Chapter three
Business
formations
Form of
business
1.
Proprietorship: Form of business with single owner who has
unlimited liability, controls all decisions, and receives all profits.
2.
Partnership: Two or more individuals having unlimited liability
who have pooled resources to own a
business
3.
Corporation: Separate
legal entity that is run by stockholders having limited liability
Table1. Comparison of
form of business
|
Criteria |
Proprietorship |
Partnership |
Corporation |
|
Ownership |
Single owner |
Multiple owners |
Shareholders |
|
Liability |
Unlimited |
Unlimited |
Limited |
|
Start-up Costs |
Low |
Moderate |
High |
|
Continuity |
Limited |
Limited |
Perpetual |
|
Transferability of Interest |
Difficult |
Limited |
Easily transferable |
|
Capital Requirements |
Limited |
Moderate |
High |
|
Management Control |
Sole control |
Shared control |
Board of Directors |
|
Distribution of Profits |
Sole proprietor |
Shared among partners |
Dividends to shareholders |
|
Attractiveness for Capital |
Limited attractiveness |
Moderate attractiveness |
High attractiveness |
Definition of micro and small enterprises
(MSEs)
Micro and Small
Enterprises (MSEs) are businesses that are privately owned and operated, with a
small number of employees and relatively low volume of sales.
v They play a crucial role in the economies of
developing countries. MSEs are often the backbone of the informal sector,
contributing to employment generation, poverty reduction, and economic growth.
Distinction between Small Businesses
and Entrepreneurial Ventures:
·
Entrepreneurial ventures are
growth-oriented and innovative.
·
Small businesses may
evolve into entrepreneurial ventures but differ in characteristics.
·
Small
business owners often focus on known products and incremental
growth, while entrepreneurial ventures prioritize rapid growth and continuous
innovation.
The definition of MSEs
can vary from country to country and may be based on different criteria.
1.
Size Criteria: Size refers to the scale of operation. Criteria for
measuring size include the number of employees, sales turnover, asset size, and
more. Small Business Administration (SBA) suggests criteria for a clearer image
of small firms.
·
Financing is
often provided by one individual or a small group.
·
Operations are
geographically localized, except for marketing.
·
The business is
small compared to major industry firms.
·
Typically, such
businesses have fewer than 100 employees.
2.
Economic/Control Criteria: focus
on qualitative characteristics that differentiate small businesses from other
types of businesses. These criteria include market share, independence,
personalized management, and geographical area of operation.
·
Market Share: MSEs
typically have a small market share that does not enable them to significantly
influence prices or dominate the market.
·
Independence: MSEs
are characterized by independent ownership and control. The owner has control
of the business and is not subject to higher-level authority for major
decisions.
·
Personalized Management: MSEs
are often managed by the owner, who actively participates in all aspects of the
business and major decision-making processes. There is little delegation of
authority, and the owner is involved in important matters.
·
Technology: MSEs
are generally labor-intensive, with only a few being technology-intensive. They
may rely more on manual labor and traditional production methods.
·
Geographical Area of Operation: MSEs
often operate at a local or regional level, serving the immediate community or
a specific market segment.
The role and importance of Micro and Small
Enterprises (MSEs)
1.
Large
Employment Opportunities: MSEs are
labor-intensive and can provide employment for a larger number of people
compared to large-scale industries. In countries like Ethiopia, where there is
a scarcity of capital but abundant labor, MSEs are especially important for
creating employment opportunities.
2.
Economical
Use of Capital: MSEs require relatively small amounts of capital,
making them suitable for countries with limited capital resources like
Ethiopia.
3.
Balanced
Regional Development: MSEs are often located in villages and small towns,
which can contribute to balanced regional growth. By promoting MSEs in rural
areas, it is possible to reduce migration to urban areas, alleviate
overcrowding, and address regional imbalances.
4.
Equitable
Distribution of Wealth and Decentralization of Economic Power: MSEs
help to prevent concentration of economic power and wealth in the hands of a
few. They contribute to a more equitable distribution of income and wealth, as
well as decentralization of economic activities.
5.
Unregulated
Growth of Large: The dispersed
ownership and decentralized location of small-scale enterprises contribute to a
more equitable distribution of income and wealth. Unlike large-scale
industries, where economic power and wealth tend to concentrate in the hands of
a few, income generated by a large number of small enterprises is dispersed
more widely, benefiting a larger segment of society.
6.
Dispersal
over Wide Areas: MSEs have a tendency to disperse over wider areas,
which can contribute to the industrialization of a developing country like
Ethiopia.
7.
Higher
Standard of Living: MSEs can contribute to higher national income and
increased purchasing power, particularly in rural and semi-urban areas.
8.
Mobilization
of Local Resources: Encouraging MSEs in small towns and villages
promotes thrift and investment among the local population, utilizing local
resources and contributing to local development.
9.
Innovative
and Productive: MSEs are often adaptable and innovative, capable of
adopting new production techniques and technologies without significant
investment in research and development.
10. Less Dependence on Foreign Capital: MSEs
rely less on imported equipment and materials, contributing to reduced
dependence on foreign capital. They can also open up avenues in the export
market, promoting economic growth.
11. Promotion of Self-Employment: MSEs
foster individual skills, initiative, and self-employment, particularly among
educated and professional individuals.
12. Protection of Environment: Micro
and Small Enterprises (MSEs), given their nature, typically have a smaller
environmental impact and can play a role in protecting the environment..
13. Shorter Gestation Period: MSEs
typically have a shorter time between the start of investment and the production
of consumable goods, allowing for quicker returns on investment.
14. Facilitate Development of Large-Scale
Enterprises: MSEs can support the growth of large enterprises by
providing inputs, raw materials, intermediate goods, and utilizing their output
for further production.
15. Individual Tastes, Fashions, and
Personalized Services: MSEs have the ability to adapt quickly to the shift
in business and technological environment, catering to individual preferences
and providing personalized services.
16. More Employment Creation Capacity: MSEs
have the capacity to generate a higher degree of employment compared to
large-scale enterprises due to their labor-intensive nature. They can create
more employment opportunities with a given level of capital investment.
Classification of Micro and Small
Enterprises (MSEs)
A. For
Manufacturing Enterprises (Manufacturing, Construction, and Mining):
1. Micro
Enterprise:
·
Investment in
plant and machinery (total asset) does not exceed Birr 100,000.
·
Operates with 5
people, including the owner.
2. Small
Enterprise:
·
Investment in
plant and machinery (total asset) is between Birr 100,000 and not more than
Birr 1.5 million.
·
Operates with
6-30 persons.
B. For
Service Enterprises (Retailing, Transport, Hotel and Tourism, ICT, and
Maintenance):
1. Micro
Enterprise:
·
Total asset
value does not exceed Birr 50,000.
·
Operates with 5
persons, including the owner.
2. Small
Enterprise:
·
Total asset
value is between Birr 100,000 and not more than Birr 1.5 million.
·
Operates with
6-30 persons.
In Ethiopia, MSEs
operate in various sectors, with priority given to specific sectors and
sub-sectors. These sectors include:
1.
Manufacturing Sector: Textile
and garment, leather and leather products, food processing and beverage, metal
works and engineering, wood works including furniture and ornaments, service,
and agro-processing.
2.
Construction Sectors: Sub-contracting,
building materials, traditional mining works, cobblestone, infrastructure
sub-contract, and prestigious goods.
3.
Trade Sectors: Wholesale
of domestic products, retail sale of domestic products, and raw materials
supply.
4.
Service Sectors: Small
and rural transport service, café and restaurants, store service, tourism
service, canning/packing service, management service, municipality service,
project engineering service, product design & development service,
maintenance service, beauty salon, electronics software development,
decoration, and internet café.
5.
Agriculture Sector (Urban
Agriculture): Modern livestock rearing, bee production, poultry,
modern forest development, vegetables and fruits, modern irrigation, and animal
food processing.
Additionally, MSEs in
Ethiopia can be categorized into different levels based on their growth and
development:
1.
Start-up Level: Enterprises
that have recently established and legally incorporated, often involve with
individuals who have completed relevant training or acquired necessary skills.
2.
Growth Level: Enterprises
that have become competent in terms of price, quality, and supply are
profitable. They have larger manpower and total assets compared to start-up
level enterprises and use bookkeeping systems.
3.
Maturity Level: Enterprises
those are profitable and capable of further investment, meeting the sector's
defined criteria and utilizing available support.
4.
Growth-Medium Level: Enterprises
that have transitioned from small to medium level of growth, demonstrate
competence in price, quality, and supply with the support provided.
Setting up a small-scale business
A. Discovery
Stage:
1.
Step 1: Discover
your entrepreneurial potential by evaluating your personal resources,
strengths, and challenges.
2.
Step 2: Identify
a problem or need in the market and develop a potential solution.
B. Evaluation
Stage:
3.
Step 3: Evaluate
the idea as a business opportunity by researching market needs and determining
if there is sufficient demand for your solution. Assess the viability of the
proposed solution from technical, economic, social, and legal perspectives.
4.
Step 4:
Investigate and gather the necessary resources to bring your product or service
to market. Determine how your business will generate revenue and identify the
required resources.
C. Exploitation
Stage:
5.
Step 5: Form the
enterprise by setting up a business entity and protecting any intellectual
property. Prepare to launch the venture in a way that minimizes risks and
maximizes returns.
6.
Step 6:
Implement your entrepreneurial strategy by activating marketing, operating, and
financial plans.
7.
Step 7: Plan for
the future by envisioning your goals and the direction you want your business
to take.
Environmental Analysis:
v Analyze the macro environment, which includes
political, technological, social, legal, and economic factors that may impact
your venture.
v Conduct a sectoral analysis to understand the
specific conditions and trends in the industry or sector where you plan to
launch your business. Consider factors such as competition, substitutes, entry
barriers, bilateral agreements, government policies, and sector-specific constraints
and strengths.
SWOT Analysis
1.
Strengths: These
are positive internal factors that contribute to an individual's ability to
achieve their mission, goals, and objectives.
v Strengths can include unique selling propositions,
specialized skills or expertise, strong brand reputation, superior quality
products or services, loyal customer base, efficient processes, proprietary
technology, financial resources, or experienced staff.
2.
Weaknesses: These
are negative internal factors that hinder an individual's ability to achieve
their mission, goals, and objectives.
v Weaknesses may include lack of capital, limited
resources, inadequate skills or knowledge, poor infrastructure, low brand
recognition, inefficient processes, high employee turnover, subpar product quality,
or ineffective marketing strategies.
3.
Opportunities these are positive external factors that an
individual can exploit to achieve their mission, goals, and objectives.
v Opportunities may arise from market trends, changes
in consumer preferences, emerging technologies, new market segments, favorable
government policies, strategic partnerships, or expanding global markets.
4.
Threats: These
are negative external forces that hinder an individual from achieving their
mission, goals, and objectives.
v Threats can arise from factors such as competition,
government policies, economic recessions, or technological advances.
Small Business Failure Factors
What is business failure?
Business failure is
defined as a business that closes due to actions like bankruptcy, foreclosure,
voluntary withdrawal with a financial loss to a creditor, or court actions such
as receivership or reorganization.
Cause of business failure
1.
Inadequate Management: Small
business owners often face challenges in acquiring management skills and
expertise.
v They must be generalists and make decisions in areas
where they may have little expertise.
v Neglecting important aspects of the business, such
as record keeping, inventory management, and customer service, can lead to
failure.
2.
Inadequate Financing: Business
failure can also result from inadequate financing caused by improper managerial
control or a shortage of capital.
v Insufficient funds at the start can prevent the
business from acquiring necessary resources, while mismanaging available
resources can lead to inventory problems and an inability to run the business
effectively.
3.
Common Mistakes: There
are numerous ways to fail in business, including extending too much credit,
failing to plan for the future, overinvesting in fixed assets, and hiring the
wrong people.
v Identifying these mistakes is one part of the
problem; finding ways to avoid them is the challenging part.
4. Other
Causes of Business Failure:
v Neglect occurs when the owner fails to pay due attention to
the enterprise, often due to delegating management responsibilities to others.
v Fraud involves intentional misrepresentation or
deception, such as misuse of company funds.
v Disaster refers to unforeseen events like natural disasters,
fires, burglaries, robberies, or extended strikes that can lead to business
failure.
Business Termination versus Failure
Business Termination: Business
termination refers to the situation when a business ceases to exist for any
reason. This can occur when the owner sells the business to someone else at a
profit, decides to retire or start a new venture, or simply loses interest in
the business.
Business Failure: Business
failure specifically refers to a situation where a business closes down with a
financial loss to a creditor. It signifies an inability to meet financial
obligations, resulting in closure.
Small
Business Success Factors:
1.
Identify
Competitive Advantage:
v Recognize and leverage unique strengths that set the
business apart from larger competitors.
v Examples include personalized customer service,
niche offerings, agility, or strong community connections.
2.
Remain
Flexible and Innovative:
v Utilize the advantage of agility to adapt quickly to
market changes, customer demands, and emerging trends.
v Cultivate an innovative culture to maintain a
competitive edge and discover new avenues for growth.
3.
Cultivate
Customer Relationships:
v Build strong connections with customers by
understanding their needs, preferences, and feedback.
v Tailor products or services to meet customer
expectations, fostering loyalty and positive word-of-mouth.
4.
Strive
for Quality:
v Differentiate the business by delivering
high-quality products or services.
v Invest in quality control, continuous improvement,
and employee training to enhance customer satisfaction and build a reputation
for excellence.
Success
factors categorized us
A.
Conductive
Environment
v Political Climate:
·
Assess the
political climate for positive measures and encouragement for private
investment.
·
Favorable
policies, liberal investment regulations, and promotional agencies can support
small businesses.
v Economic Environment:
·
Analyze the
economic environment for investment decisions, market measurement, and
forecasting.
·
Consider
economic conditions that may impact unit costs, capital, and credit
availability for small transactions.
v Technological Advances:
·
Adapt to new
technological environments and advancements.
·
Constantly
reexamine and adjust to utilize and improve existing technologies for business
operations.
v Socio-Cultural Environment:
·
Consider
socio-cultural factors influencing the business environment.
·
Address social
and cultural elements impacting the business and adapt strategies accordingly.
B.
Adequate
Credit Assistance:
v Ensure financing arrangements are in place for small
enterprise development.
v Special financing programs with less strict
requirements, lower interest rates, and collateral requirements, as well as
assistance in preparing project studies, can support new entrepreneurs in obtaining
the necessary funding.
C.
Markets
and Marketing Support:
v Address challenges related to the market by forming
alliances or associations among small enterprises.
v Government support in marketing specific products
and assisting in selling can enhance market presence.
Main Supporting Packages for MSEs
Development in Ethiopia
·
Awareness
Creation:
·
Provision of
Legal Services:
·
Technical and
Business Management Training:
·
Financial
Support:
·
Facilitation of
Working Premises:
·
Industry
Extension Services and BDS Provision:
·
Bookkeeping and
Audit Services:
Problems of Small Scale Business in
Ethiopia
·
Lack of Adequate
Finance and Credit:
·
Production
Challenges:
·
Marketing
Challenges:
Organizational
Structure and Entrepreneurial Team Formation
Designing
the Organization:
v Initial organization design may be simple, with the
entrepreneur handling all functions.
v Reluctance to delegate responsibilities or include
others in the management team can hinder success.
v As the workload increases, the organizational
structure should expand to include defined roles.
v Effective interviewing and hiring procedures crucial
for the growth and maturity of the venture.
v Formal and informal structures coexist, requiring
attention from the entrepreneur.
v Five key areas of expectations for members of the
organization:
·
Organization
Structure: Defines jobs, communication, and relationships,
often depicted in an organization chart.
·
Planning,
Measurement, and Evaluation Schemes: Reflect goals, plans,
measurement criteria, and evaluation methods.
·
Rewards: Includes
promotions, bonuses, praise, etc., managed by the entrepreneur or key managers.
·
Selection
Criteria: Guidelines for selecting individuals for each
position.
·
Training: Specifies
on or off-the-job training, either formal education or skill development.
v Organization design can range from simple
(entrepreneur handling all tasks) to complex (hiring employees for specific
tasks).
v As the organization grows, the areas of expectation
become more relevant and necessary.
v Manager or entrepreneur's decision roles become
critical:
·
Adaptor: Adapting
to changes in the environment and seeking new ideas.
·
Responder: Address
pressures like customer dissatisfaction, supplier issues, or key employee
threats.
·
Allocator
of Resources: Decide budget and responsibility delegation.
·
Negotiator: Handle
negotiations of contracts, salaries, raw material prices, etc.
Building the Management Team and a Successful Organization Culture
v Building a management team and establishing a
successful organization culture are crucial aspects of creating a thriving
venture.
v The entrepreneur must assemble a team of individuals
who can execute the business plan, identify changes in the business environment,
and make necessary adjustments to maintain profitability.
v The entrepreneur must be willing to delegate
responsibilities to foster a vibrant organizational culture.
Here are some important
considerations and strategies for recruiting and assembling an effective team
and creating a positive organization culture:
1.
Align culture with the business
strategy: The desired culture should align with the business
strategy outlined in the business plan.
2.
Motivate and reward employees: Recognition
and rewards play a significant role in reinforcing positive behaviors.
3.
Embrace flexibility: Provide
employees with the flexibility to make decisions within the established
framework of the company.
4.
Invest time in the hiring process: Take
the necessary time to find individuals who not only possess the required skills
but also have the right character and fit with the organization's culture.
5.
Understand the significance of
leadership: Leadership should establish core values and provide
employees with the tools they need to perform their jobs effectively.
6.
Implement a reward system: A
well-designed reward system can reinforce consistent and positive behavior
patterns within the organization.
Thank you!!!