THE HISTORY:Cottage Industry, CONCEPT OF SMALL BUSINESS

THE RELATIONSHIP BETWEEN SMALL AND BIG BUSINESS:The SME’S in Pakistan >>

SME Management (MGT-601)

Lesson 1

This lecture will give a clear concept of history, definition and regional concepts of SMEs. A student should

be able to understand the concept of small business, its characteristics, definitions, kinds and an overall view

of its comparison with large business.

THE HISTORY:

Recent years have seen a major resurgence of small business throughout the developed world. The countries

like divided Russia and Eastern Europe are prizing such skills very high.

The first piece of writing about the small business discovered was of about more than 4000 years ago. This

writing is about loaning from a Bank for a small business with terms and conditions. Since then, the small

business people have been the backbone of most economies providing products and services to the

consumers.

Small business flourished in almost all ancient cultures. The Egyptians, Arabs, Babylonians, Jews, Greeks

and Romans contained a substantial population of small business. Their products and services, however,

were often of poor qualities. Consumers were cheated and degraded. The result was that small business

became object of contempt. To protect the customers from such unscrupulous traders, HAMMURABI, the

king of Babylon introduced the first business laws.

Despite many successes the Greek and Roman historians virtually ignored the role of small business and

talked more about the other things. Yet it was largely through small business that the traders by doing

business in other countries spread law, religions, and philosophy and basic sciences.

In the centuries that followed the small business, the religions held small business people in low esteem.

Although now held in the higher esteem than ever before, small business remains overshadowed by

professions such as medicine and law.

When Adam Smith published "Wealth of Nations" in 1776, he was describing an economy in which local

small business was virtually being the only economic entities. Indeed, the era of local economy was the

heyday of small business.

In the undivided subcontinent if we look at beginnings of the known history of small business, the cottage

industries thrived through the period when society was organized more or less into self sufficient and self-

contained units. The sub-

Continent industry, whether small or large scale, suffered a serious set back Page during British rule. Indian

industries including small and cottage did not receive any patronage during the period before Second World

War. It was, however, since independence that a positive policy for the industrial development could be

formulated and implemented.

The best model of small industries in our region is considered to be of India. This model is defined the

SMES development through the development of infrastructure. In the year 1938 national planning

committee "NPC" was set up and its general secretary Mr. K.T. Shah made the definitions of cottage,

village and small-scale industries. The various definitions since then are in practice having different variables

as manpower, capital, assets value etc. The definitions are as under

DEFINITIONS

Cottage Industry:

The cottage industry or small scale industry may be defined to be an enterprise or series of operations

carried out only by a workman skilled in the craft on his own responsibility, the finished products of which

he markets himself. He works in his own home with his own tools and materials and provides his own

labor. These workers are mostly hand labors and having personal skills with little or no aid from modern

technology and machinery they work in accordance with the traditional technique.

In the year 1940 another Indian definition came which had a more pragmatic approach where it was

divided small industry into following categories.

SME Management (MGT-601)

1: No mechanical power and no hired labor.

2: No mechanical power and hired labor fewer than 10 persons.

3: No mechanical power but hired labor of over 10 persons.

4: Mechanical power under 10bhp but no hired labor.

5: 3 and 4 are treated here as small industries.

6: Mechanical power under 10bhp and hired labor

7: Mechanical power over 10bhp and hired labor.

Here 6 and 5 were considered as the medium size industries

Different countries defined these categories in their own way. In USA the small industry was defined as "a

business qualifies a small if does not dominates its industry and less than 100 employees"

In the United Kingdom small firms were defined in 1969 as "entities having less than 200 employees. It

should be run by its owner and should have a relatively small share of its market".

In France, it was defined as " a company with less than 10 employees, representing over 90 percent of all

businesses and employing one sixth of the total work force and they categorized it as follows:

Less than 10 employees (very small enterprise)

II.

10 to 40 employees (small enterprises)

III.

50 to 500 employees (medium enterprises).

IV.

Over 500 employees (large enterprises)

In Denmark, a small business is one with under 49 employees; a medium one has 50 to 199 employees and

large business employees over 200 people.

In Japan which is considered to be a landmark in the history of SME's the term small industry is used in a

much wider context. The term "smaller enterprises refers to such companies with a capital of not more than

five million yen, companies with not more than two hundred personnel regularly employed.

In the West Germany, Australia and Norway the definitions were made for the legal purposes and different

deciding factors were kept as landmarks.

Nowadays, a generalized definition is in practice and it says an SME entity is defined as a business with an

investment in productive assets (not including land and building) ranging between rupees 2 to 40 million

and employing among 10 to 99 workers.

SMALL: among10 to 35 employees and productive assets ranging 2 to 20 million,

MEDIUM: among 36 to 99 employees and productive assets range of rupees 20 to 40 million.

CONCEPT OF SMALL BUSINESS:

Clifford Baum back regards small business as one that is

Actively managed by its owner

Highly personalized

Largely local in its area of operation.

Relatively small in size within the industry and

Largely dependent on the internal resources of capital to finance its growth.

According to the "Committee on Economic Development" a business is small

if it meets two or more of the following criteria.

1) Management of firm is independent in the sense that owners themselves are managers.

2) Capital is supplied by ownership and is held by an individual or a small group.

3) Area of operation is local.

4) The size of the firm in the industry is small as compared to the highest unit in its field.

CHARACTERISTICS OF SMALL BUSINESS

1: Privately held small business is again subdivided into two categories.

a: Very small where chief worker is the owner like jewelry shops, shoe

stores and grocery

shops etc.

SME Management (MGT-601)

b :The Large Small business where the proprietor mainly directs the work of its employees.

2: No or few management layers

3: Style of management is personalized the owner has first hand knowledge of every move in the

business at all levels he is the main decision maker.

4: Limited resources: a small business is unlikely to have sufficient resources to dominate the market.

5: Independence: the owner has ultimate authority and effective control

6: Scope of operations: small enterprises serve a limited segment of local or regional market.

7: Scale of operation: they occupy a limited share of given market.

8: Labor: they are low in capital and high in labor, as they cannot afford capital-intensive machinery.

9: Technological innovation if available small business does well

10: Specialized skills: The small enterprises normally have specialized skills for certain specific

clients. The small business does well in small, isolated, overlooked and imperfect market.

11: Small business does well in developing markets as it can easily absorb the changes

12: Small business survives well in a bad business condition due to having quick and clever capability

of bringing changes in cost and labor.

TYPICAL SMALL BUSINESS

1: RETAILING: It's a traditional business where normally the owner is the boss and owner

2: SERVICES: such as legal and accounting, courier services and beauty parlors etc.

3: CONSTRUCTION ACTIVITY.

4: WHOLE SALE BUSINESS.

5: FINANCING, INSURANCE AND REAL ESTATE.

6: TRANSPORTATION COMMUNICATION AND PUBLIC UTILITIES.

7: MANUFACTURING.

LARGE VS. SMALL BUSINESS

1: They foster changes differently: small business fosters changes through a cycle of birth and death

whereas the large business cycle changes through expansion and contraction

2: The risk, reward and investment decisions are assessed differently in case of small business it is

personal while in the cases of large business it is made by the employee managers without livelihood

stake

3: Their economic power is different: the small business is in no position to influence its immediate

economic involvement but big business does.

4: They utilize different resources in the economy small business may use secondary resources but the

big business use most of the primary resources

5: They serve different markets in the economy: small business serves markets which big business

does not wish or cannot serve.

KEY TERMS:

1: MERCHANDISING: BUYING, SELLING AND PROMOTING GOODS.

2: ENTERPRISE: A COMPANY OR BUSINESS PROJECT OR THE COURAGE AND

WILLINGNESS TO UNDERTAKE BUSINESS PROJECTS OR A BUSINESS ACTIVITY

3: RETAILING: THE SALE OF GOODS TO THE GENERAL PUBLIC.

4: WHOLESALE: BUYING AND SELLING THE GOODS IN LARGE QUALITY FROM

MANUFACTURERS.

BOOKS RECOMENDED

1-Entreprenership and small industries by C.L. BANSAL

2-Small industries and the developing economy in India by RV RAO

3-What is an SME (UNIDO)

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