Topic 2

The Nature of Small Business

Zainon Che Mat

 Reasons for increasing interest in
small business
1. The number of small business is growing rapidly
2. Small firms generate most new private employment
3. The public favors small business
4. There is increasing interest in small business
entrepreneurship at high schools, and colleges
5. There is growing trend toward self-employment
6. Entrepreneurship is attractive to people of all ages
 Small Business
• Business is considered as small when:
– Independently owned and operated
– Owners contribute most of the operating capital
– Main decision making functions rest with the
owners
– The business has a small share of the market in
which it operates
 Quantitative aspects of the business
• The number of staff that work in the firm
• Annual wages and salaries expenditures
• Legal structures of the firm
• The total annual turnover
• The dollar value of the assets
• The share of the ownership that is held by the
owner-managers
 Small business definition
• Small business: a small scale, independent
firm usually managed, funded and operated
by its owners and whose staff size, financial
resources and assets are comparatively
limited in scale.
 General Aspects
1. Owned by just one or two individuals
2. Financing provided by the owner
3. Limited market share
4. Limited life span
5. Sometimes run on a part time basis
6. A low level of net profit
7. Limited product or service offering
8. Often home-based
9. Geographically limited to one or two locations
10. Often a family-based business
11. Located only in the private sector
 Differences between small and large
businesses
1. More female-owner managers
2. Managers have fewer qualifications
3. Fewer union employees
4. Fewer hours of operation each week
5. Less likely to use formal management improvement and
planning techniques
6. Less likely to access government assistance
7. Less likely to export
8. Less external financing
9. Less likely to want to grow bigger
10. More likely to fail
11. Differences in managerial perspectives
 Advantages & Disadvantages
1. Advantages
1. To be independent
2. Ability to fulfill personal goals and interests
3. Family benefits from establishing a firm
2. Disadvantages
1. Uncertainty
2. Financial loss
3. Business collapses, the owner may lose all he
original investment and personal assets.
 Factors leading to success and failure
• Finance
• Marketing
• Production
• Personnel
• Personal
The economic significance of the small
business sector
1. Employment opportunities for people
2. The next generation of large firms
3. Competition
4. Innovation
5. An outlet for entrepreneurial activity
6. Exports
7. Specialised products and services
8. Support to big business
9. Decentralisation
10. Distribution of economic resources, wealth, and
opportunities
11. Flexibility in the overall economy
 Differences between entrepreneurship and small
business management
Entrepreneurship
Definition The process whereby an
individual discovers, evaluates
and exploits an opportunity
independently
Firm size Large, medium or small
Degree of risk involved Very variable
Number of people involved in Can range from very small to
the business very large
Economic sector Found in private, government
and not-profit sectors
Growth focus High
Key individual Entrepreneur
Key attributes of the individual High need for achievement;
high internal locus of control;
high risk taking propensity;
creative and innovative;
growth oriented
Small business management
The administration of a small
independent business venture
Small
Small
Small
Found only in private sectors
Variable
Owner-manager
Moderate need for
achievement; good
organisational skills to manage
efficiently, no/little
innovation; moderate growth
 Unique contributions of small
business
1. Encourage innovation and flexibility
2. Maintain close relationships with customers and the
community
3. Keep larger firms competitive
4. Provide employees with comprehensive learning
experience
5. Develop risk takers
6. Generate new employment
7. Provide greater employee job satisfaction
 Why People Start Small
Businesses?
1. Satisfying personal objectives
1. Achieve independence
2. Obtain additional income
3. Help their families
4. Provide products not available elsewhere
2. Achieving business objectives
1. Service objective
2. Profit objective
3. Social objective
4. Growth objective
 What Leads to Success in
Managing a Small Business?
1. Serving an adequate and well-defined market for the
product
2. Acquiring sufficient capital
3. Recruiting and using human resource effectively
4. Obtaining and using timely information
5. Coping effectively with government regulations
6. Having expertise in the field on the part of both the owner
and the employees
7. Being flexible
 Doing an Introspective Personal
Analysis
• Analyze your values
• Analyze your mental abilities
• Analyze your attitudes
 Areas of Concern for Small
Business Owners
1. Poorly planned growth
2. Loss of independence or control
 Review Questions
• How does a small business differ from a large
one?
• In your opinion, what are the three most
important causes of business failure?
 References
• Byrd, M.J., and Megginson, L.C. (2009), Small
Business Management: An Entrepreneur’s
Guidebook, 7th edition, McGraw-Hill, Irwin.
• Scarborough, N.M. (2014). Essentials of
Entrepreneurship and Small Business
Management, 7th edition, Pearson, Global
Edition.
• Schaper, M., and Volery, T. (2007),
Entrepreneurship and Small Business, 2nd
Pacific Rim Edition, John Wiley & Sons
Australia, Ltd.