MBA Sample Term Paper on Problems & Prospects of Small Business
January 8, 2012 3 Comments
Course Name: Business Research
1.1 Back ground
Small businesses are the heart of the market-based economy with their business operations in rural and urban areas of developed and developing countries. In —–, small business enterprises are playing a significant role by contributing to the production and services, employment and thereby to GDP. But these are found to face severe competition and different types of constraints. As a result, these have not achieved substantial growth. In view of this, the present study is primarily aimed at identifying factors and obstacles that influence the growth of SBEs. Finally, the paper suggests some policy measures which are expected to excel the growth of SBEs.
1.2. Objective of the Study:
The principal objective of the present study is to identify obstacles to the growth of small business in —–. To achieve this prime objective, the study covers the following specific objectives:
1.To determine the factors influencing the growth of Small Business in —–
2. To find out the major obstacles to the growth of Small Business in —–
3. To suggest some measures including policy implications for overcoming the obstacles.
1.3 Methodology of the Study:
The present study is empirical one. Both primary and secondary data have been used for the purpose of study. First, 120 entrepreneurs of 6 categories were purposely selected so as to make it sure that the person is and has the knowledge and experience of an entrepreneur and executive. Respondents having both these qualities were expected to have the capacity to answer the questions correctly. Then questionnaire schedule was prepared in the light of objectives of the study. Primary data have been collected through direct interview method by interviewing the owner cum chief executives of selected SBE’s. For secondary data, the existing published textbooks, magazines and research works concerning this area, relevant publications of Government and related organizations were reviewed. The data and information collected have been processed and tabulated manually. Statistical tools namely average, percentage and chi-square (x2) test where relevant have been used in the study. The data have been analysed carefully & critically in order to make the study more informative and useful to the concerned people and agencies-Govt. and Non-Govt. who are interested in this field.
1.4 Limitation of the study:
There are some limitations in every analysis. I have also faced problems at the time of collecting and analyzing relevant data.
- The time frame-work did not permit me and to make my work done in a very scientific manner and also it is very difficult for researcher to make a comprehensive qualitative survey with in a very short period of time.
- I have faced enormous problems while constructing data’s because these are not well-organized.
Section One: Small Business
- According to Small Business act1934,”A business which is independently owned and operated and not dominant in its field” is a Small Business.
- Bolton Report on the commission of the inquiry on Small Business firms, 1977,”Small firm is one that has a relatively small share profits market.”
- Stoner, Freeman, & Gilbert, 1995, “Small Business refers to business locally owned and managed, often with very few employees working at a single location”.
- USGovernment, “A Small Business is one with fewer than 500 employees.”
According to executive committee for national economic development,”A Small Business one of which process at least two of the following characteristics:
- -Managers are the owners,
- -Capital supplier and the owner is individual or a small group,
- -Worker and the owners are local, market may not be so.
- -Relatively smaller compared with the biggest unit of the industry [Sales, employees etc.]
From all of the above definitions we can make a general definition of Small Business. A business not dominating in its field, does not engage in any new marketing, workers are local, working at a single location, produced units are relatively small in size, and often all organized by the owner or his family members.
Now-a-days there are a lot of Small Business firms are operating in verity of fields. We get our daily necessaries from the grocery shops. One takes food from a restaurant or from a first food shop. Some shops are selling cloths, books, electronics etc. Hair cutting saloon, laundry, automobile and electronic mechanic, travel agent all of them are serving us in different ways. A doctor, engineer or a lawyer give us different consultation services.
Some other definitions:
Curtis E. Tate, Jr. and his co authors in their book “Successful Small Business Management” (1982) define small business as “An organization with a name, a place of operations, an owner, and one or more workers other than the owner.”
The Federal Reserve Bank of USA says small business is one which “is independently owned and operated but is not dominant in its field.” In the Small Business Act of 1953, the US Congress gave the same definition of small business.
Definitions in the Context of —–:
“Small industry means an industrial establishment or unit which is rum mainly by hired labor and not using mechanical motive power but does not normally employ more than 50 workmen and whose land, building and machinery does not exceed Tk.150, 00,000 in value in either case.”–E. Pakistan Small Industries
Corporation Act of 1957.
Characteristics of Small Business Enterprises:
There are many characteristics of small business. Some of which are described in the following paragraph:
Unity of Individuals and the Organization
The strength of small business is that individual employees retain their personal identities, yet support the unity of the organization. Employees understand and commit themselves to corporate objectives.
High Individual Motivation
Individuals are highly motivated for further exertion and organizational development. Though pay for performance is a principal motivator in a small business, comfortable and social life related workplace plays a role of the social motivator.
Owners as Managers
In most of the small businesses, owners are responsible for managing the firm. The employees are hired on owner’s discretion. Owners are responsible for taking any and all management decisions.
With simple and petit structure of the organization, good and effective communication are maintained with and among employees. This keeps the organization more susceptible to changes in the business arena.
Supportive climate for Organizational Integration
Management including supervisors keeps close relations with subordinates. They offer training, encouragement and counseling to subordinates for problem solving. Employees are provided with challenging and enjoyable workplace.
Positive aspects of Small Business
The small business has many advantages over its larger counterparts. It does not have access to huge resources, numerous employees strong financial backup, or the professional management of the big businesses, but it does posses some distinct advantages that are only its one. Because of small percentage of income that goes for overhead and non-revenue-producing activities, there are still some functions that can be performed more efficiently by small business enterprises than by large ones.
Small business helps entrepreneurs develop as an individual and expand their personal abilities. Their growth might have been hampered had they been employed under the guidance of a supervisor in any other organization. Ambition also motivates entrepreneurs and makes them hang in there.
Provides self employment opportunities
Small business helps people provide job for themselves. Sometimes employment opportunities are limited in big industries. There are losing big firms that are frequently cutting back, closing plants, and laying off people. This creates unemployed people in society who are otherwise capable of performing various jobs. The area of small business can provide a much-needed source of new employment. This shows the important contribution the smaller firms are making to their respective notional economics.
Large corporations often lack the flexibility of small business because of the complex organizational structure, established bureaucracies, and high overhead costs. Decision making in the small business frequently depends on only one or two persons. The management and the workforce in the small business may be more adaptable to change than those of the large corporation. They can react more quickly to changing market conditions or to modify a product for a customer more easily than could a large business.
Better Inter-personnel Relationships
Both managers and staff in the small business are treated as individuals. Managers are given freedom and decision-making and provided with variety of responsibilities. Staffs are encouraged to innovate there by reducing boredom in the workplace. Lines of communication are direct between owners and employees.
Small businesses give its owners the liberty or independence to come go as they please. Owners of small business enterprises have a degree of freedom that are not customary for managers in most big corporations this freedom encourages self-motivation. Often this freedom of small business owners means the right to work harder and longer hours than they would if they were employees of big business. However, the psychological and financial satisfaction arising from enterprise ownership is powerful rewards for the risks of going into business for oneself.
As the owner of the business does all in all in that particular concern, the owner does decision-making mostly. So the decision is taken relatively quickly because he or she does not have to discuss other people or superiors to take the decision.
Problems of Small Business & Situation Leading to Formation of Small Business
Disadvantages of small business:
The small business has their share of disadvantages too. These disadvantages have multiplied in the current years due to increased management problem in recent years.
Inability to cope with growth
Sometimes, the factors that are advantageous to small business turn in to serious disadvantage when it is time to grow. Growth often requires the owner to give up certain authority. Similarly, growth also requires specialized management skills, which the owner may lack.
Effective and efficient management is very important for the smooth running of any kind of business. A new businessperson often has the knowledge and skill to produce a good but will lack the necessary kills of planning organizing, staffing, directing and controlling. Yet the small business owner is often forced to become a generalist in management since he or she can’t afford to employ a specialized person having necessary managerial skills. Also they do not give the subordinates enough responsibility to manage.
Shortage of working capital
Shortage of working capital is the most predominant limitation of small business. For this limitation, they cannot take the advantage of economics of scale. They cannot take the advantage of discounts given for bulk purchases. This leads to the inability to cope up with their larger competitors in new facilities, equipment, tools, and methods.
Lack of coordination
Another disadvantage is the lack of coordination between production and marketing. That is the failure to balance and coordinate these to critical functions. It is important for small business to keep judicious balance among:
Having too few products so that the orders of potential customers have to be turned down.
Having too big inventory as to bear too much inventory and maintenance cost. Diversifying too fast. The advantage of diversification and the advantages of product specialization should be balanced.
Lack of effective selling techniques
Small businesses usually don’t have the access to specialized person at marketing. So, they lack in scientific market research, specialty advertising and personal selling. As a result sales are comparatively lower than the larger enterprises. Location of the head office and the accessibility does affect the sale to certain degree.
Situation Leading to Formation of Small Business:
The formation of small business is a result of certain situational advantages it enjoys. These advantages help small businesses to be a part of any economy. Apart from relaxed government policy, the followings are the situations where small businesses have an edge over their bigger counterparts.
Introducing new product or idea
There is always a risk involved in introducing a new idea or product. In case of a radical innovation, market reaction and consumer acceptability need to be tested. It is therefore, preferable to introduce the product through a small firm, which ensures less risk factor on investment.
Having a Local Market for the Commodity offered
In certain form of business, operation in a larger market is not economically viable. For instance, it will not be economical for a restaurant to sell its product to a large market. Such scale of operation exceeding the local demand would cause inefficient use of resources. Therefore, a small firm does better in a small-scale.
Availability of Limited Market
When the market is limited, small business is the best choice. In a monopolistic competitive market there is little possibility to grab a substantial market share. In such case, small business offers better returns.
Section Two: Case Studies (Opinion of some entrepreneurs)
While preparing this essay we had to go to a couple of Small Business firms. We ask them several questions about the problems they usually face in launching and operating a Small Business firm. There answers were quite a bit similar. But they talked about several of problems. We came to know about the common problems faced by Small Business firms in —–. We went to:
1. ‘—–Kraft’ – a boutique and fashion house,
—- Shopping Complex,
The person we talked with: ———–
2. ‘ Zamdani Sharee manufacturing and retail house,
The person we talked with: ————–
3. ‘——com’ – a cyber cafe and software developing firm,
The person we talked with:
4. ‘—————- a firm for broiler chicken,
The person we talked with: ———–
For better understanding we will present this section in a different way. We made a questionnaire and the above persons answered these questions. The questions were as follows:
1) How did you manage your capital?
2) What problems do you face in collecting raw materials?
3) Is political instability affecting your business?
4) What is the effect of our social insecurity on your business?
5) Do you have any problem in distribution and transportation?
6) How do you manage labor problems?
7) What technique do you follow to increase sell?
8) What is your future plan?
Their answers are going to be discussed now:
Our first question was about collecting capital for the business and we got most frustrating answer on regarding this question. Three of the above four had to collect their capital from personal financing source.
They used their personal deposit and then borrowed from their friends. For example Mr ——- from ‘—–Kraft’ just hates commercial banks as a source of financing. He started his fashion house a couple of year back. At first he took the position of that shop and had only ninety thousand taka in his hand at that time. Then he applied for the loan. Bank officials answered positively and told him to decorate the shop to make it attractive to the customer. He then decorate the shop by a famous interior designing firm spending the rest of the money he had in his hand and borrowing some more from the friends. After decoration the bank officials deny to give him the loan saying that the place chosen for the shop is not very appropriate for a fashion house. It was totally unexpected to him and he got a great shock. He felled in a great problem that he already spent his entire fund hoping to get the bank loan. “I can’t even sleep at night thinking for the money. I need to refund the loan I took from my friends. But I don’t had nothing in my hand” said Mr. —–. Then he sold his motorcycles and some of the home appliances he used personally. He also had to sell some of his land in his village. After that we all know the rising story of ‘Key-Kraft’. Now it is a leading fashion house of the city. It enjoys a turnover of more than two million taka per year and it is receiving a more than ten percent of increase in sale each year. At —– we got totally a different story. Mr. —— recieved a loan of twenty thousand taka from ‘——- Bank’ —— branch. He had his own land there and established a broiler firm. Now one can go there to hear his success story. He repaid the loan in time also. The rest two Small Business firms we visited did not respond positively about a loan from the bank. They had to finance from their personal fund. But all of them told about this capital problem and identified it as the major obstacle for this sector.
We found the problem for raw material is the second major problem that a Small Business firm face, identified by Mr. ——. According to him this is actually the basic problem for all Small Business firm concerning agricultural production. He personally suffers from very instable supply of food for his chickens. It is not possible for a farmer to produce the food for his chickens as well as producing egg and meat. He must depend on somebody for chick food. “Sometimes I don’t know what to feed my checks next morning”. Though he is willing to pay quite a handsome amount of money for these but there is no sufficient supplier for this. It is a very disturbing problem for Mr. —– also. He needs sufficient quality thread to make a ‘Sharee’. But in this sector everything is against them. He never get the thread in time. As it needs a different kind of thread to make a ‘Zamdani Sharee’ it is not possible to by available thread from market. He must depend on limited suppliers and sometimes on the government. Very often he doesn’t get the supply and there is nothing to do but stop the production.
All the Small Business firms we visited identified political instability as the third obstacle to Small Business development in —–. It is not possible for them to run the business in this condition. Mr. ——- said that his 1300 chicken died in the 1995.That time his business was new and it was a very big loss for him. Mr. —– told very angrily about problems from political instability in his business. His business is depending on customer service. No customer no profit. Here is no chance to produce a good and sell it later. In ‘Hartal’ he cannot open the shop and so a great loss. As he bought twelve computers for the browsers it needs a big fixed cost. If this condition goes on he may be declared as a bankrupt. He is an example that how an enthusiastic entrepreneur can become a bankrupt by a bad system. The rest two also complained about this unhealthy condition.
Last June Mr. —— had to stop his fashion house for 22 days. This is all about the social condition of —–. “Every month I need to pay around ten thousand taka to various toll collectors”, said Mr. ——-. This happens so often that it is no more an abnormal matter to us. Now a days we call these illegal too collectors as ‘Chandabaz”. Mr. —— had to pay around 50 thousand taka to these gunmen at the beginning of his business. “These people are making our life hell”, said Mr. ——. “They take several thousand taka each month, moreover sometimes they take costly ‘Sharee’ without any payment. “We people are trying to protect them as much as we can but it is not so easy a job”, said Mr. —— from whom some gunmen took 50 chicken for their picnic last January.
About transportation Mr. —— has a lot of complain. Sometimes his chickens die before reaching to the city. ‘Zamdani Sharee’ also suffers from lack of transportation. Labor affair is another problem. Skilled labor is a basic need for a Small Business firm. Mr —— told they suffer from this problem very much. It takes a couple of month’s time to train up a obis labor. But after learning period many of them leave the job without any prior notice. It is very disturbing. Sometimes a few labors try to interfere about the internal management and about the production. This is really unexpected. As giant companies can do the Small Business firms cannot spent a lot of money in advertising. They emphasis on personal selling. This sector doesn’t get much exposed for their product.
The last question is about the future plan. Here we were a bit surprised that none of them could tell us about a definite future plan about their business. All of them uttered some common words saying that I will try to increase sale and expand my business. From them Mr. —– told about an interesting plan that he would try to make his ‘Zandani’ the most exportable item of —–.
Section Three: Common Problems that our Small Business firms face
Section Three: Common Problems
As we got some real life idea now we will try to find out where the problems actually lie. In —– there are a lot of Small Business firms but all of them can not succeed in their business. It is very hard to operate and make a business profitable here. It is also not very easy to start a new Small Business firm. In this part we will try to identify the key problems that a Small Business firm faces in its establishment and operating period.
The major problem a Small Business firm faces in its establishment period is the problem for capital or sufficient financing problem. The key to a Small Business success rests mostly on the ability of the entrepreneur to raise adequate amount of fund for infrastructural development as well as meeting the day-to-day working capital needs. One of the first questions any potential entrepreneur must ask is, “How do I get the money”? The type of the business may be anything but the money necessary for finance is must. Without necessary fuel (money) no ship (Small Business firm) can run. Plant or fixed asset, financial needs include purchasing land and buildings, machinery and equipments, furniture, vehicles etc all of these require a huge amount of money. In a country like —– it is not very easy to arrange a satisfactory capital to buy all these. As it is about Small Business, there is no chance to raises the capital from share market. Only personal and family funds and personal loan from the friends are major source. But in this way it is very hard to raise a sufficient amount of capital.
As we use to see Bank as a financing agent, it is very normal to think that one can get a loan easily from the bank. But the true story is far from this imagination. It is really a hard job to get a loan from a commercial bank for a Small Business firm. It is almost impossible for an inexperienced entrepreneur to manage a loan from a commercial bank. There are a lot of formalities and paper works need to be completed to get a loan. If any one wants to apply for a loan he must show some influential guarantor, a certificate of citizenship, character certificate, certificate of previous business experience, a letter of permission for the business from authority etc. with the application paper. Sometimes it is also necessary to make (?) please the associated officials of the bank. All of the work needs to be done before getting the loan. After doing all these no one can assure about the loan to be sanctioned. There are some other inner story too. Actually banks and other financial institutions are not really interested about giving a loan for a Small Business firm. But they are ready to help the BANKRUPTS.
There are some other sources for finance – micro credit by NGO, charitable foundation, bond, Small Business financial bank, trust company, mutual fund etc. From all these except NGO none of them have any good record of financing Small Business. But there are some problems with NGO. Although they claim that they have a very high percentage of returning loan back but its only the one side of the coin. The other side says quite different a story. Sometimes they distribute loan to very much needy entrepreneurs in a high rate of interest. It is also often said that some NGOs practice some unfair way to get their loan back. They create much pressure to refund the loan. Sometimes they take away personal property of the loan receiver on force if he is unable to pay back the loan. A few debtors even got suicide enabling to refund the loan.
Lack of necessary raw material is another problem. Everyone need run and run for raw materials. Here we don’t have a definite supply chain of raw materials and the producers. Entrepreneurs are ready to pay necessary money for it but there is no unstable supply. Sometimes there is nothing found when necessary, sometimes all are very high in price and sometimes adequate raw materials are in the market and it is more than necessary.
Another major problem of Small Business development in —– is lack of necessary government planning’s to up this sector. 31 years already have been passed after our independence. But still today we suffer from sufficient planning. Company and Small Business is very different. So this sector needs a special attention from the government. The procedure of distributing loan is not very easy. Still there is no plan that how many Small Business firms is to be financed each year. Government finished their duty by installing a few training center for potential entrepreneurs. But the central controlling is inadequate. There is nobody to monitor the whole activities. No one to suggest that how many entrepreneurs should be trained for what.
Every business needs some power supply and some other public utility services. Electricity, Gas, Water, Telephone etc. are some prerequisites for a business. In —– only the sufferer know how tough it is to get those connections. You need to pay a handsome amount o bribes to an invisible hand. In case of telephone you might have to wait for more than years to get connected. All these hazards are hampering the Small Business sector in —–.
Political and social instability is another big problem. Whether it is a giant company or a Small Business the success of a business is greatly dependant on the political and social stability of a country. Every business firm is dependant on production or purchasing and selling. This is the blood stream of a Small Business firm. If any of these two is stopped no Small Business can exist. It is possible for a giant company to stop all its operations for a couple of months and then start it again. But a Small Business firm can not do this. In —– our political and social climate is not stable at all. There is a condition of pre-war between the ruling party and the opposition. Always they are face to face with each other. Very often they call ‘Hartal’ and strikes. Such a loss can not be sustained. In the period of 1991-1996, 173 days of ‘Hartal’ have been called in total. It was140 in 1996-2001 sessions. This is almost impossible for a small business firm to continue its operation in such a condition. They can not sustain this loss.
Now a day’s terrorism is becoming the cancer of —–. Above discussed political instability is the reason for it. This terrorism is also hampering this Small Business very much. Toll collectors are very daring and create pressure on the businesses to collect illegal tolls. As the Small Businesses already suffer from lack of financing it is similar to death to them when they have to please the toll collectors. There are terrorists and toll collectors all and everywhere in —–. If one tries to launch a Small Business firm he needs to pay these tolls in a number of places. Otherwise those people may stop its operation and sometimes more. One need to pay for it while buying or constricting a house, purchasing raw materials, transporting to the factory, selling a good; in all places. There are also weekly, monthly or special tolls in any religious festival one need to pay. Terrorists are becoming daring day by day. In recent times they kidnap entrepreneurs and businessmen if they don’t get the money. This condition is a serious obstacle for the development of Small Business in our country.
Now let’s have a look at some internal management problems of Small Business firms. From any giant company to a cottage shop good management is a must for success. It is a challenging job to manage a Small Business firm here as they need to compete with giant companies. Management people should know all the arts of management. In our country higher study on business management is a new concept. Bachelor degree in business administration is being awarded form IBA for eight years. So a lot of management personnel of Small Business firms are without any formal management study. They are not capable of managing, specially a Small Business firm. They cannot take appropriate decision in the right moment. These under trained people create a lot of problems.
- -Cannot identify target market or target customer.
- -Does not plan.
- -Believes advertising is an expense not an investment.
- -Only primary knowledge of pricing policy and strategy.
- -Cannot identify trading area.
- -Cannot delegate.
- -Believes loan would solve every problem.
All these problems are usually created by an unskilled management people. And it is it is more that skilled people are not available in the market.
Another common problem of Small Business development in —– is the problem of distribution of goods. It is natural that a new product needs to go through a strong completion from other similar products. Small Business firms suffer from lack of distribution as they cannot compete with the giants. Another point is about our customers. They are very conservative and very much brand loyal.
These are the major problems that our Small Business firms usually face while operating.
Section Four: Suggestions to Improve the Small Business Sector
Here we are giving some suggestions that may be helpful to improve the Small Business sector in —–.
As capital is the major problem for Small Business development in —– special emphasis should be put here. Commercial banks should finance Small Business by giving them loan in low-interest and for long-term.
- NGOs are very active in this sector. Their activity should be spending all over the country.
- Government should make definite plan to boost up this sector. Youth development department should be more activate. Their fund needs to be increased and rules should be more flexible.
- Special ministry can be made to coordinate all this.
- Government can give some subsidies to boost up this sector.
- Taxation rules should be more flexible for Small Business.
- It should be assured that the Small Business firms will get sufficient raw materials in lower cost.
- Political and social instability should be maintained. Terrorism must be sustained and keep under control.
- Red tapism must be abolished. Corrupted officials need to be punished and replaced.
- It must be assured that the Small Business firms will get public utility service connection without any delay and bribe.
- A syndicate can be made to help the entrepreneurs and to support this sector.
Section Five: Conclusion & References
As we discussed all these it is clear that there are a lot of problems that Small Business is facing. It has many positive effect and some drawbacks too. We cannot build some giant corporations like Microsoft or Sony Electronics overnight. But we can launch a Small Business firm easily. We can employ a number of unemployed people in this sector. In today’s super market’s and giant corporation’s world as Small Business is still alive and transacting thousands of million of taka each year it can be said that Small Business firm can take a very important role in our economic development. So in my opinion the prospect of Small Business in —– is very bright.
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