Small and Medium Small and Medium EnterprisesEnterprises

Course Instructor: QAZI M.ADNAN Course Instructor: QAZI M.ADNAN HYE HYE

Course: Analysis of Pakistani Course: Analysis of Pakistani Industries Industries

SMEs are different from large scale SMEs are different from large scale enterprises in three main aspects;enterprises in three main aspects;

►UncertaintyUncertainty►Innovation Innovation ►And evolutionAnd evolution

The SME sector itself can be classified into The SME sector itself can be classified into ►Micro enterprises.Micro enterprises.►Small enterprises. Small enterprises. ►And medium enterprises.And medium enterprises.

►SMEs are the starting point of development SMEs are the starting point of development in the economies towards industrialization.in the economies towards industrialization.

►SMEs have a propensity to employ more SMEs have a propensity to employ more

labor-intensive production processes than labor-intensive production processes than large enterprises.large enterprises.

► SMEs contribute to over 55% of GDP SMEs contribute to over 55% of GDP and over 65% of total employment in and over 65% of total employment in high income countries.high income countries.

► SMEs and informal enterprises, SMEs and informal enterprises, account for over 60% of GDP and over account for over 60% of GDP and over 70% of total employment in low 70% of total employment in low income countries.income countries.

► while they contribute about 70% of while they contribute about 70% of GDP and 95% of total employment in GDP and 95% of total employment in middle income countries.middle income countries.

► SMEs are the major growing force SMEs are the major growing force behind the fastest growing economy of behind the fastest growing economy of China.China.

►Contribution 40% in national GDP. Contribution 40% in national GDP.

► Experts and economists are unanimous Experts and economists are unanimous about the role and importance of small and about the role and importance of small and medium enterprises in the development of medium enterprises in the development of Pakistan economy.Pakistan economy.

► According to the Small and Medium According to the Small and Medium Enterprises Development Authority (SMEDA), Enterprises Development Authority (SMEDA), "SMEs constitute nearly 90% of all the "SMEs constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the enterprises in Pakistan; employ 80% of the non-agricultural labor force; and their share non-agricultural labor force; and their share in the annual GDP is 40%, approximately. in the annual GDP is 40%, approximately.

►Small and Medium Enterprise (SME) means an entity, ideally not a public limited company, which does not employ more than 250 persons (if it is manufacturing / service concern) and 50 persons (if it is trading concern) and also fulfills the following criteria of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as relevant:

►(a) A trading / service concern with total assets at cost excluding land and building up to Rs 50 million.

►(b) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million.

►(c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

►An Individual, if he or she meets the above criteria, can also be categorized as an SME.

Purpose of Such classifications Purpose of Such classifications

►Labor welfare laws. Labor welfare laws. ►Loans. Loans. ►And tax purposes. And tax purposes.

► SMEs can make significant SMEs can make significant contribution to achieve social and contribution to achieve social and economic objectives such aseconomic objectives such as

►Labour absorption.Labour absorption.► Income distribution. Income distribution. ►Rural development.Rural development.►Poverty elimination.Poverty elimination.►An overall balance of rural and urban An overall balance of rural and urban

industrial activities.industrial activities.

► Slow down migration of labour from rural Slow down migration of labour from rural to urban areas.to urban areas.

►Efficient utilization of resources.Efficient utilization of resources.► Stability of family income.Stability of family income.►Balanced economic growth. Balanced economic growth. ►A large number of people rely on the small A large number of people rely on the small

and medium enterprises directly or and medium enterprises directly or indirectly. indirectly.

►Tax revenue.Tax revenue.

A cottage industryA cottage industry ► A cottage industryA cottage industry is carried on in is carried on in

the home as a part-time occupation the home as a part-time occupation mainly by members of one family using mainly by members of one family using human or animal power. The products human or animal power. The products are for household or local village use are for household or local village use and have more commercial importance and have more commercial importance in these days. in these days.

A handicraft industryA handicraft industry ► It is usually carried on full-time in a It is usually carried on full-time in a

separate shop by family members and separate shop by family members and outsiders together who have gone outsiders together who have gone through an apprenticeship, and who through an apprenticeship, and who make objects of art, formal or make objects of art, formal or traditional, and decorative use. traditional, and decorative use.

YearYear HandicraftHandicraft (Exports) [ (Exports) [Thousand US Dollars]

2004-052004-05 251 251

2005-062005-06 324 324

2006-072006-07 1,123 1,123

2007-082007-08 586 586

2008-092008-09 P P 843 843

YearYear Furniture (Exports) Furniture (Exports) [[Thousand US Dollars]

2004-052004-05 12,039 12,039

2005-062005-06 10,552 10,552

2006-072006-07 11,070 11,070

2007-082007-08 10,065 10,065

2008-092008-09 P P 7,895 7,895

Carpet WeavingCarpet Weaving► The carpet weaving centers are The carpet weaving centers are

located all over the country. located all over the country. ►They employ women and children for They employ women and children for

the production of fine, hand woven the production of fine, hand woven carpets.carpets.

► It brings in a lot of foreign exchange. It brings in a lot of foreign exchange.

► There is much exploitation of labor in There is much exploitation of labor in the carpet industry.the carpet industry.

►Recently, Pakistan has had to face Recently, Pakistan has had to face objections from western countries objections from western countries about its dependence on child labor to about its dependence on child labor to manufacture carpets and rugs. manufacture carpets and rugs.

YearYear ExportsExports[[Thousand US Dollars]

2004-052004-05 278,827 278,827

2005-062005-06 271,500 271,500

2006-072006-07

2007-082007-08

2008-092008-09 P P

Sports GoodsSports Goods► The sports goods industry is located in Sialkot.The sports goods industry is located in Sialkot.►Manufactures goods worth Rs. 12 billion per Manufactures goods worth Rs. 12 billion per

year. year. ►Produced items included cricket bats and allied Produced items included cricket bats and allied

equipment, hockey sticks, racquets of various equipment, hockey sticks, racquets of various types and different types of balls.types and different types of balls.

►The basic raw materials required are leather, The basic raw materials required are leather, wood, glue, rubber and chemicals. Wood of wood, glue, rubber and chemicals. Wood of various kinds and leather is easily available in various kinds and leather is easily available in Pakistan. Pakistan.

► The principal importing countries are The principal importing countries are UK,USA, Germany, France, Italy, Spain, UK,USA, Germany, France, Italy, Spain, Netherlands, Sweden, Denmark, Netherlands, Sweden, Denmark, Canada and Belgium. Canada and Belgium.

► In the international market, sports In the international market, sports goods are supplied by Japan, Taiwan, goods are supplied by Japan, Taiwan, India, South Korea and Pakistan. India, South Korea and Pakistan.

YearYear Exports (Exports (Sports GoodsSports Goods ) ) [[Thousand US Dollars]

2004-052004-05 386,381 386,381

2005-062005-06 462,959462,959

2006-072006-07 411,979 411,979

2007-082007-08 415,363 415,363

2008-092008-09 P P 384,823 384,823

SURGICAL INDUSTRYSURGICAL INDUSTRY ►Surgical instrument manufacturing Surgical instrument manufacturing

industry originated in the early 1940s industry originated in the early 1940s in and around the city of Sialkot. The in and around the city of Sialkot. The sector manufactures a wide range of sector manufactures a wide range of medical, surgical and veterinary medical, surgical and veterinary instruments exporting 80-90 % of its instruments exporting 80-90 % of its production. production.

EXPORT OF SURGICAL EXPORT OF SURGICAL INSTRUMENTSINSTRUMENTS

YearYear ExportsExports[[Thousand US Dollars]

2004-052004-05 192,014 192,014 2005-062005-06 220,855 220,855 2006-072006-07 236,302 236,302 2007-082007-08 273,609 273,609 2008-092008-09PP 279,067 279,067

There are also some hidden and apparent obstacles in the path of growth of small and medium enterprises in Pakistan. The most important are;

►Political instability►Law and order situation►Financial constraints►Energy crisis►Taxation problems►Labor issues►Lack of coordination

Energy crisis

► Gas or electricity disruptions and loadsheddings hurt SMEs more as whereas the large firms can buy generators and cylinders from the market, SMEs might not have the resources to be able to do so.

► Infrastructure provision is another major constraint. The quality of roads, the cost of transport, the efficiency of ports and airports all impose significant costs on Pakistani businesses. For the smaller provinces these problems are much more severe (Peshawar and Quetta).

► With almost all government departments there is a side-payment burden involved as well. Since there are clear threshold effects present as well, some of the burden is more for the smaller firms than the larger ones. Most of these expenses are, of course, non-productive, and negotiating them takes up significant management time as well.

►Businesses do not find trained employees, and there are few incentives to get trained, as the market does not pay enough for training.

► Though interest rate reductions and macro stability has made macro uncertainty less and has improved SMEs access of finance.

Internal Causes►Improper project feasibility►Lack of managerial knowledge►Poor educational background of lack of

education►Out dated technology►Financial problem►Poor marketing strategy►Lack of motivational factor►Traditional or rigid attitude

Improper project feasibility► Many projects were sick by birth because of Many projects were sick by birth because of

inadequate feasibility reports regarding the inadequate feasibility reports regarding the demand of product in various markets. demand of product in various markets.

►Wrong choice of technology. Wrong choice of technology. ►Improper forecasting of financial requirements. Improper forecasting of financial requirements. ►Delayed in supply of plant and machinery or in Delayed in supply of plant and machinery or in

their installation.their installation.

► No clear vision, goals and objectives. The root No clear vision, goals and objectives. The root of all these problems may be traced to the lack of all these problems may be traced to the lack of expertise in project planning and management of expertise in project planning and management on behalf of entrepreneurs and promoters. on behalf of entrepreneurs and promoters.

►Some of borrowers are also make responsible to Some of borrowers are also make responsible to the various commercial banks for the causes of the various commercial banks for the causes of sickness because these banks were not giving the sickness because these banks were not giving the expertise especially in the stages of feasibility expertise especially in the stages of feasibility reports.reports.

There is very essential to make the ground feasibility There is very essential to make the ground feasibility reports about the small industrial project. reports about the small industrial project.

► Industrial classificationIndustrial classification► Methods of marketingMethods of marketing► Market outlookMarket outlook► Plant capacityPlant capacity► Estimated project costEstimated project cost► Production processProduction process► Manpower requirementsManpower requirements► Per Kg manufacturing cost.Per Kg manufacturing cost.► Profit & loss accountProfit & loss account► Production processProduction process► List of machineList of machine

Lack of Managerial Lack of Managerial Knowledge:Knowledge:

► The majority of entrepreneurs are unaware The majority of entrepreneurs are unaware about the knowledge of managerial field. about the knowledge of managerial field.

►Therefore, they were performing the non-Therefore, they were performing the non-managerial tasks. Rather the tasks of managerial managerial tasks. Rather the tasks of managerial functions such as planning, organizing, leading functions such as planning, organizing, leading and controlling. and controlling.

► Indeed, in this dynamic world this sector needs Indeed, in this dynamic world this sector needs qualified professionals to handle the every qualified professionals to handle the every activity of business affairs more effectively and activity of business affairs more effectively and efficiently.efficiently.

► It is clear that, the sound knowledge of It is clear that, the sound knowledge of managements is a key to success.managements is a key to success.

Poor Educational Poor Educational Background or Lack of Background or Lack of

EducationEducation► The most of owners/managers are very poor in The most of owners/managers are very poor in

sound educational background, and the rest of sound educational background, and the rest of un-educated. un-educated.

►

Out- Dated TechnologyOut- Dated Technology► It is a known fact that technology plays an It is a known fact that technology plays an

important role in the potential of an industrial important role in the potential of an industrial unit. unit.

► In such a global scenario, small industrial units In such a global scenario, small industrial units can not survive and with stand the global can not survive and with stand the global competition purely on the basis of cheap labor or competition purely on the basis of cheap labor or adoption of simple labor intensive technologies. adoption of simple labor intensive technologies.

Financial ProblemsFinancial Problems► The most of units are sick by the reasons of lack The most of units are sick by the reasons of lack

of working capital, of working capital, wrong choice of financiers,wrong choice of financiers, high interests payments, corruption, lack of high interests payments, corruption, lack of financial control, an absent of costing systems and financial control, an absent of costing systems and delay in release of funds by banks or financiers.delay in release of funds by banks or financiers.

Poor Marketing StrategyPoor Marketing Strategy► Owners/managers of small industrial units in Owners/managers of small industrial units in

both estates regarding are layman, and not aware both estates regarding are layman, and not aware about the tools techniques of marketing strategy. about the tools techniques of marketing strategy.

► They did not know about the marketing about They did not know about the marketing about the mix strategy and some important elements of the mix strategy and some important elements of market segmentation, such as,market segmentation, such as,

►Demographics variablesDemographics variables►Geographic and Psychographics informationGeographic and Psychographics information