MGT601 - SME Management - Lecture Handout 01

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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

Cottage Industry:

The cottage industry or small scale industry may be defined to be an enterprise or series of operations carried out only by a workman skilled in the craft on his own responsibility, the finished products of which he markets himself. He works in his own home with his own tools and materials and provides his own labor. These workers are mostly hand labors and having personal skills with little or no aid from modern technology and machinery they work in accordance with the traditional technique. In the year 1940 another Indian definition came which had a more pragmatic approach where it was divided small industry into following categories.

  1. No mechanical power and no hired labor.
  2. No mechanical power and hired labor fewer than 10 persons.
  3. No mechanical power but hired labor of over 10 persons.
  4. Mechanical power under 10bhp but no hired labor.
  5. 3 and 4 are treated here as small industries.
  6. Mechanical power under 10bhp and hired labor
  7. Mechanical power over 10bhp and hired labor.
    Here 6 and 5 were considered as the medium size industries

Different countries defined these categories in their own way. In USA the small industry was defined as “a business qualifies a small if does not dominates its industry and less than 100 employees”. In the United Kingdom small firms were defined in 1969 as “entities having less than 200 employees. It should be run by its owner and should have a relatively small share of its market”. In France, it was defined as “ a company with less than 10 employees, representing over 90 percent of all businesses and employing one sixth of the total work force and they categorized it as follows:

  1. Less than 10 employees (very small enterprise)
  2. 10 to 40 employees (small enterprises)
  3. 50 to 500 employees (medium enterprises).
  4. Over 500 employees (large enterprises)

In Denmark, a small business is one with fewer than 49 employees; a medium one has 50 to 199 employees and large business employees over 200 people. In Japan which is considered to be a landmark in the history of SME’s the term small industry is used in a much wider context. The term “smaller enterprises refers to such companies with a capital of not more than five million yen, companies with not more than two hundred personnel regularly employed. In the West Germany, Australia and Norway the definitions were made for the legal purposes and different deciding factors were kept as landmarks.

Nowadays, a generalized definition is in practice and it says an SME entity is defined as a business with an investment in productive assets (not including land and building) ranging between rupees 2 to 40 million and employing among 10 to 99 workers.

Small: Among10 to 35 employees and productive assets ranging 2 to 20 million,
Medium: Among 36 to 99 employees and productive assets range of rupees 20 to 40 million.

Concept of Small Business
Baum back regards small business as one that is:

  • Actively managed by its owner
  • Highly personalized
  • Largely local in its area of operation
  • Relatively small in size within the industry and
  • Largely dependent on the internal resources of capital to finance its growth

According to the “Committee on Economic Development” a business is small if it meets two or more of the following criteria.

  1. Management of firm is independent in the sense that owners themselves are managers.
  2. Capital is supplied by ownership and is held by an individual or a small group.
  3. Area of operation is local.
  4. The size of the firm in the industry is small as compared to the highest unit in its field.

Characteristics of Small Business

  1. Privately held small business is again subdivided into two categories.
    • Very small where chief worker is the owner like jewelry shops, shoe stores and grocery shops etc.
    • The Large Small business where the proprietor mainly directs the work of its employees.
  2. No or few management layers
  3. Style of management is personalized the owner has first hand knowledge of every move in the business at all levels he is the main decision maker.
  4. Limited resources: a small business is unlikely to have sufficient resources to dominate the market.
  5. Independence: the owner has ultimate authority and effective control
  6. Scope of operations: small enterprises serve a limited segment of local or regional market.
  7. Scale of operation: they occupy a limited share of given market.
  8. Labor: they are low in capital and high in labor, as they cannot afford capital-intensive machinery.
  9. Technological innovation if available small business does well
  10. Specialized skills: The small enterprises normally have specialized skills for certain specific clients.
  11. The small business does well in small, isolated, overlooked and imperfect market.
  12. Small business does well in developing markets as it can easily absorb the changes
  13. Small business survives well in a bad business condition due to having quick and clever capability of bringing changes in cost and labor.

Typical Small Business

  1. Retailing: It’s a traditional business where normally the owner is the boss and owner
  2. Services: such as legal and accounting, courier services and beauty parlors etc.
  3. Construction activity
  4. Whole sale business
  5. Financing, insurance and real estate
  6. Transportation communication and public utilities
  7. Manufacturing

Large vs. Small Business

  1. They foster changes differently: small business fosters changes through a cycle of birth and death whereas the large business cycle changes through expansion and contraction
  2. The risk, reward and investment decisions are assessed differently in case of small business it is personal while in the cases of large business it is made by the employee managers without livelihood stake
  3. Their economic power is different: the small business is in no position to influence its immediate economic involvement but big business does.
  4. They utilize different resources in the economy small business may use secondary resources but the big business use most of the primary resources
  5. They serve different markets in the economy: small business serves markets which big business does not wish or cannot serve.

Key Terms:

  1. Merchandising: Buying, Selling and Promoting Goods.
  2. Enterprise: A company or business project or the courage and willingness to undertake business projects or a business activity
  3. Retailing: The sale of goods to the general public.
  4. Wholesale: Buying and selling the goods in large quality from manufacturers.

Books Recommended

  1. Entrepreneurship and small industries by C.L. BANSAL
  2. Small industries and the developing economy in India by RV RAO
  3. What is an SME (UNIDO)

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