SME Start-up, Survival & Growth

1. SME Start-up, Survival& Growth Masato Abe, Ph.D. Private Sector and Development Section United Nations ESCAP16-19 August 2009

2. Day 1

3. 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

8. What are SMEs?

9. Definition of SMEs • In Asia-Pacific, typically less than 100-200 employees for manufacturing sector

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 (%)

13. SMEs per 1,000 people Source: ESCAP (2009), developed based on data from World Bank (2000-2006)

14. SME Typology Export Cottage Enterprises Export-oriented Enterprises High Tech Low Tech Domestic Market-oriented Enterprises Supporting Enterprises Domestic/Local Market (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 Grow to a large firm Maturity Decline Growth Start-up Discontinuation? 0 Years Pick-up Loss Various supports needed at the different stages

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?

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

25. Start-ups: Sector Composition Japan (2006) Thailand (2005) 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%

26. SMEs’ Net Income in Japan Income before Tax / Total Sales

27. Four Success Factors for Start-ups Entrepreneurship Resources Management Skills Business Plan

28. Four Success Factors for Start-ups Entrepreneurship Resources Management Skills Business Plan

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 Management Skills Resources Business Plan

31. Success Factors 2: Management skills • Strategic thinking • Marketing • Accounting • Finance • HRM • Others

32. Four Success Factors for Start-ups Entrepreneurship Resources Management Skills Business Plan

33. Success Factor 3: Resources • Capitals • Human resources • Physical assets • Intangible resources • Intellectual property • Skills & knowledge • Networks

34. Four Success Factors for Start-ups Entrepreneurship Resources Management Skills BusinessPlan

35. Success Factor 4: Business plan • An executable plan that details how the enterprise is going to meet its objectives • Feasibility study • Market • Customer • Competitor • Supplier • Finance • etc

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 Resources Management 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 • Reviewing available resources • “Negative keyword” method • “Who x What x How” method • 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