Sunday, April 29, 2012
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.
Saturday, April 28, 2012
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.
Monday, January 3, 2011
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.
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.
Friday, December 31, 2010
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 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?
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?
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?
Saturday, October 24, 2009
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.
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.
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