Small Business Management MGMT5601 Topic 1: The role of ...€¦ · 8 4 July Topic 8: Assisting the small firm to grow Chapter 8 9 11 July Topic 9: Small firms and human resources

©Mazzarol 2017 all rights reserved

Small Business Management MGMT5601

Topic 1: The role of small firms in the economyProfessor Tim Mazzarol – UWA Business School

UWA Business School MBA Program [email protected] MGMT5601



Program StructureLecture Dates Topic Textbook chapter

1 16 May Topic 1: Assessing the business model and innovation strategy Chapter 1

2 23 May Topic 2: Entrepreneurs versus owner-managers Chapter 2

3 30 May Topic 3: Surviving the early years Chapter 3

4 6 June Topic 4: The process of planning and strategy in small firms Chapter 4

5 13 June Topic 5: Creating customers Chapter 5

6 20 June Topic 6: Financing the small firm (Part 1) – debt vs. equity Chapter 6

7 27 June Topic 7: Financing the small firm (Part 2) – cash flows, credit & working capital

Chapter 7

8 4 July Topic 8: Assisting the small firm to grow Chapter 8

9 11 July Topic 9: Small firms and human resources Chapter 9

10 18 July Topic 10: Franchising and legal issues Chapter 10

11 25 July Topic 11: Buying, selling and valuing the business Chapter 11

12 1 August Topic 12: The owner-manager and the troubled company Chapter 12


Introductions


• Define the term “small business”• Understand the role of the small

business owner-manager• Overview the nature and structure of

the small business sector• Describe the growth cycle of small

business• Review government policy towards the

small business sector

Learning outcomes


In this topic you should learn how to:


The importance of small firms



Defining a Small Firm

• Australia: – < 5 employees micro; < 20 employees

small; < 200 employees for medium.• Singapore:

– < 200 employees (services) and < $15M• United States:

– < 500 employees (manufacturing) and < $5M in sales (non-manufacturing)

• Many also highlight the need for independence of ownership and control

Many definitions exist, most with reference to size of employment and turnover.

Source: APEC 2002


OECD and EU Definition of a Small Firm

Source: OECD (2004)

Type Employees Annual Turnover Assets

Micro-enterprise 1-9 employees < 2 million Euro < 2 million Euro

Small-enterprise 10-49 employees < 10 million Euro < 10 million Euro

Medium-enterprise 50-249 employees < 50 million Euro < 43 million Euro

Large-enterprise > 250 employees > 50 million Euro > 43 million Euro


Various Definitions in APEC

Source: APEC 2002

Country Micro Small Medium Financial

Australia <5 employees 5-19 employees 20-200 employees N/A

Brunei < 6 employees 6-50 employees 51-100 employees N/A

Canada N/A <100 employees 101-500 employees N/A

Hong Kong <50 non-manufacturing

<100 manufacturing N/A

Indonesia 1-4 (household) 5-19 employees 20-99 employees <US$5M sales

Japan < 50 (retail firms) <100 (service firms) <300 (manufacturers) <¥300M (manufacture)

Korea < 10 (service firms) < 50 (manufacturing) < 51-300 employees N/A

Malaysia < 150 employees < US$ 6.6M sales

Philippines < 99 employees 100-199 employees < P60 million assets

Singapore < 200 employees < SIN$15M assets

Taiwan <50 employees <200 employees <NT$100M turnover

Thailand <50 employees 50-200 employees < 100M Baht assets

United States <500 employees <US$5M sales

Vietnam < 30 employees 31-200 employees <D 4 Billion assets

Russia 1-5 employees 10-49 employees 50-249 employees Varies by industry

New Zealand < 19 employees


Problems with Definition of SMEs

Source: Productivity Commission (2013)

Measure Threshold Legislation/Agency Purpose

Employees <15 Fair Work Australia Unfair dismissal & redundancy

<20 Australian Bureau of Statistics Statistical reporting

<20 Reserve Bank of Australia Business liaison

<100 Workplace Gender Equality Act 2012 Equal Opportunity Laws

Turnover <$2 million Australian Taxation Office Taxation

<$3 million Privacy Act 1988 Privacy Laws

Assets <$50 million Australian Prudential Regulation Authority Prudential supervision

Loan size <$1 million Australian Prudential Regulation Authority Prudential supervision

<$2 million Reserve Bank of Australia Analysis of financial conditions

Legal structure Unincorporated Reserve Bank of Australia Analysis of financial conditions

Transaction <$3 million Australian Competition & Consumer Commission

Collective bargaining

Wages Varies by state Payroll tax Taxation

Gaming Machines<15 AUSTRAC

Anti-money laundering & counter-terrorism financing rules.


Amongst the 31 countries of the OECD, SMEs comprise:– 99% of all firms, approximately two-thirds of all

employment, and over 50% of all value adding.In APEC they provide employment for the majority of people and contribute strongly to exports:

– The weighted contribution of SME exports to GDP is about 12%, almost double the contribution in OECD countries.

SMEs have different levels of importance to different economies:

– Over 80% of all employment in Taiwan and Greece, 53% in UK, 40% in Malaysia and Indonesia.

– In Singapore they provide a flexible skilled product base and help attract Multinational Corporations to the Singapore economy.

Small firms are important


SMEs are important within their national economies.

Source: OECD (2010)


Business in Australia by size

©Mazzarol 2017 all rights reserved Sources: ABS (2015) ASBFEO (2017)

Nano (non-employing)

60.6%

Micro (1-4 employees)

27.5%

Small (5-19 employees)

9.3%

Medium (20-199 employees)

2.4%

Large (200 + employees)

0.2%

99.8% of Australia’s 2.12 million firms are SMEs and the majority (88.1%) are micro-enterprises


If Australia had only 100 businesses


Source: Australian Small Business Commissioner (2014)

In terms of size:• 1 would a large company• 1 would be a government

agency• 2 would be not-for-profits• 6 would be small to medium

firms• 90 would be micro-enterprises


Australian SMEs role in employment


Australia’s SMEs employ around 68% of the national workforce not including self-employed nano-business owners

Small firms44%

Medium firms24%

Large32%

Proportion of Australian workforce employed by firm size 2013-2014


Australian SMEs role in value added


Australia’s SMEs contribute 56% of all value added = the increase in the value of goods and services as a result of business activity.

Share of value added by firm size 2013-2014

Small firms33%

Medium firms23%

Large firms44%


Australian SMEs role in value added


Australia’s SMEs contribute 56% of all value added = the increase in the value of goods and services as a result of business activity.

Share of value added by firm size 2013-2014

Small firms33%

Medium firms23%

Large firms44%


Australian firms by annual turnover


Only 140,834 firms out of more than 2.12 million businesses in Australia turned over more than $2 million per annum in 2016.

Annual turnover by firm size 2016

7%

33% 34%

26%

$2M+ $200K to $2M $50K to $200K $0 to $50K

Turnover


What really is a small firm?


Standing alone Operating with limited resources High levels of uncertainty High levels of external dependence Being closer to the customer Coping with ‘total’ responsibility Managing a wide range of tasks Greater scope for individual dominance and

responsibility Managing networks with suppliers, customers,

accountants, lawyers, bankers etc. Wide scope for change and flexibility Culture rather than system pull the business

together Strategic awareness, but little formal planning

process

Smallness means greater emphasis upon:


Needs of small firms


• Major problems facing Small Firms (Bolton, 1971)

– Financial management– Marketing – securing new business– Production – scheduling and purchase controls– Human resources – organization & delegation– Physical resources – technology & IT

• Small Business Problems in Australia (Sensis, 2016)

– Lack of work/sales – Economic climate– Cash flow / Bad debts / Profitability– Paperwork / Bureaucracy– Competition– Costs / Overheads

Sources: Creedy & Johnson (1993); Sensis (2016)


Myths about small business


• Failure Rates– Only 3-3.5% actually fail

• People enter small business to make money

– Most start firms for other reasons– Desire for autonomy is high

• Regulation Costs High– Compliance costs are a problem but

not critical burden• Cost of Debt

– Banks are willing to lend– Cost of Capital 7 times higher than

for larger firms• Owners happy to be ignorant

– Average training expenditure is $250 p/a but owners will training if offer is good


Other issues


• Fosters innovation & entrepreneurship – SME as innovators

• Exports– Only 3% export

• Specialised products & services– Niche marketing

• Support to big business– Suppliers and customers

• Enhances marketplace competition– Required for a healthy economy

• Decentralisation– Important for regional development


Advantages of small business ownership


• Independence– Be own boss– Work as you wish– Use your talents better

• Financial opportunities– Obtain better pay– Invest for the future

• Job security– Create a secure future?

• Family employment– Employ children or relatives

• Challenge– Follow a dream or market opportunity– Prove your worth to the community


Disadvantages of small business ownership


• Sales fluctuation– Irregular sales can make business cash

flow patchy• Income fluctuation

– Income can be unsteady and less than wages

• Financial losses– Business failure can be dramatic with loss

of home etc.• Increased responsibilities

– Hiring and firing staff or dealing with customers

• Laws and regulations– Compliance costs are high (GST)

• Stress & uncertainty– Cannot predict your future– Long hours of pressure


Small business development


Launch (Getting Started)

Survival (Making a

Living)

Consolidation (Making a

Profit)

Early Growth (Moving from

the operational to strategic)

Team Building & Delegation

Team Based Development

Source: Hall (1992)


Growth cycle of small firms


Stage 1 Stage 2 Stage 3 Stage 4 Stage 5Start-up Survival Growth Expansion Maturity

Size

Age of BusinessYoung Mature

Decline

Contained

Contained

Decline

Fold

FoldCrisis

Crisis

Crisis

Crisis

Source: (Scott and Bruce, 1987)

Source: Scott & Bruce (1987)


Three types of small firm


Lions:Growth focused, dynamic & innovativeSeeks Partnerships, new markets &value added products or service. Is notprice driven.

Mules:Satisfied with slow steady progress.Does not embrace change willinglybut can do well in a stable environment.Usually die in harness.

TurkeysLack clear focus & direction. Price driven, with little interest in newideas or external environment.Generally short life span.


Dynamics of a healthy SME sector


10% Premium SME

70%Steady State SME

10% vulnerable SMEduring recession

10% Cease trading

MarketDevelopmentpotential

LIONS

MULES

TURKEYS

Land of the LivingDead

BlackHole ofDeath


Characteristics of vulnerable businesses


• Low Margin– Insufficient profitability

• ‘Cut-throat’ competition– Too many low price competitors

• Price sensitive markets– No ability to charge a premium price

• Local markets– Little opportunity to grow

• Low wage – Too few financial returns for owners


Business failure


• However:– Only 3% actually ‘fail’ (bankruptcy)

– Most simply decide not to continue trading

– Failure is more common in first 3 years

– More common in some industries than others

• manufacturing less volatile than services due to entry-exit barriers

Business failure can be defined as a halt of operations.

William’s data (1982) indicates that a new small business has these approximate probabilities:

• 82% chance of surviving beyond 6 months• 52% probability of surviving for 2 years• 39% probability of surviving for 3 years


Australian firms births and deaths

©Mazzarol 2017 all rights reserved Source: ABS (2016)

Over a five year period the “churn” rate of entries and exits was about the same, the average % change in the total number of firms was minus 0.1%.

Business entries and exits 2011-2015

(100,000)

(50,000)

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2011-12 2012-13 2013-14 2014-15

Entries Exits Change


Survival rates of new firms in Australia

©Mazzarol 2017 all rights reserved Source: ABS (2016)

The chance of a new start-up business surviving beyond five years is around 50%.

Survival rates of start-ups in Australia, 2011-2015100%

74.3%

59.2%

50.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011-12 2012-13 2013-14 2014-15


The main causes of failure in small business start-ups


• Underestimation of the start up time• Under capitalisation• Overestimation of the market size• Lack of expertise by management• Lack of working capital• Confusion of cash flow over profit• Wrong location of the business• No Unique Selling Point• Recruitment of the wrong people to staff it• Failure to monitor the business

performance• Failure to retain profits in the business to

fund growth


Key success factors


• Management ability• Management ability• Management ability• The existence of a suitable business

opportunity – a product– a niche, and – a marketing orientation.

• Good product or service• Use of outside advisers• Adequate capital and credit• Modern business methods


SME versus large company


SME• Informal relationships• No divide between planners &

doers• Appointments & promotions

based on family or friendships• Everyone prepared to ‘muck-in’

as needed• Open communication flows

Corporation• Formal relationships• Divorce of planning from doing• Qualifications used as basis for

employment & promotion• Clear job descriptions• Structured communications

systems


Other differences with large firms


• More female owner/managers• Managers have fewer qualifications• Fewer unionized employees• Operate for fewer hours each week• Less likely to use TQM, QA, JIT methods• Less likely to access government assistance• Less likely to have a business plan• Less likely to export• Use less equity financing• Less likely to want to grow bigger• More likely to close or be sold off


Small business policy


• Requires a dual track approach focusing on:

– Individual owner-manager skills development– Industry development

• Attention needs to be given to:– Start ups and early stage ventures– Established firms with growth potential– Habitual ‘portfolio’ entrepreneurs are key

• Needs of Owner-Manager include– Business planning, marketing support, product

R&D, venture financing• Needs of Industry Development

– Mapping industry supply-chains and networks– Identify emerging industry clusters and facilitate

growth

SME Policy Framework

Business enabling

environment• Regulatory framework (laws, tax & regulation)

• Business infrastructure (communications, utilities & transportation)

Business development

services• Information & advisory services

•Small business training

Finance• Debt & equity financing• Micro-financing• Access to credit• Banking regulations

Entrepreneurial culture

•Entrepreneurship courses

•Business incubators•Niche groups (e.g. women, indigenous & youth)

• Information & publicity

Innovation & technology

• R&D and science policy• Technology transfer• Technology incubators• Science/Technology parks

• IP laws & QAMS• e-commerce

Market access• Trade fairs• Export advisory support• Export promotion• Supply chain access & clusters

• Product quality improvement

Entrepreneurship Policy centric fields

Small Business Policy

centric fields

Source: Mazzarol & Clark (2016)


OECD Recommendations

©Mazzarol 2017 all rights reservedSource: OECD (2010)

• Encourage Entrepreneurship Cultures– Foster entrepreneurial culture via

media, business support, education system.

• SME and entrepreneurship framework conditions

– Remove unnecessary barriers to new venture creation (e.g. tax reform, IP rights).

• Firm dynamics– Remove market entry and exit barriers,

particularly where market power is concentrated.

• Access to finance– Bridge the finance equity gap for small

firms via reforms to venture capital markets.

• High-employment growth firms– Encourage fast growth, knowledge

intensive sectors via support to university spin-offs, spin-ins.

• Innovation in more SMEs– Focus on incremental, non-technological

innovations designed to boost competitiveness of small firms.

• Knowledge transfer– Foster technology transfer via science parks,

business incubators, licensing of patents.• Workforce skills development in SMEs

– Enhance workforce skills development via better access to vocational training and consultants.

• Entrepreneurship skills development– Enhance management skills of SMEs via

improved access to small business development courses, business planning, leadership and financial skills training.

• Social entrepreneurship and social innovation

– Foster social enterprise and innovation via legal, financial and fiscal policies to encourage social entrepreneurship.


Small Business Policy



Group Discussion

Working in teams

• Discuss the nature of SMEs within the national economy and their characteristics and problems.

• How might government policy assist the small business sector?

End of Presentation

Documents

Small Business Management MGMT5601 Topic 1: The role of ...€¦ · 8 4 July Topic 8: Assisting the small firm to grow Chapter 8 9 11 July Topic 9: Small firms and human resources