Entrepreneurship

Chapter one : Introductory Concept of Entrepreneurship and

Entrepreneur

Objectives

Up on the completion of this unit, students will be able to:

 Define properly the term entrepreneurship and entrepreneur
 Discover themselves as change agents of their life
 Identify the personal qualities of an entrepreneur
 Identify their own personal traits
 Notice the driving force(motivators) and restraining forces(barriers) behind their
drive
 Identify factors that motivate entrepreneurship
 Can sole entrepreneurial problems creatively ; and
 Formulate strategies of treating customers.
 Understand the basic concepts of small business planning and management

1.1. Concepts and Theories of Entrepreneurship

what is entrepreneurship? And who is an entrepreneur? These two questions are asked more
frequently reflecting the increasing demand in the field of entrepreneurship. Offering a specific
and ambiguous definition of the term entrepreneurship/ entrepreneur presents a challenge. This
not because definitions are not available, but because there are so many definitions. The main
difference between entrepreneurship and entrepreneur is their attachment. Entrepreneur is a
person while entrepreneurship is a process. When it is put in other way, entrepreneurship is a
process undertaken by a entrepreneur to augment his/her business interest. Broadly defined:

1. Entrepreneurship is a dynamic process undertaken by an entrepreneur to create

incremental value and wealth by discovering investment opportunities, organizing an
enterprise, undertaking risk and economic uncertainty and there by contributing to
economic growth, or
2. Entrepreneurship is a process of creating something different with value by devoting
the necessary time and effort, assuming the accompanying financial psychic and social
risks and receiving the resulting rewards of monetary and personal satisfaction and
independence.
The four key elements in entrepreneurship are
1. Vision(identifying emerging opportunities)
2. Innovation(doing something new)
3. Risk taking(assuming different types of risks; financial, psychological social)
4. Organizing(coordinating resources and creating enterprise)

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Entrepreneurship can also be defined as the ability of some people to bring the necessary inputs
together and produce something valuable. Note that resources will not be gathered and get
combined by themselves,(when such things happen we call the process a natural process – not
production) somebody else should take the task of deciding, planning, mobilizing the resources
and make the actual production a reality. These people are called entrepreneurs.

Different Definitions of Entrepreneur by Different People

Adam Smith

Describe entrepreneur as an individual who undertook the formation of an organization for

commercial purposes. He viewed the entrepreneur as a person with unusual foresight who could
recognize potential demand for goods and services.

Carl

The entrepreneur becomes the change agent who transforms resources into useful goods and
services, often creating the circumstances that lead to industrial growth.

Peter Drucker

Entrepreneurs allocate resources “to opportunities rather than to problems.”

Robert Rostald

Entrepreneurship is a dynamic process of creating incremental wealth. This wealth created by

individuals who assume the major risks in terms of equity, time and or career commitment of
providing value for some product or services. 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.

Devid Silver

An entrepreneur is “energetic, single minded, person having mission, and clear vision, he or she
intends to create out of this vision a product or service in a field many have determined is
important to improve the lives of millions.”

David Holt

Entrepreneurs are those who incubate new ideas start enterprises based on those ideas, and
provide added value to society based on their independent initiatives.

On the whole the process of entrepreneurship includes five critical elements.

1. The ability to perceive an opportunity

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2. The ability to commercialize the perceived opportunity

3. The ability to pursue it through systematic means.
4. The ability to pursue it on a sustainable basis.
5. The acceptance of risk or failure

Based on the above concepts of entrepreneurship, an entrepreneur can be defined as follows.

An entrepreneur is someone who perceives an opportunities and creates an organization to

pursue it with the intention of being profitable.

1.2. Evolutions of entrepreneurship

Before having the present definition the term entrepreneur was related to a lot of assertions.
The following are among the significant developments that gave the present form to
entrepreneur:
1. The word entrepreneur first appeared in the French language as “entreprendre” , which
means “to undertake.”
2. From the 14th up to the end the 17th century, the term entrepreneur was applied to persons
like leaders of military expedition, tax collectors, adventurers, and architects who were
responsible for construction of roads, bridges, and buildings.
3. Writers of 17th and 18th century stressed on the two essential characteristics of
entrepreneur was taking of risks and creating innovation.
4. Richard Calliton become the first person to relate entrepreneur to economic activities,
because he defined entrepreneur as a person who buys service factors at certain prices
and sell products at uncertain price in the future. By this definition, we can observe that
entrepreneur surely face risk as there is possibility of banckruptcy and inconsistent
demand.
5. J. B. Say defined entrepreneur as economic agent who unites all means of production, the
labor, the capital or the land of the other and who finds in the value of products which
results from their employment, reconstitution of the entire capital that he utilizes and the
value of the wages the interest and the rent which he pays as well as profit belonging to
himself.
6. FH Knight(1921), in his book referred entrepreneur as specialized group of people who
bear risks and deal with uncertainty.
7. Leon Walras(1945) considered entrepreneur as a coordinator of the factors of the
production. He treated entrepreneur as the fourth factor of production, as one who hires
factors of land, labor and capital.
8. Schumpeter(1960)defined entrepreneur for developed and developing nation.
For developed countries
9. Entrepreneur is the one who innovates, raises money assembles inputs chose manager
and sets the organization with his ability to identify them.

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For developed countries

10. Entrepreneur is the one who starts in industry (old or new) undertake risk, bears
uncertainty and also perform managerial function of decision making and coordination.

As w can see from the selected evolutions, the aspects given to the entrepreneur has
expanded as the evolution continues to get modernized. Anciently, entrepreneur was
referred to people that are not considered as entrepreneurs today. Also the
importance given to entrepreneur in terms of economic enhancement and
development has significantly upgraded by the trend of the evolution.

1.3 The process of Entrepreneurship

The decision about weather to start a new business is best considered in light of
understanding of the entrepreneurial process. It involves finding, evaluating and developing
an opportunity by overcoming the strong force that resist the creation of something new.
The entrepreneurial process has four steps
1. Identifying and evaluating business opportunities
2. Developing business plan
3. Determining the resources required for business and
4. managing the enterprise
1. Identifying and evaluating business opportunities
Most good business opportunities result from an entrepreneur being alert to possibilities.
Some sources are often fruitful, including consumers and business associates. Channel
members of the distribution system retailers, whole sellers and manufacturer’s are also
helpful. Technically oriented individuals often identify screened and evaluated –this is
most critical element of the entrepreneurial process.

The evaluation process involves looking at:

 Its real and perceived value
 The creation and length of the opportunity
 Its risk and return
 It’s fit with the skills and goals of the entrepreneur
 Its differential advantage in its competitive environment
The market size and length of the window of opportunity are the primarily bases
for determining risks and rewards. The risk reflects the market competition,
technology and amount of capital involved. The amount of capital forms the basis
or the return and rewards . The return and reward of the present opportunity
needs to be viewed in light of any possible subsequent opportunities as well.
The opportunity must fit the personal skills an goals of the entrepreneur. The
entrepreneur must be able to put forth the necessary time and effort required for

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the venture to succeed. One must believe in the opportunity enough to make the
necessary sacrifices . opportunity analysis, or an opportunity assessment plan,
should focus on the opportunity and provide the bases to make the decision ,
including,
 A description of the product or service
 An assessment of the opportunity
 An assessment of the entrepreneur and team
 Specification of all the activities and resource needed
 The source of capital to finance the initial venture
The most difficult aspect of opportunity analysis is the assessment of the
opportunity.
2. Develop a business plan
A business plan is the document the entrepreneur prepares before going to the
implementation stage. It details every aspect of the business the entrepreneur aspires
to establish; description of the business and marketing, financial organizationl and
operational plans necessary for thtain e foundation of the venture. A good business
plan is important in developing opportunity and also important in determining the
resource required, obtaining those resources and successfully managing the resulting
venture.
3. Determining the resource required
Assessing the resources needed starts with an appraisal of the entrepreneur’s present
resources. Any resources that are critical must be distinguished from those that are
just helpful. Care must be taken not to underestimate the amount and variety of
resources needed. Acquiring needed resources, while giving up a little control as
possible , is difficult. The entrepreneur should try to maintain as large an ownership
position as possible, particularly in start-up stage. As the business develops, more
funds will probably be needed requiring more ownership be relinquished. Alternative
resource suppliers should be identified, along with their needs and desires, in order to
structure a deal with the lowest cost and loss of control.
Types of resources that entrepreneurs can call up on to build their ventures.
A. Financial resources: resources which take the form of or can be readily

converted to cash.
B. Human resources: refers to the sum total of the inherent abilities, acquired
knowledge and skills and represented in the talents and aptitudes of its employees
(from view point of individual enterprise).
C. Operating resources: the facilities which allow people to do their jobs such as
buildings, vehicles, office equipment, machinery, raw materials, etc.
4. Managing the enterprise

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After resources are acquired the entrepreneur must employ them through
implementation business plan. The operational problem of the growing enterprise
must also be dealt with. These involves implementing of management style and
structure, as well as determining the key variables for success. A control system must
be identified so that any problem areas can be carefully monitored.

Classification of Entrepreneurs
There are so many ways of classifying entrepreneurs. The most important bases are discussed
below.
 According to types of business
Entrepreneurs are found in various types of business occupations of various sizes. We
may broadly classify them as follows.
1. Business entrepreneur: are individuals who conceive an idea for a new product
or service and then create a business on materialize their idea into reality. They
tap both production and marketing resources in their search to develop a new
business opportunity. They may set up a big establishments or a small business
unit such as printing press, textile processing house, advertizing agency,
readymade armaments,etc.
2. Trading entrepreneurs: is one who undertakes trading activities and is not
concerned with the manufacturing desire and interest among buyer to go to in for
his product. He is engaged in both domestic and overseas trade.
3. Industrial entrepreneur: is essentially manufacturer who identifies a potential
needs of consumers and tailors product or service to meet the marketing needs. He
is product oriented man who starts in an individual unit because of the possibility
of marketing some new product. The entrepreneur has the ability to convert
economic resources and technology into a considerable profitable venture.
4. Corporate entrepreneur: is a person who demonstrate his innovative skill in
organizing and managing a corporate undertaking.
5. Agricultural entrepreneur: are those entrepreneurs who undertake such
agricultural activities as raising and marketing of crops, fertilizers and other
inputs of agriculture.
 Classification by Danhof
1. Innovative entrepreneurs: an innovative entrepreneur is the one who introduces
new goods, inaugurate new method of production discovers new market and
recognizes the enterprise. It is important to note that such entrepreneur can work
only certain level of development is already achieved, and people look forward to
change and improvement.
2. Imitative entrepreneurs: imitative entrepreneurs do not innovate the change
themselves, they only imitate techniques and technology innovated by others.
Such type of entrepreneurs are particularly important for under developed region

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for bringing mushroom drive of imitation of new combination of factors of

production already available in developed regions.
3. Fabian Entrepreneurs: Fabian entrepreneurs are characterized by very great
caution and skepticism in experimenting any change in their enterprises. They
imitate only when it becomes perfectly clear that failure not to do so would result
in a lose of the relative position in the enterprise.
4. Drone entrepreneurs: These are characterized by a refusal to adopt opportunity
to make change in production formulae even at the cost of severely reduced
returns relative to other producers.
 Classification based on motivation
Motivation if the force that influences the effect of entrepreneur to achieve his or her
objectives.
1. Pure entrepreneur: is an individual who is motivated psychological and
economic reward. The entrepreneur undertakes the enterprise for his personal
satisfaction.
2. Induced entrepreneur: is the one who is induced to take up entrepreneurial tasks
due to the policy measures of the government that provides assistance, incentives
and necessary overhead facilities to start a venture.
3. Motivated entrepreneur: motivation is the desire for self fulfillment. They come
into being because of the possibility of making and marketing some new product.
4. Spontaneous entrepreneur: is one who is motivated by his or her natural talent
to begin a business. This kind of entrepreneur is very confident in their natural
blessing from God and wants to undertake business because they believe their
natural gifts will enable them to do so.

 Classification according to use of technology

The application of new technology in various sectors of national economy is essential
for future growth of business.
1. Technical entrepreneurs:
 Have technical knowledge regarding innovation of new products
 Concentrate on manufacturing( technical aspect) rather than marketing
2. Non-technical entrepreneurs
 Are not concerned with technical aspect of a product
 Concentrate on developing alternative marketing, distribution and
promotion aspects of their product rather than manufacturing aspect.
3. Professional entrepreneurs
 Are interested in neither the technical aspects nor in the non technical
aspects of a product.

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 Are interested in establishing business but doesn’t have the interest to

manage or operate once a business is established. Professional
entrepreneurs sell their business ideas and look on to creating another
business.

 Women Entrepreneurs
Women entrepreneurs may be defined as the woman or a group of women who take initiative to
set up a business enterprises and to run it smoothly.

Women entrepreneurs are those women who generate business ideas or select the best
opportunity, mobilize resources, combine the factors of production, undertakes risks and operate
the enterprise in the most effective manner with a view to earning profit.

Empowerment of women through enterprise

The verb empower means to bestow power. So empowerment of women implies creating
conditions for enabling the women to be motivated for task accomplishment by taking personal
responsibility. In the context of empowerment through enterprises, empowerment of women
involves access to resources and market, actual ownership and active control. These three factors
act as the bull work for empowering women through enterprise.

The essence of self-development and empowerment of women lies in self-concept of women

which can be developed the following competency development exercises:

i. Self-concept which implies discovering one’s potential.

ii. Self-identity which relates to the exercise “who am I”
iii. Self-evaluation which indicates self-confidence and self-respect, i.e. “what am I
worth”
iv. Self-deal with reveals “what should I be” and “what could I become”

In the process of empowerment, women should consider their strengths, weaknesses,

opportunities and threats and move forward to unfold their own potential to achieve their
goals through self-development. The future of small enterprises depends on enabling women
to become entrepreneurs and their participation in the entrepreneurial process.

Factors governing women entrepreneurship

When entrepreneurship is governed by four spheres- psycho-sphere, socio-sphere, techno-sphere
and economic-sphere.

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The constraints faced by women entrepreneurs in different domains are discussed below.

Constraints in psychological domain

a/ lack of self-motivation

b/ conflicts due to dual responsibility

c/ poor risk taking ability

constraints in social domain

a/ lack of social contacts

b/ male dominance

c/ not in tune with social norms

constraints in technical domain

a/ lack of project idea

b/ lack of process know-how

c/ lack of do how(implementation capacity)

constraints in economic domains

a/ economic support not forthcoming from family

b/ inadequate amount advanced through financing agencies

c/ lack of economic ownership and control

in Ethiopia , women entrepreneurs generally face a large number of problems. Due to these
problems, entrepreneurship development among women has not been satisfactory. These barriers
can be elaborated as follows:

 Lack of self confidence

 Male-dominated society
 Low risk bearing society
 Lack of encouragement from family
 Discrimination in upbringing
 Role conflict
 Lack of education
 Low mobility
 Problem of access to finance

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 Stiff competition
1. Lack of self-confidence: women lack self-confidence in their own abilities which is
partly due to cultural environment. This is because family’s reluctance to provide them
funds for their venture.
2. Male-dominated society: important barrier to the empowerment of women through
enterprise is the male chauvinism .prevalent socio-cultural attitudes and beliefs are not
conducive to the blossoming of women as entrepreneurs. Male child is still preferred to
female child right from the birth. Constitution of Ethiopia speaks about the equality of
sexes but still today women are considered as weak, passive and home oriented and as a
result, less capable than men. This consideration acts as a stumbling block in their strife
for equal status with men in the pursuit of economic activity.
3. Low risk bearing capability: generally, women in Ethiopia are confined to four walls of
the house. They are less educated and thus, economically backward. This reduces their
risk bearing capability in running the enterprise.
4. Lack of encouragement from the family: very few women get encouragement from
their family to start a business. In Ethiopia, it is mainly a woman’s duty to look after the
children and other members of the family.
5. Discrimination in upbringing: right from early childhood, girl child is taught not to be
aggressive or independent. They are discouraged to move out of the family and take up
their business. Conservative attitude of the family members make the women weak and
passive in their approach. Decisions are taken for them by others.
6. Role conflict: entrepreneurship needs a high level of commitment, devotion and
dedication. Women taking on the mantle of entrepreneurship suffer from stress and strain
caused by role overload and role conflict as they strive simultaneously to cope with their
multiple roles of being a mother, wife, home maker etc.
7. Lack of education: the greatest barrier to the entrepreneurial career among women is
lack of education. In Ethiopia majority of women are still illiterate and illiteracy is the
major problem of socio-economic backwardness. Lack of education restricts inner urge of
the women to accomplish through personal risk taking capacity.
8. Low mobility: women, in general, are less mobile due to socio-cultural barriers. The dual
responsibility that women entrepreneurs have to cope with is making a success of their
enterprise as well as looking after the home and hearth place restrictions on their
mobility.
9. Problem of access to finance: women entrepreneur are lacking to institutional finance
due to absence of tangible security and credit in the market. Women do not have
property in their names. Most of the woman entrepreneurs suffers from sickness due to
lack of financing.
10. Stiff competition: women enterprises face stiff competition from organized industries
due to the absence of any kind of organizational set-up by women entrepreneurs. As a
result of this, such a completion leads to the closer of women enterprises.

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1.4 Entrepreneurial Traits

A successful entrepreneur must be a person with the following traits

1. Mental ability: it consists of intelligence and creative thinking. An entrepreneur must be

reasonably intelligent, and should have creative thinking and must be able to engage in the
analysis of various problems and situations in order to deal with them. The entrepreneur should
anticipate the changes and must be able to study the various situations under which the decisions
have to be made.

2 Clear objective: an entrepreneur should have a clear objective as to the exact nature of the
business, the nature of goods to be produced and subsidiary activities to be undertaken. A
successful entrepreneur may have the objective to establish the product, to make profit and
render social service.

[Link] secrecy: an entrepreneur must be able to guard business secrets to trade competitions
is a serious matter, which should be carefully guarded against by an entrepreneur. An
entrepreneur should be able to make a proper selection of his assistants.

[Link] relation ability: The most important personality factors contributing to the success of
entrepreneur are emotional stability, personal relations, consideration and tactfulness. An
entrepreneur must maintain good relations with his or her costumers if he or she is to establish
relations that will encourage them to continue to patronize his or her business. He or she must
also maintain good relation with his employees, suppliers creditors, and the community is much
more likely to succeed in his or her business than the individual who does not practice good
human relations.

[Link] ability: Communication is the ability to communicate effectively. Good

communication also means that both the sender and the receiver understand each other and are
being understood. An entrepreneur who can effectively communicate with customers,
employees, suppliers and creditors will be more likely to succeed than the entrepreneur who does
not.

6. Technical knowledge: An entrepreneur must have a reasonable level of technical knowledge.

Technical knowledge is the one ability that must people are able to acquire if they try hard
enough. An entrepreneur who has a high level of administrative ability, mental ability, human
relations ability, communication ability, and technical knowledge stands a much better chance of
success than his counterpart who possesses low levels of these basic qualities. Brilliant men and
women with first class degrees from university shy away from becoming entrepreneurs because
the one thing they cannot be taught is copying with human emotions.

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Robert D. Hisrich identified a few more capabilities or personal characteristics that an

entrepreneur should possess. According to him, the entrepreneur must have an adequate
commitment, motivation and skills to start and build a business. The entrepreneur must
determine if the management team has the necessary complementary skills necessary to succeed.

Some key characteristics of successful entrepreneurs are:

1. Motivator : an entrepreneur must build a team, keep it motivated, and provide an

environment for individual growth and career development.
2. Self confident: entrepreneurs must have a belief in themselves and the ability to achieve
their goals.
3. Long term involvement: an entrepreneur must be committed to the project with a time
horizon of five to seven years. No ninety-day wonders allowed.
4. High energy level: success of an entrepreneur demands the ability to work long hours
for sustained periods of time.
5. Persistent problem solver: an entrepreneur must have an intense desire to complete a
task or solve a problem. Creativity is an essential ingredient.
6. Initiative: an entrepreneur must have initiative, accepting personal responsibility for
actions and above all make well use of resources.
7. Goal setter: an entrepreneur must be able to set challenging but realistic goals.
8. Future oriented: he plans and thinks in the future. He anticipates the possibilities that
lie beyond the present.
9. Moderate risk taker: an entrepreneur must be a moderate risk taker and learn from any
failures.

Types of risks assumed by an entrepreneurs

1. Financial risk: refers to the risk of losing one’s own saving and entire capital that
would result from failures to repay loans and other financial requirements.
2. Career risk: if entrepreneurs fail to be successful, it would be difficult from them to
easily acquire another employment opportunity.
3. Psychic risk: the mind of entrepreneurs is subject to constant frustration and
psychological tensions as to the fate of their business.
4. Family risk: the spouses and offspring’s of entrepreneurs are also subjects to certain
psychological frustrations in state being worried weather their business fail or not.
5. Social risks
Manager and Entrepreneur
Entrepreneurs take existing resources and redeploy them, often in a creative way, to give
them greater economic value. They are agent of change, innovators of new products, methods
or markets. The major point of differences between the managerial and entrepreneurial
qualities are summarizes below

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An entrepreneur A manager
Launches a new business Operating an existing enterprises
Is more than an innovator Is neither an innovator nor inventor
Is a change agent Is the product of changes
Is strategic oriented to survive and Short term oriented to meet quotas and budgets, weekly,
achieve 5-10 year growth of business monthly and the annual planning horizon
Is his or her own boss Is not independent of his or her employer, the
entrepreneur/ the inventor
Follows dreams in making decisions Usually agrees with upper management positions
Involves directly more than delegation of Delegates and supervises more than direct involvement
tasks
Takes calculated risks Does not share in the business risk directly

Faces uncertainty Is less tolerant of uncertainty

Is motivated by perception of Is motivated by externally imposed goals(offices,
opportunities and profit promotion and power)
Profits are uncertain and irregular, which Is paid fixed and regular salary
may be negative
Is self employed Is salaried person

An entrepreneur is different from a manager. But it doesn’t mean that they are entirely different
from each other. That means they have their own intersection points.

Similarities

 Both make decisions

 Both are visionary
 Both are accountable for their actions
 Both work under constraints
 Both are organizers
 Both perform management functions

1.5. Entrepreneurship, Creativity and Innovation

Innovation is the process of entrepreneurship. Innovation implies action, not just a new
idea. When people have passed through the process of creativity, they may have become
inventors; but they are not yet innovators. For an idea to have value, it must be proven
useful or be marketable. Innovation is the transition of creative idea into useful
application.
1.5.1. Developing Creativity

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Creativity is the ability to bring something new into existence. Here there is no action to
make the idea reality. It is the seed that inspires entrepreneurship and it is the prerequisite
to innovation.
Developing Creativity involves the following process

In the creative process, social scientists agree on five stages. These are
[Link] generation: it is a seeding process. For most entrepreneurs ideas begin with
interest in a subject or curiosity about finding a solution to a particular problem.
2. preparation: once a seed of curiosity has taken form as a focused idea, creative
people embark on a conscious search for answers. If it is a problem they are trying to
solve, then they begin an intellectual journey, seeking information about the problem and
how others have tried to solve it.
3. incubation: it is the assimilation of the information by the subconscious mind. In this
stage, the subconscious intellect assumes control of creative process. Conscious focus :
 Behaves rational to attempt to find systematic resolutions. Subconscious process
 Minds are not hampered by the limitations of human logic; and therefore open to
unusual information and knowledge that we can not assimilate in conscious
state.

4. Illumination; (enlightment0; it occurs when the idea, by resurfaces as a realistic creation. This
stage is critical for entrepreneurs because ideas, by themselves have little meaning

5. Verification: an idea once illuminated in the mind of an individual still has little meaning until
verified as realistic and useful. Entrepreneurial effort is essential to translate an illuminated idea
into verified realistic and useful application. It is the development stage of refining knowledge
into innovation.

1.5.2. innovation:

Innovation is the process of doing new things. It is the transformation of creative ideas in into
useful applications, which result in new products, services or processes. E.g. Thomas Edison’s
bulb was only curiosity until e developed an electric system supplying power to consumers.

1. Innovation lies at the heart of the entrepreneurial process and is a means to exploitation
of opportunity. It may be viewed economically or entrepreneurial.
Economically: innovation is the combing the resources in a new and original way.
Entrepreneurial: it is the discovery of a new and better way of doing things.
2. Innovation goes beyond invention. The new way does not stand on its own merit. It
will only create new value if it offers customers an improved way to approach tasks and
to solve problems.
3. Innovation is knowledge based process. Successful innovation is founded on
knowledge in three areas.

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1. Market knowledge : is concerned with customers, three needs, demands, likely demand
growth and what competitions are supplying.
2. Technological knowledge :relates to effective development and production of the product
service aimed at the customers.
3. Capability knowledge: the venture’s understanding of what it does and why it does it well.
This includes knowledge of the informational, cost, flexibility and human advantages the
venture can call upon to compete effectively.
`
1.6. Definition of Small Business

Small Business(cottage industry) may be defined to be an enterprise or series of operations

carried out only by workman skilled in the craft on his own responsibility, the finished product
of which he market himself he work in his own with his own tools and materials and provides his
own labor. These workers are mostly hand labor s and having personal skill with little or no aid
from modern technology and machinery they work in accordance with the traditional technique.

Small business is a business which is independently owned and operate, not dominated in its
flied of operation and meets certain standard of number of employee and capital. Generally
there are two approaches to define small business enterprises

 size criteria economic/criteria

Size criteria

To measure the size of the business and classify them into small business enterprises, the
following criteria are commonly used

[Link] volume – amount of product an enterprise produce and sell specified period of
time(usually one year) number of employees, asset, volume of deposit in

insurance in force
Economic/control criteria

2. market share, independence, management style

The most widely used criteria to define small business are number of employees and amount
of capital. Beside, different countries defined small business in their own way.

In our country Ethiopia micro and small enterprises are given different meaning at different
time and the definition given by central statistics authority in using information analysis and
that given by mister of trade are industry in 1997are basic applicable definition .

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The central statistics authority defined small organization that employs lees than10

People .those engaged in handicraft and informal work sector are categorized as micro
enterprise. As the name indicates informal organizations are to mean those who are engaged in
various work without possessing trade license.

The definition of the micro and small trade enterprise can vary depending on the level of
capacity of subsiding each country and from time to time in our country the definition micro
and small trade enterprise is determined from time to time by ministry of trade and industry by
evaluating the situation from the of the time. Accordingly when seen current development level
(standard) and capacity ,the following definition is determined to be applicable by the ministry
of trade and industry

1 .micro trade work enterprise means trade organization whose is not exceeding birr20,000.00
and higher consultancy service organization and other higher technological enterprises are
included

2 all business organization means trade work organization whose minimum paid

Up capital level is not less than birr 20.000.00 and not exceeding from birr

and shall not higher technological consultancy service and other higher technological institution

3. micro and small business work sector means sector means with out including those
mentioned by the two level above (higher technical consultancy service and other higher
technological institution ) trade industry and technical

(hand craft) intuition.

1. trade means supplying for market any product or service for the purpose of getting profit .for the
propose of this program industry shall mean manufacturing industry shall mean the process of
producing new product privately or joint possession using mechanical or chemical methods,
using organic and in organic matter through machinery or labors or labor.

5 handicraft mean the process of producing a product mainly through hand and small hand tools
without motor power.

6 in the region, when we refer micro and small enterprises, it is based on the definition given to it by
the mainstay of trade and industry here in above.

1.6.1. Characteristics of small business

1 actively managed by its owner –independent management.

2 . no or few management.

3Style of management highly personalized. I.e the owner has first hand knowledge of every move in the
businesses a at a level and he is the main decision maker.

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4 Relatively small in size with the industry as compared to the highest unit in its filed.
5 Largely dependent on internal resource of capital to finance its growth.
6 Capital is supplied by .
7 ownership and is held by an individual or a small group
Limited resource small business is unlikely to have sufficient resource to dominate the
market
8 Independence the owner has ultimate authority and effective control
9 Scope of operation small enterprise service a limited segment of local or regional market.
10 Scale of operation they occupy limited share of given market.
11 Labor they are low in capital and high in labor as they can not afford capital –intensive
machinery.
12 Specialized skills the small enterprise normally have specialized skill for certain . specific client
the small business does well in small, isolated, overlooked. And imperfect market.
13 Small business does well in developing market as can easily absorb the change.
14 S mall business survives well in a bad business condition due having quick and clever
capability of bringing change in cost and labor. . .

1.6.2. Major Areas of Small Business

Small business tend to do better in some industry than in other.

1. service business –requires small capital investment to get started. In Ethiopia .most small
enterprise are engaged in hotel and transportation services.
2. Retail business – buying product from whole sellers and reselling to finale consumer.
3. Wholesale business –buying product from large manufacturers and reselling tohe product to
retailers.
4. Manufacturing business
5. Agriculture.

1.6.3. The Importance of Small Business Enterprise

a. greater value in building up local production structure and in promoting economic growth

b. as means of creating employment opportunity, and achieving a fair distribution of nation

resource, income, knowledge and power.

c. A seed bed for development of local entrepreneurship

d. promote rural industrialization

e. more appropriate technology is applied

f. Suppler of parts and accessories to bigger industries

g. play prominent role in promoting the export market

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1.6.4 Environment of Small Business

The environment of small business is often defined by the type of business or service rendered,
and in most instances the opportunities for small business are defined by the characteristics of a
community. Small businesses comprise many local enterprises, service companies, and
professional organizations that constitute more than half of all non –farm employment in the US.
This profile of small business is remarkably similar among most free- market nations. Small
businesses include merchandisers to which we turn for a significant amount of our daily
purchases. It also includes “practices” and “ personal service” enterprises of Drs,
accountants ,tailor , interior designers and many others to whom we turn personal needs. There
are also substantial number of small manufacturers, wholesalers, distributing companies and
vendors who focus on specialized niches to provide everything from local bakery goods to space
telecommunication equipment. Many

of these entrepreneurs are small by choice. They probably have opportunities to expand into new markets
or to develop Into larger organization, but they prefer the autonomy of a small business and subsequently
avoid rapid expansion. The independent businesses represent an extraordinary range of activity that has
given us a high quality life-style. A short list of these would include quick printing services, auto parts
and repair services, gift shops, personnel placement services, fashionable men’s or women’s clothing
shops, gourmet candy stores, video rental outlets, yogurt shops, and travel agencies.

For nearly all phases for domestication construction we rely small business enterprise; including
prime contractor plumbers electrician, and other craftsmen. Our recreation need are often met through
small business endeavors that include golf courses and tennis clubs, boating facilities ,ski-shop, health
clubs, and many more.

1.6.5. Factors that contribute to the success of Small business.

 Hard work, drive and dedication – an individual must have a strong desire to work
independently of others and be willing to put long hours if he is to succeed. Generally,
successful entrepreneurs tend to be reasonable risk takers, self confident, hard working,
goal setter and innovators.
 Market demand for products/ service provided-for any business to succeed, there must be
sufficient demand for the product or service provided.
 Management competence-regardless of the level of the demand it is, necessary for the
entrepreneur to posses basic managerial competences. He needs to understand how to
select a location, what kind of facilities are needed, how to acquire finance and how to
manage people.

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1.5.6. Common Causes for Small Business Failure

Many small business fail due to various reasons. Presumably, most of the reasons are artificial
i.e. the majority of the reasons are created by fault and mistakes of human beings. Some of the
reasons include the following

 Managerial incompetence or inexperience- just as competence contributes to success,

so does incompetence contributes to failure. The owner may lack the basic or experience
to recognize problems and to make hard decisions. She or he may have no experience in
hiring and evaluating employees, dealing with bankers or negotiating contracts, may do a
poor job of dealing with suppliers or customers.
 Neglect- some entrepreneurs fail because they neglect some aspect of operations. Beyond
this they also ignore customer dissatisfaction, worker unrest etc.
 Work control system- if control system do not provide adequate information on a
timely basis, the entrepreneurs may be in troubles before he knows it.
 Under capitalization – having too few funds to survive start up and growth.
 Failure to clearly define and understand your market, your customers and your
customers’ buying habits.
 Poor financial control- over investment in fixed asset, failure to plan current as well
as future operations, failure to adopt proper inventory control system
 Improper attitude- (the entrepreneur may not respect time, employees and may have
lazy life style of work)
 Inadequate marketing plan
 Incorrect market identification
 Poor distribution channel
 Poor location
 Weak marketing communication or promotion.

1.6.7 Problems in Ethiopian Small Business

While in certain circumstances SMEs enjoys some advantages of flexibility, in general they
suffer from structural handicaps in their operations arising from small size, particularly where
exports are concerned. Even SMEs that are highly successful domestically, for a variety of
reasons, don’t find easy to upgrade production for exports.

Problems faced by SMEs in Ethiopia typically include:

1. Scarcity of capital
2. Limited and unequal access to industrial credit markets
3. Irregular access to domestic and imported inputs coupled with higher cost.

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4. Inadequate infrastructure facilities.

5. Weak managerial and technical skills

A large number of SMEs have successfully overcome these formidable difficulties, established a
sound base in the domestic market, and may be potentially capable of breaking in to export
markets. However, they may be hampered by a variety of circumstances ;

1. Lack of information on possible export market.

2. Absence of guidance on export regulations and procedures.
3. Inability to identify source of assistance for product development and product upgrading
for export.
4. Lack of information on export credit and insurance facilities as well as for export
requirements.
5. Lack of information on operation of indirect marketing channels like merchant export
houses.
6. Absence of guidance on basic management issues relevant exporting firms
7. Absence of sound steps that need to be taken to enter in export field.

Setting Small Business

A business idea is some ones opinion regarding what may or may not be good business.
There are three steps of business ideas: they are:
1. Old idea- here an individual copies an existing business idea from someone
2. 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.
3. A new idea – this one involves the invention of something new for the first time.

a/ Source of Business Ideas

As entrepreneur start up a new business, they could get the idea of business from different
sources. There are many possible sources of ideas. Some of the more useful ones are consumers,
existing companies, distribution channels, the government and research and development units.

I. Customers- entrepreneurs are paying increasing attention to what should be the focal
point of the idea for a new product or services in the eyes of customers. This can take the
form of monitoring ideas mentioned on an informal basis or formally arranging for
consumers to have an opportunity to express their opinions.
II. Existing companies; entrepreneurs should also establish a more formal method for
monitoring and evaluating the products and services being offered by existing or new
companies. Frequently this analysis uncovers ways to improve on these present offerings,
resulting in a new venture being formed.
III. Distribution channel: members of the distribution channel are also an excellent source
of new idea. Because of their familiarities with the needs of the market channel members

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frequently have suggestions for completely new products. These channel members can be
a source of help in marketing the new idea once it is developed by the entrepreneur.
IV. Research and development units: the largest source for new ideas is the entrepreneurs
own research and development department, whether this is a more formal endeavor
connected with current employment or an informal lab at home. Of course the more
formal research and development department is often better equipped to produce
successful new product ideas.
V. Government: new product ideas can come from government regulations. In addition,
governments that have patent offices provide a good sources of new ideas to
entrepreneurs. Although the patents themselves may not be feasible for new product
introductions, they can frequently suggest others, more marketable, new product ideas.
b/ Methods for generating ideas
1/ Brainstorming
The most well known and widely used technique. This method is based on the fact that
people can be stimulated to greater creativity by meeting with other and participating in
organized group experience. The entrepreneur can gather a group of people to discuss
and generate new ideas.
When using this method, the following overall rules need to be followed:
 No criticism is allowed –no negative comments
 Free wheeling is encouraged- the wide idea is better
 Quantity of idea is desired- the greater the number the more likelihood of useful ideas
emerging.
 Combinations and improvements of ides are encouraged- ideas of others can be
used to produce still another new idea.
2. Customer proposal: a new opportunity may be identified by a customers on the basis of
recognition of their own needs. Customer proposals take a variety of forms. At their simplest
they are informal suggestions of the “wouldn’t it be greater if- -type.” Alternatively, they can
take the form of a very detailed and formal brief.
3. Creative groups: an entrepreneur does not have to rely on his or her creativity. The best
entrepreneur are active in facilitating and harnessing the creativity of other people to. A
creative group consists of a small number of potential customers or product experts who are
encouraged to think about their needs in a particular market area and they consider how these
needs might be better served. The customers may be the ultimate consumers of the product or
service or they be industrial buyers.
4. Market mapping; it is a formal technique which involves identifying the
5. dimensions defining a product category. These dimensions are based on the features of the
product category. the feature will differ depending on the type of product, but indicators like
price, quality and performance are quite common. The characteristics of buyers may also be
used to provide a more detailed mapping. A map is create of the market by using the
feature buyer dimensions as coordinated.

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6. Feature stretching: innovations involves offering something new. These means looking for
ways in which changes might be made. It involves defining the principal factors which
define a particular product or service and then seeing what happens if hey are changed in
someway. The trick is to test each feature with a range of suitable adjectives such as; bigger,
stronger, faster, move often, more fun and so on and see what results from such testing.
7. Product blending: This technique involves identifying the features which define particular
products instead of just changing individual features, new products are created by blending
together features from different products or services. This technique is often used in
conjunction with features stretching. Both features and features blending make good team
exercise and can prove to be quite good fun.
8. Focus groups: this method consists of a moderator leading a group of people through an
open, in-depth discussion rather than simply asking questions to solicit participative
response. The moderator focuses the discussion of the group on the
9. new product area in either a directive or a non- directive manner. In addition to generating
idea, it is an excellent method for initially screening ideas and concepts.
10. Problem inventory analysis:

It generates idea analogous to focus groups. However, instead of generating new ideas
themselves, consumers are provided with a list of problems from a general products category.
They are then asked to identify and discuss products in this category that have a particular
problem. This method is often very effective as it is easier to relate known products to suggest
problems and to arrive at a new product idea by itself. This approach is also an excellent way to
test new product idea. Results from product inventory analysis must be carefully evaluated as
they may not actually reflect a new business opportunity. To insure the best results, problem
inventory analysis should be used primarily to identify product ideas for further in-depth study to
determine their importance to their consumers.

11. Reverse Brainstorming

It is similar to brainstorming, except that criticism is allowed .the technique is the base on
finding fault by assessing the question “in hw many ways can this idea fail? “ care must be
taken to maintain the groups moral. The process most often involve the identification of
everything wrong with an idea and then the discussion of ways to overcome these faults

11. Gordon method

The Gordon method, analysis many other creative problem solving techniques, being with group
member not knowing the exact nature problems. This ensures that the solution is not concluded
by preconceived ideas and habit patterns.

It follows the following steps:

a/ The entrepreneur start by maintain a very general concept to the problem

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b/ The group responds by expressing a number of ideas

c/ Then a concept is developed, followed by related concept through guidance by the

entrepreneurs

d/ Then the actual problem is revealed, enabling the group to make suggestion for
implementation or refinement of the final suggestion.

12. Check list method

A new idea is developed through a list of related issues or suggestions. The entrepreneur can
use the list of question or statement to guide the direction of developing entirely new idea or
concentrating on specific “idea” area.

12. Free association

The technique is useful is developing an entirely new attitude to a problem. First a word or
phrase related to the problem is written down, then another and another, with each new word
attempting to add something new to the group idea going through process, there by creating a
chain of idea.

12 Forced relationships

Forced relationships are another technique that asks questing about objects or idea in an
effort to develop a new idea from resulting new combination.

The new concept is developed through a five step process

i. Isolate the element of the problem

ii. Find the relationship among theses elements
iii. Record the relationship in an organized fashion
iv. Analyze the record of relationship to find ideas or patterns
v. Develop a new ideas from these patterns

13 Collective note book method

A note book prepared that includes a statement of the problem, blank pages and any pertinent
background data. The entrepreneur then considers the problem and its possible solution,
recording resulting ideas several times a day. At the end of the month, a list of the best ideas is
developed, among with any suggestions. This technique can also be sued with a group of
individuals who record their ideas, giving their notebooks to a central coordinator who
synthesizes the data and summarizes all the materials . the summery becomes the a topic of a
final creative discussion by a group.

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14 Heuristic analyze-synthesize

It relies on the entrepreneur’s ability to discover through progression of thoughts, insights and
learning. Heuristic is probably sued more than imagined, simply because entrepreneurs
frequently must settle for an estimated outcome of a decision rather than an assure uncertainty.
One specific heuristic approach is called the heuristic ideation technique. This involves locating
all relevant concepts that could be associated with a given product area and generating a set of
all possible combinations of ideas.

15 Specific method

It consists of principles and processes, conducting observation and experiments and validating
the hypothesis used in any rigorous investigation. The approach involves the entrepreneur
defines the problem, analyzing the problem, gathering and analyzing data developing and testing
potential solutions and choosing the best solutions.

17. Value analysis

It develops methods for maximizing value to the entrepreneur and the new venture. To
maximize values, questions are developed such as “can this part be of lesser quality, since it
isn’t a critical area for problems?” to implement a value analysis procedure, regularly scheduled
times are established to develop, evaluate and refine ideas.

18. Attribute listing

It is an idea finding technique that requires that the entrepreneur list the attributes of an item or
problem and then looks at each from variety of viewpoints. Through this process, originally
unrelated objects are brought together to form a new combination and possible new uses that
satisfy a need.

19. Matrix Carting

Matrix charting is a systematic method for searching for new opportunities by listing important
elements for the product area along the two axes of the chart and then asking questions regarding
each of these elements. The answer are recorded in relevant boxes of the matrix. Example
questions that can elicit creative new product ideas include:

What can it be used for? When can it be used? Where can it be used? How can it be used? Who
can use it?

20. Big dream approach

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The entrepreneur dream about a problem and its solution-thinking big. Every possibility should
be recorded and investigated. This should continue until an idea is developed into a workable
form.

2.7. Why promote Small Business Management?

The desire for individuals to own and operate their own small business is growing. As stated
earlier, this continual creation of new business at the heart of new enterprise system. For
individuals pursuing a career in business ownership, numerious benefits can be attained
personally as well as professionally. The next section examines the following more common
advantages of owning small business.

1. Independence
2. Financial opportunities
3. Community service
4. Job security
5. Family employment
6. Challenge

1. Independence

Most small business owners enjoy being their own boss; they like the freedom to do
things their way. Although often a great deal of responsibility associated with this
independence, they are willing to assume it.

2. Financial opportunity

Another major reason for going into business for oneself is financial opportunity. Many
small business owners make more money running their own company than they would be
working for someone else.

[Link] service

Sometimes an individual will realize that a particular good or service is not available. If the
person has reason to believe the public will pay for such output., he or she will start a
company to provide it.

4. Job security
When one owns a business, job security is ensured. The individual can work as long as
he or she wants, no mandatory retirement exists.

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5. Family employment
Another advantage is the opportunity to provide family members with a place of
employment. This has several benefits. First, many owner managers want to perpetuate
their business, and how better to do so that to get children or relatives to take it over.
Second, higher moral and trust usually occur more in family run business than in others.
Third, in times of sever economic downturn, small business owners can provide
employment for family members.
6. Challenge
Many small business owners are lured by the challenge that companies going into
business for oneself. Research reveals that most successful small business owners like
to feel they have a chance to succeed(they want to know success is possible)and a
chance to fail.(success is not a sure thing) but one thing is certain: the final outcome
depends heavily on them. They want to win or lose on their own abilities. This challenge
gives them psychological satisfaction.

Disadvantages of going into small business

It should be recognized that some drawbacks to owning small business exist. Without proper
preparation an individual may find the career path of business ownership frustrating. The major
disadvantages of going in to business include the following.

1. Sales fluctuation
2. Competition
3. Increased responsibilities
4. Financial loses
5. Employee relations
6. Laws and regulations
7. Risk of failure

1/ Sales fluctuation

Working for a large firm that pays regularly allows the employee to budget food expenditure,
plan vacations, and buy clothing. The owner manager, however, often faces sales fluctuations.
In some months sales are very high, while in others they drop off dramatically. The individual
must balance cash inflows with cash outflows so that enough money to meet expenses always
exists. Sometimes this will require the owner to take a short term loan(30-90 days)to help the
business get through a slack period. And virtually every small business has sales fluctuation.

2/ Competition

A second disadvantage of owning a business is the risk of competition. In particular an

individual may start a business and prosper for three or four years before meeting
insurmountable competition. Or changes in market demand may occur, and the owner will find

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that this new demand is being satisfied by large competitors. For example, small restaurants and
diners may find that they have lost customers to fast food chains.

3/ Increased responsibilities

Small business may face many responsibilities, specially as their operations get larger. For
example, owners not only have to make more decisions on major matters but also have to
become knowledgeable in many different areas. A successful owner is often a bookkeeper,
accountant, salesperson, personnel manager, and janitor all rolled into one. The individual works
long hours, and in many cases , six or seven days in a week. This is in direct contrast to workers
who hold full-time, nine to five jobs, where salary is guaranteed and raises and promotions can
be counted on.

4/ Financial losses

When the owner makes all major decisions, inevitably some of them will be wrong. On occasion,
inventory will be too high or low, a product line developed at a great expense will not sell; a
price reduction, will not increase product demand, with a resulting decline in total revenue; an
advertizing campaign will not pay for itself; or an increase in the sales force will prove to be a
mistake, and excess personnel will have to be paid off.

In all these cases the owner will face a financial loss, and if enough of them occur, bankruptcy
may result. However; this is not what usually happens. Rather, the owner simply ends up
making less money, resulting in a small return on investment for a great deal of effort, work, and
risk, additionally it is important to note that unless the business is incorporated, the owner is
personally responsible for all losses. This means the individual could lose everything he or she
owns, although in some states the person’s home protected from creditors until the individual
chooses to sell it.

5/ Employee relations

The small business owner also needs to be concerned with employee relations. If the workers
are not content sales will suffer. For example, in many retail stores employees are not allowed
to talk or socialize on the job. Workers are expected to remain at their sales counters and stay
alert for customers who needs assistance. Management believes that if the employees begin
talking to one another, they will loss potential sales. On the other hand, research reveals that if
employees feel isolated or alone the attitude towards job will decline. This, in turn, will affect
their sales ability. They will be rude or curt to the customer, who then will refuse to buy. Thus, a
balance must be struck regarding how much socialization can be allowed. Solving this problem
requires human relations skills.

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So do other many problems the owner faces. For example, friction among workers who don’t
like each other requires the owner to resolve the conflicts by either getting the employees to put
aside their personal differences or by firing one or more of them. Another common problem is
job assignment. Who will do what? The owner must be careful not to overload one person with
work while another does virtually nothing. Financial compensation is also another issue. How
much should each be paid? When should raises be given? How large should each raise be?

Finally, should salary be secrete, or owner let every one know how much each person is being
paid?

Questions such as these exemplify the employee relations problems the owner must resolve. As
the enterprise grows and more people are hired, more issues are arise. Some of the most
common relate to medical insurance, retirement programs, other fringe benefits, and
unionization. In short, company growth requires addressing more employees relation issues.

6/ Laws and Regulations

Small business are subject to a multitude of laws and regulations. For example, the owner to pay
social security taxes for all employees as well as to with hold taxes from each person’s pay and
remit these funds to the government. At the state or regional level, in addition to employees
taxes, often a state sales tax may need to be collected and sent to the proper state agency. Also,
for some fields, the state or region requires that a license be secured before a business operates;
typical examples include; restaurants, barbershops, beauty salons, and liquor stores. At the local
level, laws may often regulates the days of the week and hours of the day during which business
can be conducted. In addition, safety and health requirements cover fire prevention and
avoidance of job hazards. Finally, building and zoning regulations limit the type of structures
that can be built and where they can be located. For example, in most cities, office and business
buildings are not allowed in the same local as residential homes.

7/ Risk of Failures

The ultimate risk the small business owner-manager faces is failure, usually with a loss of most,
if not all, of the money invested in the enterprise. All owners face risk and despite experience
and business knowledge, many fail because of factors beyond their control. For example, a major
recession hits most small businesses very hard. Meanwhile, despite precautions, every year
some companies are forced into bankruptcy because their funds are embezzled by insiders who
systematically drain their financial resource. In addition, disaster can strike, such as unexpected
tornado or earthquakes that through the town, totally demolishing many businesses. In each of
these cases, the company may be forced to close its doors. In most instances, however; failure is
caused by poor management.

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Special Contributions of Small Business

As part of the business community, small firms unquestionably contribute to our nation’s
economic welfare, they produce a substantial portion of our total goods and services. Thus, their
general economic contribution is similar to that of big business. Small firms, however; posses
some qualities that make them more than miniature versions of big business cooperation. They
make exceptional contributions as they provide new jobs, introduce innovations, stimulate
competition, aid big business, and produce goods and services efficiently .

1. Providing new jobs

As the population and , economic grow, small businesses provide new job opportunities.
It seems clear that small business produce the” lion’s share” of the new jobs, sometimes
adding jobs while large cooperation are “downsizing” and laying off employees.
Between 1980 and 1986, firms with fewer than 20 employees, accounted for more of the
total job growth than did firms of 500 and more employees.

The idea that small business generates more new jobs than big business originated in the
researcher of David L. Birch in the early 1980s. even though this conclusion has been
controversial, it has received support in some of the more recent research.

Acts and Audretsch, for example, found that 1.3 million new jobs in manufacturing were created
by small firms between 1976 and 1986while the number of manufacturing jobs in large firms
decreased by 100, 000. According to, Acts and Audretsch, Birch’s conclusion that bulk of new
jobs come from small enterprises has been largely substantiated.

2. Introducing innovation
New products that originate in the research laboratories of big business make a valuable
contribution to our standard of living. There is question, however; as to the relative

importance of big business in achieving the truly significant innovations.

The record shows that many scientific breakthroughs originated with independent inventors and
small organizations. The following is a list of some 20th c example of new products created by
small firms.

1. Photocopiers
2. Insulin

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3. Vacuum tube
4. Penicillin
5. cotton picker
6. zipper
7. Automatic transmission
8. Jet engine
9. Helicopter
10. Power steering
11. Color film
12. Ball point pen

It is interesting to note that research department of big businesses tend to emphasize the
improvement of existing products. Unfortunately, preoccupation with an existing product can
sometimes blind one to the value of a new idea.

Studies of innovation have shown the greater effectiveness of small firms in research and
development. Innovation contributes to productivity by providing better products and better
methods of production. The large number of small firms that provide the centers of initiative and
sources of innovation are thus in a position to help improve the country’s productivity.

3. Stimulating Economic Competition

Many economists, beginning with Adam smith, have expounded the values inherent in
economic- competition. In a competitive business situation, individuals are driven by
self-interest to act a socially desirable manner. Competition act as the regular that
transforms their selfishness in to service.
When producers consist of only a few big business, however; the customer, is at their
mercy. They may set high prices, withhold technological development, exclude new
competitors or otherwise abuse their position of power. If competition to have a “cutting
edge “there is need for small firms.
The fall of communist governments in Eastern Europe and the breakup of the USSR
made possible a return to a competitive economic system there. Communisms economic
system, lacking a free market and business competition, was a dismissal failure.
Scrapping that system of state owned enterprise opened the way for independent business
firms, many of them small firms, to compete and thereby to increase productivity and
raise the standard of living.
Even china has taken steps to encourage the formation of small business as a means of
stimulating economic growth. As china’s leaders has recently introduced elements of
capitalism, including privately owned businesses, the country has experienced a dramatic
rise in living standards.
The existence of many healthy small business in an industry may be vied as desirable.
4. Aiding Big Business

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The fact that some function are more expertly performed by small business enables small firms
to contribute to the success of larger ones. If small business were suddenly removed from the
contemporary scene, big business would find themselves saddled with a myriad of activities that
they could perform only inefficiently. Two functions that small business can often perform
more efficiently than big business are the distribution and the supply function.

i. Distribution function
Few large manufacturers find it desirable to own wholesale and retail outlets. Think, for
example, of products like toiletries, books, lawnmowers(machine for cutting glasses), musical
instruments, gasoline, food items, personal computers, office supplies, clothing, kitchen,
appliances, automobiles, tires, auto parts, furniture and industrial supplies. Wholesale and return

Establishments, many of them small, perform a valuable economic services by linking customers
and producers of these products.

ii. Supply function

Small business act as suppliers and subcontractors for large firms. Large firms recognize the
growing importance of their suppliers by using terms like “partnership” and strategic
“alliances” to decrease the ideal

Working relationship.

In addition to supplying services directly to large cooperation, small firms provide services to
customers of big business. For example, they service automobiles, repair appliances, and clean
carpets produced by large manufacturers.

5. Producing goods and services efficiently

Common sense tells us that the efficient size of business varies with the industry. We can easily
recognize, for example that big business is better in manufacturing automobiles but that small
business is better in repairing them. The continued existence of small business in competitive
economic system is in itself evidence of efficient small business operation. If small firms were
hopelessly inefficient and making no useful contribution. They would be forced out of business
quickly by stronger competitors. Although research has identified some cost advantages for
small firms over big businesses, the economic evidence related to firm size and productivity is
limited, the following summary points out some of the reasons for relative strength of small
business, new contributions to the theory of the business organization and operation suggest that
firms are less encumbered by the complex, multi-echelon decision making strategies that inhibit
the flexibility and productivity of many large firms, because the owners of small firms are often
also the managers, small firma are less likely too be affected adversely by the separation of

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owners interest from managerial control, empirical evidence of small firms survival and
productivity suggests that, firm sizes concerned, bigger is not necessarily better.

We believe that small business contributes in a substantial way to the economic welfare
of our society.

Chapter Two

Entrepreneurial Mindset

2.1 Motivation For Entrepreneurship

Objectives:
At the end of this unit students will be able to:
 Elaborate internal and external motivating factors of entrepreneurship
 Demonstrate motivators for considering entrepreneurial life
 Describe the role of entrepreneur for economic, social and environmental change
 Identify the ethics of entrepreneurship or entrepreneurss

What is Motivation?
Motivation is the degree to which an individual desires and is willing to exert effort toward
achieving certain goals.

Motivation can also be defined as a set of processes that arouse, direct and maintain human
behavior toward attaining some goals.

Motivation includes all of the forces operating with in the person to cause him or her to want to
engage in certain types of behavior.

Motivation is the force that influences the effort of entrepreneur to achieve his objectives. An
entrepreneur is motivated to achieve or prove his/her excellence in job performance.

It is clear that there are a lot of risks that an entrepreneur is expected to face while he/she decides
to join the business world. Establishing ones own business requires financial commitment
devoting time and effort and to assume other socials risks.

Thus, what motivates an entrepreneur to take all the risks and launch a new venture pursuing an
entrepreneurial career against the overwhelming odds for success? (write your response on the
space provided
below)________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________

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The common man thinks that why people go to business and become entrepreneur is solely to
make money. The desire to make money is no doubt an important force .but entrepreneurs are
motivated not by profit (money) alone rather there are several factors that inspire entrepreneurs.

2.1.1 The Motivating Factors

These motivating factors that can generate an inclination to adopt entrepreneurial activity can be
grouped into two major categories : internal and external factors.

1. Internal factors

The internal motivating factors like education, training, occupational experience, desire to
work independently and other factors make the personality of the entrepreneurs.

i. Educational background
Dear learner, do you think the educational background of an individual motivates
him/her to employ himself? if your answer is yes, which field of education would
motivate people to consider entrepreneurship as their career path?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________________________

The educational background of the entrepreneurs has received significant attention. While it is
frequently stated that entrepreneurs are less educated than the general population, the research
findings indicated that education was important in the upbringing of the entrepreneurs.
Technically or professionally qualified entrepreneurs considered educational qualifications as
the main motivating factors. Most of the technical qualified entrepreneurs or persons had
established enterprise in the field of their specialization which shows that such entrepreneurs
motivated by their qualification to undertake the industrial activities. In terms of type and level
of education, most entrepreneurs have a college degree in Management, English, Finance,
sociology, psychology, education, and marketing. But this does not mean that those individual
from other professions do not have the gut to launch business. The ability to deal with people
and communicate clearly in the written and spoken word is important in entrepreneurial
activity.

ii. Taking additional training

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Taking entrepreneurial development training program helps a person in strengthening and

fulfilling his entrepreneurial motive and in acquiring skills and capabilities necessary for playing
his entrepreneurial role efficiently.

iii. Occupational experience

A research by P.N Sharma(Gupta, 2001) revealed that occupational experience is the most
important internal motivating factors. The experience can be accumulated by entrepreneurs either
as business executive in an industrial concern or as the trader/merchants consultants etc. in the
related field. While the individuals tend to start a business in familiar ares, two occupational
experiences tend to be particularly motivating to establish new enterprise: marketing and
research and development. Working in technology(research and development), individuals can
develop new product ideas or processes. Similarly, individuals in marketing becomes familiar
with the market and unfilled customers’ wants and needs and frequently starts new enterprises to
these needs.

iv. The desire to work independently

while the motivations for venturing out vary greatly, the reason cited most frequently for
becoming an entrepreneur is independent- not wanting to work for any one else. The desire to be
ones own boss is what derives entrepreneurs to accept all the social, psychological and financial
risks and to work the numerous hours needed to create and develop a successful new venture.
Nothing less than this motivation would be strong enough.

v. Affiliation towards money

Although the degree of affiliation toward money, while joining the business world, differ
between men and women entrepreneurs, it is frequently stated that people start their own
business to make money and then improve their future life, if not primary motive. Money is the
second reason for starting a new venture for men while job satisfaction, achievement opportunity
and money are the reason in rank order for women. i.e, men are relatively money driven as
compared to women.

2. External motivating factors

The presence of internal factors is not doubt a necessary condition for entrepreneurial activity to
take place. But entrepreneurial ideas cannot fructify without attractive and enabling environment,
which provides support in terms of financial assistance, technology, raw material and
infrastructures facilities. These facilities and or assistance are external motivating factors and
serves as a peak in the lightening of the entrepreneurial ideas.

These are several external motivation factors in the process of formation entrepreneurs. Some are
discussed below.

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i. Families background and their know-how about risk taking

The entrepreneur’s spouse, family members and relative are found to be the prime motivators
who installed the spirit of entrepreneurship in the potential entrepreneur. The parents
relationship, social status, and occupation can have influence on establishing new ventures.
Having a father who is self-employed provides a strong inspiration for the entrepreneurs. The
independent nature and flexibility of self employed exemplified by the father is ingrained at
an early age of child. It will develop, in the mind of the child, the filling like “my father was
so consumed by the venture he started and provided such a strong example, it never occurred
to me to go to work for anyone else.”

The supportive relationship of parents(particularly the father) appears to be the most

important motivating factor for female entrepreneurs. In addition, the family plays an
important role in developing the personality necessary for turning in to an entrepreneur later
in life. In family situations where security and non-risk bearing encouraged from childhood,
the individual likes to be more security oriented rather than to attempt on his or her own in
areas where adventures and uncertainty conditions are to prevail.

ii. Role models

Perhaps one of the most important factors influencing entrepreneurs in their career choices is
role model. Role model can be parents, brothers, sisters, other relatives or successful
entrepreneurs . successful entrepreneurs are viewed frequently as catalysts by potential
entrepreneurs. As one person stated, “after evaluating Ted and his success as an
entrepreneurs, I new I was much smarter and could do a better job. So I started my own
business.”

iii. Culture and sub culture

Does culture affect the practice of entrepreneurship? If your answer is yes, dose our
culture promote entrepreneurship?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

Culture really affects the development and practice of entrepreneurship directly or indirectly.
A culture that values an individual who successfully creates a new business will
spawn/promote more company than one that does not. For instance, kuteratures have
witnessed that the American culture places a high value on being one’s own boss, having
individual opportunity being successful and making money-all aspects of entrepreneurship.
On the other hand, in some countries including Ethiopia, successfully establishing a new
venture and making money would not be valued rather failure may be considered as shame.

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Sometimes culture may be against establishing business. However, different subculture

(religion, race, ethnic group) the shape value system is operant within a cultural framework.
A frequently cited example is the case of Guragie Culture in Ethiopia It is a fundamental fact
that these people are actively participating in the formation of new enterprise regardless of
their academic excellence.

IV. Government

The contribution of government toward the promotion of entrepreneur is so significant.

As frequently stated in different literatures, many governments in developing countries

recognize that small and medium-scale industries continue to play an important role in
social-economic development. (vasant Dasi, 2001). To this end, there is growing interest in
developing programs for stimulating and encouraging entrepreneurs. Active assistance by
the government can be provided to help small business to overcome the various constraints to
their developments. Small and medium scale industries need to be equipped with the business
tools with which to build their commercial features. Therefore, in addition to creating a
favorable legal environment for the sector, the government will launch a serous of support
programs to help these businesses to overcome the specific commercial obstacles they face
and exploit available opportunities effectively.

Although contributions of governments differ from country to country, the following are
accounted for as the major motivating or hindering factor for entrepreneurship from
government side.

 Facilitating and arranging training and orientation programs

Government can promote entrepreneurship through designing entrepreneurial development

programs which encourage approach of developing achievement motivation and sharpening of
entrepreneurs trait, project planning and development, guidance on different industrial
opportunities, and developing managerial and operational capabilities. Designing such sound
programs are nothing unless the government promotes the potential entrepreneurs through
conducting successive conferences, workshops and targeted training.

 Providing incentive schemes

Government can also play an active role in facilitating development of entrepreneurship by

considering provision of some incentives for those entrepreneurs who start from the scratch.
These incentives would include:

1. Reducing const of input.

2. Encouraging cooperation between relevant government institutions as well as private
sector organizations and NGOs to mobilize training and mentoring support so that
entrepreneurs are able to take risk and manage inter-linkage actives and contracts.

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3. Facilitating the development of more appropriate small –enterprise export-support

programs. Such programs could cover exhibition facilities, export trading house,
promoting export credit schemes, and an expansion of the export marketing assistance
schemes.
4. Furnishing marketing information. Government can establish marketing information
center that would furnish market related information, in such areas as, information on
price, consumer needs, source of inputs, existing and potential market, etc. for young
entrepreneurs.

 Establishing infrastructural network

Infrastructure is one of the basic factors required to enhance the pace of entrepreneurship in any
country. Particularly, an integrated infrastructural program geared to the needs of small-holder
farmers and small-scale enterprise is the best

means of promoting entrepreneurs. The development of infrastructural facilities including the

supply of electricity, water, telecommunication connections, and sewage systems which warrant
the growth and expansion of business enterprises. Sufficient supply of energy (electric),
communication service and road enable an entrepreneur to employee cheap labor sources by
establishing his/her venture in the area he/she chooses. For example, there could be a number of
small diary farmers if a central refrigeration plant can serve all the farmers in the area by an
active network of communication, electric supply and attractive road facilities. However, the
mentioned physical infrastructure facilities are not adequately developed and expanded to meet
by growing demand of business activities in Ethiopia.2 the major factor for such
underdevelopment is due to the obvious nature of infrastructural projects, which entail huge
investment outlays.

 Formulating policies.

Government also affects entrepreneurship through formulating investment policy, licensing

policy, foreign exchange regulation, banking policy, and tax regulations. At the national level,
the primary political factor facing the entrepreneur is taxation.

Governments require large amounts of money to promote the public good and to carry out the
will of the people, particularly those who exercise political power.

Bust taxation reduces the cash available to the firm for investment. Thus, the entrepreneur is able
to invest or reinvest not the economically rational amount but an amount somewhat less than,
known as earning after tax. The outside investor is also to calculate returns after taxes. So,
sometimes, some new ventures would not able to generate outside financing.

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Taxation affects not only each business individually but also the relation between businesses,
giving some firms advantages over others. Special tax breaks for certain industries work to the
benefit of the firms that receives them. For example, government can impose higher and different
tax rates (turn over tax, value added tax (VAT), income tax and others) on individuals and
business firm’s income that hinder the possibility of creating a raw venture or expanding the
existing one. On the other hand, government may provide tax holyday opportunities for young
institutions; opportunities that relieve certain young institution from paying tax.

The investment policies (regulation) and procedures prevailing in a country also play a
significant role in making possible the entrepreneur’s idea of establishing his own business. The
government controls the flow of resources to firms and the property rights of the business owners
through federal agency regulations. These agencies are created by government in response to
some special interest group or group of stakeholders to protect their interest, value and goals.
The effects of regulation on business, however, are sometimes negative. Regulatory against
impose significant cost on firms in the form of paperwork, testing and monitoring and
compliance/filling in line. For example, licensing requirement and procedures will motivate or
hinder venture creation. Sometimes state and local authorities consider licensee as a revenue
source, which makes being licensed somewhat costly.

Now a days, currency exchange regulations(which is the manifestation of globalization)is

becoming a headache for developing country entrepreneurs who primarily intends to import
machineries and other necessary equipment for venture creation.

V . Raw materials and labor supply

The availability and access to the raw materials with reasonable effort and at reasonable cost
will also motivate or hinder potential entrepreneurs. The possibility of accessing raw material
with minimum effort goes with the availability of infrastructural facilities, if the raw material is
available locally. If it is to be imported, the import policy plus the foreign exchange policy
matters on making possible venture establishment.

VI. Source of finance

Financial resources to form a new company must be readily available. The presence of
alternative source of star- up capital, other than personal saving, friends and relatives, is one
thing but what more matter is the possibility of accessing the fund without much complication
like collaterals is another thing. Unfortunately, according to the survey conducted by central
statistics authority, micro and small enterprises in Ethiopia cite the lack of financial problem as
the greatest constraint to their growth and development, whether they are formally registered or
not. The financial needs of different potential entrepreneurs vary widely, with access problems
particularly to serve for start-up.

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Hence the presence and/or absence as well as their performance of the following financial
institutions can motivate or hinder the development of entrepreneurship.

A. Formal banks

The formal financial institutions in Ethiopia are commercial banks(private and public owned),
development bank of Ethiopia and construction bank of Ethiopia. However, the formal financial
institutions are reluctant to avail credit facility. Their standard of operation, the long waiting time
they take to sanction loans, unfavorable disposition towards small loans due to high
administrative costs involved in financing them and the stiff and limited collateral requirements
are some of the problems that are found to be discouraging micro and small enterprise from
approaching them, i.e. the presence of different commercial banks may mean nothing for those
who establish a venture from the scratch and who are with out any fixed asset to be granted for
banks as a collateral. Rather, other financial institutions, which found small enterprise, are
required(like small micro-finance institutions and other informal sources) to promote
entrepreneurship.

B. Micro and Small Enterprises Focused Financial Institutions

Although the formal financial institutions have taken various measures to strengthen their
operation and expand their services, they could not address the financial needs of micro and
small enterprises satisfactorily. In Ethiopia, the commercial banking system could not address
the financial needs of entrepreneurs wishing to start their venture from the scratch for the very
fact that they are not their ultimate target clients. On the top of that the transaction costs and risks
involved in serving them are perceived to be too high. Due to this fact, since the proclamation
40/1996for licensing and supervision of micro-finance institutions came in to effect in July
1996, 21 MFIs have been registered and licensed by national bank of Ethiopia. Concerning their
performance, the research conducted by international fund for agricultural development in the
year [Link] that the industry, which a network of 500 branches, has recorded
remarkable growth. A loan portfolio of about USD 33.5 million, net savings about USD 16
million.

These financial institutions set their own loan eligibility criteria. The major requirement for
providing and facilitating loan arrangement varies from one institution to another. Some of the
eligibility criteria that are frequently asked by many of these institutions are the following:

 Permanent residence ID card for that particular area

 Should engage in micro and small enterprise activities
 His/her age must be in the range 18 to 65
 Business plan presentation
 Ability and willingness to make regular saving deposit(weekly, biweekly or monthly)
or fixed amount that will be determined voluntarily; and

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 Accept group guarantee and take the responsibility of paying defaulted.

C . Informal institutions

There are various types of informal organizations in Ethiopia.

 Idir is a type of traditional organization whose aim is to provide assistance at times of

mourning. In order to facilitate the desired objective, members are expected to
contribute either in cash or in kind, usually monthly basis. But sometimes this
organization can serve as the source of finance for small business establishments.
 Iquip (a form of rotating savings) is a form of social organization in which members
come together for the purpose of saving in cash or in kind. The normal practice is that
members contribute money or materials on a monthly or weekly basis, and lots are
drawn every month so that the one who wins the chance gets the total sum. This
process continues every month till the last member receives his or her share, or what
she or he has been saving through the months, and then the whole process starts a

new. Since such practice facilitating saving, it indirectly initiates members to enter the business
world.

 Money lenders

Loans from money lenders are typical short term and are extended to clients of long standing.
When a potential borrower approaches a money lender for a loan, it is possible to determine the
risk involved in offering him/her a loan contract. The loan lender would not sign a loan contract
for everyone that comes along, because this could easily increase the riskiness of the loan
portfolio that the lender would find unacceptable. Hence, lower procedural activities required by
the local money lenders make easier getting money for potential entrepreneurs. However, the
higher interest rate that the lender charges would discourage the entrepreneurs to take risk.

 Non- Governmental Organizations(NGOs)

A research conducted and presented at conference on micro finance development in Ethiopia by

Ato Worku G/yohannes has indicated that there are one hundred fifty NGOs operating in
Ethiopia. Most of the NGOs programs had saving and credit as one of the components of their
activities.

Vii .Peers and Teachers

peers are very important factor in the decision to establish a new venture. An area with
entrepreneurial pool and meeting places where the potential entrepreneur and his peer(s) meet
and discuss ideas, problems and solutions will motivate the potential entrepreneur to produce
small business enterprises than the area does not occur. A significant influence can also be
placed to a potential entrepreneur from his or her teacher. There are teachers who extremely

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discourages establishing business venture from the scratch since this is for those are academic
misfits. Rather they advice their students to join a reputed organization and be competent enough
academically. On the contrary, there are teachers who discuss entrepreneurship as extremely as
popular course of study emphasizing on the prevailing lack of jobs opportunity and less
promising career paths. So, teachers’ orientation towards entrepreneurship places a significant
impact on motivating /shaping potential entrepreneurs

2.2 . The Environment, Economy and Entrepreneurship

What is Economic Development?

Economic development – is sustained increase in the economic standard of live of a country’s

population. It is defined as raising the productive capacities of societies in terms of their
technologies (more efficient tools and machines), and technical cultures.

Economic development is also defined as the process of raising the level of prosperity and
material living in a society through increasing the productivity and efficiency of its economy. In
less industrialized regions, this process is believed to be achieved by an increase in industrial
production and a relative decline in the importance of agricultural production.

The economic development of an area is evidenced by increase in total income, employment

opportunities, decreased out–migration of population, value of production, increased
diversification of industry, higher labor force participation rates, increased duration of
employment, higher wage levels or gains in other measurements of economic activity, such as
land values.

We all know that development will result structural change in a nation. And it is well known that
our world is changing rapidly. What made sense yesterday may not make sense today and clearly
will be irrelevant tomorrow. Think about this reality for just one minute.

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Ensuring our communities’ success in to the future is challenging understanding economic

development today is critically important. For any community to compete, any must adopt a
development strategy that is tune with economic and social realities that are driving change in
the early part of 21st century.

What are the indicators of for the economic development of a nation?

______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________________

Dear learner, another point equally important with economic development here is economic
growth. So, what is economic growth?

Economic growth is a positive change in the level of production of goods and services by a
country over a certain period of time. It can also be defined as the increase in the amount of
goods and services produced by an economy over time that conventionally measured as the
percent rate of increase in real gross domestic product (real GDP). Economic growth may be
nominal or real. Nominal growth is economic growth that includes inflation, while real growth is
a result of nominal growth minus inflation.

The quantities most commonly used to measure economic growth rate are GNP and GDP. The
growth in gross domestic product (GDP) is usually a good indication of economic growth but in
an economy for which earnings from overseas are substantial in relation to GDP, it is better to
look at GNP (Gross National Product). Gross National product (GNP) - is the monetary value of
a nation’s total output of goods and services usually over a year. GNP at a factor cost is based on
the total earnings of all national factors of production (wages, rent, interest, profits).

GNP at a product market cost is competed by adding total national expenditures on consumption,
foreign and domestic investment, and government spending on goods and services. Unlike Net
national product (NNP), GNP makes no deduction for the machinery used for production.

The actuality of the economic development depends on number of factors such as technology,
education and research and proper distribution and utilization of resources (capital/ financial,
human, information and time). However; these inputs and outputs of the economic system are

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mediated by the entrepreneur who drives the process of economic growth (Voslee, 1994). In its
broadest sense an entrepreneur may be described as a person who lays the ability to explore the
environment, identify opportunities for improvement, and mobilize resources and implements
action to maximize those opportunities. He is the catalyst of change, able to carry out new
combinations, instrumental in discovering new opportunities. Thus, in this section, you will be
presented about details of the roles played by entrepreneur and entrepreneurship in economic
development.

Dear learner, could you list some of the roles of entrepreneurship and Entrepreneur in economic
development?

______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________

Good!

Let us look some of the roles of entrepreneurship stated by some scholars of economics and
business.

Entrepreneurship is one of the fastest–growing fields within economics, management,

organization theory, finance and even law. Surprisingly, however, entrepreneur is fundamentally
an economic agent- the driving force of the market. Entrepreneur is the fuel for and center of
economic growth. He or she actuates the development process by creating small businesses or
using innovative means to improve existing business, which is powered by access to debt and
equity capital, labor and other inputs.

Entrepreneurship is not just about starting business, but it is also about identifying good
opportunities in economic development and innovation. What is needed here is a conceptual
understanding of entrepreneurship and its role in the process of economic development. As stated
by (Voslee, 1994), development theories of economic growth have largely ignored the existence
of someone called entrepreneur where they do

employment opportunities; creates wealth and leads to a broader tax base, improving such elements of
infrastructure as education, health service, and transportation. Such outputs comprise a sustainable

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economy that fosters exist, theories are some what fragmented. Most theories on entrepreneurship
focus on, individual specific factors, environmental factors where the importance of access to
markets, financing, labor force characteristics and institutions (government, civic, legal and
economic), stressed and group factors where the ability to mobilize the population, to facilitate
institutional and attitudinal change is central to enterprise development.

Whatever the view may be the creation of small businesses generates development and growth.
Thus, in modern economic theory, entrepreneurship is being considered as the main factor that
contributes a lot for the economic development of a nation. But it may take years to develop
entrepreneurial capabilities and years for these capabilities to prove their worth in production
outputs.

Every farmer knows that you cannot reap what you do not sow. The same is true for economic
development. Development will occur organically, but the nature, extent and equity of the
development will likely vary widely. Factually, entrepreneurship is a catalyst for economic
development and change of a country. Its role in economic development involves more than just
increasing per capita output and income; it involves initiating and constituting change in the
structure of business and society. This change as stated by Hisrich and Peters (2008) is
accompanied by growth and increased output, which allows more wealth to be decided by the
various participants.

Entrepreneurship is basically concerned with creating wealth through production of goods and
services. This results in a process of upward change whereby the real per capita income of a
country rises overtime or in other words economic development takes place. Thus,
entrepreneurial development is the key to economic development. In fact it is one of the most
critical inputs in the economic development of a region/nation. It speeds up the process of
activating factors of production leading to a higher rate of economic growth, dispersal of
economic activities and development of backward regions. If a region is unable to throw up a
sufficient number of entrepreneurs then alien entrepreneurs usually step in to provide goods and
services needed by the people.

Entrepreneurship begets and also injects change by starting a chain reaction when the
entrepreneur continuously tries to improve the quality of existing goods and services and add

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new ones. For instance, when computers came into the market there was continuous
improvement in the models, their functions etc. like first generation computers, personal
computers, laptops, palmtops etc. Not only had this fostered the development of the software
industry, computer education institutes, computer maintenance and stationery units etc. but also
other industries like banking, railways, education, travel, films, medical and legal transcriptions,
business process outsourcing (BPOs) etc. In this manner by harnessing the entrepreneurial talent
a society comes out of traditional lethargy to modern industrial culture.

One theory of economic growth depicts innovation as the key, not only in developing new
products or services for the market but also in stimulating investment interest in the new venture
being created. This new investment works on both the demand and the supply sides of the
growth equation, the new capital created expands the capacity for growth /supply side/ and the
resultant new spending utilizes the new capacity and output (demand side).

2.3. Entrepreneurship as a Career Option

After finishing your graduation you will be at the crossroads of life. You will face the dilemma
of choosing what you have to do in life. The vast majority of human beings direct their activities
towards earning a living, generating wealth and improving their standard of living. You can
choose your career from two broad categories of options- Wage Employment and
Entrepreneurship. The term ‘career’ signifies a continuous, ever evolving, ever expanding
opportunity for personal as well as business growth and development. We may define
entrepreneurship as a career in your own business (YOB) rather than wage employment. If you
opt for a job then you will work for others. In case you opt for entrepreneurship you will be your
own boss.

Which do you prefer? Why?

______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________

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In case of wage employment one is engaged in routine work carried on for others for which
he/she receives salary or wages. He/she has to follow instructions and execute plans laid down
by the superior. One can choose to be employed in Government service or the public sector or
the private sector. Some of the main differences between entrepreneurship and wage
employment career options are as under.

Entrepreneurship
Wage Employment

Own Boss

Work for others follow instructions Make own plans

Routine Job Creative activity

earning is fixed, never negative Can be negative

sometimes, generally
Does not create wealth surplus

Can choose from- Creates wealth,

contributes to
Government service

public sector or private

sector

Table 1.2 Difference between wage employment and entrepreneurship

In the context of employment generation the three terms- income generation, self- employment
and entrepreneurship are often used interchangeably.

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Income generation is the initial stage in the entrepreneurial process in which one tries to
generate surplus or profit. They are often taken on part- time or casual basis to supplement
income e.g. a man with some surplus money might put his/her money in a fixed deposit account
in a bank or a chit- fund to earn some interest.

Self- employment is the second stage in the entrepreneurial process and refers to an individual’s
fulltime involvement in his/her own occupation.

Entrepreneurship is the terminal stage of the entrepreneurial process wherein after setting up a
venture one looks for diversification and growth. An entrepreneur is always in search of new
challenges. An entrepreneur is not a routine businessman he/she might not have resources but
will have ideas. He/she is innovative and creative, who can convert a threat into an opportunity.
Small businessmen might shut- down or change a business if one anticipates losses but an
entrepreneur will try again after analyzing the situation. On the other hand an entrepreneur can
leave a perfectly running business to start another venture if he/she desires so.

Functionally all entrepreneurs are self- employed and income generating persons but the reverse
is not true- all self- employed and income generating persons are not entrepreneurs. If seen on a
continuum, income generation, self- employment and entrepreneurship can be considered as the
initial, middle and final stages of the entrepreneurial growth process.

Check your progress

What is the difference between the following pairs?

1. Self-employment and income generating?

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______________________________________________________________________________
________________________________________________________________________

2. Self-employment and Entrepreneurship?

___________________________________________________________________________
______________________________________________________________________________
________________________________________________________________________

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The environment of small business is often defined by the type of business or service rendered,
and in most instances the opportunities for small business are defined by the characteristics of a
community. Small business comprises many local enterprises, service companies and
professional organizations that consisitute more than half of all non-farm employment in the
united states. This profile of small business is remarkably similar among most free market
nations. Small business include merchandisers to which we turn for significant amount of our
daily purchases. It also includes “practices” and “personal service” enterprise of doctors,
accountant, tailors, interior designers, and many others to whom we turn for personal needs

More the entrepreneur activity betters the development. Entrepreneurship is the life blood of any
economy and it applies more to a developing economy like Ethiopia. Developing economy need
greater number of people possessing entrepreneurial qualities and capable of taking decisions
under conditions of uncertainty to transform their under developed economies into developed
one. For this well developed institutions support is very important.

The word is rapidly changing; and unless we are also able to change our attitudes and approaches
there is a real danger. The process of development includes creation of infrastructures and setting
up and management of public utilities. Non-conventional energy sources have to be developed
on a commercial scale.

Similarly, application of modern scientific techniques in agriculture and horticulture is essential

for providing a sound base for a more rapid growth of employment and incomes. There is also a
need for rapid growth of industries well distributed and in a multidirectional way. Apart from
land, labor and capital there is greater need for entrepreneurs to strive for growth on an going
basis.

Entrepreneurs are innovators, they identify business opportunities, plan to address market needs,
gather resources and manage the process of building business. Entrepreneurs create jobs, transfer
technology to the market create value, adding immeasurably to our well being.

Entrepreneurs make unique contributions to countries economy. Using innovations to grow their
business, they provide concrete benefits to the national economy. In general they play role in
reducing unemployment, stabilizing inflation, normalize balance of payment and business.

Some of the importance of entrepreneurship are:

 Taking to higher rate of economic growth by creation of value.

 Speed up the process of industrial use of the factors production
 Creation of employment opportunity
 Dispersal of economic activities to different sectors of economy and identifying a new
ventures of growth.

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 Development of backward and tribal areas

 Improvement of the standard of living of different weaker section in the society
 Bringing social and political change in the society
 Develop technological know how
 Improve culture of business and expand commercial activities
 Entrepreneurship acts as a change agent to meet the requirement of the change markets
and customer preferences

Moreover, small businesses(enterprises) have to play a vital role in Ethiopian economy. They
need a strong support on socio-economic and political growths.

Socialistic idea

Our goal is being the establishment of a socialistic pattern of society. Our objectives are
equitable distribution of wealth and decentralization of economic power. The benefits of
industrial growth should be share by as many people as possible and should improve the general
standard of living. Proliferation of small enterprises will go a long way in achieving these
objectives. The rate of Ethiopia where there is a large network of small scale enterprises, with
comparatively less investments in large scale sectors, the general standard of living is much
higher than in the states where heavy investments have been made in large scale industries.

Less capital and more labor

The main problem is that we have a vast manpower but inadequate capital, which has resulted in
increasing unemployment. This is unlike in situation in western countries where manpower is
limited but capital resources are enormous. Planners have realized the necessity of encouraging
small industries because they require less capital but generate more employment. It is estimated
that through the net-out per worker in large and medium industries is more than twice as
compared to that in small scale industries, the investment of capital per worker is about seven
times.

The small scale sector has the capacity to generate a much higher degree of employment than the
large scale sector. For example according to the data collected by the Indian development
commissioner of small industries states that the fixed investment in plant and machinery per
worker in the small scale sector is about Rs 3000 and it is Rs 20,000 in the large scale sector.

The present inflationary trend is largely due to shortage of goods. More production needs more
capital in a such situation.

The small industries will stand in good position because they are less capital intensive and more
employment oriented.

Removing Regional Imbalance

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Another problem is the continuous shifting of people from rural to urban areas which causes
overcrowding in cities with slum conditions due to lake of social and medical amenities which
require heavy investments. This problem can be solved by inducing people to set up small
industries in rural areas.

The prolific setting up of agro-based industries will go a long way in creating a balance in our
country\s economy.

Creating self employment opportunities

In India, since independence it has had a steady rise in the number of qualified engineers seeking
suitable jobs. But having inadequate avenues, they can have self employment by settings up
small industries with the help and expertise provided by the government and other agencies.
Main bank and several industrial corporations , here, have arranged special training programs
for young entrepreneurs, who can easily set up their own units which package assistance from
the governments.

Ancillary Function

Many small scale industries units supply parts and accessories to bigger industries. This ancillary
function involves specialization in specific areas and results in greater profitability. The
government has, therefore, relaxed the ceiling of investment in plant and machinery for ancillary
unit.

Export promotion

Small scale industries are now a days opening up fresh avenues in the export market in our
world. Realizing the importance of small scale sector in the economy the Ethiopian government
has adopted several measures to speed up the growth for small industries.

Supply of critical raw materials

The government has also liberalized the import policy to ensure regular supply of raw materials
to small industrial units, and devised a more efficient and consistence system of distribution of
critical raw material.

2.4. Social Entrepreneurs

Entrepreneur is an evolve thing. With the advancement of science an technology, it has

undergone metamorphosis and emerged as a critical input for socio-economic development.
various writers have developed various theories on entrepreneurship and popularized the
concept among the common people. The theories popularized by them can be categorized as
under:

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 Sociological theories
 Economic theories
 Cultural theories
 Psychological theories

2.4.1. Sociological theories

The following theories explain how sociological factors accelerator the growth of
entrepreneurship.

 Theory of religious belief-Weber

 Theory of entrepreneurial supply-Cochran
 Theory of social change-Hagen
 Theory of group level pattern-Young

[Link] of religious belief Max-Waber

Max-Weber has propounded the theory of religious belief. According to him entrepreneurism is
the function of religious belief and the impact of religion shapes the entrepreneurial culture. He
emphasized that the entrepreneurial energies are exogenous supplied by means of religious
belief. The central feature of Weberian theory of social change, therefore, consists in his
treatment of the protestant ethic and the spirit of capitalism. However, the important elements of
Weber’s theory are discussed further.

1. Spirit of capitalism: in the Weberian theory, spirit of capitalism is highlighted. We all

know that capitalism is an economic system in which economic freedom and private
enterprises are glorified, so also the entrepreneurial culture. Spirit of capitalism, therefore
is guiding factor which guides the entrepreneur to get engaged in activities that can bring
about more and more profit. Thus, the profit motive character coupled with the attitude
towards acquisition of money urges the individual to start new venture.
2. Adventurous spirit: Weber also made the a distinction between a spirit of capitalism and
adventurous spirit. According to him, the former is influenced by the strict discipline
where as the latter is affected by the free force of impulse. Entrepreneurship culture is
governed by both this factors. According to Max-Weber, the spirit of capitalism can be
grown only when mental attitude in the society is favorable to capitalism.
3. Protestant ethic: according to Max Weber, the spirit of capitalism can be grown only
when mental attitude in the society is favorable to capitalism. This Attitude can provided
by protestant ethic irrespective of cultural background, personality type of the individuals
and the experiences in the society. According to Max Weber, Hinduism lacks this sort of
mental attitude which acts as stumbling block in their way to entrepreneurship.
4. Inducement of profit: Weber introduced a new businessmen in to the picture of tranquil
routine. The spirit of capitalism intertwined with the motive of profit resulted in the
creation of greater number of business enterprises thereby leading to complete

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reorganization of individual sector. The principle of low prices and large turnovers was
the mechanism of the entrepreneurs to reap profit. So this motive of profit guided the
protestant ethic to become entrepreneurial which was not found among the Hindus.
.

2.4.3. Theory of entrepreneurial supply-Thomas Cochran

The theory propounded by Thomas Cochran, centers round the sociological aspects of
entrepreneurial supply. Beginning with the premise that fundamental problems of economic
development are non-economic, he emphasizes on cultural values, role expectation and social
sanctions as the key elements that determine the supply of entrepreneurs. The basic element of
Thomas Cochran’s theory are depicted further.

1. Entrepreneurs as social modal personality: according to him, entrepreneur is neither

supernormal individual nor a deviant person but is a role model of the society
representing modal personality. This personality is the composite of person, his skills
styles and motives.
2. Modal personality as a derivative of social conditioning: the entrepreneur being the
chief executive of his business, plays a social role. The role is partly shaped by the modal
personality. That is a derivative of social conditioning of his generation. Further,
innovation and invention goes together with the type of conditioning in the society.
3. Role expectation and entrepreneurial role: Cochran pointed out that incorporate
organizations, sector officers or board of directors have well defined expectations. They
are known as defining groups and entrepreneurial role is closely defined by them.
According to him, primary cultural factors operating on the personality of the executive
and the defining of his role by those involved must accommodate to some degree to the
necessity of the operation to be carried out.
4. The type of childrearing and schooling and its influence on intrinsic character of
the executive. According to Cochran, the executive’s ‘inner character’ is conditioned by
the childrearing and schooling common to cultural legacies. He contemplated, this
relatively simple framework of an entrepreneurial role defined by personality of the actor,
the expectations of the groups with power to sanction deviation from expected behavior
and the operational needs of the function to be performed subsumes all the social or
cultural factors.
5. Dynamics of entrepreneurs and thrust upon the social factors for the major
changes.: according to Cochran the demonstration of this model of dynamics of
entrepreneurs gives thrust upon the social factors for the major changes. He pointed out
that the model is based upon the American economic history which proves that American
economy has experienced major changes during 19th C due to entrepreneurial dynamism

2.4.4. Theory of social change-E.E Hagen:

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Everett E. Hagen, in his theory of social change, propounded how the traditional society
becomes one in which continuing technical progress takes place. The theory exhorts the
following features which presumes the entrepreneur’s creativity as the key element of
social transformation and economic growth.
1. Presentation of the general model of the society: the theory reveals a general model
of the society which considers interrelationship among physical environment, social
structure personality and culture.
2. Economic growth: product of social change and political change: according to
Hagen, most of economic theories of underdevelopment are inadequate. He vied
entrepreneur as a creative problem-shooter who brings about economic development
which is mingled with political and social changes.
3. Rejection of follower’s syndrome: Hagen rejected the idea that the solution to
economic development lies in imitating western technology. So the follower’s
syndrome on the part of the entrepreneur, is discouraged. This is because the
technology is an integral part of socio-cultural-complex, and superimposition of the
same into different socio-cultural set-up may not deliver the goods.
4. Historic shift as a factor of initiating change: Hagen, in his book How economic
growth begins, depicts historic shift as the crucial force which has brought about
social change and technological progress thereby leading to the emergency of
entrepreneurial class from different castes and communities. The historic shift caused
some groups of the lesser elite, who previously held commanding position in the
social hierarchy, feel that they were no longer valued and regarded.

Withdrawal of status respects as the mechanism for rigorous entrepreneurial activity.

Closely consistent with the historic shift it is the social groups that plunges into rigorous
entrepreneurism which experiences the status withdrawal or ‘withdrawal of status respect’.
According to Hagen, they are a group of individuals, creative and alienated from traditional
values, driven by gnawing burning drive to prove themselves (to themselves as well as to their
fellows)seeking for an area in which to do preferably an area in which they can gain power and
in some symbolic way they can vent their range at the elites who have caused their troubles.

2.4.5. Theory of group level pattern: F. Young

Frank Young in his theory, A micro sociological interpretation of entrepreneurship, points out
that entrepreneurial initiative is a function of a group level pattern. Young has elaborative
analyzed the short comings of psychogenic interpretation of entrepreneurship and suggested a
causal sequence where transformation codes are developed by the solidarity groups to improve
their symbolic position in their large structure and thus become entrepreneurs.

2.5. Ethics and Social Responsibility of Entrepreneurs

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The life of the entrepreneur is not easy. An entrepreneur must take risks with his or her own
capital in order to sell and deliver products and services while expending greater energy than the
average business person in order to innovate. In the face of daily stressful situations and other
difficulties, the possibility exists that the entrepreneur will establish a balance between ethical
exigencies, economic expediency, and social responsibility, a balance that differs from the point
where the general business manager takes his or her moral stance.

A manager’s attitudes concerning corporate responsibility are related to the organizational

climate perceived to be supportive of laws and professional codes of ethics. On the other hand,
entrepreneurs with a relatively new company who have few role models usually develop an
internal ethical code. Entrepreneurs tend to depend on their own personal value systems much
more than other mangers when determining ethically appropriate course of action.

Although drawing more on their own value system, entrepreneurs have been shown to be
particularly sensitive to examine pressure and general social norms in the community, as well as
pressures from their competitors. The differences between entrepreneurs in different types of
communities and in different countries reflect, to some extent, the general norms and values of
the communities and countries involved. This is clearly the case for metropolitan as opposed to
no metropolitan locations within a single country.

The significant increase in the number of internationally oriented businesses has impacted the
increased interest in the similarities and differences in business attitudes and practices in
different countries. This area has been explored to some extent within the context of culture and
is now beginning to be explored within the more individualized concept of ethics. The concepts
of culture and ethics are somewhat related.

Dear learner, we are familiar with term ethics. Thus, how do you define the term ethics?

______________________________________________________________________________
________________________________________________________________________

Well!

Ethics refers to the “study of whatever is right and good for humans,’’ business ethics concerns
itself with the investigation of business practices in light of human values. Ethics is the broad

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field of study exploring the general nature of morals and the specific moral choices to be made
by the individual in his relationship with others. While business ethics has emerged as an
important topic within popular and academic publications in the past few decades, to date it has
been treated a historically and with an orientation dominated by the U.S. perspective.

Though the English word ethics is generally recognized as stemming from the Greek ethos,
meaning “ custom and usage,’’ it is more properly identified as originating from ‘Swedhethos’,
in which the concepts of individual morality and behavioral habits are related and identified as
an essential quality of existence.

A central question in business ethics, as depicted by Hisrich and Peter (2008) is, “For whose
benefit and at whose expense should the firm be managed?’’ In addressing this question we
focus on the means of ensuring that resources are deployed fairly between the firm and its
stakeholders-the people who have a vested interest in the firm, including employees, customers,
suppliers, and society itself. If resource deployment is not fair, then a stakeholder is being
exploited by the firm.

Entrepreneurship can play a role in the fair deployment of resources to alleviate the exploitation
of certain stakeholders. Most of us can think of examples of firms that have benefited financially
because their managers have exploited certain stakeholders-receiving more value from them then
they supply in return. This exploitation of a stakeholder group can represent an opportunity for
an entrepreneur to more fairly and efficiently redeploy the resources of the exploited stakeholder.

Where current prices do not reflect the value of a stockholder’s resources, an entrepreneur who
discovers the discrepancy can enter the market to capture profit. In this way the entrepreneurial
process acts as a mechanism to ensure a fair and efficient system for redeploying the resources of
a “victimized’’ stakeholder to use where value supplied and received is equilibrated. Therefore,
while there is evidence that some use the entrepreneurial process to exploit others for profit; it is
important to understand that the entrepreneurial process can be an important means of helping
exploited stakeholders and at the same time setting up a viable business. Think of the
entrepreneurial process as a tool that can be used effectively.

Check your progress

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What do you understand from this section?

______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________

How do you contextualize ethics in management of business and education?

______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________

What is mean by code of ethics in general and in entrepreneurship in particular?

________________________________________________________________________________
_____________________________________________________________________________________
___________________________________________________________

Unit Summary

Risk taking, innovation, and creation of wealth are examples of the criteria that have been
developed as the study of new business creations has evolved. Entrepreneurship is defined as the
process of creating something new with value by devoting the necessary time and effort;
assuming the accompanying financial, psychological, and social risks; and receiving the resultant
rewards of monetary and personal satisfaction and independence.

The entrepreneur then goes through the entrepreneurial process, which involves finding,
evaluating, and developing opportunities for creating a new venture. Each step is essential to the
eventual success of the new firm and is closely related to the other steps. Before the opportunity
identification stage can result in a meaningful search, the potential entrepreneur must have a
general idea about the type of company desired. Once the opportunity is identified, the
evaluation process begins. Basic to the screening process is the understanding of the factors that
create the opportunity: technology, market changes, competition, or changes in government
regulations. From this base, the market size and time dimension associated with the idea can be
estimated.

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In recent decades the role of an entrepreneur has been considered of very great significance in
accelerating the pace of growth and economic development in both the developed and
developing countries. An entrepreneur is a person who perceives opportunities, organizes the
resources needed to exploit the opportunity and sets up an enterprise. The process of setting up
an enterprise is called entrepreneurship. An enterprise is a business venture. It is an undertaking
that involves uncertainty and risk as well as innovation. An individual has the right to choose any
income generating activity or self-employment or entrepreneurship as a career option.
Functionally income generating and self-employment activities are the initial stages of
entrepreneurship.

The qualities of entrepreneurship and management are present in varying degrees in both
managers as well as entrepreneurs. The most important functions of an entrepreneur are
innovation, risk and uncertainty bearing and organization building. An entrepreneur usually has
to perform all the functions of production, marketing, finance, human relations etc. especially at
the time of start-up and establishing an enterprise. Most entrepreneurs usually start a small
venture and then make it grows.

Review questions

1. How can an entrepreneur cope up with the impact of globalization in his action?
2. What competencies are expected from an entrepreneur?
3. Assume that you want to generate income for your school so as to enhance school
financing in addition to the school budget from region or federal government. What steps
would you follow to generate income in the school? What factors may affect your action
in income generation? In this case could you consider yourself as entrepreneur? Why?
4. Entrepreneurship requires the devotion of the necessary time and effort. Discuss
5. Compare and contrast the entrepreneur and a manger.
6. What is mean by opportunity identification? Elaborate on the steps used in opportunity
identification.
7. What is the concern of business ethics?
8. Give brief explanation about each of the entrepreneurial processes.
9. Why do complex decisions often raise ethical considerations for the entrepreneur?
10. How can entrepreneurs develop a position of ethical leadership in business today?

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11. Note down about the role of entrepreneurship in economic development

12. Discuss the three major phases of entrepreneurship education?

Chapter Three :

Paths to Entrepreneurial Ventures and Assessing Entrepreneurial

Opportunities

3.1 Sources of Finance and Business Plan

Objectives

At the end of the this unit students will be able to:

 Identify the source of finance to start their own business
 Properly set their own goal
 Prepare business plan and understand its purpose on preparing new venture
 Describe the relationship between agribusiness and economic development
 Discuss the role of business organizations for entrepreneurial development
 Define family business

To meet these differing types of funding requirements, the owner manager has a number of
options obtain finance. Albeit some of the various option listed below may not be currently be
available in our country, Ethiopia in the future it is commendable to introduce such schemes or
options so that the overall development of the country be accentuated

1. Personal investment by owner-managers

Several studies have confirmed that the most important source of start-up capital comes from
owner-managers themselves. There is evidence of regional differences, however, for example,
Mason and Lioyd’s study of new manufacturing Hampshire revealed that 66% used personal
savings and 42% obtained bank loans or overdrafts as launch capital. other studies, in less
prosperous regions of UK, have shown that a higher percentage of start-ups (usually over 80%)
have used personal funds from the owners. It would seem that the level of owner investment is
conditioned by two main factors.

 Credit worthiness of the owner

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As homes are the major source of guarantee on borrowing the higher value of property and,
higher rates of home ownership in more prosperous in regions, will allow owners to borrow
relatively more money as mortgages or second mortgages to finance their business.

 Experiences and awareness of sources of funds

In regions where redundancy from traditional industry is a key source of new business
information, those people “pushed” into new ventures as the only realistic alternative
employment, tend to have limited experience of financial management, and restricted awareness
of possible sources of funds

2. The business expansion scheme

The need for the investment of permanent capital as equity in small businesses from private
sources promoted the government, UK, to introduce the business expansion scheme (BES) in
1983. This was not targeted at investment by the owner-manager ; the scheme specifically
precluded investors from being directors and employees of the business.

The objective of this scheme was to encourage outside investment in small firms, by individuals
who would remain as investors, not as managers. The incentive for this investment was generous
tax relief to help compensate for the higher risks involve.

3. Venture capital

Venture capital funds provide finance for growth businesses, usually through equity capital with
some loan elements. There are over 100 venture capital companies in UK, who obtain investment
funds from variety of sources, including pension funds, insurance companies, investment trusts,
regional development agencies , and private individuals through the BES.

The best known is probably 31(investors in the country), established by the bank of England and
the cleaning banks in 1945 to provide finance to growing firms.

The venture capital provides risk finance, which will come after banks and other preferential
lenders in terms of security. The return sought from the investment will therefore high, the
internal ‘rate of return’ targets of most venture capitalists are between 25-60% depending on the
risk involved.

The structure of any particular investment will vary but, usually involves any combination of
three types of combination.

 Equity shares
 Preference shares
 Loans

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The venture capital fund will wish to see ways of cashing in their investment by selling their
shares in the future.

4. Cleaning banks

After investment by owner-manager, or private individuals, overdrafts and loans from a cleaning
bank are the next most popular form of small business finance.

Banks and the small firms

The dramatic increase in the number of small business and the self employed during the 1980s ,
stimulated the main banks to develop services specifically targeted at small firms.

Now a days many cleaning have all now developed a range of products, and advisory services to
more closely meet the varying needs of small needs .

For example if we take the national Westminster Bank in UK, offers free banking for the first
year and a range of borrowing options:

 A business start-up loan, with a fixed interest and a possible capital repayment holiday
for the first 6 months;
 A business development loan for the growing business, with a capital repayment
holiday for up to 2 years.
 A more simple and flexible overdraft.

In addition, they have an extensive network of small business advisory centers, offering
personal advice and written information, and a bank also a significant contributor of finance for
research into the small firm sector.

Loan Guarantee Scheme

For those small business not able to arrange a bank loan under a normal policies , the
government’s loans guarantee scheme can provide a guarantee of up to 80% of loans under
£100, 000.

5. Public sector sources

There are a number of central and local government sources of finance for the small
business, which represent both equity and short and long loan capital.
 The enterprise allowance scheme(EAS) operated by the department of employment
pays unemployed person £40 a week for a year if they become self-employed in their
own business.
 British Technology Group (BTG) provides finance for innovative small firms
requiring funds to develop new or existing products and ideas.

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Development agency and boards have been set up to coordinate new and small
business support in their area.
 Local enterprise agencies are coordinated under the business in the community
umbrella, to provide advice and funds for small enterprises, including equity finance.
 The rural development commission has limited funds available to promote small
rural firms with specific projects or grants to convert premises.
 Tourist boards encourage the growth of the tourist business, partly by offering loans
and grants for specific projects likely to enhance the tourist trade in the UK.
6. Finance houses and leasing companies
An important source of either short or medium term asset finance is in the form of leasing
and hire purchase. Both of them involve regular payments for the use of an asset, but
with different ownership implications.
 Leasing –allows a small firms to obtain the use of equipment, machinery or vehicles
without owning them. Ownership is retained by the leasing company, although in
many cases there is a purchase option at the end of the leas period.
 Hire-purchase- provide the immediate use of the asset and also ownership of it,
provided that payments according to the agreement are made finance houses are the
 main providers of hire purchase funds. The date back to the last century, when they
were set up principally to provide finance for the purchase of real way Wagons by
colliery owners and coal merchants.

7. Factoring
Factoring is a specialist form of finance to provide working capital to young, under
capitalized businesses. A small firm, which grants credit terms to its customers, can soon
have considerable sums of money tide up in unpaid invoices. Factoring is a method of
realizing this funds; the factoring company tasks responsibility for collection of debits
and pays a percentage(usually up to 80%) of the value of invoices to issuing company.
The company thus has immediate payment once an invoice is issued although it pays for
this service by not receiving the full value of the invoices.
8. Trade –credit
Trade credit is the most wide spread source of short term financing for business. Rather
than borrowing money to pay for products or supplies, a company buys on credit from the
supplier. The degree of formality in such arrangements may range from a simple
handshake to ironclad written agreement. Most trade credits fall with in one of the three
categories:
i. Open-book-credit

A majority of all business transactions involving merchandize are finnced through ‘open-book
credit’, sometimes referred to as an “open account.” This is an informal arrangement whereby a
purchaser may obtain products before paying for them. under this types of arrangement, the
business orders goods from the supplier, who deliver them. The amount of the purchase is then

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charged to the business’s( buyer’s) account. Companies using the open-book- credit system
indicate credit or repayment terms to the customers on the invoice that accompanies delivery.
Open-book credits are usually extended for a short period of time usually for 30 days and
customers are expected to pay their bills by the end of this period. However, many businesses try
to pay before the end of the credit period, because suppliers in order to encourage speedy
repayments offers special discounts for early repayments.

ii. Promissory notes

Not all business people are comfortable with the relative informality of open-book credit. They
prepare the security of a written agreement to repay, signed in advance by the consumer they are
supplying. One such agreement is a promissory note, an unconditional written commitment
drawn up by the borrower, who promises to pay the creditor a fixed sum of money on a specified
date in return for immediate credit. Often there is an interest rate on promissory notes, indicated
on the note itself.

The person who promises to pay the amount specified in the note is the maker. The person to
whom the note is payable is the payee. If the creditor needs the money before the due date on
the note, he can obtain it in advance without breaking the written terms of the agreement. A
creditor or payee needs only sign on the back of the note(endorse it) and take it to the bank. The
bank then pays the face value of the note, minus fee for this service. This procedure is calle

discounting of promissory note. The bank goes on to collect the full amount on the note for itself
when the note falls due. The amount of discount depends on the rate of interest the bank is
currently charging.

iii. Trade draft(commercial draft) and acceptances

Drafts and acceptance can be particularly useful when the merchant is dealing with poor or
unknown credit ratings or with foreign customers whose credit positions are difficult to check.

A commercial –draft or trade-draft is similar to a promissory note except that the person who is
to receive the money initiates it; i.e. the customer(borrower) initiates a promissory note, where as
a trade draft by the supplier

A trade draft is an order to pay a stated amount of money with in a certain number of days, as
drawn up by the creditor(the drawer). A supplier attaches a trade draft to the shipping
document(the bill of lading).

9. Export Finance

The most important step in financing international trade is ensuring full and prompt payment.
When we see the experience of foreign countries such as UK as an instance,

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The export credits guarantee departments-provide credit insurance that gives cover in the event
of non-payment by an overseas customer. They offer a variety of insurance schemes, which a
small firm can assign to a bank, or other lending body in order to obtain export finance

Export houses-offer a wide range of services to exporters including finance.

3.2 Developing a Business Plan

What is a business plan?

A business plan can be defined in different ways. A business plan is a comprehensive set of
guidelines for a new venture. A business plan is also called a feasibility plan that encompasses
the full range of business planning activities, but it seldom requires the depth of research or
detail expected for an established enterprise.

A business plan (feasibility plan) is an outline of potential issues to address and a set of
guidelines to help an entrepreneur make better decisions. This marketing, financial and
managerial considerations. In a sense, it would represent a “game plan” it would crystallize the
dreams and hopes that provide your motivation. It is sometimes called a “deal” by those
who invest in new ventures. What ever the name, it should layout your idea, describe where you
are, point out where you want to go, and how prosper to go there.

The business plan may present a proposal for launching an entirely new business. More
commonly, perhaps, it may present a plan for a major expansion of a firm that has already started
operations.

For example, an entire may open a small local business and see the possibility of operating
additional branches or extending its success in other ways.

[Link] purpose of business plan

Many mangers already involved in the small business or those considering it as a possibility,
perceive the business plan, the first and foremost, as a document that is produced for the bank
manager, investor or venture capital company in order to raise money.

For this reason, small businesses that do not have external funding requirements tend not to write
formal business plans. The reasons for this include:

 A lack of understanding of the process or benefits of business planning.

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 Pressure on ‘doing’ rather than ‘thinking’ or gathering information, in the small

business environment.
 The belief that the strategic planning is for large organization and big business
resources, and not necessary for small firms who can plan effectively on the back of
an envelop.

One of the most important steps in establishing any new business is the construction of a
business plan.

It can help the owner or manager crystallize and focus his ideas. A moment’s reflection would
alert a prospective entrepreneur to the danger of jumping in to a business venture with a” half -
backed” idea or “wild eyed” proposition.

Any activity that is limited without adequate preparation tends to be haphazard and unsuccessful.
Although planning is a mental process, it must go beyond the realm of thought. Thinking about
a proposed business becomes more rigorous as rough ideas must be crystallized and quantified
on a paper.

It can help the owner/manager set objectives and give him a yardstick against which to monitor
performance. Perhaps of more immediate importance, it cal also act as a vehicle to attract any
external finance needed by the business. It can convince investors that the owner/manager has
identified high growth opportunities, and that he has the entrepreneurial flair and managerial
talent to exploit that opportunity effectively and that he has a rational, coherent and believable
program for doing so. It entails taking a long –term view of a business and its environment. It
emphasizes strengths and recognize the weaknesses of the proposed ventures. The plan can
uncover weakness or alert the entrepreneur to sources of possible danger.

should be the final implementation of the venture. In other words, it is not just the writing of an
effective plan that is important but also the translation of that plan into a successful enterprise.

3.2.2 Benefits of Business Plan

Dear learner, would you list some of the benefits of business planning?

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Good!

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As all we know, planning is deciding on resources and activities for future action. The entire
business planning process forces the entrepreneur to analyze all aspects of the venture and to
prepare an effective strategy to deal with the uncertainties that arise. Thus, a business plan may
help an entrepreneur avoid a project deemed to failure.

Since entrepreneurial team is involved in business plan and all of the key members are parts of
writing the plan, it leads an entrepreneur to understand the contribution of each team member. It
also used as the entrepreneur’s description and prediction of his/her venture.

The following benefits of business plan are identified both for entrepreneur and the financial
sources that read it and evaluate the venture.

For the entrepreneur

The time, effort, research and discipline needed to put together a formal business force the
entrepreneur to view the venture critically and objectively.

The competitive, economic and financial analyses included in the business plan subject the
entrepreneur to close scrutiny of assumptions about the venture’s success.

The business plan quantifies objectives; provide measurable benchmarks for comparing forecasts
with actual results. The completed business plan provides the entrepreneur with a
communication tool for outside financial resources as well as an operational tool for guiding the
venture toward success.

For financial resources

 The business plan provides the details of the market potential and plans for securing a
share of that market.
 The business plan illustrates the venture’s ability to service debt or provide an adequate
return on equity.
 It gives clear, concise document with the necessary information for a thorough business
and financial evaluation.
 The plan identifies critical risks and crucial events with the discussion of contingency
plans that provide opportunity for the venture’s success.

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 The business plan provides a useful guide for assessing the individual entrepreneur’s
planning and managerial ability
3.2.3 Developing an Effective Business Plan

Dear learner, in the previous lesson, you are presented about the benefits of business plan both
the entrepreneur and financial sources. In this section you will have crucial information about the
preparation of an effective business plan, who to prepare business plan, and to whom it will be
prepared.

Before reading about detail development of an effective business plan, try the following
questions.

What is an effective business plan?

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Who is responsible to prepare business plan?

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Who will responsible to read the business plan?

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Excellent!

Let us look the points in detail:

3.2.4 Who Should Write the Plan?

The business plan should be prepared by the entrepreneur; however, consulting with many other
sources in his/her preparation is vital. Lawyers, accountants, marketing consultants and engineers
are useful to be consulted in the preparation of the plan. In many instances entrepreneurs will
actually hire or offer equity (partnership) to another person who might provide the appropriate

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expertise in preparing the business plan as well as become an important member of the
management team. To determining whether to hire the consultant or to make use of other
resources, the entrepreneur can make an objective assessment of his or her own skills.

3.2.5 Who Reads the Plan?

The second question in the preparation of business plan is about to whom the plan is developed.
It is important to understand the audience for whom the business plan is written. The business
plan may be read by employees, investors, bankers, venture capitalists, suppliers, customers,
advisors lawyers and consultants. Who is expected to read the plan can often affect its actual
content and focus. Since each of these groups reads the plan for different purposes, the
entrepreneur must be prepared to address all their issues and concerns. In some way, the business
plan must try to satisfy the needs of everyone, where as in the actual market place the
entrepreneurs’ product will be trying to meet the needs of selected groups of customers.

However, there are probably three perspectives or view points that should be considered in
preparing the plan.

First is the perspective of the entrepreneur, who understands better than anyone else the
creativity and technology involved in a new venture. The entrepreneur must be able to clearly
articulate what a venture is all about.

Second is the marketing perspective. Too often, an entrepreneur will consider only the product or
technology not whether someone would buy it or not. Entrepreneurs must try to view their
business through the eyes of their customers and the plans should be customer oriented for
sound/projections.

Third the entrepreneur should try to view his/her business through the eyes of the investor.
Sound financial projections are required; if the entrepreneur does not have the skills to prepare
this information, then outside sources can be of assistance.

Viewpoints of entrepreneur

- High technology or creativity

Focuses on who develops the venture or plan

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- Customers – about marketability of venture or market driven

Focuses on who will buy the product or use the service

- Investors – financial sources

Focuses on who will be the sponsor or the financial source for the new venture or plan

These three viewpoints have been presented in order of decreasing significance to point out the
emphasis needed in a well-conceived business plan. If they are addressed carefully in the plan,
the entrepreneur has prepared for what experts called the five-minute reading.

According to Kuratko and Hodgetts (1998:294), the following six steps represent the typical
business plan reading process many venture capitalists use (less than a minute is devoted to each
step).

1. Determine the characteristics of the venture and its industry.

2. Determine the financial structure of the plan (amount of debt or equity investment required),

3. Read the Latest balance sheet (to determine liquidity, net worth and debt equity).

4. Determine the quality of entrepreneurs in the venture

5. Establish the unique feature in this venture (find out what is different).

6. Read the entire plan over lightly/ this is when the entire package is paged through for a casual
look at graphs, charts, exhibits these steps insight into how the average business plan is read.

It appears somewhat unjust that so much of the entrepreneur’s effort is put into a plan that is
given only a five minute reading. However, that is the nature of the process for many venture
capitalists. Other financial or professional sources may devote more time to analyzing the plan.
But keep in mind that, venture capitalists read through numerous business plans; thus knowing
the steps in their reading process is valuable for developing any plan.

Discuss each of the steps in reading business plan and identify the most important step that helps
in preparing business plan for busy investors.

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3.2.6 Scope and Value of the Business Plan

Dear learner, I hope that you answered the questions related to who writes and who reads the
business plan in the previous section. Here is other basic question to be answered, i.e. how depth
or detail should be your business plan?

What factors do you think will affect the scope of the business plan?

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Of course, the depth and detail of the business plan depends on the size and scope of the
proposed new venture. An entrepreneur planning to market a new portable computer will need a
comprehensive plan, largely because of the nature of the product and market where as an
entrepreneur that plans to open a retail video store will not need the comprehensive coverage
required by a new computer manufacturer. A new e-commerce business, however, may require a
very different focus, particularly on how to market the website that will offer the goods and
services. Thus, the differences in the scope of the business plan may depend on whether the new
venture is a service, involves manufacturing, or is a customer good or industrial product.

The size of the market, competition, and potential growth may also affect the scope of the
business plan. The business plan is valuable to the entrepreneur, potential investors, or even new
person as, who are trying to familiarize themselves with the venture, its goals, and objectives.
The business plan is important to these people because:

It helps in determining the validity of the venture in a designated market.

It provides guidance to the entrepreneur in organizing his/her planning activities.

It also serves as an important tool obtaining financing. Potential investors are very particular
about what should be included in the business plan thinking process required to complete the

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plan is a valuable experience for the entrepreneur since it forces him or her to assess such things
as cash flow and cash requirements. In addition thinking process takes the entrepreneur into the
future, leading him or her to consider the important issues that could impede the road to success.

The process also provides a self-assessment by the entrepreneur. Usually, he/she feels that the
new venture is assured of success. However, the planning process forces the entrepreneur to
bring objectivity to the idea to reflect on questions as “Does the idea make sense? Will it work?
Who is my customer? Does it satisfy customer needs? What kind of production can I get against
imitation by competitors? Can I manage such a business? Whom will I compete with?”

What is the importance of business plan in educational institutions?

___________________________________________________________________________

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3.2.7 Elements of Business Plan

Dear learner, would you try to guess some basic elements of business plan?

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Very good!

Compare your answer with the major elements of the business plan described as follows.

Of course, the actual need for systematic planning will vary with the nature, size, and structure of
the business. Additionally, an entrepreneur’s planning will need to shift from an informal to a
formal systematic style for other reasons. However, preparation of detailed business plan is
essential whatever the size, scope, structure and style of the business is. Thus, a detailed business
plan usually has ten basic sections which show complete business plan outline. The basic ten
sections are listed below for detail information.

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1. Summary section
Many people who read business plan (bankers, venture capitalists, investors) like to see a
summary of the plan that features its most important parts. The summary gives a brief overview
of what is to follow; helps put all of the information into perspective. It should be no longer than
three pages and should be written only after the entire business plan has been identified. Since
the summary is the first, and sometimes the only, part of a plan to read, it must present the
quality of the entire report. It should be a clever snapshoot of the complete plan.

The statements selected for a summary segment should briefly touch on the venture itself, the
market opportunities, the financial needs and projections, and any special research or technology
associated with the venture. If information is not presented in a concise, competent manner, the
reader may put aside the plan or simply conclude the project does not warrant funding.

2. Business description
“What aspects should be described in business plan?” is the basic question to be raised in this
section. It includes the following:

1st The name of the venture should be identified, with any special significance related (such as
family name, technical name, etc …)

2nd The industry background should be presented in terms of current status and future trends. It is
important to note any special industry developments that may affect the plan.

3rd The new venture should be thoroughly described along with its proposed potential. All key
terms should be defined and made comprehensible functional specifications or descriptions
should be provided including drawings and photographs.

4th The potential advantages the new venture possesses over the competition should be discussed
at length. The discussion may include patents, copyrights and trademarks, as well as special
technological or market advantages.

3. Marketing segment
This is the third section (element) of business plan in which the entrepreneur must convince
investors that a market exists, that the competition can be beaten.

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Since almost all subsequent sections of the plan depend on the sales estimates developed here
marketing segment is one of the most critical parts.

The projected sales levels, based on the market research and analysis, directly influence the size
of the manufacturing operation, the marketing plan and the amount of debt and equity capital
required. Thus, market research and analysis and marketing plan are the two broad aspects of
marketing segment to be addressed during development of a comprehensive exposition of the
market.

4. Research, design and development segment.

The extent of any research, design and development in regard to cost, time and special testing
should be covered in this segment. Investors need to know the status of the project in terms of
prototypes, lab tests, and scheduling delays. Blue prints, clutched drawings and models are often
important for an entrepreneur to have a comprehensive section.

It is equally important to identify the design or development of work that still needs to be done
and to discuss possible difficulties or risks that may delay or alter the project. In this regard, a
developmental budget that shows the costs associated with labor, materials consulting research,
design, and the like should be constructed and presented.

This segment always should begin by describing the location of the new venture. This is to show
the appropriateness of the chosen site in terms of labor availability, wage rate, proximity to
suppliers and customers, and community support. Additionally local taxes and zoning
requirements should be sorted out and the support of area banks for new ventures should be
touched on. Furthermore, production needs in terms of the facilities required to handle the new
venture (plant, warehouse storage, and offices) and the equipment needs to be acquired (special
tooling, machinery, computers and vehicles) should be discussed.

5. Manufacturing segment
This segment always should begin by describing the location of the new venture. The chosen site
should be appropriate in terms of labor availability, wage rate, proximity to suppliers and
customers and community support. Production ne eds should be discussed in terms of the facilities
required to handle the new venture and the equipment that needs to be acquired.

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6. Management segment
This segment identifies the key personnel, their positions and responsibilities and the career
experiences that qualify them for particular roles.

This is a section where the role of entrepreneur is clearly outlined, and advisors, consultants or
members of the board should be identified and discussed. In addition, the structure of payment
and ownership (stock agreements, consulting fees, etc) need to be described clearly in this
section. Thus, investors can understand about each of the following critical factors that have been
presented

i. Organizational structure

ii. Management team and critical personnel

iii. Experience and technical capabilities of the personnel

iv. Ownership structure and compensation agreements

v. Board of directors and outside consultants and advisors.

7. Critical risks segment

This is concerned with the identification of potential risks such as effect of unfavorable trends in
the industry, design or manufacturing costs that have gone over estimates, difficulties of long
lead times encountered when purchasing parts or materials and unplanned for new competition.
In addition to these risks, covering “what Ifs” is its concern.

Finally, it should include suggestions for alterative courses of action certainly, delays, inaccurate
projections, and industry slumps all can happen, and people reading recognizes these risks and
has prepared for such critical events.

8. Financial segment
Financial segment of a business plan must demonstrate the potential viability of the undertaking.
The three basic financial statements need to be presented.

These are:

i. The pro forma balance sheet

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ii. The income statement

iii. The cash flow statement
 The pro forma balance sheet projects what the financial condition of the venture will be
at a particular point in time. It should be prepared at start-up, semi-annually for the first
years and at the end of each of the first three years. The balance sheet details the assets
required to support the projected level of operations and shows how there assets are to be
financed.
 The income statement illustrates the projected operating results based on profit and loss.
It requires the sales forecast developed in the marketing segment.
 The cash-flow statement highlights the need for and timing of additional financing and
will indicate peak requirements for working capital. It may direct the entrepreneur’s
attention to operating problems before serious cash crises arise if it is understood
properly.
9. Milestone schedule segment
- Provides investors with a time table for the various activities to be accomplished. It is a
step-by-step approach to illustrating accomplishments in a piecemeal fashion. These
milestones can be established according to any appropriate time frame, such as quarterly,
monthly or weekly.
10. Appendix and /or bibliography segment

This is the final section or segment of the business plan, which is not mandatory, but it allows for
additional documentation that is not appropriate in the main parts of the plan. Diagrams,
blueprints, financial data, vitae of management team members, and any bibliographical
information that supports the other segments of the plan are all examples of materials to be
included in the appendix segment.

Check your progress

1. Discuss the importance of each of the sections of business plan

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2. What aspects should be included in the bibliography segment of a business plan?

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3.2.8 Presentation of Business Plan

Dear learner, in the previous sections of this unit, we have discussed about who to read, who to
write and what elements to be included during the development of well established business
plan. Now it is time to present the prepared business plan for the concerned bodies. Thus, in this
part you will learn about presentation of developed business plan.

What is mean by business plan presentation?

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What steps would you follow during business plan presentation?

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Once a business plan is prepared, the next major challenge of course, is presenting the plan to
either a single financial person or, in some parts of the country, a forum, where numerous
financial investors have gathered.

Presentation refers to the process of submission the prepared plan orally or using written report.
It is a key step in “selling” the business plan to potential investors and the entrepreneur is
expected to “sell’’ his/her business concept in this designated period of time. This implies that
the entrepreneur must decide what to say and how to present the information. Typically, each
selected entrepreneur is asked to present the highlights of his/her business plan in a defined time
frame. The presentation therefore, should be organized, well prepared, interesting and flexible.
Outline of significant highlights should be prepared so as to capture the audiences’ interest. What
is also very important for entrepreneurs during preparation of presentation is that they must feel
free to add or remove certain bits of information as the presentation progresses.

3.2.9 Using and Implementing the Business Plan

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The business plan is designed to guide the entrepreneur through the first year of operations. It is
important that the implementation of the strategy contains control points to ascertain progress
and to initiate contingency plans if necessary. The most important to the entrepreneur is that the
business plan is not end up in a drawer somewhere once the financing, has been attained and the
business launched.

There has been a tendency among many entrepreneurs to avoid planning. The reason often given
is that planning is dull or boring and something used only by large companies. This may be an
excuse, perhaps the real truth is that some entrepreneurs are afraid to plan. Planning is important
part of any business operation without which an entrepreneur is likely to pay an enormous price.

All one has to do is consider the planning done by suppliers, customers, competitors, and banks
to realize that it is important for the entrepreneur. It is also important to realize that without good
planning the employees will not understand the company’s goals and how they are expected to
perform in their jobs. Bankers are the first to admit that few business failures result from a lack
of cash but, instead the business fails because of the entrepreneur’s inability to plan effectively.

Intelligent planning is not a difficult or impossible exercise for the inexperienced entrepreneur
with the proper commitment and support from many outside resources, such as, small business
administration, federal information centers, banks, trade journals, libraries, university and
community colleges, the entrepreneur can prepare an effective business plan.

In addition, the entrepreneur can enhance effective implementation of the business plan by
developing a schedule to measure progress and to institute contingency plans. These control
procedures will be discussed further below.

1. Measuring Plan Progress

- During the introductory phase of the start-up, it is essential to the entrepreneur to

determine the points at which decisions should be made as to whether the goals or
objectives on schedule. Typically, the business plan projections will be made on a 12-
month schedule. However, the entrepreneur cannot wait 12 months to see whether the
plan has been successfully achieved. Instead, on frequent basic (i.e., the beginning of
each month) the entrepreneur should check the

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- profit and loss statement, cash flow projections, and information or inventory,
production, quality, sales, collection of accounts receivable, and disbursements for the
previous month. Company websites should also be assessed as part of this process. The
feedback is expected to be simple, but provide key members of the organization with the
current information in time to correct any major deviations from the goals and objectives
outlined.

2. Updating the Plan

The most effective business plan can become out-of-date if conditions change. Environmental
factors such as economy, customers, new technology or a competition and internal factors such
as the loss or addition and key employees can all change the direction of the business plan. Thus,
it is important to be sensitive to changes in the economy, industry and market which push you to
revise the business plan if the changes are likely to affect it.

Why Some Business Plans Fail?

Dear learner, as you know in your introductory part of management, plans alone can not
guarantee the success of a business enterprise. Action is needed to operate the organization on
the proper lines. A firm will not be successful merely because of plans. But planning immensely
helps in taking advantage of the opportunities created by rapid change. Though proper
preparation of business plan plays a great role for success, it is not an end by itself rather it is a
means to an end. However, a poorly prepared business plan can be blamed on one or more of the
following factors as stated by Histich and Peters (2008:221).

- Setting unreasonable and immeasurable goals

- Lack of commitment to the business from the entrepreneur side
- Lack of experience in business plan
- Lack of sense of potential threats or weaknesses to the business
- No customer need was established for the proposed product/ service.
Setting goals requires the entrepreneur to be well informed about the type of business and the
competitive environment. Goals should be specific and not so mundane as to lack any basis of
control.

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Additionally total commitment is required from the entrepreneur and his/her family to the
business in order to be able to meet the demands of a new venture. For instance, it is difficult to
operate a new venture on a part-time basis while still holding onto a full time position.

A lack of experience also will result in failure unless the entrepreneur can either attain the
necessary knowledge or team up with someone who already has it. Documenting the customers’
needs before preparing the plan is also expected from an entrepreneur. Because customers’ needs
could be identified from direct experience, letters from customers, or marketing research. Thus, a
clear understanding of these needs and how the entrepreneur’s business will effectively meet
them is vital to the success of the new venture.

Unit Summary

Business plan is a document to describe the future of the business. It describes all relevant
internal and external elements and strategies of a new venture. Aspects to be described in new
venture include the project, marketing, research and development, manufacturing, management,
critical risks, financing and milestone or timetables which help in demonstrating a clear picture
of what a venture is all about and where it is projected to go.

Business plan is very important both for entrepreneur and the financial sources to understand and
analyze all aspects of the venture.

The business plan will be prepared by entrepreneur consulting with lawyers, accountants,
marketing consultants and engineers and may be read by employees, investors, bankers,
suppliers, customers and consultants. Preparing business plan requires considering the following
three perspectives or viewpoints.

-Entrepreneur perspective is about the source of the venture or plan.

Who develops the venture plan?

-Marketing perspective is about the customers, it is customer oriented. Who will buy the
product or use the service.

-Investor perspective is about the source of sound financial projections for the venture. Who
will be a source of finance for the venture?

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The scope of the plan will depend on who reads it, the size of the venture, and the specific
industry for which the venture is intended. Additionally, the size, competition, and potential
growth of the market may affect the scope of the business plan.

Once a business plan is prepared, the next major challenge discussed in this part of the module is
presenting the plan. It is concerned with selling the business plan to potential investors. Finally,
some basic points about implementation of Business plan are included in the discussion. This
shows that planning alone is not suffice to create a new venture but it requires effective
implementation process following some control elements including, inventory, production,
quality, sales, disbursements and website controls.

Review question

1. Who is responsible to develop business plan?

a. What is a business a plan?

b. What perspectives should be considered during business planning?
c. Discuss some of the factors that affect the scope of a business plan in a new venture.
d. The two major aspects of marketing segment in a business plan are
_______________________________________________________________

________________________________________________________________

7. What activities force an entrepreneur to develop a business plan?

8. List some of the basic elements to be included in a business plan.

9. Show the consolidation of the steps of the business plan.

10. Why is the appendix section not mandatory to be included in the business plan?

11. Why some business plans fail?

3.3 Role of Agribusiness and Micro Enterprise in Economic Development

Dear learner, can you list down some of the role of agribusiness in economic development?

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Various indicators, such as the contribution to GDP, employment, and international trade can
measure the contribution of the agribusiness sector to the national economy. Moreover, the role
cal also be assessed from the contribution to food security and environmental sustainability.

1. Employment opportunity
Agribusiness is the largest employer in many nations. In US America, agribusiness
employs 17% work force in the nation. Similarly, agriculture alone employs 80% of the
working population in Ethiopia.

The developing world economy is highly dominated by agriculture and related business.
Moreover, small scale business dominate the agribusiness sector in most developing countries.
This business do not have enough capital to purchase sophisticated equipments and machineries
that can substitute labor. As a result, agribusiness employs most of the working population.

2. Contribution to GDP

Agribusiness contributes significantly to GDP of the developed, as well as the developing

nations. Its contribution is immense, especially, in developing countries where the economy is
dominated by agriculture. In Ethiopia , agriculture contributes to about 45% of GDP. Where as in
US America, the most industrialized nation in the world, agribusiness contributes about 16%of
the GDP.

3. Foreign exchange earning

Agribusiness is the major source of hard currency in developing countries such as, Ethiopia ,
whose economy is dominated by agriculture. The export of raw agricultural commodities
contributes to 90% of foreign exchange earning of the country. Of course, coffee takes the lion’s
share. Most of the exported industrial products are the product of the agribusiness system. The
export earning of the country is expected to increase in the future as a result of removal of trade
barriers in many nations.

4. Technological Advancement of the Nations:

The development of agribusiness can contribute to the science and technological
advancement of a country through importation of new technologies from abroad and
invention of new technologies and process through research. New technologies increase
efficiency of production, which will in turn increase the contribution of the system to
GDP.
5. The Role Agribusiness in Food Security

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Food security is tightly linked to social security, political stability and national security as a
whole. Weakness in the establishment of food security is easily transformed into various
forms of instability insecurity of the nation. Therefore, to develop strong food security is a
prerequisite of development.

In developing food security program, food can be procured through import. However, under
Ethiopia’s condition, having very large population size, consisting various ethnic groups with
their own culture and custom; to depend on import in the international market is highly risky.
Besides, demanding a relatively large foreign currency, you have also to face the tin market of
food in the international market, which is also changing due the changing condition, not to say
about the possible political unrest in the exporting country. Therefore, a strong food security
program having a strong not in the diversified food resources, local culture and local institutions
is included.

The balance between production and market demand for food can be used to measure the degree
of food security, in terms of food self-sufficiency.

Agribusiness development has a significant role to develop a strong food security. By developing
agribusiness based on the diversified biological resources of the country and increasing the
awareness of the people with respect to consumption pattern and nutrient balance, with due
consideration to the local culture and institution, it is possible to develop built-in and strong
food security system.

6. Agribusiness and environmental sustainability

At present, the challenge of the decreasing quality of the living environment is becoming the real
problem for all nations, the major concern of the world population. International and national
institutions have been developed having the task to monitor and control the degree of decreasing
the quality of the living environment, managed by the government, as well as by the private
organization. Agribusiness development has the potential to avoid and to improve the decreasing
tendency of the environmental quality through the following mechanism.

First: agribusiness development will open up broad-based economic opportunities. The

economic opportunities will affect the distribution of the population and their respective

activities, so that excessive population pressure in some regions and population shortage in
others can be avoided.

Second: agribusiness development is basically focused on the utilization of diversifies resources,

and hence will be able to maintain the existing biodiversity.

Third: agribusiness development based on biodiversity, has the capacity to utilize diversity of
plant species having the role as “the carbon Estate” to absorb the excessive CO2 emission,
reducing thereby “the green- house effect” the major cause of the increasing world temperature.

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Fourth: agribusiness development will generate products, which are biodegradable, so that they
can be decomposed using the natural processes. The degradable products can reduce over
dependence on petrochemical product, which is non-biodegradable.

3.4. AGRI BUSINESS FINANCING

Since 1985, Agro- Business Finance has provided a convenient source of crop financing for
customers. They’ve helped farmers and their input suppliers alike by providing farmers with
financing solutions at competitive rates. Ultimately, ABF continues to provide producers with
the opportunity to increase sales and manage receivables better and to create enhanced seasonal
cash flow.

With a distinctive and simplified financing process, customers deal directly with ABF employees
on a one-on-one basis. Unique to ABF is its ability to interact more directly and personally than
many banks can or are willing to.
ABF has built farmer financing programs that create value to the agronomy dealers they partner
with as well. They provide them with a competitive farmer financing program and assist in the
management of risk associated with extended accounts receivable.
OPERATING LOANS
ABF, has been supplying seasonal operating loans to grain producers in the Midwest for over a
quarter of a century. Our strong history supports our focus for the future — providing flexible
and competitive operating loans for your business.
Program benefits include:
 Quick local loan decisions
 Simple application process
 Customized loan terms
 Competitive rates
 Agriculture focused lenders
EQUIPMENT FINANCING
Our Equipment Financing program offers an array of equipment loans and leases for funding
agricultural equipment. Specialty equipment, trucks, trailers and vehicles may be eligible.
Multiple structures are offered. We customize lease and loan terms and payment schedules to
meet your needs.
Program benefits include:
 Financing of new and used agricultural equipment, including specialty equipment, trucks,
trailers and vehicles
 Flexible lease structures, offering opportunities to realize tax benefits
 Fixed rate loan options
 Fully pre-payable without penalty
 Quick application and documentation processes
FARM REAL ESTATE
Our Real Estate Financing program is designed for production agriculture. Land must have an
agricultural purpose and may include improved or unimproved property. A large variety of fixed

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and variable rate products are offered, including options for full-open and lockout pre-payment
structures.
Program benefits include:
 Competitive long term fixed and variable rate products
 Revolving Lines of Credit
 Annual, semi-annual, quarterly and monthly repayment terms
 Fully pre-payable and lockout product options
 On-The-Spot and traditional application processes, providing efficient turn-around and
friendly service

3.5. Alternative Business Organization Arrangement

Business organization, an entity formed for the purpose of carrying on commercial enterprise.
Such an organization is predicated on systems of law governing contract and exchange, property
rights, and incorporation.

Business enterprises customarily take one of three forms: individual proprietorships,

partnerships, or limited-liability companies (or corporations). In the first form, a single person
holds the entire operation as his personal property, usually managing it on a day-to-day basis.
Most businesses are of this type. The second form, the partnership, may have from 2 to 50 or
more members, as in the case of large law and accounting firms, brokerage houses, and
advertising agencies. This form of business is owned by the partners themselves; they may
receive varying shares of the profits depending on their investment or contribution. Whenever a
member leaves or a new member is added, the firm must be reconstituted as a new partnership.
The third form, the limited-liability company, or corporation, denotes incorporated groups of
persons—that is, a number of persons considered as a legal entity (or fictive “person”) with
property, powers, and liabilities separate from those of its members. This type of company is also
legally separate from the individuals who work for it, whether they be shareholders or
employees or both; it can enter into legal relations with them, make contracts with them, and sue
and be sued by them. Most large industrial and commercial organizations are limited-liability
companies.

3.5.1. TYPES OF BUSINESS ASSOCIATIONS

Business associations have three distinct characteristics: (1) they have more than one member
(at least when they are formed); (2) they have assets that are legally distinct from the private
assets of the members; and (3) they have a formal system of management, which may or
may not include members of the association.

The first feature, plurality of membership, distinguishes the business association from the
business owned by one individual; the latter does not need to be regulated internally by law,
because the single owner totally controls the assets. Because the single owner is personally liable
for debts and obligations incurred in connection with the business, no special rules are needed to
protect its creditors beyond the ordinary provisions of bankruptcy law.

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The second feature, the possession of distinct assets (or a distinct patrimony), is required for two
purposes: (1) to delimit the assets to which creditors of the association can resort to satisfy their
claims (though in the case of some associations, such as the partnership, they can also compel the
members to make good any deficiency) and (2) to make clear what assets the managers of the
association may use to carry on business. The assets of an association are contributed directly or
indirectly by its members—directly if a member transfers a business or property or investments
of his own to the association in return for a share in its capital, and indirectly if a member pays
his share of capital in cash and the association then uses his contribution and like contributions in
cash made by other members to purchase a business, property, or investments.

The third essential feature, a system of management, varies greatly. In a simple form of business
association the members who provide the assets are entitled to participate in the management
unless otherwise agreed. In the more complex form of association, such as the company or
corporation of the Anglo-American common-law countries, members have no immediate right to
participate in the management of the association’s affairs; they are, however, legally entitled to
appoint and dismiss the managers (known also as directors, presidents, or administrators), and
their consent is legally required (if only pro forma) for major changes in the company’s structure
or activities, such as reorganizations of its capital and mergers with other associations. The role
of a member of a company or corporation is basically passive; he is known as a shareholder or
stockholder, the emphasis being placed on his investment function. The managers of a business
association, however, do not in law comprise all of the persons who exercise discretion or make
decisions. Even the senior executives of large corporations or companies may be merely
employees, and, like manual or clerical workers, their legal relationship with the corporation is
of no significance in considering the law governing the corporation. Whether an executive is a
director, president, or administrator (an element in the company or corporation’s legal structure)
depends on purely formal considerations; if he is named as such in the document constituting the
corporation, or if he is subsequently appointed or elected to hold such an office, it is irrelevant
whether his actual functions in running the corporation’s business and the power or influence he
wields are great or small. Nevertheless, for certain purposes, such as liability for defrauding
creditors in English law and liability for deficiencies of assets in bankruptcy in French law,
people who act as directors and participate in the management of the company’s affairs are
treated as such even though they have not been formally appointed.

PARTNERSHIPS

The distinguishing features of the partnership are the personal and unrestricted liability of each
partner for the debts and obligations of the firm (whether he assented to their being incurred or
not) and the right of each partner to participate in the management of the firm and to act as an
agent of it in entering into legal transactions on its behalf. The civil-law systems of most
continental European countries have additionally always permitted a modified form of
partnership, the limited partnership,in which one or more of the partners are liable for the
firm’s debts only to the extent of the capital they contribute or agree to contribute. Such limited
partners are prohibited from taking part in the management of the firm, however; if they do, they
become personally liable without limit for the debts of the firm, together with the general
partners. English common law refused to recognize the limited partnership, and in the United
States at the beginning of the 19th century only Louisiana, which was governed by French civil

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law, permitted such partnerships. During the 19th century most of the states enacted legislation
allowing limited partnerships to be formed, and in 1907 Great Britain adopted the limited
partnership by statute, but it has not been much used there in practice. Another distinction
between kinds of partnership in civil law—one that has no equivalent in Anglo-American
common-law countries—is that between civil and commercial partnerships. This distinction
depends on whether the purposes for which the partnership is formed fall within the list of
commercial activities in the country’s commercial code. These codes always make
manufacturing, dealing in, and transporting goods commercial activities, while professional and
agricultural activities are always noncommercial. Consequently, a partnership of lawyers,
doctors, or farmers is a civil partnership, governed exclusively by the civil code of the country
concerned and untouched by its commercial code. No such distinction is made in the common-
law countries, where professional and business partnerships are subject to the same rules as
trading partnerships, although only partners in a trading partnership have the power to borrow on
the firm’s behalf Top of Form

3.6. Family business and Succession Planning

For most family and closely held businesses, planning for succession is the toughest and most
critical challenge they face. Yet succession planning can also be a great opportunity to maximize
opportunities and create a multi-generational institution that embodies the founder’s mission and
values long after he is gone.

The Family Business Institute assists family and closely held businesses in multi-generational
planning by helping them address issues related to not only the ownership succession but
management succession planning and leadership development as well.

88% of current family business owners believe the same family or families will control their
business in five years, but succession statistics undermine this belief. Only about 30% of family
and businesses survive into the second generation, 12% are still viable into the third generation,
and only about 3% of all family businesses operate into the fourth generation or beyond. The
statistics reveal a disconnect between the optimistic belief of today's family business owners and
the reality of the massive failure of family companies to survive through the generations.
Research indicates that family business failures can essentially be traced to one factor: an
unfortunate lack of family business succession planning.

Specific Services
Management Succession Planning

Management succession planning in the family company requires focus on the four key
departments present in any business of any size: administration and finance, operations and
customer fulfillment, sales, and marketing. When we think of management succession planning,
we're not talking about who will own shares or assets in the future; we're talking about who's

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going to do the dirty, thankless, and countless tasks which make the family business an asset
worth preserving in the first place.

Ownership Succession Planning

The current state of ownership succession planning among family businesses is decidedly mixed.
About two-thirds of family business owners report a good understanding of the amount of estate
taxes due upon their deaths, but about one in five have no estate planning at all! Over one in
three junior generation family business members have no knowledge of their senior generation's
transfer plans. The ownership succession planning issues that seem to be the most common areas
of contention or omission in family business succession planning are: 1.) Technical mistakes, 2.)
Planning in a vacuum, 3.) Leaving the business to the surviving spouse, and 4.) The challenge of
treating children equitably

Leadership Development

Leadership is often a murky and nebulous concept, but it is important. How many times in the
sports world have you seen a coach or manager fired and a new leader come in, take his place,
and with the same cast of characters produce far different results? Leaders in family and closely
held businesses are, as Reggie Jackson of the New York Yankees once described himself “the
straw that stirs the drink.” Leadership experts around the world can point to the quantitative
impact leaders make. Warren Bennis says, “Leadership accounts for, at the very least, 15% of
the success of any organization.” Afsaneh Navahandi says that leadership can account for up to
44% of a firm’s profitability. Researchers at the Wharton School of Finance concluded that
between 15% – 25% of the variation in a corporation’s profitability was determined by the
character of their chief executives. In a small study, 40% of the variation in the herring catch
among fishing boats in the North Sea depended on the leadership of the boat’s captain. Even
researchers attempting to debunk the power of leadership concluded that it accounts for a
minimum of 7% – 14% of a company’s performance! Leadership development in most closely
held businesses consists of on the job training (OJT). This is certainly one way to skin the cat;
however, keeping next generation leaders and manager in 80 hour per week production jobs
crowds out many other leadership development tools and techniques The Family Business
Institute augments traditional OJT with other leadership development initiatives to assure closely
held business leaders – irrespective of generation – they have the right team with the right skills
in place for future business success.

The Family Business Institute Difference

Our commitment to helping you achieve breakthrough success is absolute. Drawing upon our
unparalleled experience in working with family enterprises across virtually all industries and
business functions, we educate our clients about the need to utilize a comprehensive and
integrated approach for the benefit of their family business system. The Family Business
Institute differentiates itself by addressing not only the typical financial side of the family
business triangle, but also the other two sides which deal with operational and/or interpersonal

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Unit Summary

Business plan is a document to describe the future of the business. It describes all relevant
internal and external elements and strategies of a new venture. Aspects to be described in new
venture include the project, marketing, research and development, manufacturing, management,
critical risks, financing and milestone or timetables which help in demonstrating a clear picture
of what a venture is all about and where it is projected to go.

Business plan is very important both for entrepreneur and the financial sources to understand and
analyze all aspects of the venture.

The business plan will be prepared by entrepreneur consulting with lawyers, accountants,
marketing consultants and engineers and may be read by employees, investors, bankers,
suppliers, customers and consultants. Preparing business plan requires considering the following
three perspectives or viewpoints.

-Entrepreneur perspective is about the source of the venture or plan.

Who develops the venture plan?

-Marketing perspective is about the customers, it is customer oriented. Who will buy the
product or use the service.

-Investor perspective is about the source of sound financial projections for the venture. Who
will be a source of finance for the venture?

The scope of the plan will depend on who reads it, the size of the venture, and the specific
industry for which the venture is intended. Additionally, the size, competition, and potential
growth of the market may affect the scope of the business plan.

Once a business plan is prepared, the next major challenge discussed in this part of the module is
presenting the plan. It is concerned with selling the business plan to potential investors. Finally,
some basic points about implementation of Business plan are included in the discussion. This

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shows that planning alone is not suffice to create a new venture but it requires effective
implementation process following some control elements including, inventory, production,
quality, sales, disbursements and website controls.

Review question

1. Who is responsible to develop business plan?

a. What is a business a plan?

b. What perspectives should be considered during business planning?
c. Discuss some of the factors that affect the scope of a business plan in a new venture.
d. The two major aspects of marketing segment in a business plan are
_______________________________________________________________

________________________________________________________________

7. What activities force an entrepreneur to develop a business plan?

8. List some of the basic elements to be included in a business plan.

9. Show the consolidation of the steps of the business plan.

10. Why is the appendix section not mandatory to be included in the business plan?

11. Why some business plans fail?

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Chapter Four

Problems of Small Business Development

4.1. Policy Framework

 Identify the major problems of small businesses in Ethiopia

 Describe the role of financial institutions for small business development
 Understand the effect of management and related trainings on small business
 Understand the concept of marketing in small business

Small-scale industries have not been able to contribute substantially as needed to the economic
development particular 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 Ethiopian small business. small scale units do not have easy
access to the capital market because they mostly organized on proprietary partnership basis and
are of very small size. They do not have access to industrial sources of finance partly because of
their size and partly because of the fact that their surplus which can be utilized to repay loans and
negligible. Because of their size and partly and because of the fact limited profit, they search for
funds for investment purposes. Consequently, the approach money lenders who charge high rate
of interest hence small enterprises continue financial to be weak.

Small-scale enterprises find it difficult to get raw materials of good quality and at cheaper rates
in the field of production. Very often they do not get raw materials in time. As a result, these
enterprises very often fail to produce more, the techniques of production which these enterprises
have adopted are usually outdated. Because of their poor financial position they are not able to

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buy new equipment consequently their productivity suffers. Besides, many small business
enterprises are suffering with the problem of marketing their products.

It is only by overcoming all these constraints that small entrepreneurs can hope to make their
enterprises successful.

Some specific problems of small business development

Year after year, the major reasons that businesses fail is incompetence. The owners simply do
not know how to run the enterprise. They make major mistakes an experienced, well trained
entrepreneur would see quickly and easily side step.

The second most common reason business fail is unbalanced experience. This means owners do
not have well rounded experience in the major activities of the business, such as finance,
purchasing, selling and production. Because the owner lacks experience in one or more of these
critical areas, the enterprise gradually

4.2 Role of Institutions

Access to credit can play a pivotal role in economic growth. Banks and lending institutions
provide the services that allow people to save and invest available assets and resources, which
further supports and strengthens economic activity. Within underdeveloped communities, the
role of microfinance institutions provides the credit access and financial services needed to
develop income-earning businesses

4.2.1. MICROFINANCE INSTITUTIONS

Microfinance institutions fill a needed gap within the financial services industry by offering
small loans, or micro-loans, to people unable to access conventional loan services. Microfinance
institutions vary in size and function with some organizations focusing entirely on micro
financing, while others work as extensions of large investment banks. People living in under-
developed areas such as Latin America, Kosovo and countries within the Sub-Saharan region can
access needed financial resources through the services provided by microfinance institutions.

ACCESS TO FINANCIAL SERVICES

Within any society, financial services provide a means for people and businesses to obtain credit
and manage available assets on a continuous basis. Access to financial services enables existing
businesses to grow and provides the starting capital for starter businesses. Microfinance
institutions provide these services within communities that have limited resources and few
avenues for economic development. People within these communities can use microloans to
develop small businesses based on their existing talents and skill sets. Examples of small
businesses funded through micro financing institutions include food preparation, tapestries and
manufacturing clothing.

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MICROFINANCE APPROACHES

On average, loan repayment rates for micro finance institutions range around 97 to 98 percent,
according to the Developing World Markets news and reference site. This high repayment rate
results from the approach methods used by microfinance institutions when working within
communities. One approach uses a group method in which borrowers work within a group
environment that fosters educational and supportive interactions among members. The group
method also requires members to hold one another accountable for repaying loan obligations and
also holds each group member accountable for unpaid loans. Microfinance institutions also work
with another approach that uses self-help groups formed by government and non-government
organizations within each community. Self-help groups also function as a supportive
environment and can also open bank accounts under the group's name.

RELIABLE SUPPORTS

Microfinance institutions provide a reliable source of financial support and

assistance compared to other sources for financing. Sources operating outside the
microfinance industry typically form informal relationships with borrowers and
have no real legal or substantial ties with their customers. As a result, loan terms
tend to carry high costs with no guarantee that lenders will remain in one place for
any length. In contrast, microfinance institutions typically work alongside
government organizations and also have ties with larger global organizations. In addition,
microfinance institutions make modern technologies available to borrowers in the form of credit
cards, ATMs and mobile phone banking capabilities.

4.3. Management and Technical Training, Appropriate Technology

Marketing, Storage, Transportation Standards, Advertisement in
Small Business.

Another common cause of business failure is lack of managerial experience. The owners simply
do not know how to manage people. Besides, another common reason is lack of experience in the
line, that is, the owner has entered a business field in which he or she has very little knowledge.

Other common causes of business failure include neglect, fraud, and disaster.

Neglect: occurs whenever an owner does not pay sufficient attention to the enterprise. The
owner who has someone else manage the business while he or she goes fishing often finds the
business failing because of neglect.

Fraud: involves intentional misrepresentation or deception. If one of the people responsible for
keeping the business’s book begins purchasing materials or goods for himself or herself with the

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companies money, the business might find itself bankrupt before too long. Of course the owner
can sue the individual for recovery of the merchandize and have him and her sent to jail, but that
all may happen after the firm’s creditors have demanded payment for their merchandize and the
owner has had to close the business.

Disaster: refers to some unforeseen happening or ‘act of God’. If a hurricane hits the area and
destroys materials sitting in the company’s yard, the loss may require the firm to declare the
bankruptcy. The same is true for fires, burglaries, robberies or extended strikers.

Avoiding management traps

In a study reported by the SBA, ten firms that had failed during prosperous years were compared
to ten similar companies that had been successful during the same period. An analysis of the two
groups revealed a number of avoidable management traps. The following section provides ten of
the more specific managerial causes of small business failure, based on a study of business that
had failed.
Inadequate records: Nine bankrupt firms had inadequate records. One of them for example,
often had bid unsuccessfully on government contracts. The bids were consistently too high.
Unable to land any contracts this way, the company then hired a consultant who not only cost it a
lot of money but also involved a firm in a disastrous subcontracts. Unable to establish an
adequate record keeping system, however, the firm simply had no basis for estimating its costs
and correcting the problem. Another firm had a good product line but failed to keep revenue and
expense records. The partners never knew where they were in terms of finances. During the
bankruptcy proceedings, the accountants admitted they were unable to reconstruct even the
simplest form of income statements from the records they had found. In fact, the office records
consisted of piles of unsorted papers jammed in to an old-fashioned safe.
Expansion beyond resources: some of the firms had grown rapidly and their book keeping
systems were not designed to handle dramatic growth. In three cases management simply tried to
save money on its book keeping system by taking short-cuts all with disastrous effects.
Lack of information about customers: Half the unsuccessful firms lacked information about
their customers. For example, one company had been shipping goods to customers without
making credit investigations. As a result its receivable was in terrible shape. Most of the
accounts were 90 days or more in arrears. Additionally, one of its customers were bankruptcy
and had not made a payment in more than a year, and the company had continued to ship goods
to it.
Failure to diversity market: Three firms failed to diversify their markets and wound up selling
their goods to mere handful of customers. A loss of any one customer would have had a
tremendous effect on overall revenue. One company contracted all of its output to one buyer;
when that buyer cancelled the contract, the company went bankrupt.
Lack of marketing research: two firma undertook major ventures without conducting any
market research, while three adopted a rather simple solution to their marketing problem by
contracting their entire plant output to a single buyer. In all cases, changes in market conditions
left them in a very poor position.
Legal problems: one company tried to save money on legal fees. However, when long drawn-
out patent infringement proceedings became necessary, the company was ill prepared to deal
with them. Had the firm exercised foresight and obtained competent legal advice from the
beginning, many of these problems could have been avoided.

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Nepotism: in three instances favoritism towards family members helped cause the enterprise’s
failure. One of the most typical examples was the practice of carrying on the payroll family
members who received high salaries but contributed little to the overall running of the business.
Additionally, in certain cases, meddling by these family members in important business matters
resulted in sever financial setbacks.
One –person management: in three cases one-person management led to company failure.
This occurred in one instance when the individual who had built the firm from nothing began to
experience poor health and sold out to a group of investors. The investors did not realize the
man’s technical genius was the reason for company’s success. Without that, the business failed
with in a year.
Lack of technical competency: two companies suffered from a lack of technical competence.
One had been purchased by a group of investors who had little technical knowledge and lacked
the expertise for choosing a technically skilled vice president. The firms previous reputation
carried it for a while, and it had no difficulty landing a contract to supply gun parts. However,
the first two shipments were rejected because they did not meet the quality called for by the
contract. Eventually, the contract was cancelled, and firm went bankrupt. From this it can be
understood that technical competence is one of the success factor for small businesses.
Absentee management: one firm had a long period of profitable operation. Then it went through
a number of years of absentee management. The owner stayed away for long periods, and
operations gradually deteriorated. Financial records were neglected, and the bookkeeper failed to
make several years tax payments. Given such developments, the company failed.

4.3.1 Marketing in small business

It is all well and good having a product or a service idea, but will it prove to be a profitable
business?
Too many businesses set up without thinking about this essential question.
The answer revolves around the most important person in any business-the consumer. Marketing
is the process of matching the needs of the consumer to the capabilities and resources of the firm.
When John Egan was MD of Jaguar, he said:

Marketing is about making money from satisfied customers-without satisfied

customers there can be no future for any commercial organization.

Marketing, then, is about making profits by anticipating and meeting the needs of the customer.
First and foremost, though marketing is an attitude of mind about satisfying the customer rather
than a set of sales techniques, and to understand the customer you need to take what is called a
marketing perspective however, whilst the customer is the most important person is a business,
you need to be clear about what that term means. The customer is the buyer of the product or
service. This person may not be the dame person as the customer, or user of the product or
service.

Take, for example, an expensive pen. That is likely to be bought by a customer as a present for
some body else: the customer. Both the customer’s and customer’s needs have to be met.
Although customers’ needs should always be paramount, there are many situations where the
customers’ needs could take precedence.

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Understanding customer and customer needs and motivations is central to marketing for small
firms. Take as an example why people might buy a mundane item like a drill: they do not buy it
for aesthetic qualities; they buy it because that want to drill a hole, perhaps to fix something to
wall. If there happens to be a more efficient or easier way of making holes or fixing things to
walls, the drill manufacture will be in trouble.

The marketing mix

The starting point for understanding the full range of benefit an existing product or service has to
offer is to list the features and then to translate them into benefits by working out hard exactly
and then to translate in to benefits by working out exactly what they mean to the customer. The
frame work often used to do this is called the marketing mix or 4 ps:

Product(service)
Place
Promotion
Price
Each element of the marketing mix is unique for every business. Indeed the development of such
a unique mix is the aim of the marketing strategy of the business.

Product (service)
This is often the heart of the marketing mix. However, the product or service must not be straight
jacket constraining that mix. It must be flexible and capable of adoption to the changing needs of
the customer.

It is always important to know why customer buy products and what particular features and
benefits they value most. Remember they buying a package and, among many other elements,
for any product or service that might include:
 Design and technical features
 Performance
 Quality
 Range(size, color etc)
 Maintenance and running cost.
 Safety
 Before and after sales service
 Pollution and environmental characteristics
 Product availability
 Image (fashion)
Even a company selling products will have a strong service element to this component of the
marketing mix. Indeed personal service is a vital way that any small firm can differentiate itself
from larger competitors. That personal service and the personal relationship built up with
customer is something that large firms find it difficult to replicate and offers one obvious area in
which small firms have a competitive advantage.
‘Relationship marketing’ may be fashionable with large companies now, but it is something that
small firms have been practicing for a long time. The element of personal service is one reason
why it is sometimes claimed that there is a 5th p: PERSONNEL.

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This principle applies to whole range of activities. Take as an example medical general practice.
Here the core clinical activities include provision of primary health care, emergency visit, minor
surgery, health clinics, etc. However, service surrounds these core activities and that extends
beyond the consultation itself, perhaps in to the area of follow up prescription.
Indeed many surveys have shown that patients are rarely dissatisfied with the core clinical
activity of a practice. Their main complaints, the state of are about waiting times, delay in
obtaining complaints are about waiting room. These are often things that the doctor considers of
little importance but become major issues for the patients, particularly when they may not be in a
position to distinguish the core activity of one practice from another.

When translating the features of both ‘the core product’ and ‘the service’ element that
accompanies it in to benefits, you may wonder whether they are real benefits of value to the
customer.
The more real, valued benefits that a firm offers, the more likely it is to attract buyers and
convert them in to satisfy customers who may return for a repeat purchase. This also explains
why customers may prefer a particular supplier of an apparently identical product, despite the
fact they are more expensive than rivals –the other benefit offered, such ass service, add up to a
more attractive and valued benefit package.

Place

The place element of the marketing mix is about getting the goods or services to the right place
at the right time for the customer. For the shop that means location, frequently the most
important element of the mix for them. For other businesses it is about physical distribution
(moving goods)and distribution channel(which out lets to use).
Physical distribution is concerned with transportation.
Should a small firms use vehicles or the train?
Should it use its own vehicles or hire a carrier?
How frequently should it deliver? these are all decisions related to distribution and they are
not necessarily best made using the simple criteria of cost minimization. You need to think what
your customer values and might therefore be willing to pay for. Distribution channel is
concerned with the out-lets you use for selling to customers. Ideally you would seek to have
channels that give you maximum control at the most reasonable cost.

However, remember that the choice of distribution channel could create a very real competitive
advantage for you. Many small firms stick to the distribution channels they have traditionally
used or know best. In doing so they may be losing out on new market opportunities. It pays to
think creatively about all elements of the marketing mix.

Promotion
This is concerned how well a firm communicates its sales message to existing and potential
customers. When products or services are very similar, this is often one of the few ways that they
can be differentiated from the competition.

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Promotion starts with the image the firms puts over. In turn this starts with the company name
and logo and all the general materials like cards and letterheads. But it extends far further in to
the ambience of accommodation and the overall style of any promotion undertaken by the
company.

The body shop is the company we shall look at in more detail later. Their distinct ‘green’ shop
front and simple interiors is a part of a carefully cultivated green image; use of natural
ingredients in their products, concern for environmental and human issues, minimal use of
packaging, recycling and waste policies, etc.

There are many ways of promoting a business. When a company promotes its products and
services directly to potential customers it is called direct promotion. Often this is undertaken
though the sales force. At one extreme this includes direct face to face selling. However, it also
includes other promotional techniques such as telephone selling, direct mail, exhibitions, and
specials demonstrations.

On the other hand, indirect presentation is concerned with the mass techniques of
communication. One of these techniques is advertising, which seeks to inform, persuade and
reinforce messages to existing and potential customers. When a business enterprise
Describe it as an expensive way for one person to talk to another. There are many ways you can
choose from and spend money through, for example, the press, magazines, journals, cinemas,
TV, radio, posters, leaflets, classified advertisement, gifts, sponsorship, hoarding, etc, not all are
expensive, but in an ideal world, face to face selling is probably more effective and cheaper. For
this reason alone many small firms choose not to use advertising extensively. Body shop, for
example, claim never to have advertised since the first shop was opened in 1976 to the present
day(1993);indeed to do so would be somewhat out of keeping with their image. On the other
hand, Dyno-Rod the drain and pipe cleaning franchise rely heavily on advertising in yellow
pages, local newspapers, etc.

Most small firms start out relying heavily on personal selling, but as they grow the real cost of
this activity become more apparent. However, it is important that advertising campaigns are
properly cost and planned in advance. Any advertising needs to address five questions:
1. who is aimed at?
[Link] should it say?
3. how should be message be communicated?
4. who should prepare the advertisement?
5. how will the results be measured?

To answer them requires the thorough understanding of the customers and the benefits they are
seeking from the product or service. The message should stress benefits, not features. In
choosing a medium, one that best presents the product or service benefits to your target customer
at the lowest cost per customer would be the most appropriate. All of which means that firms
often need help to use advertising effectively. However, even if an advertising agency is
employed, the results of the expenditure still need to be measured.

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Public relations, or PR, is a very good way of getting publicity without paying for it. Most firms
have newsworthy things happening with in them, such as contracts won, new plant or
equipment installed, expansion plans, new development, awards or even local charity work. if
they issued a press release there is a good chance that at least the local or trade press might carry
the news. The big advantage of this sort of publicity is that it is ‘editorial’ rather than
advertizing and therefore has more credibility.

Public speaking, writing articles for journals, conference participation and mounting seminaries
can be just as effective. High-tech components focus its efforts on getting engineers to specify its
components through direct selling and extensive PR than advertising.
The PR is concerned with:
 Writing articles for trade and professional journal,
 Mounting seminaries, and
 Speaking at conferences

When published, the articles are used by the company in its own promotional material. In this
way it gains respect and credibility. The staff are encouraged to speak at conferences and
meeting.

Another form of indirect promotion is the sales promotion. This is essential a short term
campaign to influence customers to buy more or to motivate your sales force to sell more. There
is a wide range of sales promotions offering money, goods or services as inducements. The
essential element is that it is intended to give a short-term boost to sales.

Price
Pricing is, of course, an important part of the marketing mix. To many small firms, however,
compete primarily on price simply because other elements in the marketing mix are
insufficiently from their competitors. However, price is more usually a barrier to sales rather than
a positive inducement. After all, people till buy bottled water when they could have tap-water
free. Clearly there are reasons for this related to the other elements of the marketing mix. Studies
have shown that the firms most likely to survive, particularly in times of recession, are those that
do not compete primarily on price and are able to sustain a higher margin.

The price charged for a product or service ought to reflect the value of the ‘package’ of benefits,
to the customers. Often the value to the customer for a product or a service can be different in
different circumstances. Take, for example, plumbing work. The value to be customer of this
work is far higher where there is a leak in the house and furniture and carpets are in danger of
being destroyed or the house has no water at all, than when routine plumbing work needs to be
done. This reflects it self in the price that can be charged for ‘emergency’ call –out work.

May firms, of all sizes, use ‘cost-plus’ pricing formula with this approach you simply add up all
the costs and add on a margin. The option of pricing high or ‘skimming’ may seem strange at
first. Higher price implies lower volume of sales, unless you are able to offer something that is
uniquely different from the completion and highly valued by the customer.

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The price charged out to reflect what the market will bear for that product or service. Normally,
the market bear a range of prices, reflecting different marketing mix offerings. The final decision
on pricing, then, is a question of judgment reflecting the value of that mix to consumers. It is
worth remembering, however, that any firm can be cheap, but not all firms can offer a better
product or service.

The important thing about the marketing mix is that is consistent. There is n point in having a
high-quality product if that is not reflected in other elements of the mix. If you have cheap
packing, for example, customers will infer certain things about the product itself from that
packaging. Similarly customers may will not believe that a high-quality product could be offered
at a low price, and that could lead to lower sales. The whole marketing mix is only as strong as
its weakest links. Elements of marketing mix are summarized in figure below.
Product place
 Design retails/ whole sale/ direct
 Quality mail/telephone order
 Specification distribution
 Materials delivery frequency
 Packing location
 Before/ during / after sales service

Promotion price
Product/service price
 Image payment terms
 Face- to face selling discounts
 Telephone selling service and spares price
 Exhibitions
 Special demonstrations
 Advertising
 PR

4.4. Adding Value to agricultural products, advertisement

Value-added agriculture refers most generally to manufacturing processes that increase the
value of primary agricultural commodities. Value-added agriculture may also refer to increasing
the economic value of a commodity through particular production processes, e.g., organic
produce, or through regionally-branded products that increase consumer appeal and willingness
to pay a premium over similar but undifferentiated products.

This concept has gained currency in the small farm policy debate, in response to the concern that
the farm value of the consumer food dollar continues to decrease. Value added agriculture might
be a means for farmers to capture a larger share of the consumer food dollar. Examples include
direct marketing; farmer ownership of processing facilities; and producing farm products with a
higher intrinsic value (such as identity-preserved grains, organic produce, hormone-free beef,

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free-range chickens; etc.), for which buyers are willing to pay a higher price than for more
traditional bulk commodities. Value-added agriculture is regarded by some as a significant rural
development strategy. Small-scale, organic food processing, non-traditional crop production,
agri-tourism, and bio-fuels development are examples of various value-added projects that have
created new jobs in some rural areas.

References

Abbot J.C (1988). Agricultural business processing for development, Growr publishing Co. UK
publications, UK Johanson D (1982). The business of farming. A guide to farm business
management in the propics. MacMillan publishers, London

Haimes M and Davis R(1987). Diversifying the farm business: a practical guide to the
opportunities and constraints, BSP professional books, UK

University of Swaziland, kwauluseni(1993). Small Business Development and Economics

transition: a case of south Africa, proceedings from regional conference on small business,
faculty of commerce

Azhar Kazmi, Business Policy, Tata McGraw Hill publishing Company Limited New Delhi,
India, 1997.

Donald A. Ball and Wendell H. Mc Culloch, Jr, international business, 4th ed, Rechard [Link],
Inc, 1990

D.R Stocks, small business management An Active learning, approach, Dp publication Ltd,
London, 1992.

Hailay Gebretinsae, introduction to business, Mekele Business College, 1997

Hailay Gebretinsae, Entrepreneurship and Small Business Management, 2003.

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