LESSON 2 SMALL BUSINESS

Dr. Jyotsna Sethi

STRUCTURE
2.0 Introduction 2.1 Objectives 2.2 Concepts and Definitions 2.2.1 Small Scale Industries 2.2.2 Ancillary Industry 2.2.3 Tiny Industry 2.2.4 Small Scale Service and Business Enterprises (SSSBEs) 2.2.5 Women Enterprises 2.2.6 Export Oriented Unit 2.3 Nature and Characteristics 2.4 Problems of Small Business 2.5 Role of Small Business in Indian Economy 2.6 Small Business as Seedbed of Entrepreneurship 2.7 Summary 2.8 Glossary 2.9 Self Assessment Questions 2.10 Further Readings

____________________________________________ 2.0 INTRODUCTION

You have learnt about the close linkage between entrepreneurship and economic development in lesson 1. The Small Scale Sector is the natural habitat of entrepreneurs. Most entrepreneurs start small and then nurture their units into large industries. The SSI Sector provides an opportunity for them to hone their skills and talents, to experiment, to innovate and transform their ideas into goods and services needed by the society. Over the last six decades the Small Scale Industry sector has emerged as a highly vibrant and dynamic sector. It has acquired a prominent place in the socioeconomic development of the country. Mostly this sector exhibited positive growth trends even during periods when other sectors of the economy experienced either negative or nominal growth. Today this sector accounts for 95 percent of the industrial units, provides nearly 80 percent of manufacturing employment and contributes around 35 percent of exports. It produces 7500 items and provides employment to more than 195 lakh

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persons. It is a well-recognised fact that a vibrant small-scale sector holds the key to economic prosperity in an economy like India. Profile of SSI Sector in India

95% of Industrial Units in the Country 39.92% of Value Added in the Manufacturing Sector 34.29% of National Exports 6.86% of Gross Domestic Product Employment To 193 Lakh Persons Production of Over 7500 Items in the Industrial Sector

298 Items Reserved for Exclusive Manufacture 358 Items for Exclusive Purchase from This Sector

____________________________________________ 2.1 OBJECTIVES

After going through this lesson you should be able To define a Small Scale Industry, Ancillary Industry, Tiny Unit, Small Scale Service And Business Enterprises [SSSBEs], Women Enterprise and Export Oriented Unit. Differentiate Between The Traditional and Modern Small Scale Sector Explain the Nature and Characteristics of SSIs Examine the Role of Small Business in National Economy Decribe how Small Industries act as Seedbed of Entrepreneurship

____________________________________________ 2.2.CONCEPTS AND DEFINITIONS

In most parts of the world the nomenclature used is Small and Medium Enterprises (SMEs) and the criteria for defining include the number of employees and /or the turnover. In India the Small Scale Industry evokes different meanings for different agencies and the financial institutions. For example for the purpose of Excise and Sales Tax Exemption, the turnover alone is the determining criterion. However in broader terms, currently, an SSI is defined in terms of investment ceilings on the original value of installed plant and machinery.

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2.2.1 THE SMALL SCALE INDUSTRIAL UNDERTAKING

An industrial undertaking in which the investment in plant and machinery, whether held on ownership terms or on lease/hire-purchase basis, does not exceed Rs. 10 million (Rs. 1 crore) is regarded as a small-scale undertaking. These include manufacturing and service units.

2.2.2 ANCILLARY INDUSTRIAL UNDERTAKING

An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or producing of parts, components, sub-assemblies, tooling or intermediates; or the rendering of services is termed as an ancillary undertaking. The ancillary undertaking is required to supply or render or propose to supply not less than 50 percent of its production or services, as the case may be, to one or more other industrial undertakings as the case may be. The investment in plant and machinery, whether held on ownership basis or on lease or on hire purchase, should not exceed Rs. 10 million. Over the years the following sub-sectors have been identified within the overall small-scale sector:

2.2.3 TINY ENTERPRISE

A unit is treated as a tiny enterprise where the investment in plant and machinery does not exceed Rs. 2.5 million (Rs. 25 Lakhs) irrespective of the location of the unit. Many shops, schools, parlours, Photostat and STD booths in your vicinity are all examples of tiny units.

2.2.4 SMALL SCALE SERVICE AND BUSINESS ENTERPRISE [SSSBES]

An industry related service/business enterprise with investment up to Re.0.5 million (5 Lakhs) in fixed assets, excluding land and building, is treated as an SSSBE. E.g. advertising agencies, Marketing consultancy, Auto repair, services and garages, Tailoring, Desktop printing etc. The service sector has emerged as the major segment of the economy.

2.2.5 WOMENS ENTERPRISES

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A Women Entrepreneurs Enterprise is termed as an SSI unit/industry-related service or business enterprise, managed by one or more women entrepreneurs in proprietary concerns, or in which she/they individually or jointly have a share capital of not less than 51 percent as partners/shareholders/directors of a private limited company/members of a cooperative society.

2.2.6 EXPORT ORIENTED UNIT [EOU]

A unit with an obligation to export at least 30 percent of its annual production by the end of the third year of commencement of production and having an investment ceiling up to Rs. 10 million (Rs. 1 crore) in plant and machinery is termed as an export oriented SSI unit.

Key Words
SSI, Ancillary Industry, Tiny Enterprise, SSSBEs, Womens Enterprise, EOU Table 2.1: Investment Ceilings for Small Scale Industries (2006) Type of SSI unit Investment limit (1 million= 10 Lakhs) Rs 10 million Rs 10 million Rs 2.5 million Rs 0.5 million Rs. 10 million Rs. 10 million Remarks

Small Scale Industry Ancillary Tiny Enterprise Service & Business Enterprise Women Enterprise Export Oriented

Historical cost of plant & machinery At least 50% of its output should go to other industrial undertaking No location limits No location limit 51% equity holding by women Obligation to export 30% of production

In India no separate definition of medium enterprises exists and as such there is no specific definition of Small and Medium Enterprises [SMEs.] Administratively, in the Indian context, the industry universe is divided into three major segments Factory Sector- Large Scale units- (Non- SSIs);

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Factory Sector-Small Scale units Village and Small Industries sector [VSI.] The VSI sector has further been divided into two broad sub-sectors viz: The Modern SSI Sector and the Traditional SSI Sector. Modern Small Scale Industries These cover SSI units [both in the Factory and Non/Factory sectors] and power loom units. Such units mostly use power driven machinery and possess superior production techniques. Units in this sub-sector are generally located in close proximity to large industrial centers or urban areas. These industries are moving away from the traditional products to knowledge-based products. Traditional Small Scale Industries This sector comprises tiny and cottage industry segments like handlooms, khadi and village industries, handicrafts, sericulture and silk, rubber and coir. These units are labour- intensive, are generally located in rural and semi-urban areas and are artisan based. Usually the capital invested is also nominal. Check your progress: Match the following: Modern SSI Large Scale Industry SSI Tiny Ancillary SSSBEs Traditional SSI Khurja Pottery Sona Steering supplying to Maruti Udyog Laundry Services Paper Manufacturing Unit with Rs. 10 million investment Photostatting Unit with Rs. 0.5 million investment TELCO Call Centre

2.3

NATURE AND CHARACTERISTICS

Small-scale industries have certain unique features, which distinguish it from the Large-scale sector. Some of the salient characteristics of small-scale businesses are given below. 1. Personal Character: In most small businesses the owners themselves are managers and so they can operate independently. They can give customized service to their clients, which in many cases is their USP. 2. Flexibility: Since most small businesses are a one-man show they do not have to go through a hierarchy to get permissions to make changes. Small business can respond quickly to environmental trends. Nimbleness and agility are

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characteristics that allow small entrepreneurs to understand market conditions and rapidly respond to changes. 3. Labour Intensive: Small businesses have tremendous capacity for employment generation through their labour intensive techniques. Small businesses actually create more jobs than big businesses. This feature of a small-scale unit is of great significance in a country like India where the number of unemployed people is phenomenal. 4. Local Area of Operation: Small businesses are largely local in operation; however the market for its products may be local, regional or even international. 5. Short Gestation Period: The capital investment in the small sector is generally low and the time taken for production to commence is also less. As a result of short gestation period the units give quick returns and consequently the pace of economic development quickens.

2.4 PROBLEMS OF SMALL BUSINESS

While the small entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the vagaries of the market, they have to face many problems like the following: 1. Paucity of Finance: The small entrepreneurs possess a weak financial structure and find it extremely difficult to obtain credit because of lack of collateral security. This acts as a big handicap, especially in the initial stages, in most of their operations like their ability to hire the best workers or to purchase the latest machinery and equipment or to acquire sophisticated technology. 2. Poor availability of power and other infrastructure: Though infrastructural bottlenecks are problems for big businesses too, yet they can overcome these problems to some extent because of their financial strength e.g. generating their own power, or even influencing the government in framing its policies sometimes. The small entrepreneur on the other hand has to battle with them. 3. Obsolete Technology: Most small businesses use old technologies because they cannot afford better. As a result the quality of their goods is inferior and the cost of production is higher than in case of other big ventures. This has acted as a serious handicap especially after opening up of the economy when they have had to compete with imported goods. 4. Marketing Problems: The small entrepreneur cannot supply standardized goods of high quality and as a result cannot compete with products of large companies or MNCs. They usually do not have a brand name or loyalty, as there are hardly any funds for advertising or sales promotion. All these increase their marketing woes.

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5. Poor Managerial and Organizational Skills: usually the entrepreneur has to perform a multitude of diverse functions invariably with out having any exposure to professional education or formal training. The large sector on the other hand can hire the best qualified and trained people. 6. High Incidence of Sickness 7 out of 10 small businesses usually fall sick and die within 3to5 years. Main causes for this are a wrong choice of product, poor managerial skills, lack of experience, poor quality of products because of the use of old technologies, etc. Apart from the above-mentioned problems the small entrepreneur has weak bargaining power to deal with suppliers and financial institutions, has to face bureaucratic red tapism and is unable to invest in R & D. After the opening up of the economy the small sector has been finding it extremely difficult to compete with the high quality goods available in the market.

2.5 ROLE OF SMALL BUSINESS IN NATIONAL ECONOMY

Small business has played a very crucial role in transforming the Indian economy from a backward agrarian economy to its present stature. Its benefits range from creating job opportunities for millions of people, including many with low levels of formal education. It has nurtured the inherent entrepreneurial spirit in far flung corners of the nation resulting in the growth and development of all regions. It has been instrumental in raising the standard of living of the multitudes. The small scale sector has contributed specifically in the following areas: 1. Employment Generation: The SSI sector in India is the second largest manpower employer in the country next only to the agriculture sector. India is characterized by abundant labour supply and is plagued by unemployment and underemployment. Under these circumstances the small-scale sector is a boon .For every Rs.0.1million of investment, the small-scale sector provides jobs to 26 people as compared to 4 jobs created in the large-scale sector. 2. Low Initial Capital Investment: Another feature of the Indian economy and most of the developing economies is the scarcity of capital. The modern largescale sector requires colossal investments whereas the small sector is just the opposite. Not only is the employment capital ratio high for the SSI but the output capital ratio is also high. 3. Balanced Regional Development: Dispersion of small business in all parts of the country helps in removing regional imbalances by promoting decentralized development of industries. It helps in industrialization of rural and backward areas. It also helps to reduce problems of congestion, pollution, housing, sanitation etc.

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4. Equitable Distribution of Income: This is a natural corollary of the above. When entrepreneurial talent is tapped in different regions and areas the income is also distributed instead of being concentrated in the hands of a few individuals or business families. 5. Promotes Inter-Sectoral Linkages: SSI units are supplementary and complementary to large and medium scale units as ancillary units. Many small units produce sub-parts, assemblies, components and accessories for the largescale sector especially in the electronic and automotive sectors. 6. Exports: The most significant contribution of the SSI has been in the field of exports. There has been a significant increase in the exports from this sector of both traditional and non-traditional goods including jewellery, garments, leather, hand tools, engineering goods, soft ware etc. 7. Development of Entrepreneurship: Small business taps the latent potential available locally. This way they facilitate the spirit of enterprise, which results in overall growth, and development of all the regions /sectors of the nation.

2.6

SMALL BUSINESS AS SEEDBED OF ENTREPRENEURSHIP

Small business is the natural habitat of an entrepreneur. They are really found in Giant Industries. Small businesses provide goods as services as well as serve as a nursery of entrepreneurial and managerial talent. Initially the capital investment in small ventures is nominal and the technology used is low, so it becomes easy for first time entrepreneurs to set up a venture. In the beginning usually these ventures are a one man show where the entrepreneur looks after the myriad functions of production, marketing, finance, legal etc. The entrepreneur gets a chance to increase his knowledge, skill and competence. He takes decisions independently and it is in these circumstances that entrepreneurial talent blossoms. In developing economies it is through a large number of such small enterprises started by these imitator entrepreneurs that a chain reaction is set into motion, which leads to cumulative progress. It is pertinent to note that nearly 70 percent of the total innovations in the world have come from the Small Scale Sector. Many of the big businesses today for example, Siemens, Ford, Eastman Kodak, Lever Brothers, Reliance, Nirma, Rasna were all started small and then nurtured into big businesses. Narayan Moorthy of Infosys spent 20 years in founding, building and nurturing Infosys. Small business mobilizes small savings, taps the latent entrepreneurial talent across regions and provides a platform for them to develop and fine-tune their

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entrepreneurial spirit. In the process the entire country benefits in the form of goods and services and higher standard of living.

2.7 SUMMARY
The small-scale sector has emerged as an engine of growth in most of the developing and newly industrialized countries of the world. In India the SSI has played a catalytic role in socio-economic transformation of the country. This sector has exhibited tremendous capacity for employment generation, greater resource use efficiency, and technical innovation, promoting inter-sectoral linkages, raising exports and reducing regional imbalances. Small business has low capital investment and therefore the risk of the entrepreneur is limited and he can afford to be venturesome. Moreover small businesses have a small gestation period so returns are also quick. The flexibility inherent in this sector allows the entrepreneur to work aggressively if a project seems promising or change course in case things do not work out. In his manner the small business functions as a nursery for developing entrepreneurial talent. The cumulative effect of these innumerable entrepreneurs leads to economic growth and higher standards of living, which transform the society. What motivates these enterprising young men and women is the subject of your study in the next chapter.

2.8 GLOSSARY
Gestation Period The period between the time of initial investment and commercial production. Large Scale Industries These are units, which are not small scale and usually with an investment of more than Rs. 100 million. Seedbed A concept borrowed from agriculture to denote small business as the training ground for entrepreneurship and management at larger scale. SMEs Small and Medium Enterprises, usually with an investment between Rs.10 to 100 million USP Unique Selling Proposition, basic or core strength of a product/firm for asserting its position at the market place; e.g. electronic major Sonys USP lies in minaturisation.

___________________________________________ 2.9 SELF ASSESSMENT QUESTIONS

1. List the advantages that a Small Business has over a Large Business

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2. In your view is it important to develop ancillary units? Give reasons. 3. Differentiate between a Modern SSI and a Traditional SSI. 4. Define a SSSBE and give some examples of such enterprises. 5. Write a short note on Small Business as seedbed of entrepreneurship.

2.10 FURTHER READINGS AND SOURCES

1. Charantimath Poornima, 2006. Entrepreneur Development Small Business Enterprise. Darling Kindersley (India) Pvt.Ltd, New Delhi. 2. Gupta C.B, Khanka S.S. 2003. Entrepreneurship and Small Business Management. Sultan Chand & Sons, New Delhi, 4th Edition. 3. Hatten S Timothy, 1997. Small Business Entrepreneurship and Beyond. Prentice Hall, New Jersey. 4. Laghu Udyog Samachar, 50 Years of SIDO, Commemorative Issue on Golden Jubilee of Small Industries Development Organisation [1954-2004], A Publication of Development Commissioner [SSI], Ministry of SSI, Government of India. 5. Report of the Expert Committee on Small Scale Enterprises, [Abid Hussain Committee], Ministry of Industries, Government of India, 1997. 6. Report of the Study Group on Development of Small Scale Enterprises, Planning Commission, Government of India, New Delhi March 2001. 7. SIDBI 13th Annual Report 20022003 Small Industries Development Bank of India. 8. SIDBI Report on Small Scale Industries 2000, Small Industries Development Bank of India, April 2000.

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