Small and medium enterprises (SMEs) are generally defined on the basis of use of various quantitative yardsticks such as the number of persons employed per enterprise, amount of capital invested, value of annual turnover or sales etc. in order to differentiate these from large enterprises. These quantitative measures, though used popularly in most countries of the world to describe and analyse the features of the SMEs, suffer from various deficiencies and fall short of capacities to highlight the intrinsic strengths and weaknesses associated with smallness per se.
Of the various drawbacks which adversely affect efficacy of the most popularly-used quantitative measures such as employment and fixed assets, their inability to reflect levels of technical efficiency and exhibit differing valuation practices respectively used by firms of similar sizes at different stages of development are the most pronounced examples. As such, none of the quantitative indicators of enterprise size is capable of adequately describing some of the important functional characteristics of SMEs. Such units find expression through their unique ownership pattern, extent of entrepreneurial involvement, business organisation and management techniques, decision-making process, innovation potentials, customer relations etc. which significantly impact on their successes and failures. These and other important qualitative features of SMEs need to be carefully counted for their pragmatic identification as integral components of the national economic systems everywhere.
For clear understanding of economic, social, psychological, behavioral and organisational characteristics of SMEs, their qualitative features need to be enumerated to reflect on their strengths and weaknesses specific to small-scale operations.
One of the leading qualitative aspects of SMEs is the strong link between the enterprise and the owner which is inseparable in most cases from each other. The personal figure (presence) of the entrepreneur is pre-eminent in the small firm activities, particularly in decision-making. In contrast to a formal hierarchy of managerial and administrative staff performing different functions in the large firms, there is no such separation of functions in the SMEs, where the owner-manager takes upon himself/herself most such functions and practices no delegation of authority.
While a SME entrepreneur is sometimes described as a 'loner' for lack of delegation of authority, it gives the person at the top greater flexibility in decision-making and offers overall greater organisational flexibility. There is then a family aspect characterising the SMEs resulting from high incidence of family workers. The overall work atmosphere is also more personal than in large firms, which creates a favourable climate for the workforce and determines a SME's typical operational structure.
Another important functional characteristic feature of small enterprises is related to their financing constraints. Due to scale barriers, they have restricted access to the sources of institutional finance. High barriers to entry into formal credit markets at affordable costs often compel them to rely on non-institutional financing which is much costlier than formal sector credits. They are also heavily dependent on self-financing which is inadequate to help them grow and expand.
SMEs emerge and grow exploiting the advantages of market niches for goods that encounter specific demands which the large firms cannot satisfy. The small market segments are created by local customs, luxury requirements, highly specific uses and local considerations (i.e. isolated populations). Such markets may be inaccessible to large firms or demand production process that is too specialised or at least not profitable enough to big business. In the industries characterised by high degree of product differentiation (i.e. electronics), the SMEs enjoy comparative as well as competitive advantages to carve out their own market niches.
Additionally, worker turnover in the SMEs is proportionately higher than in the large firms. Low earnings of the SME workers even with similar qualifications than those in the large enterprises, greater privileges of the SMEs for exploitation of potential 'collective efficiencies' etc. are also noted by many experts as distinctive characteristics of small firms.
The foregoing are some of the organisational, functional, and behavioral characteristics which differentiate SMEs from their large counterparts. However, these special features may not be universal for all SMEs and may also not always be identifiable. Nevertheless, it is important to keep in mind that each economic sector has its own micro and macro-economic characteristics such as capital or labour intensity, production organisations, size and share of relevant markets, and relationship to suppliers and customers. All these additional parameters have to be taken into account when SMEs are defined, distinguished, compared, and analysed to differentiate them from their large counterparts for SME policy making and strategy development.
Dr. Momtaz Uddin Ahmed is Professor of Economics, Dhaka University.
ahmed_1947@hotmail.com
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