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CH 6 - Operational Issues

This document defines and discusses small businesses. It begins by defining small businesses based on both qualitative and quantitative criteria, such as being independently owned and operated with limited staff, assets, and revenue. It then outlines the key characteristics of small businesses compared to large corporations, such as having few locations and market share. The document also discusses the advantages and disadvantages of small businesses, factors influencing their success and failure rates, and their important economic role as major employers and sources of innovation.

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57 views25 pages

CH 6 - Operational Issues

This document defines and discusses small businesses. It begins by defining small businesses based on both qualitative and quantitative criteria, such as being independently owned and operated with limited staff, assets, and revenue. It then outlines the key characteristics of small businesses compared to large corporations, such as having few locations and market share. The document also discusses the advantages and disadvantages of small businesses, factors influencing their success and failure rates, and their important economic role as major employers and sources of innovation.

Uploaded by

Key On
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 6: The nature of small business

Outline
 Defining small business
 Characteristic features of a small

business
 The economic significance of the

small-business sector
Learning objectives
 Define what constitutes a small business
 Identify the key characteristics that make

small businesses different from other types


of business organisations
Learning objectives
 List the advantages and disadvantages of
starting and operating a small business
 Outline the importance of small business in

the economy
 Explain the difference between small

business management and entrepreneurship


Definition small business
 Small business: a small-scale, independent
firm, which is usually managed, funded and
operated by its owners, and whose staff size,
financial resources and assets are
comparatively limited in scale.
 Most definitions are a mixture of both

qualitative and quantitative measures.


Generic definitions

Qualitative criteria for small business:


 Independently owned and operated
(not part of a larger corporation)
 The owners contribute most, or all, of
the operating capital (i.e. they bear the
risk and they are entitled to the profits)
 The owners make most decisions and
are not answerable to anyone else
(owner-managers)
 The business has a small market share
Generic definitions

Quantitative variables that are used to


categorise and sort businesses include:
 the number of staff
 wages and salaries expenditure
 legal structure
 total annual turnover (sales revenue)
 value of firm assets
 share of ownership that is held by the

owner/manager(s)
National definitions of small business

 The most commonly-cited definition is that


provided by the Australian Bureau of
Statistics (ABS)
 According to the ABS, there are four principal

categories of businesses:
Australian definitions
 Micro-enterprises, which employ less than 5
full-time staff (or equivalent number of part-
time positions). This includes
self-employed people who work on their own.
 Small businesses, who have between 5 and

19 full-time (or equivalent) staff.


Australian definitions
 Medium businesses, consisting of firms
employing 20–199 people.
 Large firms consist of businesses with

two hundred or more staff.

Collectively, micro-enterprises, small


businesses and medium-sized firms
are referred to as MSMEs or SMEs
(small and medium-sized enterprises).
Characteristic features of a
small business
 Usually only 1 or 2 owners
 Financing provided by the owner
 The business has limited market share
 Often has a limited life span
 Sometimes run on a part-time basis
 There is a low level of net profit
Characteristic features of a
small business
 Limited product or service offering
 Frequently is a home-based business
 Geographically limited to one or two locations
 Is often a family-based business
 Is only located in the private sector
 Involvement of women is high; specially in

developing countries
Differences between small
and large businesses
Compared to large corporations, small
firms tend to:
 Have more female owner/managers
 Have managers with fewer qualifications
 Have fewer unionised employees
 Operate for fewer hours each week –
seasonal OR part-time
 Be less likely to use formal management
improvement and planning techniques
The advantages of operating
a small business

 Being your own boss


 Can align personal goals and interests

with work
 Potential financial rewards
 Provide support/jobs/opportunities to

family members
Disadvantages of operating
a small business

 Uncertainty, ambiguity and constant


change
 Stress
 Potential for financial loss
 Increased responsibilities
 Need to be multi-skilled
Factors leading to success and failure

 Five common areas of failure:


◦ Finance
◦ Marketing
◦ Production
◦ Personnel
◦ Personal
Rashid:- Finance, marketing at initial stage
but family matters and rising cost of doing
business, labour contro at older stages
Factors leading to success and failure
 Business Exit: Any situation where a business
ceases to exist, such as firm closure,
liquidation, bankruptcy, sale or transfer to
another owner, or merger.
 Recent research in Australia indicates that

approximately 7.5% of all businesses exit


each year.
Factors leading to success and failure
 The cumulative effect is that about
two-thirds of all businesses still exist after 5
years, half are still trading after
10 years, and about one-third remain after
15 years.
The economic significance of the small-
business sector

Small firms are important to all national


economies because they provide:
 Employment opportunities
 The next generation of large firms
 Competition – many firms
 Innovation – spur innovation
 An outlet for entrepreneurial activity
The economic significance
of the small business sector
 Exports – to expand, survive
 Specialised products and services- small

niche market
 Support to big business – sub contracts
 Decentralisation (economic activity in regional

areas)
The economic significance
of the small business sector
 More equitable distribution of economic
resources, wealth and opportunities (e.g.
Japan)
 Flexibility in the overall economy
National and regional
economic significance
 Small businesses are a major economic
force in the Pacific Rim and around the
world
 45 million SMEs in APEC, representing

95% of all firms, and employing 60% of


the workforce
Entrepreneur or small-
business owner/manager?
 Entrepreneur:
◦ discovers/generates, evaluates and
exploits new business opportunities
◦ starts or grows an enterprise based on
these ideas
◦ adds value to society based on their
independent initiative.
Entrepreneur or small-
business owner/manager?

 Not all small business owners fit this


category. Many small firms do not
actively seek out new ideas or
business opportunities.
 The terms frequently overlap, but are

not always synonymous.


International definitions of small business

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