Success Factors of Small Business Sector - Term Paper Example

Success Factors of Small Business Sector Success Factors of Small Business Sector Introduction Small enterprises are defined in a different manner by different nations and the definition even differs in the context of sector. The State Bank of Pakistan defines the sector of small enterprises as an establishment which employees less than 10 workers and is not publicly owned and controlled (Smeda, 2007). On the other hand Small enterprises are defined by the European Union as organizations that contain less than 50 employees and experience a turnover of less than 10 million Euros (European Commission, 2013). Similarly, India defines small businesses as those organizations that have invested over Rs. 2.5 million in the business to purchase machinery as well as plant for the business (Charantimath, 2006, p.331). No matter how these nations define small enterprises, it is commonly believed that small enterprises are important for a nation’s economic growth and are even considered as the backbone of the nation and certain nations have even started to depend on this organization to help them survive the recession recently experienced by the world. For example: In Pakistan the small business sector is responsible for employing more than 70% of the individuals who work in non-agricultural organizations and these organizations contribute to 30% of the GDP of the nation (Gcu, 2013, p.2). Similarly, Small enterprises have played a major role in the economic growth of UK; it has provided UK with innovative goods and services and has provided employment to a major portion of the labour force of UK. The current size of SMEs in UK is 3.7 million and they contribute to 40% of the GDP of the nation (Lim, 2010, p.6). Small enterprises throughout the world has experienced huge amount of growth, and no matter how different regions define SMEs, the factors that have been considered critical for the success of the sector have remained the same. The factors that have been significant in the success if the small enterprises throughout the world includes the experience and the owner’s age, the educational background of the owner and the employees, the number of hours for which the organizations remain operational, the dependency level of the businesses, the effectiveness of the planning of business and how well the business has accepted technology. Body How Success is measured Whether a business is operating in a successful manner or is failing is dependent on several factors, Watson and Everett states that these factors include: kind of industry, owner’s experience of business, the locality, magnitude, and life of the organization and the obstacles that are restricting other organizations from entering the industry (Watson, 1999, p.7). Watson and Everett used the life of the business to measure how successful a business is. This means the success of the business was determined by how long the business has been able to survive. The main methods through which business are determined as successful include the share of the business in the industry or the market, how profitable the business has been and the sales turnover of the business. According to Wasilczuk, it is very complex to measure the success of a small business and a small business’ success can be measured through objective and subjective methods (Wasilczuk, 2000, p.89). Objective measurements are regarded as hard information as it is directly impacting the specific goals and objectives attained by businesses. These measures are quantifiable in nature, for example: the amounts of goods produced by an organization can help in determining how productive an organization is. Subjective measurements methods are soft in nature as these measurements are dependent on characteristics that are hard to quantify and complex to study. Foster asserts that organizations that are earning more than its competitors in the same industry are mostly those that have remained in business for a longer period of time and they have passed through the initial stages of business life cycle and are continuously increasing the sales turnover (Foster, 1992, p.125). Factors Owner’s Age The age of entrepreneurs varies, certain entrepreneurs are younger and others are older, the reasons due to which businesses are started even vary, certain people start it as a hobby and transform it into a heavy profit making organization. According to Heck, successful owners of a business are quite old and are highly educated (Heck, 1995, p.101). He stated that it was a common belief that entrepreneurs are older in age because they have passed through the hassle of being an employee and have ended up as entrepreneurs as they aged. This was found to be incorrect, Heck figured out that business owners who have become old, prefer running their own business instead of working for other organizations. Heck ended up figuring out that several individuals who own a business have been operating their business for several years and have gained tremendous amount of experience that they gained over these years. Thus they concluded that the owner’s age had a direct impact on the success and performance of any particular organization. Educational Background Successful business owners are found in two categories, certain amount of them is heavily educated and certain are not even educated to the high school level. Education is considered an integral characteristic of entrepreneurs as education enables them to tackle different problems in different manner. According to studies conducted by Heck, business owners who are educated have the ability to operate their businesses in a successful manner and have the ability to generate higher level of profitability (Heck, 1995, p.47). Education has been considered as an important factor for the success of the organization, but it is not the central factor. Employees who turn into entrepreneurs attain ample amount of expertise and knowledge in a specific field and then open their business and apply learned expertise to their own businesses to operate it successfully. Operational Hours It is stated that the more hard work and time is invested in a business, the more successfully the business operates. The time factor has been one of the reasons of success of small businesses. In recent years, small businesses have started operating through internet. This has enabled them to keep operating throughout the day and remain in constant touch with consumers. Due to 24/7 operations, small businesses have attracted a lot of consumers and have succeeded. Foster stated that organizations that are operational on the basis of full time end up earning more money than those that operate for a limited amount of time (Foster, 1992, p.130). This means that business owners who invest huge amount of hours in their business end up attaining more favourable results. Work Experience There are several entrepreneurs who enter a business after working for different organizations for several years and they are indulged in several organizations as employees and have experienced organizations pass through different stages of business lifecycle. After obtaining enough experience, entrepreneurs open their own business due to several reasons such as need and family commitments. There are even business owners who have zero amount of experience and have started operating a business in any particular field and these businesses end up experiencing failure because they do not have sufficient amount of experience to apply to their own business. On one end are those successful business individuals who obtain education and start running a successful small business and on the other end of the paradigm are those who obtain experience and then use their experience to operate successful small businesses. Legal Status Small enterprises are privately owned businesses and the owners/managers of the business enjoy limited liability, this means that owners loose what they have invested in the businesses if they fail. This kind of legal requirement encourages many to pursue small businesses and the profits earned from taking limited amount of risks are quite high and thus the owner enjoys heavy amount of profits as compared to those firms that are large in size and have huge number of owners. Harhoff conducted a research on organizations located in the region of Germany and figured out that organizations that enjoy the legal status of limited liability have experienced growth at an average and similar results were obtained by Leicht and Godwin when they conducted similar studies in the areas of US and UK (Harhoff, 1998, p.1328, Woldie, 2007, p.7) . Technology Organizations of the 21st century rely heavily on technology to operate in a successful manner. Several technological advancements have been experienced by the business world and these technological advancements have positively impacted different operational areas of a business. For example: social networking has assisted businesses to market their goods and services on global level. Similarly online education has provided people working within the organization to obtain education while working in organizations. These technological advancements have even assisted business owners in obtaining novel competencies and have provided them with a competitive edge over their competitors in various fields. Technological advancements have helped businesses by transforming complex tasks into simple tasks and decreasing the amount of time required to conduct these tasks. The amount of time that these technological advancements have saved can be used in other areas of business, especially the area of strategy creation and implementation. Ariss asserted that organizations that adopt technological advancements experienced increased rate of production and elevated performance levels (Ariss, 2000, p. 15). He further figured out that these advancements help in saving the cost of the requirement of labour that is skilled, increase the productivity of employees, and leads to decrease in the amount of time wasted due to stoppage and accidents. Planning of Business A business is a reflection of an idea that the owner himself had and was later pursued in the shape of a business. Immense amount of planning is required to ensure that an idea shifts and travels from being just an idea to a business. Business plans created by owners are even important for businesses in order to obtain financing for businesses and it is even created to construct a budgeted route map through which a business should pass to attain success. It was asserted by White that under current economic conditions, business plans are a necessity for the owner. They even figured out that the success of a small business relies heavily on planning and it should be a continuous process. Conclusion Different nations have defined a small enterprise differently and the definition of small business sector even varies from industry to industry, but the success factors for all small businesses are the same. These success factors includes: experience, age and education of the owner, the plan of the business, the legal status of the business, adoption and implementation of technology and technological updates and how long the business operates. The importance of these factors in the success of a small business even varies, in certain cases; certain factors have a higher role to play and vice-versa. References Ariss, S. S., Raghunathan, T. S., & Kunnathar, A. (2000). Factors Affecting the Adoption of Advanced Manufacturing Technology in Small Firms. SAM ADVANCED MANAGEMENT JOURNAL. 65, 14-21. Charantimath, P. M. (2006). Entrepreneurship development and small business enterprises. New Delhi, Pearson Education. European Commission (2013) Small and medium-sized enterprises (SMEs) What is an SME?. [online] Available at: http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm [Accessed: 14 Jan 2013]. Gcu. (2013) SME DEVELOPMENT IN PAKISTAN: ISSUES AND REMEDIES. [e-book] p.2. Available through: http://www.gcu.edu.pk http://www.gcu.edu.pk/publications/vc-sme.pdf [Accessed: 15th Januray 2012]. Harhoff, D., & KöRting, T. (1998). Lending relationships in Germany: empirical results from survey data. London, Centre for Economic Policy Research. Heck, R. K. Z., Owen, A. J., & Rowe, B. R. (1995). Home-based employment and family life. Westport, Conn, Auburn House. Lim, C. (2010). Risk management in small - medium enterprises (SMEs): How does risk management in small - medium enterprise (SMEs) contribute to the companys financial performance? [München], GRIN-Verl. Orser, B., & Foster, M. (1992). Home enterprise: Canadians and home-based work. [Abbotsford, B.C.], The Committee. Smeda.org (2007) SMEDA - What is SME Definition?. [online] Available at: http://www.Smeda.org/index.php?option=com_fsf&view=faq&catid=3&faqid=48 [Accessed: 14 Jan 2013]. Wasilczuk, J. (2000). Advantageous Competence of Owner/Managers to Grow the Firm in Poland: Empirical Evidence. JOURNAL OF SMALL BUSINESS MANAGEMENT. 38, 88-94. Watson, J., & Everett, J. (1999). Small business failure rates: choice of definition and industry effects. International Small Business Journal. 17. Woldie, Atsede, Leighton, Patricia, & Adesua, Adebimpe. (2011). Factors influencing small and medium enterprises (SMEs): an exploratory study of owner/manager and firm characteristics. Business Perspectives. http://hdl.handle.net/10369/2701. Read More