SMALL BUSINESS

 Business: is both commercial and social enterprise or that

makes and/or trades goods or services which involve dealing,
operations, and marketing
 Businesses might be either profit based or non-profit oriented
organization
 A given business should to be ethical and social responsible.
 Ethical means it should adopt fair practices, be honest and
truthful about quality of goods, charging fair prices, abiding to
laws, paying taxes, duties and fees to the government honestly.
 Socially responsible means it should have to take into account
the expectations of other stakeholders like shareholders,
consumers, employees, government and community.
 Business classification

 Even if the standard of business size classification varies

from country to country and depends up on the industry,
there are two approaches to classify business. They are:
A) Size Criteria: it refers to the scale of operation
 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, etc.
 Employee number and capital/asset are the most
commonly used measures, where asset is used as a
primary yardstick when the business falls in two
categories at the same time while using the two tools.
Classification in manufacturing and construction
sector

 Micro enterprise: it is a business where the total

asset does not exceed birr100, 000; and operates
with 5 people including the owner.
 Small Enterprises: it is a business where the total
asset of birr 100, 000 (one hundred thousand) and
not more than Birr 1.5 million; and operates with 6-
30 persons.
 Classification of business in service sector

 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.
 Small Enterprises: is one in which the total asset
value or a paid up capital of birr100, 000 (one
hundred thousand) and not more than Birr 1.5
million; and operates with 6-30 persons
 Contd…
5

 Similar to the sectors, business classification also varies

from nations to nations depending to the economic status
AUS US EU

Minute/Micro 1-2 1-6 <10

Small <15 <250 <50

Medium <200 <500 <250

Large <500 <1000 <1000

 Contd…
6

B) Economic/control criteria
 Some of the criteria here market share,
independence, personalized management,
technology and geographical area of operation
 The role of small business in Economy

 Employment Opportunities
 Economical Use of Capital
 Balanced Regional Development
 Equitable Distribution of Wealth and
Decentralization of Economic Power
 Unregulated Growth of Large
 Mobilization of Locals Resources
 Less Dependence on Foreign Capital/ Export
Promotion
 Factors Determining Success of Business
8

 There are different internal and external factors which

determine the success of a given business.

 Some of important factors to the success of a business are:

 Contd…
9

 Feasibility analysis: needs to serve as a starting point for

activities leading to the development of new, or expansion
of existing business.

 To capture market potential, such analysis needs to

examine a region’s economic conditions, existing
infrastructure and labor resources, identify potential
markets, and define potential development opportunities
 Contd…
10

 A feasibility analysis is important not only for

determining the viability of business clusters but also for
recruiting new businesses, identifying and securing
funding, and gaining political support for the cluster
 Contd…
11

 Entrepreneurial thinking: it is crucial to success in the

leadership of businesses, governments and supporting
organizations

 Entrepreneurship is needed to anticipate and understand

changing markets and consumer needs, and be able to
quickly respond to these changes.

 Entrepreneurship is instrumental in helping identify niche

markets, stimulate innovativeness, and consequently leads
to competitive advantage.
 Contd…
12

 Stakeholder cooperation and commitment: are crucial

for the success of a given business

 Stakeholders, representing industry, government, and

supporting organizations need to work together to create a
long-term vision for the business and apply strategies and
policies supporting business development

 Stakeholders need to be aware that business development

is a long-term process and might take time to achieve first
benefits
 Contd…
13

 Commitment is needed not only during development

stages but also when the cluster is mature and successful
to ensure its continuous competitiveness

 Cluster businesses need to understand that close

cooperation is needed for individual and collective
success
 Contd…
14

 Funding: plays a major role in the development of many

business clusters

 Entry of new businesses is often limited by needed financial

capital

 Important actions created by additional funding (such as project

grants, low interest loans, and tax incentives) include start-up
assistance to new businesses and incorporation of new
technologies
 Contd…
15

 Access to inputs and markets: It is crucial to business

development and long-term viability

 A dependable flow of raw materials and stable markets for

products and services are key to sustainable clusters

 Stakeholders need to focus efforts on ensuring continued

access to production inputs and expanding the customer base

 Adequate infrastructure is needed to ensure such access

 Key steps of business launching

 Thereare 3 main steps Discovery, Evaluation, and

Implementation, which further classified in to 7 steps
 Priority Sectors and Sub-Sectors for MSEs
Engagement In Ethiopia

 Manufacturing Sector
 Construction Sectors
 Trade Sectors
 Service Sectors
 Agriculture Sector
 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:- it is a level where an enterprise
become competent in price, quality and supply and
profitable
 Maturity Level:- it is a level where an enterprise
invest further by fulfilling the definition given to the
sector to transform to the next levels like medium
and large business
 BUSINESS ENVIRONMENT
19

 Business environment is dynamic, complex, unpredictable

and uncontrollable external force that greatly influences
the functioning of a given factor

 It varies from place to place and its extent of effect also

might vary along the place and time differences

 It can influence almost every aspect of business, be its

nature, its location, the prices of products, the distribution
system, or the personnel policies
 Contd…
20

 For example, when there is a change in the government

polices, the business has to make the necessary changes to
adapt it to the new policies

 Similarly, a change in the technology may render the existing

products obsolete or again the change in fashion or customers’
taste may shift the demand in the market for a particular
product

 So the business units must have to adapt themselves to these

changes in order to survive and succeed in business
 contd…
21

 An increasingly fierce business environment, changes in

competitors strategy and changing consumer preferences
bring a challenges to the businesses

 So it need to continuously evaluate their business

strategies in order to stay competitive

 But if they able to exploit the opportunities of change, it

can also offer new opportunities that might help them to
identify niche markets, develop unique products and
services, and consequently gain competitive advantage
 Types of Business Environment
22

 Economic Environment
 The main factors included in economic environment are
economic conditions, economic policies and economic
system of the country
 Economic condition
 Gross domestic product, markets for goods and
services,
 Availability of capital, per capital income, strength of
capital market
 Foreign exchange reserve, growth of foreign trade etc.
 Contd…
23

 Economic Policies
 The government changes policies from time to time in view of the
developments taking place in the economic scenario and political
expediency

 And all business activities and operations are directly influenced by

the economic policies framed by the government from time to time.
Some of the important economic policies are:

 Industrial policy: It covers all those principles, policies, rules,

regulations and procedures, which direct and control the industrial
enterprises of the country and shape the pattern of industrial
development
 Contd…
24

 Fiscal policy: It includes government policy in respect of

public expenditure, taxation and public debt.
 Monetary policy: It includes all those activities and
interventions that aim at smooth supply of credit to the
business and a boost to trade and industry.
 Foreign investment policy: This policy aims at regulating
the inflow of foreign investment in various sectors for
speeding up industrial development and take advantage of
the modern technology.
 Export –Import policy (Exim policy): It aims at increasing
exports and bridges the gap between export and import.
 Contd…
25

 Economic System
 This implies the way that the country is leading its
economy whether it is Capitalist, Socialist or Mixed
Economy
 Capitalist (market economy)
 Socialist (planned economy)
 Mixed Economy (Capitalism + socialism)
 Contd…
26

 Non-Economic Environment

 Social Environment
These are the social structure and the values that the society
already have. This type of environment includes social
factors like customs, traditions, values, beliefs, poverty,
literacy, life expectancy rate etc.
 Political Environment
This deals about the stability of the political system, the
government policies and its attitude towards the business
community and the unionism.
 Contd…
27

 Legal Environment
This refers to set of laws, regulations, which influence the
business organizations and their operations.

Every business organization has to obey, and work within the

framework of the law.
 Contd…
28

 Technological Environment
This includes the methods, techniques and approaches
adopted for production of goods and services and its
distribution

The varying technological environments of different

countries affect the designing of products
 Contd…
29

 Demographic Environment
This refers to the size, density, distribution and growth rate of
population

All these factors have a direct bearing on the demand for

various goods and services

 Natural Environment
The natural environment includes geographical and ecological
factors that influence the business operations
 Contd…
30

These factors include the availability of natural resources, weather

and climatic condition, location aspect, topographical factors, etc

Business is greatly influenced by the nature of natural environment.

For example, sugar factories are set up only at those places where
sugarcane can be grown

It is always better to establish manufacturing units near the sources

of input

Further, government’s policies to maintain ecological balance,

conservation of natural resources etc. put additional responsibility
on the business sector
 Business environment analysis

Macro- It’s an analysis of business environments not immediate part of the

environment entrepreneur’s venture but have an impact. Eg. Technology,
analysis political, social, legal and economic environment

It’s an analysis of the industry to determine what makes it

Sector attractive. Eg. History and future trends of the industry,
analysis government policy in the sector, product development,
input/output market,

SWOT It’s an analysis of the strength and weakness of the business; and
analysis opportunities and threats of the business
 Contd…
32

Ways of Exploiting Opportunities

 Value addition:
It is increasing the time, place, information or form utility, and
monetary worth of a product at each link of the chain

It describes what value the actors add to the product to higher

the customer value offered from the product

Value addition can be altering of a product; it can be the

adoption of new production or handling methods that increase
a farmer's capacity and reliability in meeting market demand
 Contd…
33

 Value addition has a particular importance for the

producers in that :

 It brings bargaining power

 It allows them to create new markets
 It helps to differentiate a product from others and thus
gain advantage over competitors
This strategy helps to generate additional revenues and
decreases cluster vulnerability to adverse economic
impacts.
 Contd…
34

 Product branding:

 Branding is a marketing strategy used to differentiate

products and services from those provided by competitors

 The goal of this strategy is to emphasize unique product

qualities and create a positive image that appeals to
consumers
 Contd…
35

 Certification:
Consumers are increasingly interested in purchasing goods and
services that are produced in a way that minimizes negative
environmental impacts

Certification offers a unique opportunity to assure consumers

that the production were produced in a sustainable manner

This will help to differentiate the products from competition

and increase competitive advantage of the business cluster
 Contd…
36

 Income diversification:
Businesses that provide a range of products and services
to the market are more likely to be less affected by
adverse economic conditions than those focusing only on
one component of the manufacturing process

The business which provides numerous complementary

products and services might build a strong base of
dedicated clients and create an additional demand for
cluster services
 Business Failure

Business failure vs Business termination

 Business failure is when a business closes with a

financial loss to a creditor
 Business termination is when a business is no
longer exists for any reasons. Like:-
 Selling of a business for a healthy profit
 Shifting of the business
 Shifting of form of the business
 Retiring from the business
 Business Failure

 Failure is an opposite of success or gap of vision and

reality which can occur at any business and any stage of
the venture
 The rates of business failure vary greatly by industry,
type of ownership, size of the business, and expertise of
the owner
 Failure is an opportunity for learning and prior failures
shape future strategies; But Small business are more
vulnerable to failure and they don’t give a chance to learn
from
 Contd…

A business is said to have “failed” if it meets any of

the following criteria:

Earnings Criterion
 A firm has failed if its return on capital is
significantly and consistently lower than that
obtainable on similar investments
 Contd…

 Solvency Criterion
 Solvency refers to the ability of the business to
meet its total debt obligations determined by
comparing the amount of borrowed capital used to
the amount of owner’s equity invested in the
business
, if dr>1 the business is insolvent
if dr<1 the business is solvent
 Contd…

 A firm has failed if the owner take an action such as execution,

foreclosure or attachment, voluntarily withdraws leaving
unpaid obligations to avoid bankruptcy or loss to creditors

 Bankruptcy Criterion
 A firm has failed if deemed to be legally bankrupt
 Bankruptcy is normally accompanied by insolvency
liquidation

 Loss cutting criterion

 A firm has failed if the owner disposes of the firm or its assets
with losses, in order to avoid further losses.
 Causes of small business failure

 Internal problems are the main factors of failure in the

business
 This problems share >89% of business failures
 Lack of adequate capital
 Lack of proper cash flow
 Poor facilities/equipment inventory control
 Ineffective and Inefficient human resources
 Poor leadership
 Poor organizational structure, and
 Poor accounting and business recording systems
 Therefore Entrepreneurs can avoid venture failures by
managing known internal causes of failures which are
under their control
 Causes of small business failure

Managerial causes
 Lack of strategic planning
 Plan what you want to do with your business, where you want it to go,
and how you’re going to get even if it is time consuming and might be
changed
 Lack and/or unbalanced managerial experience
 One person management/Trying to go it alone
 Poor HR management
 Avoid not hiring additional employees when it is necessary, not using
existing employees effectively, poor communication and interpersonal
relationships, Nepotism-favoritism towards family members
 Lack of technical competence on the business
 Expansion beyond resources
 Main causes of small business failure

Financial causes causes

 Inaccurate estimates of cash flow and capital
requirements
 Lack of capital to start the business properly
 Inappropriate financial sources
 Too much credit
 Improper financial allocation
Inadequate business records
 Main causes of small business failure

Marketing causes
Inadequate market orientation
Failure to diversify market
Lack of information about customer
Failure to innovate
Lack of marketing research
 Other causes of small business failure

 Failure to recognize own strengths and weaknesses

 Neglecting
 Fraud
 Disaster
 Problems of Small Business in Ethiopia

 Small business of developing countries faces

financial, human resources and managerial problems
which can be characterized as:

 Internal factors: records management,

managerial skills, Business control system, and

 External factors: taxation, capital market,

physical infrastructure, inflation, and government
control
 Contd…

 Some challenges of Ethiopian SME:

 Lack/ poor business plan
 Lack of formal and informal association
 Lack of favorable business environment
 High cost and shortage of raw materials
 Lack of proper institutional support
 Lack of proper marketing practice
 Stiff competition among MSEs
 Inadequate finance
 Lack of Entrepreneur skill