Module 1 – Introductory Concepts

Agric 105
INTRODUCTION TO ENTERPRISE AND
ENTREPRENEURSHIP

Prepared by:
Mary Joy C. Padungao
 Agric 105 – Introduction to Enterprise and
Entrepreneurship

MODULE 1 – Introductory Concepts

I. Entrepreneurship: What does it mean
II. Farming as a Business
III. Role of Farmers as Entrepreneurs
IV. Small Business Management

Introduction

Do you know that there are a number of unemployed youth in the country and by the
time you graduate, this number may increase substantially? Do you want to be part of that
group which keeps knocking from pillar to post, checking with employment exchanges,
relatives, friends, and neighbors and still not able to get a job to their liking and then settle for
a second or third rate job? These all challenges can be solved by the active involvement of
entrepreneurship in the economic development of the nation. Entrepreneurship is a dynamic
process of vision, change, and creation. It requires an application of energy and passion
towards the creation and implementation of new ideas and creative solutions. It requires
essential ingredients of an entrepreneurs such as the willingness to take calculated risks; ability
to formulate an effective venture team; the creative skill to marshal needed resources;
fundamental skills of building a solid business plan; vision to recognize opportunity where
others see chaos. Not all entrepreneurs are created equal degrees. Different degrees/ levels of
entrepreneurial intensity and drive depend upon how much independence one exhibits, the
level of leadership and innovation they demonstrate, how much responsibility they shoulder,
and how creative they become in envisioning and executing their business plans.

Learning Objectives
Upon successful completion of this module, you will be able to:

 Define and know the Meaning of the terms Entrepreneur, Entrepreneurship and
Enterprise;
 Understand the essential characteristics of an entrepreneur;
 Differentiate Entrepreneur to Manager;
 Recognize farming as a Business; and
 Understand the role of a farmer as an entrepreneur.

I. Entrepreneurship: What does it mean

Entrepreneurship is basically concerned with creating wealth through production of

goods and services. This results in a process of upward change whereby the real per capita
income of a country rises overtime or in other words economic development takes place. Thus,
entrepreneurial development is the key to economic development. In fact it is one of the most
critical inputs in the economic development of a region. It speeds up the process of activating
factors of production leading to a higher rate of economic growth, dispersal of economic
activities and development of backward regions.

Entrepreneurship is characterized by the utilization of a given opportunity through

creativity and innovation. Creativity is the ability to develop new ideas and to discover new
ways of looking at problems and opportunities. Innovation is the ability to apply creative
solutions to those problems and opportunities in order to enhance people’s lives or to enrich
society.

2
Definition of Entrepreneur, Entrepreneurship and Enterprise
The term entrepreneur stems from the French word ‘ entrependre’ meaning one who
undertakes or one who is a ‘go-between’. According to Richard Cantillon, “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”. According to J.B. Say, an entrepreneur is an economic agent who unites all
means of production- land of one, the labor of another and the capital of yet another and thus
produces a product. By selling the product in the market he pays rent of land, wages to labor
and interest on capital and what remains is his profit. He shifts economic resources out of an
area of lower productivity into an area of higher productivity and greater yield.

Entrepreneurship can be described as a process of action an entrepreneur undertakes

to establish his/ her enterprise. Entrepreneurship is a creative activity. It is the ability to create
and build something from practically nothing.

According to Peter Drucker 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.’

According to Schumpeter entrepreneurs are innovators who use a process of

shattering the status quo of the existing products and services, to set up new products, new
services. David McClleland: An entrepreneur is a person with a high need for achievement.
He is energetic and a moderate risk taker.

Entrepreneurship is a creative activity. It is the ability to create and build something

from practically nothing. It is a knack 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.

In an integrate, entrepreneurship is a dynamic process of vision, change, and creation.

It requires an application of energy and passion towards the creation and implementation of
new ideas and creative solutions. It requires essential ingredients that include: the willingness
to take calculated risk; the ability to formulate an effective venture team; the creative skill to
marshal needed resources; the fundamental skills of building a solid business plan; and the
vision to recognize opportunity where others see chaos, contradiction, and confusion.

The relationship among an entrepreneur, entrepreneurship and enterprise

The term entrepreneur is used to describe men and women who establish and manage
their own business. The process involved in creating and starting an enterprise 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. The entrepreneur is the
key individual central to entrepreneurship who makes things happen. The entrepreneur is the
actor, entrepreneurship is the act. Entrepreneurship is the most effective way of bridging the
gap between knowledge and the market place by creating new enterprises. An entrepreneur is
the catalyst who brings about change.

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

3
Essential Characteristics of an Entrepreneur
In the past, an entrepreneur was seen almost as a hero, such as Thomas Edison or
Henry Ford, who had a big idea, worked hard, and was creative enough to become a big
success. The average worker depended on the entrepreneurial hero to give them opportunities.
An entrepreneur frequently has to wear many hats. He has to perceive opportunity, plan,
organize resources, and oversee production, marketing, and liaison with officials. Most
importantly he/she has to innovate and bear risk.

In general, business literature shows several characteristics essential for entrepreneurs

that distinguish ordinary entrepreneurs from the extraordinary ones. The following are
characteristics that are found within all successful entrepreneurs and without which most
people will fall short of what it takes to succeed in an entrepreneurial enterprise.

 Confident. Confidence is a hallmark of the entrepreneur. Not all of us are born with
confidence, but that does not mean we are not capable of it. Many confident women and men
gain their sense of self-esteem and faith in their ability to greet challenges by experience and
formal education.

 Feel a Sense of Ownership. Taking responsibility for getting things done – and
doing them with care and attention – meaning, to act like an owner. Rather than viewing a
problem as someone else’s, the entrepreneur sees it as his or her own and takes pride in
finding a solution; leaving things in better shape than they were before, and improving upon
situations rather than leaving them unattended. Rather than controlling situations in an attempt
to possess them, the entrepreneur teaches other people how to take charge. In that way the
clever entrepreneur uses individual accountability in the ultimate pursuit of profitability,
teamwork, and overall success.

 Able to Communicate. Entrepreneurs recognize that the most important part of any
business is the human element. Human resources –whether in the form of clients, employees,
or strategic partners – are what make or break a business, and communication is the key to
successful relationships with people. The entrepreneur works to sharpen communication skills,
whether those are written, spoken, or non-verbal messages conveyed through body language.
And to support communication, he or she will take advantage of all available tools and
resources.

 Passionate about Learning. Entrepreneurs are often “autodidactic” learners, which

mean that much of what they know is learned not in a formal classroom setting, instead on
their own by seeking out information, asking questions, and by personal reading and research.
They also are quick to learn from their own mistakes, which mean they are less prone to keep
repeating them due to arrogance, ego, or blindness to one’s own faults, shortcomings, or errors
in judgment. To teach is to learn. To lead, train, and impart experience to others the
entrepreneur is constantly striving to learn more, and get better educated. Because of the
passion for education, true entrepreneurs surround themselves with people who either know
more than they do or know things that are different from what they know. They entertain the
views and perspectives of others that may be unlike their own, for instance, to be better
students of human nature. In this way they continue to enrich themselves with knowledge while
making a concerted effort to grow that knowledge by sharing it with others who are also front
row students of life’s valuable and unlimited lessons.

 Team Player. Team players know how to succeed by employing the physics of
interpersonal synergy and dynamic relationships. One twig can be easily snapped, but a bundle
of those small twigs becomes stronger than the sum of its individual parts and can be
impossible to bend, much less break. The same goes for businesses, and successful
entrepreneurs leverage teamwork to get the heavy lifting done without breaking stride.

 System-Oriented. Like mathematical formulas, good systems allow us to reproduce

great results every time – with less and less exertion of energy or resources. Entrepreneurs rely
upon systems before they rely upon people, and they look for system based solutions before
searching for human resource solutions. If the person gets the job done but falls sick or leaves,
4
the job is threatened. But if a system is created to get the job done, anyone can step in and
follow the blueprint to get the desired result. Designing, implementing, and perfecting systems
is one of the most useful and rewarding skills of an entrepreneur.

 Dedicated. Entrepreneurs dedicate themselves to the fulfillment of their plans,

visions, and dreams, and that tenacity of purpose generates electricity throughout the whole
organization. One of the biggest reasons that companies fail is because they lose focus. Target
a goal, clarify the objective, refine the brand, and narrow the margin of error. Regardless of
what the effort might involve, an entrepreneur brings a singleminded dedication to the task by
being committed to a positive outcome and ready and willing to do the needful. No matter what
that might mean in terms of rising to meet a challenge or acting above and beyond the call of
duty, the entrepreneur shows steadfast dedication.

 Grateful. Being grateful for what we have opens us up to receive more, and one
reason that is true is because those who are grateful appreciate what they are given. They
respect it and nurture it. They do their best to make it grow instead of allowing it to dwindle
away due to neglect. Entrepreneurs learn to take nothing for granted in this world. That gives
them the agility and flexibility to adapt to changes and demands, while it also invests in them a
thankfulness that reminds them that riches and wealth are not about “stuff”, but are about
fulfillment, satisfaction, and the pleasure that comes from one’s accomplishments and
contributions.

 Optimistic. A positive outlook is essential for the entrepreneur, who learns to see
setbacks as bargain priced tuition for the valuable business lessons gained through firsthand
experience. Past shortcomings, failures, or disappointments are relegated to the past so that
they cannot continue to haunt the present or obstruct the future. And when things go right and
business prospers, this further fuels the optimism and positive mindset of an entrepreneur,
helping to give impetus and momentum for greater accomplishments and increased
hopefulness.

 Gregarious. Because business is all about people, entrepreneurs tend to be socially

outgoing. They get excited about sharing ideas, products, and services, and that excitement is
contagious to their employees, clients, friends, and other contacts both within and beyond the
business sphere. But women and men who work hard as entrepreneurs also enjoy the unique
opportunity to have fun doing something that they love as their primary vocation. Human
resource experts, career counselors, and business psychologists all agree that those who do
jobs they enjoy and are good at have higher rates of success and broader measures of
satisfaction. Entrepreneurs know that firsthand, from their own experience, and they tend to be
a fun-loving group of people both on and off the job.

 Leader by Example. Entrepreneurs not only lead themselves through self-motivation

as self-starters who jump into tasks with enthusiasm, but they are also skilled at leading others.
They know the importance of teamwork, and they understand the need to appreciate others,
support them, and reward them accordingly. True leaders do not become indispensable,
otherwise things fall apart in their absence and they can never rise to the highest level of
entrepreneurial freedom and prosperity.

 Not Afraid of Risk or Success. Many people could be successful if they only took
chances. And many people who do take chances and become somewhat successful find the
realization of their dreams an overwhelming possibility, so they interrupt their continued
success by retreating back into a comfort zone of smallness. Those who cling to what is familiar
to them – even if it means the denial of their dreams – lack the perseverance and ambition that
the real entrepreneur exhibits. Entrepreneurs are not immune to fear. But they prioritize their
approach to life so that the fear of failure, frustration, boredom, drudgery, and dissatisfaction
far outweighs the persistent fear of success.

Entrepreneur vs. manager

Are all small entrepreneurs managers? Are all small business managers entrepreneurs?
The terms entrepreneur and manager are many times used interchangeably yet they are
5
different.

6
An entrepreneur starts a venture then a manager takes over to organize and co-ordinate
continuous production. An entrepreneur is being enterprising as long as he starts something
new then the routine day-to-day management of the business is passed on to the manager.
The main differences between the two are summed up below:

Entrepreneur

 An entrepreneur is involved with the start-up process

 An entrepreneur assumes financial, material and psychological risks
 An entrepreneur is driven by perception of opportunity
 An entrepreneur initiates change
 An entrepreneur is his own boss
 An entrepreneur gets uncertain reward

Manager

 A manager runs the business over a long period of time

 A manager does not have to bear risks
 A manager manages by the resources he currently possesses
 A manager follows rules & procedures
 A manager gets fixed rewards and salary

Role of entrepreneurship in economic development

The industrial health of a society depends on the level of entrepreneurship existing in it.
A country might remain backward not because of lack of natural resources or dearth of capital
[as it is many times believed] but because of lack of entrepreneurial talents or its inability to tap
the entrepreneurial talents existing in that society. Entrepreneurs historically have altered the
direction of national economies, industries or markets. The following are some of the roles of
entrepreneurship in economic development.

 Increasing the per capita output and income of the people of the country.
 Initiating and creating change in the structure of business and society. Further
growth and increased output arises, thus to enable more wealth to be divided
among the various participants (stakeholders).
 Generation of innovation that leads to the creation of new products and services.
 Improvisation and modification on existing product to better suit market and
customers’ needs.
 Creation of self-employment and to cut back the dependency of potential
employment of new workers in government sectors.
 Streamline of the private sector and encourage the inclusion of new technology that
is less labor dependent.
 Increase in the national outputs which in turn lead to greater and stronger
economic growth.
 Laying the seed bed for creating new entrepreneurs in various new technologies
 Acting as a catalyst to nurture intrapreneurs in a business organization.

II. Farming as a Business

What is entrepreneurship?
Entrepreneurship, value chains and market linkages are terms that are being used more
and more when talking about agriculture and farming. Many small-scale farmers and extension
organizations understand that there is little future for farmers unless they become more
entrepreneurial in the way they run their farms. They must increasingly produce for markets
and for profits. Becoming more entrepreneurial can be a challenge for small-scale farmers. They
will need help from extension workers and other institutions.

7
 What is an entrepreneur? An entrepreneur is someone who produces for the market. An
entrepreneur is a determined and creative leader, always looking for opportunities to improve
and expand his business. An entrepreneur likes to take calculated risks, and assumes
responsibility for both profits and losses. An entrepreneur is passionate about growing his
business and is constantly looking for new opportunities.

Entrepreneurs are also innovators. They always look for better and more efficient and
profitable ways to do things. Being innovative is an important quality for a farmer-entrepreneur,
especially when the business faces strong competition or operates in a rapidly changing
environment.

Farmers as entrepreneurs
Can small-scale farmers become entrepreneurs? Yes. Small-scale farmers all over the
world have shown a remarkable ability to adapt. They look for better ways to organize their
farms. They try new crops and cultivars, better animals, and alternative technologies to
increase productivity, diversify production, reduce risk – and to increase profits. They have
become more market-oriented and have learned to take calculated risks to open or create new
markets for their products. Many small-scale farmers have many of the qualities of an
entrepreneur.

For small-scale farmers to become entrepreneurs they need all of these qualities and
more. They need to be innovative and forward-looking. They need to manage their businesses
as long-term ventures with a view to making them sustainable. They need to be able to identify
opportunities and seize them.

Some small-scale farmers do have these qualities, but they still focus on maintaining
their traditional way of life. Their production decisions are based on what they need -- not on
what is possible.

The farmer-entrepreneur produces a clear picture in his mind of what is possible and the
future he wants. He knows that what is possible is determined by the market. The farmer-
entrepreneur is always looking for new opportunities. He knows that new opportunities are
found in the market. The farmer-entrepreneur wants to make profits. He knows that profits are
made in the market.

An entrepreneurial farmer has the initiative, drive, capacity and ability to take advantage
of opportunities.

Smallholder farmers usually farm for one of four reasons:

• Exclusively for home consumption with rarely any surpluses produced;

• Mostly for home consumption, but with the intention of selling surpluses on the market;
• Partly for the market and partly for home consumption; or
• Exclusively for the market.

Figure 1 Ladder of intentions and reasons for farming

8
 On the first rung of the ladder are farmers who farm exclusively for home consumption.
If there is a surplus, they will sell it on the market, but this is very rare. Often these farmers are
struggling with the basic survival of themselves and their families. They usually lack security in
terms of health, water, food and shelter. They are rarely in the position to commit their minds
and bodies to entrepreneurial tasks. While they may be entrepreneurial in spirit, they usually
lack the opportunity to farm as entrepreneurs.

On the second rung are farmers who have greater opportunities that allow them to
produce beyond just surviving. These opportunities are still very limited. However, by changing
their resource mix and overcoming access and risk issues, opportunities can be expanded. Such
farmers are sometimes viewed as ‘pre-entrepreneurial’, requiring support to move into a more
independent position. At this level the farmers are not ‘entrepreneurs’ in the true sense and
neither are they truly market-oriented. They have a greater appreciation of the market and
have expanded their survival farming to include some economic activities. They are just starting
out on the path towards developing profit-driven farming businesses.

These farmers do yet see their farms as businesses. Long-term investment is not yet a
priority. They are hesitant about diversifying to higher value products. They are comfortable
selling surpluses of their foodrops. Shifting to cash crops is too extreme and involves risks that
they are not willing to take.

The third rung represents farmers who understand the value of farming for the market,
but are often limited by access to finance, labor or market information. The elements are all
there, but they cannot risk family food requirements without greater certainty of income from
cash crops. The choice between producing primarily for the market with some produce utilized
for home consumption or primarily for home consumption with some produce sold in the
market depends on their circumstances and their willingness to take risks.

Farmers on the fourth rung are fully market-oriented. Their primary reason for farming
is to make profits by producing for the market. They are interested in profits, not food
production. To be successful at market-oriented farming, the farmer needs greater farm
management and entrepreneurial skills.

III. Role of Farmers as Entrepreneurs

The Entrepreneurial Environment

Being an entrepreneur is a way of life and a way of looking at the world. Entrepreneurs
enjoy independence and freedom. They decide for themselves what to do and when to do it.
Entrepreneurs also face risks, work under pressure and are immediately accountable for the
outcomes – good or bad – of their decisions.

While farmer-entrepreneurs are free and independent, they do not work alone. They
operate in a complex and dynamic environment. They are part of a larger collection of people
including other farmers, suppliers, traders, transporters and processors, each of whom has a
role to play in the value chain.

9
 Figure 2 The world of the farmer-entrepreneur

For farmers to cope with the risks they will face in the complex world in which they
compete, they need to develop an entrepreneurial spirit. A farmer with an entrepreneurial spirit
energetically, enthusiastically and carefully makes many different decisions about his farm in
the context of the value chain that influences the profits of the farm business. This is all
happening in a dynamic, ever-changing and uncertain setting.

To make sure their farm businesses develop and adapt in response to these changes,
farmer-entrepreneurs need to:

• Stay focused on their purpose;

• Do their best to turn every event to their advantage;

• Seize every opportunity and make the best of it;

• Make the whole system work in their favor.

The ‘way of life’ of a farmer-entrepreneur

• Freedom in making decisions about the business and the relationship with family
• Control over what has to be done, when and in what order
• Working alone often in solitude
• Coping with a wide range of managerial and ‘day to day’ tasks
• Lives with uncertainty; if you can’t generate profit you may not survive in the future
• Risking personal assets and security
• High level of responsibility and risk of failure
• Lives with an inability to control the actions of stakeholders upon whom the success of
the business depends
• Develops trust and alliances with other stakeholders where mutual benefits exist
• Works long and irregular hours to meet demands
• Closely interwoven family and business life
• Social status is linked to the success of the business
• ‘Learns by doing’ under pressure from stakeholders, by solving problems, experimenting,
seizing opportunities, and learning from competitors

Entrepreneurship Dynamics
The idea of entrepreneurship is complex. When a farmer introduces a new enterprise
into his farming system, there are different stages of development that the enterprise goes
through. The skills of the farmer must also change and develop to meet the management
demands of the enterprise.

10
 The development of a farm enterprise as a business occurs in five phases:

• Establishment
• Survival
• Early growth
• Rapid growth
• Maturity (and possible decline)

Establishment: The organization of the business at this stage is usually quite simple.
Challenges relate to market potential, the motivation of the farmer, the availability of resources
and basic business skills. Farmers require skills to negotiate with banks and other agencies in
order to get the assistance they need to establish their new enterprise. The key questions are:

• How can this become a profitable business enterprise?

• How can this become a profitable business enterprise?

• How will it impact on my farm as a whole?

• How can I establish a market?

• Do I have enough money to cover the cash demands in setting up the enterprise?

During this stage, the organization is simple and the farmer has to do most everything
himself. The focus is on making sure the product is produced, gets to market and is sold. Since
it is the first time he is producing this product, everything is new. Many new enterprises do not
survive the first season of production and marketing. Those that do, enter the survival stage.

Survival: Starting a new enterprise shows that the farmer has some entrepreneurial
skills. Surviving the first stage shows that the new enterprise has short-term viability. In the
survival stage, the focus is on the relationship between the income earned and the costs
entailed. The key questions are:

• Can I generate enough income to break-even in the short-run and to replace capital
equipment?

• Can I generate enough income to expand or diversify production according to market

demands to ensure long-term viability?

Many surviving enterprises stay in the survival stage. The farmer will need to consider if
he wants to do the work to keep growing. If he does, he will need to figure out how to build on
the success of the enterprise to move to the next stage.

Early growth: If the farmer decides to take his new enterprise beyond survival, the
enterprise needs to grow. To achieve this, the farmer needs to develop a broader product and
buyer base while ensuring that the farm business remains profitable. He must also ensure that
farm operations are efficient, find the information needed for better management and hire
more skilled staff to cope with the increased production, marketing and management activities.
While the organization may still be simple, growth requires more managerial skills and qualities
to cope with the more complex farm management activities and decisions.

Rapid growth: Once the farm enterprise is working as a well-integrated farm business,
it is in a position where it can achieve rapid growth. One way to grow is by increasing the
amount of land planted and/or raising more livestock. This will give more product to sell.
Another way is to add value to the product by processing it and/ or packaging it.

During the rapid growth stage the farmer is likely to have to delegate some managerial
responsibilities. He will need to change the way communication is done, and to make some
tasks routine. To do this, the farmer will need even broader managerial skills. As the scope of
the farm business increases, the entrepreneurial and managerial skills of the farmer must also
increase.

11
 Sometimes a small-scale farmer may prefer to remain small. When his farm reaches the
size that satisfies his requirements and purpose for farming, he may prefer to keep the business
at that level. But making this decision must not be because of a lack of knowledge, skill or
opportunity.

Maturity (and possible decline): Eventually, the farm business reaches maturity. This
means that it stops growing or expanding. It reaches a point of balance where land size, market
opportunities and the scope of activities are in balance with the skills and vision of the farmer.
As long as the farmer and the farm business continue in this balance the farm business will
continue. If the enterprises are profitable and the farm is well managed, the business can be
sustained.

Figure 3. Farm enterprises generally move through these five stages

However, a thriving business will still face challenges and threats. There might be many
competing farmers selling in the same market. Other farmers may have newer, more efficient
methods of production and processing that give them an advantage. The farmer has to be
entrepreneurial in adapting to these threats; innovating and developing strategies to ensure the
farm business remains profitable and viable.

Inevitably, the farmer will need to decide about the future of his thriving business. Will
the business outlive the farmer? Will he sell the business or hand it over to another family
member? Should he close the business down?
Understanding these stages helps extension workers provide farmer-entrepreneurs with
appropriate support, guidance and advice. It is important to remember that, in most cases,
farmers are not starting with a completely new farm. They have working farms that already
have one or two enterprises. Aspects of their farms may already be in the post-survival stages
-- some even in the maturity stage. Each new enterprise that is introduced, however, will follow
these stages.

IV. Small Business Management

Specifying size and standard to define small business is necessarily arbitrary, because
people adopt different standards for different purposes. Based on socio- economic conditions,
countries define small business differently. But all may use size and economic criteria as a base
to define small business. Size criteria include number of employees and the startup capital. Size
does not always reflect the true nature of an enterprise; in addition, qualitative characteristics
are used to differentiate small business from other business. The economic/control definition
covers market share, independence and personalized management.

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. While the small
entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the
flexibility to handle the vagaries of the market, they have to face many problems like lack of
fiancé, poor operations management, lack of experience, poor financial management, etc,.
The process of
12
setting up a venture begins with searching for an opportunity. Identifying a good opportunity is
a difficult task and involves scanning the environment and the use of creativity and innovation.

Concepts and definition of Small Business

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, but “large” when
compared to smaller ones. 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.

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 turnover, asset size, and volume of deposits, total
capital investment, volume/value of production, and a combination of the stated factors.

Even though number of employees-is the most widely used yardstick, the best criterion
in any given case depends upon the user’s purpose. To provide a clearer image of the small
firms, the following general criteria for defining a small business are suggested by Small
Business Administration (SBA)

 Financing of the business is supplied by one individual or a small group. Only in a rare
case would the business have more than 15 or 20 owners.

 Except for its marketing function, the firm’s operations are geographically localized.

 Compared to the biggest firms in the industry, the business is small.

 The number of employees in the business is usually fewer than 100.

This size criteria based definition of SMEs varies from country to country. All over the
world, number of employees or capital investment or both have been used as the basis for
defining SMEs.

The following are size criteria definitions of SMEs in some of the developing and
developed countries:

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 paidup 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 less than Birr
20,000 but not more than Birr 500,000, but excluding high-tech consultancy firms and other
high-tech establishments.

13
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

 Independence

 Personalized management

All three of these characteristics must be satisfied if the business is to rank as a small business.

 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. It, therefore, rules out those small subsidiaries which though in many ways
fairly autonomous, nevertheless have to refer to major decisions (e.g., on capital
investment) to a higher level of authority,

 Personalized Management: It is the most characteristics factor of all. 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. One person is
involved when anything material is involved.

 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.

The (Micro Small Medium Enterprise) MSME in the Philippines

Micro, small and medium enterprises (MSMEs) have a very important role in developing
the Philippine economy. They help reduce poverty by creating jobs for the country’s growing
labor force. They stimulate economic development in rural and far-flung areas. They serve as
valuable partners to large enterprises as suppliers and providers of support services. They serve
as breeding ground for new entrepreneurs and large corporations. A vibrant MSME sector is
thus an indication of a thriving and growing economy. Despite policies that aim to provide an
enabling environment for MSME development, the sector still faces various constraints that
prevent it from realizing its full growth and potential.

An MSME in the Philippines is defined as any business activity or enterprise engaged in

industry, agri-business and/or services that has: (1) an asset size (less land) of up to PhP100
million; and (2) an employment size with less than 200 employees. 1 Based on these
categories, it is classified as micro, small or medium (Table 1) regardless of the type of
business ownership (i.e., single proprietorship, cooperative, partnership or corporation).

Table 1. MSME Classification

14
 As of 2010, there were a total of 777,687 business enterprises in the Philippines. Of this
figure, MSMEs represented 99.6 percent with 774,664 establishments while large enterprises
represented 0.4 percent with 3,023 establishments. Micro enterprises comprised 91.6 percent
(709,899) of the total number of MSMEs while small and medium enterprises accounted for 8
percent (61,979) and 0.4 percent (2,786), respectively.

Advantages of going into Small Business

The desire for individuals to own and operate their own small business is growing. As
stated earlier, this continual creation of new business is at the heart of free enterprise system.
For individuals pursuing a career in business ownership, numerous benefits can be attained
personally as well as professionally. The next section explains the following 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. Although a great deal of responsibility is associated with
this independence, they are also willing to assume it.

 Financial Opportunities. Another major reason for going into business for oneself is
financial opportunity. 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 the public will pay for such output, he or she
will start a small company to provide it.

 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.

 Learning from Challenge. Many small business owners are attracted by the challenge that
accompanies going in to business for oneself. Research reveals that most successful small
business owners like to feel they have a chance to succeed (they want to know success is
possible) and the chance to fail. They learn from the past failure or success.

 Introducing Innovation: New products that originate in the research laboratories of big
business make a valuable contribution to our standard of living. There is question, however, as
to the relative importance of big business in achieving the truly significant innovations. The
record shows that many scientific breakthroughs originated with independent inventors and
small organizations.

 Catering for small or niche markets. Large firms with high overheads must produce high
levels of output to spread costs. By contrast, small firms are able to make a profit on much
lower sales figures. They can therefore sell into much smaller markets that are ignored by
larger organization: e.g. a local window cleaner serving a few hundred houses, a specialist
jeweler with personal clients.

Small Business Failure factors

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

15
 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.

 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

Other common causes of business failure include neglect, fraud, and disaster;

 Neglect occurs whenever an owner does not pay sufficient attention to the enterprise. The
owner who has someone else manage the business while he or she goes fishing often finds the
business failing because of neglect.

 Fraud involves intentional misrepresentation or deception. If one of the people responsible

for keeping the business’s books begins purchasing materials or goods for himself or herself
with the company's money, the business might find itself bankrupt before too long.

 Disaster refers to some unforeseen happening. If a hurricane hits the area and destroys
property in the company's yard, the loss may require the firm to declare bankruptcy. The same
is true for fires, burglaries, robberies, or extended strike.

16
17