This research aims to investigate the major challenges faced by hand loom sector MSEs on the diversification of woven product designs and after investigating challenges related to woven product design diversification, the researcher tried to develop and produce highly market demanded hand woven product designs with a special emphasizes on hand loom micro and small enterprises engaged in Amhara region Bahir Dar city. For the sake of achieving the objectives of this study, questionnaires were analyzed using statistical analysis such as descriptive, bar graphs and pie charts. The information gleaned through questionnaire from a sample of 11 MSEs and face-to-face interviews were conducted with 5 leaders of MSEs. The respondent MSEs were selected using simple random sampling technique. The empirical study elicited seven major challenges which seem to affect diversification of woven product designs of MSEs in Bahir Dar city which include: lack of technical skills, lack of adequate technology, marketing factor, lack of entrepreneurial skills, lack of flexibility, lack of sufficient raw material and inappropriate production methods. The findings further indicate that, skill factors and entrepreneurial factors are the two topmost factors that affect diversification of woven product designs of MSE in the selected enterprises. To alleviate the skill factors which affect the woven product design diversification of MSEs, the researchers was developed and produced 15 demanded woven designs and disseminate these designs with a detailed manual to targeted MSEs lived in Bahir dar city. Based on findings, recommendations are forwarded to concerned government bodies, ANRS TVED bureau, Amhara region Bahir Dar city MSEs, Bahir Dar poly technic college and suggestions for other researchers.