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SME Management - MGT601

MGT601 - SME Management - Lecture Handout 01

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HISTORY, DEFINITION AND REGIONAL CONCEPTS Of SMEs

This lecture will give a clear concept of history, definition and regional concepts of SMEs. A student should be able to understand the concept of small business, its characteristics, definitions, kinds and an overall view of its comparison with large business.

The History

Recent years have seen a major resurgence of small business throughout the developed world. The countries like divided Russia and Eastern Europe are prizing such skills very high. The first piece of writing about the small business discovered was of about more than 4000 years ago. This writing is about loaning from a Bank for a small business with terms and conditions. Since then, the small business people have been the backbone of most economies providing products and services to the consumers.

Small business flourished in almost all ancient cultures. The Egyptians, Arabs, Babylonians, Jews, Greeks and Romans contained a substantial population of small business. Their products and services, however, were often of poor qualities. Consumers were cheated and degraded. The result was that small business became object of contempt. To protect the customers from such unscrupulous traders, HAMMURABI, the king of Babylon introduced the first business laws

Despite many successes the Greek and Roman historians virtually ignored the role of small business and talked more about the other things. Yet it was largely through small business that the traders by doing business in other countries spread law, religions, and philosophy and basic sciences. In the centuries that followed the small business, the religions held small business people in low esteem. Although now held in the higher esteem than ever before, small business remains overshadowed by professions such as medicine and law. When, he was describing an economy in which local small business was virtually being the only economic entities. Indeed, the era of local economy was the heyday of small business.

In the undivided subcontinent if we look at beginnings of the known history of small business, the cottage industries thrived through the period when society was organized more or less into self sufficient and selfcontained units. The sub-Continent industry, whether small or large scale, suffered a serious set back Page during British rule. Indian industries including small and cottage did not receive any patronage during the period before Second World War. It was, however, since independence that a positive policy for the industrial development could be formulated and implemented. The best model of small industries in our region is considered to be of India. This model is defined the SMES development through the development of infrastructure. In the year 1938 national planning committee “NPC” was set up and its general secretary Mr. K.T. Shah made the definitions of cottage, village and small-scale industries. The various definitions since then are in practice having different variables as manpower, capital, assets value etc. The definitions are as under

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MGT601 - SME Management - Lecture Handout 02

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THE REGIONAL CONCEPT Of SMEs

This lecture will throw light on the relationship between small and big business ,concept of SME’s in our region i.e. South East Asia and in Pakistan. It should give a student a clear idea about its definitions in these areas and will help him in differentiating the variable factors of labor, investment and production volume of our region in comparison with developed countries of Europe and USA.

The Relationship between Small and Big Business

Small businesses powerfully effected by developments within the big business sector this relationship serves the interest of general economic disequilibria. Small business is less affected by economic disruptions and is more or less self-adjusting. It tends to act as cushion for economy .The nature of interlink age between small and medium business is as under

  1. Job subcontracting i.e. the large business provides materials and components to small units who process the same into finished goods
  2. purchase subcontracting i.e. in this case the material is procured by small unit who manufactures a specific part or component needed by a particular large unit
  3. Complementary: in this case the product manufactured by small company is purchased by a big unit as accessory like plastic dust covers for video recorders, electronic passive components, packaging etc.
  4. Merchandising or commercial trading: in this case the small units manufacture the goods and big units on the strength of their financial power market it with their own brands like fans, washing machines, refrigerators etc.
  5. Maintenance and repair services: many large enterprises give the operation and maintenance contract to the small companies due to being more economical and helpful
  6. Social benefits: employment generation, decentralization of industrial benefits etc.

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MGT601 - SME Management - Lecture Handout 03

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THE ROLE OF ENTREPRENEURSHIPS IN SMEs

This lecture will define the modern concepts of enterprise, entrepreneurship and will establish the relationship between an enterprise and an entrepreneur. It will also relate the SMEs advancement with entrepreneurship.

The modern civilization is the industrial system and the directing force that animates this framework is the business enterprise. In the current economic theory “the businessman” is called entrepreneur.

History

A French baker Cantilon identified the first definition of entrepreneur function in the mid-18th century to mean, a person who is “uncertainty bearer” the same term appeared in Adam Smith’s writings but not very clearly. J.B Say regarded entrepreneur to be an organizer who combines various factors of production to produce a viable project. The famous economist Joseph Schumpeter defined the theory of entrepreneurship with a new perspective and regarded the entrepreneur as an innovator who has the potential of doing things in a new way. He subdivided this innovation process into following five forms.

  1. Introduction of new goods
  2. Introduction of new methods of production
  3. Finding of new product
  4. Discovery of new sources of supply of raw materials.
  5. The organization of industry in a new way.

But, the concept of innovation has been criticized by the developing countries who need “imitating entrepreneurs” capable of implementing innovation made in the developed countries. According to Peter Kilby, an entrepreneur in an underdeveloped country performs a wide range of activities including perception of market opportunities, combining and managing factors of production, introduction of production techniques and products etc. This conflict was solved by defining innovation entrepreneur as “independent entrepreneur” and the person who carried out new combinations in order to meet perceived opportunity “corporate entrepreneur”.

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MGT601 - SME Management - Lecture Handout 04

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KINDS OF ENTREPRENEURS
THEIR ROLE AND FUNCTIONS IN AN ENTERPRISE

The lecture is about the kinds of entrepreneurs, their role and functions in an enterprise. It also explains the hurdles they encounter. The overall general profile of Pakistani entrepreneurs and their importance in enhancement of progress.

Kinds of Entrepreneurs

Innovating entrepreneurs

He is the one who introduces something new into the economy or employs a new technique of production.

Imitating Entrepreneur

They lap up innovations originated by the innovative entrepreneurs. They are suited to developing countries which are not able to take up expensive research.

Fabian Entrepreneurs

They are very cautious and skeptical in adopting and implementing any change. They are lazy and shy and lack the will to adopt new methods. They follow the old traditions and avoid risk taking.

Drone Entrepreneurs

Inert and traditional, they are hurdles in economic development. They struggle to exist, not to grow.

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MGT601 - SME Management - Lecture Handout 05

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SMALL ENTREPRENEUR IN PAKISTAN AND ROLE OF SME IN GLOBAL AND REGIONAL LEVEL

This lecture will introduce the small entrepreneur in Pakistan the activities of SMEs in global and regional level. It will also reveal the role of SMEs in a developing economy.

Salient Features of Small Entrepreneurs in Pakistan

  1. Single Owner Entrepreneur
    He works with his own hands, combines the entrepreneur function of initiating the business making investments, taking decisions and performing managerial functions.
  2. Age Pattern
    The mean age of entrepreneur was found to be 42 years and of their enterprises 12 years. It is comparable to the Korean age pattern (46).
  3. Educational Level
    Differing from industry to industry 60% have school education and 30% have college or better education only 10% have professional or graduation level.
  4. Social Background
    Caste played an important role in certain industries and on the other hand heritage is dominant. But overall it is much diversified.
  5. Sizes and Investment
    Majority started in a small way with less than 10 workers and 1/2 to 2/3 of the firms started with less than 50,000 investments.
  6. Growth
    The growth was fast in case of small firms than in large firms.
  7. Profitability
    Rate of profit is higher in case of small industries in comparison with the large industries.

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MGT601 - SME Management - Lecture Handout 06

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THE DEVELOPMENT OF SMES IN PAKISTAN

This lecture is about the history of industrial growth in Pakistan and its related factors; the factors for adopting an SME based industrial system, the institutional support of government in the shape of long term and short-term policies.

The Development of SMEs in Pakistan

The Industrial History of Pakistan

Pakistan’s industrial history has been dominated by a single-minded emphasis on industry and that too of large-scale enterprises. The fall out of that development strategy was formally adopted in the 60’s as conscious policy step in the start of second policy plan period (1960-1965) has been large scale industrial holdings, accounting for much of the country’s assets and capital. The feeling among the masses is that a few families control 70 to 80 percent of the country’s assets, led to political rebellion. That rebellion also culminated in the dismemberment of the eastern part of the country. The primary causes for that tragedy, were basically economic in nature. The upheaval also generated a parallel economic thought, exclusive to the peculiarities of Pakistan’s economy. That economic thought advocated across the board nationalization of economic assets as a vehicle for ensuring social justice in the society.

The fall out of that strategy was two pronged:

  • Inefficient labor
  • Shaken Business Confidence.

The reaction to that policy mix in the early 1980’s was reverting to the Ayubian model of economic development. The model was characterized by:

  1. Promotion of large-scale units.
  2. Expansion of large-scale enterprises.
  3. Banking sector turned to cater to large loans.

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MGT601 - SME Management - Lecture Handout 07

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GOVERNMENT’S EFFORT TOWARDS SME DEVELOPMENT

This lecture will throw light on the efforts of government towards SME development and the role of institutions in public sector.

The government of Pakistan keeping in view the importance of SMEs has adopted multi -pronged approaches at the regional, sub regional and national levels. Initiatives at the regional and sub-regional levels include efforts to strengthen economic integration and cooperation. At the national level, structural adjustment programs have been in operation along with attempts at restructuring and diversifying the production base, integrating the informal sector into the economic mainstream and stimulating the increased participation at the enterprise level.

Over the years the government has developed a wide network of numerous support institutions for the development of small-scale enterprise in the country. The development process was initiated in the sixties and the concept of development derived its origin from the “Indian Model” of small enterprise development. The basic idea behind the model is to develop infrastructure facilities such as industrial estates, common facility centers and vocational training institutes, which would, to a great extent the problems faced by the SMEs. Based on this model numerous provincial level organizations were set-up mostly with the help of foreign assistance in the shape of grants and soft loans.

Financial sector organizations also are of great importance to the SME development in the country. The government has also established some institutions, which cater to the financing needs of the small firms. Some of these institutions are meant exclusively for the small sector. Besides the efforts of the Government the non-governmental organizations have also been actively participating in the micro and small enterprise development. The role of these organizations is also discussed here. Some of these NGO’s design programs to address social needs on a community basis which have a positive impact on employment generation at a micro level, the functions of NGO’s have been discussed very briefly.

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MGT601 - SME Management - Lecture Handout 08

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The ROLE Of NGOs

The NGOs are working on socio-economic sector in the development of SMEs. They are privately owned organization registered under the social welfare act. They normally work through grants, aids or donation based finances. They are having a very constructive role in the SME development. The special property of this sector is gender development. They at some places tried to replicate Grameen banks model.

NGO Non-governmental Organization, a non-for-profit agency not affiliated with any government or private sector entity, devoted to managing resources and implementing projects with the goal of addressing social problems. May receive some public funding. NGO is a community based organization with its own management structure. The organization may receive some or all of its operating funds through a government department known as the funder, however it is accountable or answerable to its stakeholders - the people who stand to benefit or lose by its actions. The funder is one of those stakeholders. NGOs play a vital role in development of SME. NGOs helps to reduce poverty, NGOs create awareness in women of rural areas to develop small business in their own premises.

The NGO Business

Non-governmental Organizations (NGOs) have become involved in international trade in recent years in two different ways. The first is to establish fair trade cooperatives to facilitate the export of goods from developing to industrialized countries directly from the producers. Their underlying operating principle is to ensure that more of the profits from the sales of diverse products go to the producer and less to middlemen. Often these products are slightly more expensive than similar goods in the market and these businesses rely on the social conscience of its customers to ensure a steady market for their products.

Another less well-known NGO business strategy is for the NGO itself to take on the role of designer, marketer and distributor of specific products and to work with particularly disadvantaged groups, primarily women, as sub-contractors who are taught to produce the goods that the NGO sells. Thus the NGO, in effect becomes a private sector actor. How they differ from standard private sector producers is in their selection of subcontractors and the fact that all profits are invested back into the organization to ensure organizational sustainability and to expand their base of sub-contractors. Their subcontracting role also serves to empower their sub-contractors as opposed to setting up an exploitative piecework arrangement. It provides a viable means of poor women to set up their own home-based enterprises. The key to the success of this particular strategy is the fact that the NGO takes on the responsibility for the development of the international market for the product produced.

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MGT601 - SME Management - Lecture Handout 09

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ISSUES AND POLICY DEVELOPMENT FOR SME – I

This lecture is concerned with the different issue and other obstacles faced by the policy makers while forming an SME policy for Pakistan. This includes both long term and short term issues.

Issues and Policy Development

Pakistan’s economy is an economy of SME. Policies in the past have given a general perspective, direction and defining broad parameters of activity within the macro environment framework, but efforts have focused on large enterprises, neglecting SME, which are at the heart of our economy. Our SME suffers from variety of weaknesses, which have constrained their ability to adjust to the economic liberalization measures introduced and to take full advantage of the rapidly expanding markets of the world. But SME importance and contribution in the economic activity suggests that there is a significant potential to enhance their growth through appropriate regulations and promotion.

While SME are mentioned in some of our socio-economic strategies and policy documents, measures are not specified and prioritized for us to be able to speak of any coherent SME policy or approach. The SME Sector Development Program seeks to improve the situation by inviting all concerned stakeholders to draft Pakistan’s future SME policy.

SME promotion is an important issue for many government departments and central offices. However, there is an existing lack of coordination and regular information exchange mechanism among institutions which constraints their ability to deliver in the SME development process. The responsibility for facilitating the SME policy development lies with SMEDA, attached to the Ministry of Industry and Production. One of the major reasons for the lack of coordination is that SMEDA has not been provided with a mechanism to initiate, coordinate, monitor and evaluate initiatives of SME development outside of its own scope of activities. Therefore, cross departmental and stakeholder consultations, resulting in the preparation of our national SME policy are our key to success. A network of institutions stimulating the growth of SME is also being proposed. The issues highlighted in this lecture give a retrospective view of things while giving a current picture of the SME business environment in Pakistan. There are issues we may only solve in the long term and which therefore are beyond our current scope. And there are issues we may solve in the short to medium term. These issues should become the focus of our SME policy. Short to medium term issues revolve around three major topics:

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MGT601 - SME Management - Lecture Handout 10

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ISSUES AND POLICY DEVELOPMENT FOR SME – II

This lecture deals with the policy-making issues on short and medium term basis. The importance of these issues is self evident in this lecture. This lecture reflects issues where we feel we may achieve strong impacts in the short and medium-term, i.e. until 2011. They should therefore become major topics of our deliberation and shape the formulation of our SME policy.

Issues in Policy Development (Short and Medium-Term Issues)

Business Environment

The large size of the SME sector limits the ability of the Government and business support institutions to achieve competitive coverage by support programs. This is a fundamental reality in most countries of the world and it is why policy framework and regulatory measures are of tremendous importance when SME promotion is concerned. It is agreed that only appropriate policy tools and regulations than with support programs can achieve much more. Likewise, SME development is hampered more by inappropriate regulations than compensated by means of appropriate support programs.

Most of the developed nations therefore have mechanisms in place to revert the biases against small firms. For instance, the United Kingdom introduced the “Think Small First” initiative, which requires all Government organizations to assess the impact of their actions on small business prior to implementation. Furthermore, participation of small business in government procurement is being facilitated as a matter of routine.

The result of such policies is that (unfortunate) surprises to small firms are less frequent. It is made sure that businesses potentially affected are consulted and informed of any forthcoming policy shifts so as to avoid negative impacts. They are also allowed an adequate grace period for the adjustment of economic activity and there is no retroactivity of new regulations. Besides this, special attention is paid to minimizing the room for bureaucratic discretion while developing policy rules or procedures. All such mechanisms are missing in present policy or legal environment in Pakistan. The absence of a specialized, uniform legal framework for the development of SME hampers SME operations8.

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MGT601 - SME Management - Lecture Handout 11

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SHORT AND MEDIUM TERM ISSUES FOR SME POLICY FORMULATION – I

We are dealing with the short and medium term issues for SME policy formulation. In fact this whole issue is inter-related in lessons No 10,11,12,13 and14.

Labor Issues

Likewise, the intensity of the regulations is the second most important reason for firms to drift into the informal economy all over the world. Labour Laws and regulations in Pakistan14 are considered to be one of the most complicated areas with which any business enterprise deals. The present set of the labor laws was the result of checkered initiative of various governments to create a healthy business environment for the labor. Consequently, enterprises have to deal with fifty six (56) labor laws with some of them being industry specific. The existing plethora of labor laws has made compliance impossible for the enterprises due to their inherent inconsistencies. Numerous labor inspections under these laws are yet another impediment that retards the growth of SME.

The labor market dynamics have changed considerably over the years, a higher degree of adaptability and flexibility along with Labor market security, including protection against arbitrary loss of employment, reductions in income and healthy work practices are essential requirements of new environment. Besides, the condition for compliance for international labor standards under the global economic system is another issue.

Taking into account the need of labor market and employers, the Ministry of Labor and Manpower introduced an employment security regime. The new labor policy initiatives is aimed at creating a favorable environment for facilitating industrial promotion and revival along with legislative and structural changes to bring in an environment to devoid of restrictive labor practices, but protecting the rights and interest of the workers.

It was proposed that existing labor legislation be simplified and rationalized into six basic laws. In addition, for promoting bilateralism among government employer and employees, government established a forum Workers Employers Bilateral Council of Pakistan (WEBCOP). The government is also working in the development of Labor Inspection Policy under the SME Sector Development Program to reduce the interface of government officials with businesses without compromising on the unhealthy work practices. The only issue highlighted thus far through direct interaction with SME is that of co-ordination. The business and labor community at large has been supporting the reforms.

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MGT601 - SME Management - Lecture Handout 12

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SHORT AND MEDIUM TERM ISSUES FOR SME POLICY FORMULATION – II

This lecture is a continuation of the lectures No 9&10 and 11 dealing with the short term, medium term and long term issues. These issues are pre-requisites for forming a comprehensive SME policy.

Human Resource Development

One of the major challenges that SME have to face is the emergence of the knowledge-based economy. People must continue to innovate, change and upgrade. There is a need to nurture the entrepreneurial spirit and skill development for adopting innovative technologies. The low-literacy level of our population poses an immense challenge to our competitiveness. Yet, it is a fact of life, which we will not overcome, in the short run. It is therefore imperative that we seek intelligent short and medium-term solutions to bridge the literacy gap.

One aspect of the Government’s strategy is to strengthen non-formal skills and entrepreneurship development, to better prepare workers for employment and to improve population’s general capacity of self-employment. But are there other ways by which we can enhance the skills of our workforce in such a way that we need not despair when facing external competition?

The government has established a number of institutions that impart training and skill development. These institutions, Pakistan Institute of Management Science (PIMS), Provincial Vocational Training Councils Authority, Technical Training and Vocational Authority (TEVTA) Government Universities and various other support institutions have however remained rather passive regarding the shaping of human resource development for SME.

A frequent complaint is the mismatch of the output of our human resource development institutions with the demand of SME. There are also only limited options for the training of the middle management. Low skills of workforce, inadequate vocational training facilities yet remain out of the scope of the reforms agenda. Are there any mechanisms by which we may achieve effective consultation between supply and demand sides of our vocational training system so as to attain a maximum benefit for our economy?

Entrepreneurship does not breed in a vacuum. For a healthy, growing business environment, it is necessary to foster entrepreneurial culture in Pakistan, which goes beyond the inclination to trade in goods. Entrepreneurial skill development programs can boost this.

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MGT601 - SME Management - Lecture Handout 13

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SHORT AND MEDIUM TERM ISSUES FOR SME POLICY FORMULATION – III

This lecture is continuation of defining the issues for making a SME policy; this lecture deals with the short and medium term issues. The vital issues of gender development and environmental protection are also discussed in detail

Market and Industry Information

Access to market and industry information is one of the keys to develop successful business strategies. Frequently, business and trade associations are able to provide their members with such services. By associating with like institutions in foreign countries, they are also able to establish links and obtain information on foreign markets.

Over half of our SME belong to business and industry association. Their perceived role is limited to lobbing and negotiation with the government. Yet very few SME (12%) perceive their associations to be a source of information on new developments in their fields of business operation. How to increase the service provisions by all types of stakeholders will become a fundamental issue when SME support programs will be looking for deliver channels.

Monitoring Developments
Harmonizing Enterprise size Categories

Pakistan has no across the board legal definition of SME. This makes is extremely difficult to monitor the development of our SME economy and to establish benchmarks against other countries in order to devise areas of intervention and support.

Various government departments and public-sector agencies have adopted their own definitions. There are, of course, various reasons for them to define SME, and there may even be discussion on just how a strict and reasonable size standard could be defined. A number of current definitions are based on capital standards since this influences the pattern of fund raising in the formal and informal market by SME. Many stakeholders consider enterprises with 100 or more employees as large, and enterprises with less than 5 employees as micro. Yet our statistical system classifies enterprises with more than 10 employees as large, and the State Bank of Pakistan considers those with more than 250 employees as large.

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MGT601 - SME Management - Lecture Handout 14

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LONG TERM ISSUES FOR SME POLICY

This lecture is still the continuation of the policy forming issues for SMEs. But in this section instead of short and medium term issues, we are dealing with long-term issues.

Long Term Issues

There are issues, which are beyond the scope of our current interventions. They are partially rooted in the multiple cultural structures of our society, frequently exacerbated by our geo-political situation. We, nevertheless, recognize their importance and therefore point them out here. However, it is not recommended to attempt to solve these questions by ways of an SME policy Initiative.

Literacy

The evidence reveals that SME find it extremely difficult to grow because of their inability to delegate to soundly trained staff. The day the small businessman feels comfortable to delegate, SME start progressing. The low literacy level also determines the potential of our labor force. Higher literacy rates are essential to enhance the quality of production can be enhanced by multiple factors which is what we need to be able to effectively compete in the international economy which is being extended to our local markets by the effects of opening up and WTO accession.

Law and Order

Law and order situation in Pakistan has always been regarded as worrisome. One survey reports that one in five respondents report that the business was the target of at least one crime during 2002. Another assessment suggests that the businesses in NWFP spend 4.5%, Sindh and Punjab 1-2% of their revenue on security. One in four SME consider law and order to be a severe problem.
Law and order problems weaken property rights and as a result weaken investor’s decision to invest. These problems are clearly linked to the manner in which the law enforcement and criminal justice system functions. The high time cost involved in seeking legal resource together with lack of access to both effective informal and formal enforcement mechanisms, increase the costs associated with contract enforcement.

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MGT601 - SME Management - Lecture Handout 15

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THE START UP PROCESS OF A SMALL

This lecture Deals with the start up process for obtaining a Bank loan, identification of projects and its sources.

The Start up Process of a Small Enterprise

The challenges of starting a new enterprise from the stage of its conception till functioning are indeed stupendous or multidimensional as indeed its contribution to the society in various forms such as employment, economic growth, balanced development, equitable distribution of wealth etc. Success is a slave to those who only correctly perceive the nature and intensity of problems that they are likely to encounter but also plan appropriate remedial actions. This lecture is devoted to studying the following:

  1. The Identification of New Venture Opportunities and
  2. The Field Problems of Starting a new Enterprise.

Identification of New Venture Opportunities

In the search for new ventures, entrepreneurs explore both (a) external and (b) internal resources. The external resources include:-

  1. Newspapers, trade journals, professional journals etc. which tell about trends in fashions, customs and other social areas.
  2. Professional magazines catering to particular interests such as electronics, computers, oils and banaspati etc.
  3. Trade fairs and exhibitions displaying new products and services.
  4. Government agencies.
  5. Ideas put forth by others.

  6. Read more: MGT601 - SME Management - Lecture Handout 15

MGT601 - SME Management - Lecture Handout 16

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TECHNICAL AND MARKETING FEASIBILITY OF THE IDENTIFIED PROJECT

Evaluation of New Venture Opportunities

A crucial task in starting a new business enterprise is the systematic analysis and evaluation of its feasibility and long term profitability. Since a number of variables enter the calculations, the exercise is quite a cumbersome one, a US study relating to the reasons for failure of new ventures has found that most of the factors underlying the failure lie within the control of entrepreneur. Following have been listed as the reasons for failure of new ventures:

  1. Inadequate market knowledge regarding demand potential, the present and future size of market, the market share, appropriate methods of distribution
  2. Faulty product performance due to hastily taken shortcuts in production, development, quality control etc
  3. Ineffective marketing and sales efforts
  4. Inadequate awareness of competitor’s reactions e.g. price cuts, special discounts.
  5. Rapid product obsolescence due to rapid technological advances in case of certain industries
  6. Poor timing of starting a new venture e.g. introducing the product before the market has successfully matured
  7. Undercapitalization, unforeseen operating expenses, excessive investments and related financial difficulties.

Hence, there is the need to undertake a comprehensive feasibility study in the following five areas. Dealing with the technical and marketing feasibility of the identified project

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MGT601 - SME Management - Lecture Handout 17

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FINANCIAL FEASIBILITY OF SMES

This lecture deals with the financial feasibility, flow sheets, short term and long term loans, cash flow analysis and financial cost.

Financial Feasibility

It covers the following:

Determination of total financial requirements

It can be done by preparing a financial statement in the following way:

Financial Requirement Statement:

Initial Expense Period 1 Period 2
Expense in product development ------- -------
Legal expense ------- -------
Product testing expenditure ------- -------
Marketing and technical feasibility Expenditure ------- -------
Miscellaneous expense ------- -------
Sub Total(1) ------- -------
Fixed investments ------- -------
Building ------- -------
Equipment and machinery ------- -------
Patents ------- -------
Other equipments ------- -------
Sub Total(2) ------- -------
Operational expenditure ------- -------
Material ------- -------
Wages ------- -------
Sales promotion, distribution ------- -------
Rent, interest, insurance, taxes ------- -------
Contingency ------- -------
Sub Total(3)    
Total 1+2+3 1+2+3

In making the above estimation, provision must be made for cost escalation that is inevitable due to price changes. Besides, appropriate sales forecasts should also be made to have a clear picture of expenditure. The projection could be weekly or monthly.

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MGT601 - SME Management - Lecture Handout 18

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PROBLEMS FACED BY NEWLY ESTABLISHED COMPANY

This lecture will continue with the previous lecture problem and then chapter deals with the teething problem that a newly established company faces.

Cash Flow Analysis

If the projected sales associated financial requirements and available financial resources are known, the anticipated cash flow can easily be determined.

Cash Flow (Projected)

Cash Flow and Financial Transactions Period 1 Period 2
1) Cash flow    
Initial expense    
Fixed investment    
Operating expense    
Total cash outflow    
2) Cash inflow    
Cash sales    
Account receivables    
Total operating inflow    
3) Net cash flow (2-1)    
4) Desired minimum cash balance    
5) Total amount of funds required
[3 (if negative + 4)]
   

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MGT601 - SME Management - Lecture Handout 19

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POST AND FIELD PROBLEMS FACED BY A NEW ENTERPRISE

Chapter deals with post and field this problems faced by a new concern.

  1. Acquisition of land;
  2. Construction of building and other aspect of civil works;
  3. Acquisition of machinery and its installation;
  4. Preliminary work about the sources of supply of raw materials , labor and managerial inputs;
  5. Prospecting about marketing;
  6. Preliminary work regarding sources of working capital;
  7. Coordination problem connected with the acquisition of different kinds of assets or completion of jobs;

Unless care is taken to ensure proper sequencing of different activities, the project would have cost over-run and/or time over run. Here in some kind of PERT analysis could be quite helpful.

Post Operative Problems of a New Enterprise

Several problems can create hurdle to start any enterprise-whether small or large. They need not always arise but an awareness regarding them could enable their timely avoidance or prevention. Below are given some of the post-operative problems.

  • Lack or absence of profits.
  • Experience factor:
    • Unfamiliarity or lack of experience in product or services line.
    • Lack of experience in management. There is a vast difference between being a machinist and being able to manage a machine shop.
    • Over-concentration of experience e.g. focusing only on the area of interest say, sales, finance, production etc and neglecting others.
    • Incompetence of management.

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MGT601 - SME Management - Lecture Handout 20

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GUIDE LINES FOR APPROACHING LENDERS – I

This lecture is dealing with the approach guide lines for approaching lenders. The lecture also explains the expectations of a lending institute from borrower.

How to Approach Lenders

You have explored all means to you to improve your liquidity. You believe you now need a short term credit from a bank to finance your trading activities. Your next step is to decide whom to approach. You should take this decision on the basis of financing sources available in Pakistan, how you rate their effectiveness and your own experience and affinities with these institutions. If cannot obtain the credit you need through them, because of the lack of resources or the weakness of the financial sector, it may be possible to you to reach overseas institutions. There are also private institutions that provide trade finance.
Talk to your banker or a financial advisor before you start negotiating with your customers or suppliers. Remember the working capital serves to pay for goods and services. The type or terms of credit you obtain from a bank should be closely linked to the method of payment you use to settle your creditor’s invoices, or that your customers or buyers use to pay you.

Your bank’s motivations will not be the same as yours. As a lender, it is interested in obtaining a good return on money lent, and it does not want to run the risk of not being paid. It will not went to spend time and effort discussing your needs, evaluating your company, assessing your transactions and advising you without an adequate fee for such services.

Your aim is to get the best possible advice on payment mechanisms and on the most appropriate related facilities; to obtain credit on firms you afford and to ensure that you are covered for all associated risks. You will want to look at all options. Your bank on the other hand, may want to solve your problem quickly, using techniques that are well known to its staff and that involve least effort and risk. You will want the bank to consider your trade transactions on merit, be your partner and share the risks with you. The bank may prefer to avoid losing time and may simply ask for changes on your fixed and current assets as security. On the other hand, your bank is in competition with other institutions. It will want to retain you as a customer if it considers you creditworthy and a good person or company to deal with, and if you offer good growth potential.

The following sections in this lecture will examine three aspects and show how the expectations of both the borrower and the lender can be reconciled.

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GUIDE LINES FOR APPROACHING LENDERS – II

What a Bank Needs to Know About You

This section discusses the information lenders may need to have before they can assess your request for finance. As stated earlier, it is good to policy to be as open and transparent with your bankers or financial advisers as you can. This will enable them to grasp the full situation and to give you appropriate advice. To withhold important information, such as your possible liabilities with other lenders or the fact that you have already pledged your assets, may cause difficulties at a later stage.

General Credentials

If the leader you have approached does not already know you well enough, it is best to have some general background information ready. This may include the following:

  1. Letters of introduction
    If you are relatively new in business and not yet known in your business community, you may find it worthwhile to seek the sponsorship of someone respected by other business people who is sufficiently acquainted with you to be able to give you a reference. A short letter, setting out your achievements and testifying to your good character and integrity, is a traditional method of introduction. Its effect will be positive if the referee is a person well regarded in the business community.
  2. Your Profile
    This is a resume or curriculum vitae, setting out your educational achievements, professional training, qualifications and experience, and your employment record and achievements. It is a helpful introduction to you and need not be longer than a page or two. If you are a newcomer to the business community, your profile will help your bank to assess your capacity for conducting trade, producing goods and services for export, and managing people. You may also want to attach to your profile any certificate or reference from former employers if you feel this will help to show up your experience and capacities, especially if the employer is known and respected, and has written favorably about you.

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GUIDE LINES FOR APPROACHING LENDERS – III

The prerequisites for approaching a lender which every small and medium scale industry owner should know are discussed in this lecture.

Commercial Information

Details of orders booked: If you are requesting credit to enable you to fulfill a large or profitable new contract, it is advisable to have all the documents, correspondence, quotations from suppliers, draft contracts with buyers and suppliers, and your own costing, and calculations ready for discussion. This is all the more important if your order is for export. The credit facility you obtain from your bank will almost certainly need to tie in with the payment methods that you use with your suppliers or that are stipulated by your overseas buyers.

You are strongly advised not to sign any firm contract with suppliers or customers before you have discussed credit and payment methods with your bank. The reason is simple. Most import-export business arrangements or contracts stipulate the form of payment and the credit (delayed payment) terms the buyer or the seller offer or require. Once the contract is singed it may be too late to alter the terms and this may seriously limit the scope of the facilities your banker may be able to offer you.

Business Plan: If you have an up-to-date business plan for your company, showing intended capital investments and forecast revenue and expenditure for the coming three to five years, this is an excellent document to produce during discussions with your banker or financial adviser.

If, on the other hand, you do not have such a plan, you may find it useful to draw one up. It will be of great value to you personally, apart from anything else. It will also add to your credibility when you discuss your credit request with lenders. You should be able to prepare such a plan yourself, with the assistance of your qualified status is necessary. You may also ask an outside accountant or consultant to prepare the plan for you. The outline of a short, simple but effective business plan is shown in Box 7.

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TYPES OF COLLATERALS/GUARANTEES / ASSETS AND PLEDGE TECHNIQUES FOR SECURITY

This lecture deals with the types of collaterals /guarantees/assets and pledge techniques for security.

Guarantees or Collateral You Can Offer

Not many lenders will consider granting you, or anyone else for that matter, a loan without security. The question will come up early in the discussion. What guarantees or collateral can you offer? The terms collateral and security really mean the same thing. They are guarantees you give to lenders by pledging assets, which they can seize and sell off, if you do not payback the loan. . There are other forms of guarantees that can secure a loan, such as an insurance policy to the benefit of the lender, or an understanding by a third party to repay the loan, should default. The point is that, whichever way you turn, you will obtain a satisfaction from a lender only if you have something to offer should you default in your repayment obligations. The most common form of security is a charge (a pledge) on fixed assets, particularly land and property. Most lenders feel that land and property are readily marketable if this means selling them off at a price below their market value. Moreover, land and property are evidenced by the title deeds and, in many countries, the authority’s register these titles and any encumbrance would also be noted when an asset is encumbered, it means another party has a valid claim on it. When an asset is pledged to a lender, it is encumbered and it cannot be pledged a second time to another party unless the two parties agree to share the security.

Other fixed assets can also serve as a security: machinery, equipment, vehicles and suchlike. But it is often impractical for a lender to consider these as security because their market value is often difficult to determine, especially if they are not new. Instruments are sometimes acceptable to the lenders as collateral, particularly if they can be easily realized (sold). These are evidenced by share certificates of the companies listed on the stock exchange, bonds, debentures, treasury bills etc.

You can pledge current assets: stocks of raw materials, finished goods, and commodities for exports, even receivables. The easiest net asset to pledge is cash. This is called cash collateral. Your loan is secured by money! In practice, borrowers resort to this form of security when they have liquidity in another bank, which they do not want to touch. (It may be in another currency or tied up in investments. It may be funds owned by a third party or even by the borrower, but not part of his or her business).

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ASPECTS OF FINANCIAL MANAGEMENT

All businesses need sound financial management and small firms are no exception to that rule. Proper management of account s with Performa cash flows, profit and loss accounts and balance sheets are essential if a firm is to survive and prosper, as is variance analysis comparing what was planned and with what actually occurred.

Aspects of Financial Management

  • Winning the Cash Flow War.
  • Understanding the Nature of Profit.
  • Breaking Even.
  • Working Capital Management.

Winning the Cash Flow War

Most of the business founders think their problems are over once customer starts to roll in. Unfortunately they may have only just begun. One of the common characteristic that new and small businesses have in common is a tendency to change their size and shape quickly. In early weeks and months customers are few and each customer mean a large percentage increase in sales.

A large increase in sales in turn means an increase in raw material and perhaps more wages and other expenses. Generally these expenses are to be met before your customer pays up. But until the money comes in, the business has to find cash to meet its bills. If it cannot find the cash to meet these day to day bills the business very often goes bankrupt. Bankers have a name for it. They call it over trading. It means taking on more business than you have the cash to finance. Sales growth is a natural to successful new business as physical growth is to baby. And just as baby runs out of clothes, new businesses run out of cash. The following measure will help you to minimize the need for extra cash to finance the sales growth.

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WORKING CAPITAL

Working capital management or current asset management is one of the most important aspects of overall financial management in an enterprise. It is basically concerned with the management of current assets and current liabilities and inter relationship between them.

Meaning of Working Capital

Working capital is the amount of funds needed by an enterprise to finance its day to day operation. It is the part of capital employed in short-term operation such as raw materials, semi finished products, sundry debtors. Because of its variable nature, the working capital is also referred to as circulating capital. It may be pointed out that the total working capital is composed of two parts.

  1. Regular Capital
  2. Variable Capital

Regular Working capital is required for permanent investment in any business for holing certain minimum quantity of raw material, finished product or cash. Such investment is irreducible minimum and remains permanently sunk into business.

The remaining portion of working capital is variable. The variable portion first gets tied up into raw materials which are then converted into finished goods. On the sale of goods it gets converted into account receivables or cash and circle is then completed. It is depicted in following figure.

Working Capital

Different Senses of “Working Capital”

The term working capital is usually used in two different senses namely.

  1. Gross Working Capital
  2. Net Working Capital

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RECRUITMENT, SELECTION AND TRAINING – I

Talented employees are the key assets of the company. The problem with small business entrepreneur is that it cannot afford the luxury of a full time specialist in personnel area. The entrepreneur himself is generally a novice and tends to look after this aspect rather haphazardly. Either the owner personally takes care of the personnel function or delegates it to an employee who performs it along with his main job. The general tendency is to hire the first person who comes the way and accepts the lowest salary. Their basic thrust is on marketing, regarded as primary to existence.

Defining Job Requirement

The pre-requisite to efficient selection is the systematic defining of requirements of each task. The identification process has three phases;

  • Conducting job analysis,
  • Developing job descriptions, and
  • Preparing job specifications.

Job Analysis

It is the process of investigation and collection of pertinent information about each task in terms of skill, abilities, duties and responsibilities. It covers;

  1. Job title,
  2. Department to which it relates,
  3. Line of supervision,
  4. Description of job including major and minor duties
  5. Relationship with other jobs i.e. promotional avenues. Transfer, possibilities, experience required etc.
  6. Unique job characteristics (location, physical setting),
  7. Type of material and equipment used,
  8. Educational qualifications,
  9. Experience,
  10. Mental and manual dexterity,
  11. Physical requirements,
  12. Working conditions.

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RECRUITMENT, SELECTION AND TRAINING – II

It involves a number of activities which may be performed either by the owner-manager himself or with the assistance of specialists. Following is the process of selection.

  • Application Blank
    It contains a written record of candidates qualifications, name, experience, references etc. from a perusal of the record, a broad idea can be formed about the applicant’ potential.
  • Personal Interview
    The purpose of this interview is to ascertain technical competence of the candidate and his capacity to meet the requirements of the position. The fundamental mistakes committed in interviewing are;
    1. Not spending enough time analyzing the requirements of the job to be filled.
    2. Failing to ask right questions to test strengths and weaknesses of the candidate,
    3. Relying too much on gut reaction instead of making an objective analysis.
  • Checking References
    References listed by the applicant should be cross – checked through telephone and preferably through a written letter.
  • Employment Tests
    Though not a sole criterion of selection, these tests are making the employee selection more efficient. These are;-
    1. Aptitude test to measure mechanical, electrical, manual dexterity and other potential talent.
    2. Achievement test to measure performance (skill proficiency)
    3. Intelligence test to measure general mental abilities e.g. verbal ability, reasoning, comprehension etc.
    4. Personality test to select managers.
  • Final Interview
    It is designed to final impression based on earlier assessments and particularly to ascertain interpersonal competence (capability to go along well with others), whether he has autocratic/democratic disposition, cooperativeness, rigidity flexibility. The interviewer should do well to adopt a balanced approach. He should guard against “Halo effect” i.e. forming rational judgment on the basis of first impression. What happens is that the interviewer forms a favorable or unfavorable impression of the applicant very early and searches for confirmation. To guard against it, the interviewer should withhold judgement until after the interview.

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TRAINING AND DEVELOPMENT

Objectives of Training

  1. To improve job performance.
  2. To develop employees for new responsibilities.
  3. To prepare employees for promotion.
  4. To reduce accidents and wastage.
  5. To instruct in the operation of new equipment.
  6. To ensure management succession.

Effective management succession requires prior planning. Seemingly simple matter has special problems in the case of small business particularly when it comes to its practical implementation. The entrepreneur is moulded in thinking in a groovy fashion. Moreover, training is not a one time job. It is a rather continuous process. Training seeks to upgrade an employee’s knowledge to keep abreast of changes in competitive business environment and prepare for advancement to challenging opportunities.

Before initiating a training Programme, the owner/manager should ascertain as to what training would induct change. Change herein implies the attainment of improved ability. The change should benefit both individual and organization. The change should occur in the following five areas:-

  1. Knowledge
    It refers to the storage of information by an individual for use in problem-solving and decision-making. Greater the amount of knowledge, better equipped shall be a person to accomplish a job.
  2. Attitude
    It is a state of mind which creates an urge to work for personal and organizational growth.
  3. Ability
    It is the proficiency in performance of a given task.
  4. Job Performance
    It measures how well the individual meets the requirements of a position.
  5. Operational Results
    These indicate how well the organization has been able to achieve its objectives and goals.

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LEARNING IN AN ORGANIZATION

Conditions that Stimulate Learning

  • Behavior of Boss
    Boss is the key figure in an organization. Others tend to emulate him. Every meeting between boss and subordinate presents a teaching learning situation. If the boss favors training and development, the subordinates tend to become positively inclined to learn. Therefore, the boss should exhibit a tendency towards learning and training.
  • Behavior of Informal Group.
    Informal groups set the behavior norms for its individual members. It may either support or resist the introduction of any change. If the informal groups support training, measure would find a motivated group inclined towards obtaining it.
  • Influence of Formal Organization.
    The organizational structure, policies, procedures, objectives etc. reflect and reinforce the behavior which the formal organization prizes. For instance, if the company keeps the top management within the family or has rigid control, would little opportunity for growth. Learning is stimulated when there is openness, lack of constraints and climate of exploring new ideas and the objectives of the organization support training and development.
  • Economical &Technological Influence.
    A rapidly growing company in an expanding field offers more opportunities through training.
  • Performance Appraisal
    It is a form of counseling and coaching. It is used for defecting and correcting errors. It is the process by which owner gathers information about each employee’s performance, effectiveness and communicates the same to employee. It includes
    1. Establishment of Standards.
    2. Recording of Performance.
    3. Reviewing of Performance in accordance with Standards.
    4. Taking Corrective Action
  • Purpose of Performance Appraisal
    1. To evaluate performance over a specific time.
    2. To motivate employees through performance feedback.
    3. To evaluate individual employee’s potential for growth and development.
    4. To collect information for decision making.
    5. To evaluate effectiveness of training program.

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QUALITY CONTROL – I

Breadth of Scope

  • Raw Materials and Piece Parts Inspection.
  • Vender Relation.
  • Process Control.
  • Motivation of Employees.
  • Reliability

What is Quality?

Quality is Conformance to Given Requirement or Specifications on a Product or Service.
The term quality by itself does not necessarily mean high quality. It means uniformity, consistency and conformity to what user wants.

Two Aspects of Quality.

  • Design Quality.
  • Manufactured Quality.

Design Quality

  • Design Quality Covers (materials, form, appearance, functions )
  • When Reference is made to “high cost of quality” such Reference is Almost Associated with Design Quality.

Manufactured Quality

Manufacturing is the transformation of raw materials into finished goods for sale, or intermediate processes involving the production or finishing of semi-manufactures. It is a large branch of industry and of secondary production. Some industries, like semiconductor and steel manufacturers use the term fabrication.

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QUALITY CONTROL – II

This lecture is dealing with the quality standardization under WTO.

Quality Control Programs in Developing Countries

  • Establish Strong National Leadership & Q.C Society.
  • Create Govt. & Commercial Compulsion for Reasonable levels of Quality.
  • Establish a Media For Exchange.
  • Establish an Extensive Program for Training.
  • National Standardization Efforts.
  • Public Awareness.

International Quality Standards

If each country had its own set of standards, companies in selling in international markets would have difficulty in quality documentation standards in the countries where they did business.

ISO 9000

It is set of standard governing documentation quality program. Proving to a qualified external examiner that they have completed with the entire requirement certifies companies. Once certified, companies are listed in a directory so that potential customers can see which companies have been certified and to what level. Compliance with ISO 9000 standards says nothing about the actual quality of a product. Rather, it indicates to customers that companies can provide documentation to support whatever claims they make about quality.

Five Documents of ISO 9000

ISO 9000 actually consists of five documents;

  1. ISO 9000
  2. ISO 9001
  3. ISO 9002
  4. ISO 9003
  5. ISO 9004

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ROLE OF MARKETING IN SME – I

Concept of Marketing

Marketing is the process of integrating and coordinating the following.

  • Identifying and measuring the needs of customers for the type of products or services that the firm is equipped to provide.
  • Translating the perceived needs into products or services development.
  • Developing and activating a plan for availability of product or service available.
  • Informing perspective customers about availability of the product/service and stimulating their demand at a price that generates satisfactory profits for the firm.

Marketing Function

The functions that must be performed in the marketing process are as follows:

  1. Buying And Selling
    Exchange process involves buying in anticipation of customer demand and searching for materials that will satisfy those needs. Selling function includes determination of potential customers and using a combination of sales techniques to stimulate demand for those goods or services.
  2. Transportation And Storage
    It involves the movement and handling of goods. Not all goods are sold at the same time they are manufactured. Storage is done so that goods are available at the time and place they are needed.
  3. Risk-Taking, Standardization And Grading
    Stored goods are subject to several types of risks. They may undergo spoilage, obsolescence, destruction. Consumer preferences may change leaving the business owner with a large quantity of unsold goods. Some of the risks can be shifted through insurance coverage. But the most effective means of dealing with risks is the adoption of good management practices. Standardization and grading enable consumers to make a comparison of the products. Standardization establishes uniformity of specifications in the matter of color, weight, composition etc. grading is done in the case of products that cannot be produced uniformly e.g. fruit, egg.

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ROLE OF MARKETING IN SME – II

Marketing Decision Variables

  1. Marketing Controllable Variable
    • Target Market Segment
      • Location
      • Target customers
      • Timing
    • Products offered
      • Type of product
      • Range of product
      • Design features
      • Quality
    • Price
      • Price level
      • Price variables (discount)
      • Maintenance
    • Advertisement & Promotion
      • Advertising level
      • Advertising media
      • Sales promotion
    • Distrbution.
      • Channels
      • Number of sales outlets
      • Warehousing facility
    • Servicng

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ROLE OF MARKETING IN SME – III

Product Mix

It refers to number of products offered by a company. It is not uncommon to find small firms selling ultiple products. Product mix is done to optimize profits.

Advantages of product mix

  1. It enables the firm to serve different segments of the market.
  2. It gives steady sales & profits to the firm.
  3. The firm can keep all its bases covered.

Demerits of Product Mix

  1. It makes greater demand on firm’s resources in the form of increased investment in production facilities and inventory.
  2. Marketing Problems.

The firm should weigh the pros and cons of a wider versus narrow product mix. The ultimate decision would rest on such considerations as the available resources, existing and future market opportunities and strategies of competitors. Phillips kotler has suggested the following indicators of firm’s sub optional product mix;

  1. Disproportionately high percentage of total profits from a few products;
  2. Insufficient product breadth to exploit sales force;
  3. Excessive productive capacity on a chronic or seasonal basis;
  4. Steadily declining sales or profits.

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ROLE OF TECHNOLOGY – I

The application of industrial technology, as indeed of all technologies, is a means to an end, the end being the development goals of each country. An appropriate technology path has therefore to be derived from the development goals adopted. Industrial development is a centre piece of the development process. It cannot be viewed only as the means of producing a large variety of goods and services by modern processes and techniques; it must result in adequate employment opportunities, greater income generation and distribution to poorer sections and improvement in the conditions of life for the larger community in developing countries.

Technology is in fact not applied in isolation

Technology is in fact not applied in isolation but as part of the performance of one economic activity or another which contributes to development. in such activity, say industrial development, technology is again applied, not alone, but matching with investment, skills, resources and other related factors, in other words, the application of industrial technology cannot be divorced from the total context of industrial development. When considering industrial technology, and for that matter any technology a balance has therefore to be struck between considering it is the abstract and treating it as totally indistinguishable from the economic activity itself. To strike such a balance between these two trends, either of which by itself is likely to be misleading. There is a close interrelationship between industry & technology in general. Perhaps no other single branch of economic activity influences or gets influenced by technology more than industry.

Within this over-all framework, attention will be focused on certain major elements for purposes of national and international action. The linkage of technology to industrial development and industrial development to over all development goals will be successful only in the context of the formulation of relevant policy measure by national government. Technology policy and planning therefore becomes an important element. The second major element is the development of technological capabilities in each country which is a prerequisite for the selection, acquisition, adaptation, absorption or development of technology. This will involve among other things the building up of institutions and the training manpower.

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ROLE OF TECHNOLOGY – I

Measures to Implement

Measures to implement the Programme of Action include the organization of international meetings in the field of appropriate industrial technology, the establishment of a consultative group on appropriate industrial technology and the monitoring and analysis and follow up for appropriate choice of technology presupposes the existence of alternative technologies for production and knowledge and information about them. One of the first tasks is to enlarge the flow of available information. With this in view the evaluation and comparison of alternative industrial technologies will be merged for selection. This information made available should be fed into the Industrial And Technological Information Bank.

Available Information

Available information on technologies could also be enlarged through the systematic identification of technologies including the traditional ones available in developing countries themselves. With this input projects can be initiated through national research institutes, systematic survey of indigenous technologies in selected branches. The surveys are expected to bring out material on the basis of which some of the existing technologies could be upgraded and some others could be transferred for adoption by other countries. It will also provide it methodology for systematic action by the research institutes in the elaboration of their research programs.

Methods of Integrating Science & Technology in Economic & Social Development

The rapid and fruitful application of industrial technology to industrial development could be achieved only if the attempts to promote appropriate industrial technology are part of the main stream of industrial development and not apart from it. To reach this goal by stimulating policy and decision makers, enterprises and research institutes for promoting the application of appropriate industrial technology; stimulating suppliers of technology and equipment in industrialized countries to undertake the necessary adaptation and redesign to suit the needs of developing countries; stimulating government and donor agencies in industrialized countries and in developing countries with sufficient financial resources at their disposal to allocate more funds to co-operative programs on appropriate technology; mobilizing existing research capacity in research organizations, universities, private enterprises and particularly small companies and individual investors so as to promote the adaptation of available technologies and the development of new technologies where necessary.

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EXPORT POTENTIAL OF SME IN DEVELOPING COUNTRIES – I

Definition and Role in Economy

The small and medium-sized sector is a varied one and plays a predominant role in the economies of most developing countries. It comprises factories, workshops, traders and other service facilities. It ranges from the most modern and up-to-date to the simple and traditional, from independent enterprises to ancillaries and subcontractors, and from units mainly catering to the domestic market to exporters.

Small and medium-sized enterprises (SMEs) are a key component in economic life, not only because of their number and variety but because of their involvement in every aspect of the economy, their contribution to regional development, the complementary role they play in support of the large sector, and their role as proving ground for innovations and adaptations. They can be seen as a kind of industrial breeding ground, a source of constant renewal of industry and commerce, and a wellspring of competition and dynamism.

There is no universally accepted definition of an SME. One study has identified more than 50 definitions in 75 countries. Frequently, criteria defining as SME in a country may be based on the purpose for which the identification is required.

Again it is possible notionally to group manufacturing SMEs in three broad categories:

  • Cottage or Artisan Units.( less than 10 employees)
  • Small Scale Units.( up to 50 employees)
  • Medium Sized Industries.( Between 50 and 200)

These would not be watertight compartments and such a grouping would be arbitrary. SMEs play a significant role in the economies of most countries, industrialized as well as developing. Organized small and medium-scale industries in many African countries are relatively smaller in number and their contribution to GNP more limited.

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EXPORT POTENTIAL OF SME IN DEVELOPING COUNTRIES – II

Relationship between SMEs and Export Development

While in certain circumstances SMEs enjoys some advantages of flexibility, in general they suffer from structural handicaps in their operations arising from small size, particularly where exports are concerned. Even SMEs that are highly successful domestically, for a variety of reasons, do not find it easy to upgrade production to production for exports.

Problems faced by SMEs in developing countries typically include:

  • Scarcity of capital.
  • Limited and unequal access to institutional credit markets.
  • Irregular access to domestic and imported inputs coupled with higher cost.
  • Inadequate infrastructure facilities.
  • Weak managerial and technical skills.

A large number of SMEs have successfully overcome these formidable difficulties, established a sound base in the domestic market, and may be potentially capable of breaking into export markets. However they may be hampered by a variety of circumstances:

  • Lack of information on possible export market.
  • Absence of guidance on export regulations and procedures.
  • Inability to identify sources of assistance for product development and product upgrading for export.
  • Lack of information on export credit and insurance facilities as well as for export requirements.
  • Lack of information on operation of indirect marketing channels like merchant export houses.
  • Absence of guidance on basic management issues relevant exporting firms.
  • Absence of sound steps that need to be taken to enter in export field.

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WORLD TRADE ORGANIZATION (WTO)

Introduction

The emergence of World Trade Organization (WTO) in 1995, as a result of Uruguay Round of negotiations of GATT, marks a watershed in the history of international trade. GATT, the predecessor of WTO, was established by 23 countries in 1948, which liberalized the trade and created an environment that enabled the evolution of WTO is much wider as compared to GATT. It encompasses areas like textile, agriculture, services and intellectual property etc. that were excluded in the GATT.

The main guiding principles of WTO are: non-discrimination among the members in stipulation of favours regarding market access and tariff reductions provision of national treatment to foreign investors, imported goods and services stability and predictability of international trade patterns to promote confidence of investors and businesses by bounding the tariffs and market access for services; and promotion of economic development by encouraging reforms in the less developed and transition economies.

To ensure that trade is as fair as possible and as free as practical WTO has a large number of agreements that are the result of negotiations among member states. The current sets of agreements are the outcome of 1986-94 Uruguay Round negotiations. Through these agreements WTO members operate a non-discriminatory trading system that spells out their rights and obligations. Important agreements are of goods, agriculture, textile and clothing, subsidies and countervailing measures, antidumping, safeguard measures, TRIMs, customs valuation, dispute settlement, technical barriers to trade, sanitary and phytosanitary measures, GATS and TRIPs.

These agreements resulted in considerable reduction in tariffs in member countries and increased market access for developing and developed countries.

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WTO MINISTERIAL CONFERENCES

The apex body of WTO, the Ministerial conferences has a mandate to meet at least once every two years in order to strengthen the political guidance of WTO and enhance the prominence and credibility of its rules. Four ministerial conferences have been held till now and fifth one is scheduled for September 10-14 this year.

  • First Ministerial, held in Singapore 1996 declared the information technology as tariff free till the year 200. It emphasized the importance of regional trade agreements and talked about further liberalization of services. It was unable to resolve the controversies on issues like link between trade and labour standards.
  • Second Ministerial, held in Geneva on implementation issues, discussed the US and EU demand of making E-Commerce tariff free.
  • Third Ministerial, held in Seattle was disrupted by violent protests by anti-globalization organizations and conference failed to follow its proposed agenda.
  • Fourth Ministerial, convened at Doha in 2001 agreed to launch a new round of talks under the ‘Doha Development Agenda’ to take into account the areas of interest of developing countries.
  • Fifth Ministerial, held in Cancún, Mexico from 10 to 14 September 2003. The main task was to take stock of progress in negotiations and other work under the Doha Development Agenda.
  • Sixth Ministerial Conference was held in Hong Kong, China, 13–18 December 2005. In general, ministerial conferences are the WTO’s highest decision-making body, meeting at least once every two years and providing political direction for the organization

Doha Development Agenda

Doha Round of negotiations include critical issues such as production subsidies to Agriculture, TRIPs/Geographical Indications, access to generic medicines in case of public health crisis, requests/offers for services sector, antidumping agreement, revision and dispute settlement negotiations, market access to nonagricultural products. Special and Differential treatment of developing countries.

Though deadlines for reaching agreement on modalities for negotiations on most of the issues have been missed but still hopes are alive and these matters would be taken up at the forthcoming Ministerial in Cancun, Mexico.

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WORLD TRADE ORGANIZATION (WTO)
PAKISTAN & WTO – I

Trade Related aspects of Intellectual Property Rights (TRIPS)

As a member of the WTO, Pakistan is committed to fulfilling TRIPs obligations. Copyrights piracy is considered very high, affecting imported computer software, videos, films and textile designs. Pakistan like developing countries was given deadline of January1, 2000 (i.e. five year period) to bring into conformity with the WTO commitment. List copyrights laws etc. Pakistan is not yet fully ready to implement its commitment.

In Pakistan, five laws/amendments have been promulgated, to provide intellectual property protection under WTO standards.

  1. Patents Ordinance, 2002
  2. Trademarks Ordinance, 2001
  3. Copyrights Amendments Ordinance, 2000.
  4. Industrial Designs Ordinance, 2000.
  5. Registration of Layout Designs of Integrated Circuits Ordinance, 2000.

In Industrial economies, intellectual property laws are regulated under a single umbrella organization to reduce the regulatory impediments that discouraged entrepreneurs from compliance with regulations. In Pakistan, all three areas (Copyrights, trademarks and patents) are managed separately by different federal ministries, i.e. Ministry of Education (copyrights), Ministry of commerce (trademarks) and Ministry of Industries & Production (Patents). There is urgency for enforcement of the laws promulgated regarding infringement of IPRs for which necessary rules should be farmed and notified a priority basis.

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WORLD TRADE ORGANIZATION (WTO)
PAKISTAN & WTO – II

Anti-Dumping

In economics, "dumping" can refer to any kind of predatory pricing. However, the word is now generally used only in the context of international trade law, where dumping is defined as the act of a manufacturer in one country exporting a product to another country at an unfairly low price.

Antidumping Duty

A penalty charge on imports to protect domestic industry against disruptive pricing practices by foreign firms (see dumping). An antidumping duty is supposed to be set equal to the margin of dumping, defined as the difference between fair value and the actual sales price. GATT Article 6 permits members to levy antidumping duties, while the GATT Antidumping Code attempts to standardize and discipline importing governments' activities in this area. See also circumvention and injury test.

During recent years, Pakistan’s exports especially of textile and clothing have been subjected to anti-dumping and safeguard measures in Japan, EU and USA. EU is presently investigating a dumping case against Pakistan bed-linen exporters.

There is prima facie evidence that cases of imposition of ANTI Dumping Duties (ADDs) against different sub-sectors of the textile industry have been registered in orde4r to protect jobs of textile industries of developed countries. This is seriously impacting on Pakistan’s economy. Even in cases where investigations do not lead to eventual imposition of definitive ADDs, trade is disrupted in the interim period and valuable customers are lost.

Given the backdrop of increasing anti-dumping measures against our exports, we need to implement anti dumping measures to protect domestic industry against the onslaught of unfair competition. In this context, following ordinances have been promulgated in Pakistan;

MGT601 - SME Management - Lecture Handout 43

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WORLD TRADE ORGANIZATION (WTO)
PAKISTAN & WTO – III

WTO Agreements on TBT and SPS

To meet the requirements of WTO Agreements on Technical Barriers of Trade (TBT) and Sanitary and Phytosanitary Standards (SPS), Pakistan has taken a number of key initiatives aimed at strengthening technical institutions capabilities in standard setting, compliance.

In Pakistan, ISO9000 – and ISO14000 certification is rising and reportedly now well over 3,000 companies are ISO 9000 certified. as for ISO 14000 certifications, out of a total of 103 countries, Pakistan ranks 56th with only ten ISO 14001 certified firms while India is 19th. All these companies are certified by foreign based bodies. The problem with foreign certification bodies is that notwithstanding the fact that they are accredited by reputable accreditation bodies, very few have been listed for surveillance audits in Pakistan. This greatly reflects on the performance of these certification bodies.

Against this backdrop, Pakistan National Accreditation Council (PNAC) was set up in 1998 in Ministry of Science & Technology and in 1999, under ADB-assisted Trade Export Promotion & Industry Program (TEPI). Project, it launched the accreditation services for ISO 9000/ISO 14000 certification bodies and ISO-17025 laboratory certification.

According to Pakistan Country Report on Trade and Sustainable Development, prepared by Sustainable Development Policy Institutes (SDPI), in October 2002, the TBT and SPS agreements present both an opportunity and constraints. The two agreements seek to increase market access for the exports of its member countries. However, the prerequisite is that they abide by the strict rules the WTO has formulated for the development of mandatory technical regulations, voluntary standards and conformity assessment procedures. This is where developing countries like Pakistan come up short. They do not possess the institutional and technical capacity to develop, advocate and formalize such standards in WTO for a, nor the conformity assessment and accreditation bodies to certify that domestic industries are complying with international standards. While the WTO, in principle, offers technical assistance to developing countries to develop these capabilities, the concern expressed by various stakeholders suggest that Pakistan has not tapped into these opportunities.

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WORLD TRADE ORGANIZATION (WTO)
CONCLUSIONS AND RECOMMENDATIONS

WTO is a reality, which has come to stay. We have to face the emerging challenges and grasp the opportunities. As the Governor, SBP stated that we need to develop strategy to get maximum benefit from globalization.

Foremost areas of concerns

  • The textile sector, which contributes 67% of our total exports, would in 2005 face severest competition from other major suppliers like china, Hong Kong, Thailand and Bangladesh. We have made some progress in facing post quota era under Textile Vision 2005 to take the production of textile good, upwards in the value chain. it is apprehended that the MFA phase out will start another era of non-tariff barriers. With the phasing out of quotas, textile manufacturers in industrialized and some quota free countries may decide to relocate. Government should provide incentive to ensure that they relocate in Pakistan.
  • The country urgently needs to build a strong network of anti-dumping and countervailing duties to protect the local industry against the onslaught of unfair foreign competition. It is heartening to note that Trade policy 2003-04 envisages enhancement of capabilities of NTC and it is recommended that NTC should be restructured and converted into an autonomous body employing private sector professionals.
  • The developing countries face problems in hiring law firms to advice on WTO related issues, which is a constraining factor in seeking relief from Dispute Settlement Body. There is a need to train local lawyers with WTO expertise.
  • Our survival lies in enhancing credibility through adoption of international quality standards, but Pakistan has a long way to go in obtaining certifications of ISO9000, ISO14000 and other standards. We need to set up PNAC accreditation testing laboratories for conformity assessment.

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SUMMARY & CONCLUSIONS

The role of government as a facilitator of business and its interaction with business support institutions is imperative for the establishment of a mutually beneficial relationship for the growth of the sector. SME promotion is an important issue for many government departments and central offices. For example, the Ministry of Labour plays an important role in shaping the labour market policy of the state. Similarly, in order to gather information on the health of the SME population the role of Federal Bureau of Statistics, the Ministry of Finance, and planning division is pivotal. Other ministries and divisions such as Ministry of Local Government and Rural Development, and the Ministry of Science & Technology also influence the situation of our SME. Provincial and local governments also take their share in responsibility.

However, there is an existing lack of coordination and regular information exchange mechanism among institutions, which constrains their collective ability to deliver in the SME development process. As a result of the Government’s recent efforts, two institutions Small and Medium Enterprise Development Authority (SMEDA) and SME Bank were created.

The responsibility for facilitating SME policy development now lies with SMEDA, which is attached to the Ministry of Industry and Production (MOPI). SMEDA is responsible for creation and coordination of Government policy for the SME sector. Parliament, naturally, is responsible for monitoring policy and its implementation.

One of the major reasons for the lack of coordination is that SMEDA has not been provided with a formal mechanism to initiate, coordinate, monitor and evaluate initiatives undertaken for SME development, which fall outside of its own scope of activities.

Therefore, cross-departmental and stakeholder consultations, resulting in the preparation of our national SME policy are our key to success. Regular information exchange mechanism and networking needs to be developed amongst our public and private sector institutions. There is a strong need to devise such an information exchange mechanism and redefine the role of institutions, specifying their functions in order to avoid duplication of efforts and allowing the best possible usage of resources.

Under the SME Sector Development Program it is expected that SMEDA