The lifestyle entrepreneurs

These entrepreneurs are often known well in their local communities. They are normally recognised for their conspicuous consumption rather than their business acumen. They normally drive fast or flashy cars and have a range of “toys” ranging from motorbikes to cars, to beach houses and more.

They often have a man cave where they can hang out and act like men. It is an interesting observation that you find that most of the ostentatious entrepreneurs are often men. This should not surprise, as being an entrepreneur requires a big strong ego to be able to cope with the rigours of entrepreneurship.

So what is wrong with owning all the “toys”? Nothing really! There must be some reward for working hard as an entrepreneur and accepting and managing the attendant risk. The point of entrepreneurship is to create wealth, so buying real assets is completely aligned. While many of the “toys” are not really assets in the truest sense of the word, there is nothing inherently wrong in doing so.

The problem that arises with lifestyle entrepreneurs is that they often start to shorten their working week and before you know it they are only working 3 days a week.  Invariably they have hobbies, for example fishing, and that becomes their driving force. They start to run the business merely to fund their hobbies and the “toys”. They stop growing their business in order to enjoy the lifestyle, and manage the business accordingly.

This lifestyle management invariably puts the business on hold, and the world marches on by. The problem arises when the entrepreneur wants to sell because they want to retire, or they suddenly find the business is in trouble. What does the entrepreneur have to offer?  A stagnant business that shows no real growth after accounting for inflation!  A business that is no longer leading edge! A business that is worth nothing!! Quite often they will provide a long list of the income that they “steal” out of the business. The cash sales is an obvious one. But who is going to believe them?

So the lifestyle entrepreneur often presents as an excellent role model, especially once they are established and the lifestyle is established. However, later in life they often present as desperate people who have a bad business, no real pension, and no opportunities on the horizon, and the fear in their eyes makes them appear oh so pitiful as they confront their future.

Remember that I am generalising and you may well be someone, or know someone who has been able to avoid the traps and still be a lifestyle entrepreneur. However, I have also seen many people facing a very dark future.

SMEs - a good time or bad

SMEs with poor management and ownership are going to disappear, particularly those in overtraded industries with low barriers to entry. But this is a blessing, particularly for those who have what it takes and who have been battling against the bad businesses who undercut price. While it is not always necessary to discount deeply to the same level, it does require some "contribution" to the client. So margins can take a hammering. Remember the clients are often also in a similar industry.

I believe there are three key issues that are important during difficult times.

1. SMEs must be in clear defined and deep niche markets. This is the safest place to be as a SME. Too often SMEs simply try and compete on price and that is the death knell of the business.

2. Innovation. Keep everyone guessing. Keep changing what you are doing and the way you are doing it. Keep changing what you take and how you take it to market. Every time the competitors work it out, you should have changed again, so that they are expending most of their energy chasing you and not the client.

3. Maintain margins. A large part of this is the relationships with the clients. Obviously if you are in industrial sales markets it is easier, but it is possible in different ways with consumer focused businesses too. Networks and relationships always come to the fore during tough times.

SMEs - where do you fit in?

SMEs fit into one of the three (3) categories of SME I defined in the previous three blog articles.

So where do you fit. Are you a survivalist? Are a lifestyle entrepreneur? Whatever you are, it is important to know!! The lifestyle entrepreneur is the most difficult to motivate to change his or her ways.

Are they worth changing? I think that there are undoubtedly many worth changing, but the question is how to do so. It is a very difficult process, and I have yet to succeed on a significant scale. I believe that only they can change themselves. As I have stated previously, it is all about the ego. Unless they can manage their ego to the point where they can acknowledge they are wrong, they will never change. The ego will ensure that they do not change.

The survivalist, that is the one who was previously employed, may be able to break out of the mould he is in. but it is almost as difficult. These people seldom have egos. They have very low self esteem, and this has to be changed, by themselves. they need to build their own self-esteem, to the point where they believe they have the skills to do more. I do not know if they are able to grow into high growth ventures, but they can most definitely grow beyond their current position.

Which brings me to another option. An option that most entrepreneurs avoid like the plague. The partner/fellow director.

Research points to the fact that those businesses with multiple owners are generally more successful than those with single entrepreneurs. There is no doubt that 1+1=3 when it comes to multiple directors. One secret is to avoid partners with competing skills, rather seek someone with complementary skills. Accountants often make good partners, especially if you are technically or sales oriented. Give it some thought and remember that the main purpose of starting a business is to create wealth. Nothing else is important, and everything else eventually links back to this wealth creation.

SMEs - the high growth entrepreneur

The SME owner who is also a high growth entrepreneur is the least known of all entrepreneurs. However, he should be on the top on everyone's A list. The high growth entrepreneur understands that if he works real hard, generates fast growing turnover with high profit margins, he will have an even greater lifestyle than the lifestyle entrepreneur. In my humble opinion the lifestyle entrepreneur thinks he is smart, whereas the high growth entrepreneur IS smart. He soon pops up on the radar of bigger investors. He soon has people wanting to invest large sums of cash in his business. He is soon selling his business or listing it. He has soon created enormous wealth for himself and the investors. He also created many new jobs and made a significant contribution to GDP in his country. And then quite likely he repeats the exercise again. An interesting factor is that often banks will not lend to these individuals because they consider them to be overtrading, but they are highly attractive to angel funders and venture capitalists.

SMEs - the lifestyle entrepreneur

SMEs also feature the lifestyle entrepreneur. There is much debate about these people. The reality is that while they are growing the business to the size that sustains the lifestyle they want, they do contribute to GDP and employment growth. However, once they have achieved what they want to achieve in respect of turnover and profit levels, they really do not try too hard thereafter. They are usually characterised by their toys - boats, cars, beach houses and the fact that they often only work 3 or 4 day weeks. They now begin with the maintenance programme. The fact is that they are useful to governments in good times, but not so good in the bad times. They do not want growth, nor do they want risk, and they often associate the one with the other. So are they right or wrong?! On the one hand it is their choice to limit their efforts in relation to the rewards. That is what democracy is all about. The government might want to get them revved up to a higher level, but they generally have absolutely no interest. So why should we bother with them. Why not leave well enough alone? They are satisfied and happy, so why interfere? Well, and here I talk only about my experience in South Africa,the problem often arises when they get to retirement. Most of them see the business as a pension. They fully intend to sell the business. The problem is they have stolen, in one way or the other, all the profits out of the business, so there is no value to sell. Eventually they get to the point where they realise that it is unsaleable, they have no pension, and they are trapped. And so begins the beginning of the end. They cannot sell, because they did not grow, and so they often  have no dominance in the local market anymore. The business is in fact in decline. The twist is sometimes the expectation of a child coming in to run the business which never materialises either. It is sad, but here in South Africa I often find 70 year old people who have to keep working because it is their pension. I believe the start of the maintenance programme is the end of growth and is also the beginning of the end. It is slow, inexorable and barely noticeable, but too often a very real reality.

SMEs - the survivalist entrepreneur

SMEs - the survivalist entrepreneur. Do they really make a difference? If we assume we have 3 basic groupings of SME, the survivalist, lifestyle and high growth entrepreneur, we need to understand where the value is added to an economy. This blog will consider the survivalist. Many people perceive the survivalist to be the uneducated BOP person who is doomed to poverty. The kind of people who were targeted by Grameen bank and their subsequent followers. However, the person who has been fired or re-trenched and who is unemployed in contracting markets is every much a survivalist too. The difference is that they may be well educated and highly experienced. However, in both cases they want employment, albeit at different levels. Therefore government interventions for these two survivalist sub-groups need to be handled and processed in a different manner. Neither really wants to own a business. Neither of these are likely to directly and significantly contribute to employment and/or GDP growth, but will indirectly benefit from employment and GDP growth as and when they find employment. Therefore government needs growth from alternative sources in order to reduce the number of survivalists. The fewer survivalists, the better the economic health.

SMEs - are governments helping or hindering?

Government interventions are fact of life in every economy. These can be general in nature (functional interventions) or very specific (selective interventions). So what is the problem. It appears that governments the world over are seeking economic, and sometimes political, solutions through SMEs. SMEs have been around for a long time, and I have personally owned my own businesses since 1982. But the governments and the media act as though they have personally found/invented the SME. Everybody is making wild claims about the importance of SMEs in their economy, often without any research data to support their claims. Interventions are based on hearsay and urban legend, not good solid research. They then bombard the SMEs with a range of interventions that are often ill planned. ill designed and poorly implemented by inexperienced government functionaries. They try to put square pegs in round holes! They push SMEs into sectors that are not suited to SMEs, and they ignore advice. They try to force big business to do business with SMEs, ignoring the risk to big business, and this is particularly applicable to banks. Perhaps it is time for governments to step back and take a long hard look at the SME sector, their current interventions, and then assess what they should really be doing. Perhaps then greater success will be achieved.

SMEs - a new funding website for South African SMEs

There is an interesting new website for businesses seeking funding in South Africa and it can be found at this website

SMEs - why existing SMEs fail

I am sure to have a few people hating me after this blog. SMEs fail most of the time for one simple reason - the owners. The owners generally suffer from the negative side of one of their positive attributes - ego. Ego is essential for entrepreneurs because it drives them forward to greater things. The problem is that it often leads to arrogance and conceit. They do not need to plan, they do not need to read, they no longer need to work 18 hour days, they no longer can be told anything by anyone, and worst of all they can no longer accept their own fallibility. I am eternally amazed at how many people are in deep trouble in their businesses, but they still think their businesses are great and worth a fortune. The moment their businesses are in trouble they put them on the market - but they still represent great value!? I have personally had a number of lessons in humility, and I can recommend them. I have found that the locus of control issue is paramount. If any entrepreneur is unable to accept that any of the problems in the business are due to their own poor decision making, then they are due for a 'correction'. Every now and again I meet entrepreneurs such as Darlene, who cannot suck in the knowledge fast enough to satisfy her craving for improved business. Darlene is enthusiastic and desperate to learn, and I believe can only rise to the top. A star in the making. The economy would be a better place all around if there were more Darlene's.

SMEs saviour for economic policy?

SMEs all over the world, are perceived to be the saviours of government economic policy failure. SMEs will save jobs, create jobs, boost GDP growth, and stimulate innovation among a host of other thing expectations. Are these expectations realistic? It all depends on how it is contextualised! The first question has to be whether or not SMEs can deliver on these expectations? In my opinion absolutely. The next question is whether there is room for government interventions in order to assist SMEs to achieve these expectations? Once again the answer is a big yes.However, there are two types of intervention, the functional and the selective. Selective interventions do have their place. They are used to boost particular sectors for strategic reasons. But more important are the functional interventions. These are those interventions which help to level the playing field and make it easy for all citizens to be able to enter the market. The need for one or the other is largely dependent on how distorted the current economy is. So it cannot be stated that functional are better than selective interventions. It is a guide to say that research shows that developed countries are more likely to require selective interventions, while developing countries are more likely to require functional interventions. However, in the context of developing countries, there appears to often be a situation where the governments tend to follow urban legend rather than solid research. Research is clear that in most countries the start-up rate and failure rate of SMEs is at best equal, with a nett result of no job creation, rather a shuffling of the deck. Key to this problem is that most of these countries have no idea of how many businesses they have and therefore they cannot even begin to address the problem by increasing the start-up rate to a level higher than the failure rate. Japan did for example. Furthermore, job creation generally comes from high growth enterprises, and most countries total ignore this fact. Most have no idea what it is or how to deal with it. Interventions are designed by government without contextualising for the three main groups of entrepreneur. These are the survivalist, lifestyle and high growth entrepreneurs. They are all vastly different from one another, but you seldom see interventions designed appropriate to each group. Interventions are seldom measured with regard to their impact, and in many developing countries are often used as a sop to the poor rather than a genuine intervention for SMEs, the intention being to rather buy votes. If we want SMEs to work for us as countries, we need to address the problem scientifically.

SMEs – SMEs struggling in developing countries. Why?

Many white-owned businesses have struggled since 1994. Many new businesses owned by all races since 1994, have found it difficult to establish themselves and grow.

Obviously the pre-1994 white-owned businesses allocate blame to the change of government. While this is a logical conclusion to draw, how accurate is it? There is no doubt that this had an impact on those businesses who had previously been a supplier to government, as government made an attempt to make their purchases reflect the country’s demographics.

However, what many of these business people have forgotten is that soon after 1994 South Africa rejoined the WTO. Furthermore, many businesses that had previously not been trading in South Africa due to anti-Apartheid trade restrictions, suddenly appeared at the front door to trade in South Africa and to use South Africa as a stepping stone into the rest of Africa.

Yes, globalisation had arrived! The problem is that very few South African SME business people have realised this. They still think they can continue to run businesses suited to lifestyle entrepreneurs without changing their businesses. They are still trying to understand why their profit margins have dropped and remain low. This is purely about globalisation. Thanks Walmart. While consumers may be happy with lower profit margins, SMEs are not. Low margins demand much higher volumes to stay in business.

The questions that this raises are whether these SMEs have increased sales volumes, have they tried to bypass the volume solution by becoming niche players in order to reduce the impact of the high volume/low price competitors? While my comments are based on anecdotal research, it appears to me that not many have changed how they do business. They all seem to be focused on the good old days instead of the future.

SMEs need to accept that they need to carve out a niche for themselves or scale up. The problem is that South Africa offers an incredible lifestyle opportunity, and this can distract attention away from the important issues. The problem is that our new SME owners have arrived bearing similar attitudes and expectations, and are wondering why they cannot make it. We all need to change our thinking going forward, because whether we like it or not we are part of the global village.

However, this problem is no doubt not only confined to South Africa. It is possible that this is a common problem in all developing countries. They have never had to compete and suddenly when their markets open up they are hit by a wave of very smart and determined businesses as competitors. Similarly, when economic development is based purely on SMEs, and does not include large industries, it becomes that much more difficult, if not impossible. assuming there are no large industries, perhaps as a result of FDI, where will the capital injection come from to kick start these new businesses, especially in developing economies. Too often there is no capital in the economy to establish and grow SMEs. It has to come from government or FDI. So corrupt governments will essentially, without FDI, kill off any economic development activities for SMEs.

SMEs - SMEs and rigidity in labour markets

Left wing governments often resort to protection of their labour forces. This is generally necessitated by political rather than economic imperatives. This leads to rigidity in the labour markets and has a number of negative consequences.

SMEs are generally unable to pay top prices for their staff members, and by default feed from the bottom of the labour barrel. They cannot offer perks such as pensions, medical etc. Therefore when it becomes too difficult to acquire, retrench or fire staff, they simply keep it tight. They try and reduce staff before the new legislation comes in. They tailor everything to existing revenue streams. They simply do not have any of the assets necessary to handle the situation. They do not have money for legal employees, or legal advice. They cannot pay minimum salaries.

Rigid labour markets have a negative impact on economic and job growth. SMEs are equally affected by this situation. As they close ranks in order to reduce staff, so they reduce their ability to grow their businesses. Everyone is a loser, including SMEs.

SMEs generally lack the resilience or the bank balance to survive these heavy handed government interventions. This is often counter productive to other government intentions.

SMEs - types of opportunities

The starting point for me with writing this document was Prof Mark Casson from the University of Reading on the UK.

As an economist he wanted to know how many opportunities there were and who decided who got which opportunities.

I did a little desktop research as I found the question intriguing. My research revealed the following. Opportunities vary in complexity. Therefore the skills, knowledge and experience needed to sell fruit to people at a taxi rank in a developing country is minimal. However, at the other end of the scale, identifying two companies for a merger, and then succeeding in achieving a merger between the two, requires a high level of skills, knowledge and experience.

So the first thing to note is that opportunities can be graded from extremely simple through to extremely complex. Similarly, the simpler the opportunity, the more of them there are, and the converse is also true for complex opportunities.

The second thing to note is that as complexity increases so too does the profitability in respect of both % and actual value. While you may be selling oranges at the taxi rank for US $1, the merger could be a US $10bn deal.

Therefore the question must be asked as to whether you are looking for simplicity or complexity when looking for a new business opportunity?

Bear in mind that your ability to handle complexity will be informed by your education and experience.

How complex is your business or your new idea?

SME - types of entrepreneur

Research indicates a number of different types of entrepreneur. These include survivalist entrepreneur; salary replacement entrepreneur; lifestyle entrepreneur, small business manager, franchisee, copycat entrepreneur, franchisor, inventrepreneurs, serial entrepreneur, portfolio entrepreneur, angel funder and venture capitalist.

However these can be grouped into three (3) groups of people who act in a similar manner.

The first is the survivalist. The survivalist is often associated with informal sector survivalist businesses, but could also include the formal sector person forced through circumstances into self employment. This could be someone who has been retrenched.

The second group is the lifestyle entrepreneur. They vary in a number of ways, but generally are the same “animal”. For some the “lifestyle” is about working the hours they want, or the type of business (maybe a hobby) or about maintaining a lifestyle which includes holidays, and toys such as motorbikes, cars, caravans, boats etc. All of them have clearly defined “rules” on how they run their business. These rules are written in stone most of the time. Do not ask these entrepreneurs to work late or weekends.

The third group are the high growth entrepreneurs. These are the entrepreneurs who generate large profits quickly, normally create the bulk of new jobs in an economy, and are able to retire young. Notice I said “able to”; many do not and start the next business soon after they harvest from their business.

Where do you fit in?

SMEs - SMEs and creativity

SME owners are all creative! It is often suggested that if you are not creative you will not be likely to succeed as an entrepreneur.

I believe that this is generally overstated. I may well be wrong on this but I have another suggestion on what makes entrepreneurs succeed. They are opportunity aware. They never stop looking for opportunities. They actively look for them. They are not passively waiting for the order. They are deal makers not order takers.

Initially they tend to see mainly "deals" which they are able to close. As they progress so they become able to see deals in other sectors/industries, which leads to diversification (portfolio entrepreneurship). As they proceed further, depending on how well read they are in business in general, so they become better at putting greater "creativity" into the finding/creating of opportunities.

Once they become extremely well versed at this, so they are able to identify structural holes. This is when supply and demand exist, but there is no market mechanism to trade. The ultimate entrepreneur is able to identify the structural holes and close the hole by creating the ultimate creative solution based upon his /her vast knowledge base.

SMEs - Step 8 more detail on the marketing plan

When preparing the marketing plan as part of a business plan, a key component is the income budget. The idea is that the marketing department predict sales and therefore need to prepare a sales and cost of sales budget for the financial department. This will include advertising and the rest of the marketing budget as well.

It is critical that the sales budget be done first if a SME, or by the two different departments, marketing and finance, if a larger business.

Too often SMEs make the mistake of juggling sales to meet the overheads. This is a recipe for disaster. The first budget is normally based upon your understanding of the market, and therefore should not be altered to "make ends meet". Go with your gut feel if you are an SME, as quite often it is all you have to go on, as you most likely do not gather and keep marketing data for analysis.

If you find that there are insufficient sales to meet your overheads and desired profits, then review your strategy and see what can be done to change your strategy to improve sales. There must be a change of strategy to increase the sales, not simply a change in sales.

Remember this important part of the process when doing your marketing plan - it could be the difference between success and survival.

SMEs - Step 8 the marketing plan

Marketing is the key to business success, because marketing drives revenues.

No matter how well run your business is, without sales there is no business. So the focus on the marketing plan is critically important. For those who want to know more, read Kotler. He presents marketing in a simple to understand format.

Marketing is best when it is proactive rather than reactive. The purpose is to get ahead of your competitors by creating competitive advantage. This means knowing and understanding your competitors extremely well. Do you know yours? Do you know how they will react to your efforts to gain market share? How can you gain market share without creating a war with your competitors? Therefore we will look at different aspects of marketing over a period of time.

Marketing is such a deep subject that it is impossible to discuss in depth in a weekly blog. Start reading Kotler and Michael Porter. Understand the use of Ansoffs model together with Kotlers synergy rules and the BCG matrix.

Marketing is not difficult and complex, to the extent that it cannot be done by the SME owner. It is simply that it requires full attention in an ongoing manner. It is not something that happens on its own, but requires constant attention and tweaking to meet changing circumstances.

SMEs - tips for the strategy process

SMEs are generally terrible at planning. I use an example with my students. Would you leave work, go home, pack whatever clothes are in the cupboard, take whatever cash is in your pocket, get in your car, drive until you run out of petrol, and then have a holiday wherever you run out of petrol. The answer is always no. And yet most SME owners run their businesses in this way.

They simply arrive each day in the hope of sales arriving. There is no plan. No strategy. No direction. There is simply ever-fading hope.

You need to read as widely as possible in order to ensure your strategy is informed by your environment. A PESTEL analysis is not a once-off annual event, but rather a way of life. It is about knowing and understanding what is happening at all times. How often do you hear businesses who are in trouble state "I just did not see it coming. Suddenly ....". Remember nothing is "suddenly". It is always announced in advance. Even the current global financial crisis was being talked about in advance.

So read a book or two on strategy. Gary Hamel is a strategy author who can give you some good tips and insights.

Read, read, read!

SMEs - Step 9 in the business planning process

SMEs are renowned for missing the detail, but this is a detail step that makes it all worthwhile.

Once you have completed the business plan, especially Step 8 which is the Operational Strategy, you must assess the projected financial position, and then decide if the business will achieve your harvest plan. If not you have to decide whether to accept less or whether you will look elsewhere.

This important step cannot be avoided or ignored, because to do so, is to do so at your own peril. Doing this with a client once, he realised it was impossible to achieve his harvest plan with this business. His decision was to "learn to live with less". This is not an entrepreneur speaking, and frankly it is quite likely he will get exactly what he asked for, or less. Remember, it is seldom that targets are achieved or exceeded, so aiming low is a recipe for disaster.

SMEs - Step 8 in the business planning process

This is the second last step in the planning process. The Step 8 efforts are a lot more detailed. Essentially there are three (3) components. The first is the marketing plan, followed by the human resource plan and financial plan.

They must be done in this sequence. Furthermore the marketing plan must produce the sales budget and cost of sales, while the last step is the financial plan where the fixed costs are applied to assess the profitability of the business. Remember not to fudge the figures.

These three components will be considered in more depth in a separate exercise in coming weeks.