ENTREPRENEURSHIP AND

INNOVATION
SHEBA UNIVERSITY COLLEGE
MBA PROGRAM
COURSE CONTENT
 CHAPTER ONE: CONCEPT OF
ENTREPRENEURSHIP
 CHAPTER TWO: ECONOMIC IMPORTANCE OF
ENTREPRENEURSHIP
 CHAPTER THREE: FORMS OF BUSINESS
OWNERSHIP
 CHAPTER FOUR: SETTING SMALL BUSINESS

 CHAPTER FIVE: DEVELOPING BUSINESS PLAN

 CHAPTER SIX: MANAGEMENT OF RESOURCES

CHAPTER ONE: THE CONCEPT OF
ENTREPRENEURSHIP

 Basically, it is only in recent years that

entrepreneurship and the role of
entrepreneurs in the process of
industrialization and economic
development has been recognized in both
developed and developing countries.
 Even today entrepreneurship is not a fully
clear concept.
CONTINUED…..
 Thought these two terms (‘entrepreneur’
and ‘entrepreneurship’) are the two sides of
the same coin, conceptually they are
different.
 While ‘entrepreneur’ refers to a person,
‘entrepreneurship’ refers to the function.
 Basically entrepreneur is a business leader
and the functions performed by him in
relation to that business is
entrepreneurship.
CONTINUED…..
• According to Robert Ronstadt,
“Entrepreneurship is the dynamic process
of creating incremental wealth.
• This wealth is created by individuals who
assume the major risks in terms of equity,
time and/or career commitments of
providing value for some product or
service.
• The product or service itself may or may
not be new or unique but value must
somehow be infused by the entrepreneur by
securing and allocating the necessary skills
and resources.”
CONTINUED…..
 Entrepreneurship is the process of creating
and building something of value from
practically nothing.
 That is, entrepreneurship is the process of
creating or seizing an opportunity and
pursuing it regardless of the resources
currently controlled.
CONTINUED…..
 Entrepreneurship is the set of activities
performed by an entrepreneur.
 All the above definitions clearly point out the
various functions performed by an entrepreneur
(to be discussed later).
 Thus, entrepreneur precedes entrepreneurship.
The relationship between entrepreneur and
entrepreneurship is given in the following table:
ENTREPRENEUR AND ENTREPRENEURSHIP

Entrepreneur Entrepreneurship
Refers to a person: Refers to a process:
Visualizer Vision
Creator Creation
Organizer Organization
Innovator Innovation
ENTREPRENEUR AND ENTREPRENEURSHIP

Entrepreneur Entrepreneurship
Technician Technology
Initiator Initiative
Decision maker Decision
Planner Planning
Leader Leadership
ENTREPRENEUR AND ENTREPRENEURSHIP

Entrepreneur Entrepreneurship
Motivator Motivation
Programmer Action
Risk-taker(bearer) Risk-taking (bearing)
Communicator Communication
Administrator Administration
NATURE AND CHARACTERISTICS OF
ENTREPRENEURSHIP
• The distinctive features of
entrepreneurship are summarized below:
1. Innovative functions: Entrepreneurship is
an innovative function as it involves doing
things in a new and better way.
 Innovation may take several forms, e.g.,
 a new product,
 a new source of raw material,
 a new market,
 a new method of production, not yet applied
in a particular branch of manufacturing, etc.
NATURE AND CHARACTERISTICS …..
2. A function of risk-bearing: Risk is an inherent
and inseparable element of entrepreneurship.
 An entrepreneur guarantees rent to the
landlord, wages to employees, and interest to
investors in the hope of earning more than the
expenses.
 S/he assumes the uncertainty of future. In the
pursuit of profits there is every possibility of
loss.
 A businessman, who simply behaves in a
traditional ways, cannot be an entrepreneur.
 The entity is entrepreneurship if the
entrepreneur makes decisions under
uncertainty and has to take actions with
unknown and unpredictable results.
… NATURE AND CHARACTERISTICS OF
ENTREPRENEURSHIP
3. A function of high achievement: McClelland
stressed the need for achievement or
achievement orientation as the most directly
relevant factor for explaining economic
behaviour.
 The economic activity tends to possess people
having high need for achievement which
determines its success.
 Various studies on the psychological roots of
entrepreneurship reveal the presence of a high
achievement orientation among successful
entrepreneurs.
•
… NATURE AND CHARACTERISTICS OF
ENTREPRENEURSHIP
4. Economic activity: Entrepreneurship is
primarily an economic function because it
involves the creation and operation of an
enterprise. It is basically concerned with
the production and distribution of goods
and services.

5 Purposeful activity: The entrepreneur who

creates and operates an enterprise seeks to
earn profits through satisfaction of needs of
customers. Therefore, entrepreneurship is a
goal-oriented activity.
… NATURE AND CHARACTERISTICS OF
ENTREPRENEURSHIP
6. An organizing function: An entrepreneur
brings together various factors of
production.
 S/he coordinates and controls the efforts of
all the persons engaged in his enterprise.
 S/he harnesses land, labour, capital and
other resources for the benefit of mankind.
 an entrepreneur is an organization
builder.
… NATURE AND CHARACTERISTICS OF
ENTREPRENEURSHIP
7.Gap filling function: The gap between
human needs and the available products
and services gives rise to entrepreneurship.
 An entrepreneur identifies this gap and
takes necessary steps to fill the gap.
 S/he introduces new products and services,
new methods of production or distribution,
new sources of inputs and new markets for
this purpose.
… NATURE AND CHARACTERISTICS OF
ENTREPRENEURSHIP
8. Dynamic process: Entrepreneurship is a
dynamic function. Entrepreneurs thrive on
changes in the environment, which bring
useful opportunities for business.
 Flexibility is the hallmark of a successful
entrepreneur.
ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Capital formation: Entrepreneurs mobilize
the idle savings of the public through the
issue of industrial securities.
• Investment of public savings in industry
results in productive utilization of national
resources.
• Rate of capital formation increases which is
essential for rapid economic growth.
• Thus, an entrepreneur is the creator of
wealth.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Improvement in per capital income:
Entrepreneurs locate and exploit
opportunities.
• They convert the latent and idle resources
like land, labour and capital into national
income and wealth in the form of goods and
services.
• They help to increase Net National Product
and per capita income in the country,
which are important yardsticks for
measuring economic growth.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Generation of employment: Entrepreneurs
generate employment both directly and
indirectly.
• Directly, self-employment as an
entrepreneur offers the best way for
independent and honorable life.
• Indirectly, by setting up large and small-
scale business units they offer jobs to
millions.
• Thus, entrepreneurship helps to reduce the
unemployment problem in the country.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
 Balanced regional development:
Entrepreneurs in the public and private
sectors help to remove regional disparities
in economic development.
 They set up industries in back ward areas
to avail of the various concessions and
subsidies offered by the Central and State
Governments.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Improvement in living standards:
Entrepreneurs set up industries which
remove scarcity of essential commodities
and introduce new products.
• Production of goods on mass scale and
manufacture of handicrafts, etc. in the
small scale sector help to improve the
standard of life of a common man.
• These offer goods at lower costs and
increase variety in consumption.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Economic independence: Entrepreneurship
is essential for national self-reliance.
• Industrialists help to manufacture
indigenous substitutes of imported
products thereby reducing dependence on
foreign countries.
• Businessmen also export goods and services
on a large scale and thereby earn the scarce
foreign exchange for the country.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Backward and forward linkages: An
entrepreneur initiates change which has a
chain reaction.
• Setting up of an enterprise has several
backward and forward linkages.
• For example, the establishment of a steel
plant generates several ancillary units and
expands the demand from iron ore, coal,
etc. These are backward linkages.
• By increasing the supply of steel, the plant
facilitates the growth of machine building,
tube making, utensil manufacturing and
such other units.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Agents role: Entrepreneurs are suitably
called ‘Agents of change’.
• Entrepreneurs act as catalyst or agent of
economic development by perceiving
opportunities and putting them into action.
• Entrepreneurs, seizing opportunities, set-
up business undertakings and industries
and thereby make economic
transformation.
• Thus, economic development is an effect for
which entrepreneurship is the cause.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• Role of innovation: Innovation is a key to
entrepreneurship.
• Innovation implies the commercial application of an
invention.
• As an innovator, the entrepreneur assumes the role of a
pioneer and an industrial leader.
• Entrepreneurs have contributed many innovations in
developing new products and in the existing products
and services.
• All these have resulted in economic development by
providing employment, more income, etc.
• In fact, the innovational activity raises the productive
efficiency of the economy resulting in greater output
and income.
• Schumpeter finds the secret of economic development
is this rising productivity.
• Thus, innovative entrepreneurship can alter the
production function of nations and bring about rapid
development.
… ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
• 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.
• They copy the organization, technology, and the
products of innovation from other developed regions.
• They are capable of adopting the innovative
technology to the local conditions prevailing in the
country and establish business enterprises.
• Imitative entrepreneurship seems to be the best
medicine for under developed countries to overcome
their entrepreneurial ills and bring about
substantial economic development.
• They constitute the main spring of development of
under developed regions.
THE CONCEPT OF ENTREPRENEURIAL
DEVELOPMENT
• Entrepreneurs are not just born they can be
developed through education, training and
experience to undertake ventures and be
creative.
• However, everybody does not have the
potential to become an entrepreneur.
• Entrepreneurial development is essentially
an educational process and an endeavour of
inculcating entrepreneurial skills required
for setting up and operating business units.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
 Its main purpose is to motivate persons for
entrepreneurial career and to make them
capable of perceiving and exploiting
business opportunities.
 However, entrepreneurship can not grow in
vacuum.
 It requires an environment in which an
entrepreneur can learn and discharge his
functions.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
 Stepanek identifies
 intelligence,
 motivation,
 knowledge, and
 opportunity as the prerequisites for
entrepreneurial development.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
• First of all the entrepreneurs must be endowed
with above average intelligence.
• Motivation is not inherited but a personal and
cultural trait.
• Knowledge can be acquired through formal
education and experience.
• It is very difficult to measure quantitatively the
ability to use knowledge intelligently, to seize
opportunity and to inject the spark of innovation
and creativity.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
 Development of entrepreneurship
incorporates four basic issues:
 the availability of material resources;
 the selection of real entrepreneurs;
 the formation of industrial units; and
 policy formulation for the development of the
region
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
• Development of an entrepreneur means
inculcating entrepreneurial traits into a
person, imparting the required knowledge,
developing the technical, financial,
marketing and managerial skills, and
building the entrepreneurial attitude.
• The process of entrepreneurial
development involves equipping a person
with the information used for enterprise
building and sharpening his
entrepreneurial skills.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
 Entrepreneurial development program
(EDP) may be defined as “a program
designed to help an individual in
strengthening his entrepreneurial motive
and in acquiring skills and capabilities
necessary for playing his entrepreneurial
role effectively”
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
 Entrepreneurship development is not
merely a training programme. It is the
process of
 Enhancing the motivation, knowledge and
skills of potential entrepreneurs;
 Arousing and reforming the entrepreneurial
behaviour in their day to day activities; and
 Assisting them in developing their own
ventures.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
 The main objectives of an entrepreneurial
development programme are as follows:
 To identify and train potential entrepreneurs
 To develop necessary knowledge and skills
among the participants
 To impart basic managerial understanding
 To provide post-training assistance.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
• Phases of Entrepreneurship Development
Programme
• consists of three broad phases:
I. Initial or Pre-training Phase: This phase includes
the activities and the preparations required to
launch the training programme. The main activities
are:
– Creation of infrastructure for training
– Preparation of training syllabus
– Tie up of guest faculty
– Arrangement for inauguration of the programme.
– Designing tools and techniques for selecting the
trainees.
– Formation of selection committee
– Publicity campaign for the programme
– Development of application form
– Pre-potential survey of environmental opportunities.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
• Thus, pre-training stage involves the
identification and selection of potential
entrepreneurs and providing initial
motivation to them.
•
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
II. Training or Development Phase: During
this phase the training programme is
implemented to develop motivation and
skills among the participants.
The objective of this phase is to bring
desirable changes in the behaviour of the
trainees.
The trainers have to judge how much, and
how far the trainees have moved in their
entrepreneurial pursuits.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
A trainer should see the following changes in the
behaviour of participants
– Is he attitudinally tuned very strongly towards his
proposed project idea?
– Is s/he motivated to plunge for entrepreneurial
venture and risk that is expected of an
entrepreneur?
– Is there any change in his entrepreneurial outlook,
role, and skill?
– How should he behave like an entrepreneur?
– What kind of entrepreneurial behaviour does the
trainee lack?
– Does he possess the knowledge of technology,
resources and other related entrepreneurial
knowledge?
– Is he skilful in choosing the right project, mobilizing
the right resources at the right time.
… THE CONCEPT OF
ENTREPRENEURIAL DEVELOPMENT
• III. Post-training or follow up phase: This
phase involves assessment to judge how far
the objectives of the programme have been
achieved.
• Monitoring and follow up reveals
drawbacks in the earlier phases and
suggests guidelines for framing the future
policy.
• In this phase infrastructural support,
counseling and assistance in establishing
new enterprise and in developing the
existing units can also be reviewed.
CONTENTS OF TRAINING PROGRAMME
 Technical knowledge and skills
 Achievement-motivation training (AMT):
The purpose of AMT is to develop the need
to achieve, risk taking, initiative and other
such behavioural or psychological traits.
 Support systems and procedures: Training
needs to include information about support
systems.
… CONTENTS OF TRAINING
PROGRAMME
• The participants have to be exposed to
agencies like local banks and other
financial institutions, industrial service
corporations and other institutions dealing
with supply of raw materials, equipment,
etc.
• The procedures for approaching them,
applying and obtaining assistance from
them and availing of the services provided
by them.
… CONTENTS OF TRAINING
PROGRAMME
 Market survey: The participants should be
given opportunity to actually conduct
market surveys for their chosen projects.
 This would help expose the candidate to the
marketing avenues available and could be
followed by sessions on methods of dealing
in the markets.
… CONTENTS OF TRAINING
PROGRAMME
 Managerial skill:
 Project preparation: A lot of time needs to
be devoted to the actual preparation of
projects. Their active involvements in this
task would provide them necessary
understanding and also ensure their
personal commitment.
CHAPTER TWO

economic importance of small business

WHAT IS SMALL BUSINESS?
• There are two approaches to define Small
Business. They are:
– By some measure of size.
– Using an economic/control definition.
• Size Criteria
– Number of employees
– Volume/value of sales turnover
– Asset size
– Insurance in force
– Volume of deposits.
– Total capital investment
– Total investment in plant and machinery
– Volume /value of production
– A combination of the above
CRITERIA CONTINUED……
• 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.

– Technology -Small business is generally labour intensive.

– Geographical Area of Operation -The area of operation
of a small firm is often local
CHARACTERISTICS OF SMALL SCALE
INDUSTRIES
 Closely held: The unit is generally a one-
man show. Even if a unit is run by a
partnership concern/company, the
activities are mainly carried out by one of
the partners/directors and the others are
merely sleeping partners/directors who
generally assist in providing finance.
… CHARACTERISTICS OF SMALL SCALE
INDUSTRIES
• Personal character: There is close personal
contract/supervision of all activities, say
purchase, production, labour, and sale of
products. The owner himself is generally
the manager. Therefore, these firms are
generally managed in a personalized
manner. The owner has first hand
knowledge of whatever is going on in the
business. He actively participates in all
aspects of business decision making.
… CHARACTERISTICS OF SMALL SCALE
INDUSTRIES
• Limited scale of operations: A small scale
industrial unit has a lesser gestation
period. A small scale unit has a limited
share of a given market. The size of the firm
in the industry is small.
• Indigenous resources: Small-scale industries
can be easily located any where subject to
availability of raw materials, labor, finance,
etc. Small scale units use local resources.
• Therefore, they have decentralized or
dispersed location.
… CHARACTERISTICS OF SMALL SCALE
INDUSTRIES
 Labour intensive: They are generally more
labour oriented with comparatively smaller
capital investment than the larger units.
The capital investment is limited due to the
use of simple technology. They require
large amount of working capital to meet
their day – to – day expenses.
… CHARACTERISTICS OF SMALL SCALE
INDUSTRIES
• Local area of operation: The operations of a
small scale unit are generally localized.
However, market for its products need not
be local. It may cater to local and regional
demands or its products may even be
exported.
• Simple organization: A small business unit
has few or no layers of management.
Division of labour or specialization is low
and the resources are limited.
RELATIONSHIP BETWEEN SMALL AND
LARGE UNITS
• The small scale units can have the following
types of linkages with large firms.
• Competitive: Small scale industry can out
compete with large industry in certain
circumstances and in selected products.
Examples of such industries are bricks and
tiles, fresh baked goods and perishable
edibles, preserved fruits, goods requiring
small engineering skill, items demanding
craftsmanship and artistry.
… CHARACTERISTICS OF SMALL SCALE
INDUSTRIES
 Supplementary: Small industry can fill in
the gaps between large scale production
and standard output caused by large scale
units. This is due to this supplementary role
of small units. A small tricycle factory
sustained and flourished alongside a large
cycle factory in Chennai city, India.
… RELATIONSHIP BETWEEN SMALL AND
LARGE UNITS
 Complementary: Apart from supplementary
relationship, small industry has been a
complementary to its large counterparts. In
the real world, many small units produce
intermediate products for large units.
Examples of such complementary items are
internal accruals, plastic cover for video
recorders, mobiles, electronic passive
components, etc.
… RELATIONSHIP BETWEEN SMALL AND
LARGE UNITS
• Such sub-contracting relationship between
the small and large was particularly
marked in the economic history of today’s
industrially developed Japan.
• As industrialization proceeds, small firms
seem naturally to shift from activities that
compete with large firms to complementary
ones. Similarly, China too continues to rely
on Mao’s aphorism of “walking on two legs”
– one being small and the other large.
… RELATIONSHIP BETWEEN SMALL AND
LARGE UNITS
 Initiative: Attracted by the high profits of
large units, small units can also take
initiative to produce the particular product.
If succeeds, the small grows to large over a
period of time. Staley quotes such initiation
that many of the automobile factories
started this way in the United States of
America.
… RELATIONSHIP BETWEEN SMALL AND
LARGE UNITS
 Servicing: Small scale industries do also
install servicing and repairing shops for the
products of large units
 Jobbing: In some cases large enterprises
provide materials and components to small
units. The small units process these
materials and components into finished
parts or sub assemblies.
… RELATIONSHIP BETWEEN SMALL AND
LARGE UNITS
• Merchandising: Some small scale units
distribute and sell their products through
large scale units. For example, Hindustan
Lever Limited distributes soaps and
cosmetics produced by small firms;
footwear, refrigerators, voltage stabilizers
manufactured by many small firms are
marketed by large units.
• Anciliarization: Many large firms purchase
components, parts and accessories from
small firms, which serve as ancillaries. For
instance, Maruti Udyog buys some
components and accessories used in Maruti
cars, from ancillary units.
ADVANTAGES OF GOING INTO SMALL
BUSINESS
• Independence
• Most small business owners enjoy being their
own boss;
• they like the freedom to do things their way.
Although often a great deal of responsibility is
associated with this independence, they are
willing to assume it.
• Financial Opportunities
• Many small business owners make more money
running their own company than they would be
working for someone else.
… ADVANTAGES OF GOING INTO SMALL
BUSINESS
• 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
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.
… ADVANTAGES OF GOING INTO SMALL
BUSINESS
• Family Employment
• Another advantage is the opportunity to
provide family members with a place of
employment. This has several benefits. First,
many owner–managers want to perpetuate
their business, and how better to do so than to
get children or relatives to take it over?
Second, higher moral and trust usually occur
more in family–run businesses than in others.
Third, in times of severe economic downturn,
small business owners can provide employment
for family members.
•
DISADVANTAGES OF GOING INTO SMALL
BUSINESS
 Sales Fluctuations
 Working for a large firm that pays regularly
allows the employee to budget food
expenditures, plan vacations, and buy clothing.
The owner–manager, however, often faces sales
fluctuations. In some months sales are very
high, while in others they drop off dramatically
 Competition
 A second disadvantage of owning a business is
the risk of competition.
 For example, small restaurants may find that
they have lost customers to fast–food chains.
… DISADVANTAGES OF GOING INTO
SMALL BUSINESS
• Increased Responsibilities
• Small businesses face many responsibilities,
especially as their operations get larger. For
example, owners not only have to make more
decisions on major matters but also have to
become knowledgeable in many different areas.
• A successful owner is often a bookkeeper,
accountant, salesperson, personnel manger,
and janitor all rolled into one.
• The individual works long hours, and in many
cases, six or seven days per week. This is in
direct contrast to workers who hold full–time,
nine–to–five jobs where salary is guaranteed
and raises and promotions can be counted on.
… DISADVANTAGES OF GOING INTO
SMALL BUSINESS
• Financial Losses
• When the owner makes all major decisions,
inevitably some of them will be wrong. On
occasion, inventory will be too high (or low); a
product line developed at great expense will
not sell; a price reduction will not increase
product demand, with a resulting decline in
total revenue; an advertising campaign will not
pay for itself; or an increase in the sales force
will prove to be a mistake, and excess
personnel will have to be laid off.
• In all these cases the owner will face a
financial loss, and if enough of them occur,
bankruptcy may result
… DISADVANTAGES OF GOING INTO
SMALL BUSINESS
• Employee Relations
• The small business owner also needs to be
concerned with employee relations. If the
workers are not content, sales will suffer. For
example, in many retail stores employees are
not allowed to talk or socialize on the job.
Workers are expected to remain at their sales
counters and stay alert for customers who need
assistance.
… DISADVANTAGES OF GOING INTO
SMALL BUSINESS
• Laws and Regulations
• Small businesses are subject to a multitude
of laws and regulations. For example law
may require the owner to pay Social
Security taxes for all employees as well as
to with hold taxes from each person's pay
and remit these funds to the government.
… DISADVANTAGES OF GOING INTO
SMALL BUSINESS
• Risk of Failure
• The ultimate risk the small business owner–
manager faces is failure, usually with a loss of
most, if not all, of the money invested in the
enterprise. All owners face this risk, and
despite experience and business knowledge,
many fail because of factors beyond their
control. For example, a major recession hits
most small businesses very hard.
SPECIAL CONTRIBUTION OF SMALL
BUSINESS
 Providing New Jobs
 As the population and economy grow, small
businesses provide new job opportunities.
 It seems clear that small businesses produce
the “lion’s share” of the new jobs, sometimes
adding jobs while large corporations are
“downsizing” and laying off employees.
… SPECIAL CONTRIBUTION OF SMALL
BUSINESS
• Introducing Innovation
• Photo copiers
• Automatic transmission
• Insulin
• Jet engine
• Vacuum tube
• Helicopter
• Penicillin
• Power steering
• Cotton picker
• Color film
• Zipper
• Ball-point pen
… SPECIAL CONTRIBUTION OF SMALL
BUSINESS
• Stimulating Economic Competition
• When producers consist of only a few big
businesses, however, the customer is at their
mercy. They may set high prices, withhold
technological developments, exclude new
competitors or other wise abuse their position
of power. If completion is to have a “cutting
edge” there is need for small firms
• China has taken steps to encourage the
formation of small businesses as a means of
stimulating economic growth
… SPECIAL CONTRIBUTION OF SMALL
BUSINESS
 Aiding Big Business
 Distribution function
 Supply function
 Producing Goods and Services Efficiently
ECONOMIC, SOCIAL AND POLITICAL
ASPECTS OF SMALL BUSINESS ENTERPRISE
 Socialistic Idea (The Equality Argument)
 Less Capital and More Labour (The
Employment Argument)
 Removing Regional Imbalance (The
Decentralization Argument)
 Creating Self Employment Opportunities

 Ancillary Function
…ECONOMIC, SOCIAL AND POLITICAL
ASPECTS OF SMALL BUSINESS ENTERPRISE
 Export Promotion
 Supply of Critical Raw Materials - The
government has also liberalized the import
policy to ensure regular supply of raw
materials to small industrial units, and devised
a more efficient and consistent system of
distribution of critical raw material.
SMALL BUSINESS FAILURE FACTORS
 Some specific causes of failure
 Incompetence. The owners simply do not
know how to run the enterprise. They make
major mistakes an experienced, well-
trained entrepreneur would see quickly
and easily side step.
 Unbalanced experience. owners do not have
well-rounded experience in the major
activities of the business, such as finance,
purchasing, selling, and production.
… SMALL BUSINESS FAILURE FACTORS
 Lack of managerial experience. The owners
simply do not know how to manage people.
 Lack of experience in the line
 Neglect, owner does not pay sufficient
attention to the enterprise
 Fraud, involves intentional
misrepresentation or deception
 Disaster refers to some unforeseen
happening or ‘ act of God’
 Inadequate records
 Expansion beyond resources
 Lack of information about customers
… SMALL BUSINESS FAILURE FACTORS
 Failure to diversify market
 Lack of marketing research

 Legal problems

 Nepotism

 One-person management.

 Lack of technical competence

 Absentee management
 For instance, if the owner stays away for long
periods, operations get gradually deteriorated.
SMALL BUSINESS AS A SEEDBED OF
ENTREPRENEURSHIP
 As stated earlier, small enterprises
have low investment and simple
technology.
 They use local resources and cater
largely to local demands through
personal contacts.
 These are commonly known for what
is called, ‘one man show’ in which the
same person may perform various
roles simultaneously as an owner, a
capitalist, an organizer, a manager, a
labourer and what not.
… SMALL BUSINESS AS A SEEDBED OF
ENTREPRENEURSHIP
 We know that a person who
organizes, manages and takes risks
involved in running a business or
enterprise is commonly called an
‘entrepreneur’.
 This means there are as many
entrepreneurs as are small
enterprises.
… SMALL BUSINESS AS A SEEDBED OF
ENTREPRENEURSHIP
 In common sense, increasing number
of small enterprises means increasing
number of persons assuming
entrepreneurial career.
 Thus, small scale enterprises serve as
seedbed for the emergence of
entrepreneurship in the country.
 To conclude, the more the small
enterprise development, more will be
opportunities for entrepreneurial
career and vice-versa.
… SMALL BUSINESS AS A SEEDBED OF
ENTREPRENEURSHIP
 Smallenterprises serve as the seedbed
of entrepreneurship due to the following
peculiar features:
 Small units create more self employment
opportunities with comparatively less capital
investment.
 Small scale industries are usually based on local
resources.
 These industries can be located anywhere.
 These units cause relatively less environmental
pollution and disruption.
 The firms are viewed favourably because these lead
to equitable distribution of income and wealth.
 These units facilitate industrial dispersal and avoid
problems of unplanned urbanization.
… SMALL BUSINESS AS A SEEDBED OF
ENTREPRENEURSHIP
 Small firms require simple technology and low
managerial skills.
 These units help in better utilization of local
resources and skills which might otherwise
remain unutilized.
 These units help to maintain and retain
traditional skills and handicrafts.
CHAPTER THREE

FORMS OF BUSINESS OWNERSHIP

FORMS OF OWNERSHIP AND LEGAL
REQUIREMENTS
 There most common forms currently in
wide use by small business are shown in the
following figure as
1. Proprietorship,
2. Partnership,
3. Corporations, and
4. Cooperatives
THE SOLE PROPRIETORSHIP OPTION
 Advantages of Sole Proprietorship
 The sole proprietorship has a
number of advantages:
 Ease and low cost of formation
and dissolution
 Owner-ship of all profits and
personal incentive
 Freedom and promptness of
action
ADVANTAGE …….
 Business secrecy
 Social desirability
 Pride of ownership
 Single tax (tax breaks)
DISADVANTAGES OF SOLE
PROPRIETORSHIP

 Unlimited liability-the risk of losses.

 Limited financial resources

 Limitations in managerial ability & other

special skills and abilities.
 Uncertain future.

 Demands on time (overwhelming time

commitment)
 Difficulty in hiring and keeping high
achievement employees.
 Few fringe benefits
THE PARTNERSHIP OPTION
 A partnership form of organization
represents the second stage in the evolution
of the forms of business organizations.
 It grows essentially to meet the
requirement of expanding business which
calls for more capital, increased risk, and
more managerial ability that were
considered as limitations of the individual
proprietorship
… THE PARTNERSHIP OPTION
 A partnership is a business run by two or
more persons where their relationship is
based on agreement participating in the
profits and losses arising out of it. Or it is
an association of two or more persons to
carry on as co-owners of a business for
profit.
CHARACTERISTICS OF PARTNERSHIP
 Formation
 This form of business requires the existence of
two or more persons entering in to contractual
relationships.
 The agreement between the parties is desirable
to be written and signed, to prevent
misunderstanding among the parties.
 This contract is called memorandum of
association, articles of partnership deed or
partnership contract.
… CHARACTERISTICS OF PARTNERSHIP
 According to the 1960 commercial code of Ethiopia article 284, the memorandum of association
contains the following:

 The name, address and nationality of each

partner;
 The firm name;
 The head office and branches, if any;
 The business purpose of the firm;
 The contributions of each partner, their value
and their method of valuation;
 The service required from persons contributing
skill;
 The share of each partner in the profits and
losses, and the agreed procedures for
allocation;
 The managers and agents of the firm;
 The period of time for which the partnership
has been established.
… CHARACTERISTICS OF PARTNERSHIP
 Capital contribution
 Every partner shall make a contribution, which
may be in the form of money, receivables,
property or skill. The contribution to be made
for the business shall be equal unless otherwise
agreed.
 Any person capable of contracting may legally
become a business partner.
 Individuals may become partners without
contributing to capital or sharing in the assets
at the time of dissolution. Such persons are
partners only as to management and profits.
… CHARACTERISTICS OF PARTNERSHIP
 Management
 If there is no agreement as to the pattern of
managing the business, every partner has
the right to take active part in the
management of the business affairs.
… CHARACTERISTICS OF PARTNERSHIP
 Duration
 Legally a partnership comes to an end or
terminated for various reasons.
 It is terminated when any of the general
partners withdraws dies or become no
longer to be a partner.
 However, if the remaining partners agree to
continue under the original name of the
firm and style, they can continue after
settling the claims of the outgoing partner.
 The partnership can be dissolved prior to
the expiry of term when they agree to
terminate.
… CHARACTERISTICS OF PARTNERSHIP
 Other legal characters.
 Unlimited liability
 Implied agency.
 Utmost good faith. A partnership agreement is
based on mutual confidence and trust of the
partners. The parties must, therefore, be just
and honest to other partners. They must
disclose all the facts and render true accounts
relating to the business of the firm and not
make any secret profits. They should not be
deceptive.
… CHARACTERISTICS OF PARTNERSHIP
 No separate entity.
 Restriction on transfer of interest.
 Unanimity of consent No change may be made
in the nature of business and no partner can
act out of the specified way or make major and
special decision without the consent or
agreement of all the partners.
KINDS OF PARTNERS
 A general partner-assumes unlimited liability
and is usually active in managing the business.
Most partners are general partners.
 A limited or special partner-assumes limited
liability, risking only his/her investment in the
business. Limited partners may not be active in
management, and their names are not used in
the name of the business
 A secret partner - takes an active role in
managing a Partnership but whose identities
are unknown to the public, i.e., the general
public does not know of this person’s
partnership status.
KINDS OF PARTNERS
 A silent partner - as opposed to a secret partner,
silent partner his identities and involvement is
known to the general public, but is inactive in
managing the partnership business.
 A dormant or sleeping partner-is neither
known to the general public nor active in
management.
 Nominal partners - are not actually involved in
a partnership but lend their names to it for
public relations purposes but invest no money
in the firm & play no role in its management.
These are not partners but who claim they are
or allow others to think of them as partners.
Such individuals may assume some of the
responsibilities of general partners.
KINDS OF PARTNERS
Senior partners - assume major roles in
management because of their long tenure,
amount of investment in the partnership, or
age. They normally receive large shares of
the partnership's profits.
 Junior partners - are generally younger
partners in tenure, have only a small
investment in the firm, and are not
expected to make major decision. They
assume limited role in the partnership's
management and receive a smaller share of
the partnership's profits.
TYPES OF PARTNERSHIP
 The most common ones are:
1. General Partnership, and
2. Limited Partnership.
ADVANTAGES OF A PARTNERSHIP
 Ease of starting
 Increased sources of capital and credit

 Combined managerial skills (improved

decision making potential)
 Definite legal status
ADVANTAGES OF A PARTNERSHIP
 Personal supervision
 Reduced risk

 Motivation of important employees

 Tax advantages
DISADVANTAGES OF A PARTNERSHIP
 Unlimited liability
 Risk of implied authority

 Lack of harmony

 Lack of continuity (instability)

 Limited capital availability (size

limitations)
 Investment withdrawal difficulty (frozen
investment)
THE CORPORATION OPTION
 Corporations are towers on the business
landscape.
 While proprietorships are many in number,
they are generally small in size.
 In comparison, corporations are few in
number, but generally large in size.
 Because corporations tend to be large, they
play a powerful role in the economy of our
country.
 For example, corporations employ millions of
people and provide consumers with many of
the goods and services they need and want.
THE CORPORATION OPTION
 The most widely quoted definition for joint
stock company or corporation is given as
 an artificial person (being an association of
natural persons) authorized and recognized by
law, with distinctive name, a common seal,
comprising of transferable shares of fixed
values, carrying limited liability and having a
perpetual or continued or uninterrupted
succession life.
CHARACTERISTICS OF THE
CORPORATION
 Separate legal entity
 Limited liability

 Transferability of shares

 Death and Withdrawal of shareholders

 Common seal

 Separation of ownership from management

… CHARACTERISTICS OF THE
CORPORATION
 Supervision A company is created by the legal
process of incorporation. It exists as an artificial
person until it is formally dissolved by removal of
its name from the register at the company
registry. While it exists it is subject to detailed
regulation; for instance, it must prepare and
deliver to the registry annual accounts and an
annual return (a summary of its situation). The
Registrar of Companies, the Department of Trade
and Industry and the courts all may have power
of regulation and investigation over companies.
… CHARACTERISTICS OF THE
CORPORATION
 Written constitution A company has no mind of its
own to decide what to do. The structure of divided
control between directors and members must be
clearly defined. A company therefore has a written
constitution. On the creation of a company, the
promoters must file certain documents with the
Registrar of Companies. These include the Articles
of Association and the Memorandum of
Association. The articles contain details of how the
company will be run from day to day, for example the
duties of directors, the rights of each class of shares,
and procedure at meetings. The memorandum lays
down the constitution of the company, for example; its
name, authorize capital and objects.
… CHARACTERISTICS OF THE
CORPORATION
 The Corporate Charter In most states, three
or more persons are required to apply to
the secretary of state for permission to
incorporate.
 After preliminary steps, including required-
publicity and payment of the incorporation
fee and initial franchise tax, the written
application is approved by the secretary of
the state and becomes the corporation’s
charter.
… CHARACTERISTICS OF THE
CORPORATION
 A corporation charter typically provides for the following:
 Name of the company
 Formal statement of its formation
 Purposes and powers- that is, type of business
 Location of principal office in the state of incorporation
 Duration (perpetual existence, 50-year life and renewable charter,
etc.)
 Classes and preferences of classes of stock.
 Number and par (or stated value) of shares of each class of stock
authorized.
 Voting privileges of each class of stock
 Names and addresses of incorporators and first year’s directors.
 Names and addresses of, and amounts subscribed by, each subscribe
to capital stock.
 Statement of limited liability of stockholders (required specifically by
state law in many states)
 Statement of alterations of directors’ powers, if any, from the general
corporation law of the state
STRUCTURE OF COMPANY
MANAGEMENT
 We can have three groups that comprise the
corporate structure namely,
 the shareholders or stockholders,
 the board of directors and
 the officers or chief executives of the
corporation.
SHARE HOLDERS
 Ownership is divided into equal parts called
shares.
 One need only buy a share in order to become a
stockholder.
 Each stockholder receives a certificate from the
corporation, which shows the number of shares
owned.
 Ownership in a corporation is evidenced by
stock certificates, each of which stipulates the
number of shares owned by stockholder.
 An ownership interest does not confer a legal
right to act for the firm or to share in its
management.
… SHARE HOLDERS
 It does evidence the right to receive
dividends in proportion to stockholdings-
but only when they are properly declared
by the board of directors.
 Pre-emptive right- ownership of stock
typically carries the right to buy new
shares, in proportion to stock already
owned, before the new stock is offered for
public sale.
… SHARE HOLDERS
 Shareholders are the ultimate owners of a
corporation and their ownership is
proportionate to the number of shares they
have in the corporation.
 Theoretically, the shareholders, as owners,
are the ultimate governing body of the
corporation, they do influence the
management activity through their given
group and individual rights since the
supreme authority in the corporation is the
body of stockholders.
 They have the right to approve or
disapprove any and all corporate actions.
… SHARE HOLDERS
 To mention some of the group rights:
 To determine the corporate policy. For
instance, broad policies covering retirement
plans for officers and employees, stock options
for key personnel;
 To vote on election of board of directors.
Regardless of their holdings, all stockholders
have a right to vote for the board of directors.
This voting usually occurs on annual bases,
with each person permitted one vote for every
share owned. Shareholders who can not attend
the annual meeting in person vote by proxy,
signing and returning a slip of paper that
authorizes management to vote on their behalf;
… SHARE HOLDERS
 To determine the composition of directors;
 To vote on amendments in the corporate
charter as well as in the structure of the
corporation;
 Selection of the outside auditors of the firm.
… SHARE HOLDERS
 Some of the individual rights also are like:

 To transfer ownership to others;

 To buy and/or sell stocks;
 To receive dividends. Dividends are profits that
are distributed to stockholders. The decision to
distribute profits is made by the ruling body of
the corporation;
 To share in the net proceeds (cash received
from the sale of all assets less the payment of
all debts) should the corporation go out of
business or is dissolved.
BOARD OF DIRECTORS
 is the ruling body of the corporation.
 are elected body representing the body of
shareholders and chief governing body of
the corporation.
 The board consists of members who possess
business experience, technical knowledge,
financial standing and reputation for
integrity & fore sight.
 The board has ultimate authority in guiding
corporate affairs and making general
policy.
… BOARD OF DIRECTORS
 They perform core functions and have
powers to make major decisions, sets major
policies, and establish general objectives,
i.e., board of directors formulate long range
strategies, approves plans from top
management, and sets the major policies
within which all operations will be carried
out.
… BOARD OF DIRECTORS
 The board has the power to make major
management decisions (contracts) with
regard to investment, expansion, etc.
 It has the power to, vote on major
management decisions such as authorizing
money to build a new factory, develop a
new product line, or buy a new subsidiary
which may involve billions of dollars in
large corporations.
 The board also makes further
recommendations of dividends. The board
is empowered to declare stock dividends.
THE OFFICERS OR CHIEF EXECUTIVES
 The officers of a corporation are the top
executives determined by the board of
directors through either election or
appointment.
 These include president, chief managing
director, or chief executive officer, vice
presidents, secretary and treasurer.
… THE OFFICERS OR CHIEF
EXECUTIVES
 They are directly responsible for achieving
the corporate objectives by giving
directions and guidance, controlling and
supervising the overall activities of the
organization.
 In addition, the officers are responsible,
within limits set by the board for directing
day-to-day corporate activities in a manner
that conforms to the policies, strategies
establishes by the board.
 They are accountable to the board of
directors. Thus, they have to report
performance regarding the operations.
ADVANTAGES OF A CORPORATION
 Financial strength
 Limited liability

 Scope of expansion

 Managerial efficiency

 Ease in transferring ownership

 Legal-entity status
DISADVANTAGES OF A CORPORATION
 Difficulty of formation
 Lack of owner's personal interest.

 Delay in decision making

 Oligarchy and fraudulent management

 Lack of secrecy

 Double taxation

 Relative lack of credit

COOPERATIVES
 A cooperative is a business owned and operated by its
user-members for the purpose of supplying
themselves with goods and services.
 It is an organization owned by members/customers
who pay an annual membership fee and share in any
profits (if it is profit making organization).
 Owners, managers, workers and customers are all the
same people.
 These cooperatives are formed to give members more
economic power as a group than they would have as
individuals.
 The best example of such cooperatives is a farm
cooperative. The idea at first was for farmers, to join
together to get better prices for their food products.
CONTINUED …
 A cooperative is an enterprise owned and
controlled by all those who work in it.
 It can be registered and have limited liability for
its members, but has to adopt the following
principles:
 members have an equal vote in decisions;
 membership is open to everyone who fulfils specified
conditions (e.g. number of hours worked);
 assets controlled, and usually owned jointly by
members;
 profit shared equally between members with limited
interest payable on loans made by members;
Criteria for Choosing the Ownership Form

 Organizational costs
 Limited versus unlimited
liability
 Continuity
 Transferability of ownership
 Control
 Raising new equity capital
 Income taxes
CHAPTER- FOUR

SETTING A SMALL BUSINESS

SETTING A SMALL BUSINESS

• Setting up of a small new enterprise is a

very challenging and rewarding task.
Several problems are involved in this task.
Right from the conception of a business
idea up to the start of production,
numerous decisions have to be taken.
• The first and foremost step in starting a
small business is to find out a suitable
business idea and give a practical shape to
the idea.
SETTING SMALL BUSINESS….
 What is Basic Business Idea?
 It is logical, therefore, to think of a goal for
the unit in the long run rather than to look
for the immediate tomorrow. This long-term
thinking is called Basic Business Idea.
 The basic business idea and the product
through hierarchy can be represented as
follows.
BASIC BUSINESS IDEA
 Product Line
 Product Range

 Product
BASIC BUSINESS IDEA….
• The basic business idea facilitates choice of product
under an over all plan.

• The product line is relatively narrow and has a

shorter life.
• The product line consists of different families of
products.
• A unit with a basic business idea for example of
packaging can manufacture any of the following
groups of the products:
• Glass bottles
• Plastic packages
• Aluminum packages
• Paper or wooden packages
• Metal packages
BASIC BUSINESS IDEA….
 The product-range-on the other hand
includes different sizes of the product
within the product line. In the example
given above different sizes and shapes of
glass bottles can be manufactured for
varied applications.
PRODUCT……
• The product is one item of the product range
having different specifications like size,
material used and weight, etc.

• The basic business idea, which facilitates a

choice of the products at different stages of the
project, allows for diversification and
expansion.
• But the basic business idea is not always the
same. In a dynamic business scheme, one has to
carefully watch is one of the basic business idea
degenerating as regards:

1. Its ability to generate quick returns

2. Its ability to permit quick changes in the
products
STEPS IN ENTREPRENEURIAL BUSINESS
 In order to establish a business venture
with an entrepreneurial system an
entrepreneur needs to take the following
steps:
1. Search for business idea.
2. Process the ideas
3. Select the best idea
SEARCH FOR BUSINESS IDEA
• Sources of ideas: A business idea may be
discovered from the following sources:
• Observing Markets: Careful observation of
markets can reveal a business idea. Market
surveys can also reveal the demand and
supply positions for various products. It is
necessary to estimate future demand and to
take in to account anticipated changes in
fashions, income levels, technology, etc.
SOURCE OF BUSINESS IDEA…
• Prospective Consumers: Consumer knows best what
he wants and the habits/tastes, which are going to be
popular in the near future.

• Contacts with prospective consumers can also reveal

the features that should be built into a product or
service.

• These days, good business firms generally conduct a

survey among prospective consumers before
choosing the product to be manufactured.

• These firms also conduct a market test of the

prototype product before launching it into the
market. The customer is the foundation of a business
and it is he who keeps it going
SOURCE OF BUSINESS IDEA…
• Developments in Other Nations: People in
underdeveloped countries generally follow
the fashion trends of developed countries.
For example, video washing machines,
micro ovens, etc.
• Study of Project Profiles : Various
government and private agencies publish
periodic profiles of various projects and
industries. These profiles describe in detail
the technical, financial and market
requirements and prevailing position.
SOURCE OF BUSINESS IDEA…
• Government Organizations: Several government
organizations nowadays assist entrepreneurs in
discovering and evaluating business ideas.
Development banks, state industrial
development/investment corporations,
technical consultancy organizations,
investment centres, export promotion councils,
etc. provide assistance in technical, financial,
marketing and other areas of business.
Government also identifies the priority sectors
for investment through five-year plans,
industrial policy resolutions and guidelines for
industry.
SOURCE OF BUSINESS IDEA…
• Trade Fairs and Exhibitions: National and
international trade fairs are a very good
source of business ideas.
• At these fairs, producers and dealers in the
concerned industry put up their products
for display and/or sale.
• A visit to these fairs provides information
about new products/machines.
• Negotiations for the purchase, production
collaboration, dealership, etc. may also be
made at these fairs.
TRADE FAIR AND EXHIBITIONS
• Trade fairs and exhibitions provide
opportunities for,
– Assessing the market trends in terms of
demand potential and type of product required.
– Meeting a large number of buyers from
different states/countries.
– Assessing the attitude of the competitors in a
particular product or marketing area.
– Comparing the price and quality of similar
products.
– Establishing personal contacts with
dealers/importers/customers.
– Projecting new ideas on commercial publicity
for promoting sales in the country and abroad.
2. IDEA PROCESSING
 (1) Preliminary Evaluation and Testing of
Ideas: Once business ideas are discovered,
screening and testing of ideas is done.
 The following considerations are significant in
the evaluation and testing of business ideas.
(a) Technical feasibility: It refers to the
possibility of producing the product. Technical
feasibility of an idea is judged in terms of
availability of necessary
 technology,
 machinery and equipment,
 labour skills, and
 raw materials.
 The advice and assistance of technical experts
may be necessary to judge the technical
feasibility of various business ideas.
(B) COMMERCIAL VIABILITY:
 Commercial viability: A cost benefit
analysis is required to ascertain the
profitability of the ideas.
 An elaborate study of market conditions
and prevailing situation is made to assess
the viability and prospects of the proposed
project. This is known as feasibility study of
the project.
COMMERCIAL VIABILITY ……
• A number of calculations have to be made
about the
• likely demand,
• expected sales volume,
• selling price,
• cost of production,
• break-even point, etc.
• The services of market analysts and
financial experts may be necessary for this
purpose.
2. DETAILED ANALYSIS
Detailed Analysis: After preliminary
evaluation of the idea, the promising idea is
subjected to a thorough analysis from all
angles.
• Full investigation is carried out in the
technical feasibility and economic viability
of the proposed project.
• Financial and managerial feasibility of the
idea are tested.
DETAILED ANALYSIS ….
 At this stage a lot of information is
required.
 Consultations with experts in various areas
of the industry may be necessary to carry
out the detailed analysis.
 Due care should be exercised at this stage
because the idea is finally accepted or
rejected at this stage.
DETAILED ANALYSIS ….
 After the evaluation of a business idea is
completed, the findings are presented in the
form of a report known as ‘feasibility
report’ or ‘project report’.
 This report helps in the final selection of
the project.
 It is also useful for procuring licenses,
finance, etc. from governmental agencies.
3. SELECT THE BEST IDEA
• The feasibility report is analyzed to finally
choose the most promising idea.
• Generally, the following considerations
influence the selection of idea for a product or
service:

– Products whose imports are

restricted or banned by the
government.
– Products, which can be
exported easily and profitably.
SELECT THE BEST IDEA ….
 Products whose demand exceeds their supply
so that there exists ready demand.
 Products in which the entrepreneur has
manufacturing and/or marketing experience.
 Parent-ancillary relationships, i.e., the product
is to be manufactured for a parent company.
 Products, which showed high profitability.
 Products based on the expansion or
diversification plans of existing firms of the
family/friends/relatives.
SELECT THE BEST IDEA
 Products, which ensured specific advantages.
The advantages might accrue because of the
scale of the industry or the location of the
factory or technology of manufacture.
 Products favoured by the country’s
industrial/licensing policy, e.g., delicensed
industries.
 Products for which incentives and subsidies
are available
STEPS IN SETTING A SMALL SCALE
UNIT
1. The first key to success in any
manufacturing activity is to select the right
product.
• In the beginning, information of possible
lines of activity must be obtained,
• by talking to knowledgeable
people,
• from industrial publications, or
• from various organizations.
ASSESSMENT MADE
a. The marketing aspects- published data,
talks with people in the field etc., to
obtain a general idea of the market
conditions.
b. Technical aspects- detailed assessment
of the goods and services needed for the
project, the type of technology to be
adopted for the project.
c. Financial aspects- general idea of the
overall investment and scale of
operations, sources and mode of
financing, etc. The product most
suitable for an entrepreneur is to be
identified from the above
DETAILED PROJECT REPORT
2. Having selected a product, a detailed Project
Report needs to be prepared. This will cover the
following aspects:
a) A detailed estimate of demand is to be made.
– The total demand,
– existing suppliers and the capacity of existing units,
– the demand gap remaining to be met,
– the customers,
– the distribution method required, have all to be
studied.
SOURCE OF INFORMATION
• The required information may be obtained from
 published data,
 literatures available in some organizations,
 through information gathered personally
from persons already in the field,
 users,
 dealers, etc, or
 by means of a detailed market survey
conducted by government organizations,
or private institutions and consultants.
 Having detailed market information, a plan to meet
the market needs must be formulated.
B) TECHNICAL SPECIFICATIONS
Technical specifications of the process
should be carefully studied.
• The know-how may be available with the
person himself or may be obtained from
literature, or from others including
government laboratories like the National
Laboratories, etc.
CONTINUED….
c) The equipment required and their sources are
to be specified.
d) Requirements of space- land, shed etc. and
other utilities like power and water are to be
assessed.
e) Manpower requirements of direct and indirect
personnel are to be determined and their
availability ensured
f) The total cost of the project to be worked out
and the means for financing it identified;
quotations for equipment, material, etc., have to
be obtained; information of financing policies of
banks, and other financial institutions has to
begathered.
CONTINUED …..
g) Like the above information, the
economics of the entire scheme at projected
operating levels is to be assessed. The break-
even point must be well below the envisaged
levels of operation for adequate profits.
ACTION PHASE…..
3. The detailed Project Report having been
prepared and availability of the enterprise
established, the action phase begins.
• The form of ownership is to be decided upon and
the company formed and registered.
• Following this, action directed towards

• obtaining finance,
• necessary licenses, and
• necessary infrastructure is to be
taken.
CONTINUED….
 This would involve dealing with various government
bodies and other institutions like:
Financial institutions- for finance;
Sales Tax, Income Tax Authorities- for
respective registration;
 Licensing Authority- for obtaining
industrial licence and licences like for
raw material procurement;
 Municipal Authorities and Electricity
Boards- for requisite utilities.
 Directorate of Industries,

 Municipal Authorities, etc, for land,

factory, and shed, etc.
CONTINUED ….
4. Once all the required authorizations and
sanctions have been obtained, simultaneous
action is to be taken for the following:
i. Ordering machinery from suppliers.
ii. Obtaining utilities like power and water
connections after construction of shed, if
necessary.
iii. Recruitment of staff.
iv. Arranging supplies of materials.
v. Arranging for distribution of the product.
5. Once these are complete, the plant is ready for
commissioning.
6. The unit is then ready for commercial
production.
CHAPTER -5

BUSINESS PLAN
WHAT IS A BUSINESS PLAN?
• A business plan can be defined in different
ways.
• A business plan is a comprehensive set of guidelines
for a new venture.
• A business plan is also called a feasibility plan that
encompasses the full range of business planning
activities, but it seldom requires the depth of
research or detail expected for an established
enterprise.
 A business plan (feasibility plan) is an outline of
potential issues to address and a set of guidelines to
help an entrepreneur make better decisions.
 This plan would present your basic business idea
and all related operating, marketing, financial and
managerial considerations.
CONTINUED….
 Therefore,
 it should lay out your idea,
 describe where you are,
 point out where you want to go, and
 how you propose to go there.
 The business plan may present a
proposal for launching an entirely
new business.
 More commonly, perhaps, it may
present a plan for a major expansion
of a firm that has already started
operation.
THE PURPOSE OF BUSINESS PLAN
• Many managers already involved in the
small business or those considering it as a
possibility, perceive the business plan, the
first and foremost, as a Document that is
produced for the
– bank manager,
– investor or
– venture capital
in order to raise money
IMPORTANCE OF THE BUSINESS PLAN
• One of the most important steps in
establishing any new business is the setting
of a business plan.
• It can help the owner/manager crystallize
and focus his ideas.
 Any activity that is initiated without
adequate preparation tends to be
haphazard and unsuccessful.
 Although planning is a mental process, it
must go beyond the realm of thought.
Thinking about a proposed business
becomes more rigorous as rough ideas must
be crystallized and quantified on paper.
IMPORTANCE ….
 It can help the owner/manager set
objectives and give him a yardstick against
which to monitor performance.
 Perhaps of more immediate importance, it
can also act as a vehicle to attract any
external finance needed by the business.
 It can convince investors that the
owner/manager has identified high growth
opportunities, and that he has the
entrepreneurial flair and managerial talent
to exploit that opportunity effectively and
that he has a rational, coherent and
believable program for doing so.
IMPORTANCE ….
 The well – conceived plan thus offers a
sound basis for operation.
 A business plan can be used at different
times, with benefits for several audiences.
 This can be shown in form of

 when a business plan can be

used,
 by and for whom, and
 why.
WHEN IS BUSINESS PLAN PREPARED?
1. At the start up of a new business
• After the concept stage of initial ideas and
feasibility study, a new business start up.
• Many go through a more detailed planning
stage of which the main output is the business
plan.
2. Business Purchase
• Buying an existing business does not negate
the need for an initial business plan.
3. Ongoing
• Ongoing review of progress, against the
objectives of either a start – up or small
business purchase, is important in a dynamic
environment.
CONTINUED ….
4.Major decisions
 Even if planning is not carried out on a
regular basis, it is usually instigated at a
time of major change.
 Again it may be linked to
 a need for finance: for example, the need for
major new investment in equipment, or funds
to open a new outlet. It may be linked to
failure; such as a recovery plan for an ailing
business.
WHO ARE INTERESTED IN BUSINESS
PLAN?
1. Managers
• Managers are involved in small business
planning both as producers and recipients
of the plan.
• The management of a small enterprise is
the only people likely to be sufficiently
knowledgeable to produce a business plan;
• Business plans are also written to aid small
business managers.
2. OWNERS
• The managers of a small enterprise may
also be the owners and take a keen interest
in the planning process, wearing their
shareholders’ hat. A plan may be intended
for prospective equity partners, either a
sleeping partner looking for an investment,
or an active partner looking to join an
existing small business. Owners may also be
lenders, as in venture capital companies,
who take an equity stake in return for
providing loans.
WHY IS BUSINESS PLAN NEEDED?
 Managers, owners and lenders will all be
seeking to investigate the following issues:
1. Assessing the feasibility and viability of the
business or project
 Will it work and become commercially and
financially viable?
2. Setting objectives and budgets
 What is the overall direction and financial
target set by the plan?
3. Calculating how much money is needed
 What level and type of finance is required
to make the plan work?
THE FORMAT OF A BUSINESS PLAN
• The Three Key Questions
• What should a business plan look like, and
what should be included or excluded?
• To do its job business plan needs to answer
three straightforward questions:
1. Where are we now?
2. Where do we intend going?
3. How do we get?
I. ANALYSIS OF THE CURRENT
SITUATION (WHERE ARE WE NOW?)
i. Identity of the business:
1. Introduction
 relevant history and background
 date or proposed date for commencement of trading /
beginning of a plan.
2. Names
 names of business and trading names
 name of managers/owners
3. Legal identity
 company /sole trade/ partnership / cooperative.
 details of share or capital structure
4. Location
 address – registered and operational
 brief details of premises
5. Professional advisors
 accountants, solicitors, bank
II. THE KEY PEOPLE
1. Existing management
 names of the management team
 outlines of background experience,
skills and knowledge.
2. Future requirements
 gaps in skills and experience and how
they will be filled.
 future recruitment intentions
III. THE NATURE OF THE BUSINESS
1. Product(s) or service(s)
 description and applications
 breakdown of product line as % of sales
 outline of any intellectual properties - patents,
trademarks, design registrations, copyrights,
 key suppliers
 after sales service, or guarantees and warrantees offered.
 planned developments of product or service.
2. Market and customers
 definition of target market
 trends in market place
 classification of customers
 need of customers and influences in their buying decisions
 benefits offered by business to target customers.
3. Competition
 description of competitors
 strengths and weakness of the major competitors.
II. FUTURE DIRECTION
(WHERE DO WE INTEND GOING ?)
• The direction that is intended for the
business need to be clear and precise, if
others are to share its vision for the future.
• Moreover, qualitative expression of the
objectives, quantifiable targets will clarify
and measure progress towards the intended
goals.
• Identification of likely changes to the
business environment will build on the
opportunities outlined, and assess possible
threats.
… II. FUTURE DIRECTION
(WHERE DO WE INTEND GOING ?)
i Strategic influences
1. Opportunities and threats in
 Socio – economic trends the business environments
 technological trends
 legislation and politics
 competition
2. Strengths and weaknesses
 in its industry
 in the general environment
ii. Strategic direction
1. Objectives
general
 Specific
2. Policies
 guidelines and rules
3. Activities
 action plan
 time table of key activities
III. IMPLEMENTATION OF AIMS (HOW
DO WE GET THERE?)

 Implementation of accepted aims is what all

the parties to a plan are interested in as a
final result.
 Plans for marketing and managing the
business, with detailed financial analysis
are the advisable preliminaries before
putting it all into practice.
… III. IMPLEMENTATION OF AIMS
(HOW DO WE GET THERE?)
i. Management of resources
1. Operations
 Premises
 materials
 equipment
 insurances
 management information systems
2. People
 employment practices
 recruitment
 retention and motivation
 payroll and personnel system
 team management
 training.
IMPLEMENTATION …..
ii. Marketing plan
1. Competitive edge
 unique selling point of business (critical product or service
characteristics or uniqueness in relation to competitors)
2. Marketing objectives
 specific aims for product or service in the market place
3. Marketing methods
 Product - core and extended
- Product mix
- product development
 Pricing - basis
- margins
- discount policy
 Promotion - methods to be used
- consistency of image
 distribution - channels used
- direct or intermediaries
4. Research
 Confirmation of demand
 Future research planned
IMPLEMENTATION ….
iii Money : financial analysis
1. Funding requirements
 start – up capital
 working capital
 asset capital
 timing of funds required
 security offered
2. Profit and loss
 3 years forecast
 sales
 variable costs
 gross profit
 overheads
 net profit
IMPLEMENTATION …..
3. Cash flow
 3 years forecast
 receipts
 payments
 monthly and cumulative cash flow
4. Balance sheet
 use of funds
 source of funds
5. Sensitivity analysis
 break – even – point
 “what – ifs”

6. Summary
 main assumptions
 performance ratios
GROUP ASSIGNMENT 40%
– Form a group (use of the
previous group)
– Prepare business plan
– Prepare also the
implementation plan
– Submit it August 30, 2019
 Where are we
now?
(Analysis of
current
Situation)
THE
Where do we BUSIN
How do we get
intend ESS
there?
going? PLAN
(Implementatio
(Future
n of aims)
Direction
CHAPTER - SIX
MANAGEMENT OF RESOURCES
SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 How does managing a small firm differ from
that of a larger organization?
 We have already seen that the small
business environment exerts some
pressures, which can be different to the
influences on larger organizations.
 Problems of the availability or cost of
finance, the burden of government
regulations & paper work, and shortages of
suitable premises, are example of the
preoccupations that might concern the
manager of a small enterprise.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 However, differences in the environment
are probably as great between sectors
defined by products or markets, as they are
between those delineated by size of
company.
 For example, the external influences on a
large engineering company manufacturing
capital equipment for industrial customers,
will be very different to those on a building
society offering financial services to
domestic markets.
 Such environment differences can be just as
significant as those between a large and a
small company.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 It is not then the external environment
which sets small business management
apart
 What makes the difference is the enormity
of the range of issues confronting owner
managers, which they have to deal with
personally.
 The internal structure of a small business
creates the need for a different
management approach.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 In a large company, the chief executive is
head of a team of specialists in production,
finance, marketing, personnel and other
functions.
 There will be a clear distinction between
those planning the future of the business in
the longer term, and those implementing
the strategy on a day to day basis.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 The small business owner – manager has to do
it all. They are generalists who will have to
turn their hand to all functions from sales to
production.
 They are the planners and implementers,
responsible for deciding strategy and making it
happen.
 This scale and diversity of issues to be dealt
with is a unique feature of small business
management.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 Of course, no manager can hope to be
expert in all fields, and advice or training is
often needed.
 However, the required skill is not always
the trouble for an owner – manager faced
with a multitude of problems, demanding
attention simultaneously.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 Having the experience and understanding
necessary to know how to choose which
problem to deal with first is often the
difficulty.
 It is tempting to always tackle the most
immediate first; for a small business this
may mean overlooking a less obvious but
more significant problem which has a
critical impact.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 The analogy has been drawn between the
owner – manager and the entertainer
spinning dozens of plates on poles, all of
which need attention to keep them going.
One false move, one touch out of sequence,
and they all crash down.
… SMALL VERSUS LARGE BUSINESS
MANAGEMENT
 By contrast, the chief executive of a large
company is likened to a conductor of an
orchestra; their leadership can profoundly
influence the result, but their attention can
wander with out stopping the orchestra
from playing.
USE OF RESOURCES
 Management is about using resources
efficiently in order to meet the objectives of the
enterprise.
 In the start – up, and early years of a small firm,
the owner manager/s will be responsible for all
significant decisions regarding:
 What resources are needed;
 Where they will come from;
 How they will be used;
 How their use will be controlled and monitored.
… USE OF RESOURCES
 This adds up to an almost endless combination
of different responsibilities and activities.
 Some examples of these are shown in figure
given below.
 Management of Resources in a small firm’
which breaks the issues down into the four
main areas of
 operations,
 people,
 marketing, and
 finance.
MANAGEMENT OF RESOURCES IN A SMALL
FIRM -- SOME ISSUES
TO BE RESOLVED.

 OPERATIONS

 PEOPLE

 MARKETING, and

 FINANCE.
I– OPERATIONS
 Manufacturing process
 equipment required
 costs and methods of finance
 operating systems & controls
 safety regulations
 quality control
 operator training
 maintenance
… I– OPERATIONS
 Materials
 Products and services to be
bought in
 suppliers
 costs and credit terms
 purchase order systems
 storage systems
 goods inward
… I– OPERATIONS
 Premises
 location
 space requirements
 leasehold Vs. freehold
 rent and rates & insurance
 maintenance & cleaning
 environmental controls
 enterprise zones/assisted areas
 security
… I– OPERATIONS
 Office Equipment
 Telephone systems
 office furniture
 computer equipment
 WP software
 database software
 stationery items
 photocopier
… I– OPERATIONS
 Management systems
 accounting systems
 financial management information
 stock control
 debtor and creditor control
 cost controls
 order book
 mail in and out
 filing
… I– OPERATIONS
 Legal and Insurance
 employer's liability insurance
 fire and theft insurance
 loss of profits insurance
 public liability
 professional indemnity
 key man insurance
 engineering breakdown insurance
 employment law regulations (toilets; first aid, washing
water; drinking water; notice board,)
 certificate display (fire and other insurance)
 company law requirements
II – PEOPLE
 Recruitment and Dismissal
 job titles
 job definition
 person specification
 advertising/agencies
 interviewing
 offers/rejections
 anti–discrimination (race/sex/unions)
 written statements
 redundancy
 notice periods
… II – PEOPLE
 Records and Systems
 contracts
 personnel records
 payroll/ PAYE
 lateness/sickness
 holidays
 grievance procedures
 sick pay
 maternity pay
… II – PEOPLE
 Policies
 rates of pay
 full time/part time
 commission/bonus
 fringe benefits
 wage/salary review
 overtime
 training
 pension schemes
 safe working environment
III – MARKETING
 Market Research
 evaluation of competitors
 evaluation of customers
 evaluation of market needs
 primary market research
 secondary market research
 sales prospects lists
 enquiries logging
 customer sales records
 customer visit records
 database/mailing list
 order conversion rates
… III – MARKETING
 Product
 main benefits
 key features
 'extended' product opportunities (after sales
service; guarantees warrantees)
 product development
 R and D
 licensing opportunities
 collaborative ventures
… III – MARKETING
 Pricing
 price lists
 market/competitor pricing
 variable costs
 fixed costs per unit
 gross margins/mark–ups
 discounts
 contract pricing
 price increases
… III – MARKETING
 Promotion
 direct selling
 use of agents
 advertising
 listings in directories
 direct mail
 press releases
… III – MARKETING
 Promotion
 logo
 house style
 shop layout
 window display
 merchandisers
 selling aids
 leaflets and brochures
… III – MARKETING
 Distribution
 use of intermediaries (wholesale; retail; mail
order)
 export agents
 physical distribution and transport.
 goods out system
 inspection
 packaging
… III – MARKETING
 Sales Administration
 order book valuation
 order acknowledgements
 quotations/estimates
 delivery
 payment terms and conditions
 invoice/credit note queries
 customer queries
 sales leads follow–up
 export documentation
 complaints and response
IV – FINANCE
 Sales
 invoicing
 sales ledger
 payments procedures
 banking (cash; cheques)
 credit notes
 sales of assets
 bad cheques
… IV – FINANCE
 Debtors
 statements
 chasing letters
 telephone follow–up
 stop supply date
 legal action date
 write off date
 debtor information (aged analysis; by customer;
by product)
… IV – FINANCE
 Banking
 current account
 deposit account
 cheque book(s)
 signatories
 statements
 reconciliation to cash book
 bank manager relationships
 interest
 bank charges
 credit cards
… IV – FINANCE
 Tax
 VAT
 PAYE
 corporation tax
 personal tax
 capital gains tax
 stamp duty
… IV – FINANCE
 Purchases
 purchase orders
 authorization of orders
 cost control systems
 expense accounts
 chasing of suppliers
 goods in system
… IV – FINANCE
 Creditors
 creditterms and references
 authorization of invoices
 payments system
 creditor information (aged
analysis; by supplier; by
product)
… IV – FINANCE
 Management Accounting
 ledgers (purchase; sales)
 cash book
 petty cash
 cash forecast
 management accounts (P & L; balance sheet)
 audit arrangements
 filing of accounts
… IV – FINANCE
 Sources of Finance
 overdraft facility
 bank loan
 shareholders investment
 director's loans
 outside investors
 venture capital
 government assistance
OPERATING RESOURCES

 A key management area for the small

business owner is the selection, acquisition,
use and control of operating resources.
… OPERATING RESOURCES
 Under this heading we include many of the
impersonal resources that a manager
controls, such as
 premises,
 materials,
 machinery equipment,
 Finance
 Insurance and
 Management Information Systems
PREMISES
 In a start up situation, the location and type
of premises is often a first consideration
(even though location of potential
customers may be a more advisable start ).
 Key questions for an owner – manager will
be:
1. Where is the business to be located?
Once independent premises become necessary there
are many considerations to be taken into account,
such as:
 Ease of communication (road, rail, etc);
 Availability of labor, especially for any process
requiring specific skills;
 Proximity to centers of population: this is a key
factor for retail, catering and hotel businesses;
 Costs of rent and rates; these still vary considerably
even within relatively short distances;
 Government and local authority assistance
 Enterprise Zones, for example, offer a variety of
benefits including no rates, 100% capital
allowances for the first year, and simplified and
faster planning applications.
 Proximity to the home of the founder of the
small business. Research has indicated that, in
practice, this is the most important
consideration in deciding the location of a
small firm. Very few founders move their homes
in order to set up a new business.
2. What type of premises are needed?
 The nature of the business will largely
dictate the type of premises required.
Considerations will include the
 facilities,
 appearance,
 size and layout, and
 physical environment of the premises.
3. What are the legal and financial
implications?
 Taking on a lease can be a major commitment
for a small business, especially for an owner –
manager who may have to give personal
guarantees.
 As well as the obligation to pay rent and rates,
the tenants will normally be obliged to pay for
the insurance, maintenance and repair of
leasehold property.
 Are the right premises available?
 Finding suitable premises has been a major
problem for many small firms.
 Studies show that shortage of premises has
constrained the establishment and
development of small firms.
 It has also been shown that small firms tend to
relocate quite frequently as they grow;
 Requirements can change quite rapidly from
small space in a fully serviced, shared unit to
larger, more independent premises.
 Flexibility of tenure is therefore needed, in
addition to the right size of premises in a good
location, with appropriate facilities.
 These needs have been increasingly met by
local councils, Enterprise Agencies, business
centers, business parks, and science parks.
MATERIALS
 Purchasing of goods or materials is a key
management activity in many small firms,
especially manufactures and retailers.
Materials purchased fall into two basic
types:
i. Goods to be sold, either modified or
unchanged
ii. Consumable items, indirectly supporting the
business
… MATERIALS
Goods to be sold, either modified or
unchanged:
• This includes
 the stocks of raw materials for a
manufacturer,
 retail stocks in a shop,
 food ingredients in a restaurant,
and
 building materials in the
construction industry.
… MATERIALS
Consumable items, indirectly
supporting the business:
• This includes
 stationery,
 publicity material,
 reference catalogues, etc.
… MATERIALS
 Goodmanagement of this function
can assist the small firm in a
number of ways;
 ensuring that the right material
for the job is always purchased;
 reduction in costs: time spent
on researching and negotiating
with suppliers can result in
lower buying prices;
 availability of stock
 reduction in stocking cost
EQUIPMENT
 The infrastructure of a small firm is made up
principally of various categories of equipment,
representing a key resource to be managed.
These categories include:
i. Production machinery and equipment
ii. Communication equipment
iii. Office or retail furniture
iv. Systems equipment
v. Personal equipment
FINANCE
 Owners – managers often buy equipment on
lease or lease purchase at real – rates of
interest above those applying to normal
bank borrowing.
 Commentators have therefore been critical
of small firm management for its use of
financial resources to acquire equipment.
INSURANCE
 The purpose of insurance is to minimize
risks. As small firms are particularly
vulnerable to one – off disasters, an
important management issue will be the
choice of appropriate insurance policies to
mitigate the effect of misfortune.
 Obligatory insurance

 Discretionary insurance
 Obligatory insurance:
 Employers’ liability
 Third party vehicle insurance
 Discretionary insurance
 Fire and theft
 Engineering break down
 Loss of profits
 Public and product liability
 Professional indemnity
 Legal costs insurance
 Key man insurance
 Personal insurance such as life insurance,
health insurance.
MANAGEMENT INFORMATION SYSTEM
 Whilst manual systems are still common, and advisable in
some situations, computerized systems are helping the
small firm more and more to develop not only adequate
records, but controls as well.
 Management Information Systems for the small firm --
areas where records are necessary or desirable include:
 Sales
 Production
 Purchasing
 Finance
 Personnel
PEOPLE
 The small business sector became an
increasingly important employer
 The management of other people is often
the most important role played by the
owner – manager.
 It is also the function, which the owner –
manager is least likely to give up as the
firm grows.
Employment Law
 One reason for the law level of confidence
of owner – managers in their personnel role
is the complexity of employment law.
 An employee gains rights according to the
length of time they are employed by a firm.
Harmony versus Conflict
 Small firm provides a more motivational and happier
working environment than the larger firm.
 The better personal relationships between employer
and employee was made possible by the low level of
bureaucracy in the small firm.
 It is called as the ‘all one happy family’ environment
of the small firm, as compared to the ‘them and us’
attitude in larger companies.
 There are lower levels of unionization & industrial
action in smaller firms
TYPES OF MANAGEMENT CONTROL
 The way in which an owner – manager
exercises control over their work force will
depend not just on the personality of the
manager, but also the disposition of power in
the employer – employee relationship.
 Some circumstances will give the owner –
manager, as the employer, relatively high level
of control over employees; in other situations,
employees may be able to call more of the tune.
 TYPES OF MANAGEMENT CONTROL IN
SMALL FIRMS
High
Extent of employers potential

Fraternalism
economic dependence on

Paternalism
employees

Benevolent
autocracy

Sweating
Low High

Extent of employees’ potential economic

independence from employer
FRATERNALISM
 This describes a situation where the owner – manager
is heavily dependent on the skills of the employee(s) to
get the job done. They in turn are relatively
independent of the small firm because their expertise is
in demand elsewhere.
 Employer and employee work along side each other,
with decisions made from a position of mutual respect.
This is common in the construction and building
industry and craft – based companies.
 For example, the owner – manager and crafts-man who
work in a small joinery, specializing in the restoration
of old window frames and doors, were so dependent on
each other that a harmonious working relationship
evolved with no formal hierarchy for decision making.
 This management style is also common in
some professional and high technology
small businesses .
 For example, a private physiotherapy
practice, a training company or a software
development business will be dependent on
the skills of individuals, who can only be
managed by mutual consent.
PATERNALISM
 Where the alternatives for employees are
more limited, and the employer is less
dependent on them, then a paternalist
management style may emerge.
 A clear distinction between employer and
employee exists, but owner – managers are
still sufficiently aware of the importance of
their workforce to encourage common ties
and personal relations.
… PATERNALISM
 Farming: has been typified as paternalistic because
of the economic situation of small farms and the
traditional role of the landowner in society.
 Farm workers have often little choice of alternative
employment, and are poorly paid. Yet the farmer is
dependent on their commitment and experience, as
they will be working for long hours with little
supervision.
 Whilst maintaining a clear social and economic
distance, the small farmer will encourage mutual
identification of aims among their farm labourers
and wider community involvement.
BENEVOLENT AUTOCRACY
 This is the most common situation for
a small firm; the owner – manager is
less dependent on the employee, and
able to exercise their influence from
a position of power as an employer.
 However, employees are not so
economically dependent on the small
firm that they become totally
subservient.
 Close links exist between employer
and employee, and friendly relations
exist, often on a first name basis, but
… BENEVOLENT AUTOCRACY
 The founder of a small electronics company,
for example, chose the location of the
factory to ensure a ready supply of skilled
and semi – skilled labour.
 Although able to hire and fire more or less
at will, the owner – manager was anxious to
keep employee turn over to a minimum
because the selection and training of new
staff was expensive and time consuming.
… BENEVOLENT AUTOCRACY
 The firm developed a name in the areas as
good employer, a reputation the owner was
anxious to preserve by acting fairly, paying
the market rate and providing reasonable
working conditions.
SWEATING
 There are some circumstances which
conspire to give the employer all the power,
and the employee virtually none.
 The environment of parts of the clothing
industry, in which fragmented suppliers,
dependent on powerful buyers, exploit their
labour force in order to provide a low cost,
flexible service.
SWEATING
 The ‘sweat shop’ emerges in conditions such
as these. Some workers, especially
immigrant female labor, are particularly
vulnerable to exploitation because they
lack relevant skills in an area of high
unemployment.
 They have little alternative but to accept
low pay, and erratic employment dependent
on the work load of the small firm.
… SWEATING
 Their employers trade in marginal, highly
competitive industries, subject to sudden
rushes of orders, and then gluts of
production. They survive by keeping
overheads down, using poorly equipped
premises and hiring and firing workers at
the first indication of growth or contraction
of the business.
 These four examples of the types of management control
are not meant to be exhaustive; there are many variations
on the theme. Nor are the types mutually exclusive.
 In some small firms two different modes of relationship
can exist side by side. An electronic design and
manufacturing company, for example, employs highly
skilled technicians, who enjoy an egalitarian, ‘fraternal’,
relationships with the owner – manager, who is very
dependent on their design expertise. The semi – skilled
production operators also employed are more easily
replaced, and treated in a more autocratic, although still
benevolent, fashion.
 What does emerge from looking at these
types is that there is a highly varied pattern
of management of people in the small firm.
 Central to them all is the owner – manager
whose personal style will be conditioned by
the external forces prevalent in the
industry.