1

Millennia Institute PU1 Management of Business Business Size & Growth

1)Criteria for measuring the size of business Labour force Capital Output Market share 2)The small business Definition Characteristics Advantages & disadvantages Role of small businesses Government assistance 3)Growth of business Why grow? How they grow? i. integration (horizontal/vertical) ii. diversification 4) Economies of Scale Internal and external Economies of scale Diseconomies of scale Appropriateness of criteria to be used E.g: hi-tech industriescapital/amount of assets

Supporting role of small bizs Why some businessmen prefer to remain small Government assistance schemes: financial & setting up of govt organizations

To explain/describe forms of growth with examples Appropriateness of the form of growth for a given business What the EOS are for large businesses Problems of growing large

2
1) Criteria for measuring the size of business
The size of business is measured by: Labour force - Generally, a large firm would employ more workers as a larger scale of operations would require more labour for their departments, outlets, production of output etc Amount of capital employed - This measures the total value of all long term finance used in the biz. Generally, the larger the biz, the greater the value of capital needed for long term investment Volume of sales - The higher the volume of sales, the larger the biz - This way of measuring shouldnt be used if one is comparing between firms of different industries Amount of profits - The higher the amount of profits, the larger the biz as larger bizs have bigger profit margins Market share - Market Share = total sales of business x 100 Totals sales of industry - This way of measuring looks at the amount of market share affirm has captured, i.e. the firms sales in a product area as a percent of the total market sales in that area. - If a firm has high market share, it must be among the leaders in the industry and be comparatively large Scale of operation - Generally, the larger the scale of operation, the larger the biz Note: If a firm employs a large number of employees, it might not necessarily mean that the firm is a large firm. The firm could be a small firm could be labour intensive and engaging in primary activities. Alternatively, if a firm employs a small number of employees, it does not mean that it is small. The firm could still be a large firm but could be heavily automated.

3
2) The Small Business
What is a small business?
In Singapore, a small business is - At least 30% local shareholdings - Be a manufacturing-related or service enterprise employing not more than 200 workers - Have a fixed asset investment value of not more than S$15 million

Characteristics of a small business

1. Owner management managed and controlled by owner few employees which are normally family members there is a close relationship between owner and employees

2. Limited Capital - comes from owners own personal savings or loans from family and friends which is limited - difficulty in borrowing loans from financial institutions as small businesses cannot provide good collaterals or proven track records 3. Small number of workers - employ less than 10 workers - employees are normally relatives who have limited skills making it inefficient - Owner and employees have to multitask leading to inefficiency - Owner is usually a self-made entrepreneur who is not exposed to modern business management techniques - Owner has to play multiple roles like production manager, HR manager etc 4. Neighbourhood-Based located in neighbourhoods which it serves has regular customers easier for owner to understand the needs/preferences of the customers has a more open, friendly and close relationship with customers

5. Indispensable Owner management - only the owner knows the details of the businesss operations as he is the only one managing it - business cannot go on without him - the shop will close when he is away or the business may not be run as smoothly - successor may not continue the business as well as the owner did - therefore, the life span of a small business is short

4
6. Inadequate book-keeping no proper accounts are kept unable to determine the real profits made by the business owners may not know proper recording systems

Contributions of small firms to the country

1. Avenue for independence, innovation and entrepreneurial talent people want to be their own boss to test their talent not everyone can start a large business right away small bizes provide the platform for dynamic entrepreneurs to test out new ideas for goods and services when these bizes are allowed to grow, they can provide competition to larger bizes, help prevent monopoly from charging inflated prices

2. Provide important supporting roles to larger firms in the economy - Small firms can help larger firms by providing ancillary products like small component parts such as nuts and bolts - This enables the larger firms to specialize and concentrate on the production of the main products - This makes it cost effective and allows the firm to carry on their operations more smoothly - Small firms can also help by providing supporting services like subcontraction, repair & maintenance or cleaning services. - This also enables larger firms to concentrate on more important matters rather than worrying about these services - This contribution would attract new foreign investors which would stimulate economic development 3. 4. Provide employment opportunities more than 70% of businesses in Singapore are small businesses in Singapore, SMEs employ 51% of the workforce these businesses provide employment opportunities for many people especially the uneducated and unskilled more people would have a higher disposable income which contributes to a higher GNP and SOL Distribution outlets for products of larger firms small businesses help to distribute where large firms products are sold they assist larger firms in selling and promotion as they are retail outlets this allows larger firms to concentrate less on selling and more on production

5
5. Output and export contribution - help to boost to the total output produced by the country (GNP) - boost export volume by selling overseas as small firms make up 70% of businesses in Singapore 6. Provide competition - small firms inject the element of competition which helps to keep prices reasonable - small firms have a lower profit margin and can therefore offer lower prices 7. Make the country more resilient - small firms help to ensure that the economic activities of the country will still go on even if MNCs withdraw - the economy will not come to a standstill

Problems of Small businesses

(What is the problem? How it arises? How it affects the small biz?) 1. Unlimited Liability Most small firms are sole proprietors or partnerships Owner is fully responsible for all liabilities and debts incurred Owner may even have to involve personal assets when settling debts Owner might have great difficulty in setting debts. He may not even have anything left to recover after involving personal assets and may face bankruptcy

2. Inability to specialize operations - Since small firms cater to small markets, their activities, which are performed by a small number of employees, are on a small scale - Employees are unskilled and owner lacks managerial skills - Owner has to perform most activities, making him inefficient - Not cost effective to have division of labour and specialization - Unable to enjoy the benefits of large scale operations - Work done by gut feelings/hunches leading to unwise decisions 3. Shortage of Capital - Small bizes are usually SPs - Capital is limited to whatever amount they can raise from their personal savings and borrowings from family & friends - Small firms cannot borrow from financial institutions as they cannot provide valuable collaterals and proven track records - Small firms also are not likely to be able to plough back profits as they have a small profit margin

6
4. Inability to compete - small firms cannot compete and lose out to larger firms especially in terms of price and variety - small firms cannot offer a wide range of products with their limited number of stock - small firms cannot set good prices because of the high cost incurred - e.g. inability to take advantage of discounts arising from bulk discounts - However, small firms cannot compete on in other non-price ways - E.g. good services, ad hoc discounts, free door-step delivery 5. Restrictions in Market research - small firms are unable to undertake marketing research, making it difficult for them to understand the needs and wants of their customers well - small firms are also unable to undertake aggressive promotion due to shortage of capital. This makes it harder to attract more customers by advertising frequently 6. Lack of Continuity - small firms are not incorporated - they have short life spans as the business terminates when the owner dies or the partnership dissolves

Advantages of Small businesses / Reasons for staying small

(What is the advantage? How it arises? How it benefits? ) 1. Freedom of action - The owner can make and implement decisions without having to obtain approval or discuss with anyone - As there are a few workers, communication is direct. Therefore, they can act quickly and immediately without wasting time - this enables the firm to capitalize on opportunities 2. Adapting to local needs - small firms can understand the needs and wants of the market they serve as such firms are located in the neighborhood in which they serve - this enable small firms to decide on procedures and practices quickly to adapt and satisfy the changing needs and wants of their customers - small firms would then be able to have a good stock management system as they know what brands to order and in what quantity - an effective stock management system would improve sales as it is an effective utilization of resources

7
3. Owner Management only 1 owner manages the firm with few workers this allows full and greater control of their business operation shorter communication channels instructions are effectively and directed communicated, meaning lesser communication breakdowns instructions given faster and understanding is easier greater efficiency in running activities, meaning lesser mistakes

4. Ability to provide personalized services - customized services rendered according to the demands and requests based on customer specifications - e.g. haircut, massage, facial - rendered on a one-to-one basis directly to customer - larger firms are more interested in standardizing not customizing products are it is more cost effective - personalized services are efficient on a small-scale basis - small firms are able to customize and would not mind meeting customer specifications to gain loyalty - small firms also can provide services which large firms would not provide or charge for it - e.g. ad hoc discounts, free delivery 5. Ability to deal in perishable goods - Perishable goods like flowers, milk, meat products etc have short shelf life - As such, these products cannot be purchased in bulk and can only be small scale - As larger firms are not interested in these products as they cannot tap on bulk discounts, it is left to small firms to venture into

8
Government Assistance Schemes in Singapore for small bizes
1. Local Enterprise Finance Scheme (LEFS) - Loan scheme started in 1976 - Financing of up to S$15 million, at a fixed interest rate for the entire loan tenure - Purpose: to lend money to small industries which have growth potential - Types of loan available: Machinery Term Loan to purchase machinery Hire Purchase Factory Term Loan business premise Working Capital Loan working capital for day-to-day operations - To be eligible for LEFS, the business must: Be incorporated and registered in Singapore Have at least 30% local shareholdings Be a manufacturing-related or service enterprise employing not more than 200 workers Have a fixed asset investment value (defined as net book value of factory building, machinery and equipment ) of not more than S$15 million - With LEFS, firms can modernize and automate plant and equipment, expand existing manufacturing capacity, diversify into other product lines and/or augment working capital needs 2. Regionalisation Finance Scheme (RFS) - A low cost financing scheme designed to assist local companies to expand their operations overseas and sell in the global market to generate economic spin-offs to Singapore - Types of RFS: Purchase of machinery and equipment Purchase or construction of industrial facilities - To be eligible for RFS, the business must: Be Singapore-based Be involved in: + Overseas manufacturing and assembly operations or supporting services related to manufacturing and assembly operations in Singapore + The service sector (including trading companies) Have a turnover not exceeding S$100 million. For trading companies, turnover shall not exceed S$200 million

9
- Maximum loan quantum is 90% of valuation or purchase price, whichever is lower 3. Local Enterprise Technical Assistance Scheme (LETAS) - A scheme to help local enterprise defray cost incurred in modernizing and upgrading their operations through the engagement of an external expert for a limited period of time - Scope of assistance: Generally assistance provided is up to 50% of cost engaging external expert for an approved short term assignment depending on the scope, depth and effectiveness of the assignment Areas of work that may be supported: + Information technology systems + Quality management systems Each qualifying applicant will be supported for one LETAS project in each of the above stated project areas (this includes previous supported LETAS projects in these 2 areas) and limited to one LETAS project per year 4. BrandPact - All companies need clear branding strategies to grow - Global brands like Starbucks, SIA were once small companies but they were very clear about what they wanted their brands to stand for with clear and effective branding strategies - BrandPact is multi-agency initiative to better meet the varied brand development needs of local enterprises as they grow and expand within Singapore and into global marketplace. BrandPact will support both firm-level branding capability development as well as industry-wide branding efforts BrandPact consists of the following elements: - Brand Training Branding experts will conduct regular brand training workshops to help companies gain a better understanding of what branding is and how they can build strong brands - Brand Assessment Companies will have access to brand diagnostic platforms either with branding experts via online self help toolkits to determine the strengths, weaknesses, opportunities and threats that their brand faces and what they need to do to build a stronger brand - Incentives Eligible companies may look forward to support for brand projects which may include elements of training, manpower attachments, brand

10
consultancy, and development of marketing communications in their quest to build internal brand capabilities. Companies are invited to contact any of the administering agencies for information - Brand Resources Through a dedicated website, companies will be able to get online resources to build and enhance their brand knowledge. There will be research papers, articles and tip contributed by branding experts, a list of the brand consultants in Singapore, as well as a calendar of the various brand programmes and activites 5. Research and Development Assistance Singapore Institute of Standards and Industrial Research (SISIR) - an industrial research organization Services offered include a host of services ranging from consultancy & industrial research To quality control, standardization, technical information, product design and packaging

6. Product Development Assistance Scheme A grant scheme (subsidy) Qualifying industries include only Singapore companies with majority local ownership and firms must have satisfactory track records in manufacturing and marketing in proposed products Purpose: - to help local manufacturers develop new or improve existing products/processes related to their manufacturing activities - grant covers up to 50% of project costs

7. Skills Development Fund (SDF) - Established in October 1979 - To provide financial assistance to employers to encourage them to train and upgrade the skills of their workers - This furthers the goal of equipping workers with the necessary capabilities to sustain Singapores competitiveness and economic growth - The Training Assistance Scheme (TAS) is one of the SDFs schemes designed to encourage employers to initiate structured training and development programmes for employees. Under this scheme, training incentives are offered to employers to conduct a wide array of training and development programmes

11
- Enhanced financial incentives are also available to encourage the training of older worker. Employers get to enjoy couse fees support at up to 100% subject to a maximum of $20 per trainee per hour when they send their older workers for certifiable skills training during normal working hours. Older workers are defined as persons who are 40 years old and above and possess GCE A Level qualifications and below

12
3. Growth of Business
Although some firms remain small for reasons like retaining control, avoiding risks etc, many firms expand. For a biz to expand beyond a certain size, it must use the limited company system so that it can employ one or more of the following methods A. Expansion by increasing finance (Internal Growth) Internal Growth is the expansion of a business by means of opening new outlets, branches or shops. This kind of growth is quite slow but it can avoid problems of excessively fast growth which leads to overtrading and mgt problems A1) By issuing more shares (public limited companies) - Investors are always willing to buy shares in accompany which is making profits and which wants to grow and make yet more profits - dividends must be paid to shareholders - in the long run, shares can be more costly than borrowing A2) By borrowing - some investors prefer to take no risks, so they take up debentures instead of shares - the company has the disadvantage that it must pay the interest on loans - Banks and financial institutions also lend money to companies provided that companies can provide proven track records and valuable collaterals A3) By ploughing back profits (retained profits) - A.k.a. internal growth - additional finance can be obtained by retaining a large part of the companys profits - this would mean that share dividends would be lower - shareholders must be willing to receive lesser or no share dividends now in the hope of higher dividend in the future. However, there is the risk of no returns in future - this method does not require the payment of interest or dividends

13
B. Expansion by merging (External Growth) (Integration / amalgamation/ acquisition) External growth is achieved by merging or taking over another firm. This can lead to rapid expansion which is vital in a competitive and expanding market. However, it can lead to mgt problems and conflict Merging: joining of 2 or more firms of different size One company can merge with another by buying its shares. To gain control, it is therefore necessary to offer the shareholders enough to persuade them to sell. If the offer is made to all the shareholders at the same time and at the same price, it is known as a takeover bid B1) Horizontal Merger - this can happen when 2 companies engaged in the same stage of production (same kind of business) merge - E.g. POSB and DBS - This means bringing together the best features of each company and removing those which duplicate each other (rationalisation) - Rationalisation might bring about resistance from the workers which want job security - Consumers might be unhappy with less choice Advantages: - elimination of competition - make the biz more efficient instead of wasting resources to compete against each other (EOS) - increase market share - acquire better expertise to compete better internationally B2) Vertical Merger - this can happen when 2 companies engaged in different stages of production in the same industry merge Backward integration: - a firm merges with a firm that is at the stage of production before it - E.g. Car manufacturer merges with steel firm - Greater career opportunities for workers - Consumers can get improved quality and more innovative products Advantages: - control over quality, price and delivery time of supplies - encourages joint R&D to improve quality of supplies - firm can control supplies to competitors Disadvantages: - lack of experience in managing a supplying company - supplying firm may become complacent due to having a guaranteed customer

14
Forward integration: - a firm merger with another firm that is at the stage of production after it - E.g. Car manufacturer merges with a firm that sells cars - Workers can have greater job security as firm has secure outlets - More varied career opportunities for workers - Consumers may resent lack of competition Advantages: - business can control the promotion and pricing of its own products - a secure outlet for the firms products. May now exclude competitors products Disadvantages: - consumers may suspect uncompetitive activity and react negatively - lack of experience- a successful manufacturer does not make a good retailer B3) Diversification (conglomerates) - common for large companies to take over businesses which have nothing in common - E.g. Car manufacturer merges with a drink manufacturer - The intention is to spread risk so that if one part of the firm suffers a fall in profits, at least some of the others will prosper - More job security and career opportunities for workers Disadvantages: - lack of mgt experience - lack of clear focus and direction

15
4) Economies of Scale (EOS)
- Advantages that firm acquire as they grow in size (cost less to produce more) - An increase in scale of operations would result in reductions in a firms unit costs of production as total cost is spread over a larger output Types of EOS: Internal EOS - Cost savings that are enjoyed directly to the firm from expansion of output i. Technical EOS - benefits arising from production and manufacturing activities - better utilization of resources and plant capacity - better division of labour and specialization - better or increase in use of machinery - brings about greater efficiency = lesser mistakes = reduction in cost of manufacturing = lower cost per unit of production Marketing EOS - Cost savings in marketing activities - buy in greater bulk to enjoy bulk purchase discounts - cost of advertising and distribution spread over larger output = lower unit cost Financial EOS - benefits arising when firms attempt to raise finds - reduction in costs of financing the firms operations - able to have access to more varied forms of finance and at a lower cost - high financing at lower cost per dollar = lower cost of financing Managerial/ Administrative EOS - ability to have the expertise and specialized skills of specialists - better division of labour and specialization - higher efficiency and productivity with lesser mistakes = lower cost of admin over larger output Risk- Bearing EOS - ability to diversify and spread risks as the firm expands - spread investments in many products or biz ventures

ii.

iii.

iv.

v.

16
External EOS - gains arising from growth accrue to all firms in the industry ; irrespective of the size particular firm - include improvements in infrastructure, development of service firms etc Diseconomies of Scale - Problems arising from growth - Diseconomies set in when firm expands beyond optimal size - Due to increased problems of controlling and coordination activities in an enlarged biz E.g. miscommunication due to longer channels = mistakes = higher costs E.g. bureaucracy and red tape = slower decision-making as approval is needed = unable to capitalize on opportunities E.g. impersonal contact amongst workers and superiors, high degree of specialization and division of labour causing boredom when performing repetitive taks = lower employee motivation affecting productivity and quality adversely = higher costs of labour