Small and Medium Enterprises - Essay Example

1. EXECUTIVE SUMMARY Small and Medium Enterprises (SME) have a special role to play in any economy. They actually form the foundation of business and employ a sizable population. They may not gain prominence like the Multinationals but without doubt they are the backbone of the economic welfare of the country. The Singapore SME enjoys a special place. It not only provides the bulk of business, it also engages a major portion of the workforce. Its contribution to the GDP is significant. The reason for this eminence is that Singapore is a nation state without any natural resource and therefore depends entirely on its human capital to survive and prosper. The SME in Singapore is supported largely by the Government but it fails to get the financial support that would have helped it scale new heights. Capital is always shy to support the new entrants especially that are small in size. The Singapore SME has made up for this deficiency by way of its entrepreneurial skills and abilities and has entered the International arena seeking resources it could not get at home. They have realized their potential and will be doing better in the future too. The paper also mentions four SMEs that have been awarded with recognition for their various abilities as a proof of the resilience of the small and medium enterprise in Singapore. 2. INTRODUCTION Singapore presents a paradox. It is a one nation state that has enormous prosperity but still ranks among the developing nations of East Asia. It is devoid of all natural resources, dependant on imports and yet has a high GDP and an astonishing per capita income. It has only two resource; human capital that has been exploited to the hilt and has catapulted it to its present eminent position. Its labour is qualified and with political stability the system is successful. The second is the port of Singapore; it is Asias largest harbour and is used as a trading hub by numerous Asian countries. Singapore has no agriculture and it relies on four major industrial/trading activities; electronics (60% of non petroleum exports are electronic products), petrochemicals (20% of industrial production), Information Technology (IT) and logistics. Biotechnologies and pharmaceutical industry are becoming prominent as Greenfield areas. The country also has a financial sector that is world class. As a result it has attracted a fair share of small and medium industries (SME) that contribute to is economic growth. 3. SITUATION/ INDUSRTY ANALYSIS Small and Medium Enterprises (SME) play a major role in any economy. They also employ a high figure of 50-60% of the labour force of the country (Luetkenhorst 2004). This fact contributes greatly to their support of the general economy in providing livelihood to a vast number of the population, even in countries like Singapore. Here they sustain a majority of the working population as well as provide sustained assistance to the larger companies. The Singapore definition of an SME is a company that has minimum 30% local equity with assets not exceeding S$15million and with a limit of 200 employees. There are approximately 103,000 companies in Singapore that fall under this categorization. They account for 92% of the country’s businesses and employ a healthy figure (51%) of the total workforce. These SMEs make a significant contribution to the economy in Singapore: with the manufacturing sector accounting for 15% of GDP, commerce contributing 11% and the service industry accounting for 17% of GDP. However since the economy is dependant largely on only in four sectors viz., petroleum products, electronics, information technology and logistics, the field is rather overcrowded and there are not many other avenues for the entrepreneurs to diversify. This restricts their prowess and only the fittest are able to achieve significant success. But the enterprising founders of new SMEs are now looking ahead at the global markets and are making a foray into new areas, especially in the emerging markets of China and India to offer their expertise and skills. The Singapore Government is well aware of this and has extended its support to them through its institutions. The drawback for these SMEs is however in the area of finance. Banks do not offer financial support unless one has a track record of at least three years of proven service and profitability. This makes it difficult to survive the initial period and many an enterprise fails. Yet each year the number of SMEs grows to show that there is resilience in entrepreneurship. The next greatest challenge the SME faces is the local competition and 67% of those surveyed confirm this (SME Development Survey 2006). Tis is due to the small home market. The situation is much better when they move to other countries. 4. LITERATURE REVIEW The SME is essentially an entrepreneurial venture and making decisions is considered as a personal domain by an entrepreneur and he dislikes delegation of authority in this area. If strategic decisions are to be made professionally this becomes the most difficult stage for the owner-manager as they have to let go of their power and control over key resolutions that they always made (Timmons 1994). There is an alternative proposed by Kuratko and Hodgetts (1995), Burns and Dewhurst (1989), Churchill and Lewis (1983), and Tyebjee et al (1983), as an option available to the owner-manager. They propose the development of managerial skills in the entrepreneur himself. In practice however there are not many takers of this practical suggestion as by nature the entrepreneurs are arrogant and self-centered. They believe that they are masters of their own art and any further training is abhorrent for them. However, respecting the fierce independence of the SME Megginson et al (2003) believe in the owner-managers’ ability to plan and suggest that it is imperative for future growth and survival of the business venture that they plan for this as well. Another factor that put the SME’s under financial pressure is their need to offer credit terms to their customers. As suggested by Hall (1995) this phenomenon could put a great strain on the cash flow of the business. Among the variables that increased internalization by SME’s the most common are small domestic market and the unique knowledge or technology possessed by them and the attraction of variety of alliances and relationships available in the host country (Freeman et al 2006). At the same time they have also identified lack of economies of scale, shortage of financial and knowledge resources and dislike to risk taking as main deterrents for smaller, newly internationalized, firms. But Buckley (1989) has argued that owner-managers of such small companies may very well take greater risk takers than other types of decision makers. He expounded that there are two significant relationships between firm size and market size. The smaller firm faces closure or bankruptcy when many small firms try to capture a small market. It is equally difficult for a smaller firm to face competition from larger rivals where the optimal scale is large. In such situations the smaller firms can fill the role of a niche player in the market and this becomes a major advantage. This competitive advantage offers the opportunity to go International. SME’s have limited resources and this leads them to look for international alliances (Coviello & Munro, 1992) and in turn this offers them growth opportunities (Brush 1992). This is the way to managing international risk and SME’s are attracted to it despite their small size (Shrader et al 2000). This brisk internationalization of new and small ventures is an important anomaly but quite unlike the expansion of the Japanese keiretsu model (Dunning, 1993; Johanson & Vahlne, 1990), where small firms operate as totally dependent suppliers to large, established, multinational corporations. In Singapore’s case the SMEs are quite independent although they may forge alliances with lager firms for mutual benefit. However the nature of entrepreneurial business of the SME is that due to their inherent inabilities and individualistic character availability of finance continues to be a constraint on the business which is typical of firms in the growth phase of the organizational life cycle (McMahon, 1998). 4. DISCUSSION The SMEs in Singapore contribute more to the business activity and therefore play a significant role in the economy. But they have great resource constraints. There is an alternative in network resources that they can exploit to overcome this deficiency. There are three inherent resources available to them; the main resource being the firm itself as it is usually found on personal experiences and knowledge base, the second being the top management team that is usually a combination of qualified personal resources and the customer or contact base that they possess an on which basis they actually start a venture. These are resources that are fundamental and have created great firms. Their education and experience also provide personal level exceptional resources. However it is their ability to take decisions that is the most likely factor in their phenomenal growth. These are the main reasons behind the healthy growth and contributions they make to the country’s economy. 6. IMPLICATIONS & ARGUMENTS Since the SMEs contribute heavily to the economy in significant ways they have a major role to play and this is evident from the excellence they have achieved in various fields. It will be most appropriate to mention some of the success stories of such SMEs to illustrate the point. There are several categories in which the SMEs are judged annually to give others incentive to improve their ranking and status. The highest ranked companies in each category are: (Overview 2004) 1 Lipico Technologies Pte Ltd is an IT solutions provider and a specialist in process technology concentrating on customer-centric solutions to the oils and fats industry. Ever since its inception in 1996, Lipico has worked on more than 130 refining plants globally, offering its expertise and service to leading refiners in the world ranging from South East Asia, China, Japan, Bangladesh, India, Egypt to European countries. The company has recently expanded its product portfolio to include bio-diesel production plants for the renewable energy sector. They have bagged the award in the category of Growth Excellence for Sales/Turnover. 2 Hytech Builders Pte Ltd is a construction company and its expertise is in the area of civil engineering, building and construction related projects. They are strong in the building of education facilities such as primary and secondary schools as well as the construction of private condominiums. They have been recognized as an SME with Growth Excellence for Net Profit. 3 Global Marine Transportation Pte Ltd operates a fleet of tankers, which transports marine fuels to vessels around Singapore and Malaysia. The company is an accredited bunker supplier that has qualified for the Singapore Standard for Quality Management Bunker Supply Chain (QMBS). This is in addition to the Code of Practice (CP 60) for bunkering by bunker tankers, implemented by Maritime Port Authority of Singapore. Global Marine Transportation has staff strength of just 31 persons. They have been declared as the best SME for Growth Excellence in Credit Ratings. 4 S & I Systems Pte Ltd is an integrated information technology solutions provider that offers enterprise infrastructure, business solutions and integration services. This is the area of the big boys of business but they have been able to break this barrier. In a short period of 10 years they have achieved International acceptance although they employ only 200 people. They have gained the markets in Asia Pacific and have direct presence in China and ASEAN. 7. Recommendations Since the short term economic survival is always the bottom line for the SME, their priority is always to go for short term solutions that do not in the end help them to survive (Luetkenhorst 2004). This vulnerability has to be addressed in order that the SME can take long term measure for not survival but growth and prosperity. There has been extensive research on the subject of financial planning in the big business context, and many principles, theories and conceptions have been developed based on these studies (Jennings and Beaver 1997). It is usual to find that in such organisations, planning has been a deliberate and well thought out and results in unambiguous clear cut policies that are designed to work towards attaining competitive advantage in the market. This termed as formalising strategies. In a marked contrast, in case of small firms, planning usually starts in the face of adversity, or emergencies, or in response to specific events in the SME’s operating environment. This then becomes an adaptive and is short term solution. The main concern is the manipulation of scarce and limited resources (Gibson and Cassar 2002; Risseeuw and Masurel 1994). In SME’s such planning is highly personalised and is usually a result of personal preferences developed out of experiences, attitudes and prejudices of the entrepreneur or the person in control of the firm (Gibson and Cassar 2002; Lyles et al 1993; Cragg and King 1988). Without doubt it is certain that formalisation can augment the competitiveness and general overall performance of the firm (Brokaw 1992; and Branch 1991). But the matter is still a subject of argument and opposing views (Mintzberg 1994). Some researchers have claimed that SME’s do not plan at all (Berman et al 1997) while others find that not only planning is a part of and SME, it contributes to its enhanced performance. Indeed Jones (1982) and Schwenk and Shrader (1993) have gone full length to establish facts about planning and resultant performance evaluations with high success rates. Other like Perry (2001) concluded after their research that it was the failed companies that did not plan and this was the main reason of their collapse. Similarly the correlation between success and planning was established by Bracker and Pearson (1986) and Joyce, Seaman, and Woods (1996) came to the conclusion that those who planned outperformed those who did not. The inherent inability of the SME to gear up to financial and strategic management is highlighted in academic literature. Jennings and Beaver are of the view that the root cause for failure as well as poor performance is due to the lack of adequate management of strategic issues and little attention paid by the owner-manager to such important issues. In yet another observation Megginason et al (2003), Kuratko and Hodgetts (1995) and Hall (1995) have categorically pointed towards lack of capital being the major contributing factor for business failure in case of SME’s. It is therefore recommended that planning is the best way to surmount difficulties. SMEs should not shy away from this and the owner/managers should take professional advise for the sake of the future of their enterprise. 8. Conclusions From the ground realities and the literature view one thing is evident that while the SME as an establishment plays a vital role in the country’s economy and offers great employment potential to its population, it is vulnerable due to lack of adequate support from institutions, especially the financial ones. The SME also lacks in proper planning and this makes it even more difficult to formalise its financial requirements. Despite this apparent drawback there is great opportunity as the SME is turning towards global markets offering its unique expertise in construction and information technology. In both these fields it can seek resources from host countries in form of joint ventures and partnerships and can thus overcome its financial constraints to some extent. The internalization advantage can be exploited by these SMEs and here is their strength as in comparison to larger firms they stand better chances with host countries as their terms are easier and their expertise in niche areas will be welcome in many quarters. Bibliography Berman, J., D. Gordon, and G. Sussman (1997). "A Study to Determine the Benefits Small Business Firms Derive from Sophisticated Planning versus Less Sophisticated Types of Planning," The Journal of Business and Economic Studies 3(3), 1-11. Brokaw, L. (1992). "The Secret of Great Planning," Inc 14(10), 151-157. Bracker, J., and J. Pearson (1986). "Planning and Financial Performance of Small Mature Firms," Strategic Management Journal 7(6), 503-522. Branch, S. (1991). "A Good Plan Is Key to Business Success," Black Enterprises 22(4), 68-70. 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