The Essentials of Enterprise Development: Why and How?

1. The Essentials of Enterprise Development: Why and How? Dr John Walsh, Shinawatra International University, August 2010 The Mekong Institute, Khon Kaen

2. Topics • different levels and dimensions of various types of enterprises • the different categories of stakeholders • the frameworks employed by governments in creating favourable environments for enterprise development • approaches and tools to develop the enterprise sector The Mekong Institute, Khon Kaen

3. Competencies • Describe the different levels and dimensions of the contexts in which enterprises operate, categories and roles of various stakeholders in the enterprise sector; • Explain the meaning of a “developed” enterprise in terms of enterprise viability, productivity, competitiveness, innovation, self-renewal and sustainability; • Explain the importance of promoting and developing enterprises and national private sectors; • Identify the main frameworks employed by national governments to achieve an improved environment for enterprise and private sector development; • Identify and explain the approaches, tools and methodologies to develop the enterprise sector. The Mekong Institute, Khon Kaen

4. Schedule The Mekong Institute, Khon Kaen

5. Part I: What Are MSMEs? The Mekong Institute, Khon Kaen

6. What Are MSMEs? • Micro and small business enterprises • Micro-firm: four or fewer workers • Small firm: 5-19 workers • Medium firm: 20-199 employees. • In Laos, according to the Decree on the Promotion and Development of Small and Medium Sized Enterprises (No. 42/PM), SMEs are defined as dependent enterprises that legally register and are operating in accordance with the prevailing laws of Laos (Prime Minister’s Office of Lao People’s Democratic Republic [PMO. Lao PDR], 2004.a). Small enterprises normally have an annual average number of employees not more than 19 persons, with total assets not exceeding US$25,000 or an annual turnover not exceeding US$40,000. Medium sized enterprises have an annual average number of employees not exceeding 99 persons, with total assets not exceeding US$210,000, or an annual turnover not exceeding US$100,000 The Mekong Institute, Khon Kaen

7. How Many MSMEs Are There? • Malaysia: 900,000 • “Today, there are five recognized SME sectors in China – industrial, construction, retail, transportation and hospitality. The classification system defines SMEs as companies with sales between RMB30 million and RMB400 million with a workforce ranging from 400-3,000 employees. • Companies that fit this profile in China are vital to China’s economy as generators of employment, revenue and innovation. By 2007, China had 42 million SMEs, which accounted for 99.7% of the total number of enterprises in the country. SMEs also accounted for more than 68% of China’s exports and 75% of the new jobs created nationwide each year, while registering more than 65% of China’s patents.” The Mekong Institute, Khon Kaen

8. What Do MSMEs Do? • Mostly in service or retail sectors • Street vendors, market stall holders, scavengers, masseurs, mobile food sellers, handymen, electricians and carpenters, • Business model: sole proprietorship, partnerships, limited liability and franchising The Mekong Institute, Khon Kaen

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10. What Is the Importance of MSMEs? • Create employment • Generate income • Spot market gaps • Adapt new technology • Flexible and quick to change • Transfer skills and technology to local economy The Mekong Institute, Khon Kaen

11. Advanced Industrial Planning • Sub-contractors • Industrial parks/export zones • Positive and negative externalities of international and domestic investment • Not all benefits can be retained within the country The Mekong Institute, Khon Kaen

12. Business Cluster • “A group of small firms from similar industries that team up and act as one body. Creating a business cluster enables firms to enjoy economies of scale usually only available to bigger competitors. Marketing costs can be shared and goods can be bought more cheaply. There are also networking advantages, which small firms can share experiences and discuss business strategies.” The Mekong Institute, Khon Kaen

13. Features of Clusters • Each firm concentrates on its speciality • Efficient and swift-moving • Networks replace hierarchies and long-term commitment • Geography can in some cases be ignored The Mekong Institute, Khon Kaen

14. Part II: Being Entrepreneurial The Mekong Institute, Khon Kaen

15. Being Entrepreneurial • Approximately 8-900,000 businesses in Thailand. Most are single-person businesses. • Thai people are entrepreneurial • Entrepreneur: a French word meaning ‘between things’ The Mekong Institute, Khon Kaen

16. What Is an Entrepreneur? • Schumpeter: “a person who destroys the existing economic order by introducing new products and services, by creating new forms of organisation or by exploiting new raw materials.” • E.g. Google, Microsoft, Air Asia • But most are much smaller scale The Mekong Institute, Khon Kaen

17. An entrepreneur is someone who perceives an opportunity and creates an organisation to pursue it. • The entrepreneurial process involves all the functions, activities and actions associated with perceiving opportunities and creating organisations to pursue them. The Mekong Institute, Khon Kaen

18. Stages of the Entrepreneurial Process • Innovation • Triggering event • Implementation • Growth • Most new ideas come from existing work place or similar activity. The Mekong Institute, Khon Kaen

19. Entrepreneurial Traits • Personal attributes and environmental factors influence entrepreneurial ability. • Both of these can be influenced externally – or be taught. But luck is the most important thing. The Mekong Institute, Khon Kaen

20. Personal Attributes • Higher need for achievement • Higher locus of control • 10 Ds: dream; decisiveness; doers; determination; dedication; devotion; details; destiny; dollars; distribute (delegate) The Mekong Institute, Khon Kaen

21. Environmental Factors • Role models • Clustering of activities • Family responsibility • Experience, optimism and energy • Ability to deal with uncertainty The Mekong Institute, Khon Kaen

22. Fail to Prepare; Prepare to Fail • The crucial ingredients for entrepreneurial success are a superb entrepreneur with a first-rate management team and an excellent market opportunity. • In entrepreneurship, as in any other profession, luck is where preparation and opportunity meet. The Mekong Institute, Khon Kaen

23. Important Factors • Idea – which need not be unique or new • Customer need – which is crucial • Timing • Management experience • Resources: low overheads; high productivity; minimal ownership of capital assets The Mekong Institute, Khon Kaen

24. Opportunity Recognition • Determining fit • Balancing risk and reward • The business sheet may be obsolete once printed (i.e., no plan survives first contact with the enemy) The Mekong Institute, Khon Kaen

25. The Role of Ideas • The great mousetrap fallacy • Technology myopia • Getting to market first The Mekong Institute, Khon Kaen

26. Pattern Recognition • Experience • Transferring ideas to new applications • Transferring knowledge from one domain or market to another • Recognising and understanding human (customer) bevaviour The Mekong Institute, Khon Kaen

27. Enhancing Creative Thinking • The efficiency of a person’s creative process can be markedly increased if he or she understands the psychological process by which the process operates • The emotional component in the creative process is more important than the intellectual and the irrational more important than the rational • The emotional, irrational elements need to be understood to increase the probability of success in a problem-solving situation The Mekong Institute, Khon Kaen

28. Ideas and Opportunities • “An opportunity has the qualities of being attractive, durable and timely and is anchored in a product or service, which creates or adds value for its buyer or end user.” • Most frequently comes from work activity (i.e. invisible to customers) The Mekong Institute, Khon Kaen

29. Environmental Issues • Changes in the environment provide opportunities • They change in space and time • They must be married to business goals The Mekong Institute, Khon Kaen

30. Real Time • Windows of opportunity in product or service markets • Life cycle concept • Length of the product cycle The Mekong Institute, Khon Kaen

31. Part III: Problems Facing MSMEs The Mekong Institute, Khon Kaen

32. Main Causes of Small Business Failure • Lack of capital • Lack of management skill • Lack of marketing skill • Inability to adapt to change • Cash flow problems • External shocks The Mekong Institute, Khon Kaen

33. Purposes of Capital • Create initial business opportunity • Operating costs • Purchasing stock • Research and development (R&D) The Mekong Institute, Khon Kaen

34. Sources of Capital • Self savings • Self borrowing (e.g. credit card) • Family and friends savings and borrowing • External sources: banks, co-operatives, venture capitalists, micro-finance schemes The Mekong Institute, Khon Kaen

35. ED during a Time of Crisis • Reducing expenditure • Reducing inventory • Relationships reduce transaction costs • Greater variety and flexibility of goods/services assortment • Reducing capital asset expenditure • Flexibility of employment for micro-SMEs The Mekong Institute, Khon Kaen

36. Management Skills • Motivation and human resource management • Research and development • Accountancy (and bookkeeping) • Planning • Innovation The Mekong Institute, Khon Kaen

37. Stakeholder Issues • All those individuals, organisations and institutions materially affected by the actions of a firm • Includes: employees, shareholders, government, neighbours, suppliers, customers etc The Mekong Institute, Khon Kaen

38. Part IV: What Governments Do to Promote ED The Mekong Institute, Khon Kaen

39. Labour Market Types: Anglo-American • Small state with little regulation • Weak trade unions = flexibility • State focuses on enhancing job creation • Responsibility for training and mobility is on the individual The Mekong Institute, Khon Kaen

40. Labour Market Types: European • Public and private sector partnership • Enterprise unions • Firms take long-term view and maintain employment • Responsibility for training and skill development with the state The Mekong Institute, Khon Kaen

41. Labour Market Types: East Asian • State sets developmental targets and asks private sector to meet them • Labour rights very limited but firms are paternalistic • Firms are given resources to conduct such training as they require The Mekong Institute, Khon Kaen

42. Labour Market Types: Autocratic/Communist • Government agencies make all decisions based on national priorities • Labour is allocated to specific tasks • Public sector is responsible for all improvements to labour market The Mekong Institute, Khon Kaen

43. Types of Public-Private Partnership • Joint training schemes (e.g. apprenticeships provided in Japan) • University-private sector R&D • BOT (build-operate-transfer) schemes • Concessions • Contracting out public services The Mekong Institute, Khon Kaen

44. What Governments Do to Support ED at the Macro Level • Set overall strategy (macro-level) • Provide detailed statistics to support decisions • Identify national priorities • Acts as consensus-maker The Mekong Institute, Khon Kaen

45. Example: Government of Sri Lanka • The Government of Sri Lanka is strongly committed to PSD and fostering SMEs, as shown in its most recent budget. While the budget is not specific on desired PSD outcomes, the impact is flagged in the economic growth targets. • Sri Lanka has a well-established Department of Census and Statistics, which acts as a key agency for advice and collection of data on behalf of all other government agencies. It provides a considerable number of analyses of the economy, including information on establishments of businesses and aggregate private sector information. The Mekong Institute, Khon Kaen

46. This is available in hard and CD format. In addition, it conducts special studies commissioned by other ministries, such as Employment and Unemployment in Sri Lanka—Trends, Issues and Options. Further, it carries out analyses that can feed into policy decisions and are reflected in the budget strategy. However, a specific analysis of PSD has not been conducted. The Department of Census and Statistics cooperates with agencies such as ADB and World Bank in seeking to compile such information. The Mekong Institute, Khon Kaen

47. Choosing Indicators The Mekong Institute, Khon Kaen

48. Benefits of Indicators • (i) Lower risk of subjectivity, because they rely on a uniform indicator and methodology for their computation. • (ii) Comparative data, providing a powerful motivator for reform (e.g., country B decides it must initiate reforms to score better than country A next time). This is possible because of indicators being prepared on the same basis. • (iii) Reliability and consistency in measuring the impact of reform processes over time. The Mekong Institute, Khon Kaen

49. Some Problems Governments Face • Lack of capacity • Capture of resources by some government agencies (e.g. military, regions) • Empire-building by Ministries and replication of activities The Mekong Institute, Khon Kaen

50. What Aid Agencies Do to Support PSD/ED • Grants for policy development • Improvement of government services and systems • loans to boost the banking sector and provide for essential transport and energy infrastructure The Mekong Institute, Khon Kaen