Gambella University

Faculty of Business & Economics

Department of Management
ENTREPRENEURSHIP & SMALL BUSINESS MANAGEMENT:
POWER POINT TO BE DELIVERY TO COMPUTER SCIENCE
THIRD YEAR STUDENTS

B Y WAT G A C H ( M A )
 CHAPTER ONE
ENTREPRENEURSHIP AND FREE ENTERPRISE

1.1 Definition
 There is no universally accepted definition of entrepreneurship.
 The word entrepreneur originated from a 17th century French word,
Entreprendre, which means, “to undertake”.
let’s see the common attributes of the definitions of entrepreneurship.

1. Entrepreneurship is the process of creating incremental wealth. The wealth is

created by those individuals who assume the major risk in terms of equity and
time or providing value for others.
2. Entrepreneurship can also be defined as the process of creating something
different and better with value by devoting the necessary time and effort by
assuming the accompanying financial, psychic and social risks and receiving the
resulting monetary reward and personal satisfaction.
3. Our third definition views the term from three perspectives; i.e. from the
economist, psychologist and capitalist philosophers’ point of view.
 To an economist an entrepreneur is one who brings resource, labor,
materials, and other assets into combination that makes their value greater
than before and also one who introduces changes innovations.
 To a psychologist an entrepreneur is a person typically driven by certain
forces need to obtain or attain something, to experiment, to accomplish or
perhaps to escape the authority of others.
 For the capitalist philosopher an entrepreneur is one who creates wealth for
others as well, who finds better way to utilize resources and reduce waste
and who produce job others are glad to get.
1.1 Definition…..
 The above definition stresses on four basic aspects of
being an entrepreneur regardless of the field.
1. Creation process--something of value to the owner
and value to the audience.
2. Entrepreneurship requires the devotion of the
necessary time and effort.
3. Assuming the necessary risk (financial, and social).
4. Rewards of being an entrepreneur (independence,
personal satisfaction and monetary reward for profit
entrepreneurs).
1.1 Definition…..
 Entrepreneurship is a philosophy or the
process of identifying opportunities in the
market place, marshalling the resources
required to exploit the opportunities for long
term gains.
 It involves creating wealth by bringing
together resources in new ways to start and
operate an enterprise.
1.1 Definition…..
• Entrepreneurship is the function of:
 seeking investment and production as well as
opportunity,
 organizing an enterprise to undertake new production
process,
 rising capital,
 hiring labor,
 arranging the supply of raw materials,
 finding site,
 introducing a new technique,
 discovering of new resources of materials, and
 selecting top managers for day to day operations of an
enterprise.
1.2 Evolution of Entrepreneurship
1.2 Evolution…..
 Entrepreneurship is not a one time
phenomenon; it occurs over time
 It is not a 20th or 21st century phenomenon;
although it is more popular.
 The concept of Entrepreneurship has been
around for a long time.
20-Mar-
Early 14th century
 Early 14th century references to the entrepreneur stage spoke
about
tax contractor, individual who paid a fixed sum of money to a
government for the licence to collect taxes in their region.
 Tax collector bore the risk of collecting individual taxes.
 If they collected more than the sum total paid for their licences,
they
would have made profit & keep the excess.
 If they failed to collect enough to match the cost of their licenses,
they would have made loses.
Earliest Period
Marco Polo; as a go-between, was an
Italian.
 He wanted to trade routes to the far East.
 As a go-between, he had to sign a contract
with a money person to sell his goods.
In the contract, merchant-adventurer took
a loan at 22.5% rate including insurance.
Capitalist was the passive risk bearer
and merchant-adventurer took the active
role in trading, bearing all physical and
emotional risks.
When the merchant-adventurer
successfully sold the goods and
completed the trip, the profits were
divided with the capitalist taking most of
them (up to 75%), while the merchant adventurer
settled for the remaining 25 %.
20-Mar-
In summery
 Earliest period:
 Marco Polo was an early example of an entrepreneur who
attempted to
establish trade route to far east.
 Marco Polo would sign contract with money person to sell his
goods.
 A common contract for taking loan stated that trader had to pay
interest of 22.5 % for the loan; which included insurance.
 When the merchant adventurer successfully sold the goods and
completed the trip, profits were divided into two parts of which
capitalist would gain 75% of profit and trader would end up getting
25 % of income.
Middle Ages
Entrepreneur used to be described
as both an actor and a person who
managed large production projects.
Individuals did not take any risks
because all the resources used to be
provided by the government of the
country, all an entrepreneur should
do is to manage it.
20-Mar-
A typical entrepreneur in the middle age
was the priest.
 The person in charge of great architectural
works used to:
build castles and fortifications,
public buildings,
abbeys, and
cathedrals.
In general:
 Inthe middle ages, entrepreneur were more described as :
 actor, person, manager.
 His job was to manage large production projects.
 He was merely managing the business while the risk was borne by
the government of the country and not the entrepreneur.
 A typical entrepreneur in middle ages were the clerk in charge of
great architecture.
17th Century
The connection of the risk with entrepreneurship
developed in the 17th century.
An entrepreneur was a person who entered into a
contract with the government to perform a service
or to supply stipulated products.
John Law, a French man was one of the
entrepreneur in that period.
The founder of the royal bank of France and the
Mississippi Company, which had an exclusive
franchise to trade between France and the new
world.
Monopoly on French trade eventually led to
collapse of the company.
20-Mar-17
Richard Cantillion, a well-known
English economist at the beginning of
the 17th century, understood Law’s
mistake.
 He viewed the entrepreneur as a
risk taker,
observing that merchants, farmers,
craftsmen, and others sole proprietors
“buy
at a certain price and sell at an
uncertain
price, therefore operating at a risk. ”
18th Century
 In the 18th century, the person with capital
was
differentiated from the one who needed
capital.
The entrepreneur was distinguished from
the capital provider.
One reason for this differentiation was the
industrialization occurring throughout the
world.
 Eli Whitney was an American inventor
best known for inventing the cotton gin.
This was one of the key inventions of the
industrial Revolution.
Thomas Edison, the inventor of many
inventions.
 He developed new technologies and
unable to finance his inventions
himself.
 Edison was a capital user (an
entrepreneur), not a provider (a venture
capitalist).
19th & 20th Centuries
 In the late 19th and early 20th centuries,
entrepreneurs were frequently not
distinguished from managers and were
viewed mostly from an economic
perspective.
The entrepreneur organizes and
manages an enterprise for personal
gain.
 The materials were consumed in the
business, for the use of the land, for the
services he/she employs, and for the
capital he/she requires.
Andrew Carnegie is one of the best examples of this
definition.
 Carnegie, who descended from a poor Scottish family,
made the American Steel Industry one of the wonders of
the industrial world.
In the middle of the 20th Century
 The function of the entrepreneurs is to recreate or revolutionize the
pattern of production by introducing an invention.
 Innovation; the act of introducing some new ideas, is one of the most
difficult tasks for the entrepreneur.
  Edward Harriman, who reorganized
the railroad in the United States.

Traditional technologies innovations

(translators, computers, lasers) that are
usually associated with the word
invention.

 John Morgan, who developed his

large banking house by reorganizing
and financing the nation’s industries
21st century :
 During the present century, two characteristics are associated with the
entrepreneur; they are, innovation and creativity.
 Creativity is the ability to bring some thing new into existence.
 While innovators are practical people and create from the opportunities available
in reality .
 The following principles of innovation have emerged leading to success of
entrepreneur :
 Action oriented and searching for new ideas
 Making the product service simple and understandable
 Trying, testing and revising
 Learning from failures
 Hard work is the key to success
1.3 The Role of Entrepreneurship in Economic Development
 The entrepreneur is the key to the creation of new enterprises that
energize the economy and rejuvenate the established enterprises that
make up the economic structure.
 Entrepreneurs initiate and sustain the process of economic
development in the following ways:
1. Capital formation: entrepreneurs mobilize the idle saving of the public through
the issue of industrial securities.
2. Improvement in per capital income: entrepreneurs locate and exploit
opportunities.
3. Generation of employment: entrepreneurs generate employment both directly and
4. Balance regional development: entrepreneurs in the public and private sectors
help to remove regional disparities in economic development.
5. Improvement in living standard: entrepreneurs set up industries which remove
scarcity of essential commodities and introduce new products
6. Economic independence: entrepreneurship is essential for national self-reliance.
7. Backward and forward linkage: an entrepreneur initiates change which has a
chain reaction.
8. Agent role: entrepreneurs are aptly called “Agents of change “entrepreneurs act as
catalyst or agent of economic development by perceiving opportunities and putting
them in to action.
9. Role of innovation: innovation is the key to entrepreneurship. Innovation implies
the commercial application of an invention
10. Imitating role: entrepreneurs in developing countries take the role
of “imitators" who generally copy the innovations introduced by
the innovative entrepreneurs of the developed countries.
11. Socio-political stability: socio-political is the result of many
factors, of which the main one is the national stage of
entrepreneurship development.
12. It promotes country’s export trade i.e. an important ingredient
for economic development.
 1.4 Types of Entrepreneurs

Entrepreneurship can take three different forms. They are:

1.The individual entrepreneur: An individual entrepreneur is someone who started; acquired or

franchised his/her own independent organization.

2.Entrepreneur: is a person who does entrepreneurial work within large organization

3.The Entrepreneurial Organization: An organization that creates such an internal environment is

defined as entrepreneurial organization.
1.4. 2 Characteristics of the Successful Entrepreneur
Some of these characteristics are discussed as follows:
Hard Work: Entrepreneur put a lot of physical and mental effort in
developing their venture.
Self-Starting: Entrepreneurs do not need to be told what to do.
Setting of Personal Goals: Entrepreneurs tend to set clear and demanding
goals for themselves.
Resilience (Readily recovering from shock or depression)
Not everything goes right all the time. In fact, failure may be experienced
more often success.
Confidence: The entrepreneur must demonstrate that they not only believe in
themselves but also in the venture they are pursuing.
Receptiveness to New Ideas: The entrepreneur must not be overly confident.
Assertiveness: Entrepreneurs are usually clear as to what they want to gain from a
situation and are not frightened to express their wishes.
Information Seeking: Entrepreneurs are not on average are more intelligent than
any other group.
Eager to Learn: Good entrepreneurs are always aware that they could do things
better.
Attuned to Opportunity: The good entrepreneur is constantly searching for new
opportunities.
Receptive to Change The entrepreneur is always willing to embrace change in a positive
fashion, that is, to actively embrace the possibilities presented by change rather than
resist them.
Commitment to Others: Good entrepreneurs are not selfish. They cannot afford to be!
They recognize the value that other people bring to their venture and the importance of
motivating those people to make the best effort they can on its behalf.
Comfort with Power: Entrepreneurs can become very powerful figures. They can have a
great impact on the life of other people.
 1.7 Creativity, Innovation and Entrepreneurship
1.7.1 Creativity
Is defined as the tendency to generate or recognize ideas, alternatives, or possibilities that may be useful in solving problems,
communicating with others, and entertaining ourselves and others.

Is the ability to come up with new idea and different ways of looking at a problem and opportunities.

It is a process of assembling ideas by recombining elements already known but wrongly assumed to be unrelated to each
other.
Thus, creativity is the development of ideas about products, practices, services, or procedures that are novel and
potentially useful to the organization.
7.1.2. INNOVATION
 Innovation is the process of bringing the best ideas into
reality, which triggers a creative idea, which generates a
series of innovative events.
 Innovation is the process that transforms new ideas into
new value- turning an idea into value.
 Innovation is the process that combines ideas and
knowledge into new value. Without innovation an
enterprise and what it provides quickly become obsolete
 Innovation con…
1.7.2.2 Areas of Innovation
The following are some of the major areas in which valuable innovation might be made.
1. New product
2. New Services
3. New Production Techniques
4. New Way of Delivering the Product or Service to the Customer
5. New Operating Practices
6. New Means of Informing the Customer about the Product
7. New Means of Managing Relationship within the Organization
8. New Ways of Managing Relationships between Organizations
1.7.3 Flow of Creativity to Entrepreneurship

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 solution to those problems and opportunities in
order to enhance people’s lives or to enrich society.

Entrepreneurship = creativity + innovation

Flow of Creativity, Innovation and Entrepreneurship

Creativity
Thinking new things

Innovation
Doing new things

Entrepreneurship
Creating value in marketplace
 CHAPTER TWO
SMALL BUSINESS
2.1 Definition and Importance of Small Business
2.1.1. Definition of Small Business
There are two approaches to define small business.
1. by some measure of size-a quantitative approach
2. Using an economic/control definition-a qualitative
approach
Size: refers to the scale of operation. Some of the size
criteria to define small business are:
Total assets- total cash, inventory, land and machinery & other resources
the business owns.
Owner’s equity –the total investment made by investor-capital
Annual sales revenue – annual amount of goods sold times its
respective price.
Insurance in force
Volume of deposits
Volume/ value of production
Number of employees – the number of workers the business owns.
N.B The number of employees is the most widely used yardstick, the best
criteria in any given case depends up on the user’s purpose.
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 include
1) 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 price of national quantities of goods
sold to any significant extent
2)Independence: means that the owner has control of the business him
self
3) Personalized management: It implies that the owner actively
participates in all aspects of the management of the business, and in all
major decision- making process.
 According to the (SBA, 1953), a small business, “one which is

independently owned and operated for profit and is not dominant

in its field”
 According to (CSA), Ethiopia, “Small enterprises are such business enterprises
with a paid-up capital of above 20,000 and not exceeding 500,000 birr, and
excluding high technology consultancy firms and other technology
establishment”
In general, small business exhibit the following characteristics
 Management is independent
 Capital is supplied or ownership is by one individual or a few
 The area of operations is primarily local, although the market is not
necessarily local.
 The firm size is small in comparison with the largest corporations in
industry category
2.1.1 Importance of Small Business
The major importance’s of small business are: -
1) Provide new job opportunity
2) Introducing Innovation
3) Stimulating Economic
4) Aiding big
5) Distribution
6) Suppliers or Sub-contractors
7) Producing goods and Services
2.2 Economic, social and political aspects of small business
enterprise
Small businesses (enterprises) have to play a vital role in Ethiopian
economy. They need a strong support on socio-economic and political
grounds.
a. Equitable income distribution or improved standard of living
b. Inadequate financial resources and vast human resources
c. Rectifying regional imbalance/ rectifying rural/urban divide
d. Generation of foreign (hard) currency
2.3 Small Business Failure Factors
1.Poor operations management – The manager lacks the
ability to operate a small business.
 
 

2. Lack of experience – Many owners start businesses
 

 in
industries in which they have no experience
 
 

3. Poor financial management – Many owners start 
 

with
too little money and with little or no understanding of
financial spreadsheet applications. Illegal loan too!
 
 

4. Over-investing in fixed assets – Owners who over-
 

invest
in fixed assets may find themselves with no access to
funds for working capital.
5. 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.

6. Failure to plan – The lack of a strategic plan
 

to guide the business in the long run
7.Unplanned and uncontrolled growth Growth is na
tural and healthy, but
unplanned growth can be fatal to a business.
  
8.
Inappropriate location – Owners who choose a busines
s location without
proper
 P r o b le m s in E th io p ia S m a ll
B u s in e s s
 Small-scale businesses have not been able to contribute substantially
to the economic development, particularly because of:

 Financial,

 Production, and

 Marketing problems

 L a c k o f a d e q u a te fin a n c e a n d c r e d it h a s a lw a y s b e e n a m a jo r
p r o b le m o f th e E th io p ia n s m a ll b u s in e s s .
Problems in Ethiopia…..
Small-scale units do n o t h a v e e a s y a c c e s s t o t h e c a p i t a l because:

 they mostly organized on proprietary and partnership basis

 are of very small size.

They do not have easy access to industrial sources of finance

because of:

 partly their size and

 partly surpluses utilized to repay loans are relatively small

 Problems in Ethiopia…..
 Consequently, they approach traditional money lenders who
charge extra high rate of interest hence small enterprise
continue to be financially weak.
 
 

ü Small scale enterprises find it difficult to get raw materials of good
quality at reasonable prices in the field of production.
 
 

ü Furthermore, the techniques of production, which the enterprises
have adopted, are usually outdated.
 
 

ü Because of their poor financial position they are not able to buy
new equipment, consequently their productivity suffers.
 Overcoming Obstacles
Small business owner can avoid some of the common pit
falls
   that lead to business failure by:
ü Knowing the business in depth
  
ü Developing a solid business plan
  
ü Managing financial resources
  
ü Understanding financial statements
  
ü Learning to manage people effectively…