Chapter Two

Small Business: Vital Components of the Economy

2.1 Definitions of Micro and Small Enterprise/Small Business
There is great degree of diversity in size, in growth potential, in organizational structure, and
often in culture of small businesses. Many efforts have been made to define the term small
business, using such criteria as number of employees, sales volume, and value of assets. But
there is no generally accepted or universally agreed-on definition (Longenecker, Petty, Palich, &
Hoy, 2017).
Worldwide, individual countries apply their own definitions and criteria in defining categories of
small-scale enterprise. For instance definition applied to micro-enterprise in Ethiopia is
different from the developed countries such as the USA and UK – Attempt is therefore made in
this section to cite some of the definitions given to such categories of enterprise by different
countries including Ethiopia.
Micro and Small business enterprise is a specific form of small enterprise. Such enterprises
usually include small service businesses, bakeries, metal working business, small furniture
maker’s repair and maintenance business, copying business, small scale food production
business, etc. Moreover, studies indicate that this group (micro-enterprise) provides most jobs
in the industrial sector of many developing countries varying from 40% to 90%. Generally,
there are two approaches to define a small business enterprise. These are:
A. Size criteria and
B. Economic/control criteria
A. Size Criteria: Though the criteria used to measure the size of business may vary, the
following criteria are commonly used to measure the size of businesses.
i. Sales volume
ii. Number of employees
iii. Insurance in force
iv. Volume of deposits
B. Economic/Control Criteria: The definition of a small business referring to economic/control
criteria cover the following:
i. Market share: - The market share of a small firm is not large enough to enable to
influence the prices of national goods sold to any significant extent.
ii. Independence: - The owner of a small business is independent in that he/she has full
control over the business.
iii. Personalized Management: - It is the owner who actively participates in all aspects of
the firms’ management and in all major decision making processes. Thus, there is little
or no devolution of delegation of authority.
All of these three characteristics should be satisfied in order for the business firm to be
categorized as a small business. When we refer to the Ethiopia context, a standard definition to
both micro and small enterprise has been set by the ministry of Trade and Industry study on
‘MSEs development strategy’ which took place on August 1997. Accordingly, micro enterprises
in Ethiopia are defined as those firms with less than five workforces and with a paid up capital
of not exceeding birr twenty thousand. While the small enterprises are defined as those

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ventures with less than ten workforces and with paid up capital of not exceeding birr fifty
thousand.
Old Enterprise Level Manpower Paid up capital Excluding high tech. consultancy
-1997 Micro enterprise ≤20,000 ETB firms and other high tech.
Small enterprise ≤500,000 ETB establishments.
According to the new Small & Micro Enterprises Development Strategy of Ethiopia (published
2011) the working definition of SMEs is base d on capital and labor
new Enterprise Level Sector Hired labor Paid up capital
-2011 Micro enterprise Industry ≤5 ≤100,000 ETB
Service ≤5 ≤50,000 ETB
Small enterprise Industry 6-30 ≤1,500,000 ETB
Service 6-30 ≤500,000 ETB
2.2 Economic, Social, and Political aspects of Small Business Enterprise
Industrialization is of crucial importance to sustainable development. Only very few countries
with a small population and a great wealth of natural resources have succeeded in achieving a
high degree of prospects. The success of a number of newly industrialized countries, especially
in East Asia, has emphasized the importance of the relationship and interaction between
agriculture, industry and the service sector. Within each of these sectors strategic changes are
taken place, with employment in agriculture almost always going into sharp decline while
employment in services and the industrial sector grows. Growth in the industrial sector is less
rapid than in the service sector however. In any case the changes referred to highlight the
increasing importance of development in the micro and small enterprise sector.
Developing countries are devoting attention to the development of small scale enterprises in a
variety of ways. The following are the major vital roles that micro and small enterprise can play
in the socio-economic development of a nation.
 Micro and small enterprises are considered to be greatest value in building up a local
production structure and in promoting economic growth.
 Micro and small enterprise are also considered as a means of creating employment
opportunity and achieving a fair distribution of national resource income, knowledge and
power.
 Small scale enterprises are also seen as a seedbed for the development of local
entrepreneurship.
 Small enterprises are also important in that can help to promote rural industrialization.
 Small scale enterprises are also termed or seen as forms enterprises in which more
appropriate technology is applied. They require less capital and more labor. They have the
capacity to generate a much higher degree of employment with less capital as compared to
the large-scale sector. Thus, they are less capital intensive and more employment oriented.
 Small-scale enterprises are also important in that can serve as suppliers of parts and
accessories to bigger industries. This ancillary function involves specialization in specific
areas and results in greater profitability.

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 Small-scale enterprises or industries can also play a prominent role in promoting the
export market.
2.3 Benefits of Small Business Ownership
When seen from the individual point of view, going into small business has certain advantages.
As a result, the desire for individuals to own and operate their own small business firm is
growing. The following are some of four benefits that individuals pursuing a career in business
ownership can gain.
(a) Opportunity to gain control over own destiny: Owning a business provides the
entrepreneur the independence and the opportunity to achieve what is personally
important.
(b) Opportunity to reach your full potential: Too often, people find their work boring and
unchallenging. The small business therefore, becomes instrument for self-expression and
self-actualization. In your own business, all of your skills and abilities will likely be
challenged. The only barriers to success are those that your creativity and determination
cannot overcome limits artificiality created by the organization that employs you.
(c) Opportunity to rap unlimited profits: Although money is not the primary force driving most
enterprises their ability to keep the money their business earn, certainly is a critical factor in
their decisions to launch companies. Without question, men and women who apply their
knowledge to produce valuable goods and services and to solve problems of the society
often are rewarded bountifully.
(d) Opportunity to contribute to society and be recognized for your efforts: We no longer can
depend solely on our own skills to provide for all our needs. Entrepreneurs provide the rest
of us with goods and services we need. Small business owners/managers enjoy the
recognition from customers when they have served faithfully over the years. Being a part of
the business system, and knowing that their work has a direct bearing on how the economy
function is another reward for small business owners.
2.4 The Potential drawbacks of Small Business Ownership
Although owning a business has many benefits and provides many opportunities, anyone
planning to enter the world of entrepreneurship should be aware of its potential drawbacks. If
you aren’t 100 percent sure you want to own a business’ says one business consultant “there
are plenty of demands and this laps along the way to dissuade you’. The point is that, without
proper preparation, an individual may find the career path of business ownership frustrating.
The major potential drawback therefore include, uncertainty of income, risk of losing your
entire invested capital, long hours and hard work, lower quality of life until the business gets
established and complete responsibility.
1. Uncertainty of income
Opening and running a business provides no guarantee that an entrepreneur will earn enough
money to survive. Although the mean and median incomes for entrepreneurs are higher than
those for employees, so is the variability of entrepreneurs’ incomes. In other words, some
entrepreneurs earn far more through their companies than they could working for someone
else, but other entrepreneurs’ businesses barely earn enough to provide them with an
adequate income. In the early days of a start-up, a business often cannot provide an attractive

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salary for its owner and meet all its financial obligations, meaning that the entrepreneur may
have to live on savings or a spouse’s income. The steady income that comes with working for
someone else is absent because the owner is always the last one to be paid (Scarborough &
Cornwall, 2016).
2. Risk of Losing Your Entire Investment
Business failure can lead to financial ruin for an entrepreneur, and the small business failure
rate is relatively high. According to research by the Bureau of Labor Statistics, 34 percent of
new businesses fail within two years, and 51 percent shut down within five years. Within 10
years, 66 percent of new businesses will have folded.64 Business failure can mean financial ruin
for an entrepreneur. Before “reaching for the golden ring,” entrepreneurs should ask
themselves if they can cope psychologically with the consequences of failure:
 What is the worst that could happen if I open my business and it fails?
 How likely is the worst to happen? (Am I truly prepared to launch my business?)
 What can I do to lower the risk of my business failing?
 If my business were to fail, what is my contingency plan for coping? (Scarborough &
Cornwall, 2016)
3. Long hours and hard work
New business owners sometime are amazed at the tremendous investment of time and energy
required to get business of the ground. In the start-up phase in particular the entrepreneur
does everything alone-from manufacturing and selling to cleaning and raising money. Studies
for instance show that the majority of new business owners work more than 60 hours per
week. In many star-ups, six or seven day work weeks with no paid vacations may be the norm.
When the business closes the revenue stops and the customers go elsewhere. Business start-
ups usually demand long hours and hard work from their owners. The average small business
owner works 51 hours a week, compared to the 40.2 hours per week the typical U.S. production
employee works. In many start-ups, six- or seven-day workweeks with no paid vacations are the
norm (Scarborough & Cornwall, 2016).
4. Lower quality of life until the business gets established
The long hours and hard work needed to launch a company can take their role on the
remainder of the entrepreneurs’ life. Business owners find their roles as husbands and wives or
fathers and mothers take a back seat to their roles as a company founders.
5. High Levels of Stress
Starting and managing a business can be an incredibly rewarding experience, but it also can be
a highly stressful one. Entrepreneurs often have made significant investments in their
companies, have left behind the safety and security of a steady paycheck and benefits, and
have mortgaged everything they own to get into business. Failure may mean total financial
ruin, and that creates intense levels of stress and anxiety! Sometimes entrepreneurs
unnecessarily bear the burden of managing alone because they cannot bring themselves to
delegate authority and responsibility to others in the company, even though their employees
are capable (Scarborough & Cornwall, 2016).
6. Complete responsibility

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 It is great to be the boss, but many entrepreneurs find that they must make decisions on issues
about which they are not really knowledgeable. The realization that the decisions they make
are cause of success or failure of the business has devastating effect on some people. Small
business owners realized quickly that they are the business.
7. Discouragement
Launching a business is a substantial undertaking that requires a great deal of dedication,
discipline, and tenacity. Along the way to building a successful business, entrepreneurs will run
headlong into many different obstacles, some of which appear to be insurmountable. In the
face of such difficulties, discouragement and disillusionment are common emotions. Successful
entrepreneurs know that every business encounters rough spots along the way, and they wade
through difficult times with lots of hard work and an abundant reserve of optimism
(Scarborough & Cornwall, 2016).
2.5 Causes of small Business Failure Factors
The rates of business failure vary greatly by industry and are affected by factors such as type of
ownership, size of the business, and expertise of the owner. The causes of business failure are
many and complex; however, the most common causes are (Hatten, 2009):
1. External factors of failure
Every business is affected by externalities; economic business cycles, fluctuating interest rates
interrupted supplies, labor market trends, inflation.
2. Personal factors of failure
The following can be cited as personal factors attributable to small business failures:
a. Inadequate Financing: Business failure due to inadequate financing can be caused by
improper managerial control as well as shortage of capital. On the one hand, if you don’t
have adequate funds to begin with, you will not be able to afford the facilities or personnel
you need to start up the business correctly. On the other hand, if you do possess adequate
capital but do not manage your resources wisely, you may be unable to maintain adequate
inventory or keep the balance needed to run the business.
b. Inexperience: lack of technical skills and or management acumen. Each of these short
comings can be lead to disaster, but they also can be overcome by individual willing to make
the commitment of time and energy to learn about business.
c. Arrogance: Many small business persons become consumed with their own brilliance,
convinced beyond reason (often without market research) that their bright ideas will
change the world-it has got to sell. Their arrogance will not allow them to advice from
others.
d. Mismanagement: inexperience entrepreneurs simply make bad decisions in critical
situations. Lack of experience is one of their most pressing problems. Small business owners
must be generalists; they do not have the luxury of specialized management. On the one
hand, they may not be able to afford to hire the full-time experts who could help avert
costly mistakes (Hatten, 2009). Several categories of mismanagement take critical for small
business to avoid.
 Over investment in fixed asset in common: When starting or expanding a business, it is
tempting to buy facilities and equipment rather than lease or subcontract.

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  Poor inventory control: This threatens the success of nearly all retail enterprises.
Purchasing too much inventory undermines customer selection and sales. Buying the
wrong inventory, or buying at wrong time, evaporates cash.
 Poor financial control: Many entrepreneurs fail to realize that”income” does not “cash
flow.”
e. Lack of planning: research shows less than half of small business owners had formal plans
prior to going into business. Many engaged in formal planning soon after starting their
businesses, but one third could not recall ever having a formal business plan. It is nearly
impossible to acquire capital, obtains loans or solidifies vendor contracts without document
sales forecasts, financial statements, market analysis and a clear statement the business
purpose. Plans are guidelines for action.
2.6 Problems of small business in Ethiopian
Small-scale industries have not been able to contribute substantially as needed to the economic
development particularly because of financial, production and marketing problems. These
problems are still major handicaps to development. Lack of adequate finance and credit has
always been a major problem of Ethiopian small business. Small scale units do not have easy
access to the capital market because they mostly organized on proprietary partnership basis
and are of very small size. They do not have access to industrial sources of finance partly
because of their size and partly because of the fact that their surpluses which can be utilized to
repay loans are negligible. Because of their size and partly because of their limited profit, they
search funds for investment purposes. Consequently, they approach money-lenders who
charge high rate of interest. Hence small enterprises continue to be financially weak.
Small scale enterprises find it difficult to get raw materials of good quality and at cheaper rates
in the field of production. Very often they do not get raw material in time. As a result, these
enterprises fail to produce goods in requisite quantities and of good quality at a low cost.
Furthermore, the techniques of production, which these enterprises have adopted, are usually
outdated. Because of their poor financial position they are not able to buy new equipment,
consequently their productivity suffers. Many small business enterprises are suffering with the
problem of marketing their products. It is only by overcoming all these constraints that small
entrepreneurs can hope to make their enterprises successful.
2.7 Setting a Small Business
The following are the major steps in setting small scale unit:
1. Select the right product: 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.
2. Preparation of detailed project report: This will cover the following aspects:
 A detailed estimate of demand is to be made-The total demand, existing suppliers and
the capacity of existing units, the demand gap to be met, the customers, the distribution
method required have all to be studied.

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  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.
 The equipment required and the sources are to be specified.
 Requirements of space-land, shed etc. and other utilities like power and water are to be
assessed.
 Manpower requirements of direct and indirect personnel are to be determined and
their availability ensured.
 Cost of the project to be worked should be identified.
3. 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. 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 license etc.
Once all the required authorizations and sanctions have been obtained simultaneous action
is to be taken for the following:
 Ordering machinery from suppliers.
 Obtaining utilities like power and water connections after constructions.
 Recruitment of staff.
 Arranging supplies of materials.
 Arranging for distributions of the product.
 The plant is ready for commissioning.
 Trial run may be made
 Promotional work may be made
 On the basis of feedback obtained, the process or product has to be modified until
acceptance output is obtained.
4. The unit is then ready for commercial production.
2.8 What is basic business idea?
 It is logical to think of a goal for the unit in longrun 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

Figure: Hierarchical presentation of business idea

Businesspersons should think of long-term goal and the profit when they start a business. The
basic business idea, which is at the top of the hierarchy, is to meet the broadest needs of the
customers, and has the long life perhaps from 5-50 years. The basic business idea facilitates
choice of product under an overall plan. Thus, entrepreneur may think of being in the
entertainment firm, in automobiles, in medicines, in services, in industries, etc.
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The product line is relatively narrow and has a shorter life. The product line consists of different
families of product. A unit with a basic business idea for example packaging can metal
packages, aluminum packages, paper or wood packages. The product range includes different
size of the product within the product line in the examples given above different size of glass
bottles can be manufactured for varied applications.
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 product at
different stages of the product, allows for diversification and expansion. But the basic idea is
not always the same. In a dynamic business scheme, one has to carefully watch is one of the
basic idea degenerating as regards.
A. Its ability to generate quick returns
B. Its ability to permit quick changes in the products
The general business atmosphere guides the choice of basic business idea. A basic business idea
results from the identification of business opportunities in the market.
To be successful in business, consistently watch the opportunities to spot where the
entrepreneur has to be sensitive to the market changes, watch demand and supply, study
consumer behavior, and grasp the business idea.
2.8.1 Sources of New Ideas
Some of the more frequently used sources of ideas for new entrepreneurs include consumers,
existing companies, distribution channels, the federal government, and research and
development (Scarborough & Cornwall, 2016).
1. Consumers: Potential and nascent entrepreneurs should always pay close attention to
potential customers. This can take the form of informally monitoring potential ideas and
needs or formally arranging for consumers to have an opportunity to express their
opinions. The idea or need has to have a large enough market to support a new venture
(Hisrich, Peters, & Shepherd, 2017).
2. Existing Products and Services
Potential entrepreneurs should also establish a method for monitoring and evaluating
competitive products/services on the market. Frequently, this analysis uncovers ways to
improve on these offerings that may result in a new product/service that has more
market appeal and sales and profit potential. Sam Walton, founder of Walmart, would
frequently visit competitive stores focusing not on what the competitive store did badly,
but rather on what they did very well, so he could implement a version of these ideas at
Walmart. Jameson Inns established a policy whereby the manager of each of its inns
(hotels) reported weekly on competitive hotels and their prices in their market areas
(Hisrich, Peters, & Shepherd, 2017).
3. Existing Companies: Potential entrepreneurs and intrapreneur should also establish a
formal method for monitoring and evaluating competitive products and services on the
market. Frequently, this analysis uncovers ways to improve on these offerings that may
result in a new product that has more market appeal.
4. Distribution Channels: Members of the distribution channels are also excellent sources
for new ideas because of their familiarity with the needs of the market. Not only do

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 channel members frequently have suggestions for a completely new product, but they
can also help with marketing the entrepreneur’s newly developed products. One
entrepreneur found out salesclerks that the reason his history was not selling was due
to its color. By heeding the suggestion and making the appropriate color changes, his
company became the leading supplier of non-brand hosiery in that region (Hisrich,
Peters, & Shepherd, 2017).
5. Federal Government: The federal government can be a source of new product ideas in
two ways. First, the files of the Patent Office contain numerous new product
possibilities. Although the patents themselves may not be feasible new product
introductions, they can frequently suggest other more marketable product ideas.
Several government agencies and publications are helpful in monitoring patent
applications. Second, new product ideas can come in response to government
regulations. For example, the Occupational Safety and Health Act (OSHA), aimed at
eliminating unsafe working conditions in the industry, mandated that three people. The
kit has to contain specific items that varied according to the company and the industry.
The weather proofed first-aid kit needed for a construction company had to be different
from the one needed by a company manufacturing facial cream or a company in retail
trade. In response to OSHA, both established and newly formed ventures marketed a
wide variety of first-aid kits. One newly formed company, R & H Safety Sales Company,
was successful in developing and selling first-aid kits that allowed companies to comply
with the act.
6. Research and Development: The largest source of new ideas is the entrepreneur’s own
“research and development,” efforts that may endeavor connected with one’s current
employment or an informal lab in the basement or garage. A more formal research and
development department is often better equipped and enables the entrepreneur to
conceptualize and develop successful new product ideas.
2.8.2 Method Of Generating Ideas
Even with a wide variety of sources available, coming up with an idea to serve as the basis for a
new venture can still be a difficult problem. The entrepreneur can use several methods to help
generate and test new ideas, including focus groups, brainstorming, and problem inventory
analysis (Hisrich, Peters, & Shepherd, 2017).
1. Focus Groups: Focus groups have been used for a variety of purposes since the 1950s. A
moderator leads a group of people through an open, in-depth discussion rather than simply
asking questions to solicit participant response. For a new product area, the moderator
focuses the discussion of the group in either a directive or a nondirective manner.
The group of 8 to 14 participants is stimulated by comments from other group members in
creatively conceptualizing and developing a new product idea to fulfil a market need. One
company interested in the women’s slipper market received its new product concept for: a
“warm and comfortable slipper that fits like an old shoe” from a focus group of 12 women
from various socioeconomic backgrounds. The concept was developed into a new product
that was a market success. The basis of the advertising message was formed by comments
of focus group members.

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 In addition to generating new ideas, the focus group is an excellent method for initial
screening ideas and concepts. Using one of several procedures available, the results can be
analyzed more quantitatively, making the focus group a useful method for generating new
product ideas. Focus group is groups of individuals providing information in a structured
format (Hisrich, Peters, & Shepherd, 2017).
2. Brainstorming: The first technique, brainstorming, is probably the most well-known and
widely used for both creative problem solving and idea generation. It is an unstructured process
for generating all possible ideas about a problem within a limited time frame through the
spontaneous contributions of participants. A good brainstorming session starts with a problem
statement that is neither too broad (which would diversify ideas too greatly, so that nothing
specific would emerge) nor too narrow (which would tend to confine responses). Once the
problem statement is prepared, 6 to 12 individuals are selected to participate to ensure the
representation of a wide range of knowledge. To avoid inhibiting responses, no group member
should be a recognized expert in the field of the problem. All ideas, no matter how illogical,
must be recorded, with participants prohibited from criticizing or evaluating during the
brainstorming session. The brainstorming method for generating new product ideas is based on
the fact that people can be stimulated to greater creativity by meeting with others and
participating in organized group experiences. Although most of the ideas generated from the
group have no basis for further development, often a good idea emerges. This has a greater
frequency of occurrence when the brainstorming effort focuses on a specific product or market
area. When using this method, the following four rules should be followed:
1. No criticism is allowed by anyone in the group-no negative comments.
2. Freewheeling is encouraged-the wilder the idea the better
3. Quality of ideas is desired-the greater the number of ideas, the greater the likelihood of
the emergence of useful ideas.
4. Combinations and improvements of ideas are encouraged; ideas of others can be used
to produce still another new idea.
The brainstorming session should be fun, with no one dominating or inhibiting the discussion. A
large commercial bank successfully used brainstorming to develop a journal that would provide
quality information to its industrial clients. The brainstorming among executives focused on the
characteristics of the market, the information, content, the frequency of issue, and the
promotional value of the journal for the bank. Brainstorming is a group method for obtaining
new ideas and solutions (Hisrich, Peters, & Shepherd, 2017).
3. Problem Inventory Analysis: Problem inventory analysis uses individuals in a manner that
is analogous to focus groups to generate new product ideas. However, instead of generating
new ideas themselves, consumers are provided with a list of problems in a general product
category. They are then asked to identify and discuss products in this category that have the
particular problem. This method is often effective since it is easier to relate known products
to suggested problems and arrive at a new product idea than to generate an entirely new
product idea by itself problem inventory analysis can also be used to test a new product
idea. Results from product inventory analysis must be carefully evaluated as they may not
actually reflect a new business opportunity. Problem inventory analysis is a method for
obtaining new ideas and solutions by focusing on problems.
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4. Reverse Brainstorming Reverse brainstorming is similar to brainstorming, except that
criticism is allowed. In fact, the technique is based on finding fault by asking the question, “In
how many ways can this idea fail?” Since the focus is on the negative, care must be taken to
maintain the group’s morale. Reverse brainstorming can be effectively used before other
creative techniques to stimulate innovative thinking. The process most often involves the
identification of everything wrong with an idea, followed by a discussion of ways to overcome
these problems; reverse brainstorming is a group method for obtaining new ideas focusing on
the negative.
5. Synectics :-Synectics is a creative process that forces individuals to solve problems through
one of four analogy mechanisms: personal, direct, symbolic, and fantasy. A group works
through a two-step process. The first step is to make the strange familiar. This involves, through
generalizations or models, consciously reversing the order of things and putting the problem
into a readily acceptable or familiar perspective, thereby eliminating the strangeness. Once the
strangeness is eliminated, participants engage in the second step, making the familiar strange
through personal, direct, or symbolic analogy, which ideally results in a unique solution being
developed.
6. Gordon Method:- The Gordon method, unlike many other creative problem-solving
techniques, begins with group members not knowing the exact nature of the problem. This
ensures that the solution is not clouded by preconceived ideas and behavioral patterns. The
entrepreneur starts by mentioning a general concept associated with the problem. The group
responds by expressing a number of ideas. Then a concept is developed followed by related
concepts, through guidance by the entrepreneur. The actual problem is then revealed, enabling
the group to make suggestions for implementation or refinement of the final solution. Gordon
method is a method for developing new ideas when the individuals are unaware of the
problem.
7. Free Association One of the simplest yet most effective methods that entrepreneurs can use
to generate new ideas is free association. This technique is helpful in developing an entirely
new slant to problem. First, a word or phrase related to the problem is written down then
another and another, with each new word attempting to add something new to the ongoing
thought processes, thereby creating a chain of ideas ending with a new product idea emerging.
Free association is the method of developing a new idea through a chain of word associations.
8. Forced Relationships Forced relationships, as the name implies, is the process of forcing
relationships among some product combinations. It is a technique that asks questions about
objects or ideas in an effort to develop a new idea. The new combination and eventual concept
is developed through a five step process:
1. Isolate the elements of the problem
2. Find the relationships between these elements
3. Record the relationships in an orderly form
4. Analyze the resulting relationships to find ideas or patterns
5. Develop new ideas from these patterns
A forced relationship is a method of developing a new idea by looking at product combinations.
9. Collective Notebook Method In the collective notebook method, a small notebook that
easily fits in a pocket containing a statement of the problem, blank pages, and any pertinent
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solutions, recording ideas at least once, but preferably three times, a day. At the end of a
month, a list of the best ideas is developed, along with any suggestions. This technique can also
be used with a group of individuals who record their ideas, giving their notebooks to a central
coordinator who summarizes all the material. The summary becomes the topic of a final
creative focus group discussion by the group participants. Collective notebook method is
developing a new idea by group members regularly recoding ideas.
10. Heuristics This method relies on the entrepreneur’s ability to discover through a
progression of thoughts, insights, and learning. The technique is probably used more than
imagined, because entrepreneurs frequently must settle for an estimated outcome of a
decision rather than certainty one specific heuristic approach is called the Heuristic Ideation
Technique (HIT). The technique involves locating all relevant concepts that could be associated
with a given product area and generating a set of all possible combinations of ideas. Heuristics
involves developing a new idea through a thought process progression.
11. Scientific Method The scientific method, widely used in various fields of inquiry, consists of
principles and processes, conduction observations and experiments, and validating the
hypothesis. The approach involves the entrepreneur defining the problem, analyzing the
problem, gathering and analyzing data, developing and testing potential solutions, and choosing
the best solution. Scientific method is developing a new idea through inquiry and testing.
12.Value Analysis The value analysis technique develops methods for maximizing value to the
entrepreneur and the new venture. To maximize value, the entrepreneur asks such questions
as, “Can this part be of lesser quality, since it isn’t a critical are for problems?” In a value
analysis procedure, regularly scheduled times are established to develop, evaluate and refine
ideas. Value analysis is developing new ideas by evaluating the worth of aspects of ideas.
13. Attribute Listing This method is an idea-finding technique that requires the entrepreneur to
list the attributes of an item or problem and then look at each from a variety of viewpoints.
Through this process, originally unrelated objects can be brought together to form a new
combination and possible new uses that better satisfy a need. Attribute listing is developing a
new idea by looking at the positive and negative.
14. Big Dream Approach The big-dream approach to coming up with a new idea requires that
the entrepreneur dream about the problem and its solution, in other words, thinking big. Every
possibility should be recorded and investigated without regard to all the negatives involved or
the resources required. Ideas should be conceptualized without any constraints until an idea is
developed into a workable form. Big-dream approach is developing a new idea by thinking
about constraints.
15. Parameter Analysis A final method for developing a new idea-parameter analysis involves
two aspects: parameter identification and creative synthesis. Step one (parameter
identification) involves analyzing variable sin the situation to determine their relative
importance. These variables become the focus of the investigation, with other variables being
set aside. After the primary issues have been identified, the relationships between parameters
that describe the underlying issues are examined. Through an evaluation of the parameters and
relationships, a solution(s) is developed; this solution development is called creative synthesis.
2.5 Steps in setting a small scale unit.
The following are the major steps in setting small scale unit:
Teaching Material for the Course Entrepreneurship and Small Business Management
Compiled By Zeleke Wale (MBA), 2020 Page 12
 1. Select the right product: 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.
2. Preparation of detailed project report: 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 to be met, the customers, the distribution method
required have all to be studied.
b) 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.
c) The equipment required and the 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) Cost of the project to be worked should be identified.
3. 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. 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 an industrial
license etc.
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 constructions.
iii. Recruitment of staff.
iv. Arranging supplies of materials.
v. Arranging for distributions of the product.
5. The plant is ready for commissioning.
 Trial run may be made
 Promotional work may be made
On the basis of feedback obtained, the process or product has to be modified until acceptance
output is obtained.
6. The unit is then ready for commercial production.

Teaching Material for the Course Entrepreneurship and Small Business Management
Compiled By Zeleke Wale (MBA), 2020 Page 13