Small Business Management MGMT5601 Topic 1: The role of small firms in the economy

Transcription

1 Small Business Management MGMT5601 Topic 1: The role of small firms in the economy Professor Tim Mazzarol UWA Business School SBM MGMT5601 UWA Business School MBA Program

2 Program Structure Lecture Dates Topic Textbook chapter 1 16 May Topic 1: Assessing the business model and innovation strategy Chapter May Topic 2: Entrepreneurs versus owner-managers Chapter May Topic 3: Surviving the early years Chapter June Topic 4: The process of planning and strategy in small firms Chapter June Topic 5: Creating customers Chapter June Topic 6: Financing the small firm (Part 1) debt vs. equity Chapter June Topic 7: Financing the small firm (Part 2) cash flows, credit & working capital Chapter July Topic 8: Assisting the small firm to grow Chapter July Topic 9: Small firms and human resources Chapter July Topic 10: Franchising and legal issues Chapter July Topic 11: Buying, selling and valuing the business Chapter August Topic 12: The owner-manager and the troubled company Chapter 12

3 Introductions

4 Learning outcomes In this topic you should learn how to: 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 Mazzarol all rights reserved

5 The importance of small firms

6 Defining a Small Firm Many definitions exist, most with reference to size of employment and turnover. 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 Source: APEC 2002

7 OECD and EU Definition of a Small Firm Type Employees Annual Turnover Assets Micro-enterprise 1-9 employees < 2 million Euro < 2 million Euro Small-enterprise employees < 10 million Euro < 10 million Euro Medium-enterprise employees < 50 million Euro < 43 million Euro Large-enterprise > 250 employees > 50 million Euro > 43 million Euro Source: OECD (2004)

8 Various Definitions in APEC Country Micro Small Medium Financial Australia <5 employees 5-19 employees employees N/A Brunei < 6 employees 6-50 employees employees N/A Canada N/A <100 employees employees N/A Hong Kong <50 nonmanufacturing <100 manufacturing N/A Indonesia 1-4 (household) 5-19 employees employees <US$5M sales Japan < 50 (retail firms) <100 (service firms) <300 (manufacturers) < 300M (manufacture) Korea < 10 (service firms) < 50 (manufacturing) < employees N/A Malaysia < 150 employees < US$ 6.6M sales Philippines < 99 employees employees < P60 million assets Singapore < 200 employees < SIN$15M assets Taiwan <50 employees <200 employees <NT$100M turnover Thailand <50 employees employees < 100M Baht assets United States <500 employees <US$5M sales Vietnam < 30 employees employees <D 4 Billion assets Russia 1-5 employees employees employees Varies by industry New Zealand < 19 employees Source: APEC 2002

9 Problems with Definition of SMEs 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 Collective bargaining Commission Wages Varies by state Payroll tax Taxation Gaming Machines <15 AUSTRAC Anti-money laundering & counterterrorism financing rules. Source: Productivity Commission (2013)

10 Small firms are important SMEs are important within their national economies. 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. Source: OECD (2010)

11 Business in Australia by size Medium ( employees) 2.4% Large (200 + employees) 0.2% Small (5-19 employees) 9.3% Micro (1-4 employees) 27.5% Nano (nonemploying) 60.6% 99.8% of Australia s 2.12 million firms are SMEs and the majority (88.1%) are micro-enterprises Sources: ABS (2015) ASBFEO (2017)

12 If Australia had only 100 businesses 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 Source: Australian Small Business Commissioner (2014)

13 Australian SMEs role in employment Proportion of Australian workforce employed by firm size Large 32% Small firms 44% Medium firms 24% Australia s SMEs employ around 68% of the national workforce not including self-employed nano-business owners Sources: ABS (2015) ASBFEO (2017)

14 Australian SMEs role in value added Share of value added by firm size Large firms 44% Small firms 33% Medium firms 23% Australia s SMEs contribute 56% of all value added = the increase in the value of goods and services as a result of business activity. Sources: ABS (2015) ASBFEO (2017)

15 Australian SMEs role in value added Share of value added by firm size Large firms 44% Small firms 33% Medium firms 23% Australia s SMEs contribute 56% of all value added = the increase in the value of goods and services as a result of business activity. Sources: ABS (2015) ASBFEO (2017)

16 Australian firms by annual turnover Annual turnover by firm size % 34% 26% 7% $2M+ $200K to $2M $50K to $200K $0 to $50K Turnover Only 140,834 firms out of more than 2.12 million businesses in Australia turned over more than $2 million per annum in Sources: ABS (2016) ASBFEO (2017)

17 What really is a small firm? Smallness means greater emphasis upon: 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

18 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)

19 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

20 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

21 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

22 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

23 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)

24 Growth cycle of small firms Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Start-up Survival Growth Expansion Maturity Size Crisis Crisis Contained Decline Contained Crisis Crisis Fold Fold Decline Young Age of Business Source: (Scott and Bruce, 1987) Mature Source: Scott & Bruce (1987)

25 Three types of small firm Lions: Growth focused, dynamic & innovative Seeks Partnerships, new markets & value added products or service. Is not price driven. Mules: Satisfied with slow steady progress. Does not embrace change willingly but can do well in a stable environment. Usually die in harness. Turkeys Lack clear focus & direction. Price driven, with little interest in new ideas or external environment. Generally short life span.

26 Dynamics of a healthy SME sector Market Development potential Land of the Living Dead Black Hole of Death 10% Premium SME 70% Steady State SME 10% vulnerable SME during recession 10% Cease trading LIONS MULES TURKEYS

27 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

28 Business failure 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 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

29 Australian firms births and deaths 350,000 Business entries and exits , , , , ,000 50,000 - (50,000) (100,000) Entries Exits Change 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%. Source: ABS (2016)

30 Survival rates of new firms in Australia 100% Survival rates of start-ups in Australia, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 74.3% 59.2% 50.0% 0% The chance of a new start-up business surviving beyond five years is around 50%. Source: ABS (2016)

31 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

32 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

33 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

34 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

35 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

36 Business enabling environment Market access Trade fairs Export advisory support Export promotion Supply chain access & clusters Product quality improvement Regulatory framework (laws, tax & regulation) Business infrastructure (communications, utilities & transportation) Business development services Information & advisory services Small business training Entrepreneurship Policy centric fields Innovation & technology R&D and science policy Technology transfer Technology incubators Science/Technology parks IP laws & QAMS e-commerce SME Policy Framework Entrepreneurial culture Finance Debt & equity financing Micro-financing Access to credit Banking regulations Small Business Policy centric fields Entrepreneurship courses Business incubators Niche groups (e.g. women, indigenous & youth) Information & publicity Source: Mazzarol & Clark (2016)

37 OECD Recommendations 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. Source: OECD (2010)

38 Small Business Policy

39 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?

40 End of Presentation