CHAPTER TWO

SMALL BUSINESS MANAGEMENT

2.1 Definition of Small Business
Is an enterprise or series of operations carried
out only by a workman skilled in the craft on
his/her own responsibility, the finished products
of which he markets himself.
He/she works in his own home with his own tools
and materials and provides his own labor.
These workers are mostly hand labors and
having personal skills with little or no aid from
modern technology and machinery.
COMPILED BYALEMU A. 1
 Small business is a business which is independently
owned and operated, not dominated in its field of
operation and meets certain standard of number of
employee and capital.
capital
 Generally, there are two approaches to define small
business enterprises:
Size criteria

Economic/ control criteria

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Size criteria
Sales volume

Number of employees,

Asset size,

Volume of deposit,

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Economic/ control criteria
o Market share, Independence, Management
style
The most widely used criteria to define small
business:
Number of employees and
Amount of capital.
Besides, different countries defined small
business in their own way.
 Small and Micro enterprises: According to the newly
improved Small and Micro enterprises Development
strategy of Ethiopia (MSE Strategy, 2011) the definition of
Small and micro enterprises is presented as follow: 4
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2.2 Characteristics of Small Business
 Actively managed by its owner - independent
Management
 No or few management layers

 Style of management is highly personalized.

 Relatively small in size within the industry as

compared to the highest unit in its field
 Largely dependent on the internal sources of
capital to finance its growth.
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 limited Scope of operations:
 limited Scale of operation:
 Specialized skills: The small enterprises normally
have specialized skills for certain specific clients. The
small business does well in small, isolated,
overlooked and imperfect market.
 Small business survives well in a bad business
condition.

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2.3 Major Areas of Small Business
Small business tends to do better in some industries
than in other:
1. Service business- engaged in hotels and
transportation services.
2. Retail business-
3. Wholesale business-buying products from
large manufacturers and reselling the
products to retailers
4. Manufacturing business
5. Agriculture
 
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2.4 The Importance of Small Business Enterprises
 As a means of creating employment opportunity,
 A seed bed for development of local
entrepreneurship
 Promote rural industrialization
 Supplier of parts and accessories to bigger
industries
 Play prominent role in promoting the export market

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 2.5 Environment of Small Business
 Entrepreneurship environment refers to the various
facet/aspects within which enterprises have to operate
in.
 These entrepreneurial environments are most rationally
divided into two major parts: internal and external
environment. The two major parts are:
 External Environment
 Internal Environment

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 External Environment

 By and large, entrepreneurship is influenced by

environments created by the external forces. These
external forces are demarcated as macro and micro
environmental forces.
 Macro – Environment
 Macro environment is the type of environment that is
not specific to a given entrepreneur or company. It has
universal application to all the entrepreneurs in a given
country irrespective of the type of entrepreneurs.
 Macro environmental force more or less include the
following environments 11
 Economic environment: related to factors of
production & distribution like economic stage,
economic system, economic policies economic indices
(per capital income), infrastructural factors, living
standards, etc
 Socio-cultural environment: related to social attitude &
cultural factors. Demographic factors, social concern &
attitude, education level, aspirations and values,
consumer motives etc
 Political- legal environment: related to government
regulation & consumer protection-like political system,
consumer protection, taxation laws, quality leadership,
etc.
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  Technological environment: It relates to the
knowledge applied and equipments used-
like source of technology, communication
& infrastructure facilities, and patent
protection.
 2. Micro - Environment
 Micro environmental forces on the other side are
forces that are specific to companies or
entrepreneurs. It includes forces like customers,
suppliers, competitors, intermediaries, etc

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Internal Environment
 This is the second part of SWOT analysis. It
identifies the weaknesses' and strengths that
are internal in nature. In sensible terms it is
assessing the expertise, resources, abilities,
skills, costs, organizational structure and
culture, manufacturing techniques etc.

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2.6 Factors that contribute to the success of small
business
 Hard work, drive and dedication-
 Market demand for products/ services provided-
 Management competence :

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2.7Common Causes for Small Business Failure
 Managerial incompetence or inexperience-

 Neglect-

 Weak control system-

 Under capitalization-

 Failure to clearly define and understand your market,

your customers, and your customers' buying habits.
 Over investment in fixed asset

 Failure to plan current as well as future operation

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 Improper Attitude (The entrepreneur may not respect
time, employees and may have lazy lifestyle and
dictatorial style of work
 Poor distribution channel

 Poor location

 Weak marketing communication or promotion

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2.8 Problems in Ethiopia Small Business
 Scarcity of capital.

 Limited and unequal access to institutional credit

markets.
 Irregular access to domestic and imported inputs
coupled with higher cost.
 Inadequate infrastructure facilities.

 Weak managerial and technical skills.

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Lack of information on possible export market.
Inability to identify sources of assistance for product
development and product upgrading for export.
Absence of sound steps that need to be taken to enter in
export field.

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2.9 Setting Small Business
2.9.1 Business Ideas
 A business idea is some one’s opinion regarding
what may or may not be a good business.
 There are three types of business ideas. They are:
 Old idea – Here an individual copies an existing business
idea from someone.
 Old Idea with Modification – In this case the person
accepts an old idea from someone and then modify it in
some way to fit a potential customers demand.
 A new Idea – This one involves the invention/creation of
something new for the first time

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A) Sources of Business Ideas

 Customers: -

 Existing companies: -

 Distribution channels:

 Research and Development units: -

 Government:

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2.9.2 Small Scale Industry & Large Scale Industry
 The countries generally try to identify their SME and
large scale industries in order to target them for special
assistance. Yet, the definition of the terms depends to
a greater extent on local conditions.
 There are nevertheless three parameters that are
generally accepted, either independently or in
combination, in defining the terms in most countries,
these are:
 Number of workers employed
The level of capital investments or assets
The volume of production or business turnover.

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 In many countries, medium scale industry is not
defined and is understood to include those that fall
between small and large industries.
 Large-scale industries refers to those which have
relatively substantial capital and grater annual sales
turn over.

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Advantages Associated With Small Scale Industries
 This industry is especially specialized in the
production of consumer commodities.
 adopting the labor intensive approach for
commodity production.
 are helpful in distributing national income in more
efficient and equitable manner

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 Small Scale Industries help the economy in promoting
balanced development of industries across all the
regions of the economy.
 Small Scale Industries enjoy a lot of help and
encouragement from the government

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Advantages Of Large Scale Industries
 Advantages of Large Scale industries generally related
to Advantages of Large Scale Production in which it
would compensate advantages enjoyed by small scale
producers. The advantages claimed for production on a
large scale resolve themselves into two general classes:

(1) Economies in making the goods, and

(2) Economies in marketing the goods.

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2.9.3The Start up Process of a Small Enterprise
STEP 1: Identification of New Venture Opportunities
 In the search for new ventures, entrepreneurs explore
both (a) external and (b) internal resources.
The external sources include:-
 Newspapers, trade journals, professional journals etc.
which tell about trends in fashions, customs and other
social areas.
 The Internal sources basically consist of storehouse of
knowledge build up by an individual over the years.

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Sources of Ideas for New Products

1. Necessity
 It involves the identification of potential customer needs and
then tailoring the product and services to meet them.

2. Hobbies/ Personal Interest

3. Watching Trends in Fashions and Customs

 Alert observers of the fashion scene can capitalize the
opportunity thrown by the change of fashion. Demand for
handcrafted jewelry, fast foods etc. have made many
professionals in these fields.
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4. Observing other’s Deficiencies

5. Gap Filling

Business opportunities may be found to exist in

reply to the question, why is not there a tool for
doing this?

6. Novel Use of Known Products

 it is possible to think of new uses of existing

products.
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7. Ancillarisation/Subsidiary
 An entrepreneurially oriented brain can conceive new
ideas or think of improvements in products with which
they are familiar: As a consequence, a unit ancillary of
an existing industry could be started.
STEP 2: Evaluation and selection of New Venture
Opportunities
 Technical feasibility that is the possibility of
production with the available skill & technology.
 Commercial viability of the idea based on cost and
profitability. It evaluates the tradeoff between cost
and income to judge the attractiveness of a business
idea.
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Pitfall/drawback in Selecting New Venture
Opportunities
(1) Lack of objectivity
 Some entrepreneurs get so obsessed with their idea that
they ignore the need to analyze its feasibility.
(2) Market Myopia
 A shortsighted approach of concentrating on
production rather than on marketability could lead
to non avoidable disaster.
(3) Inadequate Understanding of Technical Aspects
(4)Lack of Product Differentiation
(5)Overlooking Legal Issues
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STEP 3: Technical, Marketing and Financial
Feasibility of the Identified Project
A. Technical Feasibility
 It covers the following
1) Identification of critical technical specifications
comprising
a)The functional design of the product
c) Durability
d) Reliability of performance.
e) Safety

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2) Examination of product quality-cost relationship

 Quality enhancement should not be carried beyond a

particular point because it would cause cost increase
and lead to decrease in total market demand.

3) Product testing, which includes:

a) Product development through blueprint, models,
prototypes.
b) Product testing through laboratory testing and
field-testing

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B. Market Feasibility
 The following process may be adopted to assure the
market opportunities of a product.

1) Identifying the Market Potential

 It involves an estimation of both the current demand of

the product and projection of future market trends.

2)Estimating Cost-volume Relationship to ascertain how

various price levels may affect total sales volume.
 The price must reflect the value of the product.
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3) Sources of Market Information.

 Relevant data for market analysis can be gathered

from two main sources (a) primary sources such as

interviews, mailed questionnaire, survey etc and (b)
secondary sources like government agencies, trade
unions, chambers of commerce etc. Whereas the
former is costy, the latter may not meet the
requirements of the entrepreneur.

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4) Market Testing
It is an important method of establishing the overall
feasibility of a new venture, significant market testing
methods include:
 Displaying the product at trade fairs

 Test marketing to analyze the receptivity of the

product, and
 Sample sales.

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C. Financial Feasibility
 It covers the following:

1)Determination of total financial requirements

 Financial resources could be categorized on the basis of
periodicity into:
 Short term resources: (those payable in a year).
 Term Loans: Intermediate term loans are those
available for one to three (sometimes five) years.
Long-term loans are those from banks, equity
capital and investments of earnings.

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2) Cash Flow Analysis
 If the projected sales associated financial requirements
and available financial resources are known, the
anticipated cash flow can easily be determined.
 3) Anticipated return on investment

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 STEP 4: Assessment of Personal Requirements and
Organizational Capabilities
 An inventory must be made of the skills needed for
effective implementation of new venture. The steps
in undertaking the exercise relating to
determination of personal requirements and
designing the initial organizational structure are
described below:

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STEP 5: Analysis of Competition
 In order to ensure the survival and growth of
enterprise, it is essential to make competition analysis.
 Generally, every organization to face two types of
competition:
Direct competition from similar products.

Indirect competition from substitutes.

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 Competition analysis must seek to identify potential
competitors, the strategies adopted by them and their
impact on proposed enterprise. The aim should be to
have superior strategies at least during the initial
stages.
STEP 6: Developing Action Plans
 No strategic plan is complete until it is put in to action.
To make the plan workable, the business owner should
divide the plan into projects.

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STEP 7: Implementation and Evaluation
 Now it is the time of reality. When action plans are
materialized according to the action plan which is
composed of various projects, business plans are
considered to be implemented.
 After implementation follows evaluation. Evaluation is
mainly concerning towards making sure the
achievement of mission, objectives etc.

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2.9.4 Field Problems of Starting a New
Enterprise
(1) Pre-operator problems
 Problem of selecting an appropriate form of
business organization.
 Problems related with the acquisition of basic
facilities such as sources of raw materials,
power, transport etc.
(2) Problems during the construction phase .
 Acquisition of land;
 Construction of building and other aspect of
civil works;
 Acquisition of machinery and its installation;
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(3) Post Operative Problems of a New
Enterprise
 Lack or absence of profits.
 Experience Factor:
 Sale Causes
o Weak competitive position ;
o Lack of proper inventory control;
o Low sales volume ;

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 End of
Chapter Two
Thank you very much

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