HARAMBEE UNIVERSITY COLLEGE

CHAPTER ONE
INTRODUCTION
As the population expands, there develops a need for more businesses. Every year several
million babies are born and these “babies are big business”. When these babies grow they
become the children, the learners, the workers, the managers and the customers of tomorrow.
An entrepreneur does not have to be the best manager, or have the biggest store, to compete
successfully. If entrepreneurs see a need for a new store in a growing community and begin
operating before others, they can get a head start on their competition. Enterprises in a
community have the potential to benefit from each other. Output from one enterprise normally
becomes input for other enterprises, and this helps in money circulation among the enterprises
within the community.
Being enterprising can bring benefits to you and also help you to become a valued member of
your family, community, place of work and society. By adopting an enterprising approach to
your activities, you will know what to do in whatever circumstances you find yourself in. This
kind of approach will enable you to appreciate the challenges of life because you will be able to
translate challenges into positive results.

ENTREPRENEURSHIP
Entrepreneurship can be described as a process of action an entrepreneur undertakes to
establish his enterprise.
Entrepreneurship is a creative activity. It is the ability to create and build something from
practically nothing. It is a knack (ability) of sensing opportunity where others see chaos,
contradiction and confusion. Entrepreneurship is the attitude of mind to seek opportunities, take
calculated risks and derive benefits by setting up a venture. It comprises of numerous activities
involved in conception, creation and running an enterprise.
According to Peter Dracker
Entrepreneurship is defined as ‘a systematic innovation, which consists in the purposeful and
organized search for changes, and it is the systematic analysis of the opportunities such changes
might offer for economic and social innovation.’

 Entrepreneurship is a discipline with a knowledge base theory. It is an outcome of

complex socio-economic, psychological, technological, legal and other factors. It is a
dynamic and risky process. It involves a fusion of capital, technology and human talent.
Entrepreneurship is equally applicable to big and small businesses, to economic and non-
economic activities. Different entrepreneurs might have some common traits but all of
them will have some different and unique features.
If we just concentrate on the entrepreneurs then there will be as many models as there are
ventures and we will not be able to predict or plan, how and where, and when these
entrepreneurs will start their ventures.
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 Entrepreneurship is a process. It is not a combination of some stray incidents. It is the

purposeful and organized search for change, conducted after systematic analysis of
opportunities in the environment.
 Entrepreneurship is a philosophy- it is the way one thinks, one acts and therefore it can
exist in any situation be it business or government or in the field of education, science
and technology or poverty alleviation or any others.

DEFINITION OF ENTREPRENEUR
An entrepreneur is a person who starts an enterprise. He searches for change and responds to it.
A number of definitions have been given of an entrepreneur. An entrepreneur is a person who
pays a certain price for a product to resell it at an uncertain price, thereby making decisions about
obtaining and using the resources while consequently admitting the risk of enterprise.
An entrepreneur is a person with a high need for achievement .He is energetic and a
moderate risk taker. An entrepreneur searches for change, responds to it and exploits
opportunities. Innovation is a specific tool of an entrepreneur hence an effective entrepreneur
converts a source into a resource. Emphasizes the role of an imitator entrepreneur who does
not innovate but imitates technologies innovated by others. Are very important in developing
economies. Entrepreneurs take initiative, accept risk of failure and have an internal locus of
control. Intrapreneur is an entrepreneur within an already established organization.

1.3.3 ENTERPRISE
Entrepreneur is a person who starts an enterprise. The process of creation is called
entrepreneurship. The entrepreneur is the actor and entrepreneurship is the act.
The outcome of the actor and the act is called the enterprise. An enterprise is the business
organization that is formed and which provides goods and services, creates jobs, contributes to
national income, exports and overall economic development.

1.3.4 DIFFERENCE BETWEEN ENTREPRENEUR AND

ENTREPRENEURSHIP
The term entrepreneur is used to describe men and women who establish and manage their
own business. The process involved is called entrepreneurship. Entrepreneurship is an
abstraction whereas entrepreneurs are tangible people. Entrepreneurship is a process and an
entrepreneur is a person. Entrepreneurship is the outcome of complex socio-economic,
psychological and other factors. Entrepreneur is the key individual central to entrepreneurship
who makes things happen. Entrepreneur is the actor, entrepreneurship is the act.
Entrepreneurship is the most effective way of bridging the gap between science and the market
place by creating new enterprises. An entrepreneur is the catalyst who brings about this change.

The concept of entrepreneurship from a personal perspective has been explored in this century.
This exploration is reflected in the following three definitions of an entrepreneur:

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BASIC CONCEPT’S IN ENTREPRENEURSHIP

In order to apply the process of entrepreneurship the entrepreneur should identify or develop
business ideas.
 A business idea is some one’s opinion regarding what may or may not be a good
business. There are three types 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 modifies it in some way to fit a potential customer’s demand.
3. A new Idea – This one involves the invention of something new for the first time
 The next concept is opportunity because the above business ideas are meaningless in the
absence of opportunity. An opportunity is the gap in the market which presents the
possibility of new value being created. It is also the chance of doing things both
differently from and better than how they are being undertaken at the moment.
 The last concept is innovation. Innovation is a way of doing something differently and
better. I.e. it is a means of exploiting a business opportunity. It is also a new combination
of three things (raw materials, labor and capital). In short innovation is invention (act of
creating something) plus commercialization (putting the new creativity into the market
place. The relationship between business idea and innovation is only new and modified
ideas are innovative. An old idea is not innovative because it is an imitation of existing
business concept.
Relationship between business ideas and opportunity
The three types of business ideas might have a small value or big value opportunity.
A small value opportunity – A business idea is said to have small value opportunity when its
revenue potential is small but the associated risk and cost may be high.
Big value Opportunity – A business idea with big value opportunity has high revenue potential
but risk and costs are low.
Areas of Innovation
The following are some of the major areas in which valuable innovation might be made.
A. New product
A new product can be developed through new or existing technology. The new product may
offer a radically new way of doing something or it may simply be an improvement on an
existing item. The new product must offer the customer an advantage if it is to be successful.
B. New Services
A service is an act which is offered to undertake a particular task or solve a particular
problem.

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C. New Production Techniques

Innovation can be made in the way in which a product is to be manufactured. A new
production technique should allow the end user to obtain the product at a lower cost, or a
product of higher quality or better service in the supply of the product.
D. New Way of Delivering the Product or Service to the Customer
Customer can only use product/service they can access. A common innovation is to take a
more direct routine by cutting out distributors or middlemen.
E. New Operating Practices
As with innovations in the production of physical products, innovation in service delivery
must address customers need and offer them improved benefits, for example easier access to
the service, a higher quality service, a more consistent service, a faster or less time
consuming service etc.
F. New Means of Informing the Customer about the Product
People will only use a product or service if they know about it. Demand will not exist if the
offering is not properly promoted to them. Promotion consists of two parts; a message what
is said and a means – the route by which that message is delivered.
G. New Means of Managing Relationship within the Organization
Any organization has a wide variety of communication channels running through it. The
performance of the organization will depend to a great extent on the effectiveness of its
internal communication channels. These communication channels are guided by the
organization’s structure.
H. New Ways of Managing Relationships between Organizations
Organizations sit in a complex web of relationships to each other. The way they communicate
and relate to each other is very important.
WEALTH OF THE ENTREPRENEUR
Wealth is money and anything that money can buy. It includes money, knowledge and assets of
the entrepreneur. Wealth creates a number of possibilities for the entrepreneur and their ventures
to dispose of that wealth such as: -
1. Reinvestment
If the entrepreneur wishes to grow the business they have initiated it will demand continued
investment. The best source of the investment is the profit of the business itself. It also helps
to invest in other ventures.
2. Rewarding Stakeholders
Entrepreneurs exist in a tight network of relationships with a number of other internal and
external stakeholders who are considered to give their support to the venture. They may be
asked to take risks on its behalf. In return they will expect to be properly rewarded either
financially or in other ways.

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3. Personal Reward
The entrepreneur is taking risks and putting all the efforts for the success of the business.
One of the just rewards for this is founding a comfortable lifestyle. Besides he may be keen
to put his money into altruistic projects such as sponsorship of arts, sports and other social
and creative activities.
4. Keeping the Score
For many entrepreneurs money is not so important in itself. It is just a way of quantifying
what they have achieved a way of keeping the score on their performance as it were. The
money value of their venture is a measure of how good their insight was, how effective their
decision-making was and how they put their ideas in to action. As far as the entrepreneur is
concerned money is more usually a means rather than an end by itself.
Who Benefits from the entrepreneur’s Wealth?
No entrepreneur works in a vacuum. The venture they create touches the lives of many other
people. To drive his/her venture forward, the entrepreneur calls up on the support of a number of
different groups. In return for their support these groups expect to be rewarded from the success
of the venture. Peoples who have a part to play in the entrepreneurial venture generally are called
stakeholder. The stakeholder groups are; employees, investor, supplier, customer, the local
community and government. Let us look at the benefits of each stakeholder.

 Employees

They contribute physical and mental labor to the business. Success of the entrepreneurial venture
depends on their effort and motivation. Therefore, they are rewarded with:
- Money – their wage or salary
- The possibility of owning a part of the firm through share schemes.
- A stage of which they can develop social relationships.
- The possibility of personal development.
 Investors
These are the peoples who provide the entrepreneur with the necessary money to start the
venture and keep it running. There are two main sorts of investors: stockholders and lenders.
Stockholders are those who buy the stock of the company and are true owners of the firm. The
actual return of the stockholders varies depending on how the business performs.
Lenders, on the other hand, are people who offer money to the venture on the basis of it being a
loan. They do not actually own a part of the firm and their return is independent of the businesses
performance. They also take priority for payment over shareholders and face lower level of risk
than the stockholders.

 Supplier

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They are the individuals and organizations who provide the business with the materials,
productive assets and information it needs to produce its output. They are paid for providing
these inputs.

 Customers

Customers may need to make an investment in using a particular supplier. Changing supplier
may involve switching costs and supplier, risk of quality and expenses incurred in changing over
to new inputs.
The entrepreneur may reward customers by offering quality products, fair prices, regular and
consistency of supply, loan arrangement etc.

 The local community

Businesses have physical locations. The way they operate may affect the people who live and
other businesses which operate nearby. A business has a number of responsibilities, which may
be defined or not in national laws, to this local community. Such as:
- Not polluting their shared environment
- Contributing and sponsoring local development activities
- Contribution for political and cultural stabilities and economic improvements
- Acting in an ethical way.
 Government

The responsibility of government is to ensure that businesses can operate in an environment

which has political and economic stability. In addition, it provides central services such as
education and health-care. These activities cost money to provide. Therefore, government should
be rewarded for its services. Hence, government taxes individuals and businesses

To a psychologist, such a person is typically driven by certain forces- the need to obtain
something, to experiment, to accomplish or perhaps to escape the authority of others.
 Entrepreneurship is the dynamic process of creating incremental wealth.

THE ENTREPRENEURIAL DECISION PROCESS

 (Deciding to become an entrepreneur by leaving present activity).
 Desirability of New Venture Formation
(Aspects of a situation that make it desirable to start a new company)
 Possibility of New Venture Formation
(Factors making it possible to create a new venture)

A person decides to do something either because something in that activity lures him or he
takes it as option in lieu of something else, ie, he is forced to do it by people or circumstances.

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The factors which lure a person to become entrepreneur are called Pull factors and the factors
that compel him are called Push factors.
 Pull Factors
(a)Perception of Advantages – If a person feels that he can earn better or overall gains in
terms of money. Status, security, future, etc. as an entrepreneur are better than working as an
employee, he tends to turn an entrepreneur.

(b) Spotting an Opportunity – Many employees spot a business opportunity in the course of their
work and decide to exploit that opportunity rather than pass it on to their employer. Many
employees buy unsuccessful businesses at throw away prices from their former employers and
turn them around.
(c) Government Policies – Govts very often formulate policies to promote certain business
activity or backward areas which offer tax concessions/holidays, cash subsidies, cheap land, etc,
which improve success and profit prospects.
(d) Motivation from biographies or success stories.
(e) Influenced by Culture, Community, Family Background, Teachers, Peers,
 Push Factors

(a) Job Dissatisfaction – Many people start their own venture because they feel dissatisfied
with their existing jobs/boss/work environment.
(b) Relocation – Repeated or especially unhappy relocation some times prompts some people
to entrepreneurship.
(c) Joblessness – This is the biggest source of micro level entrepreneurships.
Many parents help their academically poor children, who fail to find a job, to start their own
micro ventures. But success rate in such ventures is poor.
The very traits responsible for their academic failure lead to business failure.
D. Lay off – Layoffs often lower the market value of an employee to half.
Thus, if a person is laid off and he is unable to find a suitable job for him, he might think
of starting his own business.
(e) Retirement – Many retired, but physically and mentally fit, people start their own business
either to supplement their pension/savings or just to keep themselves gainfully occupied.
(F) Boredom – This is applicable to many ladies from well to do families. With their army
of servants to take care of home, they find an avenue to keep the boredom away and start
ventures like boutiques, fashion designing, etc.

Importance of Entrepreneurship
 Employment creation
 Local resources utilization

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 Decentralization and diversification of business

 Promotion of technology
 Capital formation
 Promotion of an entrepreneurial culture
 Sustainable utilization of natural resources
There are five elements of entrepreneurship:
Observing the environment/identifying gaps,
Identifying opportunities,
Gathering the necessary resources,
Implementing the activity and
Receiving rewards for engaging in the activity.

Entrepreneurial Functions in Business

 Identify gaps in the market and turn these gaps into business opportunities.
 Finances and mobilizes resources for the business
 Organize and manage the business.
 Bear the uncertainties and risks of the business.
 Encourage competition
 Self-employed and applying entrepreneurship
Economic Principles of Entrepreneurship

 Works best in an open market economy

 Promotes private enterprise
 Adds value to products and services (creates wealth)
 Providing needed products/service
 Developing new markets
Rewards for Being an Entrepreneur

 Self-actualization/personal fulfillment
 Feeling of freedom and independence
 Providing jobs and benefits to others (investors, suppliers, bankers,
subcontractors, work force, and customers).
 Economic goods (product/service, incomes for workers, profits for
shareholders/partners)

Personal efforts to be an Entrepreneur

 Works long hours
 Always concerned about the business

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 Needs high energy

 Sacrifices other important aspects of life
 Limited social life
 Not much time with family and friends
 Financial investment

Entrepreneurial Competencies
 Opportunity seeking and initiative
 Persistence
 Fulfilling commitments
 Demand for efficiency and quality
 Taking calculated risks

 Goal setting
 Information seeking
 Systematic planning and monitoring

 Persuasion and networking

 Independence and self-confidence
Opportunity Seeking and Initiative
Takes action to extend the business into new areas, products or services
Does things before being asked or forced by events?
Seizes unusual opportunities to start a new business, obtain financing,
equipment, land, work space or assistance
Persistence
Takes action in the face of significant obstacles and challenges
Takes persistent actions, or switches to an alternative strategy, to meet a
challenge or to overcome an obstacle
Takes personal responsibility for the performance necessary to achieve goals and
objectives
Fulfilling Commitments
Makes a personal sacrifice and extraordinary effort to complete a job
Pitches in with employees, or takes their place if needed, to get a job done.
Strives to keep customers satisfied and places long-term good will above short-
term gain
Demand for Efficiency and Quality
Finds ways to do things better, faster and cheaper
Acts to do things that meet or exceed standards of excellence

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Develops and uses procedures to ensure that work is completed on time and that
work meets agreed upon standards of quality
Taking Calculated Risks
Deliberately calculates risks and evaluates alternatives
Takes action to reduce risks and/or control outcomes
Places oneself in situations involving a challenge or moderate risks
Goal Setting
Sets goals and objectives which are personally meaningful and challenging
Articulates clear and specific long-term goals
Sets measurable short term objectives
Information Seeking
Personally seeks information from customers, suppliers and competitors
Does personal research on how to provide a product or service
Consults experts for business or technical advice
Systematic Planning and Monitoring
Plans by breaking large tasks down into sub-tasks with clear time-frame
Revise plans in light of feedback on performance or changing circumstances
Keeps financial records and uses them to make informed decisions
Persuasion and Networking
Uses deliberate strategies to influence and persuade others
Takes action to develop and maintain a network of business contacts
Uses key people as agents to achieve own objectives
Independence and Self-confidence
Seeks autonomy from the rules and/or control of others
Attributes the causes of successes and failures to oneself and to one’s own
conduct
Expresses confidence in own ability to complete a difficult task or to face a
challenge

When people acquire Entrepreneurial Competencies

 Seek opportunities
 Take initiatives
 Set SMART goals
 Finds ways to do things better, faster and cheaper
 Be highly competitive
 Uses deliberate strategies to influence and persuade others
 Exploit change
 Deal with uncertainties
Key Elements of Entrepreneur

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 Need for Achievement

 Risk taking
 Organizing Skills
 Ethics & Values
 Vision
 Innovation
 New business venturing- refers to the creation of new business within an existing
organization.
 Organizational innovativeness -refers to product and service innovation with an
emphasis on development and innovation in technology.
 Self-renewal- reflects the transformation of organizations through the renewal of the key
ideas on which they are built.
 Pro activeness -includes initiative and risk taking, as well as competitive
aggressiveness

ENTREPRENEURIAL PROCESS
The entrepreneurial process involves finding, evaluating, and developing an opportunity by
overcoming the strong forces that resist the creation of something new.
Phase 1: Identifying and Evaluating the Opportunity
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, wholesalers or manufacturer’s reps-are also helpful. Technically-
oriented individuals often identify business opportunities when working on other projects. Each
opportunity must be carefully screened and evaluated-this is the most critical element of the
entrepreneurial process.
a. The evaluation process involves looking at
b. The creation and length of the opportunity
c. Its real and perceived value
d. Its risks and return.
e. It’s fit with the skills and goals of the entrepreneur
f. Its differential advantage in its competitive environment

It is important to understand the cause of the opportunity, as the resulting opportunity may
have a different market size and time dimension. The market size and the length of the window
of opportunity are the primarily bases for determining risks and rewards. The risks reflect the
market, competition, technology, and amount of capital involved. The amount of capital forms
the basis for 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 and goals of the entrepreneur. The entrepreneur must be able to put forth the

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necessary time and effort required for 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 basis to make the decision, including:

a. A description of the product or service

b. An assessment of the opportunity
c. Assessment of the entrepreneur and the team
d. Specifications of all the activities and resources needed
e. The source of capital to finance the initial venture
The most difficult aspect of opportunity analysis is the assessment of the opportunity.

Phase 2: Develop a Business Plan

A good business plan must be developed in order to exploit the opportunity defined. A good
business plan is important in developing the opportunity and in determining the resources
required, obtaining those resources and successfully managing the venture.
Phase 3: Determine the Resources 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 as little control as possible, is difficult. The entrepreneur should try to
maintain as large an ownership position as possible, particularly in the 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.
Phase 4: Manage the Enterprise.
The entrepreneur must employ these resources through implementation of the business plan. This
involves implementing a management structure, as well as identifying a control system.

ENTREPRENEUR’S BACKGROUND & CHARACTERISTICS

1. Family Environment – In most cases, people follow the footstep of father. A businessman’s
son takes up business and a salaried person’s son tries to find a job.
2. Education – Education has no correlation with entrepreneurial spirit. If at all there is one, it
seems to be inverse. Most of the entrepreneurs come from low education background. Educated
people who get decent job rarely prefer comfort of salaried job. It is only those who are unable to
find a living for themselves eventually try their hands at new business. For long years, due to
problems of license, quota and inspector raj, most educated people preferred government job, for
it symbolized power, comfort, social status and for the people with low scruples, money too.
However, trend is slowly changing. With business environment becoming easier and government

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officials’ powers being on the wane, many educated people are also beginning to venture into
entrepreneurship
3. Age – There are people who start as early as probably 10 and some others after their
retirement. But commonly, men are often in the age group of 25 – 35 and women in the age
group of 30– 45.
4. Physical Attributes – Have absolutely no correlation with entrepreneurial spirit.
5. Marital Status – No direct correlation but going by the age group, most entrepreneurs are
married.
6. Working History – Entrepreneurs quite often have some working experience as a salaried
employee in the field of their venture. It always helps to learn a little about business before
putting your money in. Sindhi community follows this practice assiduously.
7. Family Contacts – Family contacts in business world reduce the risks and help the
entrepreneur.
8. Professional Contacts – Professional contacts again help. IIT and IIM graduates venturing
into entrepreneurship often get help from their peer and seniors.
9. Personal values
10. Lifestyle – Most entrepreneurs are fond of good things in life but are willing to wait till
they strike rich. In the interim they are willing to rough it out.
Barriers in entrepreneurship

Regulatory barriers
Cultural barriers
Financial and economic barriers

BARRIERS TO ENTREPRENEURSHIP AND BUSINESS CREATION

The OECD’s report on Women’s/men Entrepreneurship writes about the obstacles to women
entrepreneurship.
As general obstacles to women engaging in entrepreneurship, considering the opportunity
recognition and willingness to start firms, they identify:
 The lack of role models in entrepreneurship
Role models are persons that by their attitudes, behaviours and actions establish the
desirability and credibility as choice [in this case becoming an entrepreneur) for an
individual. In the case of women entrepreneurs, historically we don’t have women as
models in entrepreneurship. There’s a need to identify female role models because
studies demonstrate that an individual will be more influenced by another individual of
the same sex, as one’s aspirations and choices tend to be more influenced by persons of
the same sex. Parents also play an importance role because they function as carriers of
value, emotions and experiences towards self-employment. The studies demonstrate that
children of self-employed parents are over-represented among firm owners and those
trying to start a business.
 Lack of experience

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The ability to discover and exploit opportunities to create a new business depends largely
on previous education and work experience. Recent research demonstrate that highly
educated women seem to choose other career options than self-employment and
entrepreneurship and that entrepreneurship is more dominated by unskilled women or
very skilled or already wealthy women.
 Lack of relevant networks and of societal positions lack of wealth
Women have in general a lower social position than men, which affects the kind of
networks they can access or are part of: they have less access to critical resources,
support and information needed to successfully start and manage a new firm.
Individual’s network provides emotional support, social persuasion and vicarious
experience, which are central to whether or not a person engages in entrepreneurship and
does so successfully.
 Lack of wealth
Women’s position in society has led to a lack of financial assets and relevant
knowledge assets. The constraints of family obligations make it harder for women to
take on a full time basis and to engage in a career and in large countries women on
average earn less than men
 Competing demands on time
Because of domestic responsibilities, women don’t have enough free time to develop
either their entrepreneurial skills to become entrepreneurs or to develop an existing
business. Studies results suggest that lack of time is a barrier to most women, in most
economies.
 Ethnic minorities
Some entrepreneurs from ethnic minority backgrounds argue that the term ‘ethnic
minority entrepreneurs/business’ is a barrier to success.

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Chapter 2
Small Business
Specifying any size standard to define small business is necessarily arbitrary because people
adopt different standard for different purpose. For example legislators may exclude small firms
from certain regulation and specify ten employers as the cut off pointes. Moreover, a business
may be describe as small when compared to large firms; but large when compared to smaller
one.

Example:- Most people would classify independently owned gasoline station , neighborhood
restaurant and locally owned retailers stores as small business.

There are two approaches to define small business

1. By some measure of size

2. Using an economic /control definition.
In many ways they correspond to quantitative and qualitative approaches respectively.

1. By some measure of size.

Size refers to the scale of operation .Some criteria applicable to all industrial areas, which
others are relevant only to certain type of a business
Examples of criteria used to measure size area are?
1.1. Number of employee
1.2. Volume/ Value of sale turn over
1.3. Asset size
1.4. Insurance in force
1.5. Volume of deposit
1.6. Total capital investment
1.7. Total investment in plant & Machinery
1.8. Volume/ value of production
1.9. A combination of above
Although the first criteria listed above: Number of employee is the most widely used .The best
criteria in any given case depend up on the user’s purpose.

Small Business Administration (SBA) standard

The SBA established size standards that determine eligibility for SBA loans and for especial
consideration in bidding on government counteract.

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Size standard for most non-manufacturing industries are now expressed in terms of annual
receipts.

Example of SBA Size standard

Types Of Business Number of employee /Sales Birr

 Advertising agency ……………………………………………………………………$3.5

Mil.
 Copper ore mining …………………………………………………………………….500
employee
 Employment agent……………………………………………………………………$3.5
mil
 Furniture stores ………………………………………………………………………….
$3.5 mil
 General contractor …………………………………………………………………….$ 17
mil.
 Single family houses ………………………………………………………………………
$17 mil.
 Insurance agents, Brokers & services ………………………………………………$3.5
mil.
 Metal can manufacturing …………………………………………………………………
1000 employee
 New paper publishing &printing
………………………………………………………..500employee

Ref.

The general criteria for defining a small business are suggested

a. Financing of a business is supplied by one individual or small group. Only in a rare case
would the business have more than 15 or 20 owners.
b. Except for its marketing function, the firm operations are geographical localized.
c. Compare to biggest firms in the industry the business is small.
d. The number of employee in the business is usually fewer than 100 persons.
Small and micro enterprise (SME)the word over comprise a widely divergent spectrum of
establishment ,ranging from micro and rural enterprise to modern industrial unit using
sophisticated technologies. The importance and emphasis on SME has been accounted in the
mind of policy maker, planner and the industry.

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SME covers a wide spectrum industry &play an important role in both developed
&developing countries. On the bases of environment criteria, the general acceptable divisions
are:

 Up to -19 workers –Micro or very small enterprise

 20-100 workers Small enterprise
 101-500 workers Medium enterprise
2. Economic /Control criteria

Size does not always reflect the true nature of an entrepreneur. In addition qualitative
characteristics may be used differentiate small business from other business.

Its definition covers

1. Market share
2. Independence
3. Personalized management
All three of these characteristics must be satisfied, if the business is to rank as a small
business.

1. Market Share: - The characteristic of small business share of the market is that it is not
large enough to enable it to influences the prices of national quantities of goods sold to
any significant extent.
2. Independence: - means that the owner has control of the business himself. In many ways
fairy autonomous it therefore rules out those small subsidiaries w/c though nevertheless
have to refer major decisions.
3. Personalize Management :- (PM) is the most characteristics factor of all. It implies that
the owner activity participates in all aspects of the management of the business and in all
major decision- making process. There is little devolutions or delegation of authority.
4. Technology :- Small business is generally labor intensive
5. Geographical Area of operation: - The area of operation of small firms is often local.
Advantages of going into small Business

The desire for individual to own and operate their own small business is growing. the following
more common advantages of owning a small business:-
A. Independence-most small business owners enjoy being their own boss, they like the
freedom to do things their way.
B. Financial opportunity-many owners make more money running their own company
than they would be working for someone else.
C. community service

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D. Job security-when one owns a business, job security is ensured. the individual can work
as long as long as he/she wants; no mandatory retirement.
E. Family employment-is the opportunity to provide family members with a place of
employment. This has several benefits.
F. challenge

Small business failure factors

Every year many small firms cease operations. Some specific cause of failure-
 Incompetence-the owners simply do not know how to run the enterprise.
 Unbalanced experience-owners do not have well-rounded experience in the major activities of
the business, such as finance, purchasing, selling, and production.
 Lack of managerial experience-owners simply does not how to manage people.
 Lack of experience in the line-the owner has entered a business field in which he or she has
very little knowledge.
 Neglect-an owner does not pay sufficient attention to the enterprises.
 Fraud-intentional misrepresentation or deception.
 Disaster-refers to unforeseen happening or 'act of God'. the more specific managerial causes
of small business failure ,based on the study of business that had failed:-

 inadequate records
 expansion beyond resources
 lack of information about customers
 failure to diversify market
 lack of marketing research
 legal problem
 Nepotism-favoritism toward family members helped cause the enterprises failure.
 one-person management
 lack of technical competence
 absentee management

Weaknesses and Strengths of Small Enterprises

SMALL ENTERPRISE WEAKNESSES:
Financial limitations:
Balancing “cash in” and “cash out” is a struggle, especially when trying to expand. Instead of
receiving the red carpet treatment by financiers when asking for a loan, the small businessperson
is often made to feel like a second-class citizen. Small enterprises can’t use credit as a selling
tool as readily as companies with large financial reserves. Additionally, many small enterprises
have trouble staying afloat while waiting for their products to win acceptance in the marketplace.
Staffing problems:

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Small companies cannot pay top salaries and provide the opportunities and status normally
associated with a big company job. Small enterprise owners must also concentrate on the day-to-
day problems of running the business and generally have little time left to think about objectives.
Higher direct costs:
A small enterprise cannot buy raw materials, machinery or supplies as cheaply as a large
company, or obtain a large producer’s economies of scale. So per unit production costs are
usually higher for a small enterprise, but overhead costs are generally somewhat lower.
Too many eggs in one basket:
A large diversified company can take a licking in one sector of its business and still remain
strong. This is not so for the small business with only a few product lines. A small company is
vulnerable if a new product doesn’t catch on, if one of its markets is hit by a sharp recession, or
if an old product suddenly becomes obsolete.
Lack of credibility:
The public accepts a large company’s products because its name is well known and usually
respected. A small enterprise must struggle to prove itself each time it offers a new product or
enters a new market. Its reputation and past successes in the marketplace seldom carry weight.

SMALL ENTERPRISE STRENGTHS:

Personal touch:
Customers will often pay a premium for personalized attention. In fact, in many industries where
product and price differences are minimal, the human factor emerges as a prime competitive
advantage.
Greater motivation:
Key management of a small enterprise normally consists of the owner(s).
Consequently, they work harder, longer and with more personal involvement. Profits and losses
have more meaning to them than salaries and bonuses have to the employees of a larger
company.
Greater flexibility:
A small enterprise has the prime competitive advantage of flexibility. A big business cannot
close a plant without opposition from organized labour, or even raise prices without possible
intervention from the government, but a small enterprise can react quickly to competitive
changes. A small enterprise also has shorter lines of communication. Its product lines are narrow,
its markets limited and its factories and warehouses close by. It can quickly spot trouble or
opportunity and take appropriate action.
Less bureaucracy:
Grasping the big picture is difficult for executives of large companies. This “management
myopia” leads to redundant actions and bureaucratic inefficiencies. In a small business the whole
problem can be understood readily, decisions can be made quickly and the results can be checked
easily.

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Unobtrusive (less conspicuous):

Because it is not quite as noticeable, the small company can try new sales tactics or introduce
new products without attracting undue attention or opposition. Large companies are constantly
faced with proxy battles, antitrust actions and government regulations. They are also inflexible
and hard to change or restructure.
Problem in Ethiopia small business

Small scale industries have not been able to contribute substantially as needed 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.
 do not have easy access to the capital market
 Difficult to get raw materials of good quality and cheaper rates in the field of production.
 do not get raw material in time
 poor financial position so not able to buy new equipment

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