Small Business Basics - Introduction To Business - ثاني ثانوي

7.3 Small Business Basics Link to digital lesson www.ien.edu.sa Learning Outcomes Once you have completed this lesson, you should be able to: 7.3.1 Define a micro, small, and medium sized business and identify important characteristics of small businesses. 7.3.2 Recognize the competitive advantages of small businesses. 7.3.3 Identify challenges faced by many small businesses. Key Terms Small Business Competitive Advantage Focus on REAL LIFE During dinner, Sara excitedly told her family what happened in her Introduction to Business class. The class had spent the time thinking about opportunities for owning a small business. Sara knew that is what she wanted to do. Sara's grandfather said, "Did you know I ran a small business for almost 10 years when I was young? I was as excited as you are about starting a business when I graduated from high school. I went to work for the owner of a small hardware store. I hoped that I could save enough money to open my own store. Luckily, after eight years, he decided to retire. We worked out an arrangement where I could buy the store from him over a number of years." "What advice can you give me?" Sara asked. "Being a small business owner is exciting, but it is a difficult life," explained her grandfather. "I'm excited for you, but I want you to know that achieving your goals will be challenging. If you work hard, learn from mistakes and don't give up, I'm sure you'll succeed." LO 7.3.1 WHAT ARE MICRO, SMALL, AND MEDIUM BUSINESSES? When many people think about business, they often picture very large corporations. These companies employ thousands of people with locations all over the country and the world. That is not the true picture of most businesses. Small businesses account for a significant and growing number of businesses in Saudi Arabia's private sector. The official definition of a small business can vary from country to country. In Saudi Arabia, SMEs are separated into three separate categories (micro, small, and medium), according to the number of full-time employees and annual revenues, as illustrated in Figure 7-5. The Monsha'at website has a handy tool for calculating the official designation of a business's size by toggling these factors. An enterprise size certificate can be issued to the business by registering through the Monsha'at website. A typical small business may have the following attributes: The owner is the manager. It operates in one or very few locations. It typically serves a small market. It is not dominant in its field. Most small businesses operate in service industries, with retail accounting for the largest proportion. Examples in this sector include small stores, restaurants, and cafés. 224 Chapter 7 | Entrepreneurship and Small Business Management وزارة التعليم Ministry of Education 2024-1446 GE44.PATHWAYS.G02.ITB.SB.PP1.indb 224 08/05/2024 09:14

Small and Medium Enterprises (SMEs) Size Micro Small Medium Full-time employees 1-5 6-49 50-249 SAR Revenue SAR 0-3 million SAR 3-40 million 40-200 million (Source: https://www.monshaat.gov.sa/en/SMEs-definition) How small is a 'small' business? Why are there so many small businesses in services and retail? FIGURE 7-5 Monsha'at's Official Definition of Business Size FYI Small business owners report that the Internet is having a positive impact on their companies. In a recent survey, 51% said the Internet helped increase their profits and 49% said its use resulted in reduced operating costs. CHECKPOINT Beyond Monsha'at's formal definition of a small business, what four points can be used to describe a small business? The Relationship Between Small Business Ownership and Entrepreneurship While there is a link between small business ownership and entrepreneurship, it is important to note that they are not identical or interchangeable terms. Many small business owners demonstrate characteristics of entrepreneurship, whereas others do not. Likewise, not every entrepreneur is a small business owner. Some entrepreneurs are in charge of very large companies. Suppose, for example, that Ali and Hasan are both small shop owners in a suburban neighborhood just outside of Riyadh. They are both classed as small business owners (or technically micro businesses under the official Monsha'at definition). Ali inherited his shop, taking over management of the family business from his father. He enjoys serving the local community and has no ambitions to expand. In contrast, Hasan borrowed money to open his shop, in order to sell his own unique products that he designed personally. He has plans to open another two locations and also sells his products online to customers overseas. Clearly, Hasan is demonstrating entrepreneurial characteristics whereas Ali is not. However, small business owners such as Ali can run very successful businesses without engaging in entrepreneurial activities. وزارة التعليم Ministry of Education 2024-1446 7.3 Small Business Basics | 225

LO 7.3.2 SMALL BUSINESS COMPETITIVE ADVANTAGES Your family may need someone to maintain the grounds of your property, provide catering for an event, build custom storage, or repair hardware on the home computer. Where would you turn for help? It may not be likely that you will find a large business for all of those services. In some situations, small businesses have a competitive advantage over larger businesses, which means they are better able to meet a certain need. Meeting Customer Needs Small businesses play a vital role in the economy. They often serve customers where the number of products and services needed is small or the requirements are too specialized for large businesses to make a profit. It is easier for a small business to meet the precise needs of customers than a large business. Even though a large business has more resources, to operate efficiently it must focus on products and services that meet the needs of a large group of customers. That makes it harder to satisfy the unique needs of single customers. Small businesses often are not able to match the lower operating costs of larger businesses. They can compete by paying attention to their customers. Small businesses serve fewer customers and usually have more frequent contact with those customers than large businesses. They are more likely to be located close to the customer. They depend less on other businesses to distribute or service their products. Large businesses often rely on consumer research to gather information. Small businesses usually get direct information from their customers about what they like and dislike. Providing Unique Services Small businesses are especially suited to provide unique services for customers. They may plan an event or design a customized sound system for your home. Providing those types of services means that business representatives must take a special interest in the customer. They spend time determining needs and discussing alternatives. They have the expertise to plan and deliver the services that satisfy the customer. Large businesses may not find it profitable to spend that much time with each customer. Also, it is possible that not every employee who works with customers will have the expertise to design the required service. Big business has a clear advantage when a large number of customers are willing to buy standard products and prefer low cost and efficient delivery. Small businesses gain an advantage when customers have unique needs, want more individual attention, and are willing to pay a bit more for the product or service to obtain what they really want. When asked, "What businesses do you believe are most concerned about you as a customer?" the majority of consumers identify small businesses. How do small businesses provide unique services that large businesses cannot? 226 ليم CHECKPOINT How can small businesses compete successfully with larger businesses? 6 Chapter 7 | Entrepreneurship and Small Business Management Ministry of Education 2024-1446

LO 7.3.3 COMMON SMALL BUSINESS CHALLENGES Many successful entrepreneurs and their businesses are well known. Their success encourages others to think about starting a new business. However, developing a successful new business is not easy, and there is always a possibility that it will fail. In fact, the failure rate of SMEs is much higher than larger businesses. Many failures result from the inability to pay expenses. The business is then forced to close. Some companies quietly go out of business when the owner believes that he or she is not doing well enough to continue. The time and energy required of new business owners is much higher than most people expect. The owner may get tired of the long hours and hard work. Reasons for Failure Lack of time to devote to business Unprepared to manage growing business Lack of adequate capital Reasons for closure Low sales Competitive pressure High expenses Can you think of any other reasons why a new business might close? FIGURE 7-6 Typical Reasons for New Business Closure The most common reasons for small business failure include: Not keeping adequate records Lack of adequate capital Lack of management experience Lack of experience with the type of business Not controlling operating expenses Poor location for the business Failure to manage credit offered to customers Low sales • Competitive pressure Operations requiring more time than the owner is willing to commit Some of the primary reasons for the closure of businesses started by entrepreneurs are illustrated in Figure 7-6. Recognizing Risks and Seeking Assistance Entrepreneurs need to be aware of the many risks they may face and prepare for them. Most entrepreneurs are willing to take risks. They will work hard to make their businesses succeed. However, many entrepreneurs have seen one or more of their business ideas fail before they were able to grow a successful company. With the right kind of assistance, small businesses can overcome each of the causes of failure listed above. Small business owners can get support from a number of sources, such as Monsha'at, Social Development Bank and Research, Development and Innovation Authority described earlier. Universities and colleges often have faculty members who can give advice and support to people who are starting or have started their own businesses. Local groups of business people, such as chambers of commerce, have members who can help others with business problems. Work as a TEAM Identify two or three small businesses in your community that have been successful for many years. As a team, discuss what you think these businesses do that allows them to compete successfully with other small and large businesses. وزارة التعليم Where can small businesses find assistance? CHECKPOINT List common reasons for small business failure. 7.3 Small Business Basics | 227 Ministry of Education 2024-1446

7.3 ASSESSMENT Key Concepts Determine the best answer. 1. Monsha'at considers a business small if it employs a. 1-5 b. 6-49 c. 50-249 d. 250-500 employees. 2. A competitive advantage that small businesses have over larger businesses is a. lower costs b. more consumer research c. lower prices d. attention to unique customer needs 3. Which of the following is not one of the reasons small business fail? a. poor customer credit practices b. the owner does not have adequate experience c. a poor business location d. not enough employees to do the work Make Academic Connections 4. Technology Online auction services have become the home of many small businesses. Thousands of small business owners earn an excellent income by selling their products using these websites. Visit an online auction website and identify three ways a small business can use the website to support its operations. 5. Research Interview 10 people who have recently purchased products or services from a small business. Ask them to list the top three reasons they made the purchase from a small business rather than a large business. Summarize the results from your interviews and present your findings in the box below. 228 ليم 8 Chapter 7 | Entrepreneurship and Small Business Management Ministry of Education 2024-1446