The objective of this study is to investigate the effect of group dynamics which is concerned on how groups are formed, what is their structure and which processes are followed in their functioning (Donelson, 2009) that is measured by its variables namely; group participation, group communication, trust, group cohesion and group empowerment according to this study on performance of Micro and Small Enterprises in Simada Woreda. Based on the works of Bobbie J. & Zorka K., 2010 on Study of Group Dynamics, a structured questionnaire is developed and administered to MSEs managers in Simada Woreda which are engaged in the priority sectors of the economy. A total of 86 MSEs managers participated in the study and the data is analyzed using descriptive and inferential statistics. The results show that the five independent variables measuring group dynamics were all positively related with performance of MSEs within the range of r=0.794 to r=0.878. Moreover, group cohesion is the most contributing group dynamics variable in the prediction of MSEs performance with beta value .267. The other four variables, in their descending order of unstandardized coefficients are group communication, trust, group participation and group empowerment. Furthermore, multiple regression analysis is used to measure the statistical effect of each individual independent variable on the dependent variable. The test result indicated that the alternative hypothesis of group cohesion, group communication and trust are supported by the multiple regressions and ascertained as they have significant positive effect on firm performance with a significance value less than 0.05(p<0.05). However, group participation and group empowerment does have insignificant effect on firm performance.