Time to rethink how best to help SME owners in SA
Given the vital role of SMEs for job creation in developing and transitional countries, understanding the drivers of their growth is an important research challenge
Poverty remains one of the key global challenges. Entrepreneurship has been widely acknowledged as an important driver for economic growth and poverty alleviation. As traditional employment in big companies wilts, small companies and start-ups are becoming more important. This means headcount growth will mainly come from small scale and medium enterprises (SMEs). Experts predict that 70%-80% of jobs created in the private sector will come from these two groups.
SA has a high unemployment rate and is suffering from poor economic growth. Only about 1% of microenterprises that have started with less than five employees have grown to employ 10 people or more. A negative consequence of this fact is that these businesses are not helping solve the unemployment issue, and hardly contribute to the taxation base of the economy. Given the vital role of SMEs for job creation in developing and transitional countries, understanding the drivers of their growth is an important research challenge.
A team of international researchers, in co-operation with the school of business and finance at the University of the Western Cape, has done extensive research on success factors of SMEs during the last 15 years. Results show that we partly have to rethink how best to support business owners in SA. About 40%-50% of small business success depends on the business owner.
The person is the most important success variable. This is not surprising in a business of one to 50 employees, but has often been neglected in research. In such a small businesses the owner is typically the source of action. He or she is the one making important decisions on products and ways of production, as well as offered services. The business owner deals with important customers, suppliers, and employees — the business can rise or fall based on his or her decisions.
Our research shows that the variable with the highest correlation to entrepreneurial success is personal initiative (PI). PI has a positive effect on entrepreneurial outcomes, which includes firm growth, number of employees and innovation. The definition of PI is being self-starting, proactive and persistent, with a strong future orientation. By being self-starting, business owners can initiate changes or do something new to grow their business and differentiate from competitors. Being persistent means being resilient in overcoming barriers and dealing with uncertainty and failures on a day to day basis.
Other factors strongly influencing the success of small-scale entrepreneurs were innovativeness, learning orientation and achievement orientation. Furthermore, planning strategies, including goal setting, have a high and positive correlation to success. Interestingly, we found almost the same results in our research in Zimbabwe and Namibia.
What lessons should we learn from these results? We have to follow a partly new approach to make SA entrepreneurs more successful and reduce the failure rate in future, because up to now important factors contributing to success, such as personal initiative, were not part of entrepreneurial training. It is important that every intervention, such as training, be evidence-based. Too much money was wasted in the past.
Entrepreneurial training aimed at developing and enhancing small-scale businesses to allow them to grow and become more profitable must include the development of PI skills. Other training components should include learning how to be proactive, how to actively set and implement goals for one’s business and plan with a long-term focus, and time management — as well as being innovative and generating and implementing new ideas.
This approach focuses on “concrete actions” of concrete individuals in the market and looks at resources and barriers for these actions, and how to improve them. A condition for a proactive approach is to develop a mindset as well as action strategies for effective implementation.
We compared the business success of the entrepreneurs who participated in such training with a control group. The training group improved their turnover and profit and employed more employees, while the control group (no training) stayed the same. The training showed, for the first time, that with the right entrepreneurial development one can not only improve the business success of small-scale entrepreneurs but also create employment — a win for the economy as a whole. On average one trainee created one new job within 12-18 months.
Based on our research, it is obvious that we need to start a broad entrepreneurship training initiative in all nine provinces. The training should deal with aspects of personal initiative, innovation and action strategies, with an action learning and action training approach, because we now know that this strengthens the business performance of entrepreneurs and will create more employment.
A precondition for improvement would be that politicians and civil servants understand why it is important to use evidence-based best practice as a starting point for change and that every intervention should be evaluated properly. A lot of money could be saved by this.
Perhaps not surprisingly, the government has shown no interest in the results of our research.
• Friedrich is a professor at the University of Applied Sciences in Giessen, Germany, and an extraordinary professor at the University of the Western Cape's School of Business and Finance.