The American Scene; Health of Small Business

Good morning. Good morning. Historically, the United States is prided itself on its reputation of being a land of opportunity. An opportunity to some has meant the chance to organize and operate an independent small business. Today, however, with our increasingly complex society, the emphasis in the American scene seems to have shifted to big business, large corporations controlling the manufacture of many products throughout the country. This morning, we would like to investigate the actual status of our small business man to determine what his plight is today and to see if possible what his future might be. And to help us in this direction, we are pleased to welcome this morning, Mr. Leroy A. Wichstrom, Instructor and Conference Director in Industrial Engineering at Illinois Tech, and Associate Analyst with the Engineering Economics Research Division at Armor Research Foundation of Illinois Tech, and Dr. Manley H. Jones, Professor in the Business and Economics Department of Illinois Institute of Technology. Gentlemen,

perhaps before we get into our discussion, we'd better limit what a small business is, what makes a business small as opposed to a large one. Dr. Jones, my feeling is we probably ought to think of a small business as one with employees not in the excess of 200 or 250. Perhaps we ought to say it will have more than two or three people because that maybe should not be considered a small business. I would like to suppose or at least indicate that there is no definition of a small business, so we ought not be too limiting in our determination of what it is. Mr. Wichstrom, I tend to agree with that sometimes it's useful to think in terms of the annual sales, you know, such as saying that, well, a small business is a business that does less than three million a year in sales or something like that. Or sometimes assets, the amount of assets. Well, there is no official definition written

down. No. Well, is there a difference? We often consider of the neighborhood grocer as a small business and he is a retailer. Now, is there a difference between a retailer and a manufacturer? Well, I would suppose that... Aside from the work they do, of course. Any of the problems are the same in both of them. The problems are probably somewhat more limited in the field of retailing than in the field of manufacturing. And likely is not with a small independent grocer, for example. The father and the mother and maybe one or two of the children may be running the business from six o 'clock in the morning till 12 o 'clock at night kind of thing. But today, I think we'll talk primarily about the manufacturing end of the small businesses. There's one kind of small business that is in this general field of distribution that we ought to mention at any rate and say we're going to cast aside. That is the distributor or the mill supply operator who handles

industrial goods for manufacturers, quite often for companies that we would be talking about as manufacturers, small manufacturers who are ordinarily small companies. But nevertheless, many of the kinds of problems that a manufacturer has. Generally, we can say a company with less than 200 employees, less than three million in sales is a small business. Right. Well, now what kind of products do the small manufacturers deal in today? What areas are they founded most often? I'd like to bring out that probably the small business has to depend on custom items to a great extent. We find that larger manufacturing firms can produce the regular standard lines at very good prices and competitive prices. That would leave these small manufacturers to concentrate on custom items or unusual items which the larger manufacturer

doesn't produce or doesn't want to take on. I would agree with that. Maybe we can bring the distinction down a little bit more sharply that the large company is particularly fitted and in fact built to handle mass production items that are sold and accepted in large volume, whereas the small company is much more flexible and is able to handle with a good deal of insight, a mass of somewhat diverse products. There's one other aspect that is quite interesting to me, to see that nearly all of the companies that satisfy the aesthetic are the emotional needs of people are of this kind. Let's speak of, let's say hats, women's hats or men's hats for that manner. Many of the clothing items are produced by small companies where you need to be sensitive to the

things that are inside of the customer and what he wants to need. Books is another in the book publishing business, the relatively small industry. Well, can the large corporation deal in the custom item too? I feel they could deal in them however a large firm quite often will make a study as to which lines are profitable and often will find that these fringe and unusual small volume orders are not profitable. I may discontinue making them which then leave this open for this small manufacturer who may with a different process or manufacturing methods competitively sell this custom item. There's another great problem though I think here. Where are we to attach, we'll say as some large companies have tried to attach a small department or division or maybe a separate subordinate company to the large company that the small

segment will ordinarily have to conform to certain rules and regulations that are used for the entire organization and quite often these are not suited to and too much confine the individual small segment so that it's not flexible enough in making these decisions or fast enough it has to go up stairs real safe for some okay on some project. Either small manufacturers who manufacture one product in large quantities for instance a part of an automobile or nothing. Yes definitely and this is one way that they can really become well known let's say that they specialize on one particular item and they by doing this one item well and selling it at a competitive price they become known as possibly the main supplier of this one item yet this supplier is a small business. This would be rivets we'll say

are nuts and bolts there's something of parts that for instance for the automobile industry we have several here in Chicago that manufacture parts for the automobile industry and they're still relatively small firms but produce mainly one product. I think this is rather interesting because here we made two or three generalizations about how it would be short runs and small amounts and here is a quite different sort of pattern one single product where they push the button in January first reasonably and it runs all year long and the stuff squirting off the end of this production line. Well in essence it's the same as a large corporation a company like that. Yes except for the breadth of the line and the volume turned out. Yes. Well is this well the areas that small businesses are in today is has this changed over the years have they become more limited today than they used to be? I don't know keep in mind that when you say over

time at one time there were no small now no large businesses in in the country and that it had been has been only since we'll say about 1900 that there have been what we now define as large businesses. I don't think I know an answer a good answer to that. I think that as a result of less emphasis on on specialized items made by craftsmen that there is a tendency toward less chances for small firms in this line. I'm thinking of where a craftsman makes a certain item. This is now being produced by a large manufacturer and a craftsman to date does not enter into the picture the same way he used several years ago where a good craftsman could break into a business of his own and sell his product and there's less chances for a man like this today than he was let's say 30 40 years ago. Well there are definite areas then

where small businesses would not be wise to start. Oh yes definitely in industries where there is a very large initial investment in equipment for example where that is the mean method of competing. Well what what reasons would people have for buying from a small business if they're competing with a large corporation is there anything that a small business can provide a large corporation doesn't? Well I think there's one important one which is when I think you were bringing out a moment ago namely that we have specialized products that will fit precisely or much more precisely than the standardized products the needs of a particular customer so that the customer will say look I'll be willing to pay somewhat more than I would for the standardized product because actually it's cheaper for me to get this one that just exactly fits my needs or the supply item that works exactly right for me it's cheaper to handle

it and pay a higher price than to get the standardized item. The small business can also furnish possibly a better degree of service than a large business can. I thought of personal service that of in a small business when you buy from them you often know the president of the firm and you you he exerts his personality into the business whereas in a large firm the this personality is not the doesn't have the same effect. You can get satisfaction in annoying that the product you're buying is going to fit your needs and has been tool to fit your needs by the small business. Providing you have built or the company the small company has built a reputation for doing that some of them fail miserably at least at times and begin to lose business as a consequence of that. Well let's get into some of the problems which are facing small businesses today. What

would you say was a major problem? I would say that one of the major problems and there are four or five that I think are important is in the field of development and improvement of product. The small company can go to an agent such as Armed Research Foundation for help but nevertheless the problem of getting all of the management into a thinking pattern and saying look this is a good idea for a new product let's develop it is difficult to establish I think in a company. In a small business? In a small company? There are fewer executives however aren't there? Oh yes and fewer than who have to be convinced and this may be a very important matter. Is it possible for a small a single small business to go to a research organization and have them do research for them or is it more often done the other way around they do their own research? Well a small firm could not afford to do its own research. If

you mean by that having a full -time research staff this they could not afford. So the next thing for them to do might be to go outside and maybe use professional research help use a firm that provides this service. In my work at Armour we've worked on several employer associations and four several such associations where 100 to 200 small businesses in one industry have gotten together to start an association. Now this association is for the purpose of promotion of the product but also through this association they can approach a research organization and such as Armour and come in and say well we have a

problem in marketing or we'd like to know what new products would fit our industry and then these specialized staffs will go to work on such a problem. I think another major problem that we ought very much to be thinking about is a problem of attracting high -level thoughtful executives who are excited about running a business. Many of the men who graduate from Illinois Tech for example tend to say well look I think I ought to go into one of the big companies because I can put to work all that I've learned here virtually immediately and to certainly to a great extent that's true. But I personally am very much excited about small businesses. I've been associated with small companies that was all the time until I began teaching and now I was a consultant at them.

Of the potentials in those companies the flexibility, the amount of understanding that a man gets when he goes into a small company has contrasted with a large company. Is the major attraction to the larger company the the fact that a person feels he can do what he was trained to do quicker than in a small company? I would say wouldn't you see a good deal more of that than I do? No I can't agree with that. I feel that these students are being drawn to the large companies mainly for this security. I mean they want to feel secure and they want to be with a large firm. They don't want to take any chances. When it's good at starting salary as possible without taking let's say $50 less a month and going with a small firm where their eventual salary will be much better and what they could have gotten possibly at a large firm. They're all looking for this immediate advantage rather than the long term and then

I do see a lack of boldness in our students which is really serious. Maybe we aren't in this connection. I think we ought to recognize that these large companies also do a very careful job of soliciting employees and the student who gets out of an engineering school or business school where maybe finds it easier to look for a job that way than to go out and look for a job on his own among companies that he doesn't know anything about and who don't bother to come because they don't want one or two people not very often. Is there a trend on the part of executives in large businesses to look toward small businesses today? Are they realizing that here is an area where they can get satisfaction? Do you mean as suppliers? An executive

working for a large corporation deciding that he would get more satisfaction by turning to a smaller business. I have a feeling they get stuck in the big companies. This is one of the things that troubles me quite often men in their 40s will gradually begin to open up and they say look I'm in this large company. Everything was so wonderful when I was young and I'm on a plateau I'm stuck. I don't know. I don't dare pull out because I'll have to take a smaller salary and I can't afford it and I'm not going to get any place. I'm just in there in a rut. So there seems to be two types of people who would become business executives. Some more suited to the larger corporations and some more suited to the smaller businesses. I like to in this connection make a distinction that to me is sort of useful namely that a brilliant student not necessarily a technically a student brilliant in technical fields. A brilliant student I would highly recommend go into a large corporation because they're there the sky

is the limit presumably. Or a sort of a pedestrian student that gets his season decent. He'd like this security that you were talking about and you'll get it there. I would like to bring in to and say to the student who is between these two extremes look your place is in a large in a small company. It's amazing you see what can happen in a small company starting from virtually scratch as I have with one company just practically nothing and snowball the thing up to several well about five or six million dollars in side of five years. Is it possible today for an inventor to come up with a new idea and with no training at all in the business world set up his own company and be successful at it. These new ideas are very useful the only problem is in patents. I mean he might have an excellent new item you see which he's going to

start manufacturing but as soon but in order to the timing is so important so he's got to start making it right away and so he's applying for patents at the same time and so and he hasn't received the patents he's just applied for them and he starts manufacturing it and he runs into a great danger of being copied or the product might be copied by other manufacturers at this stage you know where he doesn't know whether he'll get patents or not and the first small manufacturer to go after someone else who has infringed upon his idea yeah it's it's very costly and so time consuming so he probably lets it go and there's some others he's lost his advantage of being the sole manufacturer of a new gadget or a new product that a man such as you have briefly described is likely to be mechanically minded and his main

concern aside from also getting a pot pad and the drawings made and everything worked out is getting his manufacturing manufacturing manufacturing set up and he sets up this beautiful plant here that's going to just turn this out at practically no cost at all and you can virtually and maybe a week produce enough in that plant to fill his warehouse and sell for the next year his big problem really is to make sure that that product that he has thought of it's going to be wanted by somebody and wanted at a price they're willing to pay a price so that there is at least some difference between the price he receives and the out of pocket costs he has so that he has something to carry his cost of manufacturing or cost of selling advertising would seem today than that a man who's considering starting his own business would have to make sure that he has a pretty firm business background before he'd even consider certainly a marketing background otherwise he's really lost well let's get into the problem

of sales what what problems face a small company and making sure they have adequate sales for their concern well you take a look at this one that you were speaking up a little while ago a company that produces virtually the same product all year long he has when when his salesman goes out except for the large companies where the orders are large that salesman gets an order we'll say for a million washers or a million rivets or whatever it may be but the difference between the manufacturing cost and the selling price for that order is not going to be enough really it's quite often to pay for the salesman's time and for his transportation and for living expenses this is a tremendous problem this is one of the reasons why I think so many companies are merging is to cut down this cost of selling you find that true the distribution costs are very high and there are of course other ways that I can think of for instance having manufacturers representative might

be a solution or then have some other marketing where the selling is done by someone other than the owners or the the immediate employees of the firm you encounter there though the problem of trying to make these men who are really selling on commission these sales agent manufacturers are you selling on commission telling me look I want you to go down to such and such a plant down at such and such a town which is way off it never wants to go there and you can't control and direct them as you would like and as you would be able directly in your firm another problem strikes me it seems that traditionally small businesses have been family owned and family controlled has this caused problems for small businesses once let's say the original I'm scared of any generalizations to making general statement yes I'm sure as it is in a large company for that matter but this period of

transition from a relatively small through a medium size on up to a large one during that transition the family is likely to be you have brushed aside somewhere another secondary generation you see this is only in the growth where the company can afford to bring in a professional manager you see a firm has to be maybe have thirty five or more employees until the left firm is justified in bringing in someone who's a good management man but the in many instances the current training methods which I use which I have found most in most cases is that this son is brought into follow in the father's footsteps now this is wonderful the I think the son starts at some of a disadvantage when it's done that way I would rather see it done this way that the son goes to college then works somewhere else at two or three different firms for for five or six years

picks up the experience and then goes into his father's firm after if this is possible this I feel is much desired we're getting back to the same point again then that it takes quite a bit of training for anyone to really successfully operate a small business yes what about production problems can a small business turn out or have an efficient production method is a large business no they can't because as you mentioned earlier the the investment involved becomes very heavy and large if you think of partially automated lines and so forth this is strictly out of this small manufacturers reach in in most instances so he has to depend on less effective equipment and his men are doing a higher caliber worked out to be more skilled than the employer employees of a large business where where you know the employee in a large business may may do only

one particular task but in a small business an employee in the shop has to be able to do several different jobs well and this is also follows as a result of the product mix being varying and then the it's the result of the custom orders that small businesses have I'm not quite as convinced that a large company is efficient as efficient necessarily and we are probably to clarify what we're talking about with efficiency which I won't try to do now that is that in a small company the control and direction of the worker and we'll just hold it to the plant operation is likely to be much more direct and much more simple rather than having it the the worker controlled and directed by some set of nice plans with all kinds of rules and regulations and things of that

kind so that the worker is actually working in terms of trying to at least not break too many of the regulations whereas in a smaller company where the relationship is a little bit more comfortable I often myself find that the man worked more efficiently as they're supervised. Now you see a shop of 11 or 12 people you can you can supervise very well and the the owner in this case can supervise it effectively of course then when he grows a little beyond that he runs into problems. Thank you very much gentlemen I'm afraid our time is up. Our discussion this morning has indicated that the world of small business has indeed been changing. In some respects operating a small business has become as complex and demanding as a large nationwide corporation. Today the chances of a craftsman opening a shop and operating it successfully have become rather slim instead a small business now requires a skillful and highly trained business executive comparable to any large corporation but whatever new problems arise it has been pointed out this morning that there is still a decided place

and need for small businesses to remain in the American scene. That there will be further problems and changes in the world of small business is inevitable but that they will be so great as to cause small business to disappear altogether seems at this point impossible. Good morning for the American scene.