NOBLE COLLEGE

Busin
ENTREPRENEURSHIP
ess
Idea

For 1st Year 1st Semester AcFn students

(Degree Program)
By:- Tilahun
 CHAPTER TWO
MICRO AND SMALL ENTERPRISES

Chapter Objectives
At the end of this chapter, students should be able to:
 State nature of Micro and Small Enterprises
 Describe the economic, social and political aspects of
small business
 Describe the steps in setting a small business
 2.1. Nature of Micro and Small Enterprises
Definitions of Micro and Small Enterprises

 Small business is a business that is privately

owned and operated, with a small number of
employees and relatively low volume of
sales.
 Small businesses are normally privately
owned corporations, partnerships, or sole
proprietorships.
 The legal definition of "small" varies by country and by
industry, ranging from fewer than 15 employees under the
Australian Fair Work Act 2009, 50 employees in the European
Union, and fewer than 500 employees to qualify for many
U.S. Small Business Administration programs.
 Table 1: MSE Definitions Employed in Ethiopia--- defined
both in terms of paid up capital and number of workers.
Enterprise scale Sector Human Resource Total asset

Micro enterprise Manufacturing ≤5 ≤ Br. 100,000

Service ≤5 ≤ Br. 50,000
Small enterprise Manufacturing 6-30 ≤ Br. 1.5 million
Service 6-30 ≤ Br. 500,000
Medium enterprise Manufacturing Over 30 >1.5 million
Service Over 30 > Br. 500,000
Source: Micro and Small Enterprises Development Policy and Strategy of Ethiopia, (2011)
 Importance of Micro and Small Enterprises
Therefore entrepreneurship is needed to
encourage small business for the following
advantages;
 Source of new goods and services:
 Self-empowerment: Setting up Small Scale Business

 Employment generation:
 Growth potential:
 Export contribution:
 Flexibility:
 Decentralization:
 Distribution of economic power:
 Mobilization of resources:
 Small Business Failure Factors
 It is an outcome of the cumulative effect of many factors working simultaneously
which may not be closely inter-related.
 The important courses for failure can be listed as given below;
8 Mismanagement:
8 Implementation delay:
8 Poor information system:
8 Energy problem:
8 Improper technology:
8 Marketing: Small business generally adopts a traditional
way of marketing where ‘more‘ is regarded as ‘better‘.
w Small enterprises fail mainly become sick mainly because of their
inability to market their products for various reasons such as poor quality
of products, lack of market information, poor advertising, obsolete
technical back-ups, less competitive potentials, lack of professionalism,
 Small Business Failure Factors
8 Overtrading: The firms grow at a faster rate than they are able to
finance from internally generated cash flow and bank borrowings.
• The firm focuses only on sales, regardless of whether or not, the
same is profitable.
• A business which tends to have such way of career is ensured of
its failure.
8 Competition: In the present liberalized atmosphere, the small
units have to face intense competition in the market.
8 Raw materials and cost of production: Cost of production depends
on the availability of raw material used in production.
• But, mostly due to shortage or poor quantity of raw materials,
cost acceleration makes the product less competitive.
 Small Business Failure Factors
8 Besides,
• Bad environmental conditions,
• Pollutions,
• Unreliable lighting system, etc.
8 In most of the small units,
• Worker‘s participation or consultation is not invited,
• There is a high degree of gap of communication,
• Absolutely no reward or recognition system and
• Poor delegation of authority and responsibility.
Characteristics of Micro & Small Enterprises in Ethiopia
 Like other developing countries, in Ethiopia MSE
are informal sectors are the main source of
employment and income for vast number of people
Solomon (2004).
 The government of Ethiopia also gives greater
emphasis for the development of MSE in its strategy
and policy formulation
 In Ethiopia, about half of the urban workforce is
engaged in the informal sector and Addis Ababa
nearly accounts for about 40% of the total operators in
micro enterprise activities (Rahael, 2010).

 Problems in the Ethiopian Small Business Industry
 Some of the identified problems of small
businesses in Ethiopia are listed here;
 Securing finance:
 Lack of management competence and
exposure:
 Non availability of raw materials:
 Markets and distribution networks:
 Limited government support:
 Absence of technological know-how:
 Setting a Small Business
The business idea
 All new ventures begin with an idea.
 A business idea is a concept which can be used for
commercial purposes.
There are several methods for developing and
testing a business idea.
 The ability to come up with a business idea can be
transformed into a viable business, where ideas
supported by feasibility and a business plan can
then be sold to interested investors, firms, and
interested parties for a lump sum or a management
contract, or as agreed.
 Setting a Small Business
The business idea
Two things should however be noted:
 Although it is a prerequisite, a business idea is only a
tool;
 An idea by itself, however good, is not sufficient for
success.
Why Generate Business Ideas?
 You need a great idea to start a new business
 Business ideas need to respond to market needs
 Business ideas need to respond to changing
consumer wants and needs
 Sources of Business Ideas
There are millions of entrepreneurs throughout the world
and their testimonies suggest that there are many
potential sources of business ideas.
 Hobbies/Interests: (a favorite leisure-time activity or
occupation )
 Personal Skills and Experience:
 Franchises: It is an arrangement whereby the manufacturer or sole
distributor of a trademark, product or service gives exclusive rights for
local distribution to independent retailers in return for their payment of
royalties and their willingness to conform to standardized operating
procedures.
 Mass Media:
 Exhibitions:
 Sources of Business Ideas
There are millions of entrepreneurs throughout the world
and their testimonies suggest that there are many
potential sources of business ideas.
 Change: An innovative entrepreneur always responds
to changes in a positive manner.
 Brainstorming:
What project ana technique for creative
entrepreneur problem-solving
should have?
as well as for generating ideas. The objective is to come up
Meaning of project
with as many ideas as possible.
 Project can be defined as a scientifically evolved work plan devised to
obtain specific objectives within specified period of time.
 project can differ in size, nature, objectives and complexity they must all
partake of three basic attributes
• of being a course of action,
 Phases of Project Management
An entrepreneur may use the following steps to
select
1. theIdentification:
Project right project for his business.
It refers to identification of
business/investment opportunities. It involves scanning of the
environment to find out investment opportunities.
2. Project Appraisal: It involves searching, scrutiny,
analysis and evaluation of market, technical, financial and
economic variables. It examines the viability of the project.
3. Project Selection: It is the process of choosing a
project rationally in the light of objectives and inherent
constraints on the basis of appraisal.
4. Project Implementation: It is the stage of birth of an
enterprise. At the end of this stage, the idea becomes a reality.
 Definition of industry and small scale
industry
What is industry?
An industry is group of productive organizations that produce or
supply goods or services.
In economics industries are customarily classified as
Primary industry includes agriculture, forestry, fishing, mining,
and etc.
Secondary/manufacturing industry processes the raw
materials supplied by primary industry in to consumer goods or
industrial goods or build capital goods used to manufacture
consumer or non consumer goods. It also includes energy
producing industry & construction industry.
Tertiary/service industry includes banking, finance, insurance,
 Steps in Setting a Small Business
 Starting a small business requires determination, motivation,
and know-how.
 If an entrepreneur is going to accept the challenge, then
he/she must do everything he/she can to improve the chances
for success.
 Though there is no standard rule for the process
of starting a new business unit, the following
steps are most common;
i. Identify Business Opportunity:
ii. Build a Business Plan:
iii. Funding the business plan:
iv. Business Structure selection:
v. Legalization:
 Setting up Small Scale Business
8 Once an individual decides to take up
entrepreneurship as a career path, to be a job
provider instead of a job seeker, s/he has to
establish an enterprise.
8 However, setting up of a small new
enterprise is a very challenging as well
as a rewarding task.
8 After tentatively identifying four to five
ideas, s/he should go in for detailed
 Setting up Small Scale Business
 The entrepreneurial process of launching a new
venture can be divided into three key stages of :
Discovery; Evaluation; and Implementation.
 These can be further sub-divided into seven steps as
shown below:
Every Big Enterprises Starts with a small Dream

So Keep Dreaming ……………………