TOPIC 2: SMALL BUSINESS Introduction This topic introduces the learner to the concept of Small Business.

Objectives After going through this topic you should be able to: Define a Small Scale Industry, Ancillary Industry, Tiny Unit, Small Scale Service And Business Enterprises [SSSBEs], Women Enterprise and Export Oriented Unit. Differentiate Between The Traditional and Modern Small Scale Sector Explain the Nature and Characteristics of SSIs Examine the Role of Small Business in National Economy Describe how Small Industries act as Seedbed of Entrepreneurship Your Learning Activity: Core Task Read the topic notes introducing the concept of Small Business and participate in the discussion in the topic discussion forum.

Assessment The discussion will be graded. Discussion 1. List the advantages that a Small Business has over a Large Business 2. In your view is it important to develop ancillary units? Give reasons. 3. Differentiate between a Modern SSI and a Traditional SSI. 4. Define a SSSBE and give some examples of such enterprises. 5. Write a short note on Small Business as seedbed of entrepreneurship.

TOPIC 2 NOTES SMALL BUSINESS You have learnt about the close linkage between entrepreneurship and economic development in topic1. The Small Scale Sector is the natural habitat of entrepreneurs. Most entrepreneurs start small and then nurture their units into large industries. The SSI Sector provides an opportunity for them to sharpen up their skills and talents, to experiment, to innovate and transform their ideas into goods and services needed by the society. Over the last six decades the Small Scale Industry sector has emerged as a highly vibrant and dynamic sector. It has acquired a prominent place in the socioeconomic development of the country. Mostly this sector exhibited positive growth trends even during periods when other sectors of the economy experienced either negative or nominal growth. Today this sector accounts for 95 percent of the industrial units, provides nearly 80 percent of manufacturing employment and contributes around 35 percent of exports. It produces thousands of items and provides employment to quite a number of people. It is a well-recognized fact that a vibrant small-scale sector holds the key to economic prosperity in an economy like Kenya. CONCEPT AND DEFINITIONS In most parts of the world the nomenclature used is Small and Medium Enterprises (SMEs) and the criteria for defining include the number of employees and the turnover. The Small Scale Industry evokes different meanings for different agencies and the financial institutions. For example for the purpose of Excise and Sales Tax Exemption, the turnover alone is the determining criterion. However in broader terms, currently, an SSI is defined in terms of investment ceilings on the original value of installed plant and machinery. WOMEN ENTERPRISES A Women Entrepreneur's Enterprise is termed as an SSI unit/industry-related service or business enterprise, managed by one or more women entrepreneurs in proprietary concerns, or in which she/they individually or jointly have a share capital of not less than 51 percent as partners/shareholders/directors of a private limited company/members of a cooperative society. NATURE AND CHARACTERISTICS OF A SMALL BUSINESS Small-scale industries have certain unique features which distinguish it from the Large-scale sector. Some of the salient characteristics of small-scale businesses are given below. 1. Personal Character: In most small businesses the owners themselves are managers and so they can operate independently. 2. Flexibility: Since most small businesses are a one-man show they do not have to go through a hierarchy to get permissions to make changes. Small business can respond quickly to environmental trends. Quickness and alertness are some of the characteristics that allow small entrepreneurs to understand market conditions and rapidly respond to changes.

3. Labour Intensive: Small businesses have tremendous capacity for employment generation through their labour intensive techniques. Small businesses actually create more jobs than big businesses. This feature of a small-scale unit is of great significance in a country like Kenya where the number of unemployed people is phenomenal. 4. Local Area of Operation: Small businesses are largely local in operation; however the market for its products may be local, regional or even international. 5. Short Gestation Period: The capital investment in the small sector is generally low and the time taken for production to commence is also less. As a result of short gestation period the units give quick returns and consequently the pace of economic development quickens. PROBLEMS OF SMALL BUSINESSES While the small entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the vagaries of the market, they have to face many problems like the following: 1. Paucity of Finance: The small entrepreneurs possess a weak financial structure and find it extremely difficult to obtain credit because of lack of collateral security. This acts as a big handicap, especially in the initial stages, in most of their operations like their ability to hire the best workers or to purchase the latest machinery and equipment or to acquire sophisticated technology. 2. Poor availability of power and other infrastructure: Though infrastructural bottlenecks are problems for big businesses too, yet they can overcome these problems to some extent because of their financial strength e.g. generating their own power, or even influencing the government in framing its policies sometimes. The small entrepreneur on the other hand has to battle with them. 3. Obsolete Technology: Most small businesses use old technologies because they cannot afford better. As a result the quality of their goods is inferior and the cost of production is higher than in case of other big ventures. This has acted as a serious handicap especially after opening up of the economy when they have had to compete with imported goods. 4. Marketing Problems: The small entrepreneur cannot supply standardized goods of high quality and as a result cannot compete with products of large companies or MNCs. They usually do not have a brand name or loyalty, as there are hardly any funds for advertising or sales promotion. All these increase their marketing woes.

5. Poor Managerial and Organizational Skills: usually the entrepreneur has to perform a multitude of diverse functions invariably without having any exposure to professional education or formal training. The large sector on the other hand can hire the best qualified and trained people. 6. High Incidence of Sickness 7 out of 10 small businesses usually fall sick and die within 3to5 years. Main causes for this are a wrong choice of product, poor managerial skills, lack of experience, poor quality of products because of the use of old technologies, etc. Apart from the above-mentioned problems the small entrepreneur has weak bargaining power to deal with suppliers and financial institutions, has to face bureaucratic red tapism and is unable to invest in Research & Development. After the opening up of the economy the small sector has been finding it extremely difficult to compete with the high quality goods available in the market. ROLE OF SMALL BUSINESSES IN NATIONAL ECONOMY Small business has played a very crucial role in transforming the Kenyan economy from a backward agrarian economy to its present stature. Its benefits range from creating job opportunities for millions of people, including many with low levels of formal education. It has nurtured the inherent entrepreneurial spirit in far flung corners of the nation resulting in the growth and development of all regions. It has been instrumental in raising the standard of living of the multitudes. The small scale sector has contributed specifically in the following areas: 1. Employment Generation: The SSI sector in Kenya is the second largest manpower employer in the country next only to the agriculture sector. K e n y a is characterized by abundant labour supply and is plagued by unemployment and underemployment. Under these circumstances the smallscale sector is a benefit

2. Low Initial Capital Investment: Another feature of the Kenyan economy and most of the developing economies is the scarcity of capital. The modern large- scale sector requires colossal investments whereas the small sector is just the opposite. Not only is the employment capital ratio high for the SSI but the output capital ratio is also high. 3. Balanced Regional Development: Dispersion of small business in all parts of the country helps in removing regional imbalances by promoting decentralized development of industries. It helps in industrialization of rural and backward areas. It also helps to reduce problems of congestion, pollution, housing, sanitation etc.

4. Equitable Distribution of Income: This is a natural corollary of the above. When entrepreneurial talent is tapped in different regions and areas the income is also distributed instead of being concentrated in the hands of a few individuals or business families. 5. Promotes Inter-Sectoral Linkages: SSI units are supplementary and complementary to large and medium scale units as ancillary units. Many small units produce sub-parts, assemblies, components and accessories for the largescale sector especially in the electronic and automotive sectors. 6. Exports: The most significant contribution of the SSI has been in the field of exports. There has been a significant increase in the exports from this sector of both traditional and non-traditional goods including jewellery, garments, leather, hand tools, engineering goods, soft ware etc. 7. Development of Entrepreneurship: Small business taps the latent potential available locally. This way they facilitate the spirit of enterprise, which results in overall growth, and development of all the regions and sectors of the nation. SMALL BUSINESS AS SEEDBED OF ENTREPRENEURSHIP Small business is the natural habitat of an entrepreneur. They are really found in Giant Industries. Small businesses provide goods as services as well as serve as a nursery of entrepreneurial and managerial talent. Initially the capital investment in small ventures is nominal and the technology used is low, so it becomes easy for first time entrepreneurs to set up a venture. In the beginning usually these ventures are a "one man show" where the entrepreneur looks after the myriad functions of production, marketing, finance, legal etc. The entrepreneur gets a chance to increase his knowledge, skill and competence. He takes decisions independently and it is in these circumstances that entrepreneurial talent blossoms. In developing economies it is through a large number of such small enterprises started by these imitator entrepreneurs that a chain reaction is set into motion, which leads to cumulative progress. It is pertinent to note that nearly 70 percent of the total innovations in the world have come from the Small Scale Sector. Many of the big businesses today for example, Siemens, Ford, Eastman Kodak, Lever Brothers, Reliance, Nirma, Rasna were all started small and then nurtured into big businesses. Small business mobilizes small savings, taps the latent entrepreneurial talent across regions and provides a platform for them to develop and fine-tune their

entrepreneurial spirit. In the process the entire country benefits in the form of goods and services and higher standard of living.