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.