FOREWORDdocshare04.docshare.tips/files/3129/31298853.pdf · 2017. 3. 19. · FOREWORD PKII Engineers, a consulting group, conducted a study of the SME Center in the country. One of

FOREWORD PKII Engineers, a consulting group, conducted a study of the SME Center in the country. One of the recommendations made by PKII consultants in their final report was to equip Business Counselors with the right skills to enable them to meet “the general business advisory needs of SMEs in the areas of marketing, technology, organizational development, and finance.” To partly address this concern, the Bureau of Small and Medium Enterprise Development (BSMED) decided to come up with a guidebook that will satisfy the basic information needs of Business Counselors. The Business Counselor’s Manual was prepared to effectively carryout the task of counseling. Apart from providing counselors with a working knowledge of the business counseling cycle, it represents an overview of the current status of the SME sector and over 30 diagnostic tools that can aid a counselor in his work. The Manual will be useful not only to DTI counselors but also to the growing number of full-time professional business counselors, whose counseling services have been valued and appreciated by the client entrepreneurs of micro, small, and medium enterprises (MSMEs). We acknowledge the University of the Philippines Institute for Small-Scale Industries for their assistance in the development of the Business Counselor’s Manual and the Bangko Sentral ng Pilipinas for their generous support.

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CONTENTS

The Business Counselor 1Chapter 1 The Counseling Profession 1

The Role and Scope of Work of a Business Counselor 1 The Demand for Business Counselors 3 Desirable Skills and Traits of a Business Counselor 3 Understanding the Client 6 The Engagement Period 7 The Business Counseling Process 7 Phase One: Making the First Contact 8 Phase Two: Studying the Client 10 Phase Three: Diagnosing 14 Phase Four: Working the Plan 18 Writing a Report 21 Professionalism and Code of Ethics 21

The Philippine SME Sector Today 25Chapter 2 Philippine SMEs: An Overview 25

The Philippine SME Sector Defined 25 Distribution of SMEs per Industry and Category 26 Geographical Concentration of SMEs 29 Employment in SMEs 30 Key Issues Facing SMEs 31 Low Competitiveness 31 Productivity and Structural Limitations 31 Limited Access to Fund Sources 32 Issues on Access to Markets 32 Other Concerns 33 Law, Policies, and Regulations in Support of SMEs 34 The BMBE Act of 2002: For the Promotion of Microenterprises 34 The Magna Carta for Small Enterprises 35 General Banking Law 36 Rural Bank Act of 1992 36 Sulong Program 37 Labor Training: The Dual Training System & TESDA Acts of 1994 37 Others 37

Initiating Changes Chapter 3 Problem Solving and Decision Making 39

Define the Problem 40 Gather Information 40 Develop Alternatives 41 Weigh Alternatives 41 Develop a Plan for Implementation and Monitor the Solution 42

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Introducing Change 42 Any Change Should Add Value 42 Managing Change Depends on Its Complexity 43 System Must Be Ready 44 Remove Barriers to Change 45 The “AIDA” Prescription 47 Overcoming Resistance to Change 48

The Basics of Starting A Business 51Chapter 4 Identifying Business Ideas 51

The Entrepreneur’s Persona 51 The World Around Him 52 Screening Business Ideas 54 Appraising Business Projects 56 Why Appraise a Project? 56 Registering a Business 65 Where to Register 66 The BMBE Law 70

Business Counselor’s Tools 71Chapter 5

Classic Diagnostic Tools 77 Cause and Effect Diagram 77

Chapter 6

Charts and Graphs 80 Cost Benefit Analysis 84 Decision Tree 86 Flowchart 89 Force Field Analysis 92 Gantt Chart 95 Linear Responsibility Chart 97 Pareto Analysis 99 PERT/CPM 102 Procedure Chart 105 Relations Diagram 108 Scatter Diagram 110 Stakeholder Analysis 112 SWOT Analysis 115

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Marketing Tools and Strategies 119Chapter 7 Channels of Distribution Chart 119

Five Forces Analysis 122 Positioning Map 124 Pricing Strategies 126 Product Life Cycle Strategies 134 Product Strategies 136 Promotion Strategies 138 Sales Forecasting Techniques 140 Value Chain Analysis 148

Production Enhancement Tools 151Chapter 8 Control Charts 151

Economic Order Quantity 155 Flow Process Chart 157 Just in Time 161 Routing Diagram 163 Run Charts 165 Simplified Layout Planning 167 Value Analysis and Value Engineering 170

Financial Tools 173Chapter 9 Break-even Analysis 173

Common Size Financial Statements 178 Financial Ratio Analysis 180 Internal Rate of Return 184 Make or Buy Decision 188 Net Present Value 190 Payback Period 193 References 195

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THE BUSINESS COUNSELOR

Chapter

1

THE COUNSELING PROFESSION

Counseling as a profession traces its foundations to guidance counseling in schools and social work with juvenile delinquents. The history of counseling, therefore, is a history of helping other people. It helps others through advice, assistance or support on the way towards achieving a goal, and providing some form of intervention to alleviate the status or condition of a person or persons, provide some remedy, or correct certain practices. Two parties are essentially involved in counseling. One party is the counselor. He is the one who gives the advice using his expert or specialized knowledge. The other party is the client. In business counseling, the counselor has expert knowledge and skills in business management. He may be a business administration/management professor in a university, lecturer and trainor on the same topics, or manager, supervisor, president or chief operating officer (COO) of a company. The client is the entrepreneur, firm, association, or group. The counselor attends to the client’s needs giving some advice and recommending possible courses of action. The counselor may deliver his services in various modes: through individual personal counseling, or through group counseling, and/or via some crisis intervention. He may conduct his advisory services with the client through interpersonal face-to-face communication, the telephone, cellphone, the internet, or some combination of interpersonal, mass, and electronic media. THE ROLE AND SCOPE OF WORK OF A COUNSELOR Counselors may work either as a development worker or as professional counselors. A counselor functioning as a development worker usually works for an agency engaged in the promotion of entrepreneurship and business creation. Many of the development worker type of counselors are employed in government institutions and non-government development agencies or organizations supported by Overseas Development Assistance (ODA). If you are a government employee, you are considered a development worker who seeks clients in line with a national program or else you are a front liner assigned in a government-run business development service (BDS) office. Professional counselors, on the other hand, are organized to do business by rendering consultancy service for a fee. Professional counselors usually come from the ranks of development worker counselors. They can be development workers full-time or most of the

2 BUSINESS COUNSELOR’S MANUAL

time in the day as they work with the government agency they are connected with, but for certain hours they become professional counselors as they move on to a part-time job where their work is precisely business counseling. On the other hand, there are now people who are full-time professional business counselors – and their ranks are increasing as the profession of business counseling gets to be valued and appreciated by the client entrepreneurs of micro, small, and medium enterprises (MSMEs) and as more stakeholders in government and in the private sector realize the need for business counseling services. As a business counselor, you take on diverse roles: whether as change agent, coach, or educator. You are a change agent because you bring about a positive change in the business, measured in concrete outcomes of productivity and profitability for the client. The more important thing is to be able to bring about behavioral change in your client. Inevitably, you are also a coach who influences the way the client should carry out the business operations. The coach is tasked to bring a higher quality of life for the client. Probing questions that you ask encourage the client to think of new ways or new insights and perspectives. As coach, you give feedback to every discussion point so as to gauge how well (or poorly) the client is doing. When positive feedback is earned, the role of a coach is to support the client in taking on new challenges for sustainability and growth for his business.

You are also an educator because you are an advocate for development by passing on to a client data and information on development out of which new perspectives are shaped. Recognizing the enthusiasm and behavioral change in the client, you facilitate the acquisition of more information for the business to be competitive by providing sources of information. If the client does not know how to get the data, you assist him for the first time while teaching him how to do it by himself the next time.

Counseling should be distinguished from activities which are akin to it such as information dissemination. The following are not considered counseling activities:

When information or data is simply handed/provided, more accurately called selective information service;

When a client is referred to another person/expert/agency without the benefit of interacting with the expert who may supply the solution to the need; and

When a client is given formats or model documents as reference.

CHAPTER 1: THE BUSINESS COUNSELOR 3

THE DEMAND FOR COUNSELORS

Business counselors are in demand or are engaged by MSME clients for many reasons. The more progressive businesses would like to have an impartial opinion to assess the existing situation, determine critical areas of operations, and obtain recommendations for improvement. Clients know that they have limitations and constraints that can be better analyzed by counselors who have the knowledge, expertise, and skills. Instead of employing specialists on a full-

time basis, counselors are engaged on a short-term or temporary basis. Many times an entrepreneur would like to know the soundness of a major decision, hence he wants someone who can agree/disagree or even challenge a course of action. Or he needs somebody to render professional advice for the adaptation of new technologies and approaches. On the other hand, engaging a counselor at the entrepreneur’s volition is not a general practice. The services of a counselor are usually sought only when the business is in trouble or when a government program is launched. What business counselors find baffling is the fact that those who need assistance most are the ones that shy away. In fact, experts observe that the more successful businesses are the ones who employ counselors. A good number of counselors working in government institutions possess the expertise and are motivated to assist small and medium entrepreneurs, and yet MSMEs particularly the smaller ones, do not seek their assistance when the latter can render services for a minimum fee or even for free. DESIRABLE SKILLS AND TRAITS OF A COUNSELOR

Not everyone can be a business counselor. To be a business counselor you must have special skills and traits that make you a cut above the rest.

Skills • Intellectual and technical competence in at least one business function. You may be a

generalist but you must have an in-depth know-how in either marketing, production, trading, finance, or law. You must continuously seek knowledge and hone your skills. Intellectual competence enables you to know why the problem arose, applying the right diagnostic tools so that the advice on what to do, when, by whom and how can it be done are accurate. You must continuously seek knowledge and hone your skills.

• Good oral and written communication skills. These skills will enable you to articulate your wide knowledge in entrepreneurship and business improvement. The knowledge stems from the acquisition and processing of data/information and readings. The belief in life-long education makes you a perennial student not only of the academic type but as practitioner. You participate in conferences, fora, and the like. Your skills are honed through the continuous study of concepts and practices.


• Objective and impartial. Practice good judgment, be objective or impartial and unemotional to be able to give unbiased advice to clients. Detach yourself from personal matters to be objective in dealing with business problems.

• Professional in delivering your commitments. Be timely in submission of reports, studies, and in attendance in meetings.

• Interpersonal skills. Be skillful in interpersonal relations as dealings will not only be with the client but also with his employees and at times with investors/funders.

• Creativity. Your wide knowledge and purposeful thinking lead you to creative solutions.

• Analytical and problem-solving ability. Necessarily, you must have an analytical mind and possess problem-solving abilities, for how else can you help a client if the diagnosis is erroneous.

• Ability to synthesize. This refers to the ability to look ahead, relaying to your client, and developing your client’s skill to plan.

• Confidentiality. Confidentiality forms the core of professional traits. “What the company owns must be the company’s.” Learn from experiences but never identify the client when using a particular experience to teach a client. Business counseling is a type of service where professional ethics demands discretion about client’s affairs. Once a cordial relationship is forged between the counselor and client there is no room for apprehension because motives are made clear. It is a win-win relationship. With this relationship it is fairly easy to gather data and information to better analyze the business situation.

• Skill of limiting engagements. An effective counselor does not count the number of clients nor the fees earned but rather the number of clients with whom relationships are forged that result in the improvement of the business.

• Special skills are needed at different stages of the engagement.

At the beginning of the engagement: o Listen and understand your client’s needs. o Understand the situation and isolate the causes and effects. o Self-disclosure is important so that the client will understand where you

are coming from.

During counseling work: o Engage in active listening. That is, listening with a questioning mind,

asking yourself questions like: Why did it happen? Why did he act the way he did? Can the situation be reversed?

o Think analytically, to determine/isolate factors that led to the problems and be able to formulate alternatives.

o Make the most of your interpersonal skills. You must know how to deal with the client and his employees so that you can extract information from which a good alternative can be developed.

o Communicate well. Communication skills require oral proficiency so that questions are understood by the client and his employees and right answers are given. Written communication skills are equally important because the SME client may not have the time to read long reports. Concise reports, with bottom line figures, are better appreciated.

o Manage time well. Time management is manifested in approximating timelines prepared in the beginning of the contract.


Towards the end of the engagement:

o Use professional skills in conveying the message to the client and employees in such manner that they see clearly the cause(s) of the problem(s) and the concomitant factors that will affect operations.

o Leave a client with an increased capacity to handle pressing issues of a similar nature. When he is doing well, a “pat in the shoulder” will work wonders. When he is doing poorly, a “slap in the back” done in jest will convey the message. Be sure the slap is accompanied with a smile then correct him by giving him alternatives.

o Provide feedback without making the client feel inferior. It is also making sure that what is acceptable (to both counselor and client) and what is not are properly accepted.

Traits • You are motivated towards service and want to share knowledge and skills with

others. You may have little or no experience in managing a business and have no desire to enter into business because counseling is your business.

• Be honest or truthful. Where you have doubts or do not know the response to a situation be honest to say so. But search/look for the information/data that will allow you to address the issues at hand.

• Positive criticism is a trait that distinguishes a good counselor from one who is not. When the client is obviously wrong and his actions are leading to a disaster, you are obliged to call his attention, explain the consequences, and let the client make the decision.

• Good physical and mental health. A client will not want to interact with one who is sick or cannot focus on discussion items. The rigors of work require physical and mental exertions. A sound mind and a healthy body augur well for stability of behavior and action. This is manifested in consistency of behavior with the desire to help the client do better.

• Etiquette and courtesy. You should know how to act and respect a client. Actions like slouching, arms akimbo, finger-pointing, and holding head high are no no’s. The intonation and voice decibels also manifest the character of the counselor.

• Self-confidence. Believing that one has the knowledge and skill to help a client in solving his problems is a must for all counselors.

• Integrity. You are expected to deliver on your commitments. Excuses, pretensions, and negligence have no place in counseling.

• Independence of mind is necessary but do not be obstinate if you know that you are not accurate or incorrect.

• Psychological maturity. You should know when you have the competency to help a client. As a counselor you must be honest to acknowledge your limitations by taking in another person/expert in the team or not entering into a counseling engagement.


UNDERSTANDING THE CLIENT Before you accept an engagement, you must have an accurate reading of your potential client. Understanding your client is a skill that is developed through experience. The more clients or interactions you encounter, the better you will gain insights in assessing clients, his personality, and aspirations. Your major concern is that at the end of the contract, your client is in a better position and can do better. You have to leave him exhibiting attributes of a successful entrepreneur. How can you tell if a client can be successful? He must have exhibited good business sense, which requires one to have the drive for growth. A good client is one who is highly motivated and possesses some knowledge and/or skills needed in the business, be it in manufacturing, trade or service. With micro enterprises comprising 90.6% of the registered businesses in the Philippines (Source: SME Development Plan), clients will most likely be micro entrepreneurs. Studies of the University of the Philippines Institute for Small-Scale Industries in the 80s reveal that majority of the entrepreneurs completed their secondary course. A similar study conducted in the 90s shows that many entrepreneurs are college graduates. This proves that more and more entrepreneurs see formal education as an important factor in entrepreneurship. Knowledge acquisition provides the necessary analytical and strategic skills in marketing, production, and finance. The small entrepreneur is a doer and action-oriented. He may be averse to lengthy academic discourses and thick reading materials but if given reading materials coupled with instructions, s/he will not stop reading and do as instructed until the work is completed. Below is a parallel analysis of client’s personal and entrepreneurial traits which are indicative of his business sense.

PERSONAL • Achievement

drive

BUSINESS SENSE ENTREPRENEURIAL • Growth motivation • Intuition • Opportunity - seeking • Perseverance • Risk tolerance • Entrepreneurial

management

• Adaptability • Independence • Decisiveness • Energy • Social skills

Fig. 1.1 Personal and Entrepreneurial Traits of Clients Indicative of a Business Sense

1. The client’s motivation for growth is usually accompanied with the drive to make things happen.

2. The client’s alertness of potential product/service innovations and markets and ability to seize opportunities, convert them to sales, and ensure repeat orders. His “gut feel” could be traced to his knowledge of the industry.

3. The entrepreneur knows that his products/services have distinctive features/characteristics that make them different from those in the market. His goal is the satisfaction of the customer and so he perseveres to improve his products and services by exploiting every opportunity to do so.

4. The client makes hard decisions to the point of self-sacrifice because he is determined to correct a situation and do better.


5. Running a business is a round-the-clock operation so that there is no room for infirmities. He delegates some authority to his employees firstly because he is not everywhere. Secondly, decision-making should be at all levels. Thirdly, he is not forever in the pink of health. A successful entrepreneur recognizes that there are risks for every decision. He must be able to tolerate minor mistakes (committed once) and be able to point these things to the decision-maker(s).

6. The client must possess interpersonal skills to make things happen without sacrificing innovation and adaptation. He must be able to correct and/or introduce change in spite of resistance.

THE ENGAGEMENT PERIOD Counseling contracts have no hard and fast rules about how long the engagement period lasts. But there is such a thing as an effective counseling contract. You must work out your exit from the beginning. The idea is for you to help clients help themselves. As a counselor, you should never manage the business of a client. You job is to merely guide. Leave the decision-making to the client. For purposes of determining fees, one must keep track of the time spent or invested in a client. Preparatory time (time spent to gather information to prepare the proposal) must be considered separately from time spent for counseling but attributed toward counseling time in reporting. Travel time should not be included in counseling time but should be tracked separately. Hence, TIME (spent per client) = Preparatory time + Counseling session + Travel time

THE BUSINESS COUNSELING PROCESS Understanding the process enables you to render counseling services by using a step-by-step approach. Others may argue that there is no need for such an approach. Experience shows that a planned work, regardless of the size of firm, will be very helpful in carrying out the job. This part of the manual will deal only with the process not the substance of the counseling service.


PHASE ONE: MAKING THE FIRST CONTACT This is the period when you meet the client for the first time for a possible engagement.

When a prospective client approaches you, the first meeting is usually a “getting to know you” session. You normally would like to know more about your client-to-be. When a client wants to confirm the soundness of his major decision or needs somebody to render professional advice for the adaptation of new technologies or approaches, you must be prepared for a longer counseling session. In this case, the client recognizes that he has limitations in time and skills which can be better provided by one who has the relevant knowledge and expertise/skills. The scenario is different in the case of government-employed counselors. When it is the counselor and not the client that makes the first move, things can be misconstrued differently. The assistance of the counselor may be perceived as motivated by other considerations instead. Suspicion or fear pervades in the first meeting. Development workers are trapped by the desire to help MSMEs. The motivation to change on the part of the client is often unintentionally overlooked in the desire of the development worker-counselor to improve the operations of the business. A development worker who visits an entrepreneur who does not value his counseling services as worthwhile should end the visit and look for other clients. Experience shows that some MSMEs who shun government-employed counselors only realize their value when the firm is in trouble. The entrepreneur will then seek counseling service. He will only approach you when he is able to confirm that you were able to bail out another entrepreneur in trouble. In the first meeting you forge a relationship built on trust and credibility. Especially in counselor-initiated engagements, never hint to a prospective client that a problem exists in the business. This can be misinterpreted as forcing through and a ploy to try to make money. The prospective client is likely to think: How can he identify a problem without even going through the firm’s operations? The first visit will not end with a contract. It is just establishing rapport with the client. What is important is that you are able to determine if the potential client is motivated to change. Prior to the counseling contract, there could be at most two more visits. Counseling a group is more challenging because it is not often clear who has what kind of problem. When faced with this challenge, at the first encounter, explore the reason for the engagement, determine willingness of members to be assisted, and identify who among them can be potential clients. Preparing the counseling proposal. If there is no previous working relationship but some chance of a counseling relationship is possible, the next step is the proposal preparation. Then you need to have a deeper knowledge of the business situation. In this regard, a preliminary fact-finding is imperative. Both parties must agree on the scope of work. The estimated time should not exceed three work days for small enterprises. On his part, the client must make available some base documents and authorize the interview with key persons in the company. Familiarize yourself with the operations to get an overall assessment of how the company is faring in terms of efficiency of operation and net revenues. How fast diagnostics are carried out will depend upon your experience and size of the firm. When you are able to isolate the cause of the problem, list the possible areas for investigation.


Enumerate the approach you will most likely take indicating possible deviations as more data come in. The proposal consists of four parts. The technical proposal details the intended work and general approach. For big complex development projects, this is called the Inception Report. The second part is identifying the counseling team and their respective areas of responsibility. The hierarchy of command should be made clear, delineating the role of the senior from the junior counselors. The third part is the resume of the team wherein the team’s counseling experiences in similar businesses are enumerated. This section should highlight the relevant experiences of the team members. It is a practice to include the terms of reference (TOR). The financial proposal may be a separate document where details on the cost of doing the work and the timetable are presented. Formalizing the Relationship. No matter how small and simple the operations of a potential client, an engagement agreement should be prepared. It can be in the form of a letter of agreement where the client will affix his signature in a space labeled as “conforme” or an “I accept” line to signify acceptance of terms. A formal contract or memorandum of agreement (MOA) is another form. The third kind is a verbal agreement which is a result of a previous relationship where mutual respect and trust for each other has been established.

CONTRACTCONTRACTCONTRACT

Contract writing is sometimes considered an awkward step for the client and government-employed counselors but it should be done. The contract binds the counselor and the client by the mutually agreed TOR which spells out the work that will be carried out. Before signatures are affixed to the document, each item in the contract must be discussed and stipulations mutually understood by both parties.

- Unpublished training material “Effective Business Counseling” - Manitoba Institute of Management

“Formulating the agreement or the contract can be looked upon as a negotiation between buyer and seller in which there is an exchange of service for fees. The counselor’s fees are often a function of hours worked and reputation, experience, skill and knowledge. The counselor’s product is often advice, guidance, and direction, sometimes in written form, sometimes not. This makes for a very nebulous exchange in which it is easy for one or both parties to feel like they win or lose. As in any negotiation that results in a continuing relationship, both parties must win. It is essential that the client feel that s/he is getting good value for the time, effort and money in the relationship. It is also essential that the counselor feels adequately rewarded for the contribution. An imbalance in the exchange can lead to feelings of guilt or victimization, and either is conducive to an effective counseling.”

The contract usually contains details on the following:

• Areas for investigation. These are the specific matters that require attention and/or improvement.

• Process. This refers to the chronological steps to be undertaken in data gathering and analysis leading to causes of problems or critical areas for decision-making. It is the


step-by-step procedure of agreeing who will do what part of the plan. Can the process be terminated any time? What are the possible signals or factors for termination? There must be mutual agreement as to who will decide the termination.

• Expected outcome details the expectations and deliverables. It is the result of the investigation, the implementation of recommendations and/or the change of policies supporting the recommendations. Others may consider these as the impact of the counseling services. Some of these outcomes are manifested in terms of increase in profitability, productivity improvement, raised employees’ moral, etc. The question that should be answered is “What will make the client happy and what will make the counselor satisfied?”

• Delineation of responsibilities identifies who will do what part of the counseling contract. In the case of manufacturing firms, the operation may have to be simulated so that data can be gathered without disturbing the operations.

• Present an activity chart, which is a graphical presentation of the planned activities. It indicates how much time will be spent for each activity and milestones. For accurate timing and logical sequence of activities, the Gantt or the precedence charts are very convenient.

• Financial aspect. This includes cost of the counseling service (i.e., billing schedules, payment procedures, and expenses to be incurred).

PHASE TWO: STUDYING THE CLIENT In this phase, you have to know your client far better than in Phase One. In this case, it is useful to think of the four development levels of a client, classified according to ability and willingness to change. A client at Level One, for example, has low skills and low in getting the task done.

LEVEL ABILITY (CAN) WILLINGNESS (WILL) One Low skill Low interest in the task Two Building skills Has interest in the task Three Adequate skills Lacks confidence to perform the task Four High skill Motivated to do the task independently

The style of counseling matters particularly in this phase. Counseling style is nothing else but the behavioral pattern when interacting with a client. There are two major types of counseling behavior: facilitative counseling and directive counseling. A counselor exhibits facilitative behaviour when there is two-way communication and the client’s inputs and participation are encouraged in the process. Directive behavior is observed when one-way communication prevails with the counselor controlling the actuations and influences the actions of the client. A seasoned counselor uses a combination of facilitative and directive behaviors. The idea is to reduce tension between him and the client as counseling progresses. As time lapses, tension is lowered as both parties become comfortable with each other and the work is completed with no disagreements/friction. You and your client will have a win-win feeling towards each other.


The improvement on the client’s development level client is the result of your counseling style. If you adopt a directive behavior, you may never lower the tension between the two of you. The results will either be: Client will simply rely on you, thus remaining at Level One, or he will not be able to help himself without you by his side But given the proper motivation and posturing, in a facilitative behavior, you will be able to raise his willingness to perform (WILL) because he has the ability (CAN) to acquire adequate skill. Thus, counselors must develop the skill to combine both facilitative and directive behaviours suited to their clients’ development levels.

Relationship

TaskTENSION

TIME

Relationship

TaskTENSION

TIME Fig. 1.2: Facilitative and Directive Behavior.

Planning the work. Details of activities have to be laid out systematically. For a realistic work plan, the SMART formula is commonly used as a standard, that is, the plan must be:

Specific Measurable Achievable Realistic and Time-bound

Major factors to be considered in preparing for the work plan are as follows: Organization 1. The owner/investors of the business must spend time for meetings and interviews. 2. Top/key persons should participate because they will be the sources of information and

the work requires interaction at all levels of the organization. Also, the key officers should act as channels of communication among employees and/or investors.

3. Employees are informed of the presence of the counselor/counseling team. 4. The culture and biases of the firm must be looked into. Resource materials 1. Determine what facts are required for the investigation. The reason for the need for data

must be discussed with the client. 2. Express the details of the required data as to criteria, content, depth, and time period. 3. Request access to basic documents. Data-Gathering 1. The interview is asking the right persons the right questions or records. A well-planned

work recognizes the value of the time of the interviewee. Time and place of interviews must be arranged before the actual interview. The counselor prepares his questions to ensure accurate responses and optimize time. After the interview, the notes are read to the interviewee to confirm responses.

2. Observe meetings, operations, and any interaction considering interpersonal and intra group relationships.

Meetings must be observed according to the following:

• Is there or is there no agenda? • How was the discussion conducted? Two-way? Moderated?


• Any dominant personality respected? Abrasive? Etc. If a visit to the firm is part of the counselor’s observation, you need to request

management to see to it that employees at the workplace are informed beforehand that an observer will be around. The presence of an observer should not distract them and that they should carry on with their activities at normal pace. You observe employees’ attitude and behaviour towards their work, how instructions were given and accepted, and how work is done.

In all interactions, especially in a face-to-face situation, make mental notes because

clients are distracted as you write notes and consider this as a sign of disrespect. However, if there is too much to be absorbed inform the person to allow writing of important notes. It is important that at the beginning, the person is informed that important data will be written. You must develop the skill to synthesize and write out your mental notes just as the interview is completed.

3. A survey may be needed to get primary data or to confirm findings, the purpose of which

must be made clear to the client. The survey instrument must be approved by the client. The survey must be short and conducted at a time that will not interfere with the production or operations of the firm.

4. Records analysis is resorted to when gathering data from files, reports, and documents.

You must develop the skill to determine what basic documents and records will give accurate data.

Other factors 1. Accountability: When preparing the work plan, responsible persons and level of authority

are written. 2. Limitations and potential constraints are factors that might affect the quality of

counseling. There are distractions that are inevitable as there are interferences that must be tucked into the schedule of the counseling engagement. Some of these are:

• Quality time of the client due to family affairs, participation in organizations, etc. • Potential constraints like holidays, personal trips of key persons, absence of data,

access to confidential files/information, client’s personal views which may run counter to the counseling team, personal problems

3. The work plan must answer the following questions: WHAT is to be done? HOW will it

be done? WHERE will it be done? WHEN will it be done? and WHO will do WHAT, WHEN, WHERE and HOW?

The work plan should contain the goals that the counseling engagement is to achieve. Such goals must be as “SMART” as the work plan is and should be consistent with the vision and mission of the company. “WHAT is to be done” is an enumeration of areas for study and activities to be undertaken, in both chronological and simultaneous order, to complete a task. The work must be divided into tasks for easy monitoring and measure.


• Sales performance• Customer feedback• Marketing mix

• Financial records maintained• Financial Statements• Flow of documents• Investment flows• Financial analysis

• Manpower Utilization• Machinery Utilization• Technology• Space Utilization• Plant Layout• Production cost

• Vision-mission, goals • Organizational aspects• Decision makers• Records

MAJOR AREAS OF

STUDY

• Sales performance• Customer feedback• Marketing mix

• Financial records maintained• Financial Statements• Flow of documents• Investment flows• Financial analysis

• Manpower Utilization• Machinery Utilization• Technology• Space Utilization• Plant Layout• Production cost

• Vision-mission, goals • Organizational aspects• Decision makers• Records

MAJOR AREAS OF

STUDY

Fig. 1.3: Major Areas of Study

“HOW will it be done” is selecting and using the appropriate tool to examine/study a situation to accomplish the tasks. For example, solving the problem of productivity can be studied by observing the work force using work sampling to record their direct and indirect work. “WHERE will it be done” specifies the place/location of the study. It could be within the organization, building or business function (marketing, production, finance, or general management). It could also be outside of the firm. “WHEN will it be done” can be best presented in graphical form using either a Gantt chart or precedence chart. The presentation should show the series of activities and their relationship. Establish milestones and celebrate when the tasks are completed satisfactorily. “WHO will do WHAT, WHEN, WHERE and HOW” identifies the person who will be responsible in carrying the task to completion. Decision-makers are also identified at all levels so that there is participation in problem-solving and improvement formulation. The secret of successful engagement depends on the attitude of the implementers. If there is participation in the process, there is ownership of the improvement which will yield better outcomes. Among the activities that must be observed and considered when preparing the timetable is the conduct of meetings and/or feedback sessions. Since the business has to move on, you must have meetings and feedback sessions, the schedules (and place) of which are either pre-determined or mutually agreed upon between you and the top person. It is at these meetings that you prepare reports and discuss causes and possible course(s) of action.

4. After using confidential files/information, you must return the same to the owner and/or

top management only to avoid leakage.


PHASE THREE: DIAGNOSING This is the first step in operationalizing the counseling contract. A good diagnosis will lead to effective solutions. The counselor identifies the forces causing the problem by using tools and techniques that s/he is adept at to get good data. These are analyzed in the context of the vision, mission and goals of the business. At this stage, the counselor is guided by the big question - Is there still a chance to do better? - broken down into the following task questions:

Where is the firm now? What seem to be the problem(s)? What are causing the problems? Where does the firm want to go? What is the nature of the gap between the current situation and the desired state? What are the forces that block the progress towards the desired situation? What is the client’s ability to solve the problem?

According to the International Labour Organization (ILO), there are five principal characteristics of a problem:

1. Substance or identity is a statement of a situation like increasing manufacturing cost, low morale, decreasing sales. The fact is these are the manifestations of a problem. There is a root cause.

2. Organizational and physical location refers to the unit in the organization where the

problem exists, which areas are affected and how widespread the problem within the organization.

3. Problem “ownership” refers to the people who are affected by the problem and are

willing to solve it. They may be the supervisors, administrative staff or managers or even the rank and file.

4. Absolute and relative magnitude ranks the importance of the problem in terms of

working hours, money lost, and people who own the problem. If problems are traced at the higher echelon of management then damages or adverse effects can pervade throughout the firm.

5. Time perspective is the frequency of the occurrence of the problem and whether it is

increasing or decreasing. If occurrence is intermittent and at long intervals these could be operational dislocations not necessarily problems. But if the effect is decreasing productivity and sales performance, even if recurrence is infrequent, then the problem must be dealt with it.

At the beginning of the diagnosis, hypothetical cause(s) may be assumed. As data and information are gathered, these hypotheses will either be negated or confirmed. Set it aside for the meantime but be on the look out for symptoms. At the beginning of this stage, avoid giving solutions because usually there are other considerations which are interwoven that may require further study and/or more facts. The importance of fact finding and selection of diagnostic tools is imperative at this stage. During diagnosis, assess your client’s problem-solving and decision-making abilities. Early in the counseling work, the time that will be spent by the client in the work is a major factor. On the other hand, you must be able to present not only problems but also identify strengths of the firm. Counseling process includes changing client’s behaviors/apprehensions towards


problems. Explain the push and the blocking factors which are actually the support and challenges a business has to face in its pursuit for improvement

GAP

PUSH FACTORS

PRESENT SITUATION

BLOCKING FACTORS

DESIRED SITUATION

Fig. 1.4: Push and Blocking Factors

You need to discuss with your client the present situation of the company based on your preliminary findings. Direct your client to express the desirable situation by helping her/him express it. To aid your client in understanding his present situation, a practical approach is to start with financial matters assuming that you have access to official financial statements. Lead the analysis of the financial situation by computing the ratios. The basic ratios are clustered into working capital ratios, productivity and debt ratio, and profitability ratio. Explain the implication of the figures to the operation then draw him to enumerate the push and the blocking factors. Using the above diagram, draw the client to identify the push and the blocking factors (force-field analysis). When identifying the negative or blocking factors, guard against the client putting the blame on events, government, external factors which s/he has no control of. An experienced counselor knows what questions to ask and how to ask the questions without embarrassing the client. Ultimately your task is to affirm your client’s self-confidence and SMART actions. Fact-finding involves data gathering, interviewing, observing, analyzing of records, interpreting data, etc. You must know how to use analytical tools and techniques to examine relations, procedures, and relate causes and effects. Your reservoir of diagnostic tools must be polished for ready application. You should know what kind of facts to look for. Too many facts may dilute the analyses. Do not be a problem-oriented counselor. Fact-finding requires a step-by-step and logical action leading towards the development of a better functioning organization. It requires that the output of an action is an input to the next one. For example, findings that retail outlets are refusing a product is a manifestation of a problem. Upon investigation, records showed high frequency of “returns of products.” Findings reveal that returns are above the industry rate. This is symptomatic of a production problem. Analyses of production operation then ensues. Study of the situation may end in quality assurance procedures or organizational issues on skills of workers, machine maintenance, utility requirement and so on. The time required to study the client’s operation depends on the type of data needed and its availability. You must determine what data/information is needed to address root problems. Often the magnitude of data required becomes a function of experience. Having worked in similar industry sector and knowledge of global information, you can readily identify critical facts that should be retrieved in the fact-finding step. In a firm where the client stated that the


problem is increasing production cost, you can initially use the flow process analysis by tracking the operation for a given work segment. Having observed that there seems to be a smooth flow and that the time lapsed for each work segment cannot significantly contribute to the increase in cost, you review the production tickets noting material usage. It may turn out that the preliminary work on materials prior to transport to the shop floor was not properly done or handling was inappropriate, thus, the high occurrence of defects during operation. Fact-finding also requires observing indirect work before and after main activities. In manufacturing operations there are many sections which can affect productivity and cost. Remember that in an enterprise all these are interrelated. You must be able to analyze workers/employees, place (working condition) of operation, and relationship of process and workers. Ask yourself the question: How were finished products affected? Correlate your findings with marketing, general management, other production subsystems, and financial implications. When gathering information and data, critical elements like depth and contents are important. Learn to pick the vital few from the many. The final step in fact-finding is data classification. There are various ways of classifying data. It can be done by business functions, whether it is a marketing, production, general management/human resource management, and financial. Classification can also be done according to work place, top management, supervisors, the stores and material preparation, shop floor, warehouse/stores/traffic, welfare facilities, and premises. Other classifications include chronology of events, introduction of new/alternative raw materials, product development, R&D work, etc. The idea in classifying information and facts is to build a “story line” on it. The organized data and information are next presented to the client. This is a learning process for both the counselor and client. Confirm your suppositions and eliminate some hypotheses which you established at the beginning of the counseling process. Classify results whether these are push or blocking factors. At this point, allow/encourage your client to make decisions for improvement by explaining to you how to eliminate/avoid the problems. When the client is jumping to conclusions slow him down. Ask him to look at the financial implications of the action to be taken. Advice him against drastic moves unless the recommendations have been tested and results were positive. An effective counselor is able to share his diagnostic tools with the client. When you see that the client can solve problems by himself, celebrate. Goal-setting and decision-making are the next steps after analyses. Goal-setting is describing the desired situation the firm should be aiming for after the counseling engagement. This is a clear picture of what the firm should be. Business situations do not lend themselves to simple solutions. Several courses of action are needed to alleviate smaller problems attached to the root cause. Goal-setting requires experience and creative thinking to get good results. Experience is accumulated through years of counseling work. Every counseling contract is a lesson in progress. On the other hand, creative thinking is the discovery of new things through idea generation and idea analysis. According to a group of Canadian counselors, the goal should be:

• Results-oriented; • Specific as to accountability; • Specific to time;


• Measurable in terms of quality and quantity factors; • Realistic and achievable; • Challenging and stretching; • Inclusive of constraints or conditions imposed by manpower, money, material, time &

other forces; and • Within the control of the person who is accountable for its achievement.

An experienced counselor will always go for creative thinking as clients are drawn to discuss possibilities of solving the problems. The ILO describes several creative thinking techniques. These are: 1. Brainstorming. This involves getting a large number of ideas from a group of

people in a short time. Typically a group of 8-12 people take a problem and produce ideas in a free-wheeling atmosphere. Judgment is suspended in all ideas. The wild ideas are particularly encouraged. The wildest ideas can often be stepping-stones to new and practical ones. Its main disadvantage is that it takes time to evaluate all the ideas.

2. Synectics is similar to brainstorming but with less people (maximum of 9) involved. The

client explains the problem and the participants put forward suggestions for solving it. The client analyzes the solutions, gives the drawbacks and what he likes in the solution. New ideas are put forward until a solution is found.

Creative thinking guidelines: • Suspend judgment: rule out

premature criticism of ideas • Free-wheel: the wilder the

ideas the better the results • Quantity: the more ideas the

better • Cross-fertilize: combine and

improve on the ideas of others

3. Attribute listing is normally used on tangible rather than

intangible things. Main attributes of the idea or object are listed and examined to see how it can be changed. Each attribute is questioned and changes are suggested.

4. Forced relationships take objects or ideas and asks the

question “In how many ways can these be combined to give a new objector idea?”

5. Morphological analysis sets down all variables in a matrix and tries to combine them in

new ways. Although the matrix does not give all possible alternatives, the various combinations of the variables listed give an impression of the possibilities that may exist. Some will be discarded, but some are worth considering, thus paving the way for new, practical, useful and feasible solutions.

6. Checklists are used as pointers to ideas. List may be particular to an area (e.g., marketing,

design) or general. Decision-making is formulating an action plan to solve a problem. Problem-solving research shows that the quality and acceptance of a decision improves with the number of legitimate alternatives considered. Thus, it is best that at least three alternative ways of achieving a goal are presented. At this stage, present to your client decision-making techniques, reiterate the desired situation or goal, and then allow her/him to make choices. Usual techniques used are the means-end chain, arrow diagram, and the decision tree. Building the means-end chain is to trace the connection to the objective. The objective becomes the end. Alternatives are means to


produce the end. The arrow diagram links alternatives to the goal graphically. The depiction is very visual, less reading on the part of the client. Decision trees are composed of sets of arrow diagrams and are used where problems are intertwined. For clients with good computer skills, encourage the use of software to facilitate decision-making. Evaluation of alternatives can be pursued through matrices analysis using as factors for comparison the following:

• Costs, • Benefits, • Process changes, • Persons affected, • Time needed to install change, and • Degree of disturbance for the installation of the improvement.

PHASE FOUR: WORKING THE PLAN This involves implementing the plan. A simple way of implementing the improvement or solution to a problem is to break the activities into smaller tasks that answer the following questions:

WHAT is to be done, HOW will it be done

WHERE will it be done WHEN will it be done

WHO will do WHAT, WHEN, WHERE and HOW

At this stage, you slowly withdraw from the action but see to it that prerequisites to implementation are in place. Depending on the complexity of the problem you may still have to participate to ensure that set goals are attained. Your participation in the implementation is not encouraged but you may mentor your client and/or his employees During the implementation of recommendations, the client must be consulted on any change, addition or deletion of an area for study and the decision left to him. By so doing, the client will feel more comfortable and not regard change(s) as a form of intrusion or escape from a hard job or complex situation. It is possible that deviations may arise during implementation because of external and internal factors impinging on the firm’s operations. You must be able to anticipate such deviations. When a deviation occurs, you should:

• Inform the client right away or warn him/her, but never blame him/her; • Describe the situation: what was suppose to happen, what happened, where and when

the deviation was noticed, who was involved; • Be ready to answer such questions as: what did not occur, why a task was not

undertaken, who should have carried out the task; • Determine who has the information or where to get the information needed to get

back on track • Get the information and fit it into the plan; and • Correct the deviation.


When a deviation occurs, the client must be engaged to do more because he will have to learn how to solve problems. Observe how the client reacts and corrects the deviation. If the client is able to proceed without much help from you, then it means that the client’s development level is a notch higher. When milestones or targets are met, there is reason to celebrate. A pat on the shoulder of key players implies recognition of leadership and/or successful participation in solving the company’s problem. As problems are solved, make the client feel like a winner. It will make him feel good and will have more confidence in solving his problems. Where there were difficulties, point out learnings and how controls were applied. Evaluation. Evaluation involves taking stock of the progress made and the phasing out or termination of contract. There are two kinds of evaluation. The first is formative evaluation which is designed to improve implementation as work is in progress. For example, it is critical to know the implication of taxes on production cost and price determination. Hence, the evaluation process will indicate what factor will reduce material usage to avoid price differentials. Summative evaluation, on the other hand, occurs at the end of the engagement. Essentially, it will lead the client to asking:

• Where are we now? • How does this compare to the desired situation? • Is there a gap? • If so, is it worth working on?

Evaluation includes a review and an assessment of relationships. Be open and honest about the way the counseling contract was implemented. Explain why you exhibited direct behavior at times and on some occasions, facilitative behavior. Discuss what led to the successes and what contributed to the slowing down of the process. Never put the blame on any one. The client on the other hand must be encouraged to give feedback on the relationship. What were the things he disliked, resented, and felt bad about? Raise the client’s development level when interest and motivation is evident in the conversation. When there is negative feedback, know how to accept and discover the real score without being defensive. It is possible that you came in too strong or was not assertive as the client expected. The more important thing to do is learn from the experience. What did you do or not do? How did you behave in client’s presence? Termination. The termination phase is the proclamation of winners: the client is satisfied with the outcome and relationship while you are able to raise the development level of the client to an independent rational thinker who knows how to solve problems. This stage starts with the counselor suggesting the end of the engagement because the agreement has been fulfilled and goals have been met. During the counseling process be on the lookout for indications of withdrawal, meaning instances that will indicate that your client can solve problem by himself and be successful. It should end in a win-win relationship, you are happy the client feels good about the engagement contact. A satisfied client ends the engagement only to engage you again for another matter. Or else, the client ends the contract only to request you to make himself available in case another problem arises.


A meeting with the client must be scheduled long before the actual termination. Prepare for the meeting and have the following on hand:

• Contract of engagement , • Schedules of meetings held, and • Accomplishments and deviations resources utilized.

During the termination meeting, review with the client the activities and outcomes. Discuss the evaluation results and reiterate key factors that led to the success (or failure) of the engagement. Both must confirm the benefits that stemmed from the relationship: new benefits, new systems, and new behaviors. Indicate critical areas and identify outstanding assets including employees and officers and why. End the terminal meeting with acknowledgment and statement of gratitude.


WRITING A REPORT

During the engagement period, major tasks are concluded with short reports containing the areas for investigation and the corresponding recommendations. This is different from the counseling report. The counseling report is the summation of completed and uncompleted activities during the engagement. Uncompleted tasks should be explained, avoid excuses. It must be written briefly and factually. The purpose of a counseling report is to document the engagement. No

professional counselor should miss preparing the completion report. It records the impact of the work and benefits to the client. The final report should not repeat the information and data which were already presented or used for implementation and/or decision-making. Facts in the terminal report should be new, things that can impact on the client’s operation and can be useful to the client in the future.

PARTS OF THE REPORT The final report contains, first, the executive summary, and then the body of the report. Executive summary consists of major outcomes of the counseling engagement based on the objectives. It should include the visible effects, the intermediate outcomes, and the long-term impact of the changes. Necessarily, the financial implications particularly the minimization of cost and the increase of profits are good inputs. The body of the report must be carefully planned both in substance and style. Write to express not to impress. Writing style must be simple and in short sentences. The use of jargon should be avoided. The reports structure must induce easy reading. The main reports content should have a logical sequence usually based on how the counselor approached the problem. The executive summary’s content are amplified in the main body of the report. Where there are major milestones include charts that will show agreed scheduled vis-à-vis actual activities or as implemented. A client, specially an MSME entrepreneur, will not read a voluminous report. Tabulations, matrices, and graphical presentations are encouraged. Writing style can also mean the use of bullets and numbers. PROFESSIONALISM AND CODE OF ETHICS Professional conduct and the observance of the Code of Ethics build your image while effective performance builds your reputation. You must be able to delineate commercial interest from personal interest when dealing with clients. The Asia Pacific Economic Cooperation – Training and Certification Program (APEC TRACE) Principles of Professional Conduct provides the fundamental principles that should guide the professional small business counselors. Professional conduct includes the following components.


Public interest

The interest of clients must be paramount except where there is conflict with the law and the duties and responsibilities owed to the community/public.

Integrity Acting at all times with honesty and integrity in dealing with clients.

Objectivity Fairness and impartiality should govern the counselors’ activities. They should not be influenced by prejudice, bias or conflict of interest in the performance of their duty.

Independence Counselors must be independent and free of any interest that is incompatible with their duty. Counselors performing professional services in commercial, industry or public service must recognize the potential problems created by personal relationships or financial involvements. Depending on the nature or degree of such relationships or involvements, the objectivity of the small business counselor may be threatened.

Confidentiality

Counselors must respect the confidential nature of information obtained from their clients in the provision of professional services. This information should not be disclosed to a third party without specific authority or criteria required by law.

Technical and professional standards Counselors are expected to meet the technical and professional standards of a professional small business counselor.

Competence and due care Counselors must perform professional services with due care, competence, and diligence. The small business counselor has a continuing duty to maintain professional knowledge and skills.

Ethical behavior Counselors must conduct themselves at all times in an ethical manner to maintain the good reputation of the small business counseling profession.

Ethics refers to how the morals of an individual impact on the way you act and make decisions. According to Anne Langden and Patricia Marshall in their book, Organizational Behavior, ethics is “a branch of philosophy providing some rules or principles to help us decide right and wrong conduct.” This definition describes the basis on which individuals and businesses must decide to conduct their business affairs. Most professionals operate based on their moral principles. Therefore, there is a need for you as counselor to have a sound ethical practice based on good moral practice.


The APEC Certified Business Counselors are bound by a Code of Conduct as follows: Credibility The small business counselor must be acknowledged as a credible professional. The small business client must be able to rely on the credibility of the small business counselor. Professionalism The small business counselor must be qualified to provide the counseling services required by the small business client and to be in position to recommend the appropriate professional advice. The counselor must be recognized by the client, other counselors and the business community as a professional in the small business counseling sector. Quality of Services The Code of Ethics and Professional Conduct charter governing small business counselors gives an assurance to the small business sector that the services provided by the small business counselor will be of the highest professional standards. Confidence Users of the services of professional small business counselors must feel confident that the counselors relate with them within the framework of professional ethics which govern the provision of these services. The Professional Conduct of the Asia Pacific Economic Cooperation (APEC) Certified Business Counselors is a good ethical guide in counselor-client encounters.

Professional Conduct of

APEC Certified Business Counselors

Certified counselors must strive to provide professional services to their clients and are expected to deliver the highest professional standards in their counseling. All certified counselors shall:

• not act recklessly or maliciously, injure or attempt to injure, whether directly or indirectly, the professional reputation of another person.

• take all reasonable steps to ensure that the person overruling or neglecting the advice is

aware of any danger which the certified counselor believes may result from such overruling or neglect, where advice based on his skill and judgment is not accepted.

• recognize his limitations, maintain a network of professional resources and refer clients

where and when appropriate.


Code of Ethics of APEC Certified Business Counselors

Small business counselors are dedicated to providing competent and ethical service in the field of small business counseling. They strive to provide professional counseling to their clients and are dedicated to the delivery of the highest professional standard in their activities as counselors. They have the responsibility to:

• Hold the affairs of the clients in the strictest confidence; • Strive continuously to improve their professional skills; • Advance the professional standards of APEC International Network of Institutes of Small

Business Counselors (IBIZ); • Abide by the principles laid out in the Code of Ethics with all by-laws, regulations,

resolutions and rules as promulgated by the International Advisory Group of Experts (INAGE), Professional Standards Committee, and the Coordinating Council; and

• Maintain the highest standards of professional conduct. Certified counselors shall uphold the Code of Ethics and the profession’s common body of knowledge. Violations of the Code and Professional Conduct shall be reported to the Professional Standards Committee of the Coordinating Council. Objectivity A certified counselor will act in the best interests of the client, providing professional services with integrity. Confidentiality A certified counselor is duty bound to keep in confidence the affairs of any colleague, client or organization and shall not disclose confidential information obtained in the course of professional activities. Nor shall a certified counselor in any way exploit information obtained in the course of their duties to their personal advantage. Integrity in Conflicts of Interest A certified counselor shall inform a client of any interest, relationships or circumstances, which may impair or be seen to impair his/her professional judgment of objectivity. In cases where impartiality is seen not to exist, the certified counselor will refer the client to another small business counselor. A certified counselor will not provide any appropriate information learned from previous clients without first obtaining their consent nor knowingly, without permission, use the copyright material and proprietary data, procedures, materials, or techniques that others have developed but not released for public use.

Chapter

2 THE PHILIPPINE SME SECTOR TODAY

PHILIPPINE SMES: AN OVERVIEW

The small and medium enterprises (SMEs) comprise an exceedingly large portion of business establishments in the Philippines. In 2002, the SME sector employed 70.4% of the total local workforce.

THE PHILIPPINE SME SECTOR DEFINED

Two basic criteria are used in defining and classifying enterprises: number of employees and asset size. The former is usually used in economic literature while the latter is far more common among financial institutions. In January 2003, the Small and Medium Enterprise Development (SMED) Council defined the SME sector as follows: Table 2.1: SME Categories by Asset Size and Number of Employees1

Category Total Assets2 No. of Employees Micro enterprises P 3,000,000 or less 1 - 9 Small enterprises P 3,000,001 – P 15,000,000 10 - 99 Medium enterprises P 15,000,001 – P 100,000,000 100 - 199 Enterprises with assets of more than one hundred million pesos or employees numbering more than 199 are classified as large enterprises, which comprise around 0.3% of business establishments in the Philippines.

1 The Bangko Sentral ng Pilipinas (BSP), through Monetary Board Resolution 328 dated March 2003,

approved the use of the SMED Council definition to apply to SME programs of financial institutions. 2 Excluding the value of land.


DISTRIBUTION OF SMEs PER INDUSTRY AND CATEGORY SMEs operate in various industries nationwide. Table 2.2 reveals that majority (53.82%) of SMEs are engaged in commerce, with the manufacturing industry (15.11%) coming in second. SMEs are involved least in mining (0.04%), utilities (0.14%), and construction (0.32%). According to size, 92.14% of the SMEs are categorized as micro-enterprises, 7.51% are small enterprises, and 0.36% are medium enterprises. Table 2.2: Number of Establishments, by Industry and by Size (2002)

MICRO SMALL MEDIUM LARGE TOTAL INDUSTRY % % % % Agri, Hunting & Forestry 1,467 47.0 1,431 45.9 101 3.2 121 3.9 3,120 Fishing 517 45.2 570 49.8 30 2.6 28 2.4 1,145 Mining & Quarrying 198 60.6 105 32.1 12 3.7 12 3.7 327 Manufacturing 108,847 88.5 12,128 9.9 1,020 0.8 982 0.8 122,977 Electricity, Gas & Water Supply 483 39.7 530 43.6 107 8.8 96 7.9 1,216 Construction 1,484 56.0 958 36.2 101 3.8 106 4.0 2,649 Wholesales & Retail Trade, Repair Motor Vehicles, Motorcycles & Personal & Household Goods 415,670 95.7 18,164 4.2 394 0.1 247 0.1 434,475 Hotels & Restaurants 81,561 92.0 6,846 7.7 142 0.2 59 0.1 88,608 Transport Storage and Communications 10,748 75.4 3,184 22.3 181 1.3 150 1.1 14,263 Financial Intermediation 18,438 76.6 5,456 22.7 74 0.3 92 0.4 24,060 Real Estate, Renting and Business Activities 34,412 88.5 3,857 9.9 273 0.7 320 0.8 38,862 Education 4,922 53.0 3,862 41.6 273 2.9 225 2.4 9,282 Health and Social Work 26,689 94.7 1,282 4.5 109 0.4 103 0.4 28,183 Other Community, Social & Personal Service Activities 37,990 94.3 2,193 5.4 57 0.1 53 0.1 40,293

All Industries 743,426 91.8 60,566 7.5 2,874 0.4 2,594 0.3 809,460 Source: National Statistics Office

CHAPTER 2: THE PHILIPPINE SME SECTOR TODAY 27

Of the 122,977 establishments engaged in manufacturing, 99.20% are SMEs. The manufacturing sector is dominated by microenterprises at 88.5% and small enterprises at 9.9%. Most (42.3%) of the SME manufacturers are engaged in the manufacture of food products and beverages, followed by wearing apparel (15.5%), fabricated metal products except machinery and equipment (11.9%), furniture (6.2%), and non-metallic mineral products (4.7%).

Table 2.3: Number of Establishments, by Manufacturing Sub-industries (2002)

MICRO SMALL MEDIUM LARGE TOTAL INDUSTRY % % % % Food Products & Beverages 48,347 92.9 3,333 6.4 179 0.3 187 0.4 52,046 Tobacco Products 4 16.7 10 41.7 0 0.0 10 41.7 24 Textiles 1,109 68.8 383 23.8 63 3.9 57 3.5 1,612 Wearing Apparel 17,328 91.0 1,448 7.6 119 0.6 142 0.7 19,037 Tanning & Leather Goods, Luggage, Handbags & Footwear 2,141 82.9 390 15.1 33 1.3 18 0.7 2,582 Wood, Wood Products & Cork, except Furniture; Articles of Bamboo Cane, Rattan Plaiting Material 3,218 86.5 455 12.2 27 0.7 22 0.6 3,722 Integrated Paper and Paper Products 291 48.7 245 41.0 33 5.5 29 4.8 598 Publishing, Printing & Reproduction of Media 3,318 77.5 916 21.4 31 0.7 18 0.4 4,283 Refined Petroleum & Other Fuel Products 10 35.7 14 50.0 0 0.0 4 14.3 28 Chemicals & Chemical Products 400 37.5 540 50.6 76 7.1 51 4.8 1,067 Rubber & Plastic Products 826 52.3 623 39.5 74 4.7 55 4.8 1,578 Other Non-Metallic Mineral Products 5,168 88.3 594 10.1 42 0.7 51 0.9 5,855 Basic Metals 792 62.6 394 31.1 49 3.9 31 2.4 1,266 Fabricated Metal Products Except Machinery & Equipment 13,734 94.0 798 5.5 49 0.3 28 0.2 14,609


Table 2.3: (continuation)

MICRO SMALL MEDIUM LARGE TOTAL INDUSTRY % % % Machinery & Equipment Not Elsewhere Classified 2,704 79.2 661 19.4 33 1.0 18 0.5 3,416 Office, Accounting & Computing Machinery 12 23.1 14 26.9 5 9.6 21 40.4 52 Electrical Machinery & Apparatus, Not Elsewhere Classified 54 22.8 119 50.2 35 14.8 29 12.2 237 Radio, Television & Communication Equipment and Apparatus 30 11.7 83 32.4 28 10.9 115 44.9 256 Medical Precision & Optical Instruments, Watches & Clocks 39 34.2 35 30.7 18 15.8 22 19.3 114 Motor Vehicles, Trailers and Semi-Trailers 640 74.9 174 20.4 22 2.6 18 2.1 854 Other Transport Equipment 321 72.5 99 22.3 11 2.5 12 2.7 443 Manufacture & Repair of Furniture 6,940 91.5 566 7.5 53 0.7 28 0.4 7,587 Recycling 32 59.3 22 40.7 0 0.0 0 0.0 54 Manufacture Not Elsewhere Classified 1,389 83.8 216 13.0 36 2.2 16 1.0 1,657

TOTAL 108,847 88.5 12,132 9.9 1,016 0.8 982 0.8 122,977 Source: National Statistics Office


GEOGRAPHICAL CONCENTRATION OF SMEs

Outside the National Capital Region (NCR), large concentrations of SMEs are located in five regions: Southern Tagalog (Region 4), Central Luzon (Region 3), Central Visayas (Region 7), Ilocos Region (Region 1), and Western Visayas (Region 6). The geographical concentration of SMEs can be seen from Table 2.4.

Table 2.4: Number of Establishments, by Region and by Size of Firm (2002)

MICRO SMALL MEDIUM LARGE TOTAL REGION % % % % National Capital Region 166,757 85.5 25,708 13.2 1,350 0.7 1,214 0.6 195,029 I (Ilocos Region) 45,945 95.5 2,064 4.3 58 0.1 36 0.1 48,103 II (Cagayan Valley) 23,977 96.2 900 3.6 23 0.1 20 0.1 24,920 III (Central Luzon) 83,356 93.8 5,110 5.7 193 0.2 163 0.2 88,822 IV (Southern Tagalog) 134,116 93.9 7,868 5.5 423 0.3 456 0.3 142,863 V (Bicol Region) 29,307 94.9 1,482 4.8 54 0.2 36 0.1 30,879 VI (Western Visayas) 42,456 92.8 3,036 6.6 151 0.3 102 0.2 45,745 VII (Central Visayas) 44,492 90.5 4,204 8.5 223 0.5 229 0.5 49,148 VIII (Eastern Visayas) 19,951 94.5 1,085 5.1 40 0.2 26 0.1 21,102 IX (Western Mindanao)/ Zamboanga Peninsula 26,067 95.0 1,286 4.7 47 0.2 30 0.1 27,430 X (Northern Mindanao) 30,791 93.2 2,108 6.4 86 0.3 60 0.2 33,045 XI (Southern Mindanao)/ SOCCSKSARGEN 26,935 95.1 1,287 4.5 46 0.2 45 0.2 28,313 XII (Central Mindanao)/ Davao Region 32,813 91.7 2,742 7.7 121 0.3 121 0.3 35,797 CAR 13,470 94.8 687 4.8 26 0.2 18 0.1 14,201 ARMM 7,892 96.7 244 3.0 12 0.2 14 0.2 8,162 CARAGA 15,101 95.0 755 4.7 21 0.1 24 .02 15,901

TOTAL IN PHILIPPINES 743,426 91.8 60,566 7.5 2,874 0.4 2,594 0.3 809,460

Source: National Statistics Office


EMPLOYMENT IN SMEs

The SME sector absorbed 70.4% of the workers in the formal sector. Microenterprises employed the largest number of workers at 39.2%, followed by small enterprises (23.9%), and medium enterprises (7.2%).

Table 2.5: Total Employment, by Region and by Size of firm (2002)

MICRO SMALL MEDIUM LARGE TOTAL REGION % % % % National Capital Region 544,621 25.8 586,790 27.8 185,144 8.8 795,983 37.7 2,112,538 I (Ilocos Region) 119,517 66.2 39,567 21.9 7,856 4.4 13,481 7.5 180,421 II (Cagayan Valley) 66,954 71.0 17,539 18.6 3,192 3.4 6,654 7.1 94,339 III (Central Luzon) 236,099 51.2 103,215 22.4 26,400 5.7 95,120 20.6 460,834 IV (Southern Tagalog) 365,135 39.9 167,465 18.3 59,795 6.5 322,179 35.2 914,574 V (Bicol Region) 82,703 63.1 29,929 22.8 7,118 5.4 11,381 8.7 131,131 VI (Western Visayas) 123,309 48.0 65,435 25.5 21,064 8.2 46,939 18.3 256,747 VII (Central Visayas) 128,684 32.4 94,119 23.7 31,081 7.8 142,972 36.0 396,856 VIII (Eastern Visayas) 58,467 61.3 21,352 22.4 5,434 5.7 10,063 10.6 95,316 IX (Western Mindanao)/ Zamboanga Peninsula 68,092 60.0 26,756 23.6 6,616 5.8 11,932 10.5 113,396 X (Northern Mindanao) 86,795 49.0 42,663 24.1 12,129 6.8 35,538 20.1 177,125 XI (Southern Mindanao)/ SOCCSKSARGEN 76,392 55.1 27,457 19.8 6,460 4.7 28,302 20.4 138,611 XII (Central Mindanao)/ Davao Region 94,829 39.6 58,687 24.5 16,712 7.0 69,416 29.0 239,644 CAR 35,225 53.9 13,727 21.0 3,595 5.5 12,836 19.6 65,383 ARMM 23,143 59.2 4,999 12.8 1,457 3.7 9,473 24.2 39,072 CARAGA 41,297 60.0 14,809 21.5 3,060 4.4 9,637 14.0 68,803

TOTAL IN PHILIPPINES 2,151,262 39.2 1,314,509 24.0 397,113 7.2 1,621,906 29.6 5,484,790

Source: National Statistics Office


KEY ISSUES FACING SMEs Since the 1970s, Philippine SMEs have lagged behind its East Asian neighbors in terms of generating employment and value added as shown in Table 2.6 below. Table 2.6: SME Contributions of Selected Asian Economies (%) Philippines South Korea Japan China Malaysia Thailand Indonesia

No. of Establishments 99.7 99 99 99 94 98 99.99 Employment 69.1 78.7 88.6 75 40 55.8 99.4 Value Added 32 47 56.7 68 26 N.A 63.11 Source: SME Development Plan 2004-2010, page 13. The lackluster performance of Philippine SMEs has been attributed to factors such as competition, productivity, and financing, among others. LOW COMPETITIVENESS Philippine SMEs have been observed to fare below average in terms of competitiveness. Local SMEs have failed to meet head-on the vicious competition in export markets as well as the influx of cheaper priced products that find their way into the local market. Other factors that contribute to the inferior competitiveness of Philippine SMEs include the:

• Relatively small domestic market; • Need for imported parts and materials; • Barriers to business such as lack of funding and research and development

support; and • Limited economic activities at the local level.

PRODUCTIVITY AND STRUCTURAL LIMITATIONS Most of the challenges facing SMEs relate to productivity and structural limitations of services and the business environment. These include:

• Outdated or less productive operational assets and systems; • Limited production capacity; • Low investment in product development; • Inadequate use of technology; • Limited management and professional skills as well as unappreciated and

inadequate professional service; • Lack of incentives and inability to meet international product standards; and • Insufficient access to information.


LIMITED ACCESS TO FUND SOURCES It is important to stress that one of the most severe constraints facing local SMEs is the limited access to financing, and not necessarily the supply of funds available for SME lending. When it comes to financing, many start-up enterprises have limited access to fund sources. Most entrepreneurs rely on their savings or borrow from relatives and friends for initial capital. They are unable to access loans from formal credit sources because of three main constraints: 1) they do not know where and how to access such services; 2) they fear they may not be able to meet loan obligations; and 3) they do not have the collateral. The situation is aggravated by the lack of access to suppliers willing to provide materials on credit. The extended repayment terms extended by supermarkets, malls, and other establishments add to the funding pressure. If and when start-up costs have been met, many entrepreneurs face another set of problems – low-grade fixed assets, low level of technology, production inefficiencies, lack of sufficient working capital, and limited production capacity – all because of their inability to access external funding. Other challenges and problems SMEs face in the area of financing include: lack of information on the different loans/financing programs available; high interest rates; stringent collateral, equity and documentary requirements; low collateral valuation; and the tedious loan application process. ISSUES ON ACCESS TO MARKETS Inadequate knowledge of market opportunities and how to penetrate bigger markets have constrained entrepreneurs to limit their activities to selling locally, more specifically direct to final consumers. Only a few entrepreneurs are able to set foot in national or foreign markets. Selling to supermarkets, groceries, and department stores is not easy for many entrepreneurs because of the volume requirements and the unfavorable terms (e.g., 90 – 120 days credit) imposed by these volume buyers. Not many entrepreneurs realize the benefits of subcontracting. Instead of entering into a subcontracting arrangement with a qualified firm, some entrepreneurs would rather produce the same product on their own. Consequently, competition is heightened, resources wasted, and production inefficiencies encouraged. Many entrepreneurs face other challenges and problems SMEs in the area of marketing. These include among others:

• Lack of appropriate channel to obtain market information, other than through participation in trade fairs;

• Lack of up-to-date market information; • Lack of good business networks; • Inadequate market linkage; and • The need to understand and meet internationally recognized technical regulations.


OTHER CONCERNS The Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, in its review of policies on SMEs3, identified issues facing SMEs according to the SME type, whether one is a low-growth domestic SME, an entrepreneurial fast-growth SME, an internationalized subcontracting or supply industry SME, or a trading SME.

Low-growth domestic SMEs. These enterprises are characterized by their static contribution to the economy, the lack of international orientation, a relatively short life expectancy, and presence in a generally “at risk” or “insulated” category. Their main challenge lies in adapting to increased competition as a result of regionalism, through better access to information and markets; avoidance of systemic biases of financial markets; better business environment unhampered by unnecessary regulations; and capability-building and human resource development for increased competitiveness.

Entrepreneurial fast growth SMEs. The main challenge for these SMEs is how to overcome blocks to international entrepreneurship, such as outdated regulations, inaccessible markets, incompetent or unsuitable managers, and lack of financing. Entrepreneurs are especially interested in securing start-up assistance, having viable exit and bankruptcy arrangements, as well as accessing reliable telecommunications facilities at reasonable rates.

Internationalized subcontracting or supply industry SMEs. These SMEs have links with larger foreign firms or an exporting domestic firm, tend to be larger on average, employ more workers, and use more up-to-date technology than other SMEs. They are very important as they contribute to technology and skill transfer and industrial development. The challenge to them is to remain up-to-date and competitive, through Electronic Data Interchange (EDI) standardization, quality improvement and accreditation, more efficient and effective technology transfer, access to for

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