sme start-up, survival & growth

SME Start-up, Survival

& Growth

Masato Abe, Ph.D.Private Sector and

Development SectionUnited Nations ESCAP

16-19 August 2009

Day 1

Introduction

4

Objectives of the Four-day Workshop

Understand SMEs’ opportunities & challenges

Learn effective skills & techniques for SME development at both corporate & public levels

Identify effective policy options Share knowledge & experience

5

Methodology Lecture Discussion Case study Individual exercise Pair-work Group work Team competition

6

Outline Day 1

Introduction Overview of SMEs & their opportunities Business start-up Team competition on business start-up

Day 2 Team competition on business start-up Survival & development

Day 3 Team competition on business start-up

Day 4 Team competition on business start-up Business competitiveness & a guest speaker Policy options for SME development Conclusion & Prizes!

7

My Background

Merchant / farmer’s family Japanese / US business Marketing, business administration &

economics UN Asia-Pacific

What are SMEs?

9

Definition of SMEs In Asia-Pacific, typically less than 100-200

employees for manufacturing sectorCountry Number of Employees

Cambodia MicroSmallMedium

< 1011- 5051- 100

China MSME < 100

Lao PDR SmallMedium

≤19 ≤99

Myanmar MicroSmallMedium

< 1010-5051-100

Thailand(4 people per firm)

SmallMedium

< 50≤ 200

Vietnam MicroSmallMedium

1-910-50

≤99

10

SMEs’ Role

More than 90% of total enterprises 99% for China; 98% for Thailand (2003); 99%

for Viet Nam (2002) More than 60% of private sector jobs

75% for China; 65% for Thailand (2003); 77% for Viet Nam (2002)

Contributing about 20-30% of GDP 65% of industrial output (China); 47% of GDP &

55% of exports (Thailand); 20% of exports (Viet Nam) (2003)

11

SMEs’ Role (cont.)

Innovation & dynamism Graduating to large enterprises (&

multinationals) Many in the informal sector Part of the social safety net

12

SMEs’ Contributions

Malaysia Thailand Philippines Republic of Korea

Japan China Indonesia India

SMEestablishments

94 98 99 99 99 99 99 95

Employment 40 56 69 69 88 74 99 80

Value added 26 47 32 46 56 60 63 40

(%)

13

SMEs per 1,000 people

Source: ESCAP (2009), developed based on data from World Bank (2000-2006)

61.8

29.6

14.9

63.2

27.0

9.06.3

13.7

1.10

10

20

30

40

50

60

70

DevelopedCountries

Developingcountries

LeastDevelopedCountries

China(2000)

Thailand(2002)

Viet Nam(2004)

Global Asia-Pacific

14

SME Typology

Export

Domestic/LocalMarket

HighTechLow

Tech

CottageEnterprises

SupportingEnterprises

DomesticMarket-oriented

Enterprises

Export-orientedEnterprises

(Uchikawa & Keola 2009)

15

SMEs’ Typical Capacities Disadvantages

Resources Technology & knowledge Network

Advantages Flexibility Specialization (niche market)

Low bargaining power (low price & high cost) Low income (Less profit) High debt structure (high cost) Weak management (less training) Weak HR base (less salary)

16

Corporate Life Model

Profit

Years0

Start-up

Pick-up

Maturity

Decline

Discontinuation?

Grow to a large firm

Various supports needed at the different stagesLoss

Growth

17

SMEs’ Life Start-up a vulnerable time

2/3 discontinued within 5 years (USA) 40% discontinued within 2 years (UK) Approx. 40% in red after 1 year (Japan)

Pick-up Growth Maturity Decline Discontinuation / dissolution

Inheritance strategy (e.g. aged owner) Few SMEs can grow to large enterprises

18

Policy Objectives Increase the number of start-ups Facilitate their growth Increase their survival rate Foster SME graduates (to be large

enterprises) Facilitate the smooth exist of losers,

providing second (& more) chance Encourage to be incorporated

19

Challenges for Policymaking Scattered targets (high transaction costs) Lack of the economies of scale Limited public resources Limited understanding about the targets,

i.e. SMEs Limited communication channels Limited knowledge & skills

20

Key Strategies Foster entrepreneurship culture Create enabling policy & regulatory

framework Develop infrastructure Enhance access to finance Develop & transfer technology Provide business development services

Accounting, marketing, incubation, technology transfer, intellectual property right, legal advice

21

Discussion

Share your observation, view and/or experience in SME development

Any initiatives in your country? Necessary public interventions at a

different growth stage?

Start-up

23

Start-ups: Japanese experience 41.4 years old (entrepreneurs) 3.9 employees 100K US$ of start-up funds

35%: Own capital 15%: Support of family, relatives and friends 50%: Public grants & commercial loans, including public

loan guarantees Man: 84.5%; Women: 15.5% College degree or above: 33.1% 60% of start-ups achieve break-even within 15

months

Source: National Life Finance Corporation (2007)

24

Start-ups: Difficult time2/3 discontinued within 5 years (USA)

40% discontinued within 2 years (UK)

Approx. 40% in red after 1 year (Japan)

25

Start-ups: Sector Composition

Services 26% 22%

Wholesale/retailer 20% 33%

Restaurants/hotels 17% N/A

Medical/health care 16% N/A

Construction 8% 14%

Manufacturing 5% 11%

Others 8% 20%

Total 100% 100%

Japan(2006)

Thailand(2005)

26

SMEs’ Net Income in Japan

0.0

0.5

1.0

1.5

2.0

2.5

3.0

01 02 03 04 05 06 (Year)

(%)

Manufacturing

Construction

AverageServices

Retail

Transportation

Wholesales

Income before Tax / Total Sales

27

Four Success Factors for Start-ups

Entrepreneurship

ResourcesManagement Skills

Business Plan

28

Four Success Factors for Start-ups

ResourcesManagement Skills

Business Plan

Entrepreneurship

29

Success Factor 1: Entrepreneurship

The individual and/or team process of doing something new or something different to add value to the society

Risk taking behaviours for future gains Individual personality Family background Education National culture Socioeconomic development Environment …

30

Four Success Factors for Start-ups

Entrepreneurship

Resources

Business Plan

Management Skills

31

Success Factors 2: Management skills

Strategic thinking Marketing Accounting Finance HRM Others

32

Four Success Factors for Start-ups

Entrepreneurship

Management Skills

Business Plan

Resources

33

Success Factor 3: Resources

CapitalsHuman resourcesPhysical assets Intangible resources

Intellectual property Skills & knowledge Networks

34

Four Success Factors for Start-ups

Entrepreneurship

ResourcesManagement Skills

Business Plan

35

Success Factor 4: Business plan

An executable plan that details how the enterprise is going to meet its objectives

Feasibility studyMarketCustomerCompetitorSupplierFinanceetc

36

Individual Exercise: Check Points for Start-ups (1)

Assume that you are about to launch a new business

Answer the following questions

Entrepreneurship Do you really want to run business? Why? Are you confident to be successful? How?

37

Check Points for Start-ups (2) Management skills

Do you have any business experience? If yes, describe it

Have you forecasted sales, costs and profits? How?

Resources Will your family support your plan? How? Have you secured adequate start-up funds,

with both capitals and loans? How much? Have you hired adequate and quality

employees? How many? What are their roles?

38

Check Points for Start-ups (3) Business plan

Do you know customers and market well? Who are the customers?

Can you provide competitive products/services? What are they?

Have you decided where you run the business? Where?

Have you completed a business plan? How?

Share the results with a classmate

39

Four Success Factors for Start-ups

Entrepreneurship

ResourcesManagement Skills

Business Plan

40

Key Success factors in Literature (1) Entrepreneurship

Deep market knowledge Good personal characters Good ideas

Management skills General management Understanding of legal requirements (ex,

business registration) Cost reduction Cash flow HRM

41

Key Success factors in Literature (2) Resources

Family supports Adequate start-up funds Substantial own capitals Assets Technology, knowledge, knowhow Supporters (ex, Engel investors)

42

Key Success factors in Literature (3) Business plan

A unique & well developed business plan Clear corporate missions Clear strength Competitive products / services Strong customer base even before started Favourable external environment (market,

customer needs, deregulation, public spending, urbanization, change in transportation systems, technological advancement, economic boom or decline)

43

Five Steps for Start-ups

Business Idea

Feasibility Study

Business Plan

Execution

Start-up

44

The First Step: Create Business Ideas

Business Idea

Feasibility Study

Business Plan

Execution

Start-up

45

Step 1: Getting a good idea

Art of business Some useful techniques

1)Reviewing available resources2)“Negative keyword” method3)“Who x What x How” method4)Others

46

The 2nd Step: Feasibility Study

Business Idea

Feasibility Study

Business Plan

Execution

Start-up

47

Step 2: Conduct Feasibility Studies Value chain analysis

Customers Products / services Competitors Channels & distributions Suppliers Facilities Employees Advertisements Sales plan Cost structures Funding requirements

48

A simplified value chains

49

The 3rd Step: Business Plan

Business Idea

Feasibility Study

Business Plan

Execution

Start-up

50

Step 3: Develop a Business Plan A business plan is to:

Detail out the business ideas into key success factors as well as executable actions

Include the outcomes of the value chain analysis

Develop sales, supply and financial plans Apply for financial support to public &

commercial financial institutions Find any missing holes

51

The 4th Step: Execution

Business Idea

Feasibility Study

Business Plan

Execution

Start-up

52

Step 4: Execute the Business Plan

Registration & licensing Fund raising Contracts Leasing Facilities Employment Procurement Production Advertisement

53

The Final Step: Launching Business

Business Ideas

Feasibility Studies

Business Plan

Execution

Start-up

Launching Business!

Business Plan Development

A Team Competition

56

Business Plan Competition Each team, which comprises of 3-4 people, will develop a

simplified two-page business plan Any line of business & location (the simpler the better) Use US$ Free access to outside resources (Internet, libraries, MI

staff) & can consult with other teams The lecturer’s multiple roles as financial/service providers:

Governmental, provincial or tax office Business association Financial institution Business service provider (e.g. accounting, consulting,

marketing, legal matters) Two pre-appointed meetings (20 min.) with me (17 & 18

August) A 15-minute team presentation in any format (Thursday

morning, 19 August) Ranked by all participants, MI staff and me Prizes on Thursday afternoon

57

Team Formation

58

What is the Business Plan? Objectives

Detail out a business idea to workable actions Develop sales, supply & financial plans Mobilize financial support from the public and

commercial financial institutions Find any missing holes

Various users Entrepreneurs

Develop a concrete & executable plan Brush up ideas

Public & commercial financial institutions Evaluate feasibility for funding consideration Use it as a supporting document for grants/loans

Employees / suppliers Know a clear corporate direction

59

What is the Business Plan? (continued) Resources mobilization

Finance HR

Three financial scenarios Conservative Most likely Ambitious

Part of the “Plan-Do-See” process

60

Necessary Components Marketing Sales forecast Procurement Production Funding Others…

61

Marketing Plan To whom: Customers What: Products / services How: Channels & distributions;

Internet; price & sales terms; volume

Where: Country, city, area, shop By whom: Employees When: Business hours

62

Sales Forecast The most difficult part in the business

plan, especially for start-ups Uncertainty & seasonal factors Three scenarios (ideally)

Conservative Most likely Ambitious

63

Sales Forecast (continued) Different methods by sector

1. Retailer Expected sales amount per 1m x square meters

2. Services (restaurants, barbers/beauty shops) Sales per customer x No. of seats x turnover rate

3. Labour intensive sector (autosales, cosmetics, building cleaning) Sales amount per labour x No. of employees

4. Asset intensive sector (manufacturing, printing, transportation) Capacity of assets x No. of facility x utilization

64

Procurement Plan What: Materials, components,

labours, services Where: Suppliers & supply markets When: Leadtime How: Price & payment terms How much: Volume, quantity, duration

65

Production Plan (if needed) What: Products & services Where: Factories & warehouses When: Leadtime How: Methods, technology,

machineries, equipments How much: Volume, quantity

66

Funding Plan Funds needed for a start-up

Facilities & equipments (factories, warehouses, shops, machines, goods & automobiles)

Operating costs (supplies, salaries, rents, interests) – at least for 2-3 months

Funds raising Own capitals (ideally, more than 50% of total funds) Support from family, relatives, friends & others Public grants Public loans (normally collateral required) Commercial loans (collateral required) Others

Funds Needed & Funds Raising must be equal

67

Income Forecast Two kinds of monthly income forecasts

(beginning & 1 year later) Details

Revenues (most likely) Costs of products / services if any Operating expenses

Salaries Rent for facilities Others (advertisements, utilities, etc.)

Interests (5%) / installments of loans, if any Net income

Tax (25%)

68

A Simplified Business Plan Two-page business plan, widely used in Japan Two-part format

1. Business Proposal (first page) Line of business Location Start-up date Missions, objectives & business opportunity Background & experience Products & services Strength Challenges & weakness Customers, channels & distributions Suppliers (procurement)

2. Financial planning (second page) Capital requirement & funding plan Income forecast (beginning & 1 year later)

69

A Good Business Plan Two parts of the business plan (business

proposal & financial plan) are consistent Funding plan can support both initial asset

investments & operating expenses (at least initial 2-3 months)

Make business in black in 1 year Make sure adequate provision for loan

installments

70

Create a Business Idea Get a novel idea through

Knowledge & experience Copying & modifying something marketable

Three techniques1) Reviewing available resources2) “Negative keyword” method3) “Who x What x How” method

71

1. Reviewing Available Resources (1)

Human resources Natural endowment Financial assets Tangible assets Human networks Yourself Others

72

1. Reviewing Available Resources (2)

Human ResourcesExperience, educationcertificatesinterests &hobbies

NetworksSupporters,

family& friends

MoneyOwn capitalsgrants, loans

& salaries

AssetsBuildings,facilities,equipments & intellectual property

Entrepreneur

73

2. “Negative Keyword” Method

Expensive Inconvenient Lacking Late / slow Old / outdated Unstylish Confused Ugly Unsatisfactory Unreliable …

74

3. “Who x What x How” Method (1)

Examples

Customers Products / Services Channels & DistributionsX X

Femaleprofessionals

Stylish dressesHigh-end specialized shopat a prestigious location

X X

Middle agedcitizens

Healthy foodsRestaurant with low

calorie dishesX X

Pre-schoolchildren

ConversationalEnglish

Bilingual kindergartenX X

Who What How

75

3. “Who x What x How” Method (2)

Who

What

How

Young mid-classprofessionals

Affordablesecondhand

cars

Online auctionw/ quality assurance

76

Individual Exercise Come up with 1 to 3 ideas for any line of

business, which you may wish to run if you have opportunity

Use either or all three methods Reviewing available resources “Negative keyword” method “Who x What x How” method

Think twice why you like it (them) Write down your ideas as detailed as possible Discuss the ideas with teammates

77

House Cleaning Matters Time schedule Assumptions & logical reasoning Outside resources (Internet, libraries, MI staff) Consultation with other teams Two 20-minute consultative meetings per team

(17 & 18 August) My roles A 15-minute team presentation in any format with

any supplemental materials, plus a 5-minute Q&A session (Thursday morning)

Ranked by all participants Order of the presentations Prizes

Day 2

Team Competition

Survival & Growth

80

Start-up 1st 2nd 3rd 4th 5th

High

Revenue

Low

Year

SME Growth Model

81

US Venture Growth Model

Source: Kao and Liang (2001)

Sta

rtup

Ear

ly

Dev

elop

men

t

Dev

elop

men

t &

gro

wth

Tra

nsit

ion

Exp

ansi

on

L

evel

of

succ

ess

(m

easu

red

by c

ash

flow

pr

ofit

and

RO

I)

Cash req’d to stay in business

(short term)

Cash drain

Profit req’d to stay in business

(long term)

Cash drain

ROI req’d to support growth & expansion

Growth process

82

SMEs’ Growth: Four Critical Issues1. Customer development2. Human resources management3. Risk of unchanged4. Cash flow management

83

SMEs’ Growth: Four Critical Issues1. Customer development2. Human resources management3. Risk of unchanged4. Cash flow management

84

1. Customer Development (1) Competitiveness of products / services Positioning of products / services New customer development Costs of customer development Customer retention Customer satisfaction Customer relationship management

85

High

Cost

Low

SalespersonMass Media(Newspaper,Magazine,TV, Radio)Direct Mail (Mail, Fax,

Telephone)

Email, Homepage

WideTarget CustomersNarrow

1. Customer Development (2)

Trade Fair/Exhibition

86

SMEs’ Growth: Four Critical Issues1. Customer development2. Human resources management3. Risk of unchanged4. Cash flow management

87

2. Human Resources Management Hiring methods

Family, relatives, friends Word of mouth Newspapers, magazines Internet/websites Governments/local public offices Recruitment consultants Head hunting

Compensation Rewards & recognition

88

SMEs’ Growth: Four Critical Issues1. Customer development2. Human resources management3. Risk of unchanged4. Cash flow management

89

3. Risk of Unchanged Only species that adapt themselves to

the changed environments can survive ultimately (Darwin’s theory of natural selection)

Danger of unfitting to changing environments

Continuously provide present products & services may be inadequate for future survival and growth

Turnaround before declining

90

Three Useful Techniques for Turnaround Management

a. Mission analysisb. Market & Product (Service) Mix Analysisc. SWOT Analysis

91

Three Useful Techniques for Turnaround Managementa. Mission Analysisb. Market & Product (Service) Mix Analysisc. SWOT Analysis

92

Mission AnalysisIdentify the key tasks of corporate functions / human resources

QuestionsWhat is the mission of a automobile salesperson? What is his/her most important

task? What is his/her most productive

activity?

93

Individual ExerciseIdentify the key mission & task in your job

Pick the most critical activity

94

Three Useful Techniques for Turnaround Managementa. Mission Analysisb. Market & Product (Service) Mix Analysisc. SWOT Analysis

95

Market & Product/Service Mix Analysis Sale promotion

New market penetration

New product/service development

New Business

Present products/services Present MarketX

New Products/Services New MarketX

New Products/Services Present MarketX

Present Products/Services New MarketX

96

Team Exercise Conduct the Market & Product Mix Analysis

based on the business plan which your team is developing

97

Three Useful Techniques for Turnaround Management1. Mission Analysis2. Market & Product (Service) Mix Analysis3. SWOT Analysis

98

SWOT Analysis (1) Probably the most popular technique for turnaround management

Positive Negative

Internal(Strength) (Weakness)

External(Opportunity) (Threat)

X X X X

99

SWOT Analysis: A Case (1)Positive Negative

Internal(Strength)- Low cost

- Good after-service

(Weakness)- Little customer

base

External

(Opportunity)- Growing market

(aging, beauty conscious)

- Unsatisfactory products / services

(Threat)- Dominance by market leaders

Hair piece (wig for men) sales through Internet with excellent after services

100

Group work Conduct the SWOT analysis for your

developing business plan

101

SMEs’ OptionsUnchanged (risk of change)Better start from known areas

Use core competenciesSynergy with the present business

New business plan developmentMarket research for new product

/service developmentCollaborate with others

102

SMEs’ Options: Restart-up

PresentBusiness Plan

NewBusiness Plan

New Products / ServicesTurnaround, Diversification, M&A

Changing Business EnvironmentMarket maturity, changed customer needs, globalization, foreign competition

Urbanization, deregulation, less public spending, technology advancement

103

SMEs’ Growth: Four Critical Issues1. Customer development2. Human resources management3. Risk of unchanged4. Cash flow management

104

4. Cash Flow Management (1) The biggest reason of corporate failure Time gap between receivables & payables

Sales CustomerPayment

Procurement Payment tosuppliers

Receivables

PayablesTime Gap

Operating funds needed

105

4. Cash Flow Management (2) Sales terms Procurement terms Short leadtime to cashing Inventory management Sales of unproductive assets Cost reduction Risk of easy loans for operating funds

High interests Late action for fundamental change (ex,

turnaround management)

106

4. Cash Flow Management (3) Simple Cash flow forecast

107

Team Exercise (Optional) Develop a one-year cash flow forecast for

the business plan which your team is developing

Include it in your presentation in the morning of Thursday for extra credit to your team

Day 3

Team Competition

Day 4

Team Presentations

111

Order of Team Presentations Group X on “ “ Group Y on “ “ Group Z on “ “

112

Evaluation Rank 1 for the best & 5 for the worst

based on the below criteria: Creativity of business ideas Feasibility of the proposal Financial robustness Quality of the presentation

But do not rank your own team!

Post-Presentation Discussion

114

Question 1

What were difficult?

115

Question 2 How did your team solve those

difficulties?

116

Question 3 What kinds of risk or uncertainty did you

see in your and other’s business plans?

117

Question 4

What are key success factors for business start-ups?

118

Question 5 What kind of outside support are most

welcome from: Governments? Local governments (provinces/cities)? Financial institutions? Business associations (e.g. chambers of

commerce)? Business service providers (e.g. accountants,

business consultants, lawyers)? International development agencies?

Business Competitiveness

120

Determinants of Business Competitiveness Internal to enterprise

Contestable market power Capacity to respond effectively to competitors Capacity & flexibility to respond to changing

environment Capacity to create new market niches

External to enterprise Market access Access to resources Business related regulatory framework Supporting services

121

Internal vs. External

- Market access- Access to resources

- Business related regulatory framework-Supporting services

- Contestable market power- Capacity to respond effectively to competitors

- Capacity & flexibility to respond to changing environment- Capacity to create new market niches

Enterprise

122

Internal: Market Power Branding Customer loyalty Distribution channels Pricing Quality …

123

Internal: Capacity to respond effectively to competitors Substitutes for products & services Diversified product & service lines Low cost structure Flexibility …

124

Internal: Capability & flexibility to respond to changing environment The availability of key resources Capacity for process & product innovation Flexible supply chains …

125

Internal: Capability to create new market niches Marketing capability Culture of innovation Customer (or market) orientation …

126

External: Market Access Significant home markets Penetration into export markets GSP treatment Trade and investment liberalization

Regional Trade Agreements (RTAs) Bilateral Trade Agreements (BTAs) Bilateral Investment Treaties (BITs)

The establishment of foreign operations …

127

External: Access to Resources People Skills, knowledge & technology Capitals Supplies Natural endowment …

128

External: Regulatory Framework The process of business registration &

licensing Taxation Competition Bankruptcy Property & intellectual property rights Trade & investment policy Customs procedures …

129

External: Supporting Services Physical infrastructure & logistics systems General & vocational education Training services Professional services, such as accounting

& legal advice Business incubation R&D & technology transfer… …

130

Competitiveness Enhancement QDC

Quality Delivery Cost (price)

Cost saving Productivity up (input vs. output) Flexibility up New idea / new market

131

Business Competitiveness Framework

- Market access- Access to resources

- Business related regulatory framework- Supporting services

- Contestable market power- Capacity to respond effectively to competitors

- Capacity & flexibility to respond to changing environment- Capacity to create new market niches

Enterprise

QDC (Quality, Delivery, Cost)

132

Others: Business Registration & Licensing Cheaper & faster business registration Incentives to be formal

Reduce business in the informal sector Incentives needed

Access to finance Grants Training Networking Information

Effective & reasonable tax collection system

133

Others: Access to Finance Own capitals Family, relatives, friends Commercial loans Public grants Public loans Collaterals

Land registration Micro loans Angles

134

Session-end Discussion (1)What are the issues & obstacles

to improve the determinants of business competitiveness in your country?

135

Session-end Discussion (2)Share any policy initiatives in

your country to improve business (enterprise) competitiveness

136

Session-end Discussion (3)How can you react to improve

pro-business conditions in your country?

137

Session-end Discussion (4)Any cooperation with

neighbouring countries to improve business competitiveness in your country?

138

Session-end Discussion (5) What should be the role of key

stakeholders to play for SME development? Governments Financial institutes Business associations Business service providers

139

Six Areas for Public Interventions Pro-business legal & regulatory framework Supporting infrastructure Enhanced access to finance Entrepreneurship development Technology transfer & adaptation (plus

R&D) Business development services

Entrepreneur centred development strategy

140

SME Development Approaches

ADB(2000

)

APO(2007)

DFID(2008

)

GTZ(2010)

ILO(2009

)

JICA(2006)

OECD(2005)

SDC(2010)

UNCTAD(2010)

UNDP(2007)

UNIDO(2010)

USAID(2010)

World Bank(2002)

Policy and regulatory framework

Infrastructure

Access to finance

Entrepreneurship / human resource development

Technology transfer and adaptation

Business development services

141

Entrepreneur Centred Development Strategies

Entrepreneurs

Access toFinance

BusinessDevelopment

ServicesTechnology

Infrastructures

BusinessEnvironment

Feedback

Prizes!