CHAPTER3:BUSI

NESSFORMATI
ON
3.
1INTRODUCTI
ON
Abusi
nessf
ormat
iondeal
swi
tht
hef
ormal
i
zat
ionandact
ual
impl
ement
ati
onof
busi
nessi
deasi
ntopr
act
ice.I
ntoday
’seconomi
cdev
elopment
/tr
ansf
ormat
ion,
smal
l
busi
nessesar
ecr
eat
ingnewj
obsev
enasl
argebusi
nessescont
inueel
i
minat
ingj
obs
andt
heyar
emor
efl
exi
blet
hanl
argeonesi
nthepr
oduct
sandser
vicest
heyof
fer
.Thi
s
chapt
erdi
scussest
hei
ssuesofbusi
nessdev
elopmentandt
hedi
ff
erentl
egal
for
msof
busi
ness.I
naddi
ti
on,
theconceptofMSEsi
ntheEt
hiopi
anandi
nter
nat
ional
cont
extar
e
di
scussed.Thei
mpor
tance/
rol
esofMSEsandabusi
nessf
ormat
iondeal
wit
hthe
f
ormal
i
zat
ionandact
ual
impl
ement
ati
onofbusi
nessi
deasi
ntopr
act
ice.Thi
schapt
er
di
scussest
hei
ssuesofbusi
nessdev
elopmentandt
hedi
ff
erentl
egal
for
msofbusi
ness.
I
naddi
ti
ont
heconceptofMSEsi
ntheEt
hiopi
anandi
nter
nat
ional
cont
extar
edi
scussed.
Thei
mpor
tance/
rol
esandsetupofMSEsar
edi
scussedv
erywel
l
.Besi
dest
hesuccess
andf
ail
uref
act
orsofMSEsandt
hecommonpr
obl
emsofMSEsi
nEt
hiopi
aar
e
di
scussed.Fur
ther
mor
e,t
hechapt
erhi
ghl
i
ght
sther
eal
i
tyi
ntheer
aofent
repr
eneur
shi
p
env
ironmentas,
notonl
yar
etheski
l
lsandabi
l
iti
esi
mpor
tant
,butt
heent
repr
eneural
so
wi
l
lneedt
oconsi
dert
heper
sonal
i
tyandchar
act
erofeachi
ndi
vi
dual
tocr
eat
eav
iabl
e
or
gani
zat
ioncul
tur
e.

Chapt
erObj
ect
ives
Af
tercompl
eti
ngt
hischapt
er,
student
swi
l
lbeabl
eto:
Expl
aint
heConceptofBusi
nessDev
elopment
;

I
dent
if
ytheFor
msofBusi
nessOwner
shi
p;

Anal
yzet
heI
mpor
tance/
Rol
eofSMEs;

SetUpSmal
lScal
eBusi
ness;

Di
sti
ngui
sht
heFai
l
ureandSuccessFact
orsofSMEs;

I
dent
if
ythePr
obl
emsofSmal
lScal
eBusi
nessi
nEt
hiopi
a;and

Dev
elopOr
gani
zat
ional
Cul
tur
e.
3.
2TheConceptofSmal
lBusi
nessDev
elopment
Speci
fyi
ngsi
zeandst
andar
dtodef
inesmal
lbusi
nessi
snecessar
il
yar
bit
rar
y,because
peopl
eadoptdi
ff
erentst
andar
dsf
ordi
ff
erentpur
poses.Basedonsoci
o-economi
c
condi
ti
ons,
count
ri
esdef
inesmal
lbusi
nessdi
ff
erent
ly.Butal
lmayusesi
zeand
economi
ccr
it
eri
aasabaset
odef
inesmal
lbusi
ness.Si
zecr
it
eri
aincl
udenumberof
empl
oyeesandt
hest
art
upcapi
tal
.Si
zedoesnotal
way
sref
lectt
het
ruenat
ureofan
ent
erpr
ise;
inaddi
ti
on,
qual
i
tat
ivechar
act
eri
sti
csar
eusedt
odi
ff
erent
iat
esmal
l
busi
nessf
rom ot
herbusi
ness.Theeconomi
c/cont
rol
def
ini
ti
oncov
ersmar
ketshar
e,
i
ndependenceandper
sonal
i
zedmanagement
.
Smal
landmedi
um ent
erpr
ises(
SMEs)cov
erawi
derspect
rum ofi
ndust
ri
esandpl
ayan
i
mpor
tantr
olei
nbot
hdev
elopedanddev
elopi
ngeconomi
es.Et
hiopi
aisnoexcept
ion
andSMEsoccupyapr
omi
nentposi
ti
oni
nthedev
elopmentoft
heEt
hiopi
aneconomy
.
Whi
l
ethesmal
lent
repr
eneur
scansetupauni
tev
enwi
thl
esscapi
tal
,enj
oyqui
ck
r
etur
nsandhav
ethef
lexi
bil
i
tyt
ohandl
ethev
agar
ies(
change)oft
hemar
ket
,theyhav
e
t
ofacemanypr
obl
emsl
i
kel
ackoff
inance,
pooroper
ati
onsmanagement
,lackof
exper
ience,
poorf
inanci
almanagement
,et
c,.Thepr
ocessofset
ti
ngupav
ent
urebegi
ns
wi
thsear
chi
ngf
oranoppor
tuni
ty.I
dent
if
yingagoodoppor
tuni
tyi
sadi
ff
icul
ttaskand
i
nvol
vesscanni
ngt
heenv
ironmentandt
heuseofcr
eat
ivi
tyandi
nnov
ati
on.
3.
3For
msofBusi
ness(
AShor
tExpl
anat
ion)
Ther
ear
ethr
eebasi
clegal
for
msofbusi
nessf
ormat
ionwi
thsomev
ari
ati
onsav
ail
abl
e
dependi
ngont
heent
repr
eneur
s’needs.
Thet
hreebasi
clegal
for
msar
e:-
1)Pr
opr
iet
orshi
p,

2)Par
tner
shi
p,and

3)Cor
por
ati
on,
wit
hvar
iat
ionspar
ti
cul
arl
yinpar
tner
shi
psandcor
por
ati
ons.
LegalFor
msofBusi
nessDescr
ipt
ion
1)Pr
opr
iet
orshi
pFor
m ofbusi
nesswi
thsi
ngl
eownerwhohasunl
i
mit
edl
i
abi
l
ity
,
cont
rol
sal
ldeci
si
ons,
andr
ecei
vesal
lpr
ofi
ts.

2)Par
tner
shi
pTwoormor
eindi
vi
dual
shav
ingunl
i
mit
edl
i
abi
l
itywhohav
epool
ed
 r
esour
cest
oownabusi
ness

3)Cor
por
ati
onSepar
atel
egal
ent
it
ythati
srunbyst
ockhol
der
shav
ingl
i
mit
edl
i
abi
l
ity

3.
4Def
ini
ti
onandRol
e/I
mpor
tanceofSMEsi
nDev
elopi
ngCount
ri
es
3.
4.1Def
ini
ti
onofSMEs

Ther
ear
etwoappr
oachusedbywr
it
ersi
ndef
ini
ngsmal
lbusi
nessi
ncl
udes:

1.Si
ze cr
it
eri
a(Quant
it
ati
ve Appr
oach)Taki
ng si
ze i
n consi
der
ati
on,t
he f
oll
owi
ng
coul
dbeusedr
elat
ivel
ytodescr
ibe/
def
inesmal
lbusi
ness:
o numberofwor
ker
sinv
olv
edi
nthebusi
ness
o Sal
esv
olume
o St
art
upcapi
tal
o Assetsi
ze
o Tot
ali
nvest
menti
npl
antandmachi
ner
y
o Vol
ume/
val
ueofpr
oduct
ion
o Vol
ume/
val
ueofsal
est
urnov
er
Thespeci
fi
cnumberofempl
oyees,sal
esv
olumeorassetsi
zeandt
heamountof
capi
talv
ari
esf
rom nat
iont
onat
ion.Fori
nst
ance,accor
dingt
otheUSAsmal
lbusi
ness
admi
nist
rat
ion(
SBA)
,thenumberofempl
oyeesi
nthebusi
nessi
susual
l
yfewert
han
100.Howev
er,
thi
sisnott
hecasei
nourcount
ry.

2. Economi
c cont
rolcr
it
eri
a(Qual
it
ati
ve Appr
oach)
:Thi
s cr
it
eri
on cov
erst
he
economi
crol
eoft
hebusi
ness,l
i
kehow muchasseti
nvol
ves,how muchempl
oyment
chancei
tpr
ovi
des.Besi
des,
thi
sdependsont
hel
awoft
henat
ion.
a) Mar
ketshar
e:smal
lbusi
nessesbyv
erynat
urear
enotl
argeenought
oenabl
eitt
o
i
nfl
uencet
hepr
iceoft
henat
ionalquant
it
iesofgoodssol
dtoanysi
gni
fi
cantext
ent
.In
ot
herwor
ds,
anyf
orm ofsmal
lbusi
nesshasv
eryl
i
mit
edmar
ketshar
eev
ensomet
imes
coul
dbei
nsi
gni
fi
cant
.Forexampl
e,t
akeagi
venci
tyandi
magi
neaboutt
hemar
ket
shar
eofsi
ngl
erest
aur
ant
.
b) Per
sonal
i
zedManagement
:Theownerofanysmal
lbusi
nesspl
aysal
lmostal
lthe
busi
nessr
oles,i
.e.
,fr
om st
artupt
oent
ir
emanagement
.Iti
mpl
i
est
hatt
heowner
 act
ivel
ypar
ti
ci
pat
esi
nal
laspect
sofmanagementoft
hebusi
ness,
inal
lmaj
ordeci
sion-
maki
ngpr
ocess.
c) Technol
ogysmal
lbusi
nessi
sgener
all
ylabori
ntensi
ve
d) Geogr
aphi
car
eaofoper
ati
on.Thear
eaofoper
ati
onofasmal
lfi
rmi
sof
tenl
ocal
.
Gener
all
y,t
her
eisnouni
ver
sal
l
yaccept
eddef
ini
ti
onofsmal
lbusi
ness.Fort
hesakeof
ourdi
scussi
on,
weadoptt
hef
oll
owi
ngdef
ini
ti
on.

Smal
lbusi
nessi
sabusi
ness,whi
chempl
oyeesl
esst
han100empl
oyees,ownedby
one or f
ew i
ndi
vi
dual
s,wi
th t
he except
ion of t
he mar
ket
ing f
unct
ion has
geogr
aphi
cal
lyl
ocal
izedoper
ati
ons,
anddoesnotdomi
nat
ethei
ndust
ry.

Hav
ingt
heabov
edef
ini
ti
oni
nmi
nd,smal
lbusi
nesscanf
oundi
ndi
ff
erenti
ndust
ri
es,
whi
chi
ncl
ude

o Ret
ail
indust
ry:
drugst
ores,
clot
hingst
ores,
bookst
ores
o Ser
vicei
ndust
ry:suchasaccount
ingf
ir
ms,
adv
ert
isi
ngagenci
es,
manager
ial
consul
tant
s,bar
berandbeaut
yshops.
o Manuf
act
uri
ngi
ndust
ry:l
i
keshoef
act
ori
es,f
urni
tur
e-manuf
act
uri
ngpl
ant
s
et
c.
3.
5Cont
ri
but
ionsofSmal
lBusi
ness:

Al
thoughsmal
lbusi
nessposeanumberofchal
l
engest
otheent
repr
eneurandhav
e
cer
tai
nli
mit
ati
ons,count
ri
eseconomycannotdowi
thoutt
hem.Thi
sisbecausesmal
l
busi
nesseshav
especi
alf
eat
urest
hatmaket
hem super
iorov
erl
argeonesi
ncer
tai
n
aspect
sofbusi
nessact
ivi
ti
es.Fi
rst
,letasseet
hespeci
alcont
ri
but
ionsofsmal
l
busi
nesst
ocount
ri
eseconomy
.

1.Pr
ovi
dingj
oboppor
tuni
ti
es:t
hisi
sonewayi
nwhi
chsmal
lbusi
nessescont
ri
but
eto
count
ri
eseconomy
.Inf
act
,inmostcount
ri
es,t
henumberofnewj
obcr
eat
edbysmal
l
busi
nessi
ssi
gni
fi
cant
lyhi
ghert
hancr
eat
edbyl
argebusi
ness.Forexampl
e,i
ntheUSA,
50% oft
heempl
oymentcomesf
rom smal
lbusi
nessesandeachy
earsmal
lbusi
ness
accountf
orabout80%t
henewj
obscr
eat
ed.

2.I
ntr
oduci
ngi
nnov
ati
on:newpr
oduct
s,whi
chor
igi
nat
eint
her
esear
chl
abor
ator
iesof
bi
gbusi
nesses,makeav
aluabl
econt
ri
but
iont
oourst
andar
dofl
i
ving.Ther
eisa
quest
ion,
howev
er,
ast
other
elat
ivei
mpor
tanceofbi
gbusi
nessesi
nachi
evi
ngt
het
rul
y
si
gni
fi
canti
nnov
ati
ons.Usual
l
yther
esear
ch depar
tmentofbi
g busi
nesst
endst
o
emphasi
zet
hei
mpr
ovementofexi
sti
ngpr
oduct
s.Recor
dsshow t
hatmanysci
ent
if
ic
br
eakt
hroughsor
igi
nat
edwi
thi
ndependenti
nvent
orsandsmal
lor
gani
zat
ions.

3.St
imul
ati
ngeconomi
ccompet
it
ion:Smal
lbusi
nessbydef
ini
ti
oni
sonet
hatdoesnot
domi
nat
eit
sindust
ry,andcompet
it
ionwi
l
lbecl
osert
oper
fect
ionwhent
hemar
keti
s
f
ullofsmal
lbusi
nessest
hatcannotexer
tasi
gni
fi
canti
mpactont
hemar
ketpr
iceand
suppl
ywhenoper
ati
ngi
ndi
vi
dual
l
y.

4.Ai
dingbi
gbusi
ness:t
hef
actt
hatsomef
unct
ionsmor
eexper
tl
yper
for
medbysmal
l
busi
nessest
hatenabl
essmal
lbusi
nessest
ocont
ri
but
etot
hesuccessofl
argerones.
Especi
all
yther
e ar
etwo t
ypes ofbusi
ness act
ivi
ti
es,whi
ch per
for
med by smal
l
busi
nessesmor
eeconomi
cal
l
yandef
fect
ivel
y.

a)The di
str
ibut
ion f
unct
ion:Few l
arge manuf
act
urer
sfi
nd i
tdesi
rabl
eto own
whol
esal
eandr
etai
lout
let
s.
b)Suppl
yfunct
ion:Mostsmal
lbusi
nessesactassuppl
i
ers,andsub-
cont
ract
orf
or
l
argef
ir
ms.
1. Pr
oduci
nggoodsandser
vicesef
fi
cient
ly.wedependhi
ghl
yonsmal
lbusi
nesses
f
ort
hepr
ovi
sionofmostgoodsandser
vicesweneedi
nourl
i
ves.I
nfact
,ifi
twasnot
f
orsmal
lbusi
ness,
wewoul
dhav
enotbeenabl
etof
indt
hegoodsandser
vicesweneed
att
imeweneedt
hem,
inaconv
eni
entpl
ace,
andatt
hequant
it
ywepr
efer
.

3.
6Mer
it
sandDemer
it
sofSmal
lBusi
ness

Somef
ir
msoper
atei
nal
lindust
ri
es.Howev
er,t
heydi
ff
ergr
eat
lyi
nthei
rnat
ureand
i
mpor
tancef
rom i
ndust
ryt
oindust
ry.Cur
rent
lyi
nEt
hiopi
a,onecancl
ear
lyobser
vet
hat
t
hedesi
ref
ori
ndi
vi
dual
stoownandoper
atet
hei
rownsmal
lbusi
nessi
sgr
owi
ng.Smal
l
busi
ness engagementmay pr
ovi
de numer
ous benef
it
s.I
tal
so hel
ps t
o dev
elop
pr
ofessi
onalcompet
encyt
hatmi
ghtl
eadt
olar
gerbusi
nesses.Thef
oll
owi
ngar
emost
commonadv
ant
agesofowni
ngasmal
lbusi
ness.
1)I
ndependency
:mostsmal
lbusi
nessowner
senj
oybei
ngt
hei
rownboss;
theyl
i
ket
he
f
reedom t
o do t
hings t
hei
rway
.Al
though of
ten a gr
eatdealofr
esponsi
bil
i
tyi
s
associ
atedwi
tht
hisi
ndependency
,theyar
ewi
l
li
ngt
oassumei
t.

2)Fi
nanci
aloppor
tuni
ty:The possi
blef
inanci
aloppor
tuni
ty obt
ained f
rom smal
l
busi
nessi
sthemai
nreasont
hatl
ett
heownert
oendur
eal
lpossi
blechal
l
engesand
pai
ns.Manysmal
lbusi
nessowner
smakemor
emoneyr
unni
ngt
hei
rowncompanyt
han
t
heywoul
dbewor
kingf
orsomeoneel
se.

3)Jobsecur
it
y:Whenoneownst
hebusi
ness,
jobsecur
it
yisi
nsur
ed.Thei
ndi
vi
dual
can
wor
kasl
ongasheorshewant
s.Nomandat
oryr
eti
rementexi
sts.

4)Communi
tyser
vice:Somet
imesani
ndi
vi
dualwi
l
lreal
i
zet
hatapar
ti
cul
argoodor
ser
vicei
snotav
ail
abl
e.I
ftheper
sonhasr
easont
obel
i
evet
hepubl
i
cwi
l
lpayf
orsuch
out
put
,heorshewi
l
lst
artacompanyt
opr
ovi
dei
t.

5)Topr
act
iceschal
l
enge:St
art
ingandpr
oper
lymanagi
ngsmal
lbusi
nesshasi
tsown
chal
l
enges.Resear
chr
eveal
sthatmostsuccessf
ulsmal
lbusi
nessowner
sli
ket
ofeel
t
heyhav
eachancet
osucceedandachancet
ofai
lbutonet
hingi
scer
tai
n:t
he
out
comedependsheav
il
yont
hem;t
heywantt
owi
norl
oset
hei
rownabi
l
iti
es.Thi
s
chal
l
engegi
vest
hem psy
chol
ogi
cal
sat
isf
act
ion.
.

Al
thought
her
esev
eraladv
ant
agesassoci
atedt
o smal
lbusi
ness,i
tisnotwi
thout
cer
tai
ndemer
it
s.Thus,i
tshoul
dber
ecogni
zedt
hatsomedr
awbackst
oowni
ngsmal
l
busi
nessexi
st.Thef
oll
owi
ngcoul
dbesomeoft
hedemer
it
s.

1) Compet
it
ion:
Compar
ati
vel
ythel
evel
ofr
isk,
star
t-
upchal
l
enges,
andr
equi
rement
f
orsmal
lbusi
nessgi
vear
oom f
orcompet
it
orst
oent
eri
ntosmal
lbusi
nesses.Ev
eni
n
y
ourl
ocal
i
ty,y
oucanobser
vet
hemov
ementonemi
ghti
dent
if
yanoppor
tuni
tyt
oopen
anysmal
lbusi
ness,
soonerhe/
shef
indssomeot
hersi
mil
arbusi
nessopensj
ustatt
hei
r
busi
nesssi
des.

2)Sal
esf
luct
uat
ion:sal
esf
luct
uat
ionscoul
dbeapossi
blechal
l
engeassoci
atedwi
th
smal
lbusi
ness.Thi
scoul
doccurduet
ochangei
nthemar
ketori
ncr
easi
ngnumber
sof
compet
it
ors.Thi
sist
urnmi
ghtl
eadt
ofi
nanci
all
osses.

3)I
ncr
easedResponsi
bil
i
ties:Smal
lbusi
nessowner
sfacemanyr
esponsi
bil
i
tiesduet
o
t
henat
ureoft
hebusi
ness,i
.e.
,becauseowner
snotonl
yhav
etomakemor
edeci
sions
onmaj
ormat
ter
sbutal
sohav
etobecomeknowl
edgeabl
einmanydi
ff
erentar
eas.

4)Ri
sksoff
ail
ure:Theul
ti
mat
eri
skt
hesmal
lbusi
nessowner
-manager
sfacei
sfai
l
ure,
usual
l
ywi
thal
ossofmost
,ifnotal
l
,oft
hemoneyi
nvest
edi
ntheent
erpr
ise.Al
lowner
s
f
acet
hisr
isk,anddespi
teexper
ienceandbusi
nessknowl
edge,manyf
ailbecauseof
f
act
ors bey
ond t
hei
rcont
rol
.Forexampl
e,a maj
orr
ecessi
on hi
ts mostsmal
l
busi
nessesv
eryhar
dly
.Meanwhi
l
e,despi
tepr
ecaut
ions,ev
eryy
earsomecompani
es
f
orcedi
ntobankr
upt
cybecausei
nsi
der
sembezzl
ethei
rfundswhosy
stemat
ical
l
ydr
ain
t
hei
rfi
nanci
alr
esour
ces?I
naddi
ti
on,
disast
erscanst
ri
ke,
suchast
heunexpect
edf
lood,
ear
thquakeandwi
ndst
orm.I
neachoft
hesecases,
thecompanymayf
orcet
ocl
osei
ts
door
s.I
nmosti
nst
ances,
howev
er,
poormanagementcausesf
ail
ure.

5)Empl
oyee’
srel
ati
ons:i
ffami
l
ymember
sownt
hebusi
nessandt
heyar
ecl
oser
,
r
elat
ivesar
ewor
kingal
ongwi
thmanybef
ew ot
hernon-
rel
ati
vewor
ker
s,t
heempl
oy
r
elat
ioncoul
dbesomet
imeschal
l
engi
ng.Besi
des,f
ri
cti
onamongwor
ker
swhodonot
l
i
ke each ot
herr
equi
res t
he ownert
oresol
vet
he conf
li
cts byei
therget
ti
ng t
he
empl
oyeest
oputasi
det
hei
rper
sonaldi
ff
erencesorbyf
ir
ingoneormor
eoft
hem.
Anot
hercommonpr
obl
em i
sjobassi
gnment
,whowi
l
ldowhat
?Theownermustbe
car
efulnotov
erl
oad one per
son wi
th wor
k whi
l
e anot
herdoes v
irt
ual
l
yany
thi
ng.
Fi
nanci
alcompensat
ioni
sal
soani
ssue.Howmucheachper
sonshoul
dbepai
d?When
shoul
drai
sesbegi
ven?
3.
7Ri
sksandCausesofSmal
lBusi
nessFai
lur
es

Al
thoughmanynew smal
lbusi
nessesar
eest
abl
i
shedi
nmostcount
ri
es,t
hesuccess
r
atei
smi
nimal
.Thi
scan be at
tri
but
ing t
o manyf
act
ors,whi
ch can gener
all
ybe
cl
assi
fi
edi
ntot
wocat
egor
ies:
ext
ernal
andper
sonal
fact
orsoff
ail
ure.

Economi
cbusi
nesscy
cles,f
luct
uat
ing,i
nter
estr
ate,i
nter
rupt
edsuppl
i
es,l
abormar
ket
,
t
rends,i
nfl
ati
on,gov
ernmentr
egul
ati
ons,andunst
abl
efi
nanci
almar
ket
sar
esomeof
t
he ext
ernalf
act
orst
hatmi
ghtbr
ing aboutsmal
lbusi
ness f
ail
ures.Al
though al
l
busi
nesses-
smal
l
/bi
g-ar
esubj
ectt
othi
sri
sk,t
hei
ref
fectonsmal
lbusi
nessesi
sfar
mor
e ser
ious t
han anyot
herbusi
nesses.Thi
sis because t
he r
esour
ces a smal
l
busi
nessownercont
rol
sar
ever
yli
mit
edwhi
chmakesi
tver
ydi
ff
icul
ttodealwi
tht
hese
si
tuat
ions.

Ont
heot
herhand,t
her
ear
ecer
tai
npr
obl
emst
hatcanbeat
tr
ibut
edt
otheweakness
andl
i
mit
ati
onsoft
heent
repr
eneur
.Thesei
ncl
ude:

o I
nexper
ience:t
ooof
ten,ent
repr
eneur
slauncht
hei
rent
erpr
iseswi
thouthav
ing
suf
fi
cientexper
iencest
osucceed.I
nexper
iencecanbet
ransl
atedt
omeanal
ack
oft
echni
cal
ormanagementacumen.

o Ar
rogance:manysmal
lbusi
nessper
sons-
par
ti
cul
arl
yinv
ent
ors and i
nnov
ati
ve
ent
repr
eneur
s-wi
th new pr
oduct
s become egocent
ri
cal
l
y engr
ossed i
nthei
r
v
ent
ures.Theybecomeconsumedwi
tht
hei
rownbr
il
li
ance,conv
ict
edbey
ond
r
eason(
oft
enwi
thoutmar
ketr
esear
ch)t
hatt
hei
rbr
ighti
deawi
l
lchanget
hewor
ld
-
ithast
osee!Thi
sar
rogancewi
l
lnotal
l
owt
hem t
otakeadv
icef
rom ot
her
s.

o Mi
smanagement
:humbl
eent
repr
eneur
sst
eepedi
nexper
iencecanst
il
lgounder
si
mpl
ymi
smanagementof r
esour
ces;
theysi
mpl
ymakebaddeci
sionsi
ncr
it
ical
si
tuat
ions.Thesemayi
ncl
ude:

a)Ov
eri
nvest
mentonf
ixedasset
s:whenst
art
ingandexpandi
ngabusi
ness,i
tis
t
empt
ingt
obuyf
aci
l
iti
esandequi
pment
srat
hert
hanl
easeorsubcont
ract
.Ev
ery
one
l
i
kest
oownasset
s,butgr
eat
eri
nvest
mentonf
ixedasset
smeansl
essf
lexi
bil
i
tyt
o
adj
ustt
oadv
ersecondi
ti
ons.

b)Poori
nvent
orycont
rol
:pur
chasi
ngt
oomuchi
nvent
oryi
ncr
easest
her
iskofl
ow
t
urnov
er and obsol
escence. Hav
ing t
oo l
i
ttl
e i
nvent
ory under
mines cust
omer
sat
isf
act
ion and sal
es.Buy
ing t
he wr
ong i
nvent
ory
,orbuy
ing att
he wr
ong t
ime,
ev
apor
atescash.I
neachscenar
io,t
hebusi
nesst
iesuphi
gh-
power
edcashi
nnon-
ear
ningasset
s,andt
hei
nvent
oryi
temscanr
arel
ybedi
sposedofmor
ethanaf
ract
ion
oft
hei
rcost
sinanemer
gency
.Ther
esul
tist
hatabusi
ness"
pur
chases"i
tsel
fint
o
i
nsol
vency
.

c)Poorf
inanci
alcont
rol
:Becauseofpoorcont
rolov
ercr
edi
tsal
es,poorbookkeepi
ng,
and adv
ances and r
egul
arpay
mentf
ori
nvent
orypur
chase,l
oan pay
ment
s,l
ease
pay
ment
s,ut
il
it
ycost
,tel
ephonebi
l
ls,
andpay
rol
lexpenses.

o Poorbusi
nessphi
losophy:Anunf
ort
unat
easpectofmanybusi
nessf
ail
uresi
sthat
of
ten-
indi
vi
dualowner
’spr
ior
it
iesgeti
nthewayofsoundbusi
nesspr
act
ices.I
nthe
l
estobt
rusi
veway
,ent
repr
eneur
s,maynotbef
ull
ycommi
tt
edt
othel
onghour
s
r
equi
redt
omakeav
ent
uresuccessf
ull
y.

o Lackofpl
anni
ng:mostent
repr
eneur
sfr
equent
lyunder
est
imat
ethei
mpor
tanceof
pl
anni
ng i
nthe busi
ness success.Notpl
anni
ng means notant
ici
pat
ing f
utur
e
pr
obl
ems;chal
l
engesnotbei
ngpr
epar
edf
ort
hem i
nadv
ance.Thi
ssur
elyl
eadst
he
ent
repr
eneuri
ntomaki
ngmi
stakesandf
aci
ngpr
obl
ems,whi
chcoul
dhav
eeasi
l
y
av
oidedt
hroughsoundpl
anni
ng.

3.
8.Pr
obl
emsi
nEt
hiopi
anSmal
lBusi
ness

Smal
l–scal
eindust
ri
eshav
enotbeenabl
etocont
ri
but
esubst
ant
ial
l
yasneededt
othe
economi
cdev
elopmentpar
ti
cul
arl
ybecauseoff
inanci
al,pr
oduct
ion,andmar
ket
ing
pr
obl
ems.Howev
er,accor
dingt
oWor
ldBankr
epor
tthecasehasshowni
mpr
ovement
ov
ert
hel
astt
hreey
ear
s.Thesepr
obl
emsar
est
il
lmaj
orhandi
capst
othei
rdev
elopment
.
Lackofadequat
efi
nanceandcr
edi
thasal
way
sbeenamaj
orpr
obl
em i
nEt
hiopi
an
smal
lbusi
nesses.Smal
l
-scal
euni
tdonothav
eeasyaccesst
othecapi
talmar
ket
becauset
heymost
lyor
gani
zedonpr
opr
iet
arypar
tner
shi
pbasi
sandar
eofv
erysmal
l
si
ze.Theydonothav
eaccesst
oindust
ri
alsour
cesoff
inancepar
tl
ybecauseoft
hei
r
si
zeandpar
tl
ybecauseoft
hef
actt
hatt
hei
rsur
plusest
hatcanbut
il
izedt
orepayl
oans
ar
enegl
i
gibl
e.Becauseoft
hei
rsi
zeandpar
tl
ybecauseoft
hei
rli
mit
edpr
ofi
t,t
hey
sear
chf
orf
undsf
ori
nvest
mentpur
pose.Consequent
ly,t
heappr
oachmoney
lender
s
whochar
gehi
ghr
ateofi
nter
esthencesmal
lent
erpr
isescont
inuet
obef
inanci
all
yweak.
Smal
l
-scal
eent
erpr
isesf
indi
tdi
ff
icul
ttogetr
awmat
eri
alsofgoodqual
i
tyandcheaper
r
atesi
nthef
iel
dofpr
oduct
ion.Ver
yof
ten,t
heydonotgetr
aw mat
eri
ali
nti
me.Asa
r
esul
t,t
heseent
erpr
isesv
eryof
tenf
ailt
opr
oducegoodsi
nrequi
sit
equant
it
iesandof
goodqual
i
tyofal
ow cost
,fur
ther
mor
e,t
het
echni
quesofpr
oduct
ion,whi
cht
hese
ent
erpr
isehav
eadopt
ed,ar
eusual
l
youtdat
ed.Becauseoft
hei
rpoorf
inanci
alposi
ti
on
t
heyar
enotabl
etobuynewequi
pmentconsequent
lyt
hei
rpr
oduct
ivi
tysuf
fer
s.Besi
des,
manysmal
lbusi
nessent
erpr
isesar
esuf
fer
ingwi
tht
hepr
obl
em ofmar
ket
ingt
hei
r
pr
oduct
s.

Smal
lbusi
ness’
sownercanav
oidsomeoft
hecommonpi
tf
all
sthatl
eadt
obusi
ness
f
ail
urebyknowi
ngt
hebusi
nessi
ndept
h;dev
elopi
ngasol
i
dbusi
nesspl
an;managi
ng
f
inanci
alr
esour
ces;
under
standi
ngf
inanci
alst
atement
s;andl
ear
ningt
omanagepeopl
e
ef
fect
ivel
y.

3.
9Cl
assi
fi
cat
ionofEnt
erpr
isesi
nEt
hiopi
anCont
ext
1.I
nCaseofManuf
act
uri
ngEnt
erpr
ise(
Manuf
act
uri
ng,
Const
ruct
ionandMi
ning)
:

AMi
A, croEnt
erpr
isei
sonei
nwhi
cht
hei
nvest
menti
npl
antandmachi
ner
y(t
otal
asset
)
doesnotexceedbi
rr
100,
000(
onehundr
edt
housand)
;andoper
ateswi
th5peopl
e
i
ncl
udi
ngt
heowner
.

B)Smal
lEnt
erpr
isesi
sonei
nwhi
cht
hei
nvest
menti
npl
antandmachi
ner
y(apai
dup
capi
tal
oft
otal
asset
)ofbi
rr100,
000(
onehundr
edt
housand)andnotmor
ethanBi
rr
1.
5mi
l
li
on;
andoper
ateswi
th6-
30per
sons.

2.I
nCaseofSer
viceEnt
erpr
ise(
Ret
ail
ing,
Transpor
t,Hot
elandTour
ism,
ICTand
Mai
ntenance)
:
a)Ami
croent
erpr
isei
sonewi
tht
hev
aluesoft
otal
asseti
snotexceedi
ngBi
rr
50,
000(
fi
ft
ythousands)
;andoper
ateswi
th5per
sonsi
ncl
udi
ngt
heowneroft
he
ent
erpr
ise.

b)Smal
lEnt
erpr
isesi
sonei
nwhi
cht
het
otal
assetv
alueorapai
dupcapi
tal
ofbi
rr
100,
000(
onehundr
edt
housand)andnotmor
ethanBi
rr1.
5mi
l
li
on;
andoper
ateswi
th6-
30
per
sons.
Mor
ecl
ear
ly,
thei
mpr
oveddef
ini
ti
onofMSEi
spr
esent
edi
nthet
abl
ebel
ow.

Whenambi
gui
tyi
sencount
eredbet
weenmanpowerandt
otal
asset
sasexpl
ained
abov
e,t
otal
asseti
stakenaspr
imar
yyar
dst
ick.
Pr
ior
it
ySect
orsandSub-
Sect
orsf
orMSEsEngagementI
nEt
hiopi
a
1.Manuf
act
uri
ngSect
or-Thi
sist
heonewhi
chcompr
isest
ext
il
eandgar
ment
;leat
her
andl
eat
herpr
oduct
s;f
oodpr
ocessi
ngandbev
erage;
met
alwor
ksandengi
neer
ingwood
wor
ksi
ncl
udi
ngf
urni
tur
eandor
nament
sser
vice;
andagr
o-pr
ocessi
ng.

2.Const
ruct
ionSect
ors-Thi
sist
heonewhi
chcompr
isessub-
cont
ract
ing;
bui
l
ding
mat
eri
als;
tradi
ti
onal
mini
ngwor
ks;
cobbl
est
one;
inf
rast
ruct
uresub-
cont
ract
;and
pr
est
igi
ousgoods

3.Tr
adeSect
ors-Thi
sist
heonewhi
chcompr
iseswhol
esal
eofdomest
icpr
oduct
s;
r
etai
lsal
eofdomest
icpr
oduct
sandr
awmat
eri
alssuppl
y.

4.Ser
viceSect
ors-Thi
sist
heonewhi
chcompr
isessmal
landr
ural
transpor
tser
vice;
caf
éandr
est
aur
ant
s;st
oreser
vice;
tour
ism ser
vice;
canni
ng/
packi
ngser
vice;
managementser
vice;
muni
cipal
i
tyser
vice;
proj
ectengi
neer
ingser
vice;
productdesi
gn&
dev
elopmentser
vice;
mai
ntenanceser
vice;
beaut
ysal
on;
andel
ect
roni
cssof
twar
e
dev
elopment
;decor
ati
onandi
nter
netcaf
é.
5.Agr
icul
tur
eSect
or(
UrbanAgr
icul
tur
e)-Thi
sist
heonewhi
chcompr
isesmoder
n
l
i
vest
ockr
ari
ng;
beepr
oduct
ion;
poul
tr
y;moder
nfor
estdev
elopment
;veget
abl
esand
f
rui
ts;
moder
nir
ri
gat
ion;
andani
mal
foodpr
ocessi
ng.
3.
10Lev
elsofMSEsi
nEt
hiopi
a
St
art
-up:
-St
artupl
evel
ref
erst
oent
erpr
isest
hati
ncor
por
atepeopl
ewhoar
eint
erest
ed
t
oest
abl
i
shMSEandt
hosewhocompl
etedt
her
equi
redpr
ofessi
on/
ski
l
lfr
om v
ari
ous
i
nst
it
uti
onsandi
nnov
atedbyl
egal
l
yei
theri
nthef
orm ofassoci
ati
onorpr
ivat
e.I
tisa
l
evel
wher
eanent
erpr
isebegi
nspr
oduct
ionandser
viceunderl
egal
framewor
korl
egal
ent
it
y.
Gr
owt
hLev
el:-Anent
erpr
isei
ssai
dtobeatgr
owt
hlev
elwhenanent
erpr
isebecome
compet
enti
npr
ice,
qual
i
tyandsuppl
yandpr
ofi
tabl
eusi
ngt
hesuppor
tpr
ovi
ded.Att
his
l
evel
,theent
erpr
isemanpowerandt
otal
asseti
slar
gert
hanatst
art
upl
evel
;anduse
bookkeepi
ngsy
stem.
Mat
uri
tyLev
el:-Mat
uri
tyl
evel
meanswhenanent
erpr
iseabl
etobepr
ofi
tabl
eand
i
nvestf
urt
herbyf
ulf
il
li
ngt
hedef
ini
ti
ongi
vent
othesect
orandusi
ngt
hesuppor
t
pr
ovi
ded.
Gr
owt
h-Medi
um Lev
el:
-Anent
erpr
isei
ssai
dtobet
ransf
ormedf
rom smal
ltomedi
um
l
evel
ofgr
owt
hiswheni
tenabl
edt
obecompet
enti
npr
ice,
qual
i
tyandsuppl
yusi
ngt
he
suppor
tgi
vent
othel
evel
.