Chapter Two

Small Business: Vital Components of

the Economy
 Introduction
• What is Small Business?
• Specifying any size standard to define is necessarily
arbitrary, because people adopt different standards for
different purposes.
• A business may be described as ‘small’ when compared to
large firms, but “large” when compared to smaller ones.
• There are two approaches to define small Business. They
are:
 By some measure of size/Size Criteria/
 Using an economic /control definitions
 1. Size Criteria:
• Size refers to the “Scale of Operations”
• Some Criteria are applicable to all industrial areas, while others only to certain
types of business.
• Examples of criteria used to measure Size are:
– Number of employees
– Sales Volume
– Asset Size
– Insurance in force
– Volume of deposits
– Total Capital Investment
– Total Investment in Plant and machinery
– Volume /Value of Production
– A combination of the Above
 The best Criteria in any given case depends upon the users “Purpose”
 Cont’d……………………….…
• To provide a clear image of the small firms, the following
general criteria for defining a small business are suggested:
 Financing of the business is supplied by One Individual or a
small group
 Except for its Marketing Function, the Firm Operations are
Geographically “Localized”
 Compared to the Biggest Firms in the industry is Small
 The number of employees in the business is usually fewer
than 100
• However, some small firms fail to meet all the above standards,
example, Small Executive Search Firm(Help corporate clients
recruit manager from other organization-May Operate in many
section of the country
 2. Economic/Control Criteria
• Size does not always reflect the true nature of an enterprise.
• The economic or control definition includes
– Market Share
– Independence
– Personalized Management
• All should be satisfied to rank a business small
1. Market Share:
• X-tics of Small business market: It is not large enough to
enable it to influence the Price of National quantities of Goods
sold to any significant extent.
 Cont’d……………………….…
2. Personal Service Firms/PSF/
• Rely on “Unique Skills of their founder or Key
employees”
• The business is the person and successions are
unlikely unless a son or daughter develops
comparable skills.
• E.g. Golf Professionals, interior designer and
freelance writers, software development, business
consulting, office system networking
 Cont’d……………………….…
3. Franchise
• Created by contract. An individual Receives “Specific help and
advantages in exchange for “Franchise fee” and A percentage of
sales.
• Individual who buys a franchisor = Franchisee and those who
sell franchises=Franchisor
• Franchisor
– Develop a network of income producing enterprises
– that share a common name, use common material and sell similar
product service
 The Franchisee May Receive: Financial Help, training, guaranteed
supplies, a protected market, technical assistance(site selection,
purchasing, accounting, and operation management) e.g. McDonald
Significance and Role of Small Business
• SB have a similar economic contribution like big
business. However, they possess some unique
qualities:
1. Job Creation:
– The energy, creativity and innovative capability
of small business owners create job
opportunities
– As the population and economy grow SB must
provide many new job: People argue that small
must produce the “Lion Share of the New Jobs”
 Cont’d………………………...
2. Introduce Innovations:
 SB have the ability to innovate and bring Significant
Changes and Benefits for Customers
 Have the capacity to Provide “Fresh Ideas and Have
greater Flexibility to change”
3. Stimulate Economic Competition
 In Competitive Situation  Individual Business person
Driven by self-interest is motivated to act  Socially
Desirable manner.
 It is competition  that act Regulator to Transform
 Selfishness into Service
 Cont’d……………………….
4. Aid Big Business:
 Some functions are Expertly performed by SB which
contribute for the success of larger ones/Advantage of
specialization/
 Two functions that SB can perform very well than big
business/Benefits of Outsourcing/
 Distribution:
Supply: SB act as suppliers and subcontractors
Example, General motor purchase goods and service
from more than 37,000 small business(3/4 of them
employee < 100 persons)
 Cont’d……………………….
5. Produce Goods and Services Efficiently
• The efficient size of business varies with the industry:
example, big business is better in manufacturing
automobiles but that small business is better in
repairing them.
 Steps in Setting a Small Business Unit
1. Identify and Evaluate the Opportunity
 Opportunity Identification
 Is a process where Entrepreneur discover opportunity for new venture
 Constantly looking for a need and opportunity to make a better
product
 Source of business opportunity: consumers, business
associates, distribution channels, technical people
Evaluation process involves:
 Looking at length of opportunity
 Real and perceived value
 Risks and return
 Does it fit personal skills and goals
 Differential advantage in its competitive advantages
 Cont’d……………………….
 Better to understand the cause of the opportunity: is it technological change,
market shift, government regulation or competition. Resulting opportunity
have a different “Market Size and time Dimension”
2. Develop a business plan:
Businesses plan is the description of the future direction of the business. A good
business plan must be developed in order to exploit the defined opportunity.
This is perhaps the most difficult phase of the entrepreneurial process.
It’s uses include:- developing opportunity, determine the resource required,
successfully manage
3. Determine the resource required:
 Appraisal of entrepreneurs present resource
 Critical Vs Helpful resources
 Looking for alternative suppliers of resource
4. Mange the Enterprise
 Operational problems of growing enterprise
 Good management style and structure
 Determining key variable for success
 Causes for Small Business Failure
Many small business firms cease operation. Why?
a. Incompetence: Not knowing how to run the enterprise
b. Unbalanced experience: not having all round
experience in major activities of business: finance,
purchasing, selling and production,
c. Lack of managerial experience
d. Lack of experience in the line: very little knowledge
of business field
e. Neglect
f. Fraud
g. Disaster
 Cont’d………………….
The following are specific managerial causes of small business
failure
• Inadequate records- unable to establish an adequate record
keeping system.
• Expansion beyond resources
• Lack of information about customer
• Failure to diversify market
• Lack of marketing research
• Legal problems
• Nepotism - favoritism toward family members
• One person management
• Lack of technical competence
• Absentee management: the owner stayed away for long period
 Small Business Success Factors
1, choice of Business
 Why this business?
 Passion and love for the business matters most!
2, Education and Experience
 The best candidate for success are those who have adequate
education AND Experience.
 Identify the area of deficiency then acquire the skill you don’t
have
3, People
3.1. Internal team: founders and key employees
 Effective functioning of the team
 Ability to cope up with dynamic nature of human: Winning strategy
are built on person or team. Success often is the result of
intangibles  desire, spirit, courage
 Cont’d………………………….
3.2 External Team: Paid Professionals.
3.3 Connections or Network:
Network provides access for more intangibles
4, Creativity in Management:
 Every Small business needs = Creative influence of
an Entrepreneurs + Stead Hands of a manager
 Some entrepreneurs are not good managers and
Some excellent managers don’t have creative bones
 Creativity help to maintain the competitive
advantage
 Cont’d…………………
5, The Industry
 High Potential Intuitive:
 high potential industry is emerging or has not spend
much time in the market
 Now a days Technology industry fits this profile
 HPI offers low capital investment and enable
operation with small number of employees
 Low Potential Intuitive:
 Its best day is almost over.
Such Industry are Capital and Labour Intensive and
Are highly Specialized
 Cont’d……………………….
6, Records
• It is one area education trumps experience
• Collecting Information: financial statements,
customer records, sales performance, service
levels and other information.
7. The Corridor Principle:
Doug: defines the Corridor Principles “the concept
where an entrepreneurial venture may significantly
change focus from the venture’s initial concept
through a continuous response to the market and
the desire to optimize profitability.
 Cont’d………………………….
Doug puts the Corridor Principle last because the best
way to adhere to it is to have the other six factors
adequately covered. No matter what business you're
in, you need to be operating with what the three-
Strategy Principle:
The current strategy - the one you're in the
marketplace with right now.
The next strategy - the R&D is done and it's on the
shelf ready to deploy when the current strategy plays
out.
The quantum leaps strategy - the one you're
investing in today so it's ready to follow #2.
 More on Key Success
Factors
1. Sell Each Unit at a Profit
• Evaluate each and every product: to Determine if you are
selling them profitably
• Identify how to make current sales Profitable
– Reducing cost of production
– Increasing it’s price
2. Continue to Reduce Overhead Costs
• It should be a continuing objective for a business. Cost
Mechanisms:
– Evaluating Insurance needs,
– Reduction of reliance on outside consultant and service
providers
– Cutting down unnecessary supplies and equipment
 Cont’d……………………………
3. Develop New product Line:
• Maintain the high quality of existing products
• Product Choice - Response to the needs of your
customers
• Customers: Surveys or Direct Interaction- To find
out what items the need and expect
4. Find and Retain High-Value Customers
• 80-20 rule of business states that: 80% of your
business will come from 20% of your customers
• Hence, it is critical your exert maximum effort to
ensure that you retain the business of your top
customers
 Cont’d………………………………
5. Create and Maintain the highest level of
Customer Satisfaction
– Important Success Factor – Provision of Best
service to Customers
Any Success Factor Must Encompass: Important
area of business
 Finance, marketing and product Development
Sales and customer service
Human resource
 Problems in Ethiopian
Small business
1. Lack of Adequate finance and Credit
 Don’t have easy access to Capital Market mostly
because
 They are organized on proprietary partnership
 They are very small size
 Don’t have access to Industrial source of
finance
 b/c of their size
 b/c their surplus can be utilized to repay loans
are negligible
 Cont’d………………….
2. Production
Difficulty of Getting raw material of good
quality and at cheaper rate in time
Hence, they fail to produce Goods in: Requisite
Quantities, of good quality and of a low cost
Outdated Techniques of Production
Poor Financial position  Unable to buy new
equipment  Productivity suffers
3, Lack of Market Outlets/Problems of marketing
their products
 What is Basic Business Idea/BBI/?

• BBI: It is logical to think of a goal for the unit

in “Long Run” rather than to look for
“Immediate tomorrow”
• This Long term thinking is called: BBI

BBI

Product Line

Product Range

Product
 Cont’d………………………………
 Business person Should think of
 Long term goals and Profit when they start a business
 BBI  Is to meet the “Broadest needs of the
customers and it has long life (from 5- 50 years).
It facilitate  Choice of product.
Product line:
It consists of different “Families of Product”
Example a unit with “Basic Business Idea” of
Packaging Can manufacture the following groups of
product: glass bottles, plastic package, metal package,
paper package
It is relatively narrow and has a shorter life
 Cont’d………………………………..
Product Range
• It includes the different size of the product within the
product line.
• E.g. different size of glass bottles can be manufactured
 BBI
facilitate choice of the product and
 allow diversification and expansion to be possible
In dynamic situation one should make sure that BBI
 Has the ability to generate quick returns
Has the ability to permit quick changes in the product
 Cont’d………………………………………
• To be successful in business
Consistently watching the opportunities
Be sensitive to the market changes
Watch DD and SS
Study consumer behavior
Source of New Ideas
1. Consumers
 Final focal point of the idea for new products/service
 Informal monitoring of potential idea & needs or
formally arranging for consumers: opportunity to
express their opinion
 Cont’d……………………………………
2. Existing Companies
Formal method of monitoring existing competitors
products and service: may result in
New ways of to improve the offering that result in
new product
3. Distribution Channels
Good source of new idea  Familiarity with the
market needs
They may
Suggest for new product/ help to market the new
products
Suggestions like: Color or size
 Cont’d………………………………………..

4. Federal Government
Files in Patent Office contains valuable new
product or service possibility  Can suggest for
new marketable product ideas
New product idea Response to Government
regulations
5. R and D
Personal or Corporate R and D
 Methods of Generating Ideas
1. Focus Group:
 Group of individuals providing information on a
structured format.
 A Moderator leads a group of people
 An open and in depth discussion: rather than
“Simply asking questions to solicit participant
response”
 The moderator focuses the discussion in either
Directive or non-directive manner
 Useful for both
 getting new idea on existing product or
Screening idea/concepts
 Cont’d ………………………………………………..

2. Brainstorming
 Used for “Creative problem solving and Idea
generation”
 Unstructured process to generate all possible idea about
a problem
 A good brainstorming starts with a problem of
statement
 Four Rules of this method are:
 No criticism is allowed
Wilder ideas are encouraged
 Quantity of idea is desired/Greater idea-higher change of
getting useful idea/
Combination and improvement of idea are encouraged
 Focus group Vs
Brainstorming
Focus Group Brainstorming

Purpose Improve Existing Ideas Generating Ideas

Need A need to study an A need to solve a problem

existing idea,
solutions/process

Condition Idea, solution or process A problem exist

exist

Person Running the Show Skill Moderator Facilitator

 Cont’d………………………………..
3, Problem Inventory Analysis
It is similar to focus group to generate new
product ideas
Difference: Rather than generating new idea
themselves, consumers are provided with a list of
problems in general product category.
Results should be viewed critically
Since they may not reflect a new business
opportunity
It is a method of obtaining “New Idea” and
solutions by focusing on problems
Definition of Industry and Small Scale Industry

Industry: An institution where

 Raw material is purchased from suppliers,
 converted into a finished product using machinery and labour,
 and sold to buyers.
Conversion of raw material mean
o Changing size, shape, chemical properties and assembling
different parts
An industry
o Is able to carry out function of buying, manufacturing, and
selling its products with the use of an organization
o Organization: collection of people with different skills
coordinating various functions involved
 The process of manufacturing a product
o The process has

A. Store Raw B. C. Selling

Seller material and Finished Finished Product
Buyer organize HR Product Product
and
Machinery
o Industry is Visualized on the basis of
strength or competitive advantage in
one of areas- A, B,C
 Basis of Classification
1. On the basis of Size
o Industry are classified as Heavy, Medium or Light
depending on the amount of Money invested.
2. On the basis of “What it Makes”
o Industry on the basis of the product: Electronic
industry, machine tool, Shipping Industry
3. On the Basis of Market
o Industry Making Consumer products: Food,
Garment
o Industry that meets the needs of other industry
 Cont’d………………….
4. On the basis of Type:
a. Manufacturing Industry: Convert Raw material
into Physical property (size, shape)
b. Process Industry: Raw material undergo change
in size through chemical process
C . Conversion Industry: Raw material undergo
change in size and shape by simple work like
cutting, assembling. example, cartons
d. Service Industry
Offers different service
 Chapter Three

Developing a Business Plan

 The Concepts of Business Plan
o To start a business
 must first have an idea
 Next devise a business plan to guide planning and development.
 Finally, decisions must be made as
o to form of ownership,
o the financial resources needed, and
o whether to buy an existing business, start a new one,
or buy a franchise.
 Meaning and Need for Planning
• A key element of business success is a business plan.
• business plan a meticulous statement of the rationale for
the business and a step by step explanation of how it will
achieve its goals.
• The business plan should
– include an explanation of the business,
– an evaluation of the competition,
– estimates of income and expenses, and other information.
– It should establish a strategy for acquiring sufficient funds to
keep the business going.
 Cont’d…………………….
• Planning is really nothing more than
decision making, that is, deciding what to
do, How to do it, and when to do it.
Business Plan
• It allows to crystallize ideas and
• to think through the problems they will face, before
they have to cope with them.
• It allows set aims and objectives and thereby set
performance std.
• immediate importance - act as a vehicle to extract
finance.
 Why a business plan?
• It forces the prospective company to systematically think
through their business, and make it powerful - focus.

• It gives an overview of what resources and capabilities will

be needed and show where there are important “gaps”.

• It serves as a communication tool for various stakeholders.

• It simulates the “real” case

• Forms a basis for the realization of the business idea

 The purpose and importance of a business plan
Business plan calls for entrepreneurs to anticipate:

The potential market for products or services

The potential costs of satisfying that market.
The potential pitfalls in organizing operations.
The early signals of progress or setbacks.
 Who Reads a Business Plan
Internal Audience What are they Looking for

Company Founders and Internal

• They write the business plan
Management Team
• Able to go through every aspect of the
business

Rank and file employees

• Look for clear description of what the
entrepreneurial venture intend to achieve
• Make Sure that they are doing things
consistent with objective

Board of Directors
• Establish Performance standard
 Cont’d………………………
External Audience What are they looking for?

Potential Investors • Evidence for strength of business

Opportunities
• quality of management
• info on return on investment

Potential Bankers • Interested how and when money loaned

to start up will be repaid
• Collateral available to secure the loan

Potential Alliance partners and major • Are reluctant to go business with

customers unknown companies.
• A convincing business plan can help
lessen their doubts.
 Suggested steps in developing a business plan
1. Make the commitment to go into business for yourself
2. Analyze your strengths and weakness paying special attention to your
business experience, business education, and desires that is why should I
be in business for myself?
3. Choose the product a service that best fits your strengths and desires
– What need will my product or service fill?
– Product USP (unique selling proposition)
– Do’s and Don’ts of product / service to customers
4. Market research
– Description of market to be served
– Market size and segments
– Market trends
– Customer – type and locations
– Competition – strengths and weaknesses
– Sales forecast
 Cont’d……………………………..
5. Marketing Plan 7. Organization and Management
– Overall marketing strategy Legal form of business
– Channels of distribution Managerial organization – roles and
relationships
– Personal selling
Key management personnel
– Advertising & Promotion Board of directors
– Pricing
– Service and warranty policies
6. Operations
– Location
– Facilities
– Raw materials
– Inventory Control
– Quality Control
– Production Control
– Staffing
– R&D
 Cont’d………………………………..
8. Financial Plan 9. Write a letter
– Initial financial requirements summarizing your
– Profit and loss forecast business plan,
stressing its purpose
– Cash flow forecast
and its promise.
– Break even analysis
– Projected source of funds
• Friends
• Mortgaged property
• Family
• Personal savings
• Bank loans
– Projected Balance sheet
– Risks and contingency plans
 Business Plan Outline:
Cover Page
Table of Content
1. Executive Summary
a. The Opportunity:
 The problem to solve or need to be filled
b. The Description of the business:
 How the proposed business solves the problem or fills the
need
c. The competitive Advantage
 Description of the business model
d. The Target Market
e. The management Team:
f. Financial Projections: The amount of capital needed, and what the capital will
be used for, if the plan is going to a potential investor
 Cont’d………………………
2. The Business:
a. The Opportunity: The problem to be solved
b. The description of the Business
 How the proposed business solves the problem
 Brief company history or background
 Company Mission or Objectives
c. Competitive Advantage
 Description of the business model
 How the business will create a sustainable competitive
advantage
 Cont’d……………………
3. Management Team
• Management Experience, mgmt ability, technical expertise
• Number of BoD, composition of the board
• Key professional Service providers: Law firm, accounting firm
and business consultants
4. Company Structure, Intellectual Property, and Ownership
• Organizational structure: Organizational chart/Description of
organizational structure
• Legal structure: Legal form of the organization, ownership
structure of the business,
• Intellectual property: Patents, trademarks, and copyrights applied
for or approved
 Cont’d…………………
5. Industry Analysis
A. Industry trends, industry size, industry attractiveness (growth,
mature, or in decline), Profit Potential
B. Target Market: Description of the target market
c. Competitive position within target market: Competitive analysis
6. Marketing Plan
a. Product Feasibility and strategy: product strategy, concept
testing, usability testing
b. Pricing strategy
c. Channels of distribution, promotion and Advertisement
 Cont’d…………………..
7. Operations Plan
A. Method of production or service Delivery
B. Availability of qualified labor pool
C. Partnership: Types and purpose of partnership
D. Quality control
E. Customers Support
 Cont’d…………………
8. Financial Plan
a. Capital requirement in coming 3 to 5 years:
source and use of funds
b. Overview of Financial Projection: Income
statements, cash flow projections, balance sheet,
Payback and Exit strategy (If there is a plan to go
for potential investors)
9. Critical Risk Factors:
– Management, marketing, financial and operation risks
– Intellectual Property Infringement
– Other risk has to be highlighted in the documents
 Cont’d……………………
10. Appendix: Supporting
Documents
Resumes of founders and key
employees
Picture of product prototypes
Other documents: Patent
/Copyright/Trademark certificate