Lecture 2: SME in a Global Economy

Course Code: Course Title: SME Management

Learning Objectives
To define Small Business To explore and identify strength and weaknesses of small business The role of small business in the economy Trends expected for small business

History
Rooted back in 4000 years ago Arab, Babylonians, Greeks, Jews, Romans et. al. In 2100 B.C. Hammurabi, King of Babylon drafted a code of 300 laws to protect consumers and small business persons During 1980s and 1990s, small businesses began to enjoy more esteem and importance in the economy

What is a small business?

The Small Business Administration (SBA) Independently owned and operated Not dominant in its field of operation < 500 employees The Organization for Economic Cooperation and Development (OECD) and the U.S. Chamber of Commerce Any firm employing fewer than 100 people White House Conference on Small Business < 500 employees <$20 million in annual sales

Definition Criteria
Revenue or net sales Number of employees Profits Type of management-ownership structure

Vary by Industry & Country

Revenue or net sales: [limits vary by industry] retailing $3.5 million to $13.5 million Services $ $3.5 million to $14.5 million Construction $7 million to $17 million Number of employees: fewer than 50 employees in nonmanufacturing and 100 employees in manufacturing industries Fewer than 75 to be eligible for Counseling assistance for Small Business Program Some agencies may use larger numbers upwards of 250 1500 depending on the industry

Vary by Industry & Country

Profits Net operating profit of $200,000 or less. Type of management-ownership structure The degree to which the owner is also the day to day manager Independent management; owner-supplied capital; local area of operations; small size within industry

The Contributions of Small Business

Represent more than 99.7 percent of all employers. Employ more than half of all private-sector employees. Pay 44.5 percent of total U.S. private payrolls. Generate 60 to 80 percent of net new jobs annually. Produce 13 to 14 times more patents per employee than do large patenting firms.

Contribution Contd.
More labor intensive than large companies Create more jobs than they lose Responsible for a majority of innovations and inventions that we benefit from today Productivity and Profitability: Bias for action Close to the customer Autonomy Employee stake Hands on managers Less bureaucracy

Contribution Contd.
Flexibility; able to respond more quickly to changes in the economy A country has a better chance of achieving economic well-being if entrepreneurial activities are supported by that society Long term interest in the community in which their business operates

Strengths
Customer Focus Attentive and responsive to customer wishes (not bureaucratic). Quality Performance Quality is not limited to large firms. Provide exceptional service to the community. Integrity and Responsibility A solid reputation builds loyal customers. Known by everyone in the community as fair/honest

Contd.
Innovation Small firms are the leading source of innovation. The Dependence of Big Businesses on Small Businesses

Creation of New Jobs

Special Niche Providing uniquely specialized services can be a powerful competitive advantage.

Small Business by Industry (2002)

[insert Figure 1.2]

Exhibit 1.6: List of Reasons for SB Success or Failure

Age Capital Economic Timing Education Expertise Marketing Parents Planning

Interesting facts about Small Business failures and closures

550,000 small businesses closed in 2000
The business failure rate for one-person businesses = 38.2% If the firm survives for two years, the chance of success starts to go up for each additional year Many of the failures are hobby or casual businesses 88.7 % of business failures are due to management mistakes About 1/3 of closed businesses were successful at closure

Exploding Myths about Small Businesses

The 80%-failure-rate myth Research shows a failure rate of only 18% for small businesses over an 8-year period. Low-wage-jobs myth

Rapidly growing small businesses (gazelles) accounted for 56% of new job growth and added to the majority of high-paying jobs from 1980 to 1990.

Small Business Risks

Overestimating the market
CONDUCT MARKET RESEARCH ON CUSTOMERS

Environmental uncertainty
DEVELOP A PLAN B IN CASE THE FORECAST IS INCORRECT

No salary for the owner

HAVE ADEQUATE SAVINGS TO DRAW ON FOR A YEAR OR TWO

Loss of investment capital Long hours and high stress Disillusionment

STICK TO YOUR PLAN AND BE PATIENT

(BORROWED FROM RELATIVES?)

ONLY TAKE MONEY FROM PEOPLE WHO CAN AFFORD TO LOSE IT

(60-80 HRS/WK)

EXPECT LONG HOURS AND DEVELOP STRESS-REDUCING ACTIVITIES

Additional Worries for Small Businesses

ADEQUATE CAPITAL -- FINANCING ISNT ENOUGH, WE NEED MORE $$$$ ECONOMIC CONDITIONS AND CYCLES

-- CAN WE SURVIVE???
EXPERIENCE (More is needed) -- IN THE INDUSTRY AND IN MANAGEMENT

GOVERNMENT REGULATION
-- HARDER FOR SMALL BUSINESSES TO COMPLY GROWTH/MAINTAINING THE MARKET -- KEEPING CUSTOMERS AND ATTRACTING NEW ONES

Contd.
PERSONNEL -- FINDING AND KEEPING EXPERIENCED, RELIABLE WORKERS PROFITS

-- REINVESTED IN THE BUSINESS OR DRAWN BY THE OWNER?

STRUCTURAL EVOLUTION -- LOSS OF CONTROL AS THE BUSINESS GROWS TECHNICAL ADVANCES -- HOW TO KEEP UP AND AVOID OBSOLESCENCE?

Factors that Improve the Likelihood of Business Survivability

If the business is an employer If the business has >$50,000 starting capital If the owner has a college degree If the business is started for personal reasons If the owner has previous experience owning and operating a business If the business has a management team If the owner starts the business from home If the owner has developed a business plan

10 Deadly Small Business Mistakes

Meir Liraz, President of BizMove

Sticking to a single idea too long Not having a results-driven marketing plan

Not knowing your customers

Ignoring your cash position (working capital) Ignoring your employees (morale) Confusing likelihood with reality Not having a sales plan

Being a Lone Ranger (learn to delegate)

No Mastermind (get an advisory group or mentor) Giving Up

Trends

11 SMALL BUSINESS TRENDS FOR 2012 By Frank J. De Raffele Jr

#1 Trend - Value Proposition Must Be Bigger Than Ever #2 Trend - Listening to Customers in New and Creative Ways. #3 Trend - Aggressively Identifying and Pursuing New Opportunities for Growth. #4 Trend - Creating Stronger Stakeholder Relationships. #5 Trend - Capitalize on Emerging Markets

Contd.
#6 Trend - Segmentation for Profitability #7 Trend - Creating Quality Content Online #8 Trend - Increasing the Online Marketing Budget. #9 Trend - Mobile Marketing #10 - Geo Target Marketing #11 - Co-Marketing

 Assignment 1 Due: Next Class