CHAPTER TWO

SMALL BUSINESS
MANAGEMENT

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 2.1. Concepts and definition of Small Business
2

Specifying size and standard to define small business

is necessary because people adopt different
standards for different purposes.
For example, legislators may exclude small firms
from certain regulations and specify ten employees
as the cut-off point.
Moreover, a business may be described as “small”
when compared to larger firms, or “large” when
compared to smaller ones.

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For example, most people would classify independently

owned gasoline stations, neighborhood restaurants, and
locally owned retail stores as small business.
Similarly, most would agree that the major automobile
manufacturers are big businesses.
And firms of in-between sizes would be classified as
medium on the basis of individual viewpoints.
There are two approaches to define small business. They
are:
1. Size criteria
2. Economic/control criteria.

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1. Size Criteria
Even the criteria used to measure the size of
businesses vary.
Size refers to the scale of operation. Some criteria are
applicable to all industrial areas, while others are
relevant only to certain types of business.
Examples of criteria used to measure size are: number
of employees, volume and value of sales, asset size,
volume of deposits, total capital investment,
volume/value of production, and a combination of
the stated factors.
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Even though, number of employees is the most

widely used yardstick, the best criterion in any given
case depends upon the user’s purpose.
This size criteria based definition of SMEs varies
from country to country.
All over the world, number of employees or capital
investment or both has been used as the basis for
defining SMEs

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Using capital as size criteria, Ministry of Trade and

Industry of Ethiopia adopted official definition of Micro and
Small enterprises as follows:
Microenterprises are business enterprises found in all
sectors of the Ethiopian economy with a paid-up capital
(fixed assets) of not more than Birr 20,000, but excluding
high-tech consultancy firms and other high-tech
establishments.
Small Enterprises are business enterprises with a paid-
up capital of not less than Birr 20,000 but not more than
Birr 500,000, but excluding high-tech consultancy firms
and other high-tech establishments.
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2. Economic/Control Criteria
Size does not always reflect the true nature of an enterprise. In
addition, qualitative characteristics may be used to differentiate
small business from other business. The economic/control definition
covers:
 Market share: The characteristic of a small firm’s share of the
market is that, it is not large enough to enable it to influence the
prices of national quantities of goods sold to any significant extent.
 Independence: Independence means that the owner has control
of the business himself.
 Personalized Management: It implies that the owner actively
participates in all aspects of the management of the business, and
in all major decision-making process. There is little delegation of
authority.
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All three of these characteristics must be satisfied if

the business is to rank as a small business.
Technology: Small business is generally labor
intensive. Only few are technology intensive.
Geographical area of operation: The area of
operation of a small firm is often local.
Generally, small business is a business that is
privately owned and operated, with a small number of
employees and relatively low volume of sales. Small
businesses are normally privately owned companies,
partnerships, sole proprietorships, or cooperatives.
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 2.2. Economic, social & political contributions of
small business enterprise
9

Small and medium enterprises (SMEs) cover a wider

spectrum of industries and play an important role in
both developed and developing economies.
Ethiopia is no exception and SMEs occupy a prominent
position in the development of the Ethiopian economy.
Some of the contributions are here under:
I) Equitable distribution of wealth and
decentralization of economic power: Unregulated
growth of large-scale industries results in concentration of
economic power in the hands of a few and consequently
gross inequalities in the distribution of income and wealth
will occur.
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On the other hand, income generated in a large number

of small enterprises is dispersed more widely and its
benefit is derived by the large segments of the society.
This is due to wide spread ownership and decentralized
location of small scale enterprises.
In this way small scale enterprises bring about greater
equality of income distribution.
II. More Employment creation capacity
Economic planners have realized the necessity of
encouraging small enterprises because they require less
capital but generate more employment.
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The small-scale sector has the capacity to generate a much

higher degree of employment than the large-scale sector.
This is because small scale enterprises are labor intensive
and thus create more employment with a given level of
capital.
III. Removing Regional Imbalance
Another problem is the continuous shifting of people from
rural to urban areas which causes over-crowding in cities
with slum conditions due to lack of social and medical
amenities which require heavy investments.
This problem can be solved by inducing people to set up
small firms in rural areas.
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 2.2.1. Advantages of going into Small Business
12

 The following are common advantages of owning a small

business:
 Independence
 Most small business owners enjoy being their own boss; they
like the freedom to do things their own way.
 Financial Opportunities
 Many small business owners make more money running their
own company than they would be working for someone else.
 Community Service
 Sometimes an individual will realize that a particular good or
service is not available.
 If the person has reason to believe that the public will pay for
such output, he or she will start a small company to provide it.
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 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.
 Family Employment
 Another advantage is the opportunity to provide family
members with employment. This has several benefits. First,
owner-managers want to perpetuate their business and
how better to do it, then to get children or relatives to take
it over. Second, higher moral and trust usually occur more
in family-run businesses than others. Third, in times of
severe economic downturn, small business owners can
provide employment for family members. 06/05/2024
 2.3. Small Business Failure factors
14

The following are some of the major factors, which cause

most small business failures.
 Poor operations management – The manager lacks
the ability to operate a small business.
 Lack of experience – Many owners start businesses in
industries in which they have no experience
 Poor financial management – Many owners start with
too little money and with little or no understanding of
financial spreadsheet applications.
 Over-investing in fixed assets – Owners who over-
invest in fixed assets may find themselves with no access to
funds for working capital.
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Poor credit practices – Owners often sell on credit to meet

(or beat) the competition and find that they lack the additional
working capital required or the ability to collect receivables.
Failure to plan – The lack of a strategic plan to guide the
business in the long run
Unplanned and uncontrolled growth – Growth is
natural and healthy, but unplanned growth can be fatal to a
business.
Inappropriate location – Owners who choose a business
location without proper analysis, investigation, and planning
often fail. Too often, owners seek “cheap” sites and locate
themselves straight into failure.

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 2.3.1. Problems in the Ethiopian Small Business
16

Small-scale businesses have not been able to

contribute substantially to the economic development,
particularly 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 the Ethiopian small business.
Because of their poor financial position they are not
able to buy new equipment, consequently their
productivity suffers.
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Small business owner can avoid some of the common

pitfalls that lead to business failure by:
Knowing the business in depth
Developing a solid business plan
Managing financial resources
Understanding financial statements
Learning to manage people effectively

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 2.4. Entrepreneurship and Business Enterprise
Creation
18

Once an individual decides to take up entrepreneurship as

a career path, to be a job provider instead of a job seeker,
he/she has to establish an enterprise.
However, setting up of a small new enterprise is a very
challenging as well as a rewarding task. Several problems
are involved in this task.
It is extremely important to take utmost care in identifying
the product or service to be launched by the entrepreneur;
otherwise it might prove to be a costly mistake.
He/ she must develop sensitivity to changes around
him/her, which can provide business opportunities and
then carefully scan his/her environment to generate ideas.
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 2.4.1. Opportunity scouting/ sensing
19

The entrepreneurial process begins with identifying

an opportunity and evaluating it through an initial
screening process.
If it appears reasonable, a detailed business plan can
be made. If not it can be discarded.
Clearly, except in rare cases, opportunities just do
not ‘occur’ to the individual.
These have to be actively searched/ scouted for.
Hence, the startup process for a new venture
creation begins with scouting for opportunities.

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 2.4.2. Opportunity scanning
20

 Once the entrepreneur perceives opportunities, it becomes

important for him/ her to scan the environment.
 It is quite possible that many of the promising opportunities
might not make commercial sense.
 Scanning involves close examination of the environmental
conditions and their impact upon the business idea.
 It is not a superficial exercise but rather an attempt to look
beyond the immediate opportunities to the emerging trends.
 An attempt can be made to modify, adapt, rearrange,
substitute, combine, reverse etc.
 What to be scanned by an entrepreneur are shown as
follows:
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I. Environmental analysis
21

 Entrepreneurship does not exist in a vacuum. It is affected by

and affects the environment.
As the economies are getting internationally integrated, for
an analysis of the environment of entrepreneurship you
would be required to develop an understanding of macro-
environment, and industry/sector specific factors.
A. Macro environment
The macro environment of an entrepreneur consists of the
political, technological, social, legal and economic
environments.
All of these are not immediate part of the entrepreneur’s
venture yet they have an impact on his enterprise.

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Ω Political Environment
Entrepreneurship can flourish under a stable and
conducive political climate.
Government policies which give priority to growth of trade
and industry, infrastructural facilities, and institutional
support gives a stimulus to entrepreneurship.
Ω Technological Environment
The level of technology, the trends and the rate of change in
technology all have a direct impact on enterprise creation.
Changes in technology, both innovation and invention
change industry structures by altering costs, quality
requirements and volume capabilities.
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Ω Socio-Cultural Environment
 The customs, norms and traditions of the society also play an
important role in either hindering or promoting enterprise.
 For example, we sometimes say that the Gurage people are very
enterprising.
 In many traditional communities of our country working of
females out of the home environment is frowning upon.
 Many times the choice of occupation is also dictated by the family
traditions.
 Socio-cultural factors are also crucial for the operations of
multinational companies.
 It is very important for a multi-national company to understand
the socio-cultural background of its customers in the host country.
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Ω Legal Environment
 The laws of the country can make the process of setting up
business very lengthy and difficult or vice-versa.
 The labor laws and legal redressing system also have a bearing on
business operations.
 Patents, agreements on trade and tariffs and environmental laws
also need to be studied.
 Copyright, trademark infringement, dumping and unfair
competition can create legal problems in the shape of long drawn
out court battles.
 Simpler legal procedures can facilitate the process of new venture
creation and its smooth functioning including setting up of
ancillaries, foreign tie-ups and joint ventures.
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Ω Economic Environment
Liberalization, globalization and opening of the
economy of Ethiopia, has increased the space for
business operations.
It has also opened channels for foreign investors to
start operations.
The resultant competition, rapid and complex
changes have generated uncertainties, which have to
be handled by the entrepreneurs.

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B. Industry/Sectoral Analysis
The purpose of industry analysis is to determine
what makes an industry attractive- this is usually
indicated either by above normal profits or high
growth rates.
For such analysis one should study the history of the
industry, the future trends, new products developed
in the industry, forecasts made by the government or
the industry.
It is also advisable to study the existing or potential
competition, threat of substitutes and entry barriers.
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II. SWOT analysis
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At this stage, conducting a SWOT analysis will help the

entrepreneur to clearly identify his/her own strengths and
weaknesses as well as the opportunities and threats in the
environment.
Threats in the environment can arise from competition,
technological breakthroughs, change in government policies
etc.
Strengths are positive internal factors that contribute to an
individual’s ability to accomplish his/her mission, goals and
objectives.
Weaknesses are negative internal factors that inhibit an
individual’s ability to accomplish his/her mission, goals and
objectives.
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An entrepreneur should try to magnify his strengths

and overcome or compensate for his/her weaknesses.
Opportunities are positive external options that an
individual could exploit to accomplish his/her mission,
goals and objectives.
Threats are negative external forces that hinder an
individual from accomplishing his/her mission, goals
and objectives.
These could arise due to competition, change in
government policy, economic recession, technological
advances etc.
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 2.4.3. Idea Generation
29

The starting point for any successful new venture is the

basic product/ service to be offered.
This idea can be either generated internally or externally.
For a new entrepreneur it becomes very difficult to filter
information from the business environment, identify
opportunities, evaluate them and then crystallize one
specific idea.
A reading of the Economic Times, business magazines,
watching special business programs on the television,
discussions with professionals, friends, even teachers,
surfing the internet all help to provide valuable inputs.

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 2.4.3.1. Role of Creativity and Innovation in Idea Generation
30

It is frequently commented that the only constant

thing in business is change.
It is a true statement as the business environment is
constantly changing for any number of reasons.
There can be technological break thorough like the IT
revolution, demographic changes like nuclear families,
working parents, which have fueled a demand for day
care centers, old people’s homes, fast food etc.
An entrepreneur with his/her vision, creativity and
innovation can capitalize on these changes and create
customers.
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Creativity is the ability to bring something new into

existence.
Innovation is the translation of an idea into
application, which has a commercial value. Creativity
is a prerequisite for innovation.
It can be developed by any individual who has a
concern for excellence and is willing to work hard.
A creative person develops new alternatives and
offers innovative solutions.

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