /
wants and needs
 Providing unique services
 They spend time determining needs and discussing alternatives.

SLIDE 34
Checkpoint ✓
 How can small businesses compete successfully with larger businesses?
 Smaller businesses are able to provide more personalized products and services to
their customers.
 They are able to provide products and services where smaller orders and projects
are required and tend to fill unique customer needs, which larger companies do not
provide.

SLIDE 35
Eight reasons why many small businesses fail.

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 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.

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 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
6. Challenge.
They want to win or lose on their own abilities the challenge
gives them psychological satisfaction

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 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
39 faces is failure.
 Assignment One:

1.Discuss with examples, the role of entrepreneurship in the economy of

a country. [min 2page]
2. Describe the small business classification and requirements
in Ethiopian context
[min 2page]

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Comment/Questions?
 Revision on Ch-1
➢Basic concepts on Entrepreneur &
entrepreneurship

➢Characteristics & Skills of Entrepreneurs

➢Motivation for starting a business

➢Success factors for entrepreneurs

➢Ways of going in to business &

becoming an entrepreneurship