An Integrated approach model for MSEs development ...

International Journal of Applied Theoretical Science and Technology Volume 3, Issue 11, pp2015-2023, December 2016

An Integrated approach model for MSEs development in Amhara Region Mr. Muluken Zegeye1, Mr. Tomas Cherkos2 , Mr. Shimelis Tilahun3, Mr. Serajul Haque4 Faculty of Mechanical and Industrial Engineering, Bahir Dar Institute of Technology, Bahir Dar University, Bahir Dar,P.o.Box 26, Ethioopia, [email protected], [email protected], [email protected], [email protected]

Abstract — It is generally believed that the role of micro and small enterprises (MSEs) is not only limited to reduction of unemployment and poverty but also for industrial transformation, industrial dispersal to different rural towns and income. However, this depends on the nature and performance of the enterprises. Particularly, furniture manufacturing MSEs in Ethiopia have great role to manufacturing sector as the country has great convection to expand in the area. Despite this fact, furniture manufacturing MSEs as that of the overall MSEs have confronted with several factors that affect their performance. Some enterprises fail to sustain, some others remain for long period of time without transforming, and most are producing similar and non-standard products. Accordingly, this research aims in identifying and analyzing the challenges, their impact and potential opportunities of furniture manufacturing MSEs in randomly selected eight larger cities of Amhara region on 120 enterprises using structured questionnaire, interview and some focus group discussion with experts and enterprise owners. Data analysis and presentation was made using SPSS tools and Impact-Effort analysis matrix tool. The findings from questionnaire analysis and

which later validated from interview and direct site survey revealed that for most enterprises the critical challenges faced are; work promise, access to finance, infrastructure, entrepreneurship and business managerial problems. As the MSE sector is highly diversified and characterized by an enormous number of problems of varied degree and complexity, it is not possible to address the whole range of MSE's operating in different sectors at the same time. Accordingly, an integrated strategy is developed which could encompass from policy development, establishment of new enterprise, service delivery, and creation of market linkage and it incorporates many actors. In the strategy a model called “MSEs support strategy model” is developed and the roles and responsibilities of each actor is defined. Furthermore, an evaluation and controlling mechanism which comprises of the three main actors (government, BDS providers and enterprise cluster) and the PDCA process of Deming have been merged for the better team work and networking. Key words- Micro and small enterprises (MSEs),furniture manufacturing, factors, integrated approach, strategy model.

I. INTRODUCTION Micro and small enterprises (MSEs) in Ethiopia are confronted with several factors that affect their performance. The major factors include financial problems, lack of qualified employees, lack of proper financial records, marketing problems and lack of work premises. Besides, environmental factor affects the business which includes social, economic, cultural, political, legal and technological factors. In addition, there are also personal attitudes or internal factors that affect the performance of MSEs, which are related to the person’s individual attitude, training and technical knowhow [1]. Hence, one of the major rationales focusing on

poverty. The second rationale is that it helps to decentralize industries, to accelerate rural development, and to restrict urban immigration and the consequent problems of overcrowding in the cities [2]. The third rationale is that it adds value in the manufacturing sector and to the Gross Domestic Product (GDP) of the economy. MSE’s could be more eagerly used to achieve industrial dispersal and regional balance in economic development, diversification of the industrial structure and the transformation of the rural economy [3]. To solve the above mentioned challenges and bring expected MSEs development, the government is working starting from policy revision, structure change and incorporating different parts. However, since

MSE’s is that they are large employers of the labor force and this helps to handle unemployment and 2015 © 2016 IJATST. All Rights Reserved

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International Journal of Applied Theoretical Science and Technology Volume 3, Issue 11, pp2015-2023, December 2016 majority of responsible parties work separately and not in an integrated way they did not bring yet MSEs to the expected development.

II. LITERATURE REVIEW The problem confronting MSE’s appears to be similar in least developed or developing countries. However, the extent of the problems varies from country to country and industry to industry; and it depends on firms’ characteristics [5]. Currently, there are many internal and external challenges face MSE’s in their operations and hold back their growth in Ethiopia [6]. A hard look at various studies has revealed a number of deterrents to the growth and survival of the MSEs. The study conducted in Kenya revealed that three out of five micro and small businesses failed within the first few months of operation due to competition, managerial inefficiency, insecurity, debt collection, lack of working capital, power interruptions, political uncertainty, cost of materials and low demand of the products [4]. Regardless of the high failure rate by MSEs in Kenya, their enormous contribution to the entire economy cannot be overlooked [7]. MSEs in Ethiopia have also been confronted with a number of challenges that obstruct their successes. Inadequate infrastructure facilities, inadequate finance, poor managerial and technical skills, and inadequate working premises are the major challenges of MSE’s successful operations followed by marketing problems, low support from respective institutions, inadequate supply of raw materials, and regulatory issues [8]. Most MSEs in Ethiopia face critical constraints both at the operation and start up level [9]. Some of these constraints include lack of access to finance, access to premise, infrastructure, training in entrepreneurial and management skills, information on business opportunities, and social and cultural factors particularly related to deficient entrepreneurial culture and excessive corruption. It has been identified that lack of access to finance and working space are the most influential factor from among all adverse factors hindering the growth and development of the MSE sector in Ethiopia [10, 11,

and 12]. Furthermore, lack of finance has been considered in many studies as a key success factor for MSEs such as [14], [7], [15], [16], and [17]. Financial institutions such as microfinance and the banking systems in Africa are not in a position in providing enough financial support to the expansion of micro and small businesses [13]. In addition to that financing has become a principal challenge to micro and small scale enterprises in Ethiopia; except city administrations and regional microfinance institutions, their savings and family supports, banks in Ethiopia do not provide finance in the form of loan to MSE’s due to collateral obligations and other requirement [6]. The main sources of startup and expansion finance or funds for most MSEs are personal savings followed by iqub/idir, family and friends/relatives. The formal financial institutions have not been able to meet the credit needs of the MSEs. The majority of MSEs in the study area use informal sources. The formal financial institutions have not been able to meet the credit needs of the MSEs [12]. Since there is high interest rate and collateral requirement, most MSEs have been forced to use the informal institutions for credit. Friends/relatives, suppliers credit, and Iqub (rotating saving and credit associations) are the most important sources of finance in that order, with moneylenders used very rarely [18]. Working premises with least leasing price adjustment is the first requirement and taken as mandatory to the government [19]. The government has supplied 23,263,938 Sq. kilometers’ land to buildings, sheds and displaying places [20]. Although these efforts have been made, it is the second ranked challenges in regional towns and the major ones in Addis Ababa [6 and 13]. The problems of MSE’s management arises from the limited knowledge and ability of the owner or shortage of competent staff to advice the owner on management policies [21]. Decision-making skills, sound management and accounting practices are very low for MSE operators in developing countries [5]. Inability to sell the products and services; lack of adequate marketing channels, and lack of marketing skills are the problems to the starting of business and further growth of the sector [2 and 6].

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International Journal of Applied Theoretical Science and Technology Volume 3, Issue 11, pp2015-2023, December 2016 Furthermore, in another study it has been indicated that MSE’s operating with available infrastructure facilities has higher probability of long lasting existence and growth as compared to those MSEs that are operating without adequate infrastructures; and electric power interruption and inadequate water supply in Ethiopia was highly affected the growth of the business [13].

reflected in both GTPs, the study showed that in the face of massive demand in the country to move the MSEs involvement further there has, still, been limited capacity to address all supports required at each enterprise levels and the output is not as expected.

Generally, there are external (contextual) and internal factors which are still affecting the very performance of MSEs. Therefore, the aim of this paper is to develop an integrated approach model which can help MSEs to solve their challenges and improve their performance by incorporating the main responsible parties in a team based manner.

III. DATA COLLECTION AND ANALYSIS The study team interviews face to face enterprise owners regarding the general enterprise information, the main challenges and opportunities they could raise. The enterprise owners are provided with close ended and open ended questions especially about the main challenges of their furniture manufacturing MSEs. In the interview a lot of challenges have been identified. Some of the challenges are politico and legal factor related, infrastructure related like repeated interruption of power, less financial access issues, technology, work area limitation and other internal factors like less market opportunity etc. Even though, there are a lot of different interrelated factors that affect most furniture manufacturing MSEs, some are identified as critical challenges by almost all enterprises. The most commonly identified challenges are work promise, financial access and infrastructure in descending order. The figure below shows the impact extent of each challenges as the enterprise owners responds in each of the surveyed cities. Table 1 below also shows the summary of the identified challenges from the interview, discussion and direct survey.

Figure 1: Impact extent of different challenges of surveyed furniture manufacturing MSEs The reason behind is that the sector is faced with complicated challenges as described early in the analysis part of this study. As the MSE sector is highly diversified and characterized by an enormous number of problems of varied degree and complexity, it is not possible to address the whole range of MSE's operating in different sectors at the same time. In addition, the services given are not in integrated and planned way, each actor do its own alone. For instance, currently in Amhara region government, TVET colleges and some NGOs deliver business development service (BDS) to such MSEs. But, mostly their effort is not integrated and their work is mostly separately. Based on this fact, there is overlapping of effort recognized. Therefore, establishing better network system and delivering appropriate orientation could bring its own impact on performance improvement. From the study, the researcher can conclude that the challenges for furniture manufacturing are so many and interrelated.

Despite these efforts and the belief of the government on the MSEs which is very strong and


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Table 1 Summary of the identified challenges It needs involvement of many actors and an integrated approach to solve the challenges and get the expected development and benefit from such enterprises as the area has large potential in employment creation, income generation and industrial transformation. The main actors that should participate and could have a role in alleviating the challenges discussed so far are; the government, NGOs, TVET colleges, research centers and higher education institutions, private service providers, technology incubators, large industries, banks, micro finance institutions and other governmental and nongovernmental sectors. In addition to involvement of many sectors in the area, there shall be well established and networked strategy from policy development, establishment of new enterprise, service delivery to enterprises, capacitating of MSEs and creation of market linkage.

1.

MSEs Support Model

The developed model can incorporate different actors that could play their role and their interaction for upgrading of MSEs. Figure 2 below indicates a model incorporating clustered MSEs, government, industries, research and higher education institutions, machinery suppliers, raw material suppliers, MFIs, private service providers and customers. The researcher named the model as “MSEs support strategic model”. Each actor should have their own role and responsibility. But, there shall be a strong and strategic network between each actor, as the services to be delivered to MSEs shall be well studied and communicated with each actor to prevent miss- match of service standard and to avoid overlapping effort. Therefore, establishing better network system and delivering appropriate orientation could bring its own impact on performance improvement.

A. MSE Clusters

IV. STRATEGIC APPROACH TO IMPROVE PERFORMANCE OF MSES The challenges for furniture manufacturing are so many and interrelated. It needs involvement of many actors and an integrated approach to solve the challenges and get the expected development and benefit from such enterprises as the area has large potential in employment creation, income generation and industrial transformation. The main actors that are mentioned before should participate and could have a role in alleviating the challenges discussed so far. Accordingly, an integrated model is developed and described in the next part.

Clustering is very advantageous for the government as well as to individual enterprise. The government could easily deliver similar and intermittent service to all enterprises with the same cluster. This minimizes effort and it is cost effective to construct work spaces or “shades”, to provide infrastructure, to search market, to facilitate for export market and to deliver other services timely and efficiently. In clustering, service delivery as well as product manufacturing could be easily standardized.


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International Journal of Applied Theoretical Science and Technology Volume 3, Issue 11, pp2015-2023, December 2016 Clustering may also lead enterprises in getting service easier, market access and more easy technology transfer. Generally, the overall working environment would be less challenging as there will be team work and experience sharing in the similar business. Therefore, there should be a cluster formation that could promote fast network establishment with relevant actors. B. Government and other governmental institutions Government has to set policies that could support MSEs and should monitor the implementation of the policy. On the other hand, government has to identify potential employment creation areas in each location and has to prioritize sectors. Government also has to set strategy on how to promote best service providers. TVET colleges are part of government who are expected to act directly in facilitating MSEs development. C. Finance institutions Finance institutions shall to capacitate themselves in order to address the financial demand of micro and small enterprises. These institutions have to set on how to improve the saving culture of the community including MSEs. On the other hand, they have to design a means on how to minimize the bureaucratic process to get finance. D. Higher education institutions and research centers Higher education institutions in addition to delivering formal education, they have to think over short training packages especial to such micro and small enterprises being with the enterprise government office. Furthermore, the higher education institutions and research centers have to consult the government in policy development through their intensive research work, in work shade design and construction and cluster site selection. E. Large industries Larger industries could capacitate the micro and small enterprises through technology transfer and by subcontracting part of their work to such small enterprises. F. Private Service providers Private Service providers are specialized experts as well as BDS provider NGOs that could give especially technical services that could not be

provided easily by other governmental institutions to the MSEs. They should do together with actors. G. Others (MFIs, Raw material suppliers, Machinery suppliers) As that of other actors these all MFIs, raw material suppliers and machinery suppliers are agents or actors that provide all necessary support in delivering all required inputs.

2. Monitoring and evaluation Model As it has been stated, Ethiopia has established a strategic document in fostering MSEs to be an engine for poverty reduction and employment growth. The sector demands more close follow-up as most of the promoters are young’s who could lose their motivation easily and there are a lot of factors that hinder their performance. Therefore, there should be close monitoring and evaluation at each level of service delivery. The plan, do check and act action has to be conducted repeatedly. Each plan has to be conducted evaluated and corrective action has to be taken for improving performance of the MSEs. A well-designed and organized system will ensure that the right information would be collected at the right time during and after project implementation and that this information will help guide project implementation and strategic decisions. By doing so, required service could be delivered timely and with less effort. It will also ensure that project staff and stakeholders will not be overwhelmed by the amount of data gathered and that a reasonable amount of time and money is being spent in collecting and analyzing data, and reporting the information. Especially, the three main actors; government, enterprises and BDS providers (private sectors, NGOs and universities) have to work together by evaluating their service regularly. They should plan and evaluate their performance towards MSEs by themselves and as a team. The PDCA cycle for evaluation and control and the three actors’ interaction has been modeled as a controlling and evaluation model for service delivery and measurement of that to MSEs success. The model is shown as in the figure below.


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Figure 3: BDS monitoring and evaluation Model To transform MSE’S into medium and above level, this enterprise cluster monitoring and evaluation model is very essential. This model is built with two parts; the PDCA and integration of Government Institutions, Enterprise Clusters, and Education and training Institutions. Part I: Integration of selected parties Government institutions, Enterprise clusters, and Education and Training Institutions should take over their own responsibilities and activities related to the success of enterprises that we seek to transform.To do that from the above monitoring model, the green color indicates the privacy that those institutes and Enterprises should takeover and it determines the success and fail of their plan. No one should involve on their decision how to do each activity of their own plan. Since the objective of this model is for the success of enterprises, one way or another in time there will be an interaction between institutes and enterprise clusters. In the model it is represented by yellow color to signify there is a sign of care not to impairment will of parties and argue with the decisions they may take about. In this yellow boundary, rules and regulations should be flowclearly seen by the respected parties. Decisions done and flow into breaking the yellow boundary should reconsider green area arguments and information so that there will be acceptance in the next party. During the act it is expected that the three parties have a common Heart-of-Success for Enterprises in transforming into medium and above. The center of this model is represented by red color to signify there is a red line that should not be forgotten while those three parties take over actions for transformation. The read lines may include but not limited to: customer Satisfaction, Teamwork, Strategic way, Resource Utilization and Eliminate bureaucracy.

Part II: Using PDCA Cycle For the success enterprise cluster and to fully transform into medium and above, selected parties in the model should follow the PDCA Cycle developed by Deming in 1986. To accomplish PDCA, selected parties should pass through the following steps: 1. Study previous results, new strategies and prepare a plan 2. Do work breakdown and accomplish every dime task of the plan 3. Check weather each activity is based on planed prepared in step one 4. Act to re-correct errors, adjust compass into success

V. CONCLUSION, RECOMMENDATION AND FUTURE WORK Conclusions i. The researchers are convinced that the furniture manufacturing MSEs in ANRS play a crucial role in economic improvement and reduction of unemployment, because they utilize relatively less capital, it’s a home of entrepreneurship, utilize mostly cheap and local raw materials, and produce goods and services. ii. The vital aspect is that it is creating opportunities for the population to generate income, which by itself create the way to reduce the poverty. Comparing with large enterprises MSEs maintain a closer association with its customers and employees; it is based on lower overhead and have greater flexibility as their size allows them to adopt new processes, services, materials and products. iii. However, the research identifies that MSEs are still facing sever constraints in their activities and their promotion and development; they are unable to address the whole problems they faced on their own and the challenge level is not tolerable and affects the enterprise performance and existence severely. iv. For instance, due to such challenges, from manufacturing MSEs existed in Amhara region in 2007E.C, 50% of them have been dropped out from the business. v. Accordingly, the researchers believing that such problems will be solved via an integrated way, develops a model for strategic approach of supporting MSEs in order to improve their performance. Here different actors have been identified and their role and interaction with each other has been discussed.


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International Journal of Applied Theoretical Science and Technology Volume 3, Issue 11, pp2015-2023, December 2016 vi. Supportive strategic model for medium and small scale industries are represented in figure 2.

Recommendations i. The research output discloses that most enterprise owners and promoters do not have formal educational background. Furthermore, most promoters possess dependency behavior i.e. they need more help and their effort is limited to resolve the challenges by themselves. Therefore, there should be an organized training and consultancy service related to technical, entrepreneurship, leadership and management. ii. The promoters have to be technically competent to perform the work effectively, have entrepreneurial skill to create more marketable jobs, have good managerial and leadership skill to manage all the activity and most importantly the promoters have to develop good attitudinal behavior about the opportunities given to the sector and the role of individual promoter to improve the performance. iii. As it is noticed in the study, MSEs are exposed to a lot of challenges which are interrelated and complicated. The root causes of most challenges are due to less implementation of the policy on the ground. Therefore, in order to resolve and minimize these challenges, there should be an integrated business development service that could involve different sectors which could have more related role in the area. The service should be more communicated to each sector and sectors service shall be based on their competency. iv. The business development services that may be delivered should be measured and controlled. The reason behind, is that the services that are being delivered unless measured and controlled could not be improved. Therefore, there should be a plan what service to deliver, service delivery, check or evaluate the performance based on the plan and a corrective action has to be conducted. v. Last but not least we recommend the government office to be committed and implement the model developed which will help all stakeholders to do integrative in most of MSEs development.

VI. REFERENCES [1] Werotaw B. (2010). Entrepreneurship: An Engine for Sustainable Growth, Development, prosperity and Good Governance; Genius Training and Consultancy Service, Addis Ababa, Ethiopia [2] MoFED (Ministry of Finance and Economic Development), (2010). The First Five Years (19982002 E.C.) Development Plan Implementation and The next Five Years (2003 to 2007 E.C.) Growth and Transformation Plan Preparation: Inception Report for Panel Discussion to the Federal Government Conference, Addis Ababa, Ethiopia. [3] Uzor, O.O. (2004). Small and Medium Scale Enterprises Cluster Development in South- Eastern Region of Nigeria; Institute for World Economics and International Management, pp.5-15. [4] Bowen, M., Morara, M., and Mureithi, S., (2009). Management of Business Challenges Among Small and Micro Enterprises; Kca Journal of Business Management, 2(1), 16-31. [5] Aremu, M., A., and Adeyemi, S., L., (2011). Small and Medium Scale Enterprises as a Survival Strategy for Employment Generation; Journal of Sustainable Development, 4 (1), 200-206. [6] MoUDC, (2013). Survey on Micro and Small Scale Enterprises in Selected Major cities of Ethiopia. Addis Ababa, Ethiopia. [7] Mbonyane, B.&Ladzani W., (2011). Factors that hinder the growth of small businesses in South African townships; Pretoria European business review, 23/ 6, 550-560. [8] Mekonnen D. et al, (2013). Deterrents to the Success of Micro and Small Enterprises in Akaki-Kality SubCity. [9] Commission on Legal Empowerment of the Poor, (2006). Background issue paper on Legal Empowerment of the Poor, Addis Ababa. [10] Zeleke W., (2009). Efficiency in Management as a Determinant of Long-term Survival in Micro, Small and Medium enterprises in Ethiopia; Problems and Perspectives in Management, 7(3):1-9. [11] HaftuBerihun, TseahyeTsegaye, TekluKidane and Tassew W/Hanna, (2009). Financial Needs of Micro and Small Enterprise (MSE) Operators in Ethiopia; Occasional Paper No. 24, Addis Ababa, Ethiopia. [12] AdmasuA.,(2012). Factors Affecting the Performance of Micro and Small Enterprises in Aradaand LidetaSub Cities; Addis Ababa, master thesis. [13] Habtamu, T., Aregawi, G. and Nigus, A. (2013). Growth Determinants of Micro and Small Enterprises: Evidence from Northern Ethiopia; Journal of Economics and Sustainable Development, 4(9), 128-135.


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International Journal of Applied Theoretical Science and Technology Volume 3, Issue 11, pp2015-2023, December 2016 [14] Rolfe, R. et al., (2010). The viability of informal micro-enterprise in South Africa; Darla Moore School of Business, University of South Carolina. [15] Olawale, F. &Garwe, D., (2010). Obstacles to the growth of new SMEs in South Africa. African Journal of Business Management, 4/5, 729-738. [16] Okpara, O. J., (2011). Factors constraining the growth and survival of SMEs in Nigeria: Implications for poverty alleviation; Management Research Review, 34/ 2, 156 – 171. [17] Etumeahu, E. H. et al., (2009). Small business problems in Nigeria: A comparison with Sweden; Master thesis in Business Administration, school of management, Blekinge institute of technology. [18] Gebrehiwot Ageba, WoldayAmha, (2006). Micro and Small Enterprises (MSEs) Finance in Ethiopia, Empirical Evidence.

[19] GFDRE, (2011), Micro and Small Enterprise Development Strategy: provision framework and Methods of Implementation. Addis Ababa, Ethiopia. [20] MSE (Micro and Small Enterprise), (2011). Addis Ababa City Administration, Micro and Small Enterprises Agency: Inception Report on Micro and Small Enterprises Development in Addis Ababa, Addis Ababa, Ethiopia. [21] Stephen, E., O., and Wasiu, A., B. (2013). The Contribution of Small Scale Industries to the National Economy; Standard Research Journal of Business Management, 1(2), 60-71. .


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Figure 2: MSEs Support strategic model


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