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Improving management and the managerial skills of small-scale entrepreneurs.

A Guatemala forest worker uses a chain saw

A cooperative sawmill in Guatemala

Ake Sahlin
Management Development Branch
International Labour Organisation (ILO) Geneva


Despite many favourable attributes, the average small enterprise is often struggling for survival in a hostile environment. Lessons learnt in Africa show that the policy framework many times is to the disadvantage of the small entrepreneur. For example, in the case of Nigeria, recent studies disclose that import tariffs applied favour larger companies and the use of advanced technologies. In one case, large companies paid duties of between 0-10 per cent on the import value while small-scale competitors had to pay 30-65 per cent although they were producing identical or similar goods.

A result of the policy framework is that many entrepreneurs are tempted to use an inappropriate technology. They soon find themselves trapped in a situation they cannot manage. Limited technical skills mean that maintenance will be poorly done and the machinery will deteriorate. Lack of spareparts and in some cases raw material for the production process due to foreign currency restrictions might halt the operation altogether.

Many businessmen running a small venture are also facing capital restrictions although not for investments in machinery and equipment. On the contrary, funds for investment in fixed assets are often easily accessible and in fact many small enterprises have a large unused capacity. The commonly encountered capital constraint is instead to get working capital. Indeed, very few sources are available to supply the small entrepreneur with money to buy raw material and intermediates, to pay workers wages, etc.

Small-scale enterprises in the forest sector rarely exist with business as the single dominating activity of the owner/manager: the small business operation is carried out on part-time basis, often as a complement to agricultural activities. In many cases, assets are also used for several ventures. It is therefore very difficult to measure the real importance and productivity of the sector or to assist the forest-based activity in isolation. It is also noted that forest-based small enterprises often are located where raw material is available. Compared with other lines of business they tend to be more spread out and consequently more difficult to reach with traditional approaches and assistance such as management training and extension service.

Most forest-based small scale enterprises apply unsophisticated production methods and equipment. It seems that most work on an order basis rather than producing for stock to supply a distant market. Although such a system reduces the working capital tied up in production or stock, it also limits the scope for productivity improvements.

It is of interest to note that early findings from an ILO-study presently being executed shows that the above-mentioned characteristics apply not only to the formal sector but also to forest-based businesses of the informal sector. A conclusion that might be drawn from this is that when discussing needs for management improvements and assistance, there are few reasons for separating the analysis of small enterprises in the formal sector from that of the informal sector.

Management of small-scale enterprises

To avoid academic discussion, management is here simply defined as the way a commercial/business activity is organized. Before looking at the forest-based sector, discussed below are some general issues relating to small enterprise management. While it is realised that management in small enterprises normally is personalised rather than being institutionalised, still the management of small enterprises can improve their position vis-a-vis competitors by introducing management practices that give consistency and viability to the administration of the entire business.

The very ownership of a business tends to create elitist attitudes and self-orientation. It imposes a monocular vision which limits the company's capacity to respond positively and aggressively to business opportunities and changing business conditions. A person who stands head and shoulders over his colleagues in perceived authority can create benefits as well as disadvantages for the business. In cases where he is a poor manager even though a good entrepreneur, his domination might prevent the enterprise from obtaining the skills and methods which are needed for further growth. A gap is thus created between the manager/owner's perception of the situation and his own abilities on the one hand and of the actual needs of the business on the other.

Small enterprises often apply a minimum of formalisation. They achieve the output without much of differentiation in job content. The built-in informality facilitates a smooth response to minor disruptions but it renders at the same time excuses for not establishing and enforcing proper performance standards. Due to the informality of the business and to the fact that most small enterprises are operating with short product cycles, the managers/entrepreneurs do not conceptualise their situation in terms of opportunities, expertise or strength. The enterprise might as a consequence implement decisions on the basis of unvalid assumptions or a misperception of the situation.

Discipline at workplace is affected in cases where a small enterprise is filled with relatives of the owner or manager, especially if there are elderly relatives since in many cultures it is difficult or even impossible to govern or reprimand such an older relative/employee. The extended family system, where it operates, requires that in the recruitment of employees for such a family business, relations of the owner/manager have to be considered irrespective of other employment criteria.

Since many entrepreneurs of small enterprises lack managerial experience when they start their business career, there is often a tendency of basing decisions and actions on hope and dreams rather than solid data. There are for example numerous cases of small enterprises going into bankruptcy because of the simple fact that they did not know how to price their goods or services. In such cases, even the introduction of the most basic management principles could improve the performance of the enterprises.

In short, the following characterises organisation and management of small enterprises:

- the entrepreneur succeeds in business due to his technical skills, not because of his ability to conceptualise market opportunities or plan ahead in strategic terms;

- in contrast to large companies, which can usually afford specialist staff, the small enterprise manager is a relatively isolated individual trying to deal with long-term policy issues and day-to-day operational problems simultaneously;

- small enterprise managers often operate without adequate quantitative data or other information, rather following the strategy of other successful entrepreneurs;

- due to low wages, limited job security and a low status from working in a small-scale enterprise, the manager cannot easily recruit and keep qualified employees.

Due to these shortcomings, many small enterprises fail to adjust in response to environmental changes, introduction of new technology or similar developments. When the skills and experience of the owner/manager become outdated, the enterprise slips into stagnation.

Given the characteristics of small enterprises in the forest-sector, with many tiny units on the border between formal and informal sector supplementing the income of the entrepreneur's family, the need for management improvement are more basic or different from those of many other lines of business. Due to the informal and irregular manner in which operations are carried out, often as a complement to agricultural work, the financial flows of the enterprise are not separated from the economy of the family. Proper books and records are rarely maintained and the assets of the enterprise not insured.

Making baskets - a family business

Many entrepreneurs in the forest sector also depend on limited market opportunities and produce few or a single product of a relatively low quality which excludes them from operating on export markets. The often poor quality of products is basically an effect of rudimentary tools and equipment being utilized. The use of relatives or poorly trained employees with low payment reinforces the quality problem. Especially in rural areas, qualified workers are not easily found.

Finally, in addition to low salaries, many small enterprises such as those in the forest sector offer poor working conditions and lack even the most basic safety-measures. This tends to increase the problem of experienced workers moving to larger enterprises in urban areas.

Entrepreneurship and management development issues related to the small enterprise sector

Management support to the small enterprise sector covers the whole range of issues from identification/selection of entrepreneurs, initial management training, support through extension services and functional support to strengthening of small enterprise development agencies and development of national policies on promotion of small enterprises.

Many countries have training programmes for the small enterprise sector but lack a specific education and training policy for small enterprises development. A number of issues need to be resolved before policies can be implemented at the national level. In the first place, potential entrepreneurs have to be identified. Even when selection procedures are used, only a relatively small percentage of graduates actually start and succeed in business. Some experts believe that wasted effort and financial loss can best be avoided by a self-selection process whereby rigorous exercises completed before attending a formal training programme allow participants to judge their own entrepreneurial potential.

Another issue is to determine the appropriate level of training. Assuming that entrepreneurship can be induced, should the starting point for entrepreneurship development be the primary, secondary, post-secondary or post-tertiary education level? The answer to this question will depend to a certain extent on the type and level of training of the personnel involved in small enterprises development assistance. It is sometimes argued that including entrepreneurship training in the primary or secondary curriculum would mean devoting less attention to basic skills such as languages, mathematics and science. This is countered by those who maintain that entrepreneureal attitudes take a long time to develop and should therefore be taught as early as possible. One reason for introducing self-employment concepts to children at the primary level in developing countries is that many of them do not pursue their formal education at the secondary level. The cost of doing so would be minimal yet it would enable young people to be informed of the possibilities of self-employment as a career. An issue of interest is also whether early entrepreneurship training should be sector oriented in order to gear potential entrepreneurs towards expanding lines of business or if the training should be kept general.

In some industrialised countries, post-secondary educational institutions provide special training programmes for potential entrepreneurs. In the developing countries, too, university-level business programmes sometimes cater to the specific needs of small enterprises. Governments are now having to decide whether to introduce basic changes in the educational system so as to offer business education and training for various age-groups.

Financing entrepreneurship development programmes is also an important issue. In some countries, the entire cost is borne by the government, in others by the participants. The decision in this matter will depend to a large extent on the type of small enterprises being aimed at (modern small enterprises, craftworkers, informal sector entrepreneurs, self-employed women, etc.). As to whether the government or the private sector should be responsible for such programmes, opinions differ, some arguing that overall government control is essential to coordinate the programme and others that the government should not be involved in any part of the programme that can he carried out by the private sector. In some instances entrepreneurship development programmes are offered jointly by government and private sector organisations. There is considerable controversy, too, over whether the programme should stop at business creation and the participants be left entirely to their own ventures once they have received their initial training or whether, on the contrary, follow-up counselling and even other types of assistance such as credit should be available for the first year or two of operation of a new small enterprise as part of the programme.

Given the particular characteristics of the forest-based small enterprise sector with small, family based units distributed in rural areas, successful assistance programmes will probably differ considerably from most existing approaches. One key issue is whether to concentrate on those with the largest potential for entrepreneurship and assume that the local community will benefit eventually rather than using scarce resources to support income supplementing activities with little scope for improvement. Although very small income generating business ventures are important from the individual's point of view and contribute to employment and national production output, it can still be argued that due to the irregular nature of activities the productivity of assistance to such tiny units is less than that of support to somewhat larger and more permanent enterprises.

In the field of social science, during the past 50 years, extensive research has been carried out regarding the issue how human beings learn and acquire skills. Although much is known today about the learning process, relatively few research projects have focussed on how successful businessmen obtained their entrepreneurial and managerial skills. Available evidence indicates that the development of entrepreneurial and managerial skills is a process different from most other learning. The importance of the childhood, early experience from working life as well as an environment favourable to business ventures are all ingredients necessary for the development of entrepreneurial attitudes and talents. Although the issue whether entrepreneurship can be taught or is inherited is still debated, there is today fairly strong support for the assumption that such traits can be developed through well designed training programmes as will be further discussed below.

When it comes to development of managerial skills, the issue is not whether they can be transfered by training but rather to what extent the quality of training programmes can be improved to the level where they attract the attention of hardworking entrepreneurs. A vast number of small business training institutions throughout the world are offering more or less comprehensive training programmes geared towards the local business community. Many of these efforts fail, often because the programme design is poor. Too many programmes are containing over-sophisticated components and abstract training materials far from the reality of the entrepreneur. In many cases, the programmes are also over-ambitious in terms of the commitment expected from the entrepreneurs. Few successful, or moderately successful entrepreneurs can manage to stay away from their businesses for long periods, something which is unfortunately often not taken into account among training officers designing the programmes.

Practical youth training in a local business community

The key factor explaining why management training programmes for small businesses are so poorly received by many entrepreneurs seems to be the fact that they are usually designed by people in ministries, public small enterprise promotion agencies, forest departments or similar institutions. Often these officials have little or no experience themselves from the small business sector. ILO experience shows that only if the training is planned and conducted by trainers familiar with the conditions of small enterprise management will it become practical-oriented and well received by the entrepreneurs. Once the programme is perceived as practical and useful by the local business community, the institution offering the training gets a solid response from the entrepreneurs.

There is also the issue of the cost-effectiveness of training. Which group training methods have given good results? What successful methodologies exist that are learner-based? Questions such as these stem from a general desire to apply the wealth of knowledge in the fields of social psychology and cultural anthropology to the design and execution of small-enterprise training programmes.

Extension services in one form or another exist in almost every country, where they are generally looked upon as one of the most important components of any serious small enterprise development programme. Yet they invariably seem to suffer from a number of unexplained shortcomings. It is therefore important to identify specific action that could be taken to improve the way they are designed and operated.

ILO activities in entrepreneurship and management development

Traditionally, most ILO activities in the field of small enterprises promotion start in response to a member State's need for assistance in training and extension services. A considerable number of field projects have been carried out over the years and their volume continues to grow.

This is not to say that the countries concerned have necessarily made notable progress in training or advisory services for small enterprises. Two critical problems prevail in the field of training. First, many countries have no comprehensive training policy and any training programme for small enterprises in these circumstances is almost bound to be wanting in quality and quantity. Therefore, the ILO's employment and training programmes seek increasingly to develop a strategy based on sound training policies. The second problem is that many approaches and methodologies for small enterprises development in developing countries have proven to be conceptually weak. These two problems have been tackled in several ways.

Texts, manuals, handbooks, workbooks and trainers' guides for small enterprises have been devised as part of the ILO's Training Programme in order to provide more practical, simple, down-to-earth training materials and to improve the cost-effectiveness of training; too often in the past entrepreneurs have had difficulty coping with over-sophisticated techniques.

The ILO has, with the support of the Swedish International Development Agency (SIDA), launched and integrated small enterprise management training programme “Improve Your Business”, which is being introduced in a number of countries in Africa, Asia and the Caribbean, following the successful promotion of a similar scheme in Sweden and other European countries during the 1970s by the Swedish Employers Confederations. Essentially, the package consists of a handbook and a workbook. The material can be used without an instructor as an analytical and counselling tool as well as for group learning. The basic aim of the material is not, as most training materials, to passively transfer knowledge to trainees but rather to motivate them to ask themselves how they are performing as managers of their businesses. By triggering off a process whereby the entrepreneurs frequently assess their respective business much more is achieved than through traditional training. In order to facilitate this self-assessment, the workbook offers an number of a checklists and exercises which are designed in such a way that the entrepreneur has to review his own situation. In areas where the entrepreneur feels that he can improve his managerial performance, the handbook offers practical advice. Supporting training activities, seminars, workshops and individual counselling are carried out with the same aim, no to tell the entrepreneurs what to do but rather to stimulate them to look at their own way of doing things in business.

The success of this programme so far has been tremendous. Numerous country adaptations have already been published and drafts of translations into French, Arabic, Swahili and Bahasa are at present available. Additional training materials using the same basic approach are also currently being produced. A trainers' guide and a business counselling guide, both belonging to the “Improve Your Business” family, are also presently being finalised. An evaluation of the Improve Your Business programme in Kenya shows that a significant number of the entrepreneurs participating in the programme did actually improve their managerial behaviour during the course of it or immediately afterwards. For example, many of the participants started using simple bookkeeping systems and basic principles for costing and pricing as a result of the programme.

Film strips - one of the mass media training material

The ILO has also developed mass-media training material for small enterprises. The material was first developed in Latin America, where experiments are being undertaken in Colombia (radio), Mexico (television), Peru (video), Brazil (photostrips), Costa Rica (audio-slides) and Argentina (radio-programmed instruction for rural producers). A similar training scheme for small enterprises by radio, classes and correspondence has also been designed for island economies in the South Pacific.

There is a contradiction in designing entrepreneurship development and management training programmes which has to be handled in order to achieve maximum cost-effectiveness in training. On the one hand, training of individuals or small groups, especially on the job training, tend to have more impact than traditional training of larger groups of entrepreneurs. At the same time, the cost per participant increases drastically when the number of persons participating in the programme is reduced.

One approach in training which has been applied by the ILO is action learning. This approach has both proven to be cost-effective and generated a lot of positive spin-off effects apart from improving management performance. Since 1981 the ILO is implementing programmes based on action-learning for small enterprises in several Latin American countries. The approach is based on the premise that people learn by doing, not simply by attending classes. Accordingly, an action-learning programme consists of setting up groups of entrepreneurs, each of whom identifies problems in his enterprise and works to reduce or cure these problems, meeting together periodically to discuss progress and plan further action. The group dynamic concept is important as it motivates or puts pressure on the participants to actually carry out their plans and makes the experience and skills of all participants available to each other. Initially, group-activities are coordinated by a facilitator who triggers off the early interaction in the group.

An evaluation of the Latin American project shows that action learning is a very appropriate methodology for training entrepreneurs to think about their enterprises, make thorough analysis of difficulties encountered and develop realistic action plans. By participating in a group, the entrepreneurs are able to extend their commercial network and later “joint ventures” are sometimes born in the groups. At the same time, the approach has to be used with caution. For a successful implementation, the following requirements must be met:

- a well planned and implemented promotion of the programme and very careful group selection, so that the future participants will form as homogenous a group as possible;

- some highly-participative, fully-relaxed work sessions that will make the entrepreneurs feel “at home”, and accept helping others so that the others will help them.

Although it is difficult to make a cost-effectiveness evaluation of the method, and as the outcome would depend largely on the geographical distribution of the group, available experience shows that the approach is more cost-effective than traditional training programmes. Action learning can prove appropriate for training of small, rural based businesses in the forest-sector.

Making wooden toys in Costa Rica

An additional finding of an ILO project in Costa Rica was that action-learning works as well with peasant farmers as with urban entrepreneurs. In a later project in Honduras, work with farmers was included in a project which also aimed at urban entrepreneurs. The results obtained in the course of only six months are quite remarkable. The urban entrepreneurs identified various management areas in which their technical knowledge was deficient, and formed working groups to address other problems such as raw materials quality. The farmers identified problems as soil diseases and insect pests and made contact with public health agencies. The farmers also identified various community level problems which were later dealt with as result of their initiative.

Finally, action-learning by participating in groups of entrepreneurs might eventually end in the small business community organising itself, something which clearly has a number of advantages but is hard to achieve since entrepreneurs are individualists and might object to such an attempt, especially if it comes from outside their own business community. In the future, working through action-learning groups might also prove to be a feasible way of introducing sound business practices among otherwise conservative entrepreneurs. If the informal leaders in such groups can be identified and influenced to adapt more efficient management principles, others might follow since we know that entrepreneurs tend to copy the successful entrepreneurs rather than training officers or other so-called experts.

Presently, the ILO is also working on a special training programme for female entrepreneurs. Research on the topic recently carried out indicated that there are specific training needs among women entrepreneurs and that there is a large demand for training efforts geared towards this group.

With regard to the training of consultants and advisers for the small enterprise sector, an ILO book “Management consulting: A guide to the profession”, includes a special section providing practical guidelines on consulting for small enterprises at various stages of development. This publication has been used extensively to train consultants and extension officers in both industrialised and developing countries.

Entrepreneurship development is receiving attention at various levels. Firstly, to introduce conceptual and practical awareness of self-employment as a career option for young people, a teachers' guide has been pilot-tested in several countries and its adaptation is in progress. To assist the self-employed, a guide entitled “The practice of entrepreneurship” was published in 1982.

Secondly, a comprehensive research study taking into account recent conceptual developments and practical applications has been undertaken by the ILO to assess the training components of entrepreneurship development programmes for business creation. The study includes pre-selection techniques for identifying entrepreneurs with potential for success. The results of the study are to be published soon. A spin-off from this exercise has been the creation of a bibliographical data-base with cross-references on this subject.

Thirdly, a number of field projects have been initiated to introduce entrepreneurship training into vocational training. Instances of this novel approach include projects in Malawi and Uganda where combined vocational, managerial and entrepreneurial development schemes linked to financial support to young entrepreneurs are being tested. In Morocco a managerial component is being introduced into the vocational training offered at 60 rural training centres. These projects are seen as pilot activies for potentially important innovations in vocational training.

Lessons of experience and new ideas

Finally, through its long history of executing field-projects, the ILO has gained considerable experience in designing and implementing business creation projects. The following are the main lessons learned in this area:

- a business creation or entrepreneurship development programme should start with the human-being and his business idea rather than with general plans for industrial development in the particular area or with market opportunities identified by experts. Identifying persons with the entrepreneurial qualities and who believe in what they are doing/want to do is more important than the line of business as such;

- efforts should be made to select those people most likely to succeed in business. A properly designed and implemented promotion for the business creation programme guarantees that a sufficient number of applications are received to cater for a reasonable number of potential entrepreneurs;

- the subsequent selection process should reveal the applicant's background, age, earlier working experience, the realism of his business idea, motivation, entrepreneurial attitudes and other relevant information. The necessary information can often be best obtained by the use of a battery of forms, tests and a structured interview;

- the aim of the training is to let those selected develop their usually infantile business ideas into feasible and viable proposals. The training component should cover all major areas of management, introduced one at a time as the business idea grows more mature. When, for example, the entrepreneur is gathering information about his potential market, he is also given a theoretical content in terms of sessions on marketing. In such a way, a group of entrepreneurs develops their respective business ideas, step-by-step getting familiar with new management topics.

Since the training is practical-oriented and the entrepreneurs/trainees expected to be quite active, they are given a number of specific tasks to carry out as part of the learning process. The task could be for each to compile a list of suppliers of raw materials for their potential business, something which might become useful once their enterprises are started. It is then up to the individual entrepreneur to use available means to carry out the assignments and prove that he has entrepreneurial talents.

The built-in difficulties in these training tasks are also functioning as selection mechanisms, if the entrepreneurs do not accomplish the tasks they drop out of the programme. Only those with a good commercial spirit and perseverance survive the training phase;

- the outcome of the training should for each entrepreneur be a well conceived business-plan, and a full-fleshed loan application which can be submitted to a commercial bank;

- usually, commercial banks are preferred to soft loan schemes. Firstly, an independent bank will make its own assessment of the proposal and thereby add views on the viability of the proposed business. Secondly, by interacting with an independent, commercial institution, the entrepreneur will immediately gain a realistic perception of how to deal with banks and of the real cost of capital. Finally, by approaching a commercial institution at an early stage, the entrepreneurs are given the opportunity to build up a relation of mutual trust with the bank, something they can benefit from later on.

Depending on the conditions in each case, this basic model for business creation is then followed up with other elements of management training and extension services.

Recent requests to the ILO for technical assistance have also concerned ways - and means of redeploying redundant employees from overstaffed public sector enterprises, it is expected that a recent training package, “Working for Yourself”, which aims at helping people with some working experience and skills to start a business, will provide a useful contribution to solving these problems. The package is based on a material earlier produced and successfully used in the United Kingdom. The first field testing of the ILO version for developing countries will take place in Nigeria during 1987.

“Working for Yourself” is a programme aimed at taking participants successfully through the stages of starting a business before they actually do it. The programme caters particulary for those who are starting on a very small-scale, usually based on their personal skills. It is suitable for those who are unemployed but have some basic skill or technical qualifications and for those who recently left school or a college/training institution. The programme is in 8 modules, each logically linked with the stages of development of a business. Participants are therefore supported individually or by participation in group interaction to develop their business idea through each stage alongside the programme.

The teaching style needed when introducing working for yourself is highly participative. Learning starts from where the participants are. Trainers do not teach “subject” but facilitate knowledge as it becomes relevant and only in digestible amounts and in appropriate language. The trainers must be highly flexible with a wide range of reference and business knowledge. Working for yourself is perceived as an appropriate programme for small, rural based enterprises in the forest sector. The characteristics of the programme also make it suitable for the action learning methodology.

On the job training

In the field of handicrafts and cottage industries, the ILO favours on-the-job rather than formal training or, exceptionally, short training courses when the subject-matter cannot be conveniently taught at the workplace. Training to use improved technologies or introduce new products is a reasonably straightforward exercise but business and management training poses great difficulties because of the trainees' low levels of literacy and numeracy.

The ILO has been assisting numerous countries in establishing extension services. Generally speaking, all ILO field projects for small enterprises have an extension services component in one form or another. This may focus on technical issues, as in Egypt in the early 1980s; on promotion aspects, as in Paraguay; or on rural artisan association building, as in the Gambia. The field work is linked to on-going ILO research into ways and means of improving the performance and cost-effectiveness of extension services. In a similar vein, a study has been made of methods of improving the management of institutions promoting small enterprises development in developing countries.

With respect to cooperatives, the ILO has introduced a successful global exercise in training known as “Materials and techniques for cooperative management training” (MATCOM). This inter-regional project, commenced in 1978 and funded jointly by SIDA, NORAD and FINNIDA, focusses on preparing and disseminating training manuals and materials adapted to local conditions. Seminars are organised in which the training of trainers is a key feature.

Delivering logs to a saw-mill

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