CHAPTER 3

 
BUSINESS FORMATION

By: Demelash Shalo 1

 OBJECTIVES OF THE CHAPTER

Explain the Concept of Business Development;

Identify the Forms of Business Ownership;
Analyze the Importance/Role of SMEs;
Set Up Small Scale Business;
Distinguish the Failure and Success Factors of
SMEs;
Identify the Problems of Small Scale Business
in Ethiopia; and
Develop Organizational Culture.
By: Demelash Shalo 2
 INTRODUCTION

• A business formation deals with the formalization and actual implementation of

business ideas in to practice.
• The importance/roles of MSEs and a business formation deal with the
formalization and actual implementation of business ideas in to practice.

By: Demelash Shalo 3

 THE CON CEPT OF S MA LL BU S IN ES S DEV ELOPMENT

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.
• The economic/control definition covers market share, independence and
personalized management.

By: Demelash Shalo 4

 FORMS OF BUSINESS

• The Four basic legal forms of ownership of business are:-..

4. Private limited Company (plc) or Limited Liability Companies..

By: Demelash Shalo 5

 SMALL BUSINESS FAILURE
AND SUCCESS FACTORS

By: Demelash Shalo 6

DEFINITION AND ROLE/IMPORTANCE
OF SMES IN DEVELOPING COUNTRIES

By: Demelash Shalo 7

 D E F I N I T IO N O F S M E S

There are two approaches to define small business. They are: Size Criteria, and
Economic/control criteria.
1. Size Criteria
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.
2. Economic/Control Criteria.
The economic/control definition covers: Market Share, Independence, and Personalized
Management. Geographical Area of Operation.

By: Demelash Shalo 8

 R O L E / I M P O RTA N C E O F M S E S I N D E V E L O P I N G
COUNTRIES

1. Large Employment Opportunities:

2. Economical Use of Capital:
3. Balanced Regional Development/ Removing Regional
Imbalance/:
4. Equitable Distribution of Wealth and Decentralization of
Economic Power:
5. Unregulated Growth of Large-scale industries
6. Dispersal over Wide Areas
7. Higher Standard of Living:

By: Demelash Shalo 9

 CONTINUED…

8. Mobilization of Locals Resources/Symbols of National Identity:

9. Innovative and Productive /Simple Technology:
10. Less Dependence on Foreign Capital/ Export Promotion:
11. Promotion of Self Employment:
12. Protection of Environment:
13. Shorter Gestation Period:
14. Facilitate Development of Large Scale Enterprises:
15. Individual Tastes, Fashions, and Personalized Services:
16. More Employment Creation Capacity:

By: Demelash Shalo 10

 SETTING UP SMALL SCALE BUSINESS

• Steps for Setting up the Entrepreneurial Venture

By: Demelash Shalo 11

 SMALL BUSINESS FAILURE FACTORS

Causes of Business Failure

• Inadequate Management
• Inadequate Financing
Other common causes of business failure
• Neglect
• Fraud
• Disaster

By: Demelash Shalo 12

 SMALL BUSINESS SUCCESS FACTORS

These success factors are categorized as

1. Conducive Environment
• Political Climate:
• The Economic Environment
• Technology:
• Socio-Cultural Environment
2. Adequate Credit Assistance
3. Markets and Marketing Support

By: Demelash Shalo 13

 CLASSIFICATION OF ENTERP RISES IN
ETHIOPIAN CONTEXT
• 1. In Case of Manufacturing Enterprise (Manufacturing, Construction
and Mining):
• 2. In Case of Service Enterprise (Retailing, Transport, Hotel and Tourism,
ICT and
Maintenance):

By: Demelash Shalo 14

 P R I O R I T Y S E C TO R S A N D S U B - S E C TO R S F O R M S E S
ENGAGEMENT IN ETHIOPIA

1.Manufacturing Sector
2.Construction Sectors
3.Trade Sectors
4.Service Sectors
5.Agriculture Sector (Urban
Agriculture)

By: Demelash Shalo 15

 LEVELS OF MSES IN ETHIOPIA

• Start-up
• Growth Level
• Maturity Level
• Growth- Medium Level

By: Demelash Shalo 16

 ORGANIZATIONAL STRUCTURE AND
ENTREPRENEURIAL TEAM
FORMATION

Typically, these expectations can be grouped into

the following five areas
• Organization structure
• Planning, measurement, and evaluation schemes
• Rewards
• Selection criteria
• Training

By: Demelash Shalo 17

 FOR MSE’S IMPROVEMENT

• Main Supporting Packages for MSEs

Development in Ethiopia
• Problems of Small Scale Business in
Ethiopia
• Building the Management Team and a
Successful Organization Culture

By: Demelash Shalo 18

 The End!
By: Demelash Shalo 19