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Welcome to Module I, The Small Business Environment

In this module, you will learn how small businesses contribute to the global economy. You
will learn about the factors that determine industry attractiveness, as well as the factors that
contribute to growing and managing a successful small business. You will learn about market
segmentation and the methods a small business uses to capture a particular segment. You will
also learn about the critical issues related to running a family business, including conflict
management and succession planning. Finally, you will learn how a successful small business
manages challenges.

When you have completed the module, you will be able to provide strategies to small
business clients to help achieve success and cope with challenges at all stages of
development. Your expertise in business development will help to make your institution the
first choice for the growing numbers of small business clients. Your knowledge will enhance
your reputation and increase your institution's influence in the small business community.

The module contains four sections:

Section
1 The Small This section provides a background on the state of small business globally.
Business It explains the factors that make an industry attractive to clients and the
Market traits that make a small business successful.
2 Market This section describes how the consumer and industrial markets are
Segmentation segmented and explains micro and macro-level segmentation of the
industrial market. It also explains how to capture market segmentation by
analyzing the competitive structure of an industry, market breakdown and
the stages of the industry life cycle.
3 Opportunities This section describes the advantages and critical issues related to running
a family business and the factors that contribute to success in this type of
business. It also describes the characteristics of succession planning and
the guidelines that make for a successful transition in the succession
process.
4 Challenges This section describes the challenges of running a small business,
including expansion and cash flow. It also explains the methods small
business owners can use to successfully meet these challenges.

The Small Business Market

Introduction
What You Will Learn
When you have completed the section, you will be able to explain important aspects of the
small business market to your entrepreneurial clients. This information will assist you in
helping them through the early stages of starting a small business.

Learning Objectives

At the end of this section, you should be able to:

 Explain the importance of small businesses for the global economy

 Interpret the factors that affect industry attractiveness
 Identify the traits of a successful small business

Banker's Challenge
In this exercise, you will meet Henry, a small business banker. Henry is meeting with his
client Natalia, who is starting up a small business as an interior designer. In their
conversation, Natalia poses a question about recent trends in the small business sector. At the
end of this section, you will revisit the conversation to see Henry’s response.

Think about how you would respond to Natalia’s question. When you have completed the
section, compare your thoughts to Henry’s response.

I used to work full time with an interior

design firm, but I left five years ago after
my second child was born. Now that both
children are in school all day, I’m
considering starting my own business. I
like the idea of independence and flexible
hours.

Owning your own business is hard work,

but it can be very rewarding. Desire for
independence is a key behavioural trait of
successful small business owners. They
also tend to have a high desire for
achievement and some tolerance of risk,
among other traits.

That’s encouraging! I’m definitely

motivated to succeed, and I understand
that there is a level of risk in starting my
own business.
 That’s great. Successful entrepreneurs
also tend to be resourceful and creative.
You also need business acumen and
strategic planning skills to effectively
operate a small business, particularly
during its early stages.

I’m definitely resourceful and creative, as I

have a background in interior design. What
skills do I need to effectively operate my
business?

The small business sector offers immense growth potential to financial institutions and their
bankers.

This reading will help you gain a clear understanding of the breadth and depth of business
potential that awaits you in the small business sector. This information will provide a
foundation for the knowledge and skills you will gain throughout the course.

PDF Reading: The Small Business Market

Background: SMALL BUSINESS

While there is no official definition of a small business, this sector is often referred to as the
“backbone of

the global economy.” In fact, small and medium-sized businesses are responsible for more than one-
half

of all global output and employ about two-thirds of the global workforce. Many small businesses are

family operated. Generally, however, a small business must meet the following criteria to be defined

as such:

» It must not be dominant within the industry.

» It must have no more than 250 employees, depending on the size of the country’s economy.

» It must be independently owned and operated.

» It must have annual revenues that do not exceed $5 million, depending on the size of the country’s

economy.

These thresholds are typically found at the higher end in larger economies and the lower end in
more service-based economies.
What is the definition of small business in banking?
In the financial industry, small business is defined more clearly, although the definition may vary in
the details across different institutions in different countries. Clarity around the definition allows the
institution to provide specialist services to meet the complex needs of small business owners. In
banking
terms, multiple criteria are used to define small business, including:
» Number of employees
» Annual sales
» Annual revenues
» Credit authorization amount

IMPACT OF SMALL BUSINESS ON ECONOMY

Small business has a major impact on the global economy. Virtually every type of industry is
represented
in this sector Small businesses are a major customer of the financial services community

Small businesses create jobs.

Small businesses are one of the largest employer groups in the world and this sector creates more net
new jobs than any other sector. Governments play both positive and negative roles in the small
business sector. In countries where the government supports small business and views itself as
responsible for assisting this sector, the results have been very positive. Richer countries in particular
have a larger small business sector, given the more favourable economic conditions and level of
government support. In countries where the government views small business as independent from its
mandate and more of a “private sector” issue, there are barriers that actually impede small business
growth, such as heavy bureaucracy and high setup fees.
Government policies that support small business as a whole, or at the “macro” level, create a better
environment for small business to grow and succeed. Government policies that specifically support
small businesses directly, or at the “micro” level, have not been as successful, as they have not created
an environment that provides sustainable support.
Small businesses have also benefited from the growth of e-commerce. This industry has attracted
many new entrants, which initially begin in the small business category. Many small businesses have
taken advantage of social media by being active on Facebook, Twitter and other sites, which has
helped their growth from both a marketing and revenue standpoint. Small businesses are also greatly
attractive to individuals who want to work for companies that encourage flexibility.

Small businesses contribute to gross domestic product.

Gross domestic product (GDP) is an important indicator of economic well-being. Without the
contribution of small businesses, global GDP would be significantly reduced. Exports may also play a
large role in the success of a small business; however, this will vary significantly due to geography. In
the Far East, small business exports make up 50% or more of their revenue. In Europe, exports make
up about 30% of the small business sector’s revenue. In North America, exports represent less than
10% of this segment’s revenue. So there are opportunities for growth, both domestically and
internationally, depending on the location of the small business.
Small businesses have influenced the move from a
manufacturing to a service-based economy.
The shift from manufacturing to service opens additional opportunities, since service-based
businesses are less capital intensive and rely heavily on a business owner’s creativity and innovation.
Small business plays a major role in all economic sectors and
industries.
Globally, the small business sector contributes to:
» Employment
» Taxes
» Global competition
» Local communities

Question 1
What percentage of total global output comes from small and medium-sized businesses?

A 75%

B 25%

C 50%

That’s right!

The small business sector is often referred to as the “backbone of the global economy.” In
fact, small and medium-sized businesses are responsible for more than one-half of all global
output and employ about two-thirds of the global workforce.

Question 2
What is the most common reason for knowledge-based businesses to fail?

A Ineffective marketing.

B Difficulty in finding qualified staff.

C Lack of management skills.

D Poor product performance.

That’s right!

Knowledge-based businesses are often based on good ideas and highly innovative products,
but may fail because of cash-flow problems, inadequate accounting and record keeping, lack
of a focused strategy, bad judgment and lack of marketing capability.

……………………………………………………………………………………………………………………………………………

Industry Attractiveness
Industry attractiveness is a powerful indicator of the degree of risk—the more attractive the
industry, the lower the risk.
This reading will help you to interpret the factors affecting industry attractiveness. This
insight you gain will enable you provide advice to clients who want to start a small business
but are unsure of which direction to take.

FACTORS THAT DETERMINE INDUSTRY

ATTRACTIVENESS
The attractiveness of any industry can be determined by examining the following factors:
» Strength of competitive forces
» Industry growth rate
» Profitability outlook
» Phase in the industry life cycle
The questions below are designed to assess each factor. However, a degree of uncertainty will remain
if there is not enough information about an industry’s structure, buyers, suppliers or competitors.

What is the strength of competitive forces?

The more attractive the industry, the more likely it is that the answer to the following questions
will be negative:
» Are entry barriers high?
» Are suppliers powerful?
» Do buyers have a strong bargaining position?
» Do substitute products or services exist?
» Is rivalry intense?

What is the industry growth rate?

High-growth industries, such as knowledge-based industries, are highly attractive. Traditional
industries, such as apparel and construction, have a lower growth rate and are less attractive, except
when they are located in a region that has abundant, low cost labour or that is experiencing sizable
economic expansion.
What is the profitability outlook?
Above-average profitability in comparison to other industries is attractive. This tends to exist in
knowledge-based industries. Traditional industries tend to have lower-than-average profitability.
What phase of the industry life cycle is the industry in?
The growth rate is high in the early growth stage of the industry life-cycle and low in the declining
stage. This makes emerging and growth industries more attractive than mature and declining ones,
since they tend to have a higher growth rate and, therefore, above average profitability.

Question 1
Wilma De Groot is tired of her office job and wants to open her own business. Her friends
tell her she has a knack for designing fashions and should consider a business in dress
making. Wilma thinks she may do better if she uses her skills in tax and accounting to offer
consulting services to other small business owners. Wilma is aware that entering an industry
judged to be more attractive will have a lower risk factor and could potentially be more
profitable. Which business should Wilma consider based on industry attractiveness?
A Dressmaking Business.

B Consulting Services

That's right!

Consulting services is a knowledge-based business. Characteristics of knowledge-based

businesses include high growth rates and above average profitability. Dressmaking is a
traditional industry, which is currently experiencing a slow growth rate and below average
profitability.

Question 2
Wilma decides to open a consulting practice in the highly profitable area of business
valuation. A few years ago, this was a rapidly growing industry, but as it has matured, growth
has flattened, partly due to a weakened economy. Demand for valuation services is still fairly
high, but competition is strong, with several established firms dominating the profession.
There is intense rivalry among newcomers for whatever business is left over. In this situation,
what is the one indication of lower risk associated with industry attractiveness?

A Maturity of the industry.

B Strong competition.

C High profitability.

D Slower growth rate.

That's right!

Above average profitability tends to exist in knowledge-based industries. This makes them
more attractive and less risky than traditional industries with lower-than-average profitability.
However, strong competition, a slowing growth rate and a maturing industry life cycle
indicate lower attractiveness, and therefore higher risk.

A Successful Small Business

Managing a small business requires an approach that is entirely different from large business
management. Some management practices of large companies may be too costly and of little
benefit to a small business, whose strengths are flexibility, adaptability, entrepreneurial drive
and creativity.

This reading will help you understand the traits, skills and business attributes that contribute
to the competitive edge and success of a small business. This information will help you
prepare your clients to succeed by helping them identify and focus on these aspects in their
own business.

GROWTH STAGES OF SMALL BUSINESS

The growth of a small business can be grouped into three stages that define the business type:
1. Start-up
2. Early growth
3. Later-growth
The business types follow the life-cycle concept, because there is a distinct link between the life cycle
of a product or service and the organization itself.

Some firms with very high growth may skip a phase. Some small business owners may avoid growth
to remain in full control of their business.

Stage 1—Start-Up Firms

A start-up firm is typically a “one-man show”. At this stage, the target customer, market niche and
competitive strategy must be defined. A product or service is brought to the market for the first time.
The objective is survival, not profitability. Expenditures are high; sales patterns are low and
fluctuating. The small business owner may be forced to offer generous credit terms to attract
customers.

Stage 2—Early-Growth Firms

The small business owner is more competent in managing the firm’s finances. Authority and
responsibility may be delegated. Profits increase. Additional assets are acquired, market strategy is
tested and new products or services are offered. Employees are hired to support the growth of
business. Cash flow concerns may result.

Stage 3—Later-Growth Firms

At this stage, the small business owner makes strategic decisions about the firm’s direction by
assessing new markets and opportunities. To succeed, it is important not to expose the market to any
unnecessary risk. The rate of growth stabilizes and decreases as competition intensifies and the niche
market becomes saturated.

ASPECTS OF A SUCCESSFUL SMALL BUSINESS

The key aspects of a successful small business include:
» Entrepreneurial traits and behaviours
» Entrepreneurial skills and competence
» Business attributes

Each of these aspects is further described below.

Entrepreneurial traits
These include the behavioral traits associated with successful small business owners. They consist of:

» High desire for achievement

» Moderate risk tolerance
» Self-determination
» Resourcefulness
» Creativity
» Intuition
» High need for independence
Entrepreneurial skills
These include business acumen and strategic planning skills critical in operating a small business
effectively. They consist of:
» Strategic thinking
» Marketing savvy
» Accounting and money management
» Record keeping
» Self-promotion and networking skills
» Organizational skills
» Delegation skills
» Team-building skills

Business attributes
These include the attributes of the business itself and the business environment that allow the
entrepreneur to build a competitive advantage. They consist of environmental attributes such as:
» Marketing capability
» Access to markets
» Access to capital
» Cost of capital
» Technology adoption capability
» Research and development (R & D) capability
» Government assistance

In addition, they include critical attributes such as:

» Customer service
» Flexibility in responding to customer needs
» Quality, range and price of products
» Frequency of introduction of new products
» Employee skills
» Cost of production
» Labor climate
» R & D Spending
HOW TO MANAGE A SUCCESSFUL SMALL BUSINESS
How does the entrepreneur affect the management of a
successful small business?
The entrepreneur is the driving force behind the small business venture. The entrepreneur’s traits,
skills and motivation will determine how the business is managed, and will affect the venture’s
success.
How does innovation affect management?
Innovation is the act of introducing something new. Not all employees are able to manage innovation.
They may need direction from the entrepreneur. The entrepreneur must be able to create,conceptualize
and understand the environmental forces at work.
How does the environment affect management?
Environmental factors, both internal and external, affect the management of a successful small
business:
» Internal factors
Within the organization itself, the culture, structure, strategy and decision-making process will affect
how a business is managed.
» External factors
Different support systems play an integral role in managing a small business, including government,
financial institutions, private capital firms and associations.
Question 1
What is the main objective for a small business in the start-up phase?

A Growth.

B Profitability.

C Survival.

That's right!

The small business owner is hoping to generate sufficient sales to continue operating.
Expenditures to set up the new business are high, and there is often a need to offer incentives
and set up generous credit terms to attract new customers.

Question 2
Jacques Charbonneau recently opened up a business that markets products for up-and-coming
small business owners. Review the following statements and see if you agree with Jacques’s
way of thinking.

Decision 1:

Jacques realizes he has to define his target customers. Currently, his strategy and plan
includes all industries. Jacques has decided to do some research to see where there is a gap
for the type of service his business offers.

Is this a good idea?

A Yes

B No

That's right!

Jacques needs to identify a market niche and come up with a competitive strategy.

Question 3
Jacques Charbonneau recently opened up a business that markets products for up-and-coming
small business owners. Review the following statements and see if you agree with Jacques’s
way of thinking.

Decision 2:

Jacques knows he will have to invest most of his savings into the business. He hopes to
generate a profit in the first year if he charges the going market rate for his services. His
accountant Jean has told Jacques this may not be the way to go and recommends he charge
lower than the going market rate initially, until he has attracted enough clients. Jacques wants
a second opinion.

Do you agree with Jean that Jacques should lower his prices initially to attract
business?

A Yes

B No

That's right!

Jacques is bringing a new product to the market and he will need to attract new customers.

Question 4
Fabio Marcello is looking at offering one-on-one computer skills courses to seniors in their
homes. Fabio is an accountant and has always been on top of the latest technology and
software. He has substantial savings set aside, which he will invest in the business. Fabio has
applied to the government for a small business grant.

Jaz Ali has always wanted to open a dog grooming business. Jaz is aware of a high number
of dogs in the neighborhood. She thinks that she can capitalize on the fact that most people
know her from working out at the local fitness centre. Jaz has always enjoyed grooming her
family’s dogs. She figures she can run the business from her basement, and will need little
capital to start and run her business.

Which business has the best chance of success?

A Fabio's computer skills courses to seniors.

B Jaz's dog grooming business.

That's right!

Fabio has a better chance at being successful. He is an accountant by profession, which gives
him the necessary accounting and cash management skills. He has the latest technology skills
to offer this type of service. Fabio has access to capital and will likely obtain government
assistance.

Jaz, on the other hand, doesn’t have any formal training in dog grooming and has limited
capital to fund her business.

Banker's Challenge Resolved

At the beginning of this section, you met Henry, a small business banker, and his client
Natalia, who is starting a home-based business. Do you remember Natalia’s question for
Henry?

Proceed to the next page to revisit the conversation and see his response.
Good luck!

What skills do I need to effectively operate

my business?

Well, to begin, you need to be able to

think strategically about your business.
This includes determining the types of
clients you want to work with, how you
will find clients, how much you will
charge, and how you will fund your
business.

I have a lot of experience in interior

design, and I learned a lot from my
previous employer. I’ve already
developed a business plan and have some
potential clients in mind, and I have a
good idea of the direction I want to go
with my business.

That’s great! You also need to understand

accounting and money management so
that you can track payments and expenses.
It also helps to have organizational skills
so that you can manage inventory, track
projects and clients, and schedule your
day.

I’ve taken some bookkeeping courses, and

I know how to do basic invoicing, so I
think that I’m OK there. I’m also very
organized in my daily life – I use my
smartphone planner for everything! What
else?

You need to understand marketing tactics,

and you have to be comfortable with self-
promotion and networking. As your
company grows, you will also need
delegation and team-building skills.

That’s good to know. I will have to learn

more about marketing, but I’m very
comfortable talking to people about my
business, so I should do well at networking.
Thanks for your advice.